Remittances Capital and Economic Growth: A Simple Model with Endogenous Growth

Abstract

In view of the growing importance of remittances flows to emerging nations, now rivaling or surpassing FDI inflows, this short paper develops a simple neoclassical growth model with remittances capital as an additional input in the production process. The inclusion of remittances capital is justified because the extant literature suggests that, as opposed to inward FDI, it is primarily channeled to investments in education, health, and economic infrastructure. In addition, it is not associated with reverse flows (often massive in absolute and relative terms) back to the parent companies, often residing in developed countries. The paper shows how in the presence of exogenous growth or diminishing returns, the economy’s long-term growth rate is unaffected, but its steady-state level of income per efficient worker can be increased as a result of changing the savings and/or tax rate. In the endogenous case, it is shown that the economy’s long-term growth rate can be permanently raised by pursuing policies that improve the financial payments infrastructure and thus enhance the remittances capital elasticity, β . The paper also shows that conditional convergence can be retained in the endogenous case via a hybrid model. Insofar as future empirical research is concerned, this simple model provides a framework for explaining the growth rate in per capita income in both cross-sectional and panel data using appropriate proxies for the regressors of interest, namely s , n , x , δ , and τ .