European Journal of Finance and Banking Research Vol. 8. No. 8. 2018.

Kanfitine Lare-Lantone.

ANALYZING THE INDIRECT IMPACT OF REMITTANCES ON GROWTH

Kanfitine Lare-Lantone1

Université de Lomé, Togo, Togo &Sheridan College, Ontario, Canada.

Email: kanflanto@gmail.com

ABSTRACTThis paper investigated the mechanism that generates and transmits the indirect impact of remittances on economic growth. It specifically explored the process through which their transitory effect, channelled through consumption, wages, investments, and subsequent remittances, cumulates and transmutes into economic growth. The theoretical framework set wages and investments to be the most growth catalyzing channels. But its empirical testing, on 36 countries sample unbalanced panel data for the period 1978-2015, finds consumption and investments to be the most significant one. Results also reveal that the more a country receives remittances, the more altruistic they are, and the weakly they impact its economic growth. The policy implication is that the mechanism allows for a country to target the optimal size of remittances its can absorb and concentrate the transmission of their indirect impact on growth on the most growth catalyzing channels. Key words: remittances, economic growth, transmission mechanism, transitory effect, indirect impact, transmission channels, optimal inflows. JEL Codes : E61, F24, O40

1 Kanfitine Lare-Lantone, PhD, Advanced Assistant Professor, Université de Lomé, Togo, Instructor, Sheridan College, Ontario Canada, 2224-2700 Aquitaine Avenue, Mississauga, ON L5N 3J6, Canada, E-mail: kanflanto@gmail.com.

I INTRODUCTIONEvidence abounds that remittances impact economic growth through various channels of which, consumption, education, financial development, investments, and real exchange rate have received the most attention. It is also demonstrated that such impact may be positive [Giuliano, P. et al. (2009)] or negative [Chami, R. et al. (2003)], direct or indirect [Rao and Hassan (2011) (2012)], and short-run or long-run [Lare-Lantone, K. (2016)]. Unfortunately, the characteristics analysis of the impact remittances exert on economic growth has not exposed the mechanism that generates and transmits it. At the same time, understanding it can only help receiving countries maximize their gains from remittances. It, therefore, urges to investigate that mechanism as it bears both theoretical and policy implications.

The current paper is motivated by the same urgency as it attempts to contribute to the understanding of the remittances-growth mechanism. Its main objective is to identify the mechanism that generates and transmits the indirect impact of remittances on growth. The interest in focusing on the indirect impact is threefold. First, according to the literature, the indirect impact is a more significant determinant of the remittances-growth relation than the direct impact. Second, as such, it has been widely covered for been channelled through various some socioeconomic channels. Third, it is when their indirect impact outweighs their direct impact that remittances generate growth. Giving that, the paper focused specifically on the mechanism through which the transitory effect generated by remittances and channelled through consumption, wages, investments, and subsequent remittances transmutes into economic growth.

The equilibrium relation derived from the theoretical framework implies that a country can maximize the indirect impact of remittance inflows on economic growth by increasing the transitory effect channelled through wages and investment and/or reducing that channelled through consumption and subsequent remittances. The theoretical model was empirically tested on a 36 sample countries panel data and subsequently on individual country’s annual data for the period 1978-2015.

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The rest of the paper is organized in four subsequent sections. Section II reviews the literature, Section III introduces the methodology, Section IV presents the empirical analysis, and Section V discusses findings and concludes.

II REVIEW OF LITERATURESeveral studies found the remittances-economic growth relation

to be positive [Giuliano, P. et al. (2009), Salahuddin, M. (2013), Katsushi, S.et al. (2014), Ebeke, C. et al. (2014)] or negative [Chami, R. et al. (2003), Barajas, A. et al. (2009), Ziesemer, T. (2010)], but incertitude subsisted on whether it is a direct, indirect, short-run, or long-run one. A consensus seems to emerge on the fact that remittances impact growth both directly and indirectly. The direct impact is rather small and non-significant [Barajas, A. et al. (2009), Ziesemer, T. (2010).] Inversely, the indirect impact is more important and significant and is transmitted to growth through various socioeconomic channels. The most investigated of these channels are output volatility [Combes, J-L. et al. (2011), Jidoud, A. (2015)], education [Cox, A. et al. (2003), Dean, Y. (2006), Acosta, P. (2006)], financial development [Giuliano, P. et al. (2009), Aggarwal, R. et al. (2010)], investments [Sayan, S. (2006), Osili, U. (2007), Adams, Jr. et al. (2010)], and real exchange rate [Lartey, E. et al. (2008).]

