Remittances and Economic Growth: Empirical Evidence from Bangladesh

Transcription

1 Journal of Economics and Susainable Developmen ISSN (Paper) ISSN (Online) Vol.7, No.2, Remiances and Economic Growh: Empirical Evidence from Bangladesh Md. Nisar Ahmed Shams Professor, Deparmen of Economics, Jahangirnagar Universiy, Savar, Dhaka -342, Bangladesh Absrac The obecive of his paper has been o invesigae he causal relaionship beween remiances and economic growh in Bangladesh over he period 972/73 o 204/5. A sable, long-run relaionship is found beween he wo variables on he basis of coinegraion es. Furhermore, a one-way causaion from remiances o economic growh is also observed hrough he Error Correcion Model (ECM). The analysis indicaes a posiive impac of remiances on economic growh. As a policy suggesion, an appropriae environmen for invesing he remied money mus be creaed. Besides, a reliable and rapid remiances ransacion sysem should also be developed so ha he emigrans are encouraged o send money hrough he formal channel. Keywords: Remiance, Economic Growh, Coiegraion, Error Correcion Model, Bangladesh.. Inroducion I is commonly believed ha remiances sen by he emigrans as foreign exchange o heir family members are mosly spen on consumpion goods as opposed o invesmen. Therefore remiances do no have any significan impac on economic growh and he relaionship beween he wo is no sudied frequenly. However, remiances have become an imporan source of foreign exchange earnings from developed o developing counries which helps he recipien counry in achieving a higher growh rae. In order o minimize he problem of shorages of foreign exchanges, remiance flows grealy assis he counries which suffer from such a problem. A number of sudies have been underaken o assess he impac of remiances on economic growh. Jongwanich (2007) examined he impac of workers remiances on growh and povery reducion in developing Asia-Pacific counries using panel daa over he period The resuls suggess ha, while remiances do have a significan impac on povery reducion hrough increasing income, smoohing consumpion and easing capial consrains of he poor, hey only have a marginal impac on growh operaing hrough domesic invesmen and human capial developmen. Fayissa and Nsiah (2008), explored he aggregae impac of remiances on economic growh for 37 African counries. Remiances were found o boos growh in counries wih less developed financial sysems by providing an alernaive way o finance invesmen and helping overcome liquidiy consrains. Using dynamic panel, Carinescu e al. (2006) found remiances o exer posiive impac on long-erm macroeconomic growh in 62 counries over a period of 34 years. Similarly, using panel daa from in 39 developing counries, Pradhan e al.(2008) showed remiances o exer a posiive impac on growh. On he conrary, a number of sudies eiher found limied suppor or no impac of remiances on economic growh. Baras e al. (2009) found remiances o have no impac on promoing long-run economic growh in he remiance recipien counries. On he basis of wo sage leas squares (2sls), remiances were found o have no direc posiive impac on economic growh in Sub-Saharan Africa during he period However, remiances had indirec posiive impac on growh hrough several channels such as invesmen and educaion (Balde, 2009). Ahmed and Uddin (2009) observed he causal nexus beween expor, impor, remiance and GDP growh for Bangladesh during The sudy found limied suppor in favour of he expor-led growh hypohesis for Bangladesh, as expors, impors, and remiances cause GDP growh only in he shor run. Feeny e al. (204) found posiive associaion beween remiances and growh in he Small Island Developing Saes (SIDS) in Sub-Saharan Africa and he Pacific bu no for hose locaed in Lain America and he Caribbean. Moreover, he sudy also presens evidence of negaive growh in he absence of remiances receips in Pacific SIDS. Siddique e al. (200) invesigaed he causal link beween remiances and economic growh in Bangladesh, India, and Sri Lanka by employing he Granger Causaliy es under a VAR framework. Growh in remiances was found o lead o economic growh in Bangladesh whereas i had no effec on growh in India. Moreover, a wo way causaliy beween remiances and economic growh had been observed for Sri Lanka. Based on panel daa regression, Zuniga (20) invesigaed he impac of remiances in developing counries using panel vecor auo regression. Remiances are found o have a posiive impac on economic growh in Easern Europe, he Americas, and Asia. However, i does no conribue significanly o economic growh in African economies. In relaion o remiances and economic growh, i is worh searching for if remiances cause economic growh or vice versa. The obecive of his paper is o invesigae he causal relaionship beween remiances and economic growh in Bangladesh for he period 972/73 o 204/5.The sudy proceeds as follows. Secion 2 presens he daa. The mehodology and empirical resuls are provided in secions 3 and 4 respecively. Finally, 28

