Worker Remittances and Growth: The Physical and Human Capital Channels

Remittances may have an impact on economic growth through channels to physical and human capital. We estimate an open economy model of these two channels consisting of seven equations using the general method of moments with heteroscedasticity and autocorrelation correction (GMM-HAC) with pooled data for four different samples of countries receiving remittances in 2003. The countries with per capita income below $ 1200 benefit most from remittances in the long run because they have the largest impact of remittances on savings. Their changes in remittances account for about 2%of the steady-state level of GDP per capita when compared to the counterfactual of having no changes of remittances. Their ratio of the steady-state growth rates with and without changes of remittances is 1.39. Transitional gains are higher than the steady-state gains only for the human capital variables of this sample. As savings react much more strongly than investment an important benefit of remittances is that less debt is incurred and less debt service is paid than without remittances. All effects are much weaker for the richer countries.