Remittances inflow and private investment: a case study of South Asian economies via panel data analysis

Abstract

This study examines the association between remittances inflow and investment. The data of five major South Asian countries that receive a significant portion of remittances including India, Sri Lanka, Pakistan, Nepal, and Bangladesh are considered from 1990 to 2016. Pooled ordinary least square (OLS), the fixed effect within group estimator (FEWGE), fixed effect (FE) and random effect (RE) are used for the analysis of the data. Unit root tests were employed and then followed by a pooled mean group (PMG) analysis to analyse the long-run relationship between private investment and remittances while controlling for several other variables, such as real-interest rate, economic growth, and the interaction between remittances inflow and business freedom. We use the error correction mechanism (ECM) to find the short-run relationship among variables. Our findings reveal that private investment is positively affected by remittances inflow. Moreover, remittances flow with low business freedom opposes the positive association in the case of these sampled countries. We recommend channelising remittances and lower barriers to business freedom, which may pave the way for a conducive investment-friendly environment.