Workers’ Remittances And Economic Growth In Selected Sub-Saharan African Countries

WORKERS’ REMITTANCES AND ECONOMIC GROWTH IN SELECTED SUB-SAHARAN AFRICAN COUNTRIES BY OKODUA, Henry CUPG040085 Department of Economics and Development Studies College of Development S

WORKERS’ REMITTANCES AND ECONOMIC GROWTH IN SELECTED SUB-SAHARAN AFRICAN COUNTRIES

BY

OKODUA, Henry CUPG040085

Department of Economics and Development Studies

College of Development Studies Covenant University, Ota, Ogun State, Nigeria

Being PhD Thesis/Dissertation Submitted in Partial Fulfillment of the Requirements for the Award of the Degree of Doctor of Philosophy (Ph.D)

in Economics of Covenant University, Ota, Nigeria

December, 2010

DECLARATION

I, Henry OKODUA, declare that this thesis is my own original work and that

no portion of the work referred to in the thesis has been or will be submitted in support of an application for another degree or qualification of this or any other university or other institute of learning

- - Signature Date

Henry OKODUA

CERTIFICATION The undersigned certify that they have read and hereby recommend for acceptance by Covenant University a dissertation/thesis entitled: “Workers’ Remittances and Economic Growth in Selected Sub-Saharan African

Countries” in partial fulfillment of the requirements for the degree of Doctor of

Philosophy (PhD) in Economics of Covenant University, Ota, Nigeria

- - Signature Date

Prof Ike, Don

Supervisor

- - Signature Date

Dr Olayiwola, W K

Co-Supervisor

- - Signature Date

Prof Ike, Don

Head of Department

- - Signature Date

Prof Aigbokhan, Ben

External Examiner

DEDICATION

I humbly and most respectfully dedicate this work to the glory of the Most High God, JEHOVAH Almighty, who is the author and finisher of every good and perfect gift I have ever received and will ever receive in my life I also dedicate this work to the loving memories of my late father, Mr Peter S E Okodua

ACKNOWLEDGEMENTS What appeared a huge joke at the beginning and ostensibly a journey without

an end has suddenly and gloriously come to a successful completion It is still like yesterday when it all started and “just overnight”, the lord God almighty has Himself changed my title and status to a most enviable one I must

therefore begin by ascribing all thanks and gratitude to Him for the gift of life,

good health, soundness of mind, divine inspiration and my overall wellbeing Some individuals also showed up as instruments in the hands of the almighty God to assist me in some most invaluable ways during the course of this work They all deserve a big thank you The Chancellor of Covenant University, Bishop David Oyedepo, who God used to provide a platform for the vision that birthed Covenant University and the PhD programme, is greatly appreciated I will forever see him as one of the rarest gifts from God to my generation The Vice Chancellor, Prof Aize Obayan did not relent in speaking into my life those divinely inspired words of encouragement whenever I was privileged to meet her during the course of this work I am truly indebted to this great daughter of Zion for all the moral support which includes the SMS that she kept sending to encourage me Pastor Yemi Nathaniel was also a very great source of inspiration to me His Godly counsel and those moments of prayers for my timely and successful completion of this PhD made a whole lot of positive difference and I sincerely appreciate him for all the support

My former Dean of the College of Development Studies, Prof Matthew Rotimi Ajayi was always keen on knowing the progress of this work and such interest encouraged me a great deal I really appreciate him for this My former Head of Department, Dr I O Ogunrinola was simply more than a Head of Department, he actually turned out to be a father, a pastor, a teacher, an uncle

and a friend, who was always willing and available to support in whatever decent way that was possible With every patience, humour and humility, he would sign a single document over and over again just to satisfy the requirements of the school of postgraduate studies I really appreciate him for all the prayers, words of advice and the promptness with which he treated all administrative matters relating to this PhD work My supervisor and incubent Head of Department, Prof Don Ike and co-supervisor, Dr Wumi K Olayiwola were simply wonderful There was really no support I needed that they never offered me and beyond my expectations these two excellent academics supported me I must never forget those moments that Dr Olayiwola even went out of his way by helping out in search of relevant literatures for my use May the good lord continue to bless them and all members of their families

I also specially appreciate Prof (Prince) Famous Izedonmi, for the role he played in the hands of God to locate me for my assignment in Covenant University Professors: Fadayomi, T O., Rudrappan, D., Omideyi, A.K Olutunla, G.T., Ige, C S Otokiti, S.O all made very useful contributions to ensure that the very best came out of this work I remain greatly indebted in gratitude to these very eminent academics The adjunct lecturers who taught and imparted me tremendously during the course work component of the PhD programme are very much appreciated In this group are Professors: Oladeji, S.I., Olomola, P.O and Drs: Adebayo, A A and Ekanem, O T They were simply wonderful as they imparted me with so much knowledge that continues

to sharpen and shape my mind I must not also forget to appreciate Drs Ebiai,

A and Enyi, E P for their tremendous inputs into the initial draft of this thesis

