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IMPACT OF REMITTANCE ON THE DOMESTIC SAVINGS OF BANGLADESH: A

COINTEGRATION APPROACH

INTRODUCTION:

Remittances are one of the most important sources of foreign exchange for many developing

nations. Remittances have the potential to create positive outcomes for the migration source

areas. In fact, migration, with the help of remittances, can contribute positively to the

developmental activity of a country, including economic growth, poverty reduction, social

empowerment and technological progress. Moreover, it also increased the supply of savings and

investment for capital formation and development. At the micro level, remittances have resulted

in improved living standards of workers’ families and helped in improving the income

distribution in favour of poorer and less skilled workers. (Murshid, K.A.S.et. al. 2002).

According to the International Organization of Migration (2008), there are more than 200 million

migrants around the world today and there is enough evidence to show that the rate international

migration has actually increased at a time when the world is getting more globalised. Over the

past 35 years, the number of people living outside their country of birth has more than doubled,

with about 190 million (refugees included) around the world in 2005 according to the UN. In the

same year, 17 million migrants came from Africa, 53.2 million from Asia and 6.6 million from

Latin American and Caraibes.

International migrant remittances have become an important source of external finance in

developing countries. In nominal dollar terms, recorded remittances sent home by migrants from

developing countries are expected to reach $283 billion in 2008, a rise by 6.7 percent from $265

billion in 2007. Remittances can generate a positive effect on the economy thorough various

channels such as savings, investment, growth, consumption, and poverty and income

distribution. At the national level, remittances contribute significantly to GDP. Remittances can

also contribute to stability by lowering the probability of current account reversals. Since they

are a cheap and stable source of foreign currencies, remittances are likely to stem investor panic

when international reserves are taking a downward trend or external debt is rising. Remittances

assist in augmenting national income by providing foreign exchange and raising national savings

and investment as well as by providing hard currency to finance essential imports hence

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curtailing any BOP crisis. In many countries, a large portion of remittances are invested in real

estate, demonstrating both a desire of migrants to provide housing to families left behind and a

paucity of other investment instruments in the recipient.

According to the International Organization of Migration (2008), there are more than 200 million

migrants around the world today and there is enough evidence to show that the rate international

migration has actually increased at a time when the world is getting more globalised. Over the

past 35 years, the number of people living outside their country of birth has more than doubled,

with about 190 million (refugees included) around the world in 2005 according to the UN. In the

same year, 17 million migrants came from Africa, 53.2 million from Asia and 6.6 million from

Latin American and Caraibes

Remittances to developing countries from international migrants rose in 2002 by 17.3%,

reaching USD 149.4 billion. Compared to other capital flows, migrants’ remittances were

smaller than foreign direct investment (FDI) (83.7%), but significantly larger than portfolio

investment flows, by more than eight times, and three times larger than official development

assistance (ODA). Remittances are a very important capital source for developing countries. In

2002, they were equivalent to 2.4% of the cumulated GDP of developing countries, 8.2% of the

cumulated exports and 10.4% of the cumulated investments. Relative to macroeconomic

indicators, remittances are significantly higher in low-income and lower-middle income

countries than in the other developing countries. For example, remittances were equivalent to

216% of exports from the West Bank and Gaza, 90% of exports from Cap Verde, over 75% of

exports from Albania and Uganda, and over 50% of exports from Bosnia and Herzegovina,

Sudan and Jordan. Remittances were also equivalent to more than 40% of the GDP in Tonga,

more than 35% of the GDP in the West Bank and Gaza, more than 25% of the GDP in Lesotho,

and more than 20% of the GDP in Cap Verde, Jordan and Moldova

Migrant remittance flows are unequally distributed in the world, with Asia receiving the lion’s

share. Since 1996, 40 to 46% of the annual remittance flows were received by Asia, followed by

Latin America and the Caribbean with 17 to 22%, and Central and Eastern Europe with 15 to

18% (Chart III.2). This is not surprising, since Asia is the most populous region of the world and

also has the most numerous diaspora.

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It is also not surprising that the top remittance receiving countries are also the most populous,

with India and China receiving over USD 14 billion, Mexico over USD 11 billion, the

Philippines and Korea over USD 7.5 billion, and Pakistan over USD 5 billion. Another way of

comparing capital flows internationally is by looking at the amounts received per capita: the

regions that received above-average levels of remittances in 2002 were the Middle East with

305%, Latin America and the Caribbean, 210%, and Eastern Europe 165%. Asia and Africa

received remittances below the 2v002 average of USD 28.53, at proportions of respectively, 72%

and 61% .

Bangladesh is considered as one of the major labour exporting country of the world. Since

independence over 4 million Bangladeshis went abroad. The cumulative receipts of remittances

from Bangladeshi migrants during 1976-2003 stood at around US$22.0 billion5. In 2003,

through the official channels Bangladesh received 3 billion US dollars and it is estimated that

another 3 billion US dollars came in through the informal channels. Bangladesh accounted for

12% of all remittances coming into South Asia and 2% of the overall global remittances.

According to Ministry of Expatriates Welfare and Overseas Employment, despite a sharp decline

in manpower export, the country’s remittance earning increased by 27 percent in the year 2005

than the previous year with the total remittance crossing US $ 4 billion mark for the first time. In

2004, the earning was US $ 3.5 billion while 0.25 million Bangladeshis went abroad for job

purposes this year against 0.27million last year.

Total remittance received by SAARC countries

Source: Remittances data, Development Prospects Group, World Bank, 2011

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Above figure shows that the magnitude of remittances received by SAARC countries during

1980-2010. In 2010, the growth of remittances was 4473926270, which is higher than the other

countries. But in Bangladesh the growth of remittance has not always been steady. Remittances

climbed to 9418583.87 in 2010 from 392002.4 in 1980. Comparing the SAARC countries, the

growth of remittance in Bangladesh is lower than other countries.

Bangladesh is the fifth highest remittance-earning country in the world and is the second largest

sector in the country which is integrated with the world economy. About 1.7 million workers left

Bangladesh in search of jobs during 2007 and 2008 and about five million Bangladeshis are

currently working abroad, mainly in Saudi Arabia, Kuwait and Malaysia. In 2009, it is predicted

that the number of workers going abroad will be significantly lower with UAE, Saudi Arabia,

Malaysia and Singapore already struggling with slow economic growth and declining demand

for construction and other services [CPD and ILO, 2009]. Overall remittances during 2008 were

37.3% higher than the previous year but since August 2008 they showed a decreasing trend as

did the number of workers travelling overseas [Bangladesh Bank, 2009].

The magnitude of remittances to Bangladesh increased steadily during the 1980s; remained more

or less flat in the 1984s and picked up sharply in the 1996s (the sharpest increase took place

during 2000-08). The US dollar terms, the growth of workers’ remittances was 8.3 percent in

1998/99 compared to 6.8 percent in 1997/1998 and 21.2 percent in 1996/97. During July–

January, total remittances were US $1125 million compared to US $ 964 million during the same

period of the previous fiscal year – a growth of nearly17 percent. In 1977/78 remittances

amounted to 1.1 percent of GDP. The growth of remittance has not always been steady.

