Industrialization and Economic Growth in Countries Sample Assignment

Industrialization and Economic Growth in Countries

with High Remittances Inflows:

An Econometric Investigation

DISSERTATION

Summary.

The unique characteristics of Remittances capital inflows and their potential economic impact for individual countries present a great opportunity for economic transformation that could lead to sustained economic development. The goal of this thesis is to investigate this important question of what relationships, if any, exists and the causal links between worker remittances capital, on the productive sectors, labour market formation, financial market development and government debt sustainability in countries with high remittances inflow.

Although this question has great significance from an economic policy viewpoint. There has been little empirical analysis undertaken so far as to understand the short and long-run macroeconomic effects of the strength of the relationships and the directions of the causality between remittances-led growth and remittances-financed industrialization, which is the core focus of this dissertation. Failure to understand these potential influences of remittances inflows by national policy makers would eventually lead countries with high inflows into a possible low-income trap. In which only a small portion of the population can benefit from these international transfers of remittances capital.

This general hypothesis is grounded in a series of current theoretical and empirical contributions from different economic perspectives. Which have acknowledged the fundamental roles of remittances capital on the process of economic growth. The first part of this thesis is devoted to constructing a formal theoretical framework of the macroeconomic influences of remittances inflows. The model established the economic motives of remittances and deliver an interesting insight on each of the different structural directions of remittances capital within the economy and on its path towards remittances-led financed productivity growth.

This research is explored further, and the key variables are constructed from the theoretical model and are analyzed within the general framework of growth regressions. Econometric panel data techniques of Autoregressive Distributed Lag Model (ARDL) and Vector Error Correction Model (VECM) along with Pruning trees, Johansen Co-Integration and Granger Causality testing were used. On data from countries with high remittances inflows during the period of 1960 to 2018, to reveal the short and long-term relationships and its explanatory powers on a variety of new variables and models driving remittance-financed economic growth and industrialization.

Chapter 1 – Introduction and Overview.

“…Remittances are vital for millions of families, helping them to address their own development goals, but we can help them do more and build their longer-term future…, [1]”

Rome, 14 June 2018,G. Houngbo.

1.1 Introduction.

This chapter introduces the research area by highlighting the current trends of remittances inflows. Followed by, the theoretical and empirical contributions from different economic perspectives on remittances-growth and remittances-financed industrialization. It then builds on the literature to formulate a working hypotheses and analytical framework of remittances capital inflows. The research questions and sub-questions are also defined. It also details the relationships under investigation in the subsequent sections and defines the study new variables, its research approach and relevance.

Gilbert F. Houngbo, President of the International Fund for Agricultural Development (IFAD) in his message in Rome, 14 June 2018 – Ahead of the International Day of Family Remittances “…estimated that family remittances – the money sent back by migrant workers to their relatives – supports 800 million people worldwide. Most migrant workers send money home several times a year, typically between US $200 and US $300, several times a year. While these amounts may appear to be relatively small, they often constitute 50 per cent or more of the migrant’s family’s income in their home country…”.

“…In 2017, 200 million migrants sent US $481 billion to remittances-reliant countries of which $466 billion went to developing countries, helping sustained about 800 million people across the world. This amounts to more than three (3) times the annual official development assistance that countries give in aid...” “…According to IFAD estimates, US $6.5 trillion in remittances will be sent to developing countries between 2015 and 2030, involving over 1 billion senders and receivers…”

With this global estimate’s immigrant remittances are truly a force to be reckoned with in the global economy [3]. Given this large size of international capital inflows relative to the recipient economies and the continued likelihood that these external flows would grow in the future. These features suggest that remittances effects are likely to be substantial and sustained over time and may have unique economic level implications on the receiving economies as well as a potential stable source of economic development. Existing empirical literature on remittances has recognizes the increasing importance of these transfers to developing countries and its impacts on development, poverty, inequality, human well-being and output growth volatility. Therefore, the economics of workers remittances on short and long-run economic growth has become an area of interest and started with the discussion of adverse macroeconomic effects of external transfers by Keynes., (1929) and Ohlin., (1929).

Currently, the debate about the effects of remittances on growth and remittances-financed industrialization is still unsettled with ambiguous conclusions. Most of the recent macroeconomic empirical studies over the last decade and are relevant to this thesis, on remittances inflows relies on the popular growth-regression methodology. In which the average growth rate of per-capita output over some period is regressed across household, cross-country and panel data. For countries on a set of variables controlling for initial conditions and for country characteristics. These studies have all found either a “positive, or negative” effects and or at best “no relationships”, between economic growth, remittances and industrialization.

For example, Efobi et al., (2016) found that remittance inflows positively affect industrialization through financial development channels in 49 African countries. Salahuddin., and Gow., (2015); investigated the relationship between economic growth and remittances in Bangladesh, India, Pakistan and the Philippines and found that remittances had positive impact on economic growth in the long run. Kumar., and Stauvermann., (2014); found similar positive impact on economic growth.

Ahamada., and Coulibaly., (2013); investigated the causal relationship between economic growth and remittances in 20 Sub-Saharan African countries and found that there was no causal relationship between economic growth and remittances. Dzansi., (2013); also found remittances positively affect manufacturing growth in 40 remittances dependent economies. Guha., (2013); finds that international remittances have a direct impact on the micro level household decision making process, primarily with respect to the consumption and labor supply decisions.

Ziesemer., (2012); used a panel of countries with per capita income less than US $1200 and studied the direct and indirect impacts of remittances and found that the total effect of remittances on levels and growth rates of GDP per capita, investments and literacy are positive. Nyamongo et al., (2012); examined the impact of remittances and financial development on economic growth of 36 African countries they, found positive impact on growth, while the volatility of remittances had negative impact on economic growth.

Nsiah., and Fayissa., (2011); also investigated the impact of remittances on economic growth in 64 countries from Africa, Asia, and Latin America and the Caribbean and found that remittances had positive impact on economic growth. Buch., and Kuckulenz., (2010); find that remittances have a positive impact on welfare enhancing effect, such as consumption, capital investment, education and health.

In others studies it has been investigated that remittances not only influence economic growth but also financial systems. Giuliano., and Ruiz-Arranz., (2009); find that remittance boost growth in countries with less developed financial systems by providing an alternative way to finance investments and help overcome liquidity constraints. Misati., and Nyamongo., (2011); find to convert remittances into deposits would result in more funds available for lending by commercial bank to the private sector and in turns, create financial development which enhances economic growth.

IMF (International Monetary Fund)., (2005); examined the effects of remittances on economic growth in 101 developing countries and found that there were no statistically significant relationships between economic growth and remittances. Chami et al., (2003) investigated the effect of remittances on economic growth in 113 countries and found that there was a negative relationship between growth and remittances.

Consequently, the above modern literature over the last decade reveals that remittances impact growth through various direct and indirect channels. The literature on remittances is yet to reach a consensus and there are still questions regarding its economic effects and or channels over the short and long term. This is relevant, because if economic influences are significant, and there are still undiscovered new innovate ideas and relationships that remains. This strengthens the case for further research into remittances-led growth.

