doi: 10.1111/imig.

12151

Effects of Workers’ Remittances and its

Volatility on Economic Growth in South Asia
Syed Tehseen Jawaid* and Syed Ali Raza*

ABSTRACT

This study investigates the effect of workers’ remittances and its volatility on economic growth
of five South Asian countries by employing long time series data from 1975 to 2009. Cointe-
gration results confirm a significant positive long run relationship between remittances and
economic growth in India, Bangladesh, Sri Lanka and Nepal, but a significant negative rela-
tionship in Pakistan. Conversely, the volatility of workers’ remittances has a negative and sig-
nificant effect on economic growth in Pakistan, Indian, Bangladesh and Sri Lanka, but a
negative but insignificant impact in Nepal. All sensitivity analyses confirm that the results are
robust. A less volatile inflow of workers’ remittances is growth-enhancing for all countries. It
is suggested that policy makers should make policies to reduce the transaction cost to welcome
remittances into the region. Furthermore, countries like Pakistan should make the policies to
discourage voluntary unemployment.

POLICY IMPLICATIONS
• This study show the positive effect of remittances on economic growth in India, Bangla-
desh, Sri-Lanka and Nepal. These countries should create friendly policies to reduce the
transaction cost to ensure the continuous inflows of workers’ remittances.
• Results indicate a negative effect of remittances on economic growth in Pakistan. Remit-
tances are considered an uninterrupted source of income, which may increase voluntary
unemployment, leading to decreased economic growth. The government should make poli-
cies to discourage this voluntary unemployment.
• Policymakers should create effective systems to ensure this inflow comes through formal
financial channels for better control.

INTRODUCTION

South Asia has been an important source of migrant workers for countries suffering from labour
shortages. Simultaneously, migrant workers’ remittances have become an increasingly important
source of income for the South Asian region. Remittances sent by migrant workers to their home
countries have played an important role in promoting economic development in these countries
(Siddique et al., 2010). Due to its relatively stable nature, remittance is different from other external
capital inflows, such as foreign direct investment, foreign loans, and aid (Shahbaz and Aamir,
2007). Similarly, remittances tend to go up when the recipient economy suffers an economic

* IQRA University, Karachi, Pakistan

© 2014 The Authors

International Migration © 2014 IOM
International Migration
Published by John Wiley & Sons Ltd. ISSN 0020-7985
2 Jawaid and Raza

recession as result of financial crisis, natural disasters, or political conflicts, as migrants send more
home during hard times to help their compatriots (Orozco, 2003).
A sufficient amount of foreign exchange reserves is very much needed to pay the import bills;
shortages of foreign exchange reserve is a main problem for developing countries. Remittances pro-
vide a main source of foreign exchange earnings in developing countries. Increases in the inflows
of remittances provide an opportunity to minimize the problem arising from shortage of foreign
exchange reserves. Most of the empirical studies use the cross sectional and panel data to analyse
the impact of workers’ remittances on economic growth (Faini, 2006; Fayissa and Nsiah, 2010;
Chami et al., 2003; Mohammed, 2009). Furthermore, some time series empirical studies have also
been conducted (Karagoz, 2009; Azam and Khan, 2011; Waheed and Aleem, 2008). Mostly empir-
ical studies found positive impact of workers’ remittances on economic growth (Fayissa and Nsiah,
2010; Faini, 2006; Azam and Khan, 2011). Some empirical studies, however, found negative
impact of workers’ remittances on economic growth (Waheed and Aleem, 2008; Chami et al.,
2003; Karagoz, 2009; Jawaid and Raza, 2012).
From Table 1 it is clear that there has been a significant increase in inflows of remittances in
South Asian countries in the last ten years. One possible reason for this increase may be the mas-
sive increase in the immigration of peoples from developing countries to developed countries in last
two decades (World Bank, 2007).

Motivation of the Study

In many studies mentioned in Section 2, cross country data have been used to analyse the relation-
ship between workers’ remittances and economic growth. The use of panel data may be suitable
for answering larger questions on average. It provides only the aggregate average results of a sam-
ple but it fails to explain the effect on each individual country for formulating and managing
domestic policies. This article make a unique contribution to the literature on South Asia, being a
pioneering attempt to investigate the impact of workers’ remittance, and its volatility, on economic
growth there by using the long annual time series data from the period of 1975 to 2010 and by
applying more rigorous econometric techniques. Our study is different from the past studies on a
remittances-growth nexus in four novel ways.
First, this study is a pioneering attempt to analyse the volatility of workers’ remittances on eco-
nomic growth in South Asia. South Asia has been an important source of migrant workers for
countries suffering from labour shortages. Simultaneously, migrant workers’ remittances have
become an increasingly important source of income for the South Asian region. Workers’ remit-
tances are a main source of foreign capital inflow for developing countries. The developing coun-
tries depend greatly on such foreign capital inflows; and volatility in these foreign capital inflows

TABLE 1
DECADE WISE SUMMARY STATISTICS

Worker’s Remittances

Countries 1970’s 1980’s 1990’s 2000’s

Pakistan 1.023 2.322 1.518 4.971

India 0.921 2.481 6.317 29.021
Sri-Lanka 0.027 0.295 0.735 2.143
Bangladesh 0.096 0.571 1.265 5.475
Nepal 0.021 0.045 0.052 1.397