Remittances climbed to Tk 162511.3 million in 1983 from Tk 866 million in 1977. After a

temporary slump, it picked up again from 1985. In 1988 overseas remittances reached Tk 24

billion (US $ 737 million). The rate of increase in remittances inflows as compared to earlier

years declined somewhat in more recent years.. The share of professional and skilled laborers in

the total expatriate workforce is 0.1 percent and 19.9 percent respectively In 2006-07, the

remittances from expatriate Bangladeshi workers stood at US$ 5978.47 million reflecting

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24.50% rise over the previous year. In 2007-08, remittances stood at US$ 7914.78 million

eflecting 32.39 % rise over the previous year.

Export receipts during July-November 2008 increased by US$ 1.5E+09 million or 26.80 percent

to US$ 6551.45 million as compared to US$ 5166.63 million in the July- November 2007. It is

evident that the export basket is not diversified. 85 percent of export earnings come from only 5-

7 products. There is a possibility that Bangladesh economy with the high share of RMG in its

export basket might be affected in the recent crisis. Revenue (foreign exchange earnings) from

merchandise exports may decline due to economic slowdown in advanced economies. On the

other hand, Bangladesh does not export a very high-end product. It is therefore, less likely that

there would be a significant reduction in the demand of this product.

Table1: Migrants’ remittances and other capital flows to, Bangladesh Economy1980-2010

Year Workers' remittancesreceived (% of GDP)

Exports of goodsand services (% of

GDP)

Net official developmentassistance and official aid

received (constant 2009 US$)

1980 1.869574 5.494284 3.01E+091985 2.324832 5.550197 2.83E+091990 2.585122 6.122069 3.18E+091995 3.167296 10.86463 1.59E+091996 3.306597 11.08433 1.59E+091997 3.607143 11.99344 1.42E+091998 3.642579 13.32868 1.66E+091999 3.954111 13.19367 1.69E+092000 4.175134 13.98002 1.68E+092001 4.478928 15.3818 1.57E+092002 6.007967 14.27597 1.30E+092003 6.148025 14.21382 1.74E+092004 6.336227 15.46485 1.61E+092005 7.157726 16.58132 1.47E+092006 8.768042 18.97366 1.32E+092007 9.591867 19.77669 1.50E+092008 11.23837 20.3396 1.98E+092009 11.77337 19.42762 1.23E+092010 10.84371 18.53239

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The magnitude of ODA to Bangladesh increased steadily during the 1980s; remained more or

less flat in the 1982s and picked up sharply in the 1991s (the sharpest increase took place during

1981- 1991). During the 1992s; ODA shows a decreasing trend. Hence in 2010, we see that Net

official development assistance and official aid received (constant 2009 US$), Foreign direct

investment, net outflows (% of GDP) FDI is lower and Workers' remittances and compensation

of employees, received (% of GDP) is 10.84371 which is lower than Exports of goods and

services (% of GDP). This is because the demand for Bangladeshi manpower declined as a result

of worldwide recession. In addition, many illegal workers were sent back to Bangladesh during

this time, e.g. following the East Asian crisis.

Careful analyses of the available household survey data indicate that remittances have been

associated with declines in the poverty headcount ratio in several low income countries and

remittances have emerged as a key driver of economic growth and poverty reduction in

Bangladesh, increasing at an average annual rate of 19 percent in the last 30 years (1979-2008).

Revenues from remittances now exceed various types of foreign exchange inflows, particularly

official development assistance and net earnings from exports. The bulk of the remittances are

sent by Bangladeshi migrant workers rather than members of the Bangladesi Diaspora.

Currently, 64 percent of annual remittance inflows originate from Middle Eastern nations.

Robust remittance inflows in recent years (annual average growth of 27 percent in FY06-

FY08)have been instrumental in maintaining the current account surplus despite widening a trade

deficit. This in turn has enabled Bangladesh to maintain a growing level of foreign exchange

reserves.

The foreign exchange remittances from Bangladeshi nationals working abroad increased by US$

100.66 million or 31.82 percent to US$ 416.99 million during December 2005 as against US$

316.33 million during November 2005. During July2005- December 2005 remittances increased

by US$ 401.6 million or 22.6 percent to US$ 2178.87 million as compared to US$ 1777.24

million during July2004- December 2004. The main sources of remittance of Bangladesh is

migrant workers living in Kingdom of Saudi Arabia (KSA), which contributed 41.1% in Fiscal

Year (FY) 2004 and 39.3% in Fiscal Year 2005. The remittance inflow, however, totalled $

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2960.69 million during July-September period of the current fiscal year, an increase of $ 301.74

million than the same period of the previous fiscal (2010-11), according to the latest provisional

figures on inward remittance released by the Bangladesh Bank.

(Millions of USdollars), 12000

0

2000

4000

6000

8000

10000

12000

14000

199019911992199319941995199619971998199920002001200220032004200520062007200820092010

Wo

rker

sre

mit

tan

ce

Figure : Workers' remittances andcompensation of employees, paid (current

US$) since 1990

Source: Remittances data, Development Prospects Group, World Bank, 2011

Remittances inflows as a Share of Selected Financial Flows and GDP,2009. Remittances flows

constitute an important source of foreign exchange for developing economies. Comparing

remittances to other financial inflows displays the extent to which remittances contribute to a

country's inflow of foreign exchange.

The economics of remittances and their determinants are both strongly linked to the theory of

migration, as remittances are the economic contribution of migrants into labour-sending areas.

Imagine a world made of two islands, Abroad and Domestic, in which economic activity exists

for infinite discrete time. Every period a new generation of two-period lived homogeneous

agents borns. With no loss of generality assume the world economy is in an equilibrium where

island Abroad is richer and also hosts immigrants from Domestic. Remittances therefore flow

from Abroad to Domestic. The effect of remittances on savings and investment in poorer

countries that can spend more than it produces, import more than it exports or invest more than it

saves, and this might even be more relevant for small economies (Connell and Conway 2000).

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Economic theory, including Keynes, stated that savings are an increasing function of income

level. Theoretically, developed markets and financial institutions encourage savings by

facilitating banking services access for households. Regarding interest rates, Schmidt-Hebbel and

Serv´en (1999) do not find any link with savings. These uncertainties may come from

macroeconomic instabilities and related to inflation, exchange rate volatility or the financial

system.

Regarding the per capita remittances received by different developing countries in 1980 to

2010 is shown in table 1. The consequence of remittances per GDP is the increasing

volume of official remittances to developing country. Here we take 8 developing countries.

In India the rate of remittances received remained more or less fluctuate in 1980 -2010. In

Tonga, this rate is increasing in 1980 but remained more or less flat in the 1990 - 2008 and

picked up sharply in the 2009s-2010s (the sharpest increase took place during 2009-10).

