Cam Nguyen

Karla La Rosa
Graduate Seminar
Prof Veitch
December 1, 2006

Does Remittance have a positive impact on Financial Development?

The two main capital inflows in developing countries are foreign direct

investments (FDI) and remittances. For the past two decades the supply of remittances

has been increasing in developing countries and has become a steady flow of income for

the families of the migrant workers (see appendix Graph 1 and Graph 2). Remittance in

developing countries has been seen as source of income, sometimes primary or

supplemental income, for families, especially in rural areas. Remittances may also be

sometimes vital for developing countries since it does help the economy of a developing

nation by the additional cash flow received. According to previous papers and studies,

remittances can help alleviate poverty in developing countries. As such, research in the

topic of remittances expanded due to the rapid increase in remittance income to

remittance receiving countries (RRC). Most remittance receiving countries are

developing countries. People from these countries migrate to seek for better job

opportunities and higher compensation. Many of the papers we found focused on the

effects of remittances on household consumption, education and poverty alleviation.

The continuous increase of remittances in developing countries and its positive

contribution to growth and poverty alleviation led to a number of interesting studies;

studies that directly link remittances to poverty alleviation, studies that indirectly link

remittances to growth and studies that discusses the relationship because remittances and

financial development. The main question that we pose in this research is -- do

remittances lead to or promote financial development? Many papers have been written

about financial development and how it can promote growth and reduce poverty. Some

papers have also made mention that a more developed financial system can help make

better use of remittances and lead to growth.

Our overall conclusion is that financial market development can influence

the long-run effects of remittances on the economies chosen for our

analysis. Our results suggest that making financial services more

generally available than now should lead to even better use of

remittances, so as to boost growth in these countries (Mundaca, 2005).

This topic about remittances and financial development seems to be a fairly new topic

that further needs to be further explored. We wish to explore this topic in a different light

by looking at it in a different perspective. Mundaca’s study of remittances looked at it in a

perspective wherein a developed financial market can lead to more remittances. Financial

institutions such as banks may improve their services and provide new services that can

cater to the needs of the recipients. Our paper will focus on the effect of remittances on

financial development- mainly, does remittance positively impact financial development.

Literature Review

There are numerous papers that deal with remittance and financial development

separately starting from as early as the 1970’s which tries to explain qualitative results of

the impact of remittance on growth and/or financial development. However, papers

involving remittance and financial development had only been dealt with empirically

only fairly recent- the earliest paper started in this decade. Empirical researches on this
topic is fairly new and have yielded mixed results- some research say remittance has a

positive impact some say negative on growth via financial development, current

accounts, etc.

Reviewing past research in regards to remittances which start as early as in the

70’s until now, one can see that the idea and sentiments of remittance have changed

throughout the years. Research in the topic of remittances expanded in the 80’s due to

rapid increase in the remittance income to remitting receiving countries (RRC). The

initial feelings about remittances in the 70’s and early 80’s seem to be that remittances are

not beneficial. But in the later part of the 80’s and to the present, another voice started

emerging and viewed remittances in a different light- a positive one. In the recent years,

many research in this field focus on empirical evidence rather than theoretical arguments

like that of the 70’s and early 80’s.

There are positive and negative effects of everything- including remittances.

Many who deem remittances as a negative solution to poverty seem to adopt similar

reasoning/arguments. They argue that:

Remittances increase dependency, contribute to economic

and political instability and development distortion, and

lead to economic decline that overshadows a temporary

advantage for a fortunate few.1

Aside from the arguments stated above, many also believe that remittances offer little

contribution to development since the amount of capital being remitted will most likely

1
Keely, Charles B. and Tran, Bao Nga. “Remittance from Labor Migration: Evaluations, Performance, and
Implications”. International Migration Review, Vol.23, No.3. Autumn 1989. pp.500-525
be used for consumption and only marginally productive enterprises2. Charles B.Keely

and Bao Nga Tran in the late 1980’s looked at the labor markets in Europe and the

Middle East to test whether or not remittance has a positive or negative impact on the

labor force and also economic conditions. They did not find that remittance increases

dependency but also stated that the contribution of remittances to economic performance

should not be overstated.

