Why Don't Remittances Appear to Affect Growth?

Exploring the development effects of remittances

This paper reviews existing explanations for why macroeconomic studies have difficulty in detecting the effect of soaring remittances on economic growth. It compares the growth rate in remittances recorded to what one would expect based on the growth in migration and the growth in incomes in destination countries over the same period. The paper also measures typical changes over time in remittances as a fraction of GDP and in the level of real GDP per capita, and estimates the variance in each. Key findings include:

  • Large majority of the recent rise in measured remittances may be illusory- arising from changes in measurement, not changes in real financial flows;
  • Even if the increases in remittances were correctly measured, cross-country regressions would have too little power to detect their effects on growth;
  • Greatest driver of rising remittances is rising migration, which has an opportunity cost to economic product at the origin.

The paper concludes by stating that migration and remittances clearly have first-order effects on poverty at the origin, on the welfare of migrants and their families, and on global GDP, but detecting their effects on growth of the origin economy is likely to remain elusive.

About this Publication

By Clemens, M.A. , McKenzie, D.