Table 2: Remittance flows to Asian countries in by region, 1980 – 2010

Country 1980 1990 2000 2005 2006 2007 2008 2009 2010

Bangladesh 1.87 2.58512 4.1751 7.1577 8.768 9.592 11.238 11.77 10.84371

China 0.04896 0.437 1.0679 1.0304 1.11 1.0731 0.976 0.872652

India 1.5 0.75086 2.7996 2.6528 2.9783 2.995 4.1175 3.583 3.125182

Israel 1.933 1.54676 0.3209 0.6332 0.6475 0.624 0.7037 0.648 0.649373

Indonesia 0.14507 0.7212 1.8958 1.5696 1.429 1.3316 1.259 0.978837

Jordan 20.04 12.4188 21.8 19.857 18.429 19.33 16.716 14.34 13.20311

Japan 0.013 0.0294 0.0237 0.0316 0.036 0.0395 0.035 0.032782

Malaysia 0.42073 0.365 0.8103 0.8724 0.834 0.5991 0.586 0.546881

Oman 0.581 0.5808 0.3339 0.1262 0.106 0.093 0.0644 0.083

Pakistan 8.644 5.01436 1.4536 3.9051 4.0165 4.189 4.2949 5.381 5.543505

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In table 2 we include remittance receiving Asian countries. In 2008-09 Bangladesh received

higher remittance than other year. In 2010 the flows of remittance decreases at a decreasing rate

than other countries. Regarding the per capita remittances received by different developing

countries, the distribution is more unequal: Bangladesh, India, Israel, Jordan, Pakistan received

in 1980 the highest amounts of remittances per capita (Table 2). Similarly, Bangladesh, India,

Jordan, Pakistan received in 2010 the highest amounts of remittances per capita.

Chart I. Per capita migrants’ remittances by region, 1980-2010, US dollars

Another way of comparing remittance internationally is by looking at the amounts received per

capita: the regions that received above-average levels of remittances in 2010 were the least

developed countries with 640%, OECD member 33.6%, and Heavily indebted poor countries

397% (Chart I).

The International Monetary Fund (IMF) does not disaggregate remittance flow data by source

countries or by destination countries, so it is not possible to distinguish the exact amounts of

remittance outflows from remittance source countries.

Serven and Solimano (1992) summarize the determinants of private investment in developing

countries as domestic income, the real interest rate, public investment, the availability of credit

(and therefore financial development), the size of external debt, exchange rate and

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macroeconomic stability (i.e. inflation). McKinnon (1973) and Shaw (1973) early suggested that

financial development can foster economic development through the reduction of credit

constraints for investment. However, openness to trade may, in certain situations, adversely

affect domestic investment. External debt, by diverting public resources to loans repayment and

debt service, reduced public investment in areas that are relevant to private sector development

such as infrastructure (Greene and Villanueva, 1991).

Remittances can influence growth and investment directly and indirectly. The economics of

remittances and their determinants are both strongly linked to the theory of migration, as

remittances are the economic contribution of migrants into labour-sending areas. Imagine a

world made of two islands, Abroad and Domestic, in which economic activity exists for infinite

discrete time. Every period a new generation of two-period lived homogeneous agents borns.

With no loss of generality assume the world economy is in an equilibrium where island Abroad

is richer and also hosts immigrants from Domestic. Remittances therefore flow from Abroad to

Domestic. The effect of remittances on savings and investment in poorer countries that can spend

more than it produces, import more than it exports or invest more than it saves, and this might

even be more relevant for small economies (Connell and Conway 2000).

They increase national income by providing foreign exchange and raising national savings and

investment as well as by providing hard currency to finance imports preventing potential balance

of payment crises. Thus, they perform a similar function as private and public capital flows since

they provide both foreign exchange and additional savings for economic development (Djajic

1986, Quibria 1996, Russell 1986, Taylor 1999, Taylor et al. 1996 and 1996b).

Economic theory, including Keynes, stated that savings are an increasing function of income

level. Theoretically, developed markets and financial institutions encourage savings by

facilitating banking services access for households. Regarding interest rates, Schmidt-Hebbel and

Serv´en (1999) do not find any link with savings. These uncertainties may come from

macroeconomic instabilities and related to inflation, exchange rate volatility or the financial

system.

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OBJECTIVES:

Not many studies based on cointegration technique have been reported on the relationship

between remittances and savings in Bangladesh. Moreover, no known study has used the vector

error correction method to examine such relationship. There is the need to fill this gap in the

literature. Hence, the objective of this paper is to shed light on the cointegrating properties of

remittance, savings and income using the cointegrating technique known as VECM approach.

LITERATURE REVIEW:

Recently, the topic of international migration received high attention through international

forums and discussions in both developed and developing countries. A wide range of issues

related to remittances became the subject of political debate, as well as of more in-depth

research. These topics include the determinants of remittances, the transfer channels used and

their economic impact on the remittance receiving countries. Over the past years, partly because

of the sharp increase in remittance flows, the research on these issues gained momentum,

resulting in a mushrooming of scientific literature.

Most studies have found that remittances have significant positive impact on receiving

economies. For Guyana, the significance of these flows where the volume of remittances is

measured as a percent of some major economic indicators, namely, GDP, FDI, and exports. As a

percent of GDP, remittances increased from 3.7 percent of at the end of 2000 to 24.6 percent at

the end on 2006. As a share of FDI, remittances amounted to 205 percent at the end of 2006 from

37.4 percent at the end of 2000. Measured as a share of exports remittances rose to 36.3 percent

at the end of 2006, from 5.0 percent at the end of 2000. In per capita terms; the rising trend

continued, with the ratio increasing to US286.9 at the end of 2006, compared with US$33.7 at

the end of 2000 and postulates that whether the funds are used to finance consumption or

investment expenditure, positive externalities and multiplier effects are derived from the

spending. The use of the funds by recipients in Guyana is to a large extent a representation of the

variation in the income levels of households. In view of this fact, poorer households need

remittances to meet immediate consumption needs, while in higher income households;

remittances may be used as surplus funds for investment. With respect to savings in a formal

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financial institution and investment in a business venture, 14 percent and 8 percent respectively

were dedicated to these activities.

When migrants send home part of their earnings in the form of either cash or goods to support

their families, these transfers are known as workers’ or migrant remittances (Ratha, 2005). On

the current debate on migration and development, many researchers have pointed out that the

way in which migrants and households spend remittances have a significant effect on the

development of local economies. In the 1970s until the late 1980s, the economic literature has

not found a positive relationship between remittances and development, arguing that remittances

are mainly used for subsistence consumption (food, clothing. . .), non-productive investments,

repayment of debts, and that these kinds of expenditures tend to have little positive impact on

local economies’ development. Rempel and Lobdell (1978) note that remittances are mainly

devoted to daily consumption needs.

However, more recent studies conducted in most cases for Latin America and Asia found that

migrants and households spend a share of remittances on investment goods (i.e. education,

housing and small business), and that these types of expenses would strengthen the human and

physical capital of the recipient countries. Neo-classical migration theory perceives migration as

a form of optimal allocation of production factors to the benefit of both sending and receiving

countries. In this perspective of ‘‘balanced growth’’, the re-allocation of labor from rural,

agricultural areas to urban, industrial sectors (within or across borders), is considered as a

prerequisite for economic growth and, hence, as an constituent component of the entire

development process (Todaro, 1969:139). The free movement of labor – in an unconstrained

market environment – will eventually lead to the increasing scarcity of labor, coinciding with a

higher marginal productivity of labor and increasing wage levels in migrant sending countries.

