Received: 7 June 2019 

|  Revised: 30 August 2019 

|
  Accepted: 3 September 2019

DOI: 10.1111/rode.12630

REGULAR ARTICLE

The effects of remittances, foreign direct investment,

and foreign aid on economic growth: An empirical
analysis

Graham Bird   | Yongseok Choi

Claremont Graduate University and

Claremont Institute for Economic Policy
Studies, Claremont, CA, USA
Correspondence
Graham Bird, Claremont Graduate
University and Claremont Institute for
Economic Policy Studies, Claremont, CA,
USA.
Email: graham.bird@cgu.edu
Abstract
The Sustainable Development Goals have refocused atten-
tion on ways of providing external finance to support de-
velopment. Because they have different motivations and
work through different modalities, remittances, foreign di-
rect investment (FDI), and official development assistance
may be expected to have different consequences for eco-
nomic growth. Existing empirical evidence suggests that
both positive and negative effects are associated with each
source of finance. We use both a dynamic panel model and
a fixed effects model to calculate the overall effects of each
source of finance in isolation and taken together over the
period 1976–2015. We include a range of control variables
to allow for other potential influences on economic growth.
We disaggregate the effects across geographical regions and
income levels to test for heterogeneity. We also undertake a
series of robustness checks. Our results suggest that FDI has
a significant positive effect on economic growth, whereas
remittances have a significant and negative effect. The ef-
fect of foreign aid is more ambiguous but is usually insig-
nificant. The article offers an interpretation of the results
drawing on ideas from the relevant theory.

KEYWORDS
aid and economic growth, investment, remittances

Rev Dev Econ. 2019;00:1–30. wileyonlinelibrary.com/journal/rode |

© 2019 John Wiley & Sons Ltd     1
 |
2       BIRD and CHOI

1  |   IN T RO D U C T ION
Seventeen Sustainable Development Goals (SDGs) were set by the United Nations in 2015. In a back-
ground report (United Nations, 2015), the United Nations also considered the ways in which financing is
required to help achieve them. Part of the financing is envisaged as coming from domestic sources. The
key issue in this context involves encouraging domestic saving. But the report also envisages an import-
ant role for external financing. Various sources of external finance include migrants’ remittances, foreign
direct investment (FDI), and foreign aid (official development assistance, ODA).1  It is widely acknowl-
edged that economic growth is a necessary precondition for sustained development. It is, therefore, im-
portant to consider the effectiveness of these external sources of finance in generating economic growth.
In this article, we empirically examine the effects of remittances, FDI, and ODA on economic
growth in a sample of 51 low-income and middle-income developing economies over the period from
1976 to 2015. There are strong theoretical reasons for anticipating that the effects of the various types
of finance will be different. Not only may they vary in size but also in direction. This means that in
attempting to encourage economic growth as a way of helping to deliver the SDGs, thought needs to
be given not just to the total amount of external financing but also to its composition.
There is already a large volume of literature on the effects of foreign aid, with fewer studies deal-
ing with remittances and FDI. However, the vast majority of the existing research looks at the three
sources of external finance independently. Relatively little work that seeks to investigate them together
has been done, and, even then, some of this examines just two of the sources rather than all three. By
failing to include all of them, there is a danger that the estimated effects of each will be inappropriately
calculated because of omitted variables that may involve a bias. The results reported in this article
address this deficiency. In estimating the effects of remittances, FDI, and foreign aid on economic
growth, we take into account contingent factors in the form of a series of control variables that may be
expected to exert an influence on economic growth and examine the extent to which the effects of the
three sources of finance depend on the recipient’s regional location and the level of per capita GDP.
We adopt both a dynamic panel approach (a system generalized method of moments, GMM) and
a fixed effects panel model for estimating the effects of the three sources of external finance on eco-
nomic growth and examine non-overlapping 5-year averages to allow for potential cyclicality. Whereas
the GMM approach is often presented as a better one for dealing with the problems associated with
endogeneity and omitted variables, as well as for avoiding a static framework that is inappropriate for
growth regressions, the use of moment conditions to generate instruments for endogenous regressors
can lead to their excessive proliferation. In this article we also apply the principal components instru-
mental variables reduction (PCIVR) technique (Bontempi & Mammi, 2015) where appropriate to help
deal with this potential problem. We also undertake a substantial amount of sensitivity analysis to
check the robustness of our results. This analysis involves examining annual data, alternative econo-
metric techniques, and different combinations of control variables.
The article is organized as follows: Section 2 presents a brief analytical background. It explains
why there are theoretical reasons to believe that there may be both positive and negative factors asso-
ciated with each source of external finance that will influence their effect on economic growth. The
section also considers whether, in the case of each specific source of external finance, it is more or
less likely that one group of factors will dominate. Section 3 begins by presenting some descriptive
statistics on remittances, FDI and aid, as well as on economic growth in developing economies. It then
moves on to critically examine the existing literature and identifies how we seek to add value to it.
This review is done in detail, because it seems useful to place our new results firmly and clearly in the
context of those that are available elsewhere. Section 4 provides new empirical evidence. The section
explains the data and methods used and the results achieved. It describes how we attempt to deal with
BIRD and CHOI   
   3
|
some of the underlying problems that are associated with estimation, such as measurement, endoge-
neity, and heterogeneity. We present results using two estimation approaches. Section 5 discusses the
various robustness checks that we ran, and for illustrative purposes, we present some of these results in
Appendix 2. Section 6 interprets and discusses our findings and relates them to the findings reported
in other studies. Section 7 offers some concluding remarks and considers the implications of our re-
sults for the design of policy and the pursuit of the SDGs.