Note: All figures are in billion US Dollar.Source: Author’s Construction

© 2014 The Authors. International Migration © 2014 IOM

 Effects of Workers’ Remittances on Economic Growth in South Asia 3

may affect their economic growth. Hence it is essential to analyse the effect of workers’ remit-
tances and its volatility on the economic growth in South Asia.
Second, we study the desired relationship of workers’ remittances and economic growth in South
Asia by using the long annual time series data for specifically analysing and estimating the relation-
ship for each country separately. We have included those South Asian countries in the top 10 of
largest recipients of workers’ remittances from 2010 to 2012. According to the World Bank, India,
Pakistan and Bangladesh are in top eight recipients of officially recorded remittances (World Bank,
2011; 2012). In the 2012 report, India, Pakistan and Bangladesh are ranked as first, seventh and
eighth top recipients of workers’ remittances respectively. So it is very important to analyse the
impact of remittances and its volatility on economic growth in the top recipient South Asian coun-
tries, by using time series data for each country.
Third, we have not restricted our study to any particular econometric technique to estimate the
long run coefficients, as is mostly done in the past studies (See Srivastava and Chaudhary, 2007;
Ahortor and Adenutsi, 2009; Karagoz, 2009; Paul and Das, 2011; and Azam and Khan, 2011). In
this study, to ascertain the robustness of the results of long-run coefficients, we use two different
sensitivity analyses to check the robustness of initial results, first by using additional variables in
basic models of remittances and volatility of remittances and secondly by using the different prox-
ies of volatility of workers’ remittances.
Fourth, some of the empirical studies have used a bivariate model to examine the relationship
between workers’ remittances and economic growth in South Asian countries (Paul et al., 2011;
Siddique et al, 2012). An econometric issue that arises in bivariate modeling is that of omitted vari-
able bias, which is likely to produce “spurious results” (Stern, 1993; Tang, 2009). We avoid the
problems of this bivariate argument. In this study we use the production function framework and
argue that along with labour and capital, workers’ remittances and their volatility affect the growth
of the economy.
The rest of the article is organized as follows: Section 2 reviews the theoretical and empirical lit-
erature on the relationship between workers’ remittances and economic growth. Section 3 discusses
the modeling framework; Section 4 shows estimations and results; Section 5 represents the robust-
ness of results through sensitivity analysis; and final section concludes the study and provides some
policy implications.

REVIEW OF LITERATURE

This section reviews some theoretical and selected cross country as well as time series empirical
studies.

Theoretical Background

Remittances and Growth Theories

Remittances can be presumed likely to have considerable effects on growth rate in receiving coun-
tries. There are three main channels, namely capital accumulation, labour force growth and total
factor productivity, through which remittances affect the economic growth of receiving countries.

Remittances and Capital Accumulation

Remittances increase capital accumulation by increasing funds directly to the investor and recipient
household’s rate of accretion of human and physical capital. In contrast, remittances also increase

© 2014 The Authors. International Migration © 2014 IOM

4 Jawaid and Raza

the credit rating of the domestic investor, which leads to a decreased cost of capital investment.
Consequences for decreasing cost of capital are increase in borrowing for new investment. Simulta-
neously, remittances may increase the economic stability of the receiving country and make the
receiving economy less volatile. This leads to reduced risk in the receiving economy which
increases investment.

Remittances and Labor Force Growth

Capital inflows in the form of remittances may also have a negative effect on the economic growth
of the receiving country, through a decrease in labour force participation. This inflow may be con-
sidered as nothing but income transfer. Many households in the receiving country may consider
this inflow as a substitute for their labour-income. Additionally, this transfer may be beleaguered
by severe moral hazards. This problem may encourage recipients to switch this resource for leisure
consumption; in that way their efforts in the labour market will be fewer.

Remittances and Total Factor Productivity

Remittances may effects total factor productivity by increasing the effectiveness of investment
through changing the eminence of the receiving country’s financial intermediation. If remittances
are considered as capital inflow and recipients are investing on behalf of the remitter, then the
effectiveness of investment is reduced because of informational drawback as compared with formal
domestic financial intermediaries. Remittances also increase the quantity of funds flowing through
the banking system. This flow leads to improved financial expansion and therefore to higher
economic growth.
From the above discussion based on Barajas et al., (2009), it is clear that remittances may have
positive effects on economic growth. However, these effects are very dubious in term of magnitude
and direction. Overall, the effect of remittances on the economic growth of recipient country is
hypothetically ambiguous. Therefore, the relationship between workers’ remittances and economic
growth can be settled only by looking at the empirical evidence.