Therefore, the objective of this thesis is to shed new light on the economic effects of remittances-financed growth and industrialization nexus and to understand under what conditions remittances capital promote a sustainable productive sector, labour markets formation, financial markets development and government fiscal sustainability, while fostering economic performance in countries with high remittances inflows.

The remainder of this chapter is organized in five major sections. Section (1.2) explains the relevance of the research. In section (1.3), the thesis provides a theoretical and analytical framework. Section (1.4) present the research questions and approach, while Section (1.5) provides an overview of the stylized facts in high remittance countries. Finally, section (1.6) describes the structure of this book.

1.2 Relevance of the Research.

‘Integrating remittances-led externalities into growth economics’

1.2.1 Introduction.

As remittances inflows increased, the importance of remittance inflows also increased which ultimately encouraged many of the researchers to conduct different studies in different remittances dimensions. These may include the impact of remittances inflows on development, poverty, inequality, human well-being and output growth volatility. However, despite their research over the last decade, economists have generally not reached a consensus on how migration and remittance-knowledge spillovers are affected by markets and economic behavior patterns.

The study of how high-remittances receiving countries copes with limited remittances resources is at the heart of long-run sustained and sustainable growth studies. Despite the increasing importance of remittances in total international capital flows. The relationship between remittances-financed economic growth and remittances-financed industrialization has not been adequately studied. This contrasts sharply with the extensive research on the relationship between growth and other sources of foreign capital, such as foreign direct investments and official assistance flows. This thesis recognized that one of the most important constraints on resources reflect by migrations are remittances inflows. For example, migration dictates the conditions in which remittances inflows happens and remittances-knowledge defines the receiving country’s ability to manage and used these conditions.

1.2.2 Remittances-led externalities.

Knowledge in a substance form has allowed the overall global economy to grow remarkable over the last century. As explained in the “theory of endogenous growth” for technological change. Where knowledge is embodied in technologies created by inventors, engineers, and scientists for purposeful activities within the marketplace. see Romer., (1986, 1987a and 1990). The Romer’s endogenous growth model further argues, any idea for a new technology. Wherever it originates, can be used to produce new goods and other ideas in any other place, now or in the future the so-called spillover effects known as externalities.

This thesis seeks to broaden the scope of economic analysis by innovating Paul Romer’s “theory of endogenous growth” and highlighting the spillover effects of remittances- externalities in the receiving economy. For example, ideas\knowledge’s for new goods and services – produced by new technologies\industries – can be created in the market economy with new remittances inflows.

Similarly, remittances inflow are, non-rival goods: remittances receiving householder or firm using remittances deposits does not preclude others from using it too. These spillovers effects will create new aggregate demand and supply of money activities for consumption, saving and investments to produce new goods and services. Moreover, the conventional wisdom seems to be that, because remittances inflows are used mostly for consumption or are welfare-reducing, they have a minimal impact on long-term growth. This thesis attempts to fill this gap in the existing literature of long-run macroeconomic impact of remittances-led growth. Also, it explores particularly the remittances saving and investment multiplier effects on patterns of growth, productivity and technological potential for countries with high remittances inflows.

This study contributes to the debate of remittances-financed growth and remittances-financed industrialization in two important ways. First, we construct a simplified conceptual framework presented in Figure 1 section 1.3; which are consistent with the scientific literature narrative. However, the main extension, lies with the specific ways in which aggregate remittances inflows are translated from householders into the productive process and, more broadly, how their benefits can be gained at the national level.

Secondly, we analyze the importance of remittances in promoting economic growth, looking specifically at the interaction relationship and its shape between remittances inflows and the different economic sectors outcomes. For example, the productive sectors, labour markets formation, financial markets development and government fiscal sustainability. On patterns of broad-based growth, productivity and technological potential an aspect ignored in the literature. In particular, we explore how local economic sectors development, influences countries with high remittances capacity to take advantage of remittances inflows.

A summary of the above discussion reveals that remittances impact growth through various channels. The literature on remittances is yet to reach a consensus about its impacts on the economy. The current study is an attempt to enrich the literature by revisiting the remittances growth nexus. Since small year-to-year differences in remittances growth rates, which may seem tiny in a short-run perspective, cumulate. If such differences are systematic over decades, they build up to significant changes in both living standards and the local productive process.

Nevertheless, this study methodologically contributes by estimating the spillover effects of remittances-led multiplier externalities that may be presence in the local productive process in countries with high remittances inflows. Which to the best of our knowledge, no other study has so far, addressed these cross-sectoral patterns. The current study also boasts a methodological contribution by using the most recent remittances data from 1960 to 2018. With alternative new complementary variables to characterize the sectoral dynamics of the productive sectors of the economy.

Finally, from this theoretical proposition we proposed a theoretical and analytical framework in the next section.

1.3 Theoretical and Analytical Framework.

“…Remittances the manna from abroad…,” Borja K., (2013)

1.3.1 Introduction.

Following the literature, the scope of this study focused on the macroeconomic-level, because of the core dimensions of economic growth and, in particular the savings and investments channels. That are relevant to remittances-growth and remittances-financed industrialization. In this section, the recent literature on the analytical frameworks that link remittances with economic performance are discussed to enable conceptual clarity over the main research variables. This leads to the formulation of a working hypotheses followed by, the thesis proposed conceptual framework. Which would form the theoretical and empirical propositions. We then explained each of the different structural directions within the proposed analytical framework for remittances capital within the economy.

1.3.2 The conceptual framework.

International migration has led to social, economic, demographic, political and cultural consequences for both labor exporting and importing countries. One of the migration influences of economic growth is remittances. Although a considerable amount of literature has been published on the determinants of workers’ remittances inflows, the literature seems to be dominated by two major approaches: one focusing on microeconomic factors and the other focusing on macroeconomic variables. However, despite this obvious division, there is virtually no standard theory for workers’ remittances determination. Much of the current literature has concentrated on individuals’ “motives”, “intended function” and “end use” to remit. Rather than the macroeconomic variables that are impacted from migrant’s savings and investments inflows to their countries of origin.

Remittances flows are large and permeate a significant number of households in the recipient economies and will reflect the underlying microeconomic considerations which determined the individual decisions about remittances. Lucas., and Stark., (1985); identify three (3) descriptions of motivation for why migrants remit parts of their incomes to their families at home. First, migrants may remit for “purely altruistic” reasons to increase the well-being of family members at home by providing additional income and thus, higher consumption levels. Secondly, migrants may remit part of their savings for motives of “self-interest” to be used to finance the purchase of durable goods, and or investments in real estates and financial assets.

Finally, remittances can be part of a mutually beneficial “Insurance arrangement” between the migrant and his or her family at home. There are two possible reasons for such a contract. First, if investment in human capital is financed from household resources, migrants, who are typically the more educated household members, may remit part of their income as repayment of the principal invested by the household in their education. In so far as family members also share in the costs of migration then remittances are partly a return to the family's investment, Glytsos., (1988). Secondly, migration may be part of a household decision in the face of risks where families face the possibility of income losses through crop failures or due to unexpected price changes. Migration is thus part of a diversification strategy for the household to provide an alternative source of income or risks sharing, Mchabb., and El-Skka., (1999).