2  |  A N IN FO R MA L A NA LY T ICAL FRAM EWORK

In principle, remittances, FDI, and foreign aid can affect economic growth through a wide range of
channels. The effects can be both positive and negative. The net effect depends largely on the ways in
which the related resources are used. Are they used in ways that encourage or discourage economic
growth or have no effect on it?2 
Where, for example, remittances are used to provide finance for small- to medium-sized enter-
prises that would otherwise be unavailable, or would be available only at a prohibitive rate of interest,
they may encourage investment and thereby foster future economic growth. They may have a similar
positive effect in the medium to long term if they finance education and increase the rate of human
capital formation. However, the latter effect will be negated to some extent if the better-educated
workforce emigrates (“brain drain”). Similarly if remittances are used to finance contemporary con-
sumption, this may lead to faster inflation and an increase in the relative price of non-tradeables. The
resulting appreciation in the real exchange rate may then discourage exports and have a negative effect
on economic growth (Chami et al., 2008).3  A negative effect could also be exerted if remittances
encourage individuals to substitute leisure for work (Chami, Fullenkamp, & Jahjah, 2003; 2008), or
if remittances crowd out private sector saving more than proportionately. It follows that the effects of
remittances on economic growth could differ over different time frames.
If FDI facilitates the international transfer of technology and carries with it beneficial spillover ef-
fects, it will increase productivity and have a positive effect on economic growth. The same will be true
where FDI leads to a better-trained workforce. Similarly, FDI may occur in the financial sector and in-
volve the entry of foreign financial institutions. This may help to increase the efficiency of the domestic
financial system. FDI may more generally result in a higher degree of domestic industrial competition,
leading to efficiency gains and faster growth. It may also generate additional tax revenue and thereby
help to alleviate domestic fiscal problems. On the contrary, FDI may drive up the value of the domestic
currency (“Dutch disease”), or it may be associated with privatization that merely converts state mo-
nopolies into foreign-owned private monopolies with little benefit for economic growth. Developing
countries that have been hostile toward FDI have regarded it as a mechanism that allows foreign firms
to exploit and derive rents from the host country’s natural resources, or to take advantage of “fire sales”
associated with domestic economic crises. Where domestic investment undertaken by foreign firms is
heavily leveraged and reliant on borrowing in domestic credit markets, the net inflow of funds associated
with FDI may be less than the gross flows. Multinational enterprises may repatriate funds borrowed
in domestic financial markets. Finally, the effects of FDI may depend on the sector of the economy in
which it occurs, because the marginal efficiency of capital is likely to vary across sectors.
There is a large volume of literature that examines the modalities through which foreign aid may af-
fect economic growth. Recent analyses have been done by Arndt, Jones, and Tarp (2015) and Addison,
Morrissey, and Tarp (2017). Using foreign aid to improve human, social, and physical infrastructure
should have a positive effect on economic growth in the medium to long term. Similarly, if it is associated
 |
4       BIRD and CHOI