The disadvantages that some researchers point out do sound alarming and their

arguments do make sense but when we analyze tools, we need to see if the benefits

outweigh the cost of implementing the tool. Researchers who are opposite side of the

argument that are in support of remittance points out that the argument against remittance

tends to “focus attention on the immediate use of remittance income” and is ignoring “the

considerable stimulus it provides to indigenous industries, as well as its contribution to

the supply of loanable funds, i.e. investment capital”3. Although consumption may be

seen as a negative impact by researchers who are not in support of remittance, one must

not undermine its multiplier effect.

Other researchers point out that consumption behavior has multiplier

effects that increase the demand for goods and services, as well as indirect

investments. This is true especially when remittances are used for health,

education, and shelter, which impact human development4 (Bagasao,

2004).

2
Castles and Kosack 1973
3
Stahl, Charles B. 1999
4
Bagasao, 2004.
Stahl agrees with the statement above and also states in his paper that the expenditures

from remittance income generate a multiplier effect that will positively impact the

economy5.

A study conducted by four ADB consultants spearheaded by Ildefonso F. Bagasao

focused on remittances by Filipino overseas workers, “Enhancing the Efficiency of

Overseas Filipino Workers Remittances”, published by the Asian Development Bank.

The objectives of the study are the following:

(1) reviewed the flows of remittances in the Philippines (2) identified the

constraints in policy, regulatory and institutional frameworks that impact

these flows and (3) developed proposals that will increase remittances (if

possible), facilitate the shift of remitting money from the informal to the

formal sector and encourage the use of remittance proceeds for

sustainable poverty reduction.

The paper provides an in-depth analysis of the negative and positive effects of

remittances in the country. Several foreseen negative impacts of remittances are excessive

consumption, the “dependency syndrome”, irregular or undocumented workers, human

rights violations and brain drain. Consumption becomes a negative effect when

remittances are not put into productive means such as investment in human capital,

infrastructure or profit generating activities. The so-called “dependency syndrome” takes

effect when beneficiaries (families) of remittances rely on it too much that they simply

fail to participate in productive endeavors6. Aside for the need to earn a higher income

abroad, the demand for cheap labor by developed countries is another reason why

5
Stahl, Charles B. 1999
6
Bagasao, July 2004.
undocumented workers seek jobs abroad. This study was very useful in helping us

understand the underpinnings of remittances.

As mentioned earlier, empirical research on the effects of remittances on growth

started early in this decade and continue on so. These empirical researches tried to

explain how remittance affects growth by way of another channel whether it is current

account or financial development. Adams and Page (2003) in a published paper by the

World Bank, International Migration, Remittances, and Poverty in Developing Countries,

tried to explain the impact of international migration and remittances on poverty using a

74 country cross section dataset. The authors looked at how GDP per capita, survey

mean income per capita, Gini coefficient, remittance as a share of country GDP affects

poverty. Poverty was measured as a headcount of people living less than 1USD per day,

the poverty gap and the poverty gap squared. In each of these regressions, the remittance

variable came up to be statistically significant. The authors found that remittances had a

statistically significant impact on reducing poverty- “10% increase in share of remittance

in a country GDP will lead to a 1.6% decline in the share of people living on less than

1USD per person per day”.