Members of my academic department turned out to be truly an academic family Every one simply believed in me even in moments I was not delivering

satisfactorily on their expectations Dr Alege, P O and my brother and friend

Mr Urhie, Ese were very helpful to me in the area of modeling and clarification of theoretical framework respectively Mr Urhie, Ese also helped

in printing copies of the final draft of this thesis I really appreciate these two friends for supporting me so immensely Mr Osabuohien, Evans is sincerely appreciated for clarifying to me a particular STATA command that I so much needed Elder Iyoha, Francis of the Department of Accounting kept pouring out his elderly counsels in torrents and I really appreciate him for this My good friend Mr Folarin, Sheriff of the Department International Relations was also very helpful with his positive comments and I truly appreciate him for his support Mr Wogu, Power of the Department of Human Resource Development was really available to help in changing the slides during the proposal presentation and I do thank him for this friendly gesture I am indeed very grateful to all individuals (academic and non-academic members of staff

as well as my undergraduate students) in the Department of Economics and Development Studies and of course, in the College of Development Studies for every contribution made to ensure the best of this work is produced

Members of my immediate family led by my most loving wife, Mrs Ngozi H Henry-Okodua were ever there to support me with their prayers, precious time and very kind words of encouragement My mother, Mrs S O Okodua, My sisters Mrs Margaret Ajibola, Grace (Mama Emma), Mrs Christiana Nkanga and my brothers, Clifford and Philip were all very supportive with their prayers and I thank them from the very bottom of my heart I do always realize that I

am from one of the best families on earth and I consider myself very privileged and fortunate to be a part of this family I am thankful to my parents-in-law, Sir and Mrs Lawrence Amazue who were never tired of praying for the successful completion of this work and always sending me kind words of encouragement

to finish on time My sisters-in-law, Ugochi, Chidinma, Onyekachi and Ijeoma were a most formidable team of encouragers I simply cannot thank these lovely sisters enough My brothers-in-law, Messrs Bankole Ajibola and Dave Nkanga were nonetheless supportive particularly with their prayers, I really appreciate them I remain grateful to all other family members who supported

in one way or the other

Finally, I appreciate the almighty God once again for giving me strength and courage to walk on this terrain that is reserved for real men throughout all ages

He alone has by this rare out-pouring of divine favour and privileges given me

a new name that opens additional doors and windows of opportunities Thus,

He has empowered me to walk in the paths of the chosen and privileged few

Henry Okodua

December, 2010

TABLE OF CONTENTS

Title page……… …… i

Declaration ……….ii

Certification… ……… …iii

Dedication ……… ……iv

Acknowledgements ……….…… v

Table of Contents ……….…… …ix

List of Abbreviations ………xiii

List of Figures……… ….xiv

List of Tables ……… ……xv

List of Appendices ……….xvi

Glossary of Terms ………xvii

Abstract ………xxi

CHAPTER ONE: INTRODUCTION 1.1 Background to the Study ……….……… 1

1.2 Statement of the Problem ……….……… … 8

1.3 Research Questions …….……… … ….… 14

1.4 Objectives of the Study ……… ……… …14

1.5 Statement of Research Hypotheses……… ……… ……15

1.6 Scope of the Study……… ……….……15

1.7 Justification of the Study……… ……….… 16

1.6 Structure of the Study……….18

CHAPTER TWO: PATTERNS AND TRENDS OF REMITTANCES AND ECONOMIC GROWTH IN SSA 2.0 INTRODUCTION……… ……… 19

2.1 Patterns and Trends of Output Growth in SSA……… ………… 19

2.2 Patterns and Trends of Domestic Investment in SSA……… ………… 23

2.3 Patterns and Trends of Foreign Trade in SSA……… … ….26

2.4 Patterns and Trends of Workers’ Remittances flow to SSA…… …… 29

2.5 Trends in Workers’ Remittances and Growth Indicators in SSA… … 32

2.6 Sources and Destination of Remittance Flows ……….… 34

2.7 Country Level Analysis of Remittance Flows to SSA ……….……… 35

CHAPTER THREE: REVIEW OF THE LITERATURE 3.1 Conceptual and Measurement Issues……… ……… 51

3.2 Review of Theoretical Issues……… ……… 57

3.3 Review of Methodological and Empirical Issues………… ……… 64

3.4 Modeling Issues in the Remittances Literature………… ………… 78

CHAPTER FOUR: THEORETICAL FRAMEWORK AND METHODOLOGY 4.1 Theoretical Framework……….………… 81