At the macroeconomic level the aggregate remittance inflows are undoubtedly complex and have effects on influencing both growth and industrialization. Through their economic interaction among households, firms, industries, financial intermediaries and governments. The recent macroeconomic studies discussion in the previous section. Outline these mechanisms which motivate the empirical work that has examined the relationships between remittances and growth using modern growth theory and mostly resulting into a positive and or negative outcomes. See Efobi et al., (2016); Salahuddin., and Gow., (2015); Kumar., and Stauvermann., (2014); Ahamada., and Coulibaly., (2013); Ziesemer., (2012); IMF (International Monetary Fund)., (2005) and Chami et al., (2003).

Following the above foregoing discussions, there are different macroeconomic channels through which migrants-remittances can affect remittances-growth and remittances-financed industrialization either directly or indirectly. This thesis therefore endeavors to propose a formal theoretical framework from the literature and our own compilations of the macroeconomic influences of remittances. The conceptual framework is illustrated in Figure 1.

The conceptual model above established the economic motives of remittances inflows and delivered an innovative macroeconomic insight on the effects of the accumulation of physical capital. As well as their effects on the efficiency of the allocation of this new capital over time within the recipient economy. For example, within the model, the fact that remittances entered the economy through family transfers and indirectly. Through the activities of remittances-receiving householders, primarily through their consumption decisions and saving and investment patterns. Since remittances contribute to higher consumption in (domestic and imported good and services) and higher saving and investment in (human capital and financial intermediary). This in turn would lead to an increase in the aggregate demand for money, as well as expanding the aggregate supply of funds available to facilitate positive growth via the aggregate multiplier’s effects within the economy.

On each of the different structural directions of remittances capital within the conceptual model and on its path towards remittances-growth and remittance-industrialization. The framework further argues remittances behave differently from other private capital, official aid and or foreign direct investment inflows. And, in turn have different spillover impacts via consumptions, savings and investments channels. Such as enhancing aggregate demand, generate local multipliers, increasing the aggregate productive capacity, and promoting industrial, financial, and labour markets developments. Also, as a potential source for government revenues and fiscal sustainability performances.

For example, remittances may increase or enhance investment in physical capital and total factor productivity to the extent than there are linkages to domestic financial systems in the economy. The receipts of substantial and sustained remittances in an economy may lead to increase in domestic investment rates, thus increasing economic growth. If financial constraints are significant – for example, a large group of householders are rationed out of the credit markets because of the lack of domestic financial development-then remittances may help to ease the credit constraints (inefficient credit markets), resulting in an increase in investments rather than using the remittances for consumption . By increasing the recipient country’s demand for money, remittances are likely to expand the supply of funds to the banking systems and various financial intermediary (i.e. “catalyst for financial development”) this would make it easier for entrepreneurs, firms, and governments to borrow and smooth their investments, expenditures and earnings overtime, Ayadiet el al., (2013); Misati., and Nyamongo., (2011); Giuliano., and Ruiz-Arranz., (2009); and Gupta el al., (2009).

IMF Working Paper., (2009); found remittances affect debts sustainability through three (3) channels. First, “higher tax base”, even if they are not taxed directly, remittances flows may indirectly increase the revenue that the government receives from consumption and trade-based taxation since they contribute to higher consumption of domestic and imported goods. However, the strength of this channel is dependent on the tax structure in place in remittance-receiving countries. With approximately half of revenues in developing countries due to consumption and production taxes, Gordon and Li,. (2006); Ziesemer., (2006). The evidence suggests this channel may be particularly robust. In this case, higher remittances that lead to an increase in the tax base can also lower country risk and reduce the marginal cost of borrowing.

Secondly, “seigniorage” if remittances increase the domestic demand for banking sector liabilities, the demand for money will rise. As a result, for a given rate of inflation, the government’s seigniorage revenue will tend to increase. Finally, “higher private savings”, remittances may lead to increased deposits in the banking system, and to the extent that the marginal propensity to consume is less than unity, remittances may increase private savings. This higher level of private saving could be channeled by the banks through the purchases of government bonds to support higher government debt levels.

Remittances and labour markets development can be expected to have important consequences on the economies of remittances-receiving countries. These labor market outcomes are an important determinant of long-run growth. As remittances are an alternative to labor income, and may therefore affect labor force participation, wages, and employment choices, among other labor supply outcomes. Chami et al., (2003); argue that remittances reduce work incentives and therefore decrease labor supply and economic growth. Dustmann et al., (2015); find that emigration increases wages, because it reduces the size of the labor force. Docquier et al., (2013); examined the wage impacts of emigration in OECD countries, and finds that emigration decreases the supply of highly educated workers and therefore increases their wages. Al Mamun et al., (2015); finds a positive impact of remittances on labor productivity, in countries that both receive large amounts of remittances and have large labor forces.

Remittances-financed industrial development could be defined as transforming mobilized deposits into credit for economic operators within an economy. It involves the increase in value adding of the manufacturing sector, compared with other sectors, will lead to a faster attainment of any country’s industrialization, GuiDiby., and Renard., (2015). From this definition, two components are required for remittances-industrialization to thrive. They include the encouragement of the manufacturing sectors for production and such production must be sustained to meet local and international demands.

Modern literatures have documented a more active utilization of capital flow from remittances rather than final demand expenditure. More importantly, as a source of liquidity, remittances can boost domestic entrepreneurship. Woodruff., and Zentano., (2001); found that 27 percent of firms in Mexico were reliant on remittances from abroad to finance their liquidity and that remittances represent 20 percent of the capital invested for business development. Massey., and Parrado., (1998); earlier, concluded that start-up capital for 21 percent of businesses in Mexico required remittances from working in the United States.

Hossain., and Hasanuzzaman., (2015); on the relevance of remittances to Bangladesh’s economy, found a positive long-run effect of remittances inflows on investments. Another, channel through which remittances inflows affect industrialization is via the exchange rate, which will affect the manufacturing sector’s performances. Since remittances affect the exchange rate of countries because of the demand for and supply of foreign exchanges, the value of tradable manufacturing goods will most likely be affected, which will in turn influences the performance of the manufacturing sectors. Rajan., and Subramanian., (2005); Selaya., and Thiele., (2010).

Following, the theoretical and analytical framework presented above, this research is mainly concerned with remittances-led growth and remittances-financed industrialization nexus. As such, it builds on and incorporates insights from the literature on economic development. To consider how the productive sectors, labour markets formation, financial markets development and government fiscal sustainability changes with remittances inflows. On patterns of broad-based growth, productivity and technological potential. To further study these interactions among the context of industrialization. The research connects to the literature to fill specific gaps in regard, to developing an insightful theoretical framework (in a logical approach). Also making sense of new empirical variables, its strength of the relationships and the directions of the causality, with specific reference to countries with high remittances inflows.

1.4 Research Questions and Approach.

The overall research question this dissertation addresses is:

To what extent, through which mechanisms and directions, do remittance capital inflows influences the emergence of remittances-growth performance and remittances-financed industrialization, in countries with high remittances inflows?

The main sub-questions that this research seeks to explored are:

SQ1. How and to what extent do remittances capital inflows influences GDP remittances-growth performance and remittances-financed industrialization through the accumulation of the Agriculture, Industry, Manufacturing and Services sectors value adding?