We wish to explore this topic in a different light by looking at it in a different

perspective. Mundaca’s study of remittances looked at it in a perspective wherein a

developed financial market can lead to more remittances. The paper by Aggarwal, Kunt

and Peria provides a model that will allow us to measure the effect of remittances in the

financial sector. Remittances can contribute to the improvement of financial sectors such

as the banking industry through the increase of deposits or the amount of credit provided

to private sectors (Aggarwal, Demirguc-Kunt, Peria, 2006). The increase in credit

provided can be attributed to the increase in loanable funds which can be increased

through remittance deposits. Currently, remittance income is mainly utilized to buy

necessary and discretionary items, pay off debts, purchase of non-productive assets such

as land and homes. In the paper by Charles Stahl, he notes that the propensity to save is

higher for remittance receiving households than that of non-receiving households – this

increase of savings rate can have a long run positive effect on the economy if we follow

the Solow Model. As you can see an increase in the savings rate does not only promote

financial development but can also promote growth. The paper by King and Levine

further discusses how financial development is correlated to growth by way of several

different types of financial indicators. Aggarwal, Demirguc-Kunt, and Peria uses two of

the 4 different financial indicators suggested by King and Levine to create a financial

development model that will help us map the relationship between remittances and

financial development and in turn affecting growth as suggested by the paper from King

and Levine. Furthermore, the paper by Aggarwal uses balance of payments data on

remittances of 99 countries that were categorized as low to middle developing economics

from 1975-2003. The primary sources of data for these remittances were obtained from

the International Monetary Fund (IMF) Balance of Payments Statistics Yearbook.

Data

In our paper we will be working with the same data but decided to start and end on

a later period from 1980-2004. Also we will not conduct our study on the 99 countries but

on the top ten countries and also thirty one other countries that are similar to the top ten

remittance receiving countries that are currently receiving the highest inflow of
remittances. These forty-one countries will be chosen with same criteria as the selection

criteria in the Aggarwal, Demirguc-Kunt, and Peria paper- all countries are categorized as

low to middle developing economies. However, not all of the countries that are chosen in

our paper are highly dependent on remittances. We would like to see if there were any

biases during the selection of countries in the Aggarwal, Demirguc-Kunt, and Peria paper

since most of the 99 countries in their model are dependent on remittances. If there are

biases, then the current model only applies to countries that are dependent on remittances

and nothing else.

Although data is readily available and easy to attain, we are aware of the fact that

data on remittances are not as accurate because of there are migrant workers who remit

there money through unofficial sectors. These unofficial sectors do not provide records of

remittances remitted by migrant workers and because of that there is no way to measure it.

These remittances are left unaccounted for and many believe that the range for unaccounted

or unrecorded remittances range from 20 to 200 percent (Aggarwal, Demirguc-Kunt, Peria,

2006). Data used in our model is obtained from the International Monetary Fund (IMF),

United Nations Conference on Trade and Development (UNCTAD) and the World Bank

(WB) websites and statistical yearbooks. The dataset includes countries from South

America, Central America, the Middle East, Africa, Southeast Asia, Central Asia, and

Europe.

Methodology
 We will use balance of payment data on remittance flows from 31 countries

categorized as low to middle developing economies over the period of 1981-2005 to study

the impact of remittances on financial development. The countries of interest are the top

ten remittance receiving countries are the following: India, Mexico, Egypt, Philippines,

Turkey, Morocco, Poland, Jordan, Bangladesh, and Brazil. The 31 other countries have

similar economic backgrounds as the top ten remittance receiving countries- all categorized

as low to middle developing economies by the World Bank. Increases in the level of

deposits to banks will be used to measure financial development in our panel dataset

because when big projects are implemented, individuals will need loans which will be

finance by banks; hence, if there are increases in the level of deposits to banks, more loans

are available for usage. King and Levine suggested that the level of demand deposits is a

good indicator for financial development since there is a relationship between this financial

indicator and economic growth. To examine the relationship between financial

development and remittances by running regressions on the following model:

FDi,t =β0 + β1 Rem/GDP + β2 Ln(GDP) + β3 GDP/Cap + β4 Inflation +

β5Flows/GDP + β6 Exports/GDP + β7 Interest Rate + μ

The difference between our model and the Aggarwal, Demirguc-Kunt, and Peria is that

we included an interest rate variable because we believe that changes in interest rates will

affect financial development. A standard measure of financial development, FD,

according to the literature by King and Levine is the ratio of bank deposit to GDP. Data

that are used to construct this ratio are obtained on the IMF statistics website. Rem/GDP

is the ratio of remittances to GDP. Remittance data is obtained from the IMF World

