Does Remittance Bring Economic Dividends to the Home Country, Ethiopia? Empirical Evidence from a Non-Linear Autoregressive Distributed Lag Model.

Abstract

The 

impact of remittance on economic growth is a topic of intense debate. Optimistic scholars argue that remittance positively influences economic growth, while pessimistic critics contend that its effect is negative. This study aims to examine the relationship between remittances and economic growth in Ethiopia, focusing on data from 1981 to 2022.

To estimate the short- and long-term asymmetrical impact of remittances on economic growth, we employed a linear and nonlinear autoregressive distributed lag model (NARDL) because it is flexible and allows for the testing of co-integration between I (0) and I (1) variables, capturing the non-linear and regime-dependent effects of remittances on growth.

The short-run linear ARDL analyses reveal a negative but insignificant correlation between remittances and GDP, with no long-term impact on economic growth due to remittances being diverted for consumption and wasteful spending by Ethiopians. According to Nonlinear ARDL models, remittances have two effects on economic growth: a positive change in remittances has a significant negative impact on economic growth, and surprisingly, a negative change in remittances also has a negative impact. Remittances have changed negatively, and the coefficient for this change is significantly higher than the coefficient for the positive change. In particular, economic growth is reduced by 0-72 percent for every 1 percent increase in negative remittances and by 0-49 percent for every 1 percent increase in positive remittances

Additionally, factors such as the inflation rate, gross capital formation, and human capital have a positive and significant effect on economic growth. Conversely, total government expenditure and gross capital formation are observed to negatively impact economic growth in the short term.

Utilizing data for a sample of 42 from 1981 to 2022, this paper offers unique econometric evidence regarding whether remittance transfers promote economic growth. This paper uses both linear and nonlinear ARDL models to thoroughly evaluate the impact of remittances on economic growth in East Africa, with a particular focus on Ethiopia, whereas the majority of studies used linear ARDL models.