4.2 The Empirical Models……….……….90

4.2.1 The Output-Remittances Model (Model 1) ……… ………… 92

4.2.2 Investment-Remittances Model (Model 2) ………… ……… 97

4.2.3 Trade Balance-Remittances Model (Model 3) … …… 101

4.3 Model Estimation Technique ……… … 104

4.4 Definition of Variables and Data Sources ……… ….….109

CHAPTER FIVE: DISCUSSION OF EMPIRICAL RESULTS 5.0 Introduction …… ……… ………… 112

5.1 Presentation of Estimated Empirical Results in the Growth-Remittances Model…… ……….….……… 114

5.2 Presentation of Estimated Empirical Results in the Investment-Remittances Model ……… ………122

5.3 Presentation of Estimated Empirical Results in the Trade Balance-Remittances Model.……… … 126

5.4 Policy Implications of Findings.……… ………131

CHAPTER SIX: SUMMARY, CONCLUSION AND RECOMMENDATIONS 6.0 Summary ……… 135

6.2 Conclusion……… 138

6.3 Recommendations ……… 139

6.4 Limitations of the Study ……… 142

6.5 Suggestions for Future Researches ……… … 143 References ……… … 145 Appendices ……….……… 161

LIST OF ABBREVIATIONS ARMA: Autoregressive Moving Average

BOP: Balance of Payments

EGLS: Estimated Generalised Least Squares

FDI: Foreign Direct Investment

FGLS: Feasible Generalised Least Squares

GDP: Gross Domestic Product

GLS: Generalised Least Squares

GLSS: Ghana Living Standard Survey

GMM: Generalised Method of Moments

IMF: International Monetary Fund

LSDV: Least Square Dummy Variable

MTOs: Money Transfer Operators

NPISHs: Nonprofit Institutions Serving Households

ODA: Official Development Assistance

OIR: Over Identification Restrictions

OLS: Ordinary Least Squares

SSA: Sub-Saharan Africa

SUR: Seemingly Unrelated Regression

UNCTAD: United Nations Conference on Trade and Development

LIST OF FIGURES Figure Page 1.1: Sub-Saharan Africa: top 25 recipients of remittances in 2008 …….… 5 2.1: Trends in Workers’ Remittances and Selected Economic Growth

Indicators in SSA……….……… 33 2.2: Remittance Receipts and other Growth Indicators in Nigeria… ……39 2.3: Remittance Receipts and other Growth Indicators in Kenya ………….40 2.4: Remittance Receipts and other Growth Indicators in Botswana ………42 2.5: Remittance Receipts and other Growth Indicators in Cameroon… …43 2.6: Remittance Receipts and other Growth Indicators in Guinea… …….46 2.7: Remittance Receipts and other Growth Indicators in Djibouti …… …47 2.8: Remittance Receipts and other Growth Indicators in Lesotho …… ….48 2.9: Remittance Receipts and other Growth Indicators in Gabon …… ….49 4.1: Schematic analysis of the remittances-development nexus…… ……83

LIST OF TABLES Table page 2.1 GDP Growth Rate in Selected SSA Countries… ….…… …………20 2.2 Domestic Investment in Selected SSA Countries.……… … 24 2.3 Real External Balance in Selected SSA Countries ……… …… 27 2.4 Remittance Flows to in Selected SSA Countries… ………… …… 31

2.5 Estimated flows of remittances by region, (2000) ………… …… 34

2.6 Volume and Value of Remittance Flows to SSA by Sub-Region and by Country ……… ……… 36 2.7 Major Growth Indicators of Sub-Regional Top Remittance Recipients in

SSA … ……… …38 2.8 Growth Indicators of least Sub-Regional Remittance Recipients in

SSA.……… 45

4.1 Definition of Variables and Data Sources, …… ……… 109 5.1 Estimated Empirical Results in the Output-Remittances Model …… 110 5.2 Estimated Empirical Results in the Investment-Remittances Model ….123 5.3 Estimated Results in the Trade Balance-Remittances Model……… …128

LIST OF APPENDICES Appendix Page 1: Two-Step System GMM Dynamic Panel Data Estimation (YGR)… …161 2: Correlation Coefficients for the Two-Step System GMM Dynamic Panel Data Estimation (YGR)……….162 3: One-Step System GMM Dynamic Panel Data Estimation (YGR)… ….163 4: LSDV Linear Regression Result (YGR)………… ……….….… …….164 5: Correlation Coefficients for the One-Step System GMM Dynamic Panel Data Estimation (YGR)……….165 6: OLS Linear Regression Result (YGR) ……….…….….… 166 7: Two-Step System GMM Dynamic Panel Data Estimation (INV)….……167 8: Correlation Coefficients for the Two-Step System GMM Dynamic Panel Data Estimation (INV)……… 168 9: One-Step System GMM Dynamic Panel Data Estimation (INV)… ….169 10: Correlation Coefficients for the One-Step System GMM Dynamic Panel Data Estimation (INV)……… 170 11: OLS Linear Regression Result (INV)………… …… ………….….… 171 12: LSDV Linear Regression Result (INV) ……….……… 172 13: Two-Step System GMM Dynamic Panel Data Estimation (REB)…… 173 14: Correlation Coefficients for the Two-Step System GMM Dynamic Panel

Data Estimation (REB)……….174

15: One-Step System GMM Dynamic Panel Data Estimation (REB) …… 175 16: Correlation Coefficients for the One-Step System GMM Dynamic Panel

Data Estimation (REB)……….176

17: OLS Linear Regression Result (REB)……… ……… ……177 18: LSDV Linear Regression Result (REB) …… …… ………….…… 178

GLOSSARY OF TERMS

1 African Diaspora - the African Diaspora consists of peoples of African

origin that are living outside the continent, irrespective of their citizenship and nationality

2 Brain Drain – this is also known as Human capital flight, it is the

large-scale emigration of individuals with technical skills or knowledge

3 Capital Flow – this is the movement of investment capital from one

country to another Also called capital movement, movement of capital

4 Economic Development - Economic development is the increase in the

standard of living in a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy Also, if the local quality of life could be improved, economic development would

be enhanced Its scope includes the process and policies by which a nation improves the economic, political, and social well-being of its people

5 Economic Growth – Economic growth is the increase of per capita gross

domestic product (GDP) or other measure of aggregate income; it is typically reported as the annual rate of change in real GDP Economic growth refers to the quantity of goods and services produced and does not account for working conditions, education, political and social conditions, depletion of nonrenewable resources or environmental degradation