Economic Outlook and the UN Statistics Handbook under workers’ remittances which are
the current transfers made by migrant workers working abroad. If our theory that

remittances does have a positive impact on financial development, we will observe that

Rem/GDP will be a statistically significant positive value. Log of GDP and GDP per

capita are included in this model because they allow us to take into account for the

country size and the level of economic development. Data for the Log of GDP and GDP

per capita are obtained on the UN statistics division website. We can expect that these

two variables will have a positive impact on financial development: an increase in these

two variables will cause an increase in financial development. To account for inflation,

we will look at the GDP deflator during this time period. GDP deflator data was obtained

from the UN Statistics Handbook. According to Smith, Levine, and Boyd, 2001, inflation

affects individuals’ decision-making choices that also influences savings rate in real

assets. We would expect that this variable will have a negative affect on financial

development. Another variable that influences financial development is capital inflows to

GDP, Flows/GDP. The ratio of Flows to GDP was constructed by data that was obtained

from the UN Statistics Handbook. We expect Flows/GDP to have a positive effect on

financial development. The level of export to GDP is also important to helping us

understand financial development. The ratio of export to GDP was constructed by data

that was obtained on UN statistic division website under trade and development. We

expect this variable to have a positive affect on financial development because as exports

increase, firms will have an incentive to expand due to the raising demand, thus helping

financial development. We would also include interest rate as the final independent

variable in our model because interest rate does effect individuals’ decision on saving.

Interest rate data was obtained on the IMF statistics website. Since there were missing
data for the lending rate and discount rate, we made an interest rate variable as the

average percent change in the discount rate and lending rate. We expect this value to be

positive also.

A correlation matrix (on appendix, Correlation Matrix) for the variables showed

that among the seven independent variables, ln_gdp is positively correlated to per capita

gdp by .3082 and ln_gdp is negatively correlated to rem_gdp by -.4572 and to exp_gdp

by -.2801. Given this, ln_gdp seemed to be the variable that is highly correlated with

rem_gdp, per capita gdp and exp_gdp if compared among the other explanatory variables

in the model. But these values are not strong enough evidence to state that

multicollinearity can be a problem in this model. Also, we can not simply drop ln_gdp in

our model because we believe that this variable is relevant, has explanatory power and

must be included in the model. Omitting an important variable can result to specification

bias which is a more serious problem than multicollinearity.

Our model has data from 41 countries over 20 years so there may be some

characteristics in each individual country that persist over time which are unobservable in

our model. For that reason, we will need to run a fixed effect or random effect regression

to address this underpinning issue, time invariant errors, with our data. We will need to

perform a Hausman Test to see which regression, fixed or random, best fits our dataset.

When running the Hausman Test, the Null Hypothesis is that the Fixed Effects and

Random Effects Results are equal and the alternative hypothesis is that the fixed effects

and the random effect results are not similar.

We would first run this regression but without the remittance to GDP variable:
 FDi,t =β0 + β1 Rem/GDP + β2 Ln(GDP) + β3 GDP/Cap + β4 Inflation +

β5Flows/GDP + β6 Exports/GDP + β7 Interest Rate + μ

We should expect the signs of this model to be similar to that of the Aggarwal, Demirguc-

Kunt, and Peria model. And then we will add the remittance to GDP variable and

observe the significance of remittances to financial development. Aggarwal, Demirguc-

Kunt, and Peria suggested that remittance is statistically significant in their 99 country

panel dataset so if their model is good, we should see similar results in our regression.

We will then add a remittance lagged variables (one year and two year lag) into our

model to see if that would yield more robust results with the lagged terms. Adding

lagged variables in our model does make economic sense because it usually takes several

quarters to see the affects of remittances on financial development. After that is done, we

will run both the random and fixed effects regressions on our model above.