Capital flows are expected to go in exactly the opposite direction, that is, from the labor scarce to

the capital-scarce migrant sending countries. Eventually, this process of factor price equalization

(the Heckscher-Ohlin model) predicts that migration ceases once wage levels at the origin and

destination converge (Massey et al., 1998).

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In a strictly neo-classical world, the developmental role of migration is entirely realized through

factor price equalization. As Djajic (1986) pointed out, earlier neo-classical migration theory

ruled out the possibility of a gain for non-migrants. Strictly speaking, neo-classical migration

theory has therefore no place for money remittances flowing to origin countries (Taylor,

1999:65).3 Neo-classical migration theory tends to view migrants as atomistic, utility

maximizing individuals, and tends to disregard other migration motives as well as migrants’

belonging to social groups such as households, families and communities.

According to dominant views of the 1950s and 1960s in development theory, return migrants

were seen as important agents of change and innovation. It was expected that migrants not only

bring back money but also new ideas, knowledge, and entrepreneurial attitudes. In this way,

migrants were expected to play positive role in development and contribute to the accelerated

spatial diffusion of modernization in developing countries. Also remittances have been attributed

an important role in stimulating economic growth.

Lipton (1980) estimates that purchases of consumer goods related to daily needs absorb about 90

per cent of remittances received. For Massey et al. (1987), 68 to 86 per cent of the Mexican

migrants’ remittances are used for consumption. According to Mishra (2005), an increase of 1

per cent in remittances in 13 Caribbean countries leads to an increase in domestic private

investment by 0.6 per cent. Funkhouser (1992) for El Salvador, Yang (2004) for the Philippines,

Woodruff and Zenteno (2001) for Mexico highlight that remittances would have reduced credit

constraints in the receiving households and encouraged entrepreneurship in these countries.

Adams et al. (2008) found that households in Ghana treat remittances as any other source of

income and there is no disproportionate tendency to spend them on consumption. Mesnard

(2004) finds that migration, through enrichment of some Tunisian workers abroad, allows

investment in more productive activities in their home country. Tests conducted by Leon-

Ledesma and Piracha (2004) for 11 countries of Central and Eastern Europe and Drinkwater et

al. (2003) on 20 developing countries show that remittances contribute significantly in increasing

the level of investment in migrants’ home countries.

At the macro level, remittances were considered a vital source of hard currency. At the meso and

micro level, migration was expected to lead to the economic improvement of migrant sending

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regions. Remittances would ‘‘improve income distribution and quality of life beyond what other

available development approaches could deliver’’ (Keely and Tran, 1989:500). Moreover, it was

expected that labor migrants or ‘‘guest workers’’ would re-invest substantially in enterprises in

origin countries after their widely expected return. Migrant workers were seen as representing ‘‘a

hope for the industrial development of their native land’’ (Beijer, 1970:102) and it was widely

thought that ‘‘large-scale emigration can contribute to the best of both worlds: rapid growth in

the country of immigration… and rapid growth in the country of origin’’ (Kindleberger,

1965:253).

Although this optimism would diminish after 1970, several governments, particularly in Asia and

the Pacific regions, have continued to see international migration as a major instrument of

national economic development (Bertram, 1986, 1999; Fraenkel, 2006). Remittances have been

growing rapidly in the past few years and now represent the largest source of foreign income for

many developing countries. The official data on the inflow of remittances into Bangladesh refers

to the transfer of funds made by migrant workers through the banking channel (and through post

offices) (Mahmud, 1989). The records of such transfers can be easily separated from other

foreign exchange transactions since these take place under what is known as the Wage Earners’

Scheme (WES).

The speed of economic development of a nation poses one of the most essential issues in

economic debate. A nation could accelerate the rate of economic growth by promoting exports of

goods and services. The volume of imports is negatively related to its relative price and varies

positively with aggregate demand (real GDP growth). The higher relative price leads to

substitution away from imports—necessarily reducing the dollar value of imports as volumes

decline. Remittances have been used in financing the import of capital goods and raw materials

for industrial development.

Remittances are typically transfers from a well-meaning individual or family member to another

individual or household. They are targeted to meet specific needs of the recipients and thus, tend

to reduce poverty, which have substantial development impact as can be understood from micro

and macro point of view. From macro frontier, remittances are used to make import payments

and are used for productive investment by the government (Salim, 1992). World Bank (Ali,

1981) identified overseas remittances achieving a favorable balance of payments and as well as

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creating a new resources base for the country. In fact, World Bank studies, based on household

surveys conducted in the 1990s, suggest that international remittance receipts helped lower

poverty (measured by the proportion of the population below the poverty line) by nearly 11

percentage points in Uganda, 6 percentage points in Bangladesh, and 5 percentage points in

Ghana.

Remittance flows tend to be more stable than capital flows, and they also tend to be counter-

cyclical—increasing during economic downturns or after a natural disaster in the migrants' home

countries, when private capital flows tend to decrease. In countries affected by political conflict,

they often provide an economic lifeline to the poor. The World Bank estimates that in Haiti they

represented about 17 percent of GDP in 2001, while in some areas of Somalia, they accounted

for up to 40 percent of GDP in the late 1990s.

A large number of studies tested the Export Led Growth (ELG) hypothesis using different

econometric procedures ranging from simple OLS to multivariate cointegration but previous

empirical studies have produced mixed and conflicting results on the nature and direction of the

causal relationship between export growth and output growth. Giles and Williams (2000a,

2000b) provide an excellent literature review of the ELG hypothesis until the late 1990s. In

addition to this extensive survey, one notes that the literature on the ELG hypothesis has been

constantly expanding with more recent studies such as Darrat et al. (2000) for Taiwan; Hatemi-J

and Irandoust (2000a) for Nordic countries; Fountas (2000) for Ireland; Panas and Vamvoukas

(2002) for Greece; Balaguer et al. (2001) for Spain; Chandra (2003) for India; Abual-Foul (2004)

for Jordan; Al Mamun and Nath (2005) for Bangladesh; Awokuse (2005a) for Korea;

A major benefit of labor export is the balance of payments support provided by remittance

(Mahmud, 1989). He also stated that, in a situation of chronic foreign exchange shortage,

remittance inflows could promote investment and capacity utilization if most of the remitted

foreign exchange is used for importing capital goods and essential inputs. Alternatively,

increased foreign exchange availability may lead to a relaxation of controls on luxury imports. It

may also lead the government to choose the easier short-run options instead of taking measures

designed to strengthen the economy’s structure and reduce its import dependence in the longer

run.