To correct some of the theoretical and data specification limitations of early studies, Rao and Hassan (2012) clearly disentangled the direct impact of remittances from the indirect one and tested each distinctly on 40 countries’ data with a remittance-to-GDP ratio of 1 or more over the period 1960-2007. Their results confirmed that the direct growth impact is non-significant, and, at best, it is a medium-run effect. Also, that investments [Cooray, A. et al. (2013), Githaiga, P. (2014)] and financial development [Brown, R. et al. (2013), Ebeke, C. et al. (2014)] are the most significant channels through which the indirect impact is transmitted to growth. They also confirmed that volatility in output [Combes, J-L. et al. (2011), Jidoud, A. (2015)] and real exchange rate [Amuedo-Dorantes, C. et al. (2004), Acosta, P. et al. (2009), Humberto, L. et al. (2007)] exert a negative impact on remittances while investments and financial development exert a positive impact. Lare-Lantone (2016) found that the direct impact is a short-run but non-significant impact and the indirect impact is a long-run, positive and significant one. Also, the transitory effects generated through

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consumption, investments, and wages affect the indirect impact significantly. For example, remittances boost growth by dampening consumption instability [Agarwal, R. et al. (2002), Osili, U. (2007), Bettin, G. et al. (2014).] They increase wages through investments in education and labor participation [Edwards, A. et al. (2003), Gupta, S. (2009), Jidoud, A. (2015)] and productivity [Giuliano, P. et al. (2009)] or reduce them by reducing households’ working hours [Acosta, P. (2006).] Remittances also affect real exchange rate [Lartey, E. et al. (2008)].

Unfortunately, these analyses including the disentanglement of the remittance-economic growth relation have not exposed the mechanism that mutates remittance flows into growth. The need to explore that mechanism emerges as its knowledge and control has important theoretical and policy implications.

III DATA AND METHODOLOGY

A. Methodology

The model used is an extension of the dynamic remittances-growth threshold-constraint model developed by Lare-Lantone (2016) to assess the indirect impact remittances generated and transmitted to growth. It led to the equilibrium relation stated as:

Φ i ,t=Γ i ,t (1)

With Гi,t the direct impact and Φi,t the indirect impact defined as:

Γ i , t=−dY i, t

dR i ,t−2 , Φ i ,t=

dY i ,t

dT i ,t−1∙dT i ,t−1

dR i ,t−2

Yi,t is the output at t, Ri,t-2 remittances at (t-2) and Ti,t-1the transitory effect at(t-2). T is derived as a short-run disequilibrium relationship such that:

T i ,t=(W ¿¿ i , t−Ri ,t)−(C i ,t−Ii , t)(2)¿Ci,t is consumption, Ii,t investments, Ri,t subsequent remittances, and Wi,t wages are determined auto regressively and exogenously by other variables at the initial period (t-2) such that:

W i , t−1=a0+a1W i ,t−2+a2T i ,t−2+X1' +ε1 i ,t−1(3)

Ri , t−1=b0+b1R i ,t−2+b2T i ,t−2+X2' +ε2 i ,t−1(4)

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C i ,t−1=c0+c1C i ,t−2+c2T i , t−2+X3' +ε 3i , t−1(5)

I i ,t−1=d0+d1 I i ,t−2+d2T i ,t−2+X 4' +ε 4 i ,t−1(6)

X1' , X2

' , X3' , and X 4

' are sets of exogenous control variables.

Equation (1) captures the threshold point from which a country can start reaping gain in output or growth if the indirect impact of its received remittances surpasses the direct impact (Φi,t ≥ Гi,t .)

