Do remittances not promote growth? A bias-adjusted three-step mixture-of-regressions

This paper re-examines the impact of remittance inflows on growth using data for developing countries over the period 1970-2010. The paper seeks to understand why it has been so difficult to find a positive impact of remittances on growth despite the growing amount of remittances in many developing countries and the different studies that have emphasized the positive effect of remittances on poverty and inequality. We relax the hypothesis that all countries follow the same unique growth regime and test whether the impact of remittances on growth depends on the growth regime to which a country belongs. We apply the newly bias-adjusted three-step finite mixture approach, which incorporates corrections into the different steps of the estimation. We find that our data are best described by an econometric model with two different growth regimes: one in which remittances have a positive and significant impact on growth and another in which the effect of remittances is insignificant. The analysis of the determinants of the probability of being in the remittances growth-enhancing regime shows that an increase in the level of financial development decreases the probability of a country being in this growth regime, while being a Sub-Saharan African country increases this probability.

Key words: Remittances, Growth Regimes, Three-step Mixture of regression

JEL Classification: F24; O47