In addition to the regressions we have mentioned, we will further more split our

dataset into two subsamples: one sample including 21 countries that are highly dependent

on remittances and the other sample including 20 countries that are not so dependent on

remittances. The 41 countries were ranked according to the amount of remittances it

receives and from there the dataset was divided into two subsamples. The top 21

countries were included in the first subsample of highly dependent countries and the

bottom 20 countries in the subsample moderately dependent countries. If the Aggarwal,

Demirguc-Kunt, and Peria model is correct, this means that the model will work for these

two subsamples and should yield similar results. However if it is wrong, then we should

observe deviations of their interpretation of remittances on financial development.

Empirical Results

The appendix pages in back provide all of the regressions that were used in this

paper. After running both the Fixed Effects and the Random Effects Regression, I ran the

Hausman test to see which model was more appropriate for the dataset. The null

hypothesis of the Hausman Test states the following: H0=βFE= βRE which means that the

difference in coefficients of the Fixed Effects and the Random Effects is not systematic.

The Hausman Test rules out that the Fixed Effects model was more appropriate for the

dataset.

Table 1 reports the fixed effects estimates of the model with and without the

variable ratio of remittances to GDP. Comparing the two models, we can see that

remittance have a positive coefficient and is also statistically significant in the 1% level

of confidence. Furthermore, the R-squared between the two models are quite different-

the model without remittance has an R-Squared of 4.1% whereas the model with

remittance has an R-Squared of 12.5%. This means that the model with remittances helps

explain the variation of financial development better than the model without the ratio of

remittances to GDP. Also, by looking at the model with the ratio of remittance to GDP,

we see that a one percentage point increase in the share of remittances to GDP leads to a

0.132 increase in the ratio of deposits to GDP. An F-test was conducted on these models

to further validate the importance of the inclusion of the remittance variable in the model.

The restricted model is the model without the remittance to GDP variable and the

unrestricted being the model that includes this variable. If we accept the null hypothesis

this indicates that the restricted model is as good as the unrestricted in explaining the

dependent variable. The F-value turned out to be 24.31 is clearly greater than the F
critical value of 3.86. Hence, we can reject the null and this means that the unrestricted

model is a better model to use.

As we can observe from results of the fixed effects regression on Table 1,

financial development is affected by the country’s size, the level of income in the country,

the size of capital inflows, and the ratio of exports to GDP positively and also statistically

significant ranging from the 10% level of confidence to the 1% level of confidence.

Financial development is negatively affected by inflation as we have expected due to the

fact that inflation affects individuals’ decision-making choices which also influences

savings rate in real assets. Looking more closely at Table 1 we see that the changes in

interest rate, though positive, appear to have no significant effect on financial

development. The Random Effects estimates yielded similar results to the Fixed Effects

results but since the Hausman test ruled that the Fixed Effects model was more

appropriate, we will only consider the results of the Fixed Effects estimate for later

regression. The results of Table 1 are consistent with Aggarwal’s study.

Fixed Effects regressions of the forty-one countries and also the two subsamples,

highly dependent and moderately dependent, are located on Table 2. When comparing

the whole sample regression to the highly dependent sample, we can see that the highly

dependent countries’ fixed effects results are fairly similar to that of the whole sample.