For the purpose of this paper, it is assumed that, for economic growth to be triggered by received remittances, a country must maximize their indirect impact to permanently outweigh their direct impact such that:

MaxΦi , t>Γ i , t(7)

The country maximizes the indirect impact of received remittances given the transitory effect generated by past remittances such as:

MaxdY i ,t

dT i ,t−1 subject to dT i, t−1

dRi , t−2

Setting dRi,t-2 equal to Ri,t-2 at the initial period, applying the Lagrange multiplier to solve the maximization problem, deriving with respect to T, and solving for equilibrium leads to:

Φ i ,t=dY i ,t

dRi ,t−2=dY i , t−1

dRi ,t−2

⏞A [( dW i ,t−1

dT i ,t−2+dI i ,t−1

dT i ,t−2)

⏞B

−(dRi ,t−1

dT i ,t−2+dC i ,t−1

dT i ,t−2)

⏞C ](8)

This equilibrium relation captures the mechanism that generates and transmits the indirect impact of remittances to growth. Segment A exerts a multiplying effect on the transitory effect and captures the direct impact of past remittances as:

Γ i , t=−dY i, t

dR i ,t−2=

−dY i ,t

dY i ,t−1∙dY i , t−1

dRi ,t−2

⏞A

It is derivable from the output-remittances relation, specified at time (t-1) as:

Y i ,t−1=Y i ,t−1[(R i ,t−2 , T i , t−1 ,C i ,t−2 ,W i , t−2 , I i ,t−2) , X5' ] (9 )

This output-remittances relation captures the short-run direct impact, long-run direct impact, and the transitory effect of remittances on output change. Segments B and C capture the incremental transitory effect channelled through wages,

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consumption, investments, and subsequent remittances that cumulates and transmutes into the indirect or long-run impact on output change.

Given the transitory effect generated by past remittances, any increase in segment B can only result from an increase in wages and/or investment and any increase in segment C from an increase in subsequent remittances and/or consumption. To maximize its output gain from remittance inflows, a country must increase their transitory effect channelled through wages and investment and stabilize or reduce the transitory effects channelled through consumption and subsequent remittances. It must, simultaneously, keep their direct impact equal or superior to 1 to sustain the positive change in output.

B. Data description and sources

The theoretically derived equations were estimated on 36 countries’ sample unbalanced panel and annual data for the period 1978-2015. The availability of data, from the World Bank’s World Development Indicators, dictated the selection of countries and the period covered. The selected countries are: Algeria, Bangladesh, Bolivia, Botswana, Brazil, Burkina Faso, Cameroon, Colombia, Cyprus, Dominica, Dominican Republic, Egypt, El Salvador, Greece, Honduras, India, Jordan, Kenya, Madagascar, Mali, Mexico, Morocco, Mozambique, Nigeria, Pakistan, Panama, Paraguay, Senegal, South Africa, Sudan, Suriname, Swaziland, Thailand, Trinidad & Tobago, Tunisia, and Turkey.

IV EMPIRICAL RESULTSFor estimation purposes, all the variables were renamed, the

variable wages were proxied with value-added (VA), and TRANSRES the residual value of the estimated transitory effect equation was derived (Table 1.) All the estimations were done using Eviews econometrics package. Table 1. Definition and measures of retained variablesVariable Name Measures Definition∆Yt GROWTH GDPG GDP growth (annual %)

  CGDP Change in GDP per capitaTt-1 TRANSIT (Value added per capita -Remittances per capita) - (Household

consumption per capita - GFCF per capita)TRANSRES TRANSRES(-2) Residual series from the estimated TRANSIT Equation

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∆Rt-1 REMITTANCES CREMGDP Change in Personal remittances, received (% of GDP)Rt-1 REMGDP Personal remittances, received (% of GDP)Wt-1 WAGES VAGDP Gross value added at factor cost (% GDP)Ct-1 CONS HCPC Household final consumption expenditure per capita (constant 2005

US$) It-1 INVEST INVEST1 Gross fixed capital formation (constant 2005 US$) per capitaOt-1 OPEN OPENNESS (Exports + Imports of goods and services (constant 2005 US$))/GDPEt-1 EXCHANGE TTRADE1 (Country’s World export)/(Country World import)Ft-t FDEV FDEV Domestic credit to private sector (% of GDP)Gt-1 GOV GOV Government expendituresDt-1 FDI FDI Foreign direct investment, net inflows (% of GDP)Yt INCOME LOGGDP LOG (GDP per capita) (constant 2005 US$)It-1 INFLATION CPI (-1) Consumer Price IndexIt-1 POPULATION POP (-1) Population (level)Source: Author’s own definitions.