with the improved design of economic policy, it may confer growth benefits. On the contrary, if it too has
Dutch disease consequences, finances unproductive investment, postpones necessary economic reform,
encourages dependency, and is associated with high levels of corruption, then the effects of foreign aid
can be expected to be negative. In theory, the effects of aid depend as much on the type of aid and how
it is used as on its overall amount (Clemens, Radelet, Bhavnani, & Bazzi, 2011; Rajan & Subramanian,
2008). Moreover, and as is the case with remittances, the relationship between foreign aid and economic
growth may contain an important element of endogeneity. Larger amounts of foreign aid may be attracted
to countries with relatively low rates of economic growth. It then may appear from statistical analysis that
foreign aid is exerting a negative effect on economic growth when in practice there is reverse causality.
The bottom line is that the effects of remittances, FDI, and foreign aid on economic growth will de-
pend on the impact they have on its underlying determinants. The current state of growth theory does not
draw a firm conclusion on what these are, or how they will be affected by remittances, FDI, and foreign
aid.4  Overall, the complex set of relationships involved makes it difficult to anticipate a priori what the ef-
fects of remittances, FDI, and foreign aid on economic growth will be. Moreover, there is little theoretical
reason to believe that the effects of the three sources of external finance will be similar.5  In the absence
of clear theoretical priors, the relationship between the three sources of external finance and economic
growth becomes an empirical issue. It is on the empirics of the relationship that we focus in this article.

3  |  E X ISTING E MP IR ICA L E V IDENCE

3.1  |  Descriptive statistics

Figures 1 and 2present information about the changing relative importance of remittances, FDI, and
ODA as sources of external finance for developing economies. They cover 76 developing countries
over the period 1975 to 2015. Until the end of the 1970s, ODA was the single largest source of finance
representing more than 50% of total flows. Generally since then, ODA relative to the other sources has
been on a downward trend. There was a relatively sharp fall in the share of aid in the 1990s; a period
that became characterized as reflecting “aid fatigue.” After the mid-1990s Figures 1 and 2 reveal a
number of features.

F I G U R E 1   Three Sources of External Finance for 76 Developing Countries, (in billion US dollars), 1975-2015
Source: World Development Indicators, World Bank and author’s calculation
BIRD and CHOI   
|
   5

F I G U R E 2   Relative Size of The External Finance for 76 Developing Countries, 1975-2015

Source: World Development Indicators, World Bank and author’s calculation

First, there was a sharp increase in the size of remittances. By the end of the period, remittances
were the single largest source of external finance to developing countries and larger than FDI and
ODA combined. Second, there was a rapid increase in FDI in the mid-2000s but a subsequent decline
and leveling off in the period after the global economic and financial crisis in 2008–2009. Third, the
relative size of ODA has declined fairly persistently over the period covered. A pronounced contrast
may be made between the beginning of the period and the end of it. Although it is too soon to make a
firm judgment about it, the figure also suggests that in the period since 2010 the relative shares of the
three sources of external finance seem to have stabilized.
Of course, overall numbers can be misleading. Historically, FDI has been quite heavily concen-
trated in a relatively few countries. In 2014, for example, more than half of total FDI inflows to devel-
oping countries went to China. For some individual countries, the relative importance of remittances,
FDI, and ODA looks very different from the averages reported earlier. In Tanzania and Malawi, for
example, foreign aid has been much more important than either remittances or FDI.
The features of the data shown by Figures 1 and 2 suggest that remittances and FDI deserve closer
attention relative to foreign aid than they have received in the extant literature. The trends shown in
the figures also raise issues concerning the relationship between the three sources of external finance
and economic growth in developing economies. These are the aspects of external financing for devel-
opment that we analyze in more depth in the rest of this article.
Figure 3 illustrates what happened to economic growth in developing economies from the mid-
1970s to the mid-2010s. The sharp declines in economic growth appear to coincide with the global
economic slowdowns in the early 1980s and the early 1990s. They also appear to coincide with the
East Asian crisis in 1997–1998 and more dramatically the global economic and financial crisis in
2008–2009. The figure also provides a reminder of the importance of global economic activity in de-
termining growth performance in developing economies. But what contribution do remittances, FDI,
and foreign aid make in fostering their economic growth?