Empirical Studies

Large number of studies suggest a positive relationship between workers’ remittances and economic
growth. On the other hand some studies show a negative relationship between workers’ remittances
and economic growth. Some selected studies are discussed below.
Bliss (1989) argues that most of the countries do not achieve a higher rate of economic develop-
ment because of shortage of foreign exchange. Thus the sizeable amounts of remittances may come
in handy here, in filling the gap of foreign exchange receipts. The OECD report (1985) contends
that the most important benefit of workers’ remittances is the supply of additional foreign
exchange. Russel (1986) argues that workers’ remittances are a main source of savings and invest-
ments and also raise the standard of living. Adams (1998) concludes that workers’ remittances help
to increase investment by raising the marginal propensity to invest for migrant households in
Pakistan.
On the other side, some researchers find insignificant or negative effects for workers’ remit-
tances on the economic growth of different countries. Becker (1974) argues that workers’ remit-
tances flow is not profit-driven but compensatory. Gilani et al. (1981) conclude that most of the
workers’ remittances in Pakistan are spent on consumption followed by residential investment.
Kritz et al. (1981) argue that remittances raise imports into the country and widen the balance of
payment deficit. Keely and Tran (1989) consider remittances a risky source of finance because

© 2014 The Authors. International Migration © 2014 IOM

 Effects of Workers’ Remittances on Economic Growth in South Asia 5

any sort of barrier to migration may reduce the numbers of migrant workers, leading to a sharp
decline in foreign exchange receipts. Sofranko and Idris (1999) argue that workers’ remittances
cannot play a major part in savings because workers’ remittances are mainly used in daily con-
sumption. Kapur and McHale (2003) conclude that workers’ remittances may create idleness
among recipients.
A large numbers of studies have been done on the subject. Table 2 shows the overview of some
selected studies on the relationship between workers’ remittances and economic growth.
Chami et al. (2003) investigate the remittances as a source of capital development by using
the panel data of 113 countries from the period 1970 to 1998. Regression results indicate a
negative and significant long run impact of workers’ remittances on economic growth. Fayissa
and Nsiah (2008) investigate the impact of remittances on economic growth of African countries.
Regression results indicate a positive and significant relationship between remittances and
economic growth.
Waheed and Aleem (2008) investigate the impact of workers’ remittances on economic growth
in Pakistan. Findings indicate a positive and significant relationship between workers’ remittances
and economic growth in short term. On the other hand, a significant negative relationship is found
between workers’ remittances and economic growth in the long run. Qayyum et al. (2008) empiri-
cally identify the impact of workers’ remittances on economic growth and poverty reduction in
Pakistan. Results indicate the positive and significant effect of remittances on both economic
growth and poverty reduction.
Karagoz (2009) investigates the long run effect of workers’ remittances on economic growth in
Turkey. Results show the significant negative impact of workers’ remittances on economic growth
there. Mohamed (2009) investigates the effect of workers’ remittances on economic growth in
seven MENA countries, where results indicate significant positive relationship between remittances
and economic growth. Fayissa and Nsiah (2010) empirically examine the long run impact of
workers’ remittances on economic growth in Latin American countries. Regression results indicate
a significant positive long run relationship exists between workers’ remittances and economic
growth.
Das and Chowdhury (2011) empirically examine the impact of workers’ remittances on economic
growth in 11 top remittance-receiving developing countries. Results indicate significant positive
relationship between remittances and economic growth. They suggested that policy makers in
developing countries should formulate policies to utilize the remittance resources into more produc-
tive sectors. Siddique et al. (2012) examine the causal relationship between workers’ remittances
and economic growth in South Asian countries. Results indicate that no causal relationship exists
between workers’ remittances and economic growth in India; unidirectional causality is found
between workers’ remittances to economic growth in Bangladesh and bidirectional causality
between remittances and economic growth in Sri Lanka.
Yasmeen et al. (2011) investigate the effect of workers’ remittances on total consumption and
private investment in Pakistan. Regression results indicate significant positive relationship of work-
ers’ remittances with both private investment and total consumption. They recommend that devel-
oping countries may ask developed countries to soften policies for workers’ remittance in favour of
their countries. Azam and Khan (2011) investigate the relationship between workers’ remittances
and economic growth in Azerbaijan and Armenia. Results indicate a positive and significant rela-
tionship of workers’ remittances with economic growth.
Jawaid and Raza (2012) investigate the effect of workers’ remittances on economic growth in
China and Korea. Results indicate positive and significant impact of workers’ remittances on eco-
nomic growth in Korea, while a significant negative relationship is found in China. On the other
hand, in the short run, a significant positive relationship is found in Korea. The results of China
were found insignificant.

© 2014 The Authors. International Migration © 2014 IOM

 TABLE 2 6

AN OVERVIEW OF SOME SELECTED STUDIES ON THE RELATIONSHIP BETWEEN WORKERS’ REMITTANCES AND ECONOMIC GROWTH.

Author(s) and Year of Publication Sample Results

Chami et al. (2003) 113 countries, 1970 to 1998 Negative

IMF (2005) 101 developing countries, 1970 to 2003 Insignificant
Faini (2006) 64 countries, 1980 to 2004 Positive
Srivastava and Chaudhary (2007) Nepal, 1975 to 2005 Positive
Jongwanich (2007) 17 countries, 1993 to 2003 Positive
Fayissa and Nsiah (2008) 37 African countries, 1980 to 2004 Positive
Pradhan et al. (2008) 39 countries, 1980 to 2004 Positive
Waheed and Aleem (2008) Pakistan, 1981 to 2006 Negative
Qayyum et al. (2008) Pakistan, 1973 to 2007 Positive
Le (2009) 49 Countries, 1970 to 2005 cross section data Negative
Karagoz (2009) Turkey, 1970 to 2005 Negative
Giuliano and Ruiz-Arranz (2009) 73 Countries, 1975 to 2002 Positive
Majagaiya (2009) Nepal, 1991 to 2005 Positive
Ahortor and Adenutsi (2009) 31 Developing countries, 1996 to 2006 Positive
Barajas et al. (2009) 84 Countries, 1970 to 2004 Negative
Catrinescu et al. (2009) 162 countries, 1970 to 2003 Positive
Mohammed (2009) 7 MENA countries, 1975 to 2006 Positive
Ruiz et al. (2009) 15 Countries, 1978 to 2001 Positive
Jawaid and Raza

