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Impact of Diaspora Remittances on Poverty Reduction in Developing Countries

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Impact of Diaspora Remittances on Poverty Reduction in Developing Countries View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by KDI School Archives IMPACT OF DIASPORA REMITTANCES ON POVERTY REDUCTION IN DEVELOPING COUNTRIES By DZVUKUTU, Tapiwa THESIS Submitted to KDI School of Public Policy and Management In Partial Fulfillment of the Requirements For the Degree of MASTER OF DEVELOPMENT POLICY 2017 IMPACT OF DIASPORA REMITTANCES ON POVERTY REDUCTION IN DEVELOPING COUNTRIES By DZVUKUTU, Tapiwa THESIS Submitted to KDI School of Public Policy and Management In Partial Fulfillment of the Requirements For the Degree of MASTER OF DEVELOPMENT POLICY 2017 Professor Shun WANG IMPACT OF DIASPORA REMITTANCES ON POVERTY REDUCTION IN DEVELOPING COUNTRIES By DZVUKUTU, Tapiwa THESIS Submitted to KDI School of Public Policy and Management In Partial Fulfillment of the Requirements For the Degree of MASTER OF DEVELOPMENT POLICY Committee in charge: Professor Shun WANG, Supervisor Professor Jin PARK Professor Hee-Seung YANG Approval as of December, 2017 ABSTRACT The aim of this study is to investigate the impact of diaspora remittances in developing countries. The fixed effects method was applied in this paper, with a panel data of 58 developing countries, covering the period 1990-2015. Generally, the study concluded that diaspora remittances have poverty reducing effects in developing countries. Overall, on a policy perspective, the findings of this study call for the governments in developing countries to employ mechanisms that promote smooth flow of remittances into their countries. These may include developing strong ties with remittance-sending countries, minimizing the costs of transferring money, liberalizing interest rates, and developing sound financial infrastructure to improve the accessibility of remittances. *Key Words: Diaspora Remittances, Poverty Reduction, Developing Countries, Fixed Effects i ACKNOWLEDGEMENTS Firstly, I wish to extend my sincere gratitude to Professor Wang Shun, my major supervisor for this study and Professor Park Jin, my second supervisor. The guidance, encouragement and unwavering support provided by these two distinguished Professors made this study a success. Secondly, I would like to extend my profound appreciation to all KDI School Professors for the knowledge and wisdom they imparted in me. In addition, I would also like to give thanks to all my friends at KDI School, as well as staff members who provided moral support and made sure that I complete this study. Special mention also goes to Chamunorwa Nyamuranga and Stephen Nkomo, who guided me throughout the whole thesis writing process. I’m also grateful to the Government of Korea for awarding me the Global Ambassador Scholarship. This is a rare opportunity which many people wish to grab and utilize. Finally, I would have done injustice if I don’t extend my gratitude to my wife, Sheba, my son, Tinevimbo, my mom, Dr. John MacRobert, and Pastor Erica Saunders for prayers and encouragement during my studies in Korea. I understand these people were patiently waiting for me and all I can say is Ebenezer, the Lord has brought me this far! Grace, Peace & Love! ii TABLE OF CONTENTS Table of Contents ABSTRACT .................................................................................................................................................. i ACKNOWLEDGEMENTS ....................................................................................................................... ii TABLE OF CONTENTS .......................................................................................................................... iii LIST OF TABLES ..................................................................................................................................... iv LIST OF FIGURES ................................................................................................................................... iv LIST OF ACRONYMS .............................................................................................................................. v 1. INTRODUCTION ............................................................................................................................... 1 1.1. Research Questions ..................................................................................................................... 4 1.2. Objectives of study ...................................................................................................................... 5 1.3. Hypothesis .................................................................................................................................... 5 1.4. Significance of the study ............................................................................................................. 5 1.5. Organization of the paper .......................................................................................................... 6 2. LITERATURE REVIEW................................................................................................................... 8 2.1. Conceptual Framework .............................................................................................................. 8 2.2. Review of Empirical Studies .................................................................................................... 10 3. METHODOLOGY ........................................................................................................................... 13 3.1. Model specification ................................................................................................................... 14 3.2. Data ............................................................................................................................................ 16 4. RESULTS ANALYSIS AND DISCUSSION .................................................................................. 17 5. CONCLUSION ................................................................................................................................. 25 5.1. Policy Recommendations .......................................................................................................... 26 5.2. Limitations of the Study ........................................................................................................... 27 5.3. Suggested Areas for Further Study ......................................................................................... 28 6. REFERENCES .................................................................................................................................. 29 7. APPENDICES ................................................................................................................................... 33 iii LIST OF TABLES Table 1: International Migration Trends for the Major Remittance Recipient Countries (1990-2015) .... 7 Table 2: Summary Statistics .................................................................................................................... 17 Table 3: Results of Poverty Head-Count Ratio at US$1.90 per day ..................................................... 18 Table 4: Results of Poverty Head-Count Ratio at US$3.10 per day ..................................................... 19 Table 5: Results of Poverty Head-Count Ratio at US$1.90 per day (with interactions) .................... 21 Table 6: Results of Poverty Head-Count Ratio at US$3.10 per day (with interactions) .................... 22 Table 7: Average Remittance Flows (as a % of GDP) by Income Level (1990-2015) ......................... 24 LIST OF FIGURES Figure 1: Diaspora Remittance Receipts of Major Receiving Regions (2000-2015) ................................... 6 Figure 2: Stock of Migrants by Major Remittance Receiving Regions as of 2015 ...................................... 8 iv LIST OF ACRONYMS GDP Gross Domestic Product FDI Foreign Direct Investment FE Fixed Effects NGO Non-Governmental Organization(s) ODA Official Development Assistance OLS Ordinary Least Squares PHCR Poverty Head Count Ratio RE Random Effects SSA Sub-Saharan Africa SGMM System Generalized Method of Moments UN United Nations WB World Bank 2SLS Two Stage Least Squares v IMPACT OF DIASPORA REMITTANCES ON POVERTY REDUCTION IN DEVELOPING COUNTRIES __________________________________________________________________ 1. INTRODUCTION Diaspora remittance flows have attracted the attention of many policy makers across the globe and some proponents of Development Economics believe that these foreign currency earnings can be a panacea to the financial challenges bedeviling many developing counties in the world. Diaspora remittances, commonly known as international remittances or simply remittances1, are transfers from migrant workers to their relatives or friends in their countries of origin, in the form of cash or kind (Eurostat, 2015). Current trends show that remittance streams into the least developed economies are increasing in general (Figure 1). This surge is mainly attributed to the increase in the number of migrant workers around the world. Most young men and women flee poverty from their home countries to seek employment and survival abroad, where opportunities are better. According to the UN (2015), the number of foreign migrants worldwide has been growing exponentially over the past decade, reaching 244 million in 2015, up from 222 million and 173 million recorded in 2010 and 2000, respectively. Fig. 2 and Table 1 below shows the stock and migration trends in the major remittance receiving countries. As shown
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