3.2  |  Existing empirical studies: some general observations

Research into the effects of all sources of external finance on economic growth confronts a number of
common fundamental problems. These problems relate to measurement, endogeneity, heterogeneity,
 |
6       BIRD and CHOI

7%

6%

5%

4%

3%

2%

1%

0%
1975 1980 1985 1990 1995 2000 2005 2010 2015

F I G U R E 3   Average GDP per capita growth for 76 developing countries, 1975-2015

Source: World Development Indicators, World Bank and author’s calculation

simultaneity, and timing. It is unwise to underestimate these problems when interpreting the results
of empirical work; they can lie at the heart of why different studies report different and sometimes
contradictory results. Moreover, as noted earlier, although the problems are common across all stud-
ies, they may vary in terms of their importance.
A comprehensive discussion of the problems would be lengthy. However, a few remarks relating to
each source of external finance are illustrative. Many remittances are likely to be unrecorded. They may
take the form of flows of real goods rather than financial transfers. They are likely to be influenced by the
level of economic activity and the growth of per capita GDP in the receiving countries, as migrants send
resources back home in an attempt to raise the living standards of family members. There may therefore
be reverse causality between remittances and economic growth in the receiving countries. They may
be used for different purposes with different consequent effects on economic growth and different lags.
Similarly, aid may be measured in terms of commitments or disbursements. It may be recorded
as gross flows or merely the grant element of the flows or as in the case of ODA meeting a thresh-
old in terms of concessionality. Measurement may need to consider differences in quality, in
which case criteria for evaluating quality are needed and such criteria are likely to involve a sub-
stantial subjective element. As with remittances, aid may take on various forms and may be used
in different ways. Different types of aid may be expected to have different effects on economic
growth and exhibit different lag structures. Moreover, aid may be as much a function of economic
growth in the receiving country as it is a factor in generating economic growth. There is again,
therefore, a potentially important problem associated with reverse causality and endogeneity.
FDI exhibits fewer measurement problems, but it is not exempt from them. For example, the pro-
portion of ownership at which control becomes effective may be somewhat arbitrary. Endogeneity
may, once more, be an issue with countries that are growing more rapidly attracting more FDI.
As noted earlier, the degree of seriousness of these fundamental problems creates a potential dif-
ficulty for comparative analysis. Thus if, for example, FDI is relatively accurately recorded, but re-
mittances are substantially under-recorded, it is possible that the effects of remittances on economic
growth will be overestimated relative to those of FDI. The problem may be compounded where the
accuracy of the data changes over time.
BIRD and CHOI   
   7
|
The problems discussed above do not completely undermine the legitimacy of empirically estimating
the effects of remittances, FDI, and foreign aid on economic growth in developing countries. However,
they do need to be borne in mind when evaluating the results of empirical studies, including this one.

3.3  | Remittances

A relatively small but growing empirical literature deals with various aspects of remittances.6  A broad
consensus has emerged on some issues. Remittances are generally found to behave counter-cyclically
in the recipient country and pro-cyclically in the host one (Chami et al., 2008; IMF, 2005). They,
therefore, tend to smooth aggregate demand in the country that receives them. Compared to other
sources of external finance, remittances are usually more stable. They are mainly used to finance
consumption and investment in education and health, although there are some differences across
countries (Yiheyis & Woldemariam, 2016).
When it comes to estimating the impact of remittances on economic growth, however, the findings
of existing studies are mixed. Some discover a significant positive impact (Catrinescu, Leon-Ledesma,
Piracha, & Quillin, 2006; Faini, 2006; Giuliano & Ruiz-Arranz, 2009; Imai, Gaiha, Ali, & Kaicker, 2011),
whereas others report either no significant effect or a negative one (Acosta, Cesar, Pablo, & López,2008;
Barajas, Chami, Fullenkamp, Gapen, & Montiel, 2009; Chami et al., 2003, 2008; Fajnzylber & Lopez,
2007; IMF, 2005; Ratha, 2003). The differences in results may reflect differences in sample size, com-
position, and time period, as well as in econometric methodology, lag structure, and the selection of
control variables. A particular issue relates to how endogeneity is handled and the design of instrumental
variables. To be valid, instrumental variables have to be correlated with remittances but uncorrelated
with the error term in the regression. It is not easy to find them, and different studies have used different
instruments. Some have used external instruments such as the income gap and real interest gap with the
United States (Chami et al., 2003), the distance between the recipient and the host country (Faini, 2006;
IMF, 2005), a common language (IMF, 2005), or the ratio of remittances to GDP for all other recipients
(Barajas et al., 2009), whereas others have used the lagged values of the explanatory variables.
Since the growth effects of remittances are likely to be felt in the medium to long term, many recent
studies have used non-overlapping 5-year moving averages to iron out any short run instability associ-
ated with the business cycle (Acosta et al., 2008; Barajas et al., 2009; Chami et al., 2003; Fajnzylber
& Lopez, 2007; Giuliano & Ruiz-Arranz, 2009).7 