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A precarious balance of payments has always been a major constraint to development efforts in

Bangladesh. The country became heavily dependent on foreign aid immediately after

Independence, Particularly because of the disastrous fall in terms of trade in the early seventies

and the sluggish growth in exports ever since. However, since the beginning of the eighties, the

external aid inflow in real terms has stagnated or even declined. Against his background, the

huge upsurge in the floe of remittances inevitably had a salutary effect on the country’s capacity

to import. The role of remittances in compensating for the sluggish growth in real export

earnings particularly since the beginning of the eighties, is quite evident. Turning to the balance-

of payments (BOP) issue, while it is widely recognized that the remittance flows from the

migrants provided a dramatic boost to the BOP, the precise position is not clear (Saith, 1989). In

part, this is on account of the absence of appropriately and accurately recorded data and some

other problems, like the leakage or diversion of the remittances into imports.

The financial flows triggered by international migration have had a dominant impact on the

balance of payments of all the labor exporting countries. At a time when massive increase in oil

imports and international recession put severe pressure on the country’s balance of payments,

remittances offered much needed relief (Amjad, 1989). Hyun (1984) estimated that during the

late 1970s a 10 per cent increase in remittances led to a 0.32 per cent increase in private

consumption in the long run and fixed investment by .053 per cent. GDP increased by 0.22 per

cent and GNP by 0.24 per cent. Hyun also estimates that a 10 per cent increase in remittance

leads to a decrease in the ratio on the current account deficit to GNP by 0.40 percent in the long

run. He however argues that the immediate effect of increase in remittances is to adversely affect

exports due to increase in prices and wages but the net effect in the long run would be positive.

The important point to grasp is that the increase in income attributable to remittances enables the

economy to realize an excess of investment over domestic savings through a corresponding

excess of imports over exports with a smaller withdrawal on external resources than would

otherwise be the case. (Amjad, 1989). Nayyar (1984) explains, as a result of remittance financed

investments it “ may appear to be paradoxical – but it is gross national savings rather than gross

domestic savings that would rise and the economy would be able to realize a excess of

investment over the latter.” What this means is that the effective savings constraint on

investment is not domestic savings but national savings, which take into account remittances.

17

According to Nayyar (1984) In a situation where the departure of migrants does not reduce

domestic output, remittance inflows should increase national income. He also stated in his

research paper that, the increase in income attributable to remittances might enable the economy

to realize an excess of investment over savings, through a corresponding excess of imports over

exports, with a smaller drawl on external resources than would otherwise be the case. Unless the

marginal propensity to absorb out foreign incomes exceeds unity, remittance inflows should

always improve the balance of payments position or prevent it from deteriorating as much as it

otherwise would.

The increased inflow of remittances significantly improved the balance of payment position of

Pakistan’s economy during the second half of the seventies and early eighties. The foreign

exchange made available because of workers’ remittances also reduced the external debt,

improved debt servicing ability, and decreased the need for additional foreign loans (Burney,

1989). Sunny Kumar Singh (2011) founds International Migration, Remittances and its

Macroeconomic impact on Indian Economy. The data regarding remittances and some of the

macroeconomic variables like GDP, PFCE, GDFC, savings, FDI, FII, export, import and balance

of trade deficit etc have been analyzed for the period 1971-2008. The study shows that

remittances have been consistently increasing at very fast rate for the last 15 years which have

significant implications on the above mentioned macroeconomic variables. Through this study,

the importance of remittances as a source of external development finance has been discussed.

At last, some of the regulatory frameworks governing the flow of remittances have also been

discussed.

Serven and Solimano (1992) summarize the determinants of private investment in developing

countries as domestic income, the real interest rate, public investment, the availability of credit

(and therefore financial development), the size of external debt, exchange rate and

macroeconomic stability (i.e. inflation). McKinnon (1973) and Shaw (1973) early suggested that

financial development can foster economic development through the reduction of credit

constraints for investment. However, openness to trade may, in certain situations, adversely

affect domestic investment. External debt, by diverting public resources to loans repayment and

debt service, reduced public investment in areas that are relevant to private sector development

such as infrastructure (Greene and Villanueva, 1991).

18

Economic theory, including Keynes, stated that savings are an increasing function of income

level. For Friedman (1957), in his theory of permanent income, savings do not depend on long-

term current income but permanent income, defined as the income that the agent may have each

period of his life without damaging its heritage. Ando and Modigliani (1963), in their ‘life cycle

hypothesis of saving’, consider that economic agents save money depending on their life cycle.

They borrow when young, save during working time period and spend during retirement. Snyder

(1990) underlines that income per capita is an important omitted variable in the first studies on

the determinants of savings. Empirically, Masson et al. (1998) found an inverted-U relationship

between per capita income and savings. Savings increase at the early stage of development,

leading to higher incomes and then to more investment opportunities and growth. It decreases

gradually as countries reach higher income levels and more mature development levels meaning

lower investment opportunities and growth (Ogaki et al., 1995). One of the main reasons for

savings is the precautionary motive. Households save in anticipation of uncertain and difficult

times where there is a risk of decreasing income. These uncertainties may come from

macroeconomic instabilities and related to inflation, exchange rate volatility or the financial

system.

Remittances can influence growth and investment directly and indirectly. However, it is

noteworthy that conditions that initially promote migration, such as low income and low

productivity, may also discourage investment. Workers’ remittances have become an

increasingly prominent source of external findings for many developing countries. A study by

Dilip Ratha (2007) found that the relative importance of workers’ remittances as a source of

development finance and discusses measures that industrial and developing countries could take

to increase remittances. Remittance flows are the second-largest source, behind FDI, of external

funding for developing countries. Remittances to low-income countries were larger as a share of

GDP and imports than were those to middle income countries. Remittances are also more stable

than private capital flows, which often move pro-cyclically, thus raising incomes during booms

and depressing them during downturns. By contrast, remittances are less volatile—and may even

rise— in response to economic cycles in the recipient country. As a share of GDP and other key

economic indicators, remittances are significantly higher in low-income countries than in other

developing countries. In 2001, remittances to low-income countries were 1.9 percent of GDP and

19

6.2 percent of imports; in the upper-middle-income countries they were 0.8 percent of GDP and

2.7 percent of imports. Adelman and Taylor (1990) found that for every dollar Mexico received

from migrants working abroad, its GNP increased by $2.69 to $3.17, depending on whether

remittances were received by urban or rural households. Remittances also more than offset the

loss of tax revenue in most developing countries. The net fiscal loss associated with Indian

emigration to the United States was estimated at 0.24 to 0.58 percent of Indian GDP in 2001

(Desai, Kapur, and McHale 2001b), but remittances amounted to at least 2.1 percent of GDP in

the same year. The evidence on the impact of remittances on income inequality is mixed.

Remittances augment incomes and can lift people out of poverty.

A study of mobilizing remittances for productive use policy oriented approach by Bhubanesh

Pant(2008). They find that migrant remittances represent the most direct, immediate and far

reaching benefit to migrants and their countries of origin. The potential for remittances to reduce

poverty and economic vulnerability, improve family welfare and stimulate economic

development has been of special interest to the governments everywhere. For this to take place,

the formulation and implementation of effective remittance-augmenting policies and strategies is

the core. This paper thus looks at the different policies initiated by some countries. Policy

alternatives for Nepal are then suggested for mobilizing remittances for productive use. The

Nepal Rastra Bank (NRB), the country’s central banking authority, follows the IMF Manual in

recording remittances or migrant transfers in its BOP computation. Since the end of the 1990s,

there has been a renewed interest in the financial resources that migrants send back to their

countries of origin due to the potential contribution to the economic development of the

receiving regions.

