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DOI 10.1007/s12232-014-0199-3
RESEARCH ARTICLE
Received: 24 August 2013 / Accepted: 9 March 2014 / Published online: 22 March 2014
Ó Springer-Verlag Berlin Heidelberg 2014
Abstract In this article, we explore the much debated nexus between remittances
and economic growth in Bangladesh. Drawing on an annual data from 1979 to 2012
and using the augmented Solow framework with the autoregressive distributed lag
bounds procedure, we examine the cointegration relationship, the short-run and
long-run effects and the causality nexus between remittances per worker, capital per
worker and the output per worker. The results show that remittances have a mixed
effect in the short-run, however, a momentous positive effect in the long-run
(0.11 %), on the output per worker. From the Granger causality assessment, we find
inter alia, a bidirectional causality between remittances and output (in per worker
terms) and a unidirectional causation from capital to remittances (in per worker
terms). Our results therefore support remittance led growth hypothesis in
Bangladesh.
1 Introduction
R. R. Kumar (&)
School of Accounting and Finance, The University of the South Pacific, Laucala Campus, Suva, Fiji
e-mail: kumar_RN@usp.ac.fj; ronaldkmr15@gmail.com
P. J. Stauvermann
Department of Economics, Changwon National University, Changwon, South Korea
e-mail: pstauvermann@t-online.de
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400 R. R. Kumar, P. J. Stauvermann
1
Note that the World Bank has renamed the Workers’ Remittances to Personal Remittances since 2012.
We are therefore using the latter definition.
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A study of Bangladesh 401
transfer costs discourage the flow of remittances through formal channels thus give
rise to informal money transfers. This is a more pressing issue in developing
countries where besides poor infrastructure, high cost of transfer constraints the ease
of remittances inflow subsequently compelling remitters to send money via informal
channels such as postal mails, visiting migrants or migrant’s relatives and friends,
and the informal money transfer services (IFTs) (Coxhead and Linh 2010). The
formal channels used by remitters often include Western Union money transfers,
bank drafts, and automated teller machines. Notably, the remittances flow is also
influenced by a remitter’s job stability and the remittance-sending country’s
economic performance.
Empirically, it has been shown that remittances have both a growth-enhancing
and a poverty-reducing potential. For instance, Adams and Page (2005) study 71
developing countries with the aim to analyze the effects of migration and
remittances on inequality and poverty. Their results show that both international
migration and remittances significantly reduce the level, depth, and severity of
poverty in developing countries. Nevertheless, the remittances-led growth (RLG)
hypothesis has shown mixed results. For example, Pradhan et al. (2002) examine
the effect of workers’ remittances on economic growth in a sample of 39
developing countries using a panel data from 1980 to 2004 and a standard growth
model. Their results show a positive impact of remittances on growth. In a study,
Chami et al. (2003) consider the role of remittances in development and economic
growth by constructing a framework which connects the motivational (altruistic)
aspects of remittances to the impacts on economic activities, and find that
remittances in fact have a negative effect on economic growth largely due to the
moral hazard problem in remittances. Gupta et al. (2009) assess the effect of
remittances in Sub-Saharan Africa within the context of financial development and
poverty reduction and find remittances have a direct poverty-mitigating effect and
the potential to support financial development. Giuliano and Ruiz-Arranz (2009)
explore the links between remittances and growth within the context of financial
development for 100 countries and find remittances can boost growth in countries
with a less developed financial system by providing an alternative way to finance
investment and help overcome liquidity constraints. Acosta (2008) studies ten
countries in Latin America and the Caribbean (LAC) and finds remittances support
growth and reduce inequality and poverty. Mundaca (2009) analyzes the effect of
workers’ remittances and financial intermediation on economic growth with a
panel data for selected countries in the LAC and states that remittances when used
appropriately with effective financial intermediation could result in growth
possibilities. Nyamongo et al. (2012) investigate the role of remittances and
financial development on economic growth in a panel of 36 countries in Africa
over the period 1980–2009. They find, inter alia, (a) remittances are an important
source of growth for African countries; (b) volatility of remittances has a negative
effect on growth; (c) remittances seem to compliment financial development; and
(d) financial development is a weak contributor to growth. Contrary to Giuliano
and Ruiz-Arranz (2009), Bettin and Zazzaro (2012) show where financial system
functions effectively, the RLG hypothesis is highly plausible relative to where
banking systems are weak. In a recent study, Kumar (2013b, e) considers the
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402 R. R. Kumar, P. J. Stauvermann
effects of capital inflows including remittances in the LAC region by grouping the
region into two clusters led by Brazil and Mexico and finds remittances have a
positive contribution in the Mexico-led cluster, negative in the Brazil-led cluster,
and overall, there is a net positive effect of remittances in the region which
nevertheless is relatively lower due to the predominant negative effects in the
Brazil-led cluster.
