Are remittances and foreign aid interlinked? Evidence from least developed and developing countries

Abstract

Foreign aid and migrant remittances are major sources of external finance for developing countries, but there is little research into whether they are interlinked. In the existing literature, only a few studies have examined the nexus between these two financial flows and their conclusions have been mixed. This study, using recent data (1980–2016) from 50 aid-recipient countries, empirically analyses the relationship between foreign aid and remittances. Applying dynamic panel estimation techniques, we find a negative relationship between foreign aid and remittances. Further investigation of the transmission channels reveals that foreign aid, by broadening human capital through its robust effects on education, increases remittance flows. The human capital led growth channel is found to be effective in all countries (and sub-groups), while the migration channel of aid significantly favours remittances only in the LDCs. Though aid substitutes remittances generally, it also increases remittances indirectly through different transmission channels.