Remittances, saving, investment, and school enrollment in developing countries

Remittances are an important source of foreign exchange earnings for many of the poorest developing countries. This dissertation develops an OLG model of households with residences in two countries to show how remittances may be either be saved for retirement, used to finance investment in housing, schooling, or simply consumed. The model provides several hypotheses regarding how remittances might affect household spending and investment decisions in the home country. These hypotheses are tested using panel data for 62 countries. A number of studies focus on the determinants of remittances (including Puri and Ritzema (1999), Chami, Fullenkamp, and Jahjah (2003), and Bouhga-Hagbe (2004)). However, it is only recently that the economic effects of remittances been studied empirically: Adams and Page (2003) use a cross section of countries to study the impact of remittances on poverty while and Rajan and Subramanian (2005) explore the impact for remittances and aid on growth. In particular, I use the theoretical framework of McLeod et al. (2005), Kremer and Chen (2002) and Stark and Wang (2003), to develop the model. In the empirical analysis, I use the estimation framework Gruben and McLeod (1998), Bosworth and Collins (1999), and Mody and Murshid (2002) to study the impact of remittances on savings and investment in a panel of 62 developing countries for which long remittances series are available and compose either over 2% of exports or imports or over 0.5% of GDP. In addition, I study the impact of remittances on school enrollments in that same panel of developing countries. The empirical results appear to be consistent with the model as remittances appear to have a weak but positive effect on Gross national Savings and Investment. Furthermore, the results show that Remittances positively affect primary school enrollment as well as secondary school enrollment. I use Instrumental variables as well as the Generalized Method of Moments to carry out robustness checks and to estimate the best unbiased coefficients in the long term in all cases. The conclusion offers a plea for more data availability regarding poverty and discusses the new ways of measuring remittances