The positive effect of remittances on income is also noted in a number of
country-specific studies. For instances, some studies conclude remittances have a
growth-enhancing capacity in the long-run for countries which are recipients of
large amount of remittances. Among these, countries include Tonga, Samoa, Fiji,
Vanuatu, India, Pakistan, Nepal, and Guyana (Jayaraman et al. 2011a, b, 2012;
Kumar 2011a, b; Kumar et al. 2011; Kumar 2012a, 2013c). Similarly, other studies
also show when remittances are effectively linked with technology (Philippines) and
financial development (Sub-Saharan countries), the effect on growth is positive
(Kumar 2012b; 2013d). On the contrary, some studies find remittances have a
negative effect on growth. For instance, Rao and Takirua (2010) examine the
plausible sources of growth in a small island economy of Kiribati using the general-
to-specific (GETS) technique and find remittances have a long-run negative effect.
In examining the effects of tourism and remittances in Kenya, Kumar (2013a)
concludes that the latter has a positive influence on per worker output in the short-
run only.
Quite a lot of studies have explored the role of remittances in Bangladesh, with
mixed outcomes (Mahmud and Osmani 1980; Stahl and Habib 1989; Murshid et al.
2002; Siddiqui and Arbar 2003). Hasan (2006) confirms that remittances have a
positive impact on household consumption in Bangladesh and suggests the need to
strengthen the micro-finance institutions for effective and efficient mobilization of
remittances. Ahmed (2010) points out that despite Bangladesh being one of the top
recipients of remittances, remittances have a negative effect on its economic
growth. Ahmed therefore emphasizes that the motivation for remittance differs
significantly to that of investment and exports in Bangladesh, and hence, remittance
does not play a significant role in the capital development. Moreover, although the
evidence of many policy initiatives and activities to increase the inflow of
remittances is clear, there is a lack of effective use of remittances in the country
(Chowdhury et al. 2010). Barai (2012) argues that remittances are mainly used for
consumption as a means to overcome poverty, and hence, remittances contribute
substantially to the marginal propensity of consumption. In a recent study, Siddique
et al. (2012) examine the causal link between remittances and economic growth for
three countries namely—India, Sri Lanka, and Bangladesh using the Granger
causality test in a vector autoregression (VAR) framework and over a 25-year
period (1975–2006). Their results show a unidirectional causality from remittances
to economic growth.
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A study of Bangladesh 403
3.1 Framework
For the purpose of modeling and analysis, we use an approach introduced by Sturm
et al. (1998) and Rao (2010) which are related to the augmented Solow (Solow,
1956) framework.2 The initial equation is defined as:
yt ¼ At kta ; a [ 0 ð1Þ
where A = stock of technology and k = capital per worker, and a is the capital
share. The Solow model assumes that the evolution of technology is given by:
Ut ¼ A0 egt ð2Þ
where A0 is the initial stock of knowledge and t is time.
Next, we introduce remittances per worker, rmt, as shift variable:
Wt ¼ f ðrmt Þ ð3Þ
The effect of rmt on total factor productivity (TFP) can be captured when the
latter is entered as a shift variable into the production function (c.f. Rao 2010).