SQ2. Do remittances capital inflows promote participation and or mobility within the labour market?

SQ3. Can remittances capital inflows foster financial markets developments?

SQ4. Under what conditions do remittances capital inflows influences government fiscal sustainability and taxation levels?

As the overall research question above suggests, this research focuses on two specific research dimensions, namely: the theoretical and empirical methods. At the theoretical level, the thesis develops a general hypothesis grounded in a series of current and historical theoretical contributions. From different perspectives, having acknowledged the fundamental roles of remittances capital on the process of economic growth. The first part of the research approach is devoted to constructing a formal theoretical framework of the macroeconomic influences of remittances. The model established the economic motives of remittances and deliver an interesting new insight on each of the different structural directions of remittances capital within the economy and on its path towards remittances-financed economic growth and remittances-financed industrialization.

Following the theoretical model, the empirical approach used are in the Post-Keynesian and Romer’s endogenous growth schools of thought. Which establishes a linkage between the different strands of literature and stylized within the general framework of growth regressions. In the empirical analysis we proposed a mathematical model using econometric panel data techniques of Autoregressive Distributed Lag Model (ARDL) and Vector Error Correction Model (VECM) along with Pruning trees, Johansen Co-Integration and Granger Causality testing. We also construct a comprehensive real-world dataset with information on value added, and productivity by broad sectors of the economy. From countries with high remittances inflows during the period of 1960 to 2018. To reveal some of the noticeable hypotheses arising from the reviewed literature and our model. As well as the short and long-term relationships and its explanatory powers on a variety of variables and models driving remittance-led growth and industrialization.

Finally, the last step in the research approach the thesis construct a detailed examination of the sectoral dynamics of the productive sectors of the economy. This bring both the initial theoretical propositions with empirical findings, as well as bringing out new and innovative insights, revealed by the empirical examinations. For this part of the analysis the thesis proposes several new complementary variables to characterize the sectoral patterns of the productive sectors proximate as the Agriculture, Industry, Manufacturing and Services sectors value adding. Ultimately, this method includes an in-depth examination of the sectoral distributions of manufacturing, employment, financial market development and government debts sustainability and taxes and its contribution of different sectors to the aggregate industrialization of the economy.

1.5. High Remittance Countries

1.5.1 Remittances inflow compared with other resources: Global Perspectives

Remittance, funds received from migrants working abroad to developing countries have grown dramatically in recent years. According to recent data released by the International Monetary Fund (IMF) and the World Bank, global remittance flow is estimated at $542 billion in 2018. Remittance remain a key source of external resource flows for developing countries, far exceeding official development assistance and are more stable than Foreign Direct Investment (FDI) over the years (Figure 1).

This section would use the dataset to created various graphs and tables on the selected data

1. Remittances graphs on the correlations of the all variables

2. Figure Global remittances and other resources

3. Global growth % of remittances trend

4. Most 20 remittances recipient 2018.

5. Remittances as % of selected variables

1.6. Outline of the Dissertation.

The core of the dissertation is organized as a series of chapters that each examined one specific aspect of the central research question “…to what extent, through which mechanisms and directions, do remittance capital inflows influences the emergence of remittances-growth performance and remittances-financed industrialization, in countries with high remittances inflows…?” Each chapter opens with an introductory paragraph that describes how the chapter contributes to answering the question and how these are addressed in each subsequent chapter.

Chapter 1 sets the scene. It provides a broad understanding of the rationale and evolution of remittances capital inflows aimed to support industrialization in countries with high remittances inflows. It then examines the notion of “remittances-led growth and remittances-financed industrialization” and builds on the theoretical and empirical literature. To formulate a working hypothesis, introduce a conceptual model and research question and sub-questions around the long run macroeconomic effects of remittances inflows.

Chapter 2 outlines the current literature employed to study, the relationship between remittances-led economic growth and remittances-financed industrialization nexus. The chapter not only presents the general theoretical and empirical foundation on which the thesis will be constructed. But also identifies several gaps within the most influential literature on remittances growth and summarized into a table, over the last decade. That need further exploration and will constitute the focus of this thesis investigation.

Chapter 3 Builds on the theoretical and empirical contributions, proposed a conceptual model and the gaps in the literature identified in the first and second chapters. To frame the investigation between remittances economic growth and remittances-financed industrialization. First by defining the research variables, and sub-variables, based on the research questions. Secondly, the data sets applied in the analysis are also described showing how they were collected and the reliability of variables and their attributes. Thirdly, a mathematical model of the relationship between remittances-led economic growth and remittances-financed industrialization. Are develop and the hypotheses to be tested are also articled.

Chapter 4 develops the econometric panel data techniques to be used to estimate a variety of models and explore the short and long-term relationships and its explanatory powers on a variety of variables. The chapter gives an explanation on how the role of the productive sectors, employment, financial market development and government fiscal sustainability and taxes contributions towards different sectors to the aggregate industrialization of the economy. The chapter also draws on results from the different empirical models and provides a summary of the main arguments and evidence presented throughout the dissertation. Building on those, it formulates a few policy directions that should be primarily important for development practitioners.

Chapter 5 concludes. It offers a conclusion regarding all emerging findings, aggregating them to offer an opinion based on empirical findings presented. In the preceding chapters on the influence of between remittances economic growth and remittances-financed industrialization in countries with high remittances inflows. Finally, it suggests areas and opportunities for further research and analysis.

CHAPTER 2. - Literature Review.

“Some tales of growth economics”

2.1 Introduction.

The chapter establishes the literature theoretical and empirical foundations for the research into remittances-financed industrialization and economic growth. It also enables the theoretical propositions and empirical findings and provides conceptual clarity over the thesis main research macroeconomic parameters. The chapter not only presents the general ground on a subset of particular literature over the last decade which this thesis will be expanded on. In particular, it discusses the hypothesis of new remittances-led growth and remittances-financed industrialization nexus. As such, it builds on and incorporates insights from the literature. To consider how the productive sectors, labour markets formation, financial markets development and government fiscal sustainability changes in the short and long-term. With remittances inflows over time on patterns of broad-based countries growth, productivity and technological potential. Finally, the chapter concludes with summarizing the main research gaps that have been identified through the literature reviewed and that will be addressed in the remaining of this book.

2.2 Economic Growth and Remittances.

What makes some countries grows faster or richer than others? Economists have been studying this question since the days of Adam Smith and David Ricadro to Karl Marx, John Maynard Keynes and Robert Solow. Up until now after more than two centuries, the mystery of economic growth remains. One of the main insights into the effects of capital accumulation on growth were due toSolow., (1956, 1957), the founder of the neoclassical growth model. Helpman., (2004) illustrated and example of the neoclassical growth model and is presented in Figure 2. Which shows the horizontal axis represents the economy’s capital intensity, defined as the ratio of capital to effective labour. Effect labour is measured in efficiency units. It is the product of labour hours worked and a measure of the productivity of labour. The vertical axis represents both the ratio of savings to effective labour and the ratio of the replacement requirement ( i.e. in the context of this thesis remittances-capital and remittances-financed industrialization are the replacement requirements) to effective labour.

