Remittances and Economic Growth Dynamics: Does Corruption Augment or Impede This Nexus?

Introduction

Remittances are a crucial revenue source for funding household budgets, investments, and consumption and supporting the national budget, contributing to overall economic growth (Pradhan, 2016; Mohammed and Karagol, 2022; Randazzo & Piracha, 2019). Also, remittances contribute to the general advancement of human development in SSA (Mohammed, 2021). They have thus become a substantial resource in Sub-Saharan Africa, garnering attention from policymakers, economists, and migration experts. Remittances significantly contribute to households' GDP and financial well-being in many nations, and their contributions to GDP in most Sub-Saharan countries have been increasing, surpassing FDI and overseas development assistance (World Bank, 2021). According to the World Bank (2023), estimated official remittance flows to Sub-Saharan Africa increased by 6.1% in 2022 to $53 billion. The impact of these substantial inflows on economic growth is a critical topic. Some studies argue that remittances go beyond being a source of external finance as they contribute to national income and directly affect households' permanent income (Mashayekhi, 2013; Das and McFarlane, 2020). Remittances also play a vital role in household income and ensure a more even distribution of funds than other external sources such as ODA and FDI.

The existing literature varies significantly regarding both the magnitude of remittance inflows and the potential implications of these inflows on economic growth. Several studies, including Giuliano and Ruiz-Arranz (2009) and Adjei et al. (2020), concluded that remittance inflows positively impact the receiving country's economic growth. In contrast, other research (Chami et al., 2005; Sutradhar, 2020) found a negative relationship between remittances and economic growth, suggesting that remittances behave more like compensating transfers than capital flows, resulting in little impact on economic growth.

There is also minimal evidence that strong governance facilitates external capital flow and fosters economic growth (Catrinescu et al., 2009; Nguyen & Luong, 2020). While remittances can increase household income and corporate investment, poor governance and corruption impede resource allocation. For example, remittance recipients may desire to develop or invest in businesses, but a corrupt system may discourage their participation in their country's economy and use remittances for unprofitable ventures.

Unfortunately, many countries in Sub-Saharan Africa (SSA) are associated with bad governance and corruption. Yeandle and Doyle (2023), through a survey conducted in 34 African countries, found that corruption hinders policymakers' efforts to formalize economic systems and encourage voluntary tax payments. Thus, bribery at the local level can impair the macro-level impact of remittance flows on economic development. Table 1 displays a yearly average of governance scores for SSA countries using the World Bank's World Governance Indicators (WGIs). Each composite indicator is computed to produce a value centered at zero ranging from -2.5 (weak institutions) to 2.5 (strong institutions). On average, SSA performed poorly regarding corruption control, the rule of law, and other governance indicators.

Source: Author’s computations based on World Bank Data (2024)