Subsequently, we identify rmbt [where b [ (0, 1) represents elasticity of remittances]
as part of the stock of technology and redefine At as follows:
At ¼ Ut Wt ¼ Ao egt rmbt ð4Þ
In this case, egt includes catch-all factors. Hence,
yt ¼ Ao egt rmbt kta ð5Þ
3.2 Data
We use the perpetual inventory method to build the data for capital stock. We
assume depreciation rate (d) of 0.08 and an initial capital stock (K0) as 1.2 times the
real GDP of 1978 in constant USD (US dollars at 2005 prices). The gross fixed
capital formation in constant 2005 USD is used as a suitable proxy for aggregate
investment (It). Hence, Kt = (1–d) Kt-1 ? It. The data on labor stock are estimated
using average rate of employment (which was 69.1 % over the period 1991–2011).
Remittances per worker data are converted to constant 2005 prices. A total of
34 years of annual data over the period 1979–2012 are used in the analysis. Notably,
the data for gross fixed capital formation reported by the World Bank (2013) are
from 1980 to 2012, and therefore, our sample size is restricted to 1979–2012
although data are available for remittances since 1976. The data on key variables are
sourced from World Development Indicators and Global Development Finance
database (World Bank 2013). All data are duly transformed into natural log form for
analysis. A descriptive statistics and correlation matrix and the graphs of log of
2
Note that if a Cobb–Douglas function is used, the form of neutrality of technical progress (Harrod‘-
neutral, Solow-neutral, and Hicks-neutral) does not play a role since the effect remains the same.
123
404 R. R. Kumar, P. J. Stauvermann
output, capital, and remittances, in per worker terms, are provided in Table 1 and
Fig. 1, respectively.
Next, we specify the ARDL specifications as (6–8) below. Note that each equation
has a dummy (dum) associated that represents the structural break in the respective
level series which is identified by applying the Perron (1997) unit root test with
structural break. Including the dummy therefore provides a relatively more robust
computation of bound statistics.
DLyt ¼ b10 þ b11 Lyt1 þ b12 Lkt1 þ b13 Lrmt1 þ a10 dumy
Xp Xp X
p
ð6Þ
þ a11i DLyti þ a12i DLkti þ a13i DLrmti þ e1t
i¼1 i¼0 i¼0
DLkt ¼ b20 þ b21 Lyt1 þ b22 Lkt1 þ b23 Lrmt1 þ a20 dumk
Xp Xp X
p
ð7Þ
þ a21i DLyti þ a22i DLkti þ a23i DLrmti þ e2t
i¼1 i¼0 i¼0
DLrmt ¼ b30 þ b31 Lyt1 þ b32 Lkt1 þ b33 Lrmt1 þ a30 dumrm
Xp Xp X p
ð8Þ
þ a31i DLyti þ a32i DLkti þ a33i DLrmti þ e3t
i¼1 i¼0 i¼0
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A study of Bangladesh 405
8.0
6.0
4.0
2.0
Ly Lk Lrm
0.0
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Fig. 1 Log of output, capital, and remittances (in per worker terms) constant 2005 US$. Source Authors’
calculation and World Bank (2013)
worker. In this case, we rely on the ADF, PP, and KPSS tests to pursue cointegration
tests while controlling for the relevant period breaks in the respective series. As
evident from Table 3, the structural breaks in the level series are noted in 1992,
1987, and 1988 for Ly, Lk, and Lrm, respectively. In case of the first difference
series, breaks in the series are noted in the years 1984, 2006, and 1988 for DLy, DLk,
and DLrm, respectively. We factor this information while computing the bounds F-
statistics by setting the break period to one in the respective dummy variable in Eqs.
(6–8).
Next, the bounds F-statistics are presented in Table 4. The results show evidence
of long-run cointegration when the per worker output (Lyt) is set as the dependent
variable. In this case, the computed F-statistics of 14.6512 exceeds the upper critical
bound of 9.413 at the 1 % level of significance. Notably, when the Lk and Lrm are
set as dependent variable, separately, the computed F-statistics does not satisfy the
critical bounds duly confirming a single cointegrating vector.3
3
Note that the critical bounds are presented for samples of 35 and 30 since the Narayan (2005) bounds
are for samples from 30 to 80 with 5-year intervals. The sample size in this study is 34 and the computed
F-statistics of Ly as depended variable clearly exceeds both samples of 30 and 35.
