Worker remittances and government behaviour in the receiving countries

We estimate the impact of worker remittances on savings, taxes, and public expenditures on education, all as a share of GDP, for about 30 years in two samples of countries with per capita income above and below $1200 using dynamic panel data methods. Remittances increase the savings ratio in both samples. Savings have an (inverted) u-shaped impact on the tax ratio in poor (rich) countries. Higher tax revenues lead to higher public expenditure on education in both samples. In the richer sample, governments raise less tax revenues but spend more on education in direct response to remittances. Governments of the poorer sample raise more tax revenues in response to remittances at low levels of remittances, but less at high levels of remittances. In simultaneous equation simulations of a permanent shock to remittances, the governments of richer countries reduce taxation and public expenditure on education as a share of GDP. This may slow down growth of human capital, one of the major growth factors. In poor countries they raise more tax revenues and spend more money on education, which is likely to support growth. Strong non-linearities, which differ by country group, make the effects of shocks dependent on the initial levels of the variables and the heterogeneity of the estimation results.

JEL class.: F22, 24; O15, J61.

Keywords: migration, remittances, growth, accumulation