6 Financial Flow - this is the movement of cash or funds in and out of a

business or the account of an individual or a firm

7 Foreign Direct Investment - investment in a developing country by

foreign companies or governments

8 Foreign Exchange – this refers to foreign currencies in general or the

exchanging of the money of one country for that of another

9 Generalized Method of Moments - the generalized method of moments

(GMM) is a popular statistical method (among econometricians) for obtaining estimates of parameters of statistical models GMM was developed by Lars Peter Hansen, of the method of moments

10 Globalization – globalization describes the process by which regional

economies, societies, and cultures have become integrated through a global network of political ideas through communication, transportation, and trade The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence

11 Gross Domestic Investment – Gross private domestic investment is the

measure of investment used to compute GDP This is an important component of GDP because it provides an indicator of the future productive capacity of the economy It includes replacement purchases plus net additions to capital assets plus investments in inventories

12 Migrants - People who migrate are called migrants or more specifically,

emigrants, immigrants, or settlers, depending on historical setting, circumstances and perspective

13 Migration - Human migration is the physical movement by humans from

one area to another, sometimes over long distances or in large groups The movement of populations in modern times has continued under the form

of both voluntary migration within one's region, country, or beyond, and involuntary migration (which includes the slave trade, trafficking in human beings and ethnic cleansing)

14 Neo-Classical Growth Model - the neo-classical growth model, also

known as the exogenous growth model or Solow–Swan growth model is a term used to sum up the contributions of various authors to a model of

long-run economic growth within the framework of neoclassical economics In neoclassical growth models, the long-run rate of growth is exogenously determined – in other words, it is determined outside of the model A common prediction of these models is that an economy will always converge towards a steady state rate of growth, which depends only on the rate of technological progress and the rate of labour force growth A key prediction of neoclassical growth models is that the income levels of poor countries will tend to catch up with or converge towards the income levels of rich countries as long as they have similar characteristics – like for instance saving rates

15 Official Development Assistance - Flows of official financing

administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25 percent (using

a fixed 10 percent rate of discount) By convention, ODA flows comprise contributions of donor government agencies, at all levels, to developing countries (“bilateral ODA”) and to multilateral institutions ODA receipts comprise disbursements by bilateral donors and multilateral institutions

16 Poverty - poverty is the lack of basic human needs, such as clean water,

nutrition, health care, education, clothing and shelter, because of the inability to afford them This is also referred to as absolute poverty or destitution Relative poverty is the condition of having fewer resources or less income than others within a society or country, or compared to worldwide averages

17 Sub-Saharan Africa - Sub-Saharan Africa as geographical term refers to

the area of the African continent which lies south of the Sahara A political definition of Sub-Saharan Africa, instead, covers all African countries which are fully or partially located south of the Sahara

18 Trade Balance – This is the difference between the monetary value of

exports and imports of output in an economy over a certain period It is the relationship between a nation's imports and exports

19 Workers’ Remittances - Workers’ remittances (within the context of this

study) are financial flows made up of private and unilateral household transfers of money by a migrant worker resident in a foreign country (host country) to a person (most often a family member of the migrant) living in the migrant’s country of origin (home country)

inter-ABSTRACT Remittance flows to Sub-Saharan African (SSA) region has steadily been on the increase in recent history Unlike capital inflows which generally create obligations for future outflows either in the form of debt servicing or investment income and other payments, remittance inflows do not as they are generally unilateral and unrequited This thesis investigates the economic growth and developmental role of workers’ remittances in selected Sub-Saharan African (SSA) countries Specifically, it seeks to determine the contributions of workers’ remittances to output growth in SSA, analyze the importance of workers’ remittances to the level of domestic investment in SSA, and determine the effects of remittances on trade balance in the selected SSA countries

Within the framework of an extended standard neo-classical growth model, the

system Generalized Method of Moments (GMM) estimation technique was

employed in this thesis on a set of three linear dynamic panel data models These models were then used to estimate the links between remittances and output growth, remittances and domestic investment, and; remittances and trade balance There are usually two major and important complications arising from an effort to estimate dynamic panel data models using macroeconomic panel data First, is the presence of endogenous and/or predetermined covariates and second, are the small time-series and cross-sectional dimensions

of the typical panel data set The Blundell and Bond (1998), extended version

of the generalized method of moments (GMM) estimator, (also known as

system GMM estimator) was applied to estimate the specified models This

estimator is widely believed to be adequate in overcoming complications that may arise from efforts to estimate the usual linear dynamic panel data models

The findings are many and most instructive However, the major findings which are quite striking include the followings Workers’ remittances have an insignificant contemporaneous negative impact on output growth suggesting that a sizeable proportion of remittances inflow to SSA is channeled intentionally or unintentionally at some economically unproductive uses Workers’ remittances also have a significant contemporaneous negative impact

on domestic investment For example, a 10 percent increase in workers’ remittances under the Blundell–Bond estimates, was found to explain negatively about 20.9 percent of the changes in domestic investment across the study group This clearly suggests that these financial flows do crowd-out domestic investment in SSA In addition, workers’ remittances inflow has a significant contemporaneous negative impact on external trade balance (proxied by real external balance) in the recipient SSA economies Contemporaneously, real external balance in the selected SSA countries decline by about 2.21 percent as workers’ remittance inflows into SSA rise by

10 percent This suggests that workers’ remittance inflow depresses trade balance in SSA These findings are rather shocking and disturbing but they all provided the basis for policy recommendations in this work