A.Measuring the direct multiplicative effect of past

remittances

The transitory effect equation (Equation 2) was estimated on level data using Panel Least Square method. The residual series TRANSRES was derived from the estimated Equation 2. Two-period lagged values of TRANSRES were plugged into Equations 3 to 6 with control variables, using Panel GMM to control for possible endogeneosity biases. Then, Equation 9 was estimated, including lagged TRANSRES and control variables, as:GDPG i ,t−1=φ0+φ1CREM i ,t−1+φ2TRANSRESi ,t−2+φ3REM i , t−2+φ3 FDEV i ,t−2+φ3GOV i ,t−2+φ3OPEN i , t−2+φ3FDI i ,t−2(10)+φ3LOGGDPi , t−2+υi ,t−1

The dependent variable is measured as change in GDP (CGDP) and GDP growth (GDPG). However, all CGDP-based results were later dropped due to their weaknesses and only GDPG-based results are reported (Table 2.) Globally, the results reflect goodness of fits and no serial correlations with the instruments used satisfying instrument exogeneity.

Column 1 shows wages proxied by value added to only be significantly determined by one-period lagged output and inflation. Column 2 reveals that subsequent remittances are directly and significantly determined by past remittances. Column 3 shows consumption to be significantly determined by the transitory effect

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generated by past remittances and one-period lagged output, inflation, and population. Consumption is also significantly determined by its one-period lagged value but not so significantly by the one-period lagged government expenditures. Column 4 reveals that investments are significantly determined by the transitory effect generated by past remittances and by one-period lagged financial development, FDI and exchange rate. In sum, consumption and investments are significantly determined by the transitory effect of remittances but not wages as predicted by the theoretical framework. Column 5 shows that output growth is positively but non-significantly determined by the transitory effect generated by past remittances. Both short-run (CREMGDP) and long-run REMGDP(-2) changes in remittances carry the expected positive sign but are non-significant, a confirmation of the weakness of the direct impact of remittances on economic growth. The one-period lagged financial development FDEV(-1) is a significant but negative determinant of output growth. The one-period lagged government expenditures GOV(-1) and output LOGGDP(-1) are negative but non-significant determinants. The one-period lagged openness OPEN(-1) and foreign direct investments FDI(-1) are positive but non-significant determinants. Globally, the results confirm that the portion of the impact of remittances on economic growth, transmitted through the various channels, is more significant than the one transmitted directly.

Due to the presence of country-specific effect in the panel data, each individual country’s indirect impact was also estimated on annual data over the same period. TRANSRES series were derived from the estimated transitory effect equation using the OLS method and plugged back into the consumption, subsequent remittances, investments, wages, and output equations using GMM. Results reveal that the transitory effect of remittances channelled through wages was positive for 20 countries but only significant for 12. It was negative for 16 other countries but only significant for 11. The transitory effect channelled through investments was positive for 26 countries but only significant for 13. It was negative for the other 10 countries but only significant for 4. The transitory effect channelled through subsequent remittances was negative for 21 countries and only significant for 6. It was negative for the other 15 countries and significant for only 6. The transitory effect channelled through consumption was negative for 19 countries and only significant for

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7. It was rather positive for the other 17 countries and only significant for 11 of them.

B.Estimating the indirect impact of remittances on economic growthTo estimate the actual size of the indirect impact of remittances on growth, the estimated values of coefficients a2, b2, c2, d2, and 3 from the wages, subsequent remittances, consumption, investments, and output equations (3, 4, 5, 6 and 10) were plugged into the equilibrium relation (Equation 8).