2 Journal of Economics and Susainable Developmen ISSN (Paper) ISSN (Online) Vol.7, No.2, conclusions and policy recommendaions are drawn in he las secion. 2. Daa This sudy is based on annual daa covering he period from 972/73 o 204/5. Daa on remiances (R) has been obained from various issues of Economic Trends published by he Bangladesh Bank (BB). Economic growh (G) refers o real per capia GDP. Real GDP (RGDP) is obained by dividing GDP a curren marke price by he Consumer Price Index (CPI). Afer obaining RGDP, i has been convered o per capia erms. Daa on GDP, CPI (Base: = 00) and Populaion of Bangladesh are gahered from differen issues of Saisical Yearbook of Bangladesh, published by he Bangladesh Bureau of Saisics (BBS). R and GDP are expressed in erms of Taka (Domesic Currency of Bangladesh) in Crores. Economeric esimaions have been done using EViews Mehodology 3. Uni Roo The economeric mehodology firs examines he saionariy properies of he ime series. Two procedures for deecing a uni roo in remiances and economic growh are used in our analysis: (i) The Dickey-Fuller (DF) es (Dickey and Fuller, 979), and (ii) he Augmened Dickey-Fuller (ADF) es (Dickey and Fuller, 98). The DF es is derived from he regression equaion: Z = 0 + c+ sz - c + w - s where, Z is a random walk wih drif around a sochasic rend and ω is a whie noise error erm. Ifs =, hen Z is nonsaionary. Alernaively, we can esimae he model: = ( -) f s,d DZ = + c+ fz - c + w 0 (3.2) where is he firs difference operaor and es he null hypohesis ha. If,, we have a uni roo, implying ha he ime series under consideraion is nonsaionary. The ADF es is underaken by adding lagged values of he dependen variable DZ if he error erms are correlaed. Thus, he following regression is esimaed for uni roo esing: DZ = c + c + fz + b DZ + e p å f = (3.3) = In model (3.3) Z is a random walk wih drif around a sochasic rend, D is he firs-difference operaor, ε is a whie noise error erm and p is he number of lags in he dependen variable. The null hypohesis of a uni roo implies ha he coefficien of is zero i.e., f = 0. Reecion of he null hypohesis implies ha he series is Z - saionary and no differencing in he series is necessary o induce saionariy. The number of lags in he dependen variable is chosen by he Akaike Informaion Crierion (AIC). Uni roo es idenifies wheher he variables are saionary or nonsaionary. The es is applied on boh he original series (in logarihmic form) and o he firs differences. In addiion, boh models wih and wihou rend are ried. 3.2 Coinegraion Tes Time series should o be checked for coinegraion. For wo or more variables o be coinegraed, he ime series mus have similar saisical properies i.e., hey mus be inegraed of he same order. The Engle-Granger wosep mehod (Engle and Granger, 987) is used for his purpose. The order of inegraion of he variables is idenified in he firs sep while in he second sep he residuals are esimaed from he Ordinary Leas Squares (OLS) regression on he levels of he variables. The following coinegraion equaions are esimaed: V (3.4) X = + Y + e Y = + xx + e f (3.) = 0 u (3.5) X and Y will be coinegraed if hey are inegraed of he same order i.e., I(d) and he residuals from he coinegraion equaions ( e and ) are inegraed of order less han d. e The presence of a long-run equilibrium relaionship beween wo variables X and Y is also esed hrough Johansen (988) maximum likelihood procedure. In Johansen s procedure X and Y is assumed o follow he firs order Vecor Auo Regressive (VAR) represenaion as follows: X = P X + Y + - P - e (3.6) 2 X s = Crore = 0 Million. 29