No doubts, workers’ remittances are unarguably a vital source of finance for many individuals and families in developing countries However, the full economic benefits of these flows to SSA countries can only be realized by formulation of appropriate policy measures to channel remittance flows into some more economically productive uses The option of using Diaspora bonds

to raise needed vital foreign exchange for development in these SSA economies may be considered by the various governments However, this option will only be attractive to the Diaspora if the issues of good governance, transparency, the rule of law, etc are made sacrosanct by the various SSA

governments One other policy option that may help attract additional and significant remittance flows to SSA countries is a policy that facilitates investment by migrants in real estate But the various governments must first create the initial infrastructure for such projects to be located in choice locations across each of the SSA countries

CHAPTER ONE INTRODUCTION

1.1 Background to the Study

Economic growth and development processes affect and are affected by migration of people In traditional viewpoint, people migrate when they are both pushed by lack of opportunities at home and pulled by the hope of economic gains elsewhere Thus, the hope that migration will help associate migrants more closely with available economic opportunities, employment and services elsewhere is a major incentive for migration Arguably, migration is necessarily a part of a family strategy to raise income, obtain new funds for investment, and insure against risks It is not surprising therefore that thousands of African workers with relevant skill endowments leave their home country yearly to pursue better economic prospects within or outside Africa However, migration of skilled workers could potentially hurt the sending countries if not well managed by appropriate policies

As populations in advanced countries continue to age, shortage of labour in sectors such as health care continue to attract relatively cheap but qualified labour from these developing countries of Africa Migration of skilled workers

in this sense contributes to the economic growth of receiving countries by responding to real labour needs in receiving countries In addition, migrant workers help fulfill unmet labour requirements in many lower-pay and low-skill jobs such as those associated with domestic and agricultural work in developed countries Migrants also contribute to the scientific and technological development of host countries These factors partly provide the necessary impetus for international migration flows to continue to increase,

and for the process of globalization and the interdependence of nations to continue to deepen

While the positive aspects of migration can lead to economic gains for the receiving countries, it can also lead to ―unintended consequences‖ in both the sending and receiving countries Some of these consequences include an outright deprivation of vital human resources in sending countries, and by implication the adverse impact of migration of skilled workers on the brain drain phenomenon in sending countries Such deprivation of vital human resources is rather very alarming given that the United Nations predicts that the net number of migrants from developing to developed countries will increase by 2.2 million people annually, from 191 million or 3 per cent of the world population in 2005 (United Nations, 2004) This problem is even further compounded when the long gestation period for training skilled workers is taken into account by the migrant sending countries of Africa There are also the issues of cultural conflicts in receiving countries, human trafficking, economic exploitation of migrants, sending country dependency patterns, delayed economic growth in sending countries, etc In this case, a vicious cycle

is easily perpetuated

The emigration of people with scarce skills, such as entrepreneurs, scientists, technicians and health professionals reduces both the stock of human capital and the overall labour productivity of developing countries However,

if these highly skilled migrants return, they bring with them experience, knowledge contacts and capital, which have a positive impact on development Thus, gains and losses from migration depend on whether it is temporary or permanent (Rena, 2008) In essence, African countries stand to benefit from

migration through the African Diaspora1 expertise, knowledge, technology, professional capacity building and a great potential for trade and investment links The migrant sending countries of Africa can also benefit economically from migration through the inflow of workers‘ remittances Given these possibilities, migration is increasingly being regarded as an important instrument for growth and development in Sub-Saharan Africa (SSA)

Migrant remittances seem to have contributed to poverty reduction throughout Sub-Saharan Africa, leading to increased household investments in education, entrepreneurship and health At the household level, remittances are spent primarily on general consumption items in local communities which can contribute to local economies by supporting small businesses This in general, has its employment generation implications in these critical services sectors In addition to supporting domestic consumption, remittances can also promote investments in real assets including building schools and clinics Remittances flow is directly to households and they are widely distributed in small amounts throughout the economy This makes remittances capable of having a much broader effect on home country economies than either FDI or official development assistance

Official data on remittances inflow to Sub-Saharan Africa reveal that, the flow

of remittances to the region has been far more stable than official aid flows and foreign direct investment (FDI) Besides, remittances do not decline even in conditions of instability and poor governance Hence, remittance flows represent one of the least volatile sources of foreign exchange earnings

1

The African Diaspora consists of peoples of African origin that are living outside the continent, irrespective of their citizenship and nationality

They are also more evenly spread among developing countries than capital flows Workers‘ remittances represent one of the largest private sources of external finance for developing countries; thus, remittances are the main transmitter of migration‘s development benefits to sending country economies Workers‘ remittances are inter-household transfer of money within or across national boundaries According to Reinke and Patterson (2005), workers‘ remittances cover current transfers by migrants who are employed in new economies and are considered residents there

Workers‘ remittances flow has steadily increased since the mid 1980s Officially recorded remittances were an estimated US$206 billion in 2006, compared to US$19.6 billion in 1985 (World Development Indicators 2006) Remittances have been the second most important source of external finance for developing countries, being twice the size of Official Development Aid (ODA) and almost as large as Foreign Direct Investment (FDI) World Bank (2009) reports that recorded remittances to developing countries in 2008 were estimated to have reached US$305 billion This is equivalent to nearly two percent of aggregate developing country GDP and well over half of estimated FDI inflows (US$490 billion) The 2008 estimated remittances to developing countries are over twice as large as official development aid of US$119 billion received by developing countries