Overlaying the two coordinate systems allows to depict not only the relationship of each of these ratios to capital intensity but also their relationship to each other. One curve describes saving per effective until of labour. In this model aggregate saving equals a constant fraction of income. The curve is concave, because due to the declining marginal productivity of capital, the adding of a unit of capital adds less to output the larger the capital stock.

At point 0 through the origin describes the investments (remittances-capital and remittances-financed industrialization) in capital per effective unit of labour that is needed to keep the capital-labour ratio at its original level, assuming the population grows, and capital depreciates at a constant rate, and that labour productivity improves at a constant rate. The required investment compensates the capital stock for population growth, capital depreciation, and technological progress. For example, a larger population supplies more working hours resulting in capital intensity to decline, if the capital stock were to remain constant. Depreciation reduces the capital stock therefore, investment (remittances-financed/inflows in the productive sectors) is needed to restore the original capital stock and the original capital intensity.

Finally, technological progress (via remittances-financed industrialization) that raises the productivity of workers and expands the effective supply of labour. If the stock of capital did not change the capital-labour ratio would decline. Therefore, again investment are needed to restore the original capital intensity. Whenever saving exceeds the replacement requirement, investment exceeds the amount needed to maintain constant capital intensity. As a result, the capital-labour ratio rises. But when saving falls short of the replacement requirement, the ratio of capital to effective labour declines. The arrows on the horizontal axis show the implied directions of change in capital intensity. A long-run equilibrium is attained when saving equals the required replacement. Such an equilibrium is depicted by point E, where the two curves intersect.

Following Solow’s growth model and other studies on the theoretical and empirical literature on economic growth. Which can be explained into four main neoclassical themes. First, the accumulation of physical and human capital which describes one part of the variation across countries income per capita and its rate of growth. Secondly, total factor of productivity [10] which is at least as significant as accumulation. To understand its determinants, one need to understand what shapes the accumulation of knowledge and the incentives for knowledge creation. This leads to explore the effects of research and development, learning-by-doing, externalities, and increasing returns. Thirdly, interdependent [11] within this theme this thesis is grounded, and expanded. For example, growth rates of different countries are interdependent, because knowledge flows across national borders, as well as foreign trades, capital inflows (remittances) and investments affects (remittances-financed industrialization via the productive sectors growth), the incentives to innovate, to imitate, and to use new technologies. Finally, economic and political institutions affect the incentives to accumulate and to innovate, and they also affect the ability of countries to accommodate changes. See also Arrow., (1962a); Uzawa., (1965); Shell., (1967); Romer., (1986); Lucas., (1998); Aghion., and Howitt., (1992); and North., (1981); (1990). [12]

Having established remittances-inflows and remittances-financed industrialization via neoclassical growth model through the channel of replacement requirement to effective labour and the interdependent theme along the lines of the theory of endogenous growth. The literature identifies other various transmission channels through which remittances have an impact on economic growth. For example, remittances promote economic growth by increasing household income. Increasing income creates the opportunity to boost consumer spending, accumulation of assets, promotion of self-employment, and investments in domestic entrepreneurships. As well as improved government revenues and fiscal sustainability.

Moreover, emigration and remittances contribute to human capital accumulation. Ratha., (2007, 2016). A positive impact of emigration on growth is more likely in developed countries, which usually have a higher ability to transfer knowledge and skills when emigrants return to the country of origin, or to divert remittances in order to create new opportunities in the private sector. At the macroeconomic level, the impact of remittances-development occurs within the multiplier effects through a household’s consumption of goods and services; investment in human capital, which improves labour productivity; and investment in gross capital formation. United Nations., (2007). Despite the positive impact of remittances, they cannot ensure long-run economic growth or solve structural economic problems, such as unstable political climate and economic policies, or corruption, which is common in developing countries. De Haas., (2007). Some studies found that remittances influence economic growth in less developed countries because they fill the gap of foreign currency shortage. Bliss., (1989). The other reason for a positive impact is that remittances provide an alternative way to finance investments and help overcome liquidity constraints. Fayissa., (2008).

2.2.1. First gap: a formal model of remittances-financed growth.

From the aforementioned studies reviewed above and summarized in Table 1. Which serve to underscore the growing importance of remittances provided by migrant workers from developing countries working in other countries. Consequently, the modern macroeconomic literature over the last decade reveals that remittances impact growth through various direct and indirect channels. With most of the empirical studies based on a simple of listed countries and or in most part are country or regions specific. Found either a “positive, or negative” effects and or at best “no relationships”, between economic growth and remittances. Much of the current microeconomic literature has concentrated its efforts on income distribution, individuals’ “motives”, “intended function” and “end use” to remit that is there consumption patterns.

In this thesis we reconcile both these traditions into a simplified conceptual framework presented in Figure 1; which are consistent with the scientific literature narrative. However, the main extension, lies with the specific ways in which aggregate remittances inflows are translated from householders into the productive process and, more broadly, how their benefits can be gained at the national level. Accordingly, we divided the remittances receiving economy into four economic development outcomes and we model the cause of remittances-led productivity growth along the lines proposed in Romer., (1986); and Lucas., (1998). As we would see in chapter 3, a distinguishing feature of the proposed model is that its multiple outcomes can be obtained depending on the country initial conditions and underlying macroeconomic parameters.

Therefore, this formalization gives an interesting theoretical insight in explaining the emergence of remittances-led spillovers effects in the economy. In particularly, understanding the effects of aggregate demand and supply of remittances-money for saving and investments to produce new goods and services. By setting, the models to analyze the outcomes of certain productive sectors, labour markets formation, financial markets development and government fiscal sustainability on patterns of growth, productivity and technological potential.

In the reviewed literature, however the dynamic interactions between the degree of remittances-financed growth and the possibilities for remittances-led industrialization. Over the short- and long-term relationships for countries with high remittances inflows are not fully explored. As we will see, the main contribution of our model relies precisely on the examination of this kind of interaction and its evolution along the process of economic development. Hence, the conceptual framework proposed in this thesis contributes both to the neoclassical and dependency theory literature. That has tried to bring together these related traditions in a coherent framework to analyze the basic potential of remittances-financed development.

2.3 Remittances-financed Industrialization.

Arthur Lewis in his seminar paper (1954) emphasis that a rapid increase in productive capacity particularly of the manufacturing sectors is “the central fact of economic development.” Kuznets., (1966) described long-term development patterns of countries based on empirical analyses of national accounts and argued that industrialization or increases in the share of manufacturing in GDP is a key feature of modern economic growth. Kaldor., (1967) examined the relationship between industrial development and economic growth, and based on empirical results, characterized the manufacturing sectors as “the main engine of fast growth”. Diby., and Renard., (2015) find that significant development of the manufacturing sectors, compared with other sectors, will lead to a faster attainment of a country’s industrialization.

