Introduction
Remittances are defined as the transfer of money or goods from migrant workers to their families living back in the home countries. In 1990, remittances going into the developing countries stood at $28.6 billion. This was nearly 52 percent of the Official Development Assistance (ODA) or foreign aid ($55.6 billion) received by these countries. By 2015, foreign aid received by developing countries had increased three folds to $152.4 billion. In contrast, over the same time period the amount of remittances received by these countries increased fourteen-fold to $422 billion. This trend is even sharper when we focus on the South Asian countries. In 1990, this region received $5.9 billion of foreign aid in contrast to $5.5 billion of remittances. Over the next twenty-five years, while foreign aid increased at an average annual growth rate of 6.4 percent to total $15.5 billion, remittances grew at a staggering average annual growth of 80.4 percent and stood at $117.6 billion, or nearly eight times that of foreign aid. This trend underscores the importance of remittances as a means of meeting various domestic expenditure needs, especially for families of migrant workers.
Figure 1: Inflow of Remittances in South Asia
Figure 1 shows the trends in remittances received among the six major South Asian economies: India, Pakistan, Bangladesh, Sri Lanka, Nepal and Afghanistan. All remittance data are taken from latest World Bank report, unless otherwise mentioned and details are given in the reference at the end of the chapter. India continues to be the largest destination of remittances and accounted for more than half of the region’s total remittances. Considering the large amount of remittance inflows in South Asia, a report by the Asian Development Bank dubbed the region as a “remittance economy” (Ozaki 2012).
The amount of remittances received by a country are a direct function of the number of migrants the country sends out. Figure 2 examines the stock of migrants originating from the above six countries. From an initial number of 18 million migrants in 1960, the number of migrants sent out each year more than doubled over the next fifty years. As of 2013, this number stood at 37 million of which India accounted for more than a third of the migration- 13.9 million migrants- followed by Bangladesh at 7.6 million.
Figure 2: Stock of Migrants Sent out from South Asia, Selected Years
Another interesting fact from the above chart is that from 1960 to 2000 the stock of migrants grew very gradually from 16.6 to 20 million but then almost doubled to 37 million in 2013. This period saw a quadrupling of migration from Afghanistan- 1.8 to 5.6 million, doubling from Pakistan and a 50 percent increase from Indian and Bangladesh. Contrasting Figure 1 with Figure 2, we see a very strong correlation between remittances and migration.
In the remainder of this essay, I will summarize some of the economic benefits of remittances discussed in the literature and discuss the trends in migration and remittances of the above South Asian economies. Then, I will conduct an econometric analysis of the impact of remittances on the economic growth of selected South Asian economies and conclude with major findings.
Impact of Remittances
In one of the earliest studies on remittances, Lucas and Stark (1985) argued that tempered altruism is a critical motivation for remittance. They developed a theoretical model whereby migrants derive utility not just from their own consumption,...