Worker Remittances and Capital Flows by Claudia M. Buch Anja Kuckulenz Marie-Helene Le

Manchec (2002) provides an analysis on the magnitude of remittances, their volatility, and their

relationship to other capital flows. Worker remittances are classified as current transfers and

appear in the current account of the balance of payments, whereas capital flows belong to the

capital or financial account. Current transfers are part of gross national product, while capital

movements are a part of gross domestic product and are a source of financing. While capital

flows between countries are defined as changes in the assets and liabilities of resident’s vis-à-vis

non-residents, worker remittances are transfers of funds between nationals of a given country.

20

Hence, an inflow of worker remittances does not constitute a capital import from a foreign

country but rather a transfer of capital from nationals living abroad towards those living in the

home country. It may be useful to think about worker remittances as enlarging the available

funds that can be invested in the recipient country. In addition, remittances have grown in the

context of the increased globalization. The economics of remittances and their determinants are

both strongly linked to the theory of migration, as remittances are the economic contribution of

migrants into labour-sending areas.

Remittances can have a strong positive impact on the current account, but they can also have less

beneficial features, such as leading to a Dutch disease effect. With remittances, an economy can

spend more than it produces, import more than it exports or invest more than it saves, and this

might even be more relevant for small economies (Connell and Conway 2000). Remittances are

thus perceived as having a positive impact on the current account: They increase national income

by providing foreign exchange and raising national savings and investment as well as by

providing hard currency to finance imports preventing potential balance of payment crises. Thus,

they perform a similar function as private and public capital flows since they provide both

foreign exchange and additional savings for economic development (Djajic 1986, Quibria 1996,

Russell 1986, Taylor 1999, Taylor et al. 1996 and 1996b).

Remittances can influence growth and investment directly and indirectly. However, it is

noteworthy that conditions that initially promote migration, such as low income and low

productivity, may also discourage investment. The effects of remittances will therefore depend

strongly on the government’s policy to organize and control flows of remittances and to promote

an economic environment conducive to investment in productive activities that would encourage

migrants to remit (Glytsos 1997). Welfare implications of remittances have also been derived

based on microeconomic models, which stress risk sharing and access to informal loan markets.

Stark and Bloom (1985) developed what is called the New Labour Economics of Migration

(NELM) and focused on explaining remitters’ behavior by viewing the household as the relevant

unit for the analysis.3 NELM stresses the implicit coinsurance between migrants and their

household of origin. Families engage in migration by sending one or more members abroad and

bear the initial costs of migration.

21

Douwere Grekou (2009) founds the effect of remittances on savings and investment behavior.

On his paper he addresses the question with a simple theory that builds on the role of networks as

a determinant of migration. The theory treats remittances as a signal of the well-being of the

network, hence allowing remittances to induce emigration. The analysis demonstrates that

remittances have an ambiguous effect on savings and investments. This paper explores the effect

of remittances on savings and investment using a simple theory that builds on the role of

networks as a determinant of migration. Networks effects are important for migration decision

since the presence of a network of family or friends minimizes both the uncertainty of finding a

job and the non-economic costs once arrived at destination. Adams (2005) shows that

remittances increase savings and investment in human capital in Guatemala but Adams,

Cuecuecha, and Page (2008) find no particular effect in Ghana, where, it is argued, remittances

are used like any other financial resource. They use remittances as a signal of how-well their

network is doing and therefore, how well they could do themselves if they migrate. According to

Douwere Grekou, the impact of remittances on savings and investment depend on the effect of

remittances on migration and how constrained investment is. Remittances have a positive impact

on both savings and investment only if they have a low effect on the probability to migrate and

investment is constrained. Remittances can have a negative impact on both savings and

investment if remittances induce a high probability to migrate and investments are constrained.

Serv´en and Solimano (1992) summarize the determinants of private investment in developing

countries as domestic income, the real interest rate, public investment, the availability of credit

(and therefore financial development), the size of external debt, exchange rate and

macroeconomic stability (i.e. inflation). The neoclassical theory of investment, which is based on

the work of Jorgensen (1963), and the accelerator theory consider that the stock of capital (i.e.

investment) is a positive function of income. The increasing demand resulting from, adversely

affect domestic investment. External debt, by diverting public resources to loans certain

repayment increasing income encourages firms to increase investment to meet demand.

Neoclassical theory also suggests a possible negative relationship between real interest rates and

investment, high interest rates corresponding to heavier debt services for borrowers. McKinnon

(1973) and Shaw (1973) call into question this assumption by arguing that high interest rates, by

encouraging savings that are more paid, increase the volume of available domestic credit, which

22

increases investment. This argument, known as the ‘McKinnon and Shaw hypothesis’, assumes

that it is not the cost of financial resources that hinder investment, but rather the lack of available

financial resources for investment. This is particularly true for African countries where, despite

high nominal interest rates, real interest rates are often negative because of high inflation rates

(Ndikumana, 2000). McKinnon (1973) and Shaw (1973) early suggested that financial

development can foster economic development through the reduction of credit constraints for

investment. However, openness to trade may, in situationsand debt service, reduced public

investment in areas that are relevant to private sector development such as infrastructure (Greene

and Villanueva, 1991).

An alarming findings of the study (Debra Roverts,2009) was that development impact of

remittances on Caribean economies and founds that the nature of remittance. The magnitude and

nature of remittances to the Caribbean has changed significantly. At the end of 2005, these

transfers amounted to US$6.4 billion2, emerging as the second largest source of foreign finance

for the region after private capital flows. The rising level of these flows opens up new

opportunities since securitizing future remittance flows can reduce the cost of borrowing on the

international capital market. Remittances can also facilitate growth and development since the

limited availability of foreign savings has been a major obstacle to achieving this objective for

decades. The acceptable hypotheses range from pure altruism, in which case the funds are sent as

financial assistance for those left in the origin country, or pure self-interest, where the funds are

sent as a form of portfolio investment that is beneficial to the migrant the altruistic motive

predominates, making remittances counter-cyclical, and responding positively to natural disaster

or any other adverse shock.

Many writers are of the view that too much of the funds are used to satisfy consumption needs,

which are considered counter- productive, while very little is dedicated to more productive

activities that have development implication. This paper departs from this view, and postulates

that because Caribbean economies have a history of severe poverty, in the absence of these

additional funds the poverty level for the recipient households would have been significantly

higher in absolute terms and in terms of severity. A study on remittances from a development

perspective in Guyana is paramount since these flows are substantial, (amounting to US$225.9

million at the end of 2006), and the country is listed among the world top thirty (30) recipients of

23

remittances measured as a share of GDP. Although there are some downsides to the remittances

phenomenon, these flows are of increasing importance at both the household and

macroeconomic levels. In Guyana when they found higher income jobs in the country of their

destination. This consistent cross border movement of people propelled the increase in the

volume of remittances repatriated to Guyana, and started a new era in the country. Today ,

although there is an upsurge in economic activities, migration and remittances continue to rise, as

a result of the continuous decline in the cost of international travel, frequent communication with

the Diaspora community and new migration laws that attracts skilled workers and trained

professionals. Available data records that Guyanese migrant in all of the more developed

economies amounts to approximately 500,000.In the USA, the official migrants reported by the

United States Immigration and Naturalization Service (INS) was approximately 200,00010 at the

end of 2005. Since this data does not include illegal immigrants that are assumed to be very high,

it is reasonable to expect that when the official numbers are adjusted for illegal immigrants the

total number of migrants will be in excess of 250,000, which represents almost a quarter of the

current population.