The indirect impact of remittances on economic growth, channelled as a transitory effect through wages, investments, subsequent remittances, and consumption, in the period 1978-2015 was positive for 25 of the countries and negative for the other 11. The largest indirect impact sizes were recorded in Paraguay (0.51), Bangladesh (0.56), Mozambique (0.69), Greece (0.74), Honduras (0.80), Senegal (0.92), El Salvador (1.40), and Suriname (31.2). The largest negative indirect impact sizes were recorded in Bolivia (-0.95), Trinidad & Tobago (-0.77), Nigeria (-0.74), Tunisia (-0.65), and Burkina Faso (-0.59). The direct impact was positive for 18 countries and negative for the other 18. The sizes of the direct, indirect, and total impacts are compiled in Table 3.

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Comparing remittances’ economic weight with their indirect impact on economic growth

To test whether the impact of remittances on growth depends on their importance in a receiving economy, the size of their indirect impact on growth is compared to the averaged remittances-to-GDP ratio for the period. Also, for the purpose of comparing selected countries’ dependencies on remittances, five-year averaged

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Table 2. GMM Estimates of the Transitory Effect and Output Equations   VALUE-ADDED REM CONS INVEST GDPGC -0.980 -6.323 941.3 64.29 5.646

-1.904 -0.419 4.892 1.092 0.266CREM(-1) 1.045

0.932TRANSRES(-2) -0.001 0.035 -0.812 0.410 0.043

-0.820 1.096 -2.440 2.229 0.661REM(-2) 1.546 0.218

9.048 0.673FDEV(-1) -0.117 -0.060

-2.291 -2.239GOV(-1) -0.994 -0.042

-1.834 -0.157OPEN(-1) 0.000 -0.002 0.017

0.659 -0.129 0.623LOGGDP(-1) 0.043 0.255 -32.97 -2.272 -0.065

2.070 0.399 -4.727 -1.012 -0.074FDI(-1) -0.003 1.767 0.465

-1.412 3.344 1.481TTRADE1(-1) -0.008 0.071

-0.908 2.864CPI(-1) -0.001 0.395

-1.940 4.269POP(-1) 0.000 0.000

-1.412 1.107INVEST(-2) 0.065

0.182CONS1(-2) -1.175

-2.276VA(-2) 0.958

8.232R-squared 0.819 0.760 0.716 0.445 0.358Adjusted R-Sq. 0.772 0.702 0.648 0.269 0.141Instrument rank 52.00 47.00 51.00 46.00 49.00Durbin-W stat 1.829 1.942 1.020 1.715 1.880J-statistic 24.65 11.39 43.34 15.01 7.601Prob(J-statistic) 0.026 0.328 0.000 0.059 0.575Values in italics are t-statistics.Estimates from author’s computation of the model using WDI data.

remittances-to-GDP ratios are plotted. Figures 1a to 1j reveal that MENA economies depended the most on remittances and the European economies the least. Their averaged remittances-to-GDP ratios for the period are 6.50% and 1.69% respectively.

Table 3. Estimation of Remittances’ Indirect Impact on Output by Country

Direct Indirect Total

Direct

Indirect Total

CountryEffects Impact

Impact Countryeffects

Impact Impact

All 1.19 0.218 0.26Algeria 2.35 0.67 Madagascar -1.95 -0.81 0.41Bangladesh 0.17 0.10 0.56 Mali -0.47 0.20 -0.42Bolivia 0.34 -0.32 -0.95 Mexico -2.55 0.38 -0.15Botswana 2.20 0.32 0.15 Morocco 0.03 0.00 0.02Brazil 19.1 6.67 0.35 Mozambique 3.47 2.41 0.69Burkina Faso -0.70 0.41 -0.59 Nigeria -0.62 0.46 -0.74Cameroon 1.65 0.14 0.08 Pakistan 1.26 0.48 0.38Colombia 3.91 1.71 0.44 Panama -0.63 -0.18 0.28Cyprus -0.09 0.00 0.05 Paraguay 0.71 0.37 0.51Dominica -0.17 -0.02 0.10 Senegal -0.52 -0.48 0.92Dominican R. -1.06 0.33 -0.31 South Africa -16.8 -6.89 0.41Egypt -0.28 -0.01 0.04 Sudan -1.59 -0.78 0.49El Salvador -0.20 -0.28 1.40 Suriname 4.15 130 31.2Greece -1.14 -0.84 0.74 Swaziland 1.54 -0.71 -0.46Honduras 0.05 0.04 0.80 Thailand 2.85 0.78 0.27India -0.84 0.19 -0.23 Trinidad & T. 15.7 -12.1 -0.77Jordan 0.73 -0.14 -0.20 Tunisia -0.10 0.06 -0.65Kenya 1.41 0.22 0.15 Turkey -0.80 -0.30 0.37Values in italics are t-statisticsEstimates from author’s computations of the model using WDI data.

