Three essays on non-market financial flows to developing countries
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This dissertation consists of three essays on the impact of non-market financial flows in developing countries. The first essay answers two questions. First, to what extent are remittances (as private transfers) differentiable from grants (as public transfers) in their effects on capital formation and growth? Second, how might the motivations to remit inform the nature of the relationship between remittances and growth? Using a sample of four developing countries, results suggest that remittances and grants, in fact, do behave differently. Remittances have no significant relationship with investment for all but one country (remittances are positively correlated with growth for Bangladesh). Grants’ impact on investment is negative in Egypt, positive in Pakistan and Syria and insignificant in Bangladesh. Migrants’ motivations to remit are found to be different across countries. Enlightened self-interest motivation to remit is the most likely cause of growth impacts in Egypt. A combination of self-interest and enlightened self-interest explains the growth impact in Bangladesh. Finally, a combination of migrants’ altruistic behavior and self-interest attitude explains the growth impact in Pakistan and Syria. The second essay demonstrates the allocation of foreign aid between consumption and investment with special emphasis on the importance of reverse flows in developing countries. Using a panel of 61 countries from 1980 to 2006, results indicate that, on average, 23 to 25% of any increase in foreign aid has been directed towards financing reverse flows. 78% was consumed and an insignificant amount was invested. Additional investigation suggests that almost 50% of aid is used for reverse flows in Sub-Saharan Africa, 19% in the Americas and 16 to 20% in North Africa, Asia and the Pacific. The third essay examines how remittances are allocated between consumption, investment and reverse flows in developing countries. Using a panel of 36 countries from 1980 to 2006, results suggest that almost 80% of any increase in remittances/GDP was consumed. With respect to investment, remittances had to statistically discernable effect on rate of investment. Additionally, 20% of any increase in remittances was diverted as reverse flows and contributed neither to increase consumption nor to investment.