3.4  |  Foreign direct investment

Existing studies have generally found the effect of FDI on economic growth to be fairly consistently
positive (Borenzstein, De Gregorio, & Lee, 1998; Hsiao & Shen, 2003), with it being greater in coun-
tries with higher levels of human capital (Borensztein, De Gregorio, & Lee, 1998) and higher levels
of financial development (Alfaro, Areendam, Kalemli-Ozcan, & Sayek, 2006; Hermes & Lensink,
2003). Li and Liu (2005) also find that FDI has a positive effect on economic growth and discover a
similarly sized effect to the one reported by Borensztein et al. with a 1% increase in FDI relative to
GDP leading to an increase in GDP per capita growth of 0.8% when using a cross-sectional model and
almost 0.5%when allowing for errors to be correlated across countries (using a seemingly unrelated
regression equations estimator).
Some of the empirical research on FDI examines the modalities through which it may affect the
receiving country, often focusing on technological and other spill-over effects. However, there are
 |
8       BIRD and CHOI

studies that counsel caution with regard to the effects of FDI and claim that it may not always benefit
the host country (Razin, Sadka, & Yuen,1999). There are those who argue that FDI may have negative
social implications that can, in principle, adversely affect economic growth (Blomstrom & Kokko,
1998; Globerman & Shapiro, 1999; Mencinger, 2003), and some studies have challenged the existence
of growth-enhancing spillover effects (Haddad & Harrison, 1993). A number of studies suggest that
FDI may hamper economic and human development and that this may then impede economic growth
(Campos & Kinoshita, 2002; Mencinger, 2003; Nunnenkamp & Stracke, 2008). But in general the
direct evidence has provided little support for the claim that FDI is growth retarding.

3.5  |  Foreign aid

The literature dealing with the effects of foreign aid on economic growth is extensive and diffi-
cult to summarize briefly. Arndt, Jones, and Tarp (2010), Arndt et al. (2010, 2015), Burnside and
Dollar (2000, 2004), Collier and Dollar (2002, 2004), Dalgaard, Hansen, and Tarp (2004), Easterly,
Levine, and Roodman (2004), Hansen and Tarp (2000), Nowak-Lehman, Dreher, Herzer, Klasen,
and Martínez-Zarzoso (2012), Rajan and Subramanian (2008), Roodman (2007), and Clemens et al.
(2011) are illustrative of the existing research. Studies vary in design, sample, and methodology. This
also means that the results change considerably along a spectrum between the two extremes. Some
of them report positive effects and others negative ones. Several studies find that the effects of aid
depend significantly on contingent factors, in particular the quality of domestic economic policy (e.g.,
Burnside & Dollar, 2000; Collier & Dollar, 2002), whereas others do not. Easterly et al. (2004) claim
that even allowing for the design of policy, and using the same basic data as Burnside and Dollar, aid
is ineffective. In contrast, Hansen and Tarp (2000) conclude that aid is effective even in the absence
of good domestic policy. Some studies claim that the effects of aid depend on the type of aid and
the motives of donors, with the effects on economic growth being positive when aid is motivated
by recipient need rather than donor interest (Dreher, Eichenauer, & Gehring, 2013; Kilby & Dreher,
2010). Clemens et al. (2011) point out that one would not expect all the diverse types of aid to have
similar effects and that it is often this diversity that accounts for the wide-ranging results reported in
the literature.8 
Even survey articles that attempt to identify the preponderance of one finding reach different con-
clusions. Doucouliagos and Paldam (2008) use meta-regression analysis (MRA) and find no overall
evidence that aid encourages economic growth. Meanwhile, using the same MRA methodology and
the same set of nearly 70 studies, Mekasha and Tarp (2013) conclude that aid is effective.9 