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1978

1979

1980

1985

1990

1995

2000

2005

2010

2015

0

5

10

Figure 1a. Evolution of selected Asian countries' remittances over GDP ratio (1978-2015)

BangladeshIndiaPakistanThailand

Year

Perc

ent

1978

1979

1980

1985

1990

1995

2000

2005

2010

2015

02468

Figure 1b. Evolution of selected European countries' remittances over GDP ratio (1978-2015)

CyprusGreece

Year

Perc

ent

1978

1979

1980

1985

1990

1995

2000

2005

2010

2015

05

10152025

Figure 1c. Evolution of selected Americas countries' remittances over GDP ratio (1978-2015) - I

BoliviaBrazilColombia

Year

Perc

ent

1978

1980

1990

2000

2010

05

10152025

Figure 1d. Evolution of selected Americas countries' remittances over GDP ratio (1978-2015) - II

Dominican Republic

El Salvador

Honduras

Mexico

Year

Perc

ent

1978

1980

1990

2000

2010

01234

Figure 1e. Evolution of selected Americas countries' remittances over GDP ratio III (1978-2015) - III

Panama

Paraguay

Suriname

Trinidad and TobagoYear

Perc

ent

1978

1980

1990

2000

2010

0

5

10

15

Figure 1h. Evolution of selected SSA countries' remit-tances over GDP ratio (1978-2015) - I

Burkina FasoBotswanaCameroonKenya

Year

Perc

ent

1978

1979

1980

1985

1990

1995

2000

2005

2010

2015

05

10152025

Figure 1f. Evolution of selected MENA countries' remittances over GDP ratio (1978-2015) - I

AlgeriaEgyptJordan

Year

Perc

ent

1978

1979

1980

1985

1990

1995

2000

2005

2010

2015

02468

Figure 1g. Evolution of selected MENA countries' remittances over GDP ratio (1978-2015) - II

MoroccoTunisiaTurkey

Year

Perc

ent

1978

1980

1990

2000

2010

0

5

10

15

Figure 1i. Evolution of selected SSA countries' remit-tances over GDP ratio (1978-2015) - II

Madagascar

Mali

Mozambique

Nigeria

Year

Perc

ent

1978

1979

1980

1985

1990

1995

2000

2005

2010

2015

0

5

10

15

Figure 1j. Evolution of selected SSA countries' remit-tances over GDP ratio (1978-2015) - III

SenegalSouth AfricaSudanSwaziland

Year

Perc

ent

Graphs 1a to1j depict trends in selected countries’ remittances-over-GDP ratios over1978-2015.Source: Author’s estimations on World Development Indicators data.

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Cross-comparisons of the remittances’ economic weight with the size of their indirect impact on growth reveal that countries with a remittances-to-GDP ratio less than 2% (Brazil, Mozambique, South Africa, Suriname, and Trinidad and Tobago) had remittances’ indirect impact on growth equal to 2 or more, in absolute terms. Those with remittances-to-GDP ratios higher than 2% (Bangladesh, Botswana, Burkina Faso, Dominica, Dominican Republic, Egypt, El Salvador, Honduras, India, Jordan, Mali, Morocco, Nigeria, Pakistan, Senegal, Sudan, Swaziland, and Tunisia) had remittances’ indirect impact on growth less than 1, in absolute terms. In other words, countries with lower remittances-to-GDP ratios recorded stronger indirect impact of remittances on growth, and vice versa. The indirect impact of remittances on growth was weaker in countries which depended more on remittances and stronger in countries which depended less on remittances. Only Brazil, Colombia, Mozambique, and Suriname had a size of indirect impact that surpassed the remittances-to-GDP ratio.