3 Journal of Economics and Susainable Developmen ISSN (Paper) ISSN (Online) Vol.7, No.2, Y = P X + Y P22 - e Y Subracing lagged dependen variables from he respecive equaions, he sysem can be wrien in marix noaion as follows: DX é é ù G G2 X - e X =ê +ê ú ë ë û ê ë é DY ú û ù G 2 G 22 ùé úê ûë Y where G = Π -, G 22= Π 22-, G 2= Π 2 and G 2= Π 2 and X and Y are firs difference saionary i.e., I(). The exisence of a coinegraing relaionship depends on he rank of he marix Γ which mus be equal o one as here can be up o one linearly independen coinegraing vecors. The number of non-zero characerisic roos of he Γ marix is used o es he rank condiion. Johansen s procedure gives wo likelihood raio ess for he number of coinegraing vecors (r) which are found by he race and he maximum eigen value ess as follows: l - ˆ = -N ln (- l ) race ( r) å i k i= r+ l + l =-N ln( - ˆ ) (3.9) max( r, r+ ) r where, li's are he characerisic roos of he marix Γ and N is he sample size. The null hypohesis of a mos r coinegraing vecors is esed in boh he race es as well in he maximum eigen value es. In he race es, he alernaive hypohesis is ha he number of coinegraing vecors is equal o or less han r +, whereas i is equal o r + in he maximum eigen value es. 3.3 Granger Causaliy Tes If coinegraion exiss beween wo variables, hen sandard Granger causaliy es canno be used as i ignores he possible long-run relaionship. Vecor error correcion will be used o es for Granger causaliy direcion. In spie of a long-run relaionship beween he variables, here may by disequilibrium in he shor run. An error correcion model (ECM) merges he long-run relaionship wih he shor-run dynamics of he model in he presence of coinegraed variables. This approach consiss in esimaing he firs difference of boh he dependen and explanaory variables. According o Granger (969), when X and Y are found o be coinegraed, he specificaion of ECM can be expressed as: n m DY = d + r m + i Y + i i X å D - åud - w (3.0) i= = n m DX = d + r h + s i X + i V Y å D - å D - n (3.) i= = where D is he firs difference operaor, μ - and η - are he error correcion erms which represens he lagged residuals from he coinegraing equaions, n and m are he number of lag lenghs chosen by he Akaike Informaion Crierion (AIC) and n and w are he disurbance erms. The error correcion erms μ - and η - measures he deviaions of he series from he long-run equilibrium relaions. In he above wo equaions, he series X and Y are coinegraed when a leas one of he coefficiens r and r 2 is no zero. In addiion, shor-run dynamics beween X and Y are characerized by he coefficiens s and s. Causaliy may be deermined by esimaing equaions (3.0) and (3.) by esing he null hypohesis ha u V 0 for all s agains he alernaive hypohesis ha 0 u ¹ and ¹ 0 ú û ù e Y u V = (3.7) = (3.8) V for a leas some s. The F-saisic is used o es he oin null hypohesis u = V = 0. X is said o Granger-cause Y no only if he coefficiens u s are oinly significan bu also if r is significan. Similarly, Y is said o Granger-cause X no only if V s are oinly significan bu also if r2is significan. If boh causally independen if u and significance of he error correcion coefficiens. u and V are significan hen causaliy runs boh way. Finally, X and Y are V are no saisically differen from zero. The -saisic is used o es he 4. Empirical Resuls The resuls in Table- indicae ha in all cases, a he level remiances (R) and economic growh (G) are nonsaionary. Thus o achieve saionariy he variables mus be firs-differenced. The DF and ADF saisics are 30

4 Journal of Economics and Susainable Developmen ISSN (Paper) ISSN (Online) Vol.7, No.2, significan only for he firs-differenced series. Thus, he ime series on remiances and economic growh appear o be I(). The resuls repored in Table- provide he basis for he es of coinegraion. The DF and ADF saisics for he coinegraion ess are presened in Table-2. Thus, according o he Engle-Granger mehod, wo variables, remiances (R) and economic growh (G) are considered o be coinegraed if hey are inegraed of he same order i.e., I(d) and he residuals in he regression of R on G (or vice versa) is inegraed of order less han d. For example, R and G will be coinegraed if he residuals in he regression of R on G (and vice versa) is I(0) provided ha R ~I() and G ~I(). The resuls show ha remiances and economic growh are coinegraed. The residuals of he coinegraing regressions are saionary indicaing ha deviaions beween remiances and economic growh reconcile ogeher in he long-run. Table-3 provides he resuls of he Johansen s maximum likelihood procedure for deermining he number of coinegraing vecors r. The resuls show ha he null hypohesis of no coinegraion (r = 0 ) can be reeced. Therefore, i can be confirmed ha remiances and economic growh are coinegraed. Table-4 repors he F-saisics and he -saisics on he lagged ECM erms. The lagged changes in he independen variable represen he shor-run causal impac while he error correcion erm gives he long-run impac. The F-saisic measures he shor-run causaion while he -saisic on he lagged error correcion erms indicaes long-run causaliy. Boh ess show ha here exiss unidirecional causaliy in he shor as well as in he long run from remiances o economic growh. 5. Conclusions The main aim of his paper has been o invesigae he causal relaionship beween remiances and economic growh in Bangladesh over he period 972/73 o 204/5. For his invesigaion we use various ime series economeric echniques such as uni roo es, coinegraion and Error Correcion Model (ECM). The resuls imply ha remiances and economic growh are boh I() and coinegraed. The resuls furher show a one-way causal relaionship from remiances o economic growh on he basis of he Granger Causaliy es. In spie of low remiance spending on invesmen, even a small porion invesed can help o alleviae he liquidiy consrains and conribue o growh. This is especially undeniable for Bangladesh in he face of high unemploymen pressure a home which can be alleviaed hrough overseas employmen. As a policy recommendaion, here should be an appropriae environmen for invesmen which will enable remiance recipiens o uilize heir funds ino he producive secors of he economy. Moreover, a reliable and rapid remiances ransacion suppor is essenial in discouraging he emigrans in remiing money hrough he informal channel (Shams, 202). References Ahmed, H. A. & Uddin, M. G. S. (2009). Expors, Impors, Remiance, and Growh in Bangladesh: An Empirical Analysis. Trade and Developmen Review, 2 (2), Balde, Y. (2009). Migrans Remiances and Economic Growh in Sub-Saharan Africa. [Online]Available:hp:// h_in_ssa.pdf (April 25, 206). Baraas, A., Chami, R., Fullenkamp, C., Gapen, M. & Moniel, P. (2009). Do Worker s Remiances Promoe Economic Growh? IMF Working Paper, WP/09/53, -22. Carinescu, N., Ledesma, M. L., Piracha, M. & Quillin, B. (2006). Remiances, Insiuions, and Economic Growh. IZA Discussion Paper, 239, -26. Dickey, D. A. & Fuller, W. A. (979). Disribuion of he Esimaors for Auoregressive Time Series wih a Uni Roo. Journal of he American Saisical Associaion, 74, Dickey, D. A. & Fuller, W. A. (98). Likelihood Raio Saisics for Auoregressive Time Series wih a Uni Roo. Economerica, 49, Engle, R. F. and Granger, C. W. (987). Co-inegraion and Error Correcion: Represenaion, Esimaion and Tesing. Economerica, 55, Fayissa, B. & Nsiah, C. (2008). The Impac of Remiances on Economic Growh and Developmen in Arfica. Working Paper Series, Deparmen of Economics and Finance, Middle Tennessee Universiy, -9. Fenny, S., Iamsiraro, S. & McGillivray, M. (204). Remiances and Economic Growh: Larger Impacs in Smaller Counries? [Online]Available:hp://susineo.com.au/sies/defaul/files/publicaions/spdi-- 2_growh remiances_in_sids.pdf (April 25, 206). Granger, C. W. J. (969). Invesigaing Causal Relaions by Economeric Models and Cross-specral Mehods. Economerica, 37, Johansen, S. (988). Saisical Analysis of Coinegraing Vecors. Journal of Economic Dynamics and Conrol, 2, Jongwanich, J. (2007). Workers Remiances, Economic Growh and Povery in Developing Asia and he Pacific Counries. UNESCAP Working Paper, WP/07/0,