3.6  |  Remittances, FDI, and foreign aid together

Although numerous studies examine the growth effects of remittances, FDI, and ODA taken indepen-
dently, very few simultaneously include all three sources of external finance. Examining one source
without considering the others may mean that important variables are being omitted and may miss
interactions between them. This may bias the results.
Three recent studies attempt to fill this gap, but they vary in terms of their sample, methodology,
and results. Using a three-stage least squares estimation, Driffield and Jones (2013) examine data
from 1984 to 2007. They are critical of the GMM approach that uses lagged variables as estimators.
They analyze the data both annually and as 5-year averages, although they claim that the results are
similar suggesting that cyclicality is not a problem. They find that the effects of remittances and FDI
BIRD and CHOI   
   9
|
on economic growth are positive but that of ODA is negative.10  Benmamoun and Lehnert (2013) use
a panel GMM model, arguing that a dynamic approach is more appropriate in the context of estimat-
ing economic growth regressions. Their sample includes either 47 or 54 countries over the period
1990–2006. They find that all three sources of external finance have a significant positive effect in
low-income countries, but not in middle-income ones. They do not report the number of instruments
used and it is possible that the study overfits endogenous variables thereby reducing the confidence
that can be placed in their results. Nwaogu and Ryan (2015) use a dynamic spatial framework and
conclude that when all three sources of external finance are included, only remittances have a positive
effect in Latin America, and only FDI has a positive effect in Africa; they discover different results
when the sources of finance are examined separately.
While studying the effects of remittances, FDI, and ODA alongside one another represents a step
forward the findings of the studies cited previously that do this are frequently not robust to changes
in econometric methodology and sample selection. There is also evidence to suggest that results vary
across regions and levels of development. In what follows we endeavor to provide a more comprehen-
sive analysis of the effects of the three sources of external finance to developing countries. In doing
so, we report findings that differ in important ways from those of other studies.

4  |  N E W E MP IR ICA L E ST IMATIONS

4.1  |  Data, estimation methods, and model specification

In this article we build on and extend published research by examining recent data and a lengthy time pe-
riod of nearly 40 years running from 1976 to 2015. The longer time period than that used in other studies
and the inclusion of more recent data allow us to more fully take into account a period when the relative
importance of the three sources of external finance has been changing, as shown earlier in Figures 1 and
2. It also allows us to have more observations within an approach based on 5-year non-overlapping aver-
ages and to divide the data across sub-periods. We estimate both a dynamic system GMM model, where
we adopt the PCIVR technique as appropriate to avoid the potential problem of proliferating instrumen-
tal variables (IVs), and a fixed effects panel model.11  We offer further tests of robustness by analyzing
annual data, modifying the control variables that we include in our estimations, and running a simple
ordinary least squares procedure.12  We test to see how our results change when all sources of external
finance are included simultaneously rather than separately. By focusing on the 5-year non-overlapping
averages, we can also compare our results with those achieved by other researchers who have used a
similar approach. We disaggregate between regions and income levels to allow us to explore potential
heterogeneity. Although we do not investigate empirically, the mechanisms through which the effects we
identify are being brought about, we can comment on the extent to which our results are consistent with
specific theoretical priors.
We draw our data from International Monetary Fund (IMF) and World Bank sources and provide
details of the data in Appendix 1. We include 51 countries in our sample, straddling both low-income
and middle-income countries as well as different geographical regions. The composition of the sample
was also influenced by the availability of consistent and comparable data. A list of the countries in our
sample is provided in Appendix 1.
In our estimations, the results from which are reported in the next subsection, the dependent variable
is economic growth, as measured by annual average percentage changes in real GDP per capita mea-
sured in U.S. dollars. Our control variables are selected bearing in mind the analytical rationale for their
inclusion.13  However, the selection is also constrained by data availability, particularly with regard to
 |
10       BIRD and CHOI

some of the control variables we use in our estimations. This means that the sample of countries in our
more detailed regression analyses drops from the 76 covered in Figures 1‒3 to 51. However, this sample
size compares with other studies, allows us to disaggregate our results, and seems unlikely to bias the
results. Furthermore, we have chosen control variables in a way that facilitates comparison between
our results and those found by other researchers who have used a similar range of controls. We control
for the initial level of real GDP per capita, as well as for domestic investment, education, population
growth, inflation, trade openness, the current account of the balance of payments, and government
spending. We also include a time dummy in our estimations to control for potential year effects. More
detailed information on the data in terms of both definitions and sources is contained in Appendix 1.

