Are Institutions Improving the Contribution of Remittances to Economic Growth? A Panel Data Analysis

Abstract

This paper is to test the hypothesis that better governance can improve the response of remittances on economic growth. Using panel data for 12 Middle East and North Africa (MENA) countries over the period of 2002 to 2020, the various estimates were carried out by the system generalised method of moments (GMM) method to examine the problem of endogeneity, and unobserved heterogeneity. The results indicate that migrant remittances have a direct negative link to economic growth due to it being mainly used for consumption. This increases the likelihood of dependency, which leads to the reduction of labour supply. The joint relationship between the governance composite index, and remittances, may moderate this negative effect on economic growth. However, considering the individual dimensions of governance, this shows that only the interaction between remittances and the control of corruption gives a positive and significant impact. The interaction between remittances and the five other governance quality indicators appears to be negative and insignificant. This shows that political instability, ineffective government, and poor regulatory quality encourages money transfer through informal channels that thwart economic growth in MENA countries.