Vargas-Silva et al. (2009) 20 Asian countries, 1988 to 2007 Positive

Mundaca (2009) 25 Latin America and certain countries in the Caribbean (LAC),1970 to 2002 Positive
Fayissa and Nsiah (2010) 18 Latin American countries, 1980 to 2005 Positive
Das and Chowdhury (2011) 11 top remittances recipient developing countries, 1985 to 2009 Positive
Paul and Das (2011) Bangladesh, 1979 to 2009 Positive
Imai et al. (2011) 24 Asia and Pacific Countries, 1980to 2009 Positive
Adenutsi (2011) Ghana, 1987 to 2004 Positive
Azam and Khan (2011) Azerbaijan and Armenia, 1995 to 2010 Positive

© 2014 The Authors. International Migration © 2014 IOM

Lartey (2011) 36 Sub Saharan African countries, 1990 to 2008 Positive
Zuniga (2011) 122 Countries, 1980 to 2005 Positive
Jawaid and Raza (2012) Korea, 1980 to 2009 Positive
Jawaid and Raza (2012) China, 1980 to 2009 Negative
Senbeta (2013) 50 Countries, 1970 to 2004 Positive

Source: Author’s Construction

 Effects of Workers’ Remittances on Economic Growth in South Asia 7

EMPIRICAL FRAMEWORK

After reviewing the empirical studies, the models to examine the relationship between the volatility
of workers’ remittances and economic growth are derived by using the production function frame-
work. The general production function is:

Yt ¼ b0 þ b1 Lt þ b2 Kt þ b3 Rt þ et ð3:1Þ

whereas ɛt is the error term, R represents the workers’ remittances and its volatility. (This study
examines two vectors. The first vector includes real GDP, labour, capital and workers’ remittances.
The second vector includes the same variables as in the first vector, except that workers’ remit-
tances are replaced by volatility of workers’ remittances). The positive sign is expected for L and
K while, the sign of R is to be determined. Different annual time series data have been used for dif-
ferent countries (for Pakistan, India and Bangladesh (1980–2009); for Sri Lanka (1985–2009) and
for Nepal (1975–2009). It all depends on availability of data). All data are gathered from the offi-
cial database of World Bank (http://data.worldbank.org/indicator). All variables are used in loga-
rithm form. The volatility of workers’ remittances is measured by Generalized Autoregressive
Conditional Heteroscedasticity (GARCH). Bleaney and Greenaway (2001) and Jawaid and Haq
(2012) have adopted the same method for measuring volatility.
Augmented Dickey Fuller (ADF) (Dickey and Fuller, 1979) and Phillip Perron (PP) (Phillips and
Perron, 1988) unit root test are used to examine the stationary properties for a longterm relation-
ship. Augmented Dickey Fuller (ADF) test is based on equation given below:

X
k
DYt ¼ a0 þ a1 Yt1 þ dj DYtj þ et
j¼1

where ɛt is pure white noise error term, D is first difference operator, Yt is a time series, a0 is the
constant and k is the optimum numbers of lags of the dependent variable. ADF test determines
whether the estimates of coefficients are equal to zero. ADF test provides cumulative distribution
of ADF statistics. The variable is said to be stationary, if the value of the coefficient a1 is less than
critical values from fuller table. The Phillip and Perron unit root test is also based on t-statistics
associated with estimated coefficients of q∗. Phillip and Perron unit root test equation is given
below:

DYt ¼ a þ q Yt1 þ et

The present study employs the Johansen and Juselius (J.J., 1990) cointegration technique to ana-
lyse the existence of a long run relationship of workers’ remittances and volatility of workers’
remittances with economic growth in South Asian countries. The Johansen and Juselius cointegra-
tion test is based on ktrace and kmax statistics. First “trace test” cointegration rank ‘r’ is as follow:

X
n
ktrace ¼ T lnð1  kj Þ
j¼rþ1

Second, kmaxmaximum number of cointegrating vectors against r + 1 is presented in following way:

kmax ðr; r þ 1Þ ¼ T lnð1  kj Þ

The null hypothesis of the Johansen and Juselius cointegration is that there is no long run cointe-
gration among the variables. If null hypothesis is rejected, that means there is significant long run

© 2014 The Authors. International Migration © 2014 IOM

8 Jawaid and Raza

relationship among the series of variables and vice versa. We use two different sensitivity analyses
to check the robustness of initial results. First, by using additional variables in basic models, and
secondly by using the different proxies of volatility of workers’ remittance.