123
406 R. R. Kumar, P. J. Stauvermann
The ADF critical values are based on Mackinnon (1996). The optimal lag is chosen on the basis of the
Akaike information criterion (AIC). The null hypotheses for ADF and Phillips–Perron tests are that a
series has a unit root (non-stationary) and for KPSS, the series is stationary, respectively. A, B, and C
denote 1, 5 and 10 % level of significance denotes the rejection (and acceptance) of null hypothesis in
case of ADF and Phillips–Perron (and KPSS) tests. Source: Authors’ calculation using Eviews 8
Critical values are obtained from Perron (1997). The null hypothesis is that a series has a unit root with a
structural break in both the intercept and the trend; A denotes rejection of the null hypothesis at the 1 %
level of significance. Source: Authors’ calculation using Eviews 8
Ly 14.6512A
Lk 6.0642
LRM 4.2949
35 7.977 9.413
30 7.643 9.063
Critical values are from Narayan (2005)—Critical values for the bounds test: case V: unrestricted
intercept and unrestricted trend, p. 1990; A—indicates significance at 1 % level. Source: Authors’
calculation using Mocrofit 4.1
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A study of Bangladesh 407
a
15
10
-5
-10
-15
1995 2000 2005 2010
b
1.5
1.0
0.5
0.0
-0.5
1995 2000 2005 2010
Fig. 2 a Cumulative sum of Recursive residuals. b Cumulative sum of squares of Recursive residuals.
The straight lines represent critical bounds at 5 % significance level.
(I) Serial correlation v2(1) = 0.2078A 0.649 F(1, 16) = 0.1116A 0.743
2 A
(II) Functional form v (1) = 0.8006 0.371 F(1, 16) = 0.4387A 0.517
(III) Normality v2(2) = 3.9403A 0.139 Not applicable
(IV) Heteroscedasticity v2(1) = 2.5009A 0.114 F(1, 28) = 2.5464A 0.122
A indicates rejection of null hypothesis of the presence of the respective test types, (I), (II), (III), and (IV)
at 1 % level of significance, respectively. Source: Authors’ calculation using Mocrofit 4.1
correct functional form [v2(1) = 0.8006]; (3) normality test based on a test of
skewness and kurtosis of residuals [v2(2) = 3.9403]; and (4) heteroscedasticity test
based on the regression of squared residuals on squared fitted values
[v2(1) = 2.5009]. As noted from the v2 results, the diagnostic tests show the
equation performed well as the disturbance terms are normally distributed and
serially uncorrelated with homoscedasticity of residuals duly confirming the models
have correct functional form. Moreover, the CUSUM and CUSUM of squares plot,
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408 R. R. Kumar, P. J. Stauvermann
which measures stability of the parameters in the model, show the model is
stable (Fig. 2a, b).
3.4.1 Short-run
The short-run results show mixed outcomes (Table 6: panel a). The capital
productivity coefficient is not statistically significant in the current (t), lag-one (t -
1) and lag-two (t - 2) periods. However, capital per worker coefficient at lag-three
(t - 3) is negative (D0t-3 = -0.9528) and statistically significant at the 10 % level
of significance. Moreover, the coefficient of remittances per worker, although
positive, is not statistically significant in period t. Notably, the coefficients of
remittance per worker are negative and statistically significant in periods t - 1
(DLrmt-1 = -0.0482) and t - 2 (DLrmt-1 = -0.0454), at the 10 and the 5 %
levels of significance, respectively. Therefore, remittances per worker have a net
negative effect in the short-run. The error-correction term (ECTt-1 = -0.6640),
which measures the speed at which prior deviations (errors) from equilibrium are
Panel a: long-run (dependent variable Lyt) Panel b: short-run (dependent variable DLyt)
A, B, and C refer to the 1, 5; and 10 % level of significance, respectively; N = not significant within the
1–10 % level. Source: Authors’ calculation using Mocrofit 4.1
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A study of Bangladesh 409
corrected (in this case, about 66 %), has the correct (negative) sign and is significant
at the 1 % level duly indicating a relatively speedy convergence to the long-run
equilibrium.
