Do remittances not promote growth? A finite mixture-of-regressions approach

This paper re-examines the impact of remittance inflows on growth using data for developing countries over the period 1970–2010. We relax the hypothesis that all countries follow the same unique growth regime in favor of multiple regimes, and test whether the impact of remittances on growth depends on the growth regime to which an economy belongs. We follow the recent literature that has applied the finite-mixture-of-regressions method in other circumstances to endogenously identify growth regimes, correcting for unobserved heterogeneity. We find that our data are best described by an econometric model with two different growth regimes: one in which remittances have a positive and significant marginal impact on growth; and another in which the impact of remittances is insignificant. The analysis of the determinants of the probability of being in the remittances growth-enhancing regime shows that being a Sub-Saharan African country increases significantly this probability, while financial development moderately reduces this probability but with strong reservations on the statistical significance of the estimates on the different indicators of financial development.