In a recent survey, Johnson et al. (2010) conclude that there is virtually no non-oil-exporting economy, which see sustained economic growth without a sound manufacturing base. These studies imply that an important avenue to understanding the long-run implications of the rising levels of remittances is how remittances inflows impact on the growth of the manufacturing sectors. Other studies infer the relationship between remittances and manufacturing growth by examining the link between remittances and the real exchange rate. The main finding of these studies is that the inflow of remittances is associated with real exchange rate appreciation. They conclude that remittances inflow has the potential to inflict economic costs on the manufacturing sectors of receiving countries. The economic reasoning behind this conclusion is that the remittance-induced real exchange rate appreciation undermines the competitive position of the remittances-receiving countries with dire consequences for manufacturing growth. See Amuedo-Dorantes., and Pozo., (2004); Acosta et al. (2009); Lartey et al. (2008). Rodrik., (2008); and Williamson., (2009).

Dzansi., (2013); identify some perspectives in the theoretical and empirical literature. First, under the Dutch disease perspective, the manufacturing sectors is assumed to produce mainly tradable goods. While the non-manufacturing sector produces goods and services primarily for the domestic market. The prevailing output price of manufactured goods is internationally determined. Whereas the price of non-manufactured goods depends entirely on domestic conditions. Under this setting, remittances inflows impact the manufacturing and non-manufacturing sectors differently. In the tradable sector, supply increases correspondingly (through increased imports and/or reduced exports) to meet demand. However, the non-tradable sectors experiences excess demand that results in higher relative price. This is often referred to as the spending effect in the Dutch disease literature. Corden., and Neary., (1982).

Secondly, financial constraints perspective, several studies have shown that one of the principal factors that constrains growth of poor countries is inadequate access to finance e.g., Levine., and Zervos., (1998); Levine., (1997); Rajan., and Zingales., (1998). Considering these external inflows such as foreign aid Sachs., (2005) and foreign direct investment; Phelps., (2009) are avenues to relax the financial constraints of the developing world.

Finally, demand constraints perspective where consumption expenditure constitutes the largest share of remittances inflows. Adams., (2006). Barajas et al., (2009) acknowledge the positive welfare implications of remittances-induced consumption but express skepticism about the growth effects. It is, however, important to point out that such consumption expenses can stimulate the economy in general and the manufacturing sectors. A useful framework within which to see this is a “quasi-closed” economy whose manufacturing sectors is constrained by the small size of its product market from the demand side. For such an economy, Keynes., (1936) tells us that one approach is to activate manufacturing activities is to stimulate demand.

Another direct channel through which remittance inflow promotes industrialization is skill and technology transfer, and improved market-oriented production. Brinkerhoff., (2006) presents an explicit analysis of how migrants promote skill transfer within the homelands of Peoples Republic of China (PRC), Philippines, and Afghanistan. Syed., and Miyazako., (2013) found remittances to be an important source of investments in agriculture particularly for a shift from subsistence agriculture to market-oriented production. Likewise, in Ghana, remittance is seen to improve both farm and non-farm production; Tsegai., (2004). Another important channel through which remittances inflow affects productivity via industrialization is skill and technology transfers that migrants bring to their home countries. Barajas et al., (2009) noted that remittances may affect Total Factor Productivity (TFP) growth by changing the size of dynamic production externalities generated by an economy. Moreover, remittances have also been recently documented to contribute to output per worker; Ssozi and Asongu., (2016a) and TFP; Ssozi., and Asongu., (2016b) in Sub-Saharan Africa (SSA).

2.3.1. Second gap: remittances induce industrialization.

Following, the foregoing theoretical and empirical literature reviewed above and summarized in Table 1. Which indicates that there are several channels remittances inflows can induce industrialization. The specific ways in which new remittances are translated into the productive process and, more broadly, how their benefits can be gained at national level, however, are still subject to debate. Most of the studies seem to focus on the linkages between remittances and the real exchange rate effects on imports and exports demand. As well as the financial constraints caused by inadequate access to finance. And the skills and technology transfers that migrants bring on their return home.

From our knowledge there has being very little to no research on remittances-led industrialization. Through the sectoral patterns of manufacturing sectors growth over the short- and long-term relationships for countries with high remittances inflows. For example, this thesis models assume that industrialization via economic growth is demand-led. In particular, remittances-led via the manufacturing sectors. As there is a dynamic interactive process connecting the expanding aggregate supply of funds available to facilitate growth of aggregate demand and the growth of productivity for countries with high remittances inflows. This is not only an original contribution to the remittances-growth literature, but also attempts to formalize these ideas within the general framework of mathematical growth models.

2.4 Remittances and Labour Markets Developments.

Remittances and labour markets development can be expected to have important consequences on the economies of remittances-receiving countries. For example, remittances receipt affects households' consumption and investment decisions. Which may have a significant follow-on effects on labor demand. Labor market outcomes are an important determinant of long-run growth. The quantity and quality of labor in an economy, the human capital help determine the potential GDP as well as its growth rate. Recent studies on the labor market consequences of remittances has focus on two aspects, emigration and labor markets supply. Where the emigration literature complements the findings in the remittance’s literature. While other papers on emigration utilize a remittance channels to explain why emigration affects labor market outcomes. Chami et al., (2018).

For example, Elsner., (2013a) for Lithuania, Elsner., (2013b) for the post Soviet era, and Dustmann et al., (2015) for Poland found that emigration increases wages, because it reduces the size of the labor force. Docquier et al., (2013) examine the wage impacts of emigration in OECD countries, and finds that emigration decreases the supply of highly educated workers and therefore increases their wages. The so-called brain drains effects that affects developing countries. By forcing governments to react to the outflows of skilled labor by adjusting the subsidies to education and training. Al Mamun et al., (2015) considers labor productivity and finds a positive impact of remittances on labor productivity. In countries that both receive large amounts of remittances and have large labor forces. Abdulloev et al., (2014) for Tajikistan finds that there is a negative effect of emigration on the labor force participation among that is separate from the effect of remittances.

Dzansi., (2013); examine the labor market perspective from the potential of transfer of labor from the manufacturing sectors as implied by the Dutch disease literature [13]. The study finds remittance inflows may reduce the existing stock of labor supply and thereby increase the labor cost of production. However, a key assumption in arriving at this implication is that remittances receipts are non-labor income. However, from the household’s point of view, remittance inflows could be conceived as labor income. In this outset, remittance inflows should not affect the household’s work–leisure trade-off and the implied labor supply. For example, the principal recipients of remittances are the migrant-dependents such as children, a spouse, and/or parents. Thus, remittance inflows could be looked upon as a contribution to the household “labor income.”

Posso., (2012) examines the behavior of aggregate labor supply rather than the behavior of individuals. The paper finds that remittances increase the aggregate labor force participation of men, including those who do not receive remittances. Because non-migrant households who want to migrate after watching neighboring households receive remittances from members who emigrated, and therefore join the labor force in order to accumulate the skills and experience for migration.

Other studies have considered the impact of emigration or remittances on the level of unemployment. For example, Jackmann., (2014) found a positive and significant impact of remittances on unemployment for countries in Latin American and the Caribbean that have low remittance-GDP ratios. Where Amuedo-Dorantes., and Pozo., (2006a) find that remittances reduce the number of hours that men spend in formal work and self-employment and increase the number of hours spent in informal work. More recently, Ivlevs., (2016) finds that remittances and emigration increase the share of informal employment in a sample of six transition economies, using the Social Exclusion Survey conducted in Kazakhstan, Macedonia, Moldova, Serbia, Tajikistan and Ukraine in 2009.

