Inflows of Remittances - Micro Medicine/Macro Placebo?

Abstract

This thesis challenges the orthodox view which states that remittances are a key factor for alleviating poverty, creating new investment in lagging regions, reducing income inequality, and stimulating economic development.

There are theoretical and empirical reasons to doubt the optimistic orthodox view. This thesis develops a theoretical approach and an analytic model to demonstrate that earlier studies have ignored a crucial link between workers' remittances and the exchange rate.

We test the impact of workers' remittances on the real exchange rate, using a fixed effects methodology, on a panel of five SAARC countries. Although remittances benefit their individual recipients, our theory and empirical findings raise a concern that workers' remittances have macroeconomic costs on receiving economies. In particular, our findings reveal that workers' remittances result in real exchange rate appreciation. These findings raise concerns similar to the Dutch Disease - the macroeconomic stimulation from the domestic expenditure of remittances is affected by the exchange rate effect of converting the remittances to the local currency. Thus, this thesis re-examines the role of remittances by recognising that the ultimate benefit of foreign currency is to buy foreign goods.