T A B L E 1   The effects of remittances, FDI and aid on economic growth, 1976–2015 (GMM)

Variables (1) (2) (3) (4)

Remittances/GDP –0.025*** –0.031***
(0.01) (0.01)
ODA/GNI –0.036 –0.030
(0.03) (0.03)
FDI/GDP 0.078 0.108**
(0.05) (0.04)
Gross capital formation 0.122*** 0.105*** 0.088*** 0.127***
(0.03) (0.03) (0.03) (0.03)
Education 0.290** 0.214 0.176 0.304**
(0.14) (0.13) (0.13) (0.15)
Log real GDP per capita –0.996*** –1.047*** –0.878*** –1.150***
(0.22) (0.21) (0.19) (0.22)
Population growth –0.486*** –0.578*** –0.513*** –0.607***
(0.18) (0.17) (0.18) (0.16)
Inflation –0.002*** –0.002*** –0.003** –0.002***
(0.00) (0.00) (0.00) (0.00)
Government consumption –0.156*** –0.151*** –0.166*** –0.126***
(0.04) (0.04) (0.04) (0.03)
Openness 0.016*** 0.015*** 0.013** 0.011**
(0.01) (0.01) (0.01) (0.01)
Current account balance 0.055* 0.025 0.051 0.088**
(0.03) (0.03) (0.03) (0.04)
Observations 277 284 289 273
Number of countries 51 51 51 51
AR(1) p value 0.01 0.01 0.01 0.01
AR(2) p value 0.95 0.97 0.32 0.68
Hansen test p value 0.07 0.07 0.06 0.11
Number of instruments 28 28 28 30
Note: Robust standard errors in brackets.
***p < .01, **p < .05, *p < .1.
BIRD and CHOI   
|
   11

4.2  | Results

The main results from our system GMM estimation are presented in Table 1. Columns 1, 2, and 3
present the results when remittances, FDI, and ODA are included separately. Column 4 presents the
results when all three sources are included simultaneously such that we are estimating the relationship
between any one particular source of external finance and economic growth while controlling for the
other two. Focusing on the column 4 results, we discover that remittances are significantly and nega-
tively associated with economic growth and that there is an insignificant relationship between aid and
growth and a significant positive relationship between FDI and growth. The other control variables
exhibit significant relationships with economic growth in ways that seem reasonably consistent with
theoretical priors. The diagnostic tests for autocorrelation and the validity of the instruments are re-
ported at the bottom of the table and these suggest that we can have a reasonable degree of confidence
in the results.14  Although including all three sources of external finance together does not alter the

T A B L E 2   The effects of remittances, FDI, and aid on economic growth, 1976–2015 (fixed effects)

Variables (1) (2) (3) (4)

Remittances/GDP –0.047*** –0.051***
(0.01) (0.01)
ODA/GNI –0.069** –0.039
(0.03) (0.04)
FDI/GDP 0.154** 0.147**
(0.08) (0.07)
Gross capital formation 0.191*** 0.144*** 0.103** 0.192***
(0.03) (0.04) (0.04) (0.03)
Education –0.111 -0.243 –0.361 –0.263
(0.45) (0.50) (0.47) (0.44)
Log real GDP per capita –3.696*** –3.514*** –3.607*** –3.553***
(1.20) (1.09) (1.12) (1.12)
Population growth –0.470 –0.601 –0.529 –0.537
(0.46) (0.47) (0.41) (0.43)
Inflation –0.002*** –0.002*** –0.003** –0.002***
(0.00) (0.00) (0.00) (0.00)
Government consumption –0.095 –0.067 –0.088 –0.056
(0.07) (0.07) (0.07) (0.07)
Openness 0.015* 0.023*** 0.021** 0.015*
(0.01) (0.01) (0.01) (0.01)
Current account balance 0.079** 0.021 0.032 0.121***
(0.03) (0.04) (0.04) (0.04)
Observations 277 284 289 273
R-squared 0.42 0.39 0.45 0.46
Number of countries 51 51 51 51
Note: Robust standard errors in parentheses.
***p < .01, **p < .05, *p < .1.
 |
12       BIRD and CHOI