We observe that the ratio of remittances to GDP is positive and statistically significant in

the 1% level of confidence. However, the coefficient of the ratio of remittances to GDP

increased from 0.132 to 0.155 which suggests that a one percentage point increase in the

ratio of remittance to GDP leads to a 0.155 increase in the ratio of deposits to GDP.
 As expected, the signs of most coefficients of the independent variables

explaining financial development did not change for countries that are highly dependent

on remittances. The variable ln(GDP), which helps measure the country’s size, is still

positive in both models but has dropped in significance from 10% level of confidence to

the 20% level of significance. Per capita GDP is still positive and has increased in

significance level to the 20% level of confidence in the highly dependent countries’ fixed

effects results. Inflation variable is negative and dropped its level of significance which

means that inflation does not have a statistically significant effect on financial

development in highly dependent countries. The ratio of flows to GDP remains positive

and statistically significant in the 1% level of confidence. The coefficient for this variable

increased from 0.289 to 0.444- this suggests that for countries that are highly dependent

on remittances, FDI accounts for more of the change in financial development than the

ratio of remittances to GDP. The same changes are also true to the ratio of exports to

GDP. We observe the same behavior, positive effect on financial development and also

statistically significant in the 1% level of confidence. As for interest rate, we noticed that

interest rate positively affected the whole sample and now negatively effects countries

that are highly dependent on remittances- though the sign of the coefficient has changed,

this variable remains insignificant in both cases. The R-squared for the model increased

from 0.125 to 0.155 which indicates that the specified model works better for countries

that are highly dependent on remittances.

When comparing the whole sample results to countries that are moderately

dependent on remittances results, we observe that the ratio of remittances to GDP is

negative and also insignificant. This means that for countries that are moderately
dependent on remittances, remittances is not a statistically important variable that helps

explain their financial development and also negatively effects their financial

development. This may be caused by how remittances are used in these countries that are

moderately dependent on remittances. Remittances that were bought into their country

through financial intermediaries are often withdrawn out immediately for consumption

usage which does not help financial development. A reason why remittances are

insignificant may be also due to the fact that with these moderately dependent countries,

the amount money that is being remitted is often times sporadic and is not a steady source

of income of families. The results of the other variables are similar to that of the whole

sample results with ln(GDP), GDP per capita, ratio of flows to GDP, ratio of exports to

GDP, and interest rate being positive and the variable inflation being negative. We must

note that ln(GDP) and the ratio of exports to GDP dropped in significance level. The

only two variables that are significant in explaining financial development for countries

that are moderately dependent on remittances are inflation and ratio of flows to GDP. The

R-squared for the model increased from 0.125 to 0.168 when we split the data into two

subsamples.

Table 3 shows the fixed effects results with one time lag. The results of

comparing countries that are highly dependent on remittances to the whole sample are

similar to that of the results with no time lags. We observe that the ratio of remittances to

GDP is positive and statistically significant in the 1% level of confidence- also with an

increase in the coefficient of the ratio of remittances to GDP increased from 0.39 to 0.49

which suggests that a one percentage point increase in the ratio of remittance to GDP

leads to a 0.49 increase in the ratio of deposits to GDP. We observe that one time period
lagged variable of remittances is also significant but negatively impacts financial

development. The significance of this variable in the whole sample is at the 1% level of

confidence whereas it is in the 5% level of confidence for countries that are highly

dependent on remittances. The net effect of remittances, ratio of remittances to GDP and

the lagged variable, is positive (0.49-0.34=.15). This means that for countries that are

highly dependent on remittances, remittances positively affects financial development.

The signs of most coefficients of the independent variables explaining financial

development did not change for countries that are highly dependent on remittances-

yielded similar results as the model without the lagged variable. The variable ln(GDP),

which helps measure the country’s size, is still positive in both models but has dropped in

significance from 10% level of confidence to the 20% level of significance. Per capita

GDP is still positive and became insignificant. Inflation variable is negative and dropped

its level of significance. The ratio of flows to GDP remains positive and statistically

significant in the 5% level of confidence. The coefficient for this variable increased from

0.246 to 0.396. For the ratio of exports to GDP, we observe a positive effect on financial

development and also statistically significant in the 1% level of confidence. As for

interest rate, we noticed that interest rate positively affected the whole sample and now

negatively effects countries that are highly dependent on remittances- though the sign of

the coefficient has changed, this variable remains insignificant in both cases.