Remittances literature has also focused on the choice to become self-employed. Rodríguez-Oreggia., (2009) finds that remittances increase labor force participation for some women in Mexico and argue that this effect may be due to self-employment. Khanal et al., (2015) finds that remittances receipt among rural families in Nepal increases the amount of land that farmers leave unproductive. The impact of emigration and remittances on educational choices has also been studied. Several papers find that remittances receipt reduces child wage labor and increases recipient spending on education. Calero et al., (2009), Acosta,. (2011), and Alcaraz et al., (2012).

2.4.1. Third gap:remittances-induce labour productivity.

Overall, the evidence from the modern literature on the aggregate labor-market effects of remittances are consistent. With wages and productivity tend to increase as a result of emigration and remittances. Which appears to be steady with a decrease in overall labor supply due to emigration. Remittances also tend to induce people to shift away from formal employment and toward informal and unpaid work. And reducing the supply of labor in the market for formal employment, causing upward statics on wages.

The evidence regarding the effect of emigration and remittances on self-employment, entrepreneurship, and on the unemployment rate are mixed.An interesting question remains, however, is whether remittances- induce aggregate multiplier’s effects have any impacts. On the remining labor force participation rate at the sectoral level after emigration. In the productive sectors within the economy for countries with high remittances inflows. From the reviewed literature above and summarized in Table 1 indicates that the debate is still opened. And to the best of our knowledge this thesis is the first to fill this gap within the remittance’s growth studies over the short- and long-term relationships for countries with high remittances inflows.

2.5 Remittances and Financial Sector Development.

There is a growing body of literature in recent years that has examined the economic effects of remittances through its impact on financial development. Theoretically, this relationship is ambiguous. For example, money transferred through financial institutions can enable households to gain access to financial products and services provided by financial institutions. Thus, for a financial system to be efficient there must be credit flowing within the financial system to the real economy through the pooling of savings and allocation of capital to productive investments. Levine., (2005); Estrada et al., (2010); Svirydzenka., (2016).

Giuliano., and Ruiz-Arranz., (2009) find that remittance boost growth in countries with less developed financial systems by providing an alternative way to finance investments and helping overcome liquidity constraints. Chowdhury., (2011) examined how financial sector development is impacted by remittances inflows in Bangladesh. The paper concluded that the development of financial system of Bangladesh is positively impacted by the increase in remittances inflows. Aggarwal et al., (2011) examined the links between the cumulative deposits’ level and remittances inflows and finds that financial sector development is positively impacted by remittance inflows and they are interrelated.

Furthermore, Nyamongo et al., (2012) find remittance emerged as an important source of growth and financial development. However, volatility of remittances appears to have a negative effect on the growth of countries in Africa. Anzoategui et al. (2014) investigate the impact of remittances on financial inclusion using household-level survey data for El Salvador and finds that remittances have a positive impact on financial inclusion by promoting the use of deposit accounts. Uddin and Sjo (2013) investigates the effects of remittances and financial development on economic growth. This study finds that the flow of remittances and the expansion of financial sectors drive the growth in GDP in the long run, while remittance act as a shock absorber to income changes in the short run.

Finally, some studies in the long-run finds the efficiency of the financial system can lead to the growth of the manufacturing sectors and industrial development. Shahbaz., and Lean., (2012); Udoh., and Ogbuagu., (2012); Ewetan., and Ike., (2014). Remittances are also seen as an important source of savings and bank deposits to the financial sector in recipient countries. In Uganda, Kaberuka., and Namubiru., (2014) found a positive effect, while Karikari., Mensah., and Harvey., (2016) also found a positive effect for 40 African countries.

2.5.1. Fourth gap:remittances-induce financial development.

Overall, the evidence from the above studies and summarized in Table 1; finds that in countries with high remittances inflow and improved financial institutions, remittances recipient can better utilize the fund for investment and business development. Though, the studies have already proposed that remittance inflows exert significant positive impact on financial sectors developments. Further studies are still needed so that the relationship between remittances and financial developments could be better understood. Moreover, the question is of great significance because it is believed that remittances are mostly used for the purposes of consumption and not spend on saving and investments instruments or starting a business.

Finally, the reviewed studies over the last decade have investigated the impact of remittances inflows on financial development by considering only the banking development indicators that transform liquid short-term savings into long-term investments thus promoting capital accumulation. Therefore, this thesis is first to our knowledge. To construct a financial development index from banking, stock market and insurance companies’ indicators for countries with high remittances inflows. To understand the multiplier effects from householders into the productive process within the economy. Because financial market has an important role in investment capital within the economy.

2.6 Remittances, Government Fiscal Sustainability and Taxation.

Following the theoretical and empirical literature on remittances effects of government fiscal sustainability and taxation. Which starts with the government budget constraint and the accumulation of the corresponding debt stocks over time. However, governments have no direct claims on these personal householders’ transfers. For example, remittances enter the recipient economy via family transfers and remittances affects debts sustainability and taxation indirectly. Through the activities of household’s consumption decisions and saving and investments patterns. As well as the economy multiplier effects via remittances-led money creation activity. Both of these remittances channels will have some effects on government fiscal sustainability and taxation policies. Since they alter the fiscal balance and the evolution of the stock of public and private sector liabilities over time. See Chami el at., (2008) and Ziesemer., (2012; 2006).

IMF Working Paper., (2009); found remittances affect debts sustainability through three (3) channels. First, “higher tax base”, even if they are not taxed directly, remittances flows may indirectly increase the revenue that the government receives from consumption and trade-based taxation since they contribute to higher consumption of domestic and imported goods. However, the strength of this channel is dependent on the tax structure in place in remittance-receiving countries. Secondly, “seigniorage” if remittances increase the domestic demand for banking sector liabilities, the demand for money will rise. As a result, for a given rate of inflation, the government’s seigniorage revenue will tend to increase. Finally, “higher private savings”, remittances may lead to increased deposits in the banking system, and to the extent that the marginal propensity to consume is less than unity, remittances may increase private savings. This higher level of private saving could be channeled by the banks through the purchases of government bonds to support higher government debt levels.

To illustrate remittances effects of government fiscal sustainability Chami el at., (2008) examines a simplified economy. In which the government issues only domestic-currency debts and assumed that the household receives remittances only in terms of domestic currency. Sustainability conditions are derived from households and government budget constraints to show the channels through. Which remittances alter the accumulation of liabilities and the affect of debt sustainability. The government budget constraints and choices with remittances can be summarized. As remittances are unrequited, nonmarket personal transfers between household across countries, and as such they enter the household budget constraint as an addition to income separate from the domestic production process. Previously accumulated stocks of money balances (M) and real government bonds (B), income from production (Y) net of taxes (T), and real remittances transfers (Rem) are used to finance household expenditure (C). In this simplified setting the aggregate household budget constraint is:

Where R is the gross domestic interest rate, or R = (1+r), where r is the net domestic interest rate, and P is the price level. The government uses taxes, money creation, and real bond issuance to finance its expenditure (G ) according to:

Under the assumption that household and government consumption include public and private investment, the economy wise resource constraint is:

