Anupam Das and John Serieux say not necessarily. They argue that a significant portion of remittances is no longer available for domestic resource mobilization when they are used for debt amortization, capital flight, or reserve accumulation (reverse flows). Their empirical evidence from 36 developing countries shows over the period 1980 to 2006 that a one percent increase in the rate of remittance flows increased the rate of consumption by roughly 0.8 percent, and had no statistically discernable effect on the rate of investment. Their results also indicate that approximately 20 percent to 27 percent of remittance flows have been diverted to finance reverse flows. Furthermore, changes in the rate of remittance flows tended to be positively correlated with changes in debt service payment-to-income ratios and the rate of reserve accumulation relative to income.
Below are tables of variables and expected sign of coefficient used by the authors in their investment and net exports functions.
| Determinants of the Rate of Investment | ||
| Variables | Relevance | Expected Sign of Coefficient |
| Total external debt/GDP | Import compression and debt-related disincentive effects | Negative |
| Log of rate of inflation | Proxy for macroeconomic instability | Negative |
| Per capita income | Affects profitability and, therefore, the rate of return on capital | Negative |
| Index of real exchange rate | A depreciation (increase in the index) improves the competitiveness of domestically produced goods | Positive |
| Remittances/GDP | Increased access to resources beyond that derived from domestic output | Zero or positive |
| Private capital flows/GDP | Direct contributions of commercial credit for investment | Positive |
| ODA/GDP | Increased access to resources beyond that derived from domestic output | Zero or Positive |
---------------------
| Determinants of Net Exports | ||
| Variables | Relevance | Expected Sign of Coefficient |
| OECD income to domestic to domestic income index | Affects the demand for net exports | Positive |
| Index of relative prices | Affects the demand for imports and supply of exports | Positive |
| Foreign exchange reserves/GDP | Influences the feasible supply of imports | Negative |
| Remittances/GDP | Influences the feasible supply of imports | Negative |
| Private capital flows/GDP | Influences the feasible supply of imports | Negative |
| ODA/GDP | Influences the feasible supply of imports | Negative |
I think the same effect is reached if remittances are largely used to finance consumption of imported goods, which will have minimal effect on domestic investment and exports. The results is that remittances will have little impact, if any, on economic growth. It is happening in Nepal. There is also not a significant impact on foreign exchange reserves, debt level is pretty much the same, and capital flight is directed by the interest rates differential prevailing in the Indian and Nepali financial sectors. But, the story remains the same, i.e. domestic investment level is not affected by remittances. How to ensure that remittances are used for domestic investment in the productive sector and not in financing imports or investment in unproductive sectors?
