Do Remittances Reduce Aid Dependency?

32 Pages Posted: 8 Nov 2011

See all articles by Kangni Kpodar

Kangni Kpodar

International Monetary Fund (IMF)

Maelan Le Goff

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Date Written: October 2011

Abstract

Aid has been for decades an important source of financing for developing countries, but more recently remittance flows have increased rapidly and are beginning to dwarf aid flows. This paper investigates how remittances affect aid flows, and how this relationship varies depending on the channel of transmission from remittances to aid. Buoyant remittances could reduce aid needs when human capital improves and private investment takes off. Absent these, aid flows could still drop as remittances may dampen donors’ incentive to scale up aid. Concurrently, remittances could be positively associated with aid if migrants can influence aid policy in donor countries. Using an instrumental variable approach with panel data for a sample of developing countries from 1975-2005, the baseline results show that remittances actually increase aid dependency. However, a refined model controlling for the channels of transmission from remittances to aid reveals that remittances lead to lower aid dependency when they are invested in human and physical capital rather than consumed.

Keywords: Aid flows, Capital accumulation, Developing countries, Development assistance, Economic models, Human capital, Workers remittances

Suggested Citation

Kpodar, Kangni and Le Goff, Maelan, Do Remittances Reduce Aid Dependency? (October 2011). IMF Working Paper No. 11/246, Available at SSRN: https://ssrn.com/abstract=1956393

Kangni Kpodar (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Maelan Le Goff

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

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