Remittances and the Effectiveness of Foreign Aid

• Published date: 01 August 2016
• Author: Peter Nunnenkamp,Anna Minasyan
• DOI: http://doi.org/10.1111/rode.12193
• Date: 01 August 2016

Remittances and the Effectiveness of Foreign Aid

Anna Minasyan and Peter Nunnenkamp*

Abstract

We argue that donors could improve the effectiveness of foreign aid by pursuing complementary and

coherent non-aid policies. In particular, we hypothesize that aid has stronger growth effects if recipients

receive more aid from donors who allow for (temporary) worker mobility and (more permanent) migra-

tion. We focus on overall remittances paid by the donor countries to proxy for worker mobility and migra-

tion. Our empirical results support the hypothesis that higher remittances paid by donor countries

strengthen the growth effects of foreign aid.

1. Introduction

The World Bank’s study “Assessing Aid: What Works, What Doesn’t, and Why?”

(World Bank, 1998) and the underlying contribution of Burnside and Dollar (2000)

have triggered a lively and ongoing debate on the role of sound economic policies in

the recipient countries for foreign aid to have the desired effects on poverty allevia-

tion and economic growth. How donor countries could enhance the effectiveness of

their aid has received considerably less attention.

Berthélemy (2006) concluded from his analysis of selfish and altruistic motives of

aid allocation that donors do not behave the same. Concerning donor motives and aid

effectiveness, Bearce and Tirone (2010), Kilby and Dreher (2010) and Dreher et al.

(2014) found that the growth impact is insignificant or even negative for politically or

strategically motivated aid that typically provides favors to political allies, while the

growth impact tends to be positive if aid is motivated by the need of recipients.1

However, it remains open to question whether donors could improve the effective-

ness of aid by pursuing complementary and coherent policies. As argued by Fuchs et

al. (2014), foreign aid may be complemented or substituted by donor policies related

to private financial flows, imports and exports of goods and services, and international

migration. Here, we focus on the overall remittances paid by donor countries, as a

proxy of (temporary) worker mobility and (more permanent) immigration, since the

interaction between aid and remittances has received scant attention so far. Specifi-

cally, we hypothesize that aid has stronger growth effects if recipients receive more

aid from donor countries with higher outflows of remittances than from donor coun-

tries with lower outflows of remittances.

Section 2 sketches the analytical background of our hypothesis. Section 3 discusses

measurement issues and justifies our focus on remittances, while section 4 describes

the method and data used. We present our estimation results in section 5, and con-

clude in section 6.

* Nunnenkamp: Kiel Institute for the World Economy, Kiellinie 66, D-24105 Kiel, Germany, E-mail:

peter.nunnenkamp@ifw-kiel.de. Minasyan: University of Goettingen, Platz der Göttinger Sieben 5, 37073

Göttingen, Germany. Minasyan is also affiliated to Heidelberg University.

© 2015 John Wiley & Sons Ltd

Review of Development Economics, 20(3), 681–701, 2016

DOI:10.1111/rode.12193

2. Why Remittances Matter for Aid Effects

According to the Organisation for Economic Co-operation and Development

(OECD) Development Centre, donor countries “must also make intelligent use of

non-aid policies,” including migration policies, to render aid more effective;

the relevant question for OECD policy makers is how to combine aid and non-aid

policies to achieve the desired results most effectively (Dayton-Johnson and Katseli,

2006, p. 1). Likewise, the view that “foreign aid is only one aspect of the relation-

ship between rich and poor countries” is underlying the Commitment to Develop-

ment Index (CDI) of the Center for Global Development (CGD, Birdsall and

Roodman, 2003, p. 2). This index, which has been compiled annually since 2003,

includes migration as a major component to assess the policy coherence of donor

countries.2

In actual practice, however, the required policy coherence often appears to be vio-

lated by donor countries. For instance, some large donor countries, notably France

and Japan, ranked at the bottom of the CDI’s 2003 scorecard on migration policies

(Birdsall and Roodman, 2003). De Haas (2005, p. 1269) observes that “migration and

development policies generally constitute separate policy domains” in the donor

countries, which hampers more positive links between migration and development in

the recipient countries. It even appears that some donors regard foreign aid as a

“remedy” against migration from recipient countries.3

As noted by the CGD and Foreign Policy magazine when launching the CDI in

2003,

at first glance, it may seem odd to include immigration policy in the CDI.

How is the process of development advanced if thousands of Turks exit

their native country for Germany or if millions of Mexicans cross the

border into the United States? Clearly, migration flows hurt in some ways

and help in others. On balance, however, the freer movement of people—

like the freer movement of goods—generally enhances development.4

The evidence on positive developmental effects of migration in the sending countries

has mounted since then.5

According to Fernández-Huertas Moraga and Rapoport (2013, p. 1), “interna-

tional migration is maybe the single most effective way to alleviate global poverty.”

In quantitative terms, the remittances of migrants and temporary foreign workers

are a much more important source of external financing for many developing coun-

tries than aid inflows (Gammeltoft, 2002). However, in addition to directly contrib-

uting to external financing and poverty alleviation, donor countries allowing for

temporary worker mobility and more permanent immigration could also enhance

economic growth in aid recipient countries indirectly by increasing the effectiveness

of foreign aid.

Empirical evidence on whether liberal policies with respect to worker mobility and

migration and higher remittances improve the effectiveness of official development

aid hardly exists. By contrast, there is a fairly large literature on the links between

migration and private international transactions. Various studies address the effects of

migration on international trade relations. Starting with the pioneering work of

Gould (1994), Head and Ries (1998) and Rauch (2001), “evidence of a positive rela-

tionship between trade and migration has been around for almost two decades”

(Hatzigeorgiou and Lodefalk, 2015).6This is typically attributed to the immigrants’

familiarity with business conditions and market opportunities in their country of

© 2015 John Wiley & Sons Ltd

682 Anna Minasyan and Peter Nunnenkamp