In absolute terms, big developing countries like India, China, Mexico and the Philippines receive the largest shares of remittances in the world However, in relative terms, small and poor countries tend to be much more dependent on remittances For many countries with large Diasporas, workers‘ remittances often amount to at least, 15% of Gross Domestic Product (GDP) Tonga for example had a share of remittances to GDP of 39% and Haiti and Lesotho of 27% in 2003 Actual figures are even higher than this, because unrecorded

remittances in cash or kind are often brought by migrants themselves or sent through third parties, and are not declared when entering the country

Remittance receipt in relative terms is expressed as a percentage of GDP for the top 25 recipients in SSA in 2008 and is reported in figure 1.1

Figure 1.1: Sub-Saharan Africa: top 25 recipients of remittances in 2008

Source: International Monetary Fund (IMF) (2009) Regional Economic Outlook:

Sub-Saharan Africa

Figure 1.1 shows that Lesotho tops remittance recipients in SSA with remittance inflow amounting to about 27.5 percent of GDP This is followed closely by Comoros with about 25 percent of GDP Mozambique and Cote d‘Ivoire are the least in terms of relative importance of remittances with about

1 percent of GDP in each of the countries

When considered as a share of GDP, workers‘ remittances can in fact be conveniently regarded as a vital source of finance for many developing countries These flows contribute to the poverty reduction process by enhancing the living standards of the beneficiaries Workers‘ remittances can also contribute to the poverty reduction process through the multiplier effects

of flows which create additional demand, employment and income Page and Adams (2003) estimate that a 10% increase of remittances per capita would lead to a decline of the poverty head count by 3.5%, due to multiplier effects

on GDP growth Despite their positive impact on poverty rates, the way in which remittances contribute to economic growth and development is still an open question Even if we take account of multiplier effects, poverty reduction through remittances is, in principle, a one-time effect From a development perspective the question must be whether remittances have, beyond their immediate impact on poverty, an effect on the long-term growth of a country Most remittances are made in the form of cash rather than as goods Therefore, remittances are financial flows made up of private and unilateral transfers of money by a migrant worker resident in a foreign country (host country) to a person (most often a family member of the migrant) living in the migrant‘s country of origin (home country) In principle, there are three ways of measuring remittance inflows in countries According to Addison (2004), the first approach is the balance of payments (BOP) estimates Other methodologies include micro or household surveys of recipients of such flows e.g inference from the Ghana Living Standard Survey (GLSS) The third method is through banks or financial institutions in origin countries i.e focusing on resource transfer institutions

In terms of relative accuracy and level of coverage, the micro or household surveys of recipients approach is likely to be the least The obvious explanation

will be the problems of non-disclosure by respondents and general costs associated with micro or household surveys respectively The BOP approach tends to be most reliable for macro studies since aggregated data are usually compiled and reported by the various monetary authorities under this approach Thus, the size of the remittances flows employed in this study are based on BOP estimates reported by the various central banks of the IMF member countries For obvious reasons, the cross–country nature of this study demands that relevant data are drawn from a common source to allow for uniformity of measurement standard as well as easy comparism The World Bank Africa Development Indicators satisfactorily meets these requirements

The importance of remittances for some countries in the SSA region can be best illustrated by expressing them as a ratio to GDP, while in others the absolute total of per-capita value of remittances flows are more revealing.Remittance flows is widely believed to be much more sustainable as a source

of development finance to many countries around the world Two major forces are expected to ensure the growth and sustenance of these flows: Globalization and the aging populations (Olayiwola et al, 2008 and Olayiwola, 2010) Globalization and the aging of developed economy populations will ensure that demand for migrant workers remains robust for years to come Consequently, the volume of remittances will most likely continue to grow, since migrants will continue to support the elderly and other dependants in their countries of origin However, challenges remain in determining how best to channel the flow of remittances through formal financial institutions to promote economic growth and development in sending countries (Chami, Barajas, Cosimano, Fullenkamp, Gapen, and Montiel, 2008) This study empirically examines this challenge, and sheds more light on several possible options open to some

selected SSA countries in the effort to harness maximum societal benefits from workers‘ remittances inflow

1.2 Statement of the Problem

The major research issue in this study bothers on the determination of the nature of relationship between remittances and economic growth in SSA There is so far no conclusive answer in the literature to the question of whether workers‘ remittances constitute at the aggregate level, a vital source of development finance to the developing countries of the Sub-Saharan African region

The literature on the potential developmental impact of remittances in an economy is quite vast but mixed and can be divided into two separate strands One strand takes a microeconomic approach and examines the causes and uses

of remittances using household surveys and aggregate data (Taylor, 1999) The other strand focuses on the effects of remittances and uses macroeconomic models (that are not based on individual maximizing behavior) to estimate the impact of remittances While the micro dimension of remittances is often closely associated with the ―dependency framework‖, the macro dimension is often associated with the ―developmental framework‖

In other words, workers‘ remittances seen from the perspective of individual to individual transfers often connote a relationship between two parties that allows for regular financial support from one party Such support is often to meet the consumption, medical and/or education needs of the dependant party However, when workers‘ remittances is taken from the perspective of group to group transfers, it connotes an arrangement that allows for group or societal support often to meet the developmental needs of the benefiting party The

likely negative impact of remittances associated with the dependency framework is that it may engender a culture of dependency among the economically active population that benefit from remittances flows