5 Journal of Economics and Susainable Developmen ISSN (Paper) ISSN (Online) Vol.7, No.2, Pradhan, G., Upadhyay, M. & Upadhyay, K. (2008). Remiances and Economic Growh in Developing Counries. The European Journal of Developmen Research, 20 (3), Shams, M. N. A. (202). The Impac of Remiances in Bangladesh Economy: Issues and Prospecs. The Jahangirnagar Economic Review, 23, Siddique, A, Selvanahan,. E. A. & Selvanahan, S. (200). Remiances and Economic Growh: Empirical Evidence from Bangladesh, India and Sri Lanka. Discussion Paper,0.27, Griffih Business School, Griffih Universiy Queensland, -24. Zuniga, M. C. (20). On he pah o Economic Growh, Do Remiances Help? Evidence from Panel Vars. The Developing Economies, 49 (2), Table Uni Roo Tess wih DF and ADF for he period 972/73 o 204/5 Noes: i) The DF and ADF ess are carried ou by replacing Z wih R and G in equaions (3.2) and (3.3) respecively; (ii) Figures wihin parenheses indicae lag lenghs chosen by he Akaike informaion crierion (AIC); iii) *** and ** denoe reecion of he null hypohesis of uni roo a he % and 5% levels respecively. Table 2 Uni Roo Res for he Residuals w Noes: i) The Engle-Granger wo-sep mehod is underaken by subsiuing X and Y by R and G in equaions (3.4) and (3.5) respecively; ii) Figures wihin parenheses indicae lag lenghs chosen by he Akaike informaion crierion (AIC); iii) The null hypohesis of uni roo in he residuals can be reeced a he % level. Table 3 Johansen s Maximum Likelihood Procedure Noes: i) The Johansen s maximum likelihood procedure is conduced by replacing X wih R and Y wih G in equaions (3.6) and (3.7) respecively; ii) The lag lenghs are chosen by Akaike s Final Predicion Error (FPE) crieria; iii) r denoes he number of coinegraing vecors; iv) The null hypohesis of no coinegraion can be reeced a he % level. 32

6 Journal of Economics and Susainable Developmen ISSN (Paper) ISSN (Online) Vol.7, No.2, Table 4 Granger Causaliy Tes Noes: i) The Granger Causaliy es is performed by replacing X wih R and, Y wih G in equaions (3.0) and (3.) respecively; ii) *** denoe reecion of he null hypohesis a he % level; iii) The opimal lag lengh has been considered o be 3 according o he Akaike informaion crierion (AIC). 33