Most studies have found that remittances have significant positive impact on receiving

economies. For Guyana, the significance of these flows where the volume of remittances is

measured as a percent of some major economic indicators, namely, GDP, FDI, and exports. As a

percent of GDP, remittances increased from 3.7 percent of at the end of 2000 to 24.6 percent at

the end on 2006. As a share of FDI, remittances amounted to 205 percent at the end of 2006 from

37.4 percent at the end of 2000. Measured as a share of exports remittances rose to 36.3 percent

at the end of 2006, from 5.0 percent at the end of 2000. In per capita terms; the rising trend

continued, with the ratio increasing to US286.9 at the end of 2006, compared with US$33.7 at

the end of 2000 and postulates that whether the funds are used to finance consumption or

investment expenditure, positive externalities and multiplier effects are derived from the

spending. The use of the funds by recipients in Guyana is to a large extent a representation of the

variation in the income levels of households. In view of this fact, poorer households need

remittances to meet immediate consumption needs, while in higher income households;

remittances may be used as surplus funds for investment. With respect to savings in a formal

24

financial institution and investment in a business venture, 14 percent and 8 percent respectively

were dedicated to these activities.

In fact, 15 percent of the funds being used for education would suggest that remittances may be

contributing to human capital accumulation in Guyana, while 16 percent being dedicated to

expenditure on real estate and 14 percent being saved in a financial institution, suggests that

remittances can have significant multiplier effect in the economy and makes funds available for

projects with development implication. This paper provides that these flows have positively

impacted on the development of Guyana. More importantly, given the strong altruistic motive for

sending remittances to Guyana, formulating appropriate policies to enhance the flow and the use

of remittances will increase the development impact of these flows and mitigate the cost of

migration in Guyana. To improve compliance and reliability of data on remittances, in order to

facilitate monitoring and analysis, legislation must be put in place for the regulation and

supervision of all categories of remittances service providers. A very useful strategy may be for

the policy measures recommended in this paper to be harmonized with government development

objectives. Within this context, it is necessary for remittances and related issues to become an

integral part of the Poverty Reduction Strategy Paper of Guyana and the also the country’s

National Development Strategy Paper.

Migration, remittances and development by Judith van Doorn;ILO founds that the money that

migrants send back home is an important source of revenue for families, but also for developing

economies. How can the productive use of these remittances be enhanced? Throughout the

world, labor migration has become a major source of support for poor families in developing

countries. Substantial amounts of remittances move between regions, through different

mechanisms. It is impossible to determine the value of informal remittances globally, since data

on these transactions are obviously difficult to obtain. A good measure of the weight of

remittances is their proportion to a country’s population, its gross national product (GNP) or

other income-generating activities like merchandise exports and tourism.

Remittances have the potential to create positive outcomes for the migration source areas. Their

scale is considerable, as can be seen when looking at the total amount of remittances compared

to official development assistance (ODA). Remittances can contribute to reducing inequalities

resulting from globalization, in particular since almost two-thirds of all remittances are sent to

25

developing countries. Attractive investment opportunities in the country of origin can capture

remittances for the stimulation of production and employment. Furthermore, for migrant workers

it is important that the transfer of funds takes place in a cost-effective and safe way, and should

not be subject to policies and regulations that direct the use of remittances. Remittances can be

transferred freely and through channels preferred by migrants and their families. The quality and

reliability of remittance services varies widely across the world, and research on this issue is

limited. Yet it appears that the main concerns pertain to the risk involved in the transaction, the

transparency of the transfer costs, and the speed and efficiency of the service. Money may get

lost in the transfer process. Anecdotal evidence reveals that this risk is considerable in the case of

hand-carriage. Migrants may be robbed, or may have to pay large bribes to get their money

across the border. Similar concerns arise when the money is given to a friend or acquaintance. In

this case, trust is also a major issue. The costs of transfer and transparent information on these

costs are another concern. Some markets are being monopolized, and information on the transfer

costs (in particular the exchange rate and the costs at the receiving end) is often not well

communicated.

Remittances are the result of hard work by relatively poor people. Many of these migrants work

under harsh conditions, and are often paid marginal wages. It is therefore crucial to maximize

their benefits, and to reduce outside interference in the use of these funds. When planning to

enhance their productive use, incentive-based initiatives, rather than regulatory and heavy

handed approaches appear most promising. Migrants and their families should be encouraged to

allocate these funds in a way that enhances local development, as well as their individual needs.

Current work by the Social Finance Programe explores the relative cost-effectiveness of

remittance-promoting policies and the conditions for international cooperation.

METHODOLOGY AND VARIABLE DEFINITION:

This paper is based on secondary data. Annual data are taken from World Bank data source, and

monthly data from the Bangladesh Bank economic Trends. Our study have used time series data

from 1976 to 2010.

26

Table 1: Definition and source of variables

Variables Definition Source

REM Migrant remittances as a % of GDP World Development Indicators (WDI)

Y Real GDP per capita ibid

S Savings as a % of GDP ibid

In applying the cointegration technique, we need to determine the order of cointegration of each

variable. In table 2 we present results that illustrate the uncertainty over whether our variables of

interest are I(0) or I(1).While augmented Dickey Fuller tests suggest that, in general, the null

hypothesis that a series is I(1) cannot be rejected, this is also true for all other variables when we

consider the results from Phillips Perron test.

Table 2: Result of Unit Root test

Variable ADF test statistic (withtrend and intercept)

P.P test statistic (withtrend and intercept)

Result

Level First Difference Level First Difference

Real GDP Per Capita (Y) -0.927 -6.285 -0.85 -5.892 I(1)Savings as a % of GDP (S) -3.261 -9.293 -2.26 -8.441 I(1)Remittances as a % GDP (R) -2.357 -7.935 -1.78 -8.441 I(1)

5 % Critical Value -3.564 -3.564 -2.97 -2.978

Several studies have used Johansen (1988) and Johansen and Juselius (1990) co integrating

technique in examining the long run relation among variables in order to test for co integration.

For robust- ness check, we perform the Johansen multivariate cointegration test. Results in Table

3 show two cointegrating vectors. This implies that the long-run relationship between the

variables is valid and robust. Since there are cointegration vectors among the variables, we

derive the long-run elasticities as the estimated coefficient of one lagged level independent

variable divided by the estimated coefficient of one lagged level dependent variable and multiply

with a negative sign.