3.4.2 Long-run
The long-run results (Table 6: panel b) show that the capital per worker
(Lk = 0.3314) is the dominant driver of the output per worker. The coefficient of
Lk is statistically significant at the 5 % level and is close to the stylized value of
one-third (0.33) (Rao 2007; Ertur and Koch 2007). However, in many instances, the
capital share can deviate from the stylized value due to a number of reasons. These
include: (a) when the capital and labor inputs tend to grow at relatively similar rates;
(b) when an economy is predominantly developing, and hence, a large number of
self-employed persons earn income from both capital and their own labor (Gollin
2002) thus making it difficult to obtain meaningful measures of income shares; and
(c) the quality of data and the sample size which also makes it difficult to compute
the capital stock (Bosworth and Collins 2008) that can ideally exhibit decreasing
returns to scale and thus conform to a desirable steady-state convergence. Moreover,
the elasticity coefficient of remittances per worker is 0.11 % (Lrmt = 0.0187),
which is statistically significant at the 10 % level. We also include the trend (Trend)
variable is in the regression. The results show Time trend is significant and has a
marginal positive effect on the output per worker both in the short-run
(Time = 0.0105) and the long-run (Time = 0.0157), respectively. Hence, the
marginal positive effect over time is an indication of the other factors contributing
positively to the growth in the economy of the Bangladesh that are not controlled
explicitly in the regression.
Next, we examine the Granger non-causality test proposed by Toda and Yamamoto
(1995) (henceforth, T–Y approach). The T–Y approach is suitable when the series
are either integrated of different orders, not cointegrated, or both. In these cases, the
ECM (error-correction method) cannot be applied for Granger causality tests, and
the standard (pair-wise) Granger causality test may not give robust results. Hence,
the T–Y approach provides a method to test for the presence of non-causality,
irrespective of whether the variables are I(0), I(1) or I(2), not cointegrated or
cointegrated of an arbitrary order. In order to carry out the Granger non-causality
test, we present the model in the following VAR system:
X
k dX
max X
k dX
max
lyt ¼ a0 þ a1i lyti þ a2j lytj þ g1i Lkti þ g2j Lktj
i¼1 j¼kþ1 i¼1 j¼kþ1
X
k dX
max
þ /1i Lrmti þ /2j Lrmtj þ k1t ð9Þ
i¼1 j¼kþ1
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410 R. R. Kumar, P. J. Stauvermann
Ly Lk Lrm
Based on the maximum order of integration (p = 1) and maximum lag used in the ARDL estimation
(m = 4), the maximum lag in the Toda-Yamamoto non-causality test is (p ? m) 5. A, B, C indicate
causality at the 1, 5, and 10 % levels of significance, respectively. Granger causality is denoted as X
causing Y, that is: X ? Y. Source: Authors’ calculation using Eviews 8
X
k dX
max X
k dX
max
Lkt ¼ b0 þ b1i Lkti þ b2j Lktj þ h1i lyti þ h2j lytj
i¼1 j¼kþ1 i¼1 j¼kþ1
X
k dX
max
þ #1i Lrmti þ #2j Lrmtj þ k2t ð10Þ
i¼1 j¼kþ1
X
k dX
max X
k dX
max
Lrmt ¼ c0 þ c1i Lrmti þ c2j Lrmtj þ u1i lyti þ u2j lytj
i¼1 j¼kþ1 i¼1 j¼kþ1
X
k X
dmax
þ l1i Lkti þ l2j Lktj þ k3t ð11Þ
i¼1 j¼kþ1
The null hypothesis of non-causality is rejected when the p-values fall within the
conventional 1–10 % level of significance. Hence, in (9), Granger causality from lkt
to lyt and lrmt to lyt implies g1i = 0Vi and /1i = 0Vi, respectively. Similarly, in
(10), lyt and lrmt Granger causes lkt if h1i = 0Vi and #1i = 0Vi, respectively; from
(11) lyt and lkt Granger causes lrmt if u1i = 0Vi and l1i = 0Vi, respectively. From
the unit root results, the maximum order of integration is 1 (m = 1), and the optimal
lag length chosen in the ARDL estimates using the Akaike information (AI) and
Schwarz Bayesian (SB) Criteria (Table 6: panel c) is four (p = 4). Hence, the
appropriate lags to carry out the Granger non-causality test (p ? m = 5) is five.