V. DISCUSSIONS AND CONCLUSIONA.Discussions

The equilibrium relation, derived from the theoretical framework of this paper, characterizes the indirect impact of remittances on economic growth as their incremental transitory effect cumulated through wages, consumption, investments, and subsequent remittances and affected by the direct impact subsequent periods’ inflows. Growth is triggered as the cumulated transitory effect transmutes into a sustained positive change in output. Given that mechanism, a country can maximize its output gain from remittances by increasing the transitory effect channelled through wages and investments and/or reducing the transitory effect channelled through consumption and subsequent remittances.

The empirical testing of the model reveals that consumption and investments are significantly determined by the transitory effect generated by past remittances and not wages and subsequent remittances. Specifically, consumption is significantly determined by the transitory effect for the sample of countries and for half of the individual countries. This result confirms previous findings [Lare-Lantone (2016)] and may be an indication that, in most countries,

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larger shares of remittances are used for consumption expenditures. It is, therefore, not surprising that for half of the countries the transitory effect affected consumption positively, urging the need for policies to deviate remittances from consumption expenditures to investments. These policies should reduce households’ dependencies on remittances by creating jobs, improving productivity, and eliminating income disparities.

The non-significance of wages as a channel of the transitory effect, as derived theoretically, may be attributable to the use of value added data instead of wage data in empirical estimations. The wages coefficient is also negative for half of the countries, comforting findings that remittances induce households to work fewer hours [Amuedo-Dorantes, C. et al. (2012).] It may also simply be that shares of remittances invested in human capital development [Edwards, A. et al. (2003), Gupta, S. (2009)] were too insignificant for the transitory effect to significantly affect wages.

The transitory effect of remittances affected investments positively for most of the countries, comforting findings that remittances impact investments positively [Cooray, A. et al. (2013), Bettin, G. et al. (2014).] For example, Yang (2008) found that remittances led households in Philippines to increase self-employment hours and likely start relatively capital-intensive entrepreneurial activities. Githaiga (2014) found that remittances had a positive and significant effect on private sector investment in fifteen Sub-Saharan Africa countries over the period 1982-2012. In a recent study, Petreskiand Mojsosko-Blazevski (2015) found a positive relationship between remittances and youth self-employment in Macedonia.

The transitory effect of remittances also affected subsequent remittances positively for most of the countries, offering strong evidence that remittances are self-generating as past remittances induce subsequent inflows [Chami, R. et al. (2003), Ziesemer, T. (2010).]

Comparisons of the sizes of remittances’ indirect impact on growth and their weight in selected countries suggest that, the more a country receives remittances, the more altruistic they are, and the weakly they impact its economic growth. The policy implication is that a receiving country should, at any period, only welcome remittance inflows up to an optimum level, beyond which,

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its economy may be adversely affected [Barajas, A. et al. (2016).] It must also influence the transmission of remittances’ transitory effect through the most growth catalyzing channels. In sum, a country should know its remittances’ absorption capacity and the transitory effect channels that are most favourable to its economy to maximize its gains in growth from receiving remittances.

B.Conclusion

This paper investigated the mechanism that generates and transmits the indirect impact of remittances on economic growth. It found that the transitory effect generated by past remittances is channelled through wages, consumption, subsequent remittances, and investments. It then cumulates incrementally each period under the influence of the direct impact of subsequent inflows and, overtime, transmutes into a change in output. Such a mechanism allows a country to target the optimal size of remittances its can absorb and also concentrate the transmission of their indirect impact on growth on the most growth catalyzing channels.

While the theoretical framework depicts wages and investments as the main channels through which the transitory effect is transmitted, the empirical testing found consumption and investment to be the most significant channels. This ambiguity over the importance of wages as an important remittances’ transitory effect transmission channel, is a limitation of the paper. It may, however, have resulted from the use of value added data in lieu of wages data in empirical estimations. Another limitation may come from the use of ratios of trade data to proxy exchange rate. These limitations will be addressed by future research which will also attempt to develop a framework to capture countries’ optimal remittances absorption capacities.

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