Didar Erdinç and Ligia Dorobantu
Despite the growing importance of workers’ remittances in total capital flows, the relationship between growth and remittances has not been adequately studied empirically in the context of transitional economies, especially in a comparative framework with other recipient countries. This is surprising because migrants from the Central and Eastern European Economies (CEECs) contribute significantly to their home economies through remittances, influencing investment and consumption patterns. This paper examines the impact of workers’ remittances on growth, investment and consumption in a number of CEECs in comparison to Latin America and the Middle East-North Africa- Turkey (MENAT) in a panel data framework. Using annual data ranging from 1993-2006, it is shown that as compared to Latin America, both investment and consumption are positively affected by the amount of remittances sent by workers’ to their home countries in the CEECs after controlling for several important determinants of growth such as openness to trade, inflation, real interest, credit-GDP ratio as a measure of financial deepening. In the CEECs, as in the Middle East, the workers’ remittances affect growth both through consumption and investment while the latter effect is stronger. By contrast, in Latin America, remittances mainly impact consumption rather than investment, even having a negative impact on growth. To gauge these differential effects, we use fixed and random effects estimation as well as GMM strategy to account for country-specific heterogeneity and to control for possible endogeneity among repressors. Our findings also suggest that workers’ remittances could be a significant impetus for growth, working through the investment channel, and their significance conditional on credit in investment equations suggest that they can help overcome the liquidity constraints by providing an alternative to formal channels of financing.
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