Table 3: Johansen & Juselius Cointegration Test

Eigenvalue Likelihood

Ratio

5 Percent

Critical Value

1 Percent

Critical Value

Hypothesized

No. of CE(s)

27

0.747087 56.92128 29.68 35.65 None **

0.443180 17.05473 15.41 20.04 At most 1 *

0.002578 0.074871 3.76 6.65 At most 2

*(**) denotes rejection of the hypothesis at 5%(1%) significance level

L.R. test indicates 2 cointegrating equation(s) at 5% significance level

FINDINGS AND CONCLUDING REMARKS:

From Table 4 we obtained, The coefficient 3.639099 tells us that holding the influence of real

GDP per capita constant, on average as remittances increase, say by a dollar on average savings

goes up by 3.64 units. Similarly ,there is positive relation between S and Y. Other coefficient -

118.5800 tells us that holding the influence of R,Y constant, on average as C increases, say by a

dollar on average S decreases by 118.58 units. Now from the t table we find that for 28 df the 5

percent critical t value is 2.048 and the 1 percent critical t value is 2.763. Thus , the observed t-

value of 2.265453, 3.515155, and 3.409661 are significant at the 5 percent. Another way, the

observed t-value of 3.515155, 3.409661 are significant at the 1 percent but the oserved t value of

2.265453 are insignificant at 1% level of significance.

Table 4: Long run Cointegrating relation

Dependent Variable: SMethod: Least SquaresIncluded observations: 31

Variable Coefficient Std. Error t-Statistic Prob.

R 3.639099** 1.606425 2.265453 0.0432Y 23.52892*** 6.693566 3.515155 0.0015C -118.5800*** 34.77764 -3.409661 0.0020

R-squared 0.740350 Mean dependent var 13.05374Adjusted R-squared 0.721803 S.D. dependent var 4.522482S.E. of regression 2.385354 Akaike info criterion 4.668338Sum squared resid 159.3176 Schwarz criterion 4.807111Log likelihood -69.35923 F-statistic 39.91869Durbin-Watson stat 0.559334 Prob(F-statistic) 0.000000

Since Cal F > Tab F at 5% level of significance with 3 & 27 df , hence we may reject the null

hypothesis. The results shown in Table 4 reveal that the computed F-values are much higher than

the above critical bounds values. There is, therefore, strong evidence of a long run relationship

28

among the variables of our model. The R² value of about .74 means that about 74 percent of the

variation in savings is explained by R, Y, C.

They increase national income by providing foreign exchange and raising national savings and

investment as well as by providing hard currency to finance imports preventing potential balance

of payment crises. Thus, they perform a similar function as private and public capital flows since

they provide both foreign exchange and additional savings for economic development (Djajic

1986, Quibria 1996, Russell 1986, Taylor 1999, Taylor et al. 1996 and 1996b).

From the vector error correction model, we find that the coefficient of lag error term is negative

and significant at 5 b5 level which provides further evidence of a conitegrating relationship

among the variables. The value of the estimated coefficient is 0.37 which means about 37%

percent of short run deviation is corrected in the long run.

For robustness check, we also conducted pair wise Granger Causality test reported below. The

Granger causality test is performed to find the direction of causality between savings and other

variables.

Table 5: Short Run Vector Error Correction Model

Error Correction: D(S) D(R) D(Y)

CointEq1 -0.376199** -0.001763 0.003272(0.14756) (0.01075) (0.00147)

(-2.54953) (-0.16388) (2.23160)

CointEq2 -9.905595 -0.152947 0.039321(4.22224) (0.30775) (0.04195)

(-2.34605) (-0.49699) (0.93730)D(S(-1)) -0.200225 -0.015674 -0.001002

(0.18994) (0.01384) (0.00189)(-1.05414) (-1.13214) (-0.53118)

D(S(-2)) -0.130575 0.042972 -0.000183(0.15508) (0.01130) (0.00154)

(-0.84200) (3.80179) (-0.11902)

D(R(-1)) 2.316850 0.013913 -0.011788(2.66406) (0.19418) (0.02647)(0.86967) (0.07165) (-0.44533)

D(R(-2)) 1.883898 -0.456105 -0.025660(2.32620) (0.16955) (0.02311)

29

(0.80986) (-2.69010) (-1.11018)D(Y(-1)) -13.67185 -0.615596 0.141532

(25.9450) (1.89105) (0.25779)(-0.52696) (-0.32553) (0.54903)

D(Y(-2)) -1.365219 3.814759 -0.036193(24.6305) (1.79524) (0.24473)

(-0.05543) (2.12493) (-0.14789)C 0.630364 -0.019587 0.027942

(0.98917) (0.07210) (0.00983)(0.63727) (-0.27168) (2.84304)

R-squared 0.513497 0.818001 0.762586Adj. R-squared 0.308653 0.741370 0.662622F-statistic 2.506777 10.67453 7.628608Log likelihood -32.08317 41.24457 97.04163Akaike AIC 2.934512 -2.303184 -6.288688Schwarz SC 3.362721 -1.874975 -5.860479

Note: Standard errors & t-statistics in parentheses

For robustness check, we also conducted pair wise Granger Causality test reported below. The

Granger causality test is performed to find the direction of causality between savings and other

variables. The causality between savings and remittance may be bi-directional. In order to

establish the direction of causality, Granger casualty test has been employed and the results are

presented in Table 2. F-statistic and probability values are constructed under the null hypothesis

of no causality. It is evident that there is a causal relationship between two variables of major

concern and, importantly, the one way causality runs through savings and remittance. Similarly,

F-statistic and probability values are constructed under the null hypothesis of no causality in

other variable.

Table 6: Pair wise Granger Causality Test

Null Hypothesis: Obs F-Statistic Probability

DS does not Granger Cause DR 28 4.21539 0.02756

DR does not Granger Cause DS 5.66681 0.00998

DY does not Granger Cause DR 28 5.19173 0.01378

DR does not Granger Cause DY 1.04455 0.36795

DY does not Granger Cause DS 28 0.16668 0.84748

DS does not Granger Cause DY 0.11652 0.89053

30

Remittances have the potential to create positive outcomes for the migration source areas. In fact,

migration, with the help of remittances, can contribute positively to the developmental activity of

a country, including economic growth, poverty reduction, social empowerment and technological

progress. Moreover, it also increased the supply of savings and investment for capital formation

and development. At the micro level, remittances have resulted in improved living standards of

workers’ families and helped in improving the income distribution in favour of poorer and less

skilled workers.

To emphasize the importance of remittance for the developing world, it was estimated that 60

percent of global remittances were sent to developing countries in the year 2000. Lower middle

income countries apparently receive the largest amounts, but remittances may constitute a much

higher share of the total international capital flow to low-income countries. To further emphasize

the development dimension of migrant transfers, remittances seem to be more stable than private

capital flows and to be less volatile to changing economic cycles. It may, therefore, be concluded

that monetary remittances play a most important role in the domestic savings of many

developing countries like Bangladesh and are crucial to the survival of poor individuals and

communities in Bangladesh.

31

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