Workers‘ remittances may on the other hand generate a number of important positive contributions to economic growth and development In particular, remittances tend to reduce poverty and inequality in recipient countries, as well

as increase aggregate investment and growth Moreover, when perceived to behave counter – cyclically, remittances may significantly reduce growth volatility and help countries adjust to external and macroeconomic policy shocks At the microeconomic level, remittances allow poor recipient households to increase their savings, spend more on consumer durables and human capital, and improve children‘s health and educational outcomes Consequently, the net impact of workers‘ remittances is that it is beneficial to the recipient party if properly managed

Workers‘ remittances are important source of finance and foreign exchange for many African countries They help the countries to stabilize irregular incomes and also assist communities to build human and social capital Remittances receivers in many cases are typically or financially better off than their peers who lack this source of income (Sander and Maimbo, 2003) In this sense, remittances are private and family funds, which may be construed as constituting some form of familial support that does not create any future liabilities such as debt servicing or profit transfer for the recipient

These transfers have been a critical means of financial support to many poor families in developing economies for generations and have helped them significantly in confronting the plague of poverty Thus, remittances reduce the problem of income inequality in many societies Within this perspective, there

are at least four identifiable motives for remittances in the literature; these include (i) altruism (ii) self interest (iii) implicit family contract: - loan repayment, and (iv) implicit family contract: - co-insurance (Solimano, 2003)

At the macroeconomic level, remittances have a substantial positive effect on the balance of payments and on foreign exchange revenues This however may not be true for net remittances More importantly, remittance inflows, unlike oil windfalls do not weaken institutional capacity This is because remittances are widely dispersed with the great bulk allocated in small amounts to the recipients while the governments are precluded from playing the role of

Workers‘ remittances to Africa are nevertheless an important financial flow—with perhaps, significant developmental effects As shown in figure 1.1, workers‘ remittance as a percentage of GDP in many SSA countries is quite significant averaging about 8 percent for these countries Thus, these realities make a study on the subject worth embarking on Moreover, their level is probably much higher than official data indicates (Sander and Maimbo, 2003) Anecdotal reports support the fact that many transactions go unrecorded or unreported, this in large part is because financial systems and services are weak in much of Africa The weakness of financial systems brings about the problem of remittance leakages as it creates obstacles for the efficient transfer

of remittances through formal money transfer services and limits the potential

of remittances to contribute to development (Gupta, Pattilo and Wagh, 2007) The weak financial systems and services in Africa has been a major stimulus for the sustenance of the informal transfer systems which includes personal carriage of cash or goods by migrants, their relatives, their friends, or trusted agents Other informal services operate as a side business to an import-export operation, retail shop, or currency dealership Most of them keep little paper or electronic documentation Transactions are communicated by phone, fax, or e-mail to a counterpart who will make the payment (El-Qorchi, Maimbo, and

Wilson, 2002) The best known of the informal services are hawala and hundi,

which operate in a similar fashion The terms can be used interchangeably, but

hawala is typically used in the context of the Middle East and Arab countries

and their migrant populations, whereas hundi is usually connected with South

Asia especially Bangladesh (Sander and Maimbo, 2003)

Workers‘ remittances as a potential source of external development finance for many developing countries provide a much more stable source of foreign exchange than other foreign currency flows to developing countries This is

especially relevant to SSA, where official aid flows have fluctuated over the years The increasing attention is also due to the growing volume of official financial remittances to low income countries and their potential contribution

to the development of the receiving regions But despite the large interest in remittances, their role in economic growth and development remains unclear First, it is extremely difficult to gather accurate data on remittances This is because many remittances are not channeled through the payment system and are left outside the official statistics In addition, most studies on workers‘ remittances flows to Africa tend to be on a single country or one migrant group

at a time and this does not allow for any form of general inference

At the macro level, the economic growth and developmental impact of remittances on the economy attracts two opposing views in the literature Within the first perspective, remittances often provide a significant source of foreign currency, increase national income, finance imports and contribute to the balance of payments Remittances also contributed to the expansion of wire transfer and courier companies as well as money exchanges (Russell 1986; Keely and Tran 1989; Massey 1992; Taylor et al 1996a and 1996b) Other studies with contrary views believe that remittances decrease the likelihood of

an improved economy Their argument is that, the inflow of funds can be deceptive if it creates dependence among the recipients, encourages the continued migration of the working age population and decreases the likelihood of investment by the government or foreign investors because of an unreliable workforce (Pastor and Rogers 1985; Pastor 1989) Another possible negative effect of remittances is the possibility that they produce a ―Dutch disease‖ effect For countries that receive important sums of remittances, there

is a tendency for the real exchange rate to appreciate, penalizing

non-traditional exports and hampering the development of the tradable goods sector (Solimano, 2003)

Remittances can also be countercyclical or procyclical with the GDP in recipient countries On the one hand, remittances motivated largely by altruism, are argued to have a tendency to move counter-cyclically with the GDP in recipient countries The reasoning here is that migrant workers are expected to increase their support to family members during down cycles of economic activity back home This expectedly will compensate the remittances beneficiaries for lost family income due to unemployment or other crisis-induced reasons However, remittances conceived as procyclical with output in recipient countries may act as a destabilizing force In this case, procyclical remittances increase the capacity of swings in remittance flows to produce additional fluctuations in output or current account balances, with serious macroeconomic effects (Sayan, 2004) It is quite obvious from the foregoing that, despite the increasing importance of remittances in total international capital flows, the direct or indirect relationship between remittances and economic growth and development has not been adequately studied

This study sheds additional insight into the inconclusive debate on the remittance – growth nexus by exploring the macroeconomic impact of remittances on economic growth and development in some selected SSA countries It does this within the extended neoclassical growth framework using a balanced panel data set spanning from 2000 to 2007 for twenty one SSA countries

1.3 Research Questions

Given the various issues relating to the growth and developmental role of workers‘ remittances flows to SSA, a number of research questions arise as follows:

(i) What are the roles or contributions of remittances to output growth

within the SSA?