A clearer picture of the effect of remittances on fiscal policy choice, including debt creation, can be obtained through examination of the intertemporal government budget constraint. Substituting for the successive bond term in the government budget constraint yields:

Where µ is the growth rate of the nominal money balances and

The usual interpretation of this exercise is that a positive stock of the debt in the present period must eventually be paid for by generating fiscal surpluses or money creation. Using the economy-wide resources constraint to substitute for the sequence of the government spending result in:

Where is the level of household saving. Following Chami el at., (2008), equations are very useful for understanding the impact of remittances on fiscal policy choices. Since the stock of debt issued during the previous period, must be taken as a given state variable, increase in remittances that do not result in a one-to-one increase in household consumption will support new sequences of taxes, money growth, and bond issuance. For example, given stream of future tax revenues chosen by the fiscal authority and a future stream of money growth chosen by the monetary authority, an increase in remittances will be met with an increase in future debts issuance, for some future period. The increase in government bond issuance can be viewed as a mechanism to absorb additional levels of household saving, , and support the householders desire to smooth consumption across time. If these flows were instead channeled through the financial system, an increase in remittances that led to additional household saving could also lead to increases in financial system liabilities, which in turn could lead to additional private and public sector credit provisions.

However, should the fiscal authority not want to increase future debt levels, the increase in remittances given a future stream of monetary policy will be met by an increase in future tax revenue. Though remittance do not enter directly into the government budget constraint and empirical evidence suggest that government do not tax remittances directly but received tax revenue indirectly. Additional tax revenues may be collected through a consumption-based taxes system. Consequently, remittances can be viewed as part of the potential tax base in addition to labor incomes from production, depending on the taxes structure.

Finally, for a given stream of future tax revenues and bond issuance by the fiscal authority, the monetary authority may also meet an increase in remittances with an increase in money creation. In this regard, inflows of remittances have macroeconomic policy implication similar to those of inflow of market-based capital, and countries that operate within inflation-target regimes need to conduct liquidity operation to deal with any changes in liquidity resulting from remittances.

Chami el at., (2008), also present a derivation for remittances and external sustainability to assess debt sustainability that would include exchange rates effects. On remittances and foreign currency debt issued by the public sector. In addition to the sustainability of public sector debt, remittances also affect external sustainability through their inclusion in net transfers as part of the noninterest current account balance. For example, assessments of external sustainability are a key element in IMF surveillance of member countries and involve forming a view of how outstanding stocks of liabilities are likely to evolve over time. External debt evolves according to:

Where D represents the stock of public and private external debt and CAB the noninterest current account balance in U.S. dollars. Separating the components of the noninterest current account mean the equation can also be written as:

Where TB is the balance on good and services, Inc represents the balance of income less interest, and Tr is net current transfer, which include workers’ remittances. Normalizing the preceding equation by nominal GDP results in an external debt-to-GDP ratio of:

Where Y is the growth rate real GDP and P is the growth rate of the U.S. dollar value of the GDP deflator [14]. Here, lowercase variable (d, tb, inc, tr) are used to denote ratios to GDP (of D, TB, Inc, and Tr, respectively). The change in the debt-to-GDP ratio is then:

According to this debt dynamic equation, an increase in the level of remittances-to-GDP ratio, all else equal, improves external sustainability. Remittances also have indirect beneficial effects on debt dynamics to the extent that presence reduces external borrowing costs and causes the domestic currency to appreciate.

However, the improvement in debt dynamic should be qualified when the empirical results regarding the cyclicality of remittances rate appreciation are considered. An increase in domestic GDP relative to GDP abroad will improve debt dynamics through the coefficient on d, but will be offset somewhat by a decline in remittances (e.g. transfers) and any increase demand for imports. Conversely, a relative increase in GDP abroad will lead to higher remittances inflow and possibly increase in the demand for export, both of which should lead to improvements in sustainability. Finally, external sustainability will improve if remittances transfers result in a real appreciation of the domestic currency, but such an appreciation will also adversely affect exports.

2.6.1. Fifth gap: remittances-inducegovernment debts sustainability and taxation

Overall, the evidence from the modern literature on remittances effects of government fiscal sustainability and taxation. Suggest that remittances presence supports higher future debt levels. Because of the correlation between remittances, banking sectors credit to public sector, and public debt levels. These higher debt levels tend to be associated with increased government taxation and spending. Through the activities of aggregate household’s consumption decisions and saving and investments patterns.

The evidence suggests this channel may be particularly robust. In this case, the question arises under what conditions do remittances capital inflows and the economy multiplier effects via remittances-led money creation activity, influences government fiscal or debts sustainability and taxation? From the reviewed literature above over the last decade and summarized in Table 1; and to the best of our knowledge. This thesis is the first to fill this gap within the remittance’s growth studies. In particular, for the short- and long-term relationships for countries with high remittances inflows.

2.7 Final Remarks.

In this chapter we develop an innovative insight by connecting the diverse strands of literature on growth theory for remittances inflows, that address this topic for remittances-led developing economies. Starting from the general discussion on the degree of remittances-financed growth and the possibilities for remittances-led industrialization among countries, and the related concept of economic growth. The review has moved to several theoretical contributions that have tried to explain the main forces behind these trends. The key outcomes of certain productive sectors, labour markets formation, financial markets development and government fiscal sustainability on patterns of growth, productivity and technological potential has been highlighted. The review has also revealed some gaps in the literature over the last decade that deserve further research. There are five gaps that was identify and at least three related issues that remain unexplored or have attracted little or no interest and these will be the main focus of this thesis.

The first issue is theoretical in nature and is related to the fact that the formalization of the remittances growth literature has not paid enough attention to the dual character of remittances-led saving and investments spillovers effects for developing economies. Moreover, insufficient effort has been devoted. To specific the ways in which aggregate remittances inflows are translated from householders. Into the productive process and, more broadly, how their benefits can be gained at the national level. This thesis addresses these gaps in Chapter 1 and proposed a formal model for remittances-financed growth and the possibilities for remittances-led industrialization. The validity of this theoretical formulation will be further examined from an empirical perspective in Chapter 3 and 4, where the noticeable outcomes of the model will be evaluated with real-world data.

The second issue refers to the specific remittances inflows roles for the different economic sectors outcomes. For example, the productive sectors, labour markets formation, financial markets development and government fiscal sustainability. On countries patterns of growth, productivity and technological potential. That according to the model are key to achieving successful remittances-financed growth and industrialization. This mechanism is perhaps one of the least explored in the empirical literature and deserves more attention. In this thesis we will address these multiple spillovers outcomes that can be obtained depending on the country initial conditions and underlying the long-term macroeconomic parameters to fuel remittances-led economic growth.

The third issue, in turn, refers to the short- and long-term economic relationship that can be observed within the productive part of the economy for countries with high remittances inflows. These will be addressed in this thesis from an original viewpoint that focuses on the contribution of different productive sectors, so far as to understand the macroeconomic effects. Of the strength of the relationships and the directions of the causality between remittances-growth and remittances-financed industrialization. Even though this question has great significance from an economic policy viewpoint. There has been little empirical analysis undertaken which is the core focus of this dissertation and will be examined from this perspective.

Table 1. Summary of Empirical Research of Remittances financed Economic Growth and Industrialization.