signs of the estimated coefficients, in the case of FDI, it does change the coefficient’s significance,
from insignificant to significant at the 5%level.15 
Table 2 presents the results from the fixed effects panel estimation. In terms of our variables of in-
terest, and in the case where all three sources of external finance are included simultaneously, (column
4) the results reinforce those from the system GMM estimation, confirming a significant and negative
association between remittances and economic growth, an insignificant relationship between aid and
economic growth, and a significant and positive relationship between FDI and growth. In the case
of the fixed effects estimations, however, and when each source of finance is examined in isolation,
it appears that both remittances and ODA are significantly and negatively associated with economic
growth, whereas FDI is significantly and positively associated with it. It may be noted that the size
of the coefficients does not change greatly when all three sources of external finance are included
together. To a lesser extent, this is also the case with the GMM estimations. With the fixed effects
estimations as compared with the GMM ones, a slightly different picture emerges in terms of the sig-
nificance (and in some cases the sign) of the coefficients on the control variables. In particular, the co-
efficients on education, population growth, and government consumption are no longer significant.16 
The R-squared statistic suggests that the estimating equation is reasonably successful in explaining
economic growth and rather better than that used in some other studies.
When taking the results of both the GMM and fixed effects estimations together, reasonable confidence
can be placed on the key findings relating to our variables of interest. Remittances appear to be negatively
related to economic growth and FDI positively related to it. For ODA, the relationship is insignificant.
Tables 3 and 4 examine regional heterogeneity between Latin America and Caribbean and sub-Sa-
haran Africa (SSA). Table 3 provides the results using the system GMM approach. The table reveals
some areas of heterogeneity in terms of the significance of control variables. Population growth, ini-
tial GDP, and government consumption have exerted a significant negative effect in Latin America but
not in SSA. Meanwhile the current account balance of payments has been significant in SSA but not
in Latin America. For the variables of interest, heterogeneity is not as pronounced. In each region the
results are consistent with the overall results reported in Table 1, which for convenience are repeated
in column 3 of Table 3. Heterogeneity is only found in terms of the strength of the significance and
the size of the coefficients. For example, the estimated coefficients are larger in Latin America than in
SSA.17  The picture is different in Table 4 where the fixed effects panel estimation is used. Here, Latin
America generates no significant effects for any of the three sources of external finance, whereas in
SSA both foreign aid and FDI have significant positive effects.
Tables 5 and 6 disaggregate the data into low-income and middle-income countries. In this case,
both the GMM and the fixed effects estimations show similar results in as much as remittances are
found to exert a significant and negative effect on economic growth in low-income countries, and FDI
is found to have a significant positive effect in middle-income ones. The effects of ODA and FDI in
low-income countries are insignificant, and those of remittances and ODA are insignificant in mid-
dle-income ones.18 

4.3  |  Robustness checks

To test the robustness of our results, and in addition to using both the GMM and fixed effects panel
estimations as applied to non-overlapping 5-year averages as reported earlier, we experimented with an
ordinary least squares estimation, with different specifications of the estimation equation, with a slightly
larger sample of countries (63 rather than 51), and with annual data. In some cases the use of annual data
affected the control variables that we could include. For example, a lack of available data meant that we
BIRD and CHOI   
|
   13

T A B L E 3   The effects of remittances, FDI, and aid on economic growth in Latin America and the Caribbean,
and in Africa, 1976–2015 (GMM)

Variables (1) Latin (2) Africa (3) All

Remittances/GDP –0.150** –0.043*** –0.031***
(0.07) (0.01) (0.01)
ODA/GNI –0.073 0.012 –0.030
(0.07) (0.04) (0.03)
FDI/GDP 0.233*** 0.091** 0.108**
(0.07) (0.04) (0.04)
Gross capital formation 0.129** 0.186*** 0.127***
(0.05) (0.05) (0.03)
Education –0.252 –0.081 0.304**
(0.49) (0.44) (0.15)
Log real GDP per capita –1.290* –0.012 –1.150***
(0.65) (0.48) (0.22)
Population growth –1.318** 0.050 –0.607***
(0.49) (0.60) (0.16)
Inflation –0.002*** 0.040*** –0.002***
(0.00) (0.01) (0.00)
Government consumption –0.155*** –0.044 –0.126***
(0.05) (0.05) (0.03)
Openness 0.001 0.012 0.011**
(0.01) (0.01) (0.01)
Current account balance 0.055 0.125*** 0.088**
(0.06) (0.03) (0.04)
Observations 87 65