(ii) What is the contribution of remittances to private investment?

(iii) To what extent do remittances contribute to foreign trade balance? (iv) What are the various policy options that can be adopted to better

manage the macroeconomic effects of remittances in SSA?

Any research effort that provides satisfactory answers or at the least, shed some meaningful insights into the above questions represents a valuable guide to the understanding of the economic growth and development role of workers‘ remittances inflows to SSA Therefore, in this empirical study, no effort is spared in providing meaningful answers to the above questions

1.4 Objectives of the Study

The overall objective of this study is to investigate the economic growth and developmental role of workers‘ remittances in selected Sub-Saharan African (SSA) countries The specific objectives are to:

(i) Determine the contributions of remittances to output growth in SSA (ii) Analyze the importance of remittances to the level of domestic investment in SSA

(iii) Investigate the effects of remittances on trade balance in SSA

1.5 Statement of Research Hypotheses

The following testable hypotheses which are implied in the research questions are considered appropriate for this study and are therefore subjected to empirical investigation These hypotheses are stated in their null context as follows:

1 Workers‘ remittances do not significantly promote economic growth in selected SSA countries

2 Workers‘ remittances do not significantly impact positively on domestic investment in selected SSA countries

3 Workers‘ remittances inflow has no significant impact on foreign trade balance in the selected SSA countries

1.6 Scope of the Study

The study employs data covering a period of eight years (2000-2007) The choice of this period is explained by the availability of data across the selected countries as well as the fact of a dramatic rise in recorded remittance flows to the region over this period The study is limited to the twenty one SSA countries that reported inward remittances receipts for the period- 2000 and

2007 These countries are:

Benin, Botswana, Cameroon, Cape Verde, Djibouti, Ethiopia, Gabon, Ghana, Guinea, Kenya, Lesotho, Malawi, Mali, Namibia, Niger, Nigeria, Senegal, Seychelles, Sierra Leone, Togo, Uganda

Remittance flows will be restricted to inter-household unilateral and unrequited transfer of cash earnings, meaning that such transfer is void of any form of

quid pro quo terms, across national boundaries only The implication is that

remittances in forms of material transfers by migrant workers to their home

countries, compensation of employees, or unrequited inter-household cash transfers within each economy under investigation, are not covered in this study It is important to clarify here that the study is restricted to the macroeconomic impact of remittances on the receiving economies and not on their microeconomic impact

1.7 Justification of the Study

A common theme motivating much of the research on remittances is the better understanding of their role as promoter of economic growth and development This also includes the question of how remittances flows can be channeled into productive investments by appropriate policies Black (2003) noted that despite the glaring evidence on the extent of the flow of remittances, gaps still remain in the understanding of how remittances are or can be used to promote growth and development, especially given that existing policy incentives are not generally considered as having been very effective in channeling remittances towards economic growth The study is considered important to SSA countries in several ways as follows: the SSA region is widely regarded least among remittances recipients in the world A good knowledge of the growth and developmental role of remittances will help encourage regional and national policies that will further boost the inflow of this very important source of foreign exchange to the region In other words, this study helps policymakers in the various SSA countries to better understand the phenomenon of remittances flows to the region and how best to manipulate related policies to optimize these flows This hopefully will help loosen the foreign exchange constraint that has so far weakened the capacity of most of these African economies to operate effectively in the international market

The literature on remittances is replete with inadequacies regarding an appropriate measure of remittances Many researchers make use of an aggregate measure of remittances and this at best exhibit characteristics that are different from those which they intend to study According to Chami et al (2008), the category ‗workers‘ remittances‘ in the balance of payments best

represents what economists have in mind when modeling remittances The properties of this series differ significantly from those of ‗employee

compensation‘ and ‗migrants‘ transfers‘, so combining these three items into a

single measure of remittances, as is common practice in the literature, can lead

to invalid conclusions about the properties of remittances and, in turn, suboptimal policy decisions Again, effort is made in this study to correct this inadequacy by isolating data on workers‘ remittances from the aggregate measure commonly used in the remittances literature

The resource-gap syndrome is more pronounced in SSA countries than anywhere else in the world As a consequence, the region is often not able to meet up with its foreign exchange requirements for imports A stable remittances inflow can reasonably fill the foreign exchange gap in SSA There

is however the need to properly channel remittances into growth and development The overall understanding of remittances and economic development is inadequate given the importance of this economic phenomenon The debate on the growth and development impact of migrants‘ remittances, which is based largely on evidence from proximate economies, is rather inconclusive Sub-Saharan Africa has unfortunately been grossly under-researched in this respect Situating the SSA countries properly on the growth and development impact of remittance inflows remains a major gap in the literature This study is an attempt to further close this identified gap The study therefore is a contribution to the inconclusive debate on the growth and