ESTIMATIONS AND RESULTS

Augmented Dickey Fuller (ADF) and Phillip Perron (PP) unit root test are used to examine the sta-
tionary properties for a longterm relationship. Table 3 represents the results of unit root test.
The results of Table 3 confirm the stationary of all variables at first difference in all countries.
This means that the combination of one or more series may exhibit a long run relationship among
the variables of equation 3.1.
Table 4 represents long run relationship among considered variables. Initial Results show that
autocorrelation exist in the model of Pakistan, India & Sri Lanka. Cochrane and Orcutt (1949)
iterative procedure has been used to remove autocorrelation in these models. Results indicate that

TABLE 3
STATIONARY TEST RESULTS

ADF test PP test

I(1) I(1)

Country Variables C C&T C C&T

Pakistan Y -3.954 -4.342 -3.921 -4.336

L -5.011 -5.348 -5.010 -5.384
K -3.433 -3.431 -3.014 -3.486
R -4.132 -4.456 -4.132 -4.385
VR -5.064 -5.148 -5.063 -5.185
India Y -3.970 -4.940 -3.970 -4.940
L -3.780 -4.120 -3.830 -4.260
K -4.310 -4.790 -4.310 -4.790
R -6.280 -7.180 -6.160 -7.130
VR -6.470 -6.329 -8.279 -8.101
Bangladesh Y -3.950 -5.210 -3.950 -5.210
L -4.670 -5.950 -4.630 -5.910
K -3.530 -3.500 -3.560 -3.500
R -4.270 -5.890 -4.210 -5.020
VR -5.857 -6.203 -5.857 -6.363
Sri Lanka Y -3.980 -4.944 -3.980 -5.129
L -6.418 -6.447 -8.939 -11.878
K -3.629 -4.050 -3.601 -4.180
R -5.261 -5.435 -5.308 -5.674
VR -4.920 -4.420 -4.732 -4.552
Nepal Y -2.937 -3.349 -3.655 -3.578
L -5.321 -5.599 -5.326 -8.664
K -2.786 -3.568 -5.814 -6.120
R -4.914 -5.030 -4.898 -5.415
VR -4.710 -4.597 -6.733 -6.616

Notes: The critical values for ADF and PP tests with constant (c) and with constant & trend (C&T) 1%, 5%
and 10% level of significance are -3.711, -2.981, -2.629 and -4.394, -3.612, -3.243 respectively.
All variables of all selected countries are non-stationary at level.
VR shows the volatility of workers’ remittances
Source: Author’s estimations.

© 2014 The Authors. International Migration © 2014 IOM

 Effects of Workers’ Remittances on Economic Growth in South Asia 9

significant positive long run relationships exist between workers’ remittances and economic growth
in India, Bangladesh, Sri Lanka and Nepal.
The findings are consistent with Fayissa and Nsiah (2010), Faini (2006), and Azam and Khan
(2011). The increase in remittances leads to increase in the purchasing power that will increase
total consumption. Investment and production are also increased by the rise in the transferred
amount of workers’ remittances. The increases in consumption, investment and production are the
major signs of economic development and all are increasing by the efficient usage of workers’
remittances.
On the other hand, results show the negative and significant long run relationship between work-
ers’ remittances and economic growth in Pakistan. The findings are consistent with previous results
of Pakistan (Waheed and Aleem, 2008) and other studies (Chami et al., 2003) and Karagoz, 2009).
The possible reason for this negative relationship might be the luxurious consumption spending on
imported items, hence the decline in demand for domestically produced goods and domestic invest-
ment, which retards economic growth. The brain drain may be the another possible reason for the
negative relationship between workers’ remittances and economic growth. The highly skilled work-
ers, when they leave the country, will not only cause a shortage of human capital but also transfer
their financial capital from the country, which limits domestic resource mobilization. Furthermore,
a continuous inflow of workers’ remittances considered as an uninterrupted source of income may
increase voluntary unemployment in the country, which leads to a decrease in economic growth in
Pakistan. However, the coefficient of R in Sri Lanka is 0.408 which shows the most efficient utili-
zation of this inflow.
Table 5 shows estimates of the model of the volatility of workers’ remittances. Results indicate
the significant negative effect of the volatility of workers’ remittances on economic growth in
Pakistan, India, Bangladesh and Sri Lanka. On the other hand, negative but insignificant effect of
the volatility of workers’ remittances on economic growth is found in Nepal. Overall results
confirm that the volatility of workers’ remittances is proved to be an unfavourable condition for
economic growth in selected South Asian countries. Furthermore, the coefficient of R in Sri Lanka
is 0.957 which shows the most affected country due to volatilities of workers’ remittances.
Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests are used to analyse the unit root
test for stationary of residuals. The results of Tables 6 and 7 show that residuals of both models,
namely workers’ remittances and volatility of workers’ remittances of all countries, are stationary at
level and variables are at first difference. This confirms the valid long run relationship that exists
between the considered variables in selected South Asian countries.
Johansen and Juselius (1990) cointegration method is used to estimate the long run relationship
among the variables of equation 3.1. Table 8 and 9 represents the calculated and critical values of
Trace statistics and Maximum Eigen value statistics.
Results indicate the rejection of null hypothesis of no cointegration in models of workers’ remit-
tances and its volatility at significance level of 5 per cent in all five countries, in favour of an alter-
native hypothesis that is the existence of one or more cointegrating vectors. Both residual
stationary test and cointegration test confirms the existence of a long run relationship among vari-
ables of equation 3.1 in all countries. To check the short run relationship we employed the error
correction model developed by Engle and Grange (1987), but the results were insignificant for all
selected South Asian countries.

SENSITIVITY ANALYSIS

In this section two different sensitivity analyses have been performed to check the robustness of
the initial results, first by using additional variables in basic models, and secondly by using the
different proxies of volatility of workers’ remittance.

© 2014 The Authors. International Migration © 2014 IOM

 10

TABLE 4
LONG TERM DETERMINANTS OF ECONOMIC GROWTH WITH WORKERS’ REMITTANCES

Pakistan India Bangladesh Sri Lanka Nepal

Variables Coeff. t-stats Coeff. t-stats Coeff. t-stats Coeff. t-stats Coeff. t-stats

C 0.432 5.150 1.494 4.114 2.200 10.759 2.404 4.631 2.668 9.869
L 1.125 15.809 1.072 9.051 0.019 2.873 0.843 1.943 0.738 2.121
K 0.321 5.160 0.429 11.909 0.219 2.172 0.037 1.756 0.705 19.104
R 0.043 3.186 0.033 2.394 0.056 1.984 0.408 4.983 0.049 1.744
Jawaid and Raza

2
Adj. R 0.989 0.998 0.998 0.981 0.997
D.W stats 1.710 1.583 1.641 1.362 1.537
F-stats (prob) 878.283(0.000) 5008.818(0.000) 4582.622(0.000) 424.011(0.000) 4692.101(0.000)

Source: Authors’ estimation.

© 2014 The Authors. International Migration © 2014 IOM

 TABLE 5
LONG TERM DETERMINANTS OF ECONOMIC GROWTH WITH VOLATILITY OF WORKERS’ REMITTANCES

Pakistan India Bangladesh Sri Lanka Nepal

Variables Coeff. t-stats Coeff. t-stats Coeff. t-stats Coeff. t-stats Coeff. t-stats

C 0.664 5.081 2.025 6.645 1.842 5.999 0.263 1.044 2.253 16.568
L 1.073 14.574 0.418 14.561 0.026 3.462 1.729 12.580 1.127 5.089
K 0.352 5.265 1.235 12.036 0.214 1.786 0.061 8.032 0.709 17.901
R 0.098 3.197 0.404 2.084 0.094 2.357 0.957 3.585 0.385 0.733
Adj. R2 0.993 0.998 0.998 0.989 0.998
D.W stats 2.291 1.817 1.559 1.558 1.663
F-stats (Prob.) 2354.746 (0.000) 5511.967 (0.000) 3526.587 (0.000) 770.471 (0.000) 4549.459 (0.000)

Source: Authors’ estimation.

© 2014 The Authors. International Migration © 2014 IOM

Effects of Workers’ Remittances on Economic Growth in South Asia
11
12 Jawaid and Raza

TABLE 6
RESIDUALS STATIONARY TEST RESULTS OF WORKERS’ REMITTANCES MODELS

Country Test Without Trend With Trend

Pakistan ADF Test 3.728 3.678

PP Test 3.632 3.646
India ADF Test 2.923 3.602
PP Test 3.046 3.452
Bangladesh ADF Test 4.242 4.203
PP Test 4.253 4.213
Sri Lanka ADF Test 3.361 3.320
PP Test 3.361 3.320
Nepal ADF Test 4.799 4.762
PP Test 4.815 4.761

Note: The critical values for ADF and PP tests with constant (c) and with constant & trend (C&T) 1%, 5%
and 10% level of significance are -3.711, -2.981, -2.629 and -4.394, -3.612, -3.243 respectively.
Source: Authors’ estimation

TABLE 7
RESIDUALS STATIONARY TEST RESULTS OF VOLATILITY OF WORKERS’ REMITTANCES MODELS

Country Test Without Trend With Trend

Pakistan ADF Test 4.067 3.885

PP Test 3.964 3.862
India ADF Test 4.863 4.819
PP Test 4.522 4.413
Bangladesh ADF Test 4.144 4.196
PP Test 4.130 4.082
Sri Lanka ADF Test 3.433 3.372
PP Test 3.895 3.847
Nepal ADF Test 4.576 4.526
PP Test 4.531 4.475

Note: The critical values for ADF and PP tests with constant (c) and with constant & trend (C&T) 1%, 5%
and 10% level of significance are -3.711, -2.981, -2.629 and -4.394, -3.612, -3.243 respectively.
Source: Authors’ estimation.

Additional Variables

The degree of confidence among the relationship between dependent and independent variables is
tested through sensitivity analysis. If the coefficient of independent variable gives same sign and
significance after putting additional variables in the basic model, then they refer that the results are
robust. The results are ‘refer to fragile’ if coefficient of independent variables do not give same
sign or significance or both after putting additional variable in the basic model (Levine and Renelt,
1992). We used the following model to perform sensitivity analysis.
Yt ¼ b0 þ b1 Lt þ b2 Kt þ b3 Rt þ b3 Zt þ 62t ð5:1:1Þ

where ɛt represents the error term and Z represents a subset of variables that are theoretically
related to the economic growth. In our core model, foreign direct investment (FDI), education
expenditure (EEX), life expectancy (LEX), export as percentage of GDP (EXP) and fertility rate

© 2014 The Authors. International Migration © 2014 IOM

 Effects of Workers’ Remittances on Economic Growth in South Asia 13

TABLE 8
COINTEGRATION TEST RESULTS OF WORKERS’ REMITTANCES MODELS

Null Hypothesis 5% critical Max. Eigen Value 5% critical

Country No. of CS(s) Trace Statistics values Statistics values

Pakistan None * 71.783 63.876 32.490 32.118

At most 1 39.293 42.915 15.539 25.823
India None * 58.400 40.175 38.848 24.159
At most 1 19.552 24.276 9.327 17.797
Bangladesh None * 48.481 40.175 28.614 24.159
At most 1 19.867 24.276 13.294 17.797
Sri Lanka None * 56.174 40.175 36.339 24.159
At most 1 19.835 24.276 14.328 17.797
Nepal None * 86.290 63.876 32.490 32.118
At most 1 41.488 42.915 15.539 25.823

Source: Authors’ estimation.

TABLE 9
COINTEGRATION TEST RESULTS OF VOLATILITY OF WORKERS’ REMITTANCES MODELS

Null Hypothesis 5% critical Max. Eigen 5% critical

Country No. of CS(s) Trace Statistics values Value Statistics values

Pakistan None * 74.673 63.876 35.943 32.118

At most 1 38.730 42.915 21.644 25.823
India None * 72.525 40.175 49.939 24.159
At most 1 22.586 24.276 10.696 17.797
Bangladesh None * 46.318 40.175 30.149 24.159
At most 1 16.169 24.276 10.000 17.797
Sri Lanka None * 88.723 63.876 57.929 32.118
At most 1 30.794 42.915 13.942 25.823
Nepal None * 55.448 40.175 31.365 24.159
At most 1 24.082 24.276 13.394 17.797

Source: Authors’ estimation.

(FER) are considered as determinants of economic growth. The results of sensitivity analysis are
reported in Table 10, where we have shown the coefficient of workers’ remittances on economic
growth with the inclusion of other relevant variables in the basic model.
It is confirmed from Table 10 and 11 that the coefficient of workers’ remittances and its volatility
remains the same sign and significance, despite the inclusion of relevant variables in the basic
model. Consequently it can be concluded that the relationship between remittances, their volatility,
and economic growth in South Asian countries, is robust.

Different Proxies of Volatility

The different measures of volatility used in empirical studies include: standard deviation, general-
ized autoregressive conditional heteroscedasticity, five-year moving averages, and five-year moving
standard deviations (Geol and Ram, 2001). To test the robustness of volatility of workers’ remit-
tances, we considered a five-year moving standard deviation (MSTD) and five-year moving average

© 2014 The Authors. International Migration © 2014 IOM

 14

TABLE 10
RESULTS OF SENSITIVITY ANALYSIS WITH ADDITIONAL VARIABLES OF WORKERS’ REMITTANCES MODEL

Pakistan India Bangladesh Sri Lanka Nepal

Coeff. Coeff. Coeff. Coeff. Coeff.

Variables of R t-stats. Adj R2 F-stats Of R t-stats. Adj R2 F-stats of R t-stats. Adj R2 F-stats of R t-stats. Adj R2 F-stats of R t-stats. Adj R2 F-stats

Basic 0.043 -3.186 0.989 878.284 0.033 2.393 0.998 5008.821 0.056 1.983 0.998 4582.622 0.408 4.983 0.981 424.012 0.049 1.743 0.998 4692.120

Model

Model 1 0.032 -2.098 0.989 684.170 0.036 2.593 0.998 3798.292 0.055 1.917 0.998 3557.220 0.440 5.781 0.984 380.351 0.051 1.767 0.998 3412.111

FDI

Model 2 0.043 -2.619 0.989 632.575 0.034 2.364 0.998 3620.443 0.059 2.109 0.998 3712.411 0.404 4.547 0.981 303.212 0.049 1.989 0.998 4527.078

EEX
Jawaid and Raza

Model 3 0.054 -1.904 0.987 943.974 0.034 2.424 0.998 3662.535 0.059 2.044 0.998 3549.578 0.412 5.828 0.986 429.764 0.067 1.769 0.997 3456.241

LEX

Model 4 0.034 -1.976 0.989 649.502 0.036 2.366 0.998 3646.642 0.053 1.890 0.998 3659.287 0.433 5.112 0.981 321.087 0.049 1.787 0.998 3456.244

EXP

Model 5 0.040 -3.053 0.990 701.841 0.038 2.571 0.998 3742.581 0.056 1.933 0.998 3514.052 0.470 4.678 0.981 322.595 0.049 1.768 0.998 3388.741

FER

Source: Authors’ estimation

© 2014 The Authors. International Migration © 2014 IOM

 TABLE 11
RESULTS OF SENSITIVITY ANALYSIS WITH ADDITIONAL VARIABLES OF VOLATILITY OF WORKERS’ REMITTANCES MODEL

Pakistan India Bangladesh Sri Lanka Nepal

Coeff. Coeff. Coeff. Coeff. Coeff.

Variables of R t-stats. Adj R2 F-stats Of R t-stats. Adj R2 F-stats of R t-stats. Adj R2 F-stats of R t-stats. Adj R2 F-stats of R t-stats. Adj R2 F-stats

Basic 0.098 3.197 0.993 2354.746 0.404 2.084 0.998 5511.971 -0.094 -2.357 0.998 3526.593 -0.957 -3.585 0.989 770.471 -0.385 -0.733 0.998 4549.461

Model

Model 1 0.065 5.629 0.997 1932.672 0.391 2.104 0.998 4526.812 -0.072 -2.434 0.998 2718.544 -0.732 -8.149 0.989 589.718 -0.395 -0.707 0.998 3281.392

FDI

Model 2 0.057 2.140 0.989 2109.213 0.422 1.874 0.998 3959.084 -0.038 -3.597 0.996 2807.858 -0.957 -4.045 0.990 595.172 -0.701 -1.454 0.998 3318.324

EEX

Model 3 0.043 1.863 0.995 1823.490 0.344 4.702 0.998 4715.695 -0.071 -3.114 0.998 2721.181 -0.371 -3.937 0.989 573.260 -0.438 -0.809 0.998 4294.882

LEX

Model 4 0.044 1.847 0.995 1798.229 0.426 2.196 0.998 4183.267 -0.048 -1.977 0.998 2875.652 -0.836 -4.777 0.990 621.249 -0.378 -0.713 0.998 3344.815

EXP

Model 5 0.087 2.991 0.997 2056.398 0.268 2.389 0.998 5787.851 -0.093 -2.530 0.998 3130.210 -0.398 -2.960 0.990 457.638 -0.38 -0.708 0.998 3282.710

FER

© 2014 The Authors. International Migration © 2014 IOM

Source: Authors’ estimation
Effects of Workers’ Remittances on Economic Growth in South Asia
15
16 Jawaid and Raza

TABLE 12
TEST FOR ROBUSTNESS OF VOLATILITY OF WORKERS’ REMITTANCES MODEL BY DIFFERENT
PROXIES

GARCH MSTD MAVG

Coeff. Coeff. Coeff.

Variables of R t-stats Prob. of R t-stats Prob. of R t-stats Prob.

Pakistan 0.098 3.197 0.004 0.094 1.810 0.082 0.083 2.223 0.038
India 0.404 2.084 0.049 0.072 2.950 0.008 0.026 2.162 0.042
Bangladesh 0.094 2.357 0.026 0.043 2.451 0.024 0.021 2.654 0.015
Sri Lanka 0.957 3.585 0.002 0.169 2.247 0.036 0.096 2.673 0.014
Nepal 0.385 0.733 0.470 0.494 1.005 0.326 0.184 0.485 0.633

Source: Authors’ estimation.

(MAVG) as other measures of volatility of workers’ remittances. Table 12 represents the results of
sensitivity analysis of volatility of workers’ remittances.
Table 12 clearly confirms that it does not matter what proxy of volatility of workers’ remittances
is considered, the results showed the same sign and significance level of volatility of workers’
remittances on economic growth. This confirms that our initial results are robust.

CONCLUSION AND POLICY RECOMMENDATIONS

This study investigates the effect of workers’ remittances and their volatility on the economic
growth of five South Asian countries, namely Pakistan, India, Bangladesh, Sri Lanka and Nepal,
by employing long time series data from 1975 to 2009. Cointegration results confirm that there
exists significant positive long run relationship between remittances and economic growth in India,
Bangladesh, Sri Lanka and Nepal while, significant negative relationships exist between workers’
remittances and economic growth in Pakistan. Conversely, the volatility of workers’ remittances
has a negative and significant effect on economic growth in Pakistan, India, Bangladesh and Sri
Lanka, while a negative but insignificant effect is found in Nepal. Sensitivity analysis confirms that
the results are robust.
The results of this study show the positive effect of workers’ remittances on economic growth in
India, Bangladesh, Sri-Lanka and Nepal. We can probably conclude that inflows of remittances
may increase capital accumulation and the effectiveness of financial intermediation in these coun-
tries. These countries should form friendly policies to reduce the transaction cost to ensure the con-
tinuous inflows of workers’ remittances. On the other hand, results indicate that the negative effect
of worker’s remittances on economic growth in Pakistan. In the long run, policymakers in Pakistan
should rely more on increasing exports rather than on workers’ remittances as foreign exchange
earnings. The continuous inflow of workers’ remittances regarded as an uninterrupted source of
income may increase voluntary unemployment in the country, which leads to decrease in the eco-
nomic growth of Pakistan. The government should create policies for the labour market that dis-
courage this voluntary unemployment.
Overall, less volatile inflow of workers’ remittances is growth-enhancing for all countries.
Policymakers of all the countries mentioned should form an effective system to ensure the inflow
of remittances comes through formal financial channels for better control. In addition to this,
workers’ remittances should be efficiently utilized to create sustainable economic growth in these
countries.

© 2014 The Authors. International Migration © 2014 IOM

 Effects of Workers’ Remittances on Economic Growth in South Asia 17

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