The results when comparing countries that are moderately dependent on

remittances and the whole sample with one time lag are fairly similar to the results when

comparing countries that are highly dependent on remittances to the whole sample with

one time lag. We notice that the ratio of remittances to GDP is positive but insignificant.
We observe that one time period lagged variable of remittances is also insignificant and

negatively impacts financial development. The net effect of remittances, ratio of

remittances to GDP and the lagged variable, is negative like that of the model without the

time lag (0.081-0.097=-0.016). This means that for countries that are moderately

dependent on remittances, remittances negatively affects financial development even

though this results is insignificant.

We also tried running the same model with two time lags on remittances with the

idea that remittances takes time to affect a countries’ financial development and yielded

similar results as to the model with just one period time lag- Table 4. The main

difference between the one period time lag and the two period time lag models is that the

results for the time lags are insignificant for the whole sample, countries that are highly

dependent on remittances, and also countries that are moderately dependent on

remittances. Besides that main difference, Table 4 had similar results as Table 3 with the

one period time lag.

In addition to splitting the data into two subsamples, I ran the Hausman Test to

see if the variables in both models were significantly different. The null hypothesis of the

Hausman Test is as follows: βHighly Dependent=βModerately Dependent- the differences in coefficients

are NOT systematic. After running the Hausman test, we reject the null hypothesis that

the differences in coefficients are not systematic in the 1% level of confidence- so the

differences in coefficients are systematic. The result of the Hausman Test implies that the

data should be split into two subsamples.

By running all of these models, we notice the underlying theme which carries on

throughout all of these models- remittances are positive and significant for countries that
are highly dependent on remittances. As for countries that are moderately dependent on

remittances, we observe that remittances are not significant and negative for financial

development. This insignificant should not overshadow the fact that remittances do help

families and therefore is not necessarily bad.

Conclusion

The steady flow of remittances in many low middle income developing countries

have paved way for studies of its effect on growth, poverty alleviation and eventually

financial development. The main question we posed earlier was do remittances lead to

financial development. After further study, research and test conducted on this model it

has generated some interesting results.

Based on the results of this study, remittances do have a significant and positive

impact on financial development. But another interesting result came about upon splitting

the data into two subsamples: one sample including 21 countries that are highly

dependent on remittances and the other sample including 20 countries that are moderately

dependent on remittances, results show that there are indeed differences in the effect of

remittances on financial development. For countries that are highly dependent on

remittances the significance and positive impact of remittances on financial development

is still evident. However for countries that are moderately dependent on remittances, such

an impact does not exist. Remittance is not significant meaning that it does not contribute

to financial development. With these results, our model seemed to work not for all

countries but only for countries that are highly dependent on remittances.
 Furthermore, when adding the lag term to see if past period of remittance

behavior effects financial development, we observed that the one period time lag value is

negative and significant which may be explained through past studies on the usage of

remittance income. Though remittances do provide a steady source of income for

developing economies, the remittance income is used to purchase household/daily goods

for living.

Through this research, we can see that remittances do effect financial

development positively and significantly. And since remittances effects financial

development, remittance should effect growth due to the fact that the financial

development is similar to that of King and Levine’s model and King and Levine showed

the positive relationship between financial development and growth.

There are some policy implications based on this study. Since there are evidence

that remittances can contribute to financial development for countries that are highly

dependent on it, policymakers can propose or implement policies that can improve

remittance collection through formal channels. Policies that can help improve remittance

collection may further contribute to financial development.

Further Research

Based on several studies conducted on the use of remittances, remittances are

used for consumption purposes by the families of the migrant workers. As such, we

believe that a study should be done in a micro level since remittances are used and is

more effective in the micro level rather than the macro level. Also, remittances have

different effects for each country. For countries that are highly dependent on remittances
it may be vital to their financial development but such an effect may not be evident for

countries that are moderately dependent on it. Hence, a study on remittances on a per

country basis on a regional or municipality level may further capture the effect of

remittances on development. Data for such study may be unavailable since this field has

not been thoroughly explored.