Before proceeding to causality test, we examine the inverse roots of the AR (auto-
regressive) characteristics polynomial which should lie within the positive and
negative unit boundary in order to obtain reliable results. If the inverse roots lie
outside unity, the appropriate lag and/or trend variables are included as the
exogenous variables to correct this. We ensure that the AR inverse roots are within
the unit boundary by including the trend and the appropriate lags as exogenous
variables before proceeding to the causality assessment. The results of the causality
tests are reported in Table 7.
The Granger causality results (Table 7) show a bidirectional causation between
output per worker (Ly) and remittances per worker (Lrm) which are statistically
significant at 1 % level. In other words, Lrm ? Ly (v2 = 21.3215) and Lrm / Ly
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A study of Bangladesh 411
(v2 = 16.1776) (Ly $ Lrm) duly indicating the mutually reinforcing effect of the
remittances and output. Moreover, a unidirectional causation is noted from capital
per worker to output per worker (Lk ? Ly, v2 = 10.1832) at the 10 % level and from
capital per worker to remittances per worker (Lk ? Lrm, v2 = 13.9653) at the 5 %
level of significance. The latter indicates the plausibility of remittances being
channeled into investment activities and capital accumulation. Finally, the causation
from the combined effects (which we define as the causation due conjoint interaction)
show that the capital per worker and the remittances per worker conjointly cause the
output per worker (Lk 9 Lrm ? Ly, v2 = 41.0459) at the 1 % level of significance;
and the output per worker and the capital per worker conjointly cause the remittances
per worker Ly 9 Lk ? Lrm, v2 = 27.1659) at the 1 % level of significance.
Our findings to some extent are similar to Siddique et al. (2012), who find a
unidirectional (one-way) causation from remittances to economic growth, and Paul et al.
(2011) who find that output alone determined long-run movements of remittances.
However, our study deviates both from Siddique et al. (2012) and Paul et al. (2011) in that
we find a bidirectional causation between economic growth (measured by output per
worker) and the remittances per worker and hence conclude that remittances and output
are have mutually reinforcing effect in Bangladesh.4 Furthermore, we also estimate the
long-run elasticity coefficient of remittances per worker, which is 0.11 %.
4 Conclusion
In this paper, we set out to explore the much controversial topic of whether
remittances influence economic growth in Bangladesh. We used the augmented
Solow framework and the ARDL bounds procedure to examine the short-run and
long-run effects, and further extended the study to examine the causality nexus. The
results clearly show that the remittances per worker have a long-run momentous
effect on the output per worker in the long-run. However, the short-run results
indicate a net negative effect. Furthermore, the causality results show a mutually
reinforcing effect between remittances and output, and a unidirectional causation
from capital per worker to remittances. Subsequently, we contend that remittances
in Bangladesh exhibit a mixed effect on the economic growth in the short-run.
However, there is evidence that remittances have a momentous long-run effect and
therefore support the remittances-led growth hypothesis (RLG). Noting these
outcomes, cost-effective and efficient remittance inflows to Bangladesh need to be
encouraged which duly need to be channeled to ongoing and new productive
activities. Developing pro-remittance infrastructure, which includes financial sector
development, technology, financial literacy, and supporting institutions will
therefore be critical for optimizing benefits from remittances and propelling the
economic growth of Bangladesh.
4
Note that the study also considered the role of financial development and information and
communications technology (ICT). We find that both have no significant effect on per worker output
both in the short-run and long-run, and therefore they are not included in the study.
123
412 R. R. Kumar, P. J. Stauvermann
Acknowledgments The authors thank and appreciate the comments and suggestions from the Editor-in-
Chief, Professor Dr. Pierluigi Porta and the anonymous reviewers. Peter J. Stauvermann thanks the
financial support from the College of Economics and Business of the Changwon National University,
2013. Finally, the views expressed in the article are those of the authors and does not necessarily reflect
the views of their affiliated institutions.
Appendix
See Table 8.
123
A study of Bangladesh 413
Table 8 continued
The data are sourced from World Bank (2013). Data on employment are computed from the average
employment rate, and remittances data are converted to 2005 constant prices, n.d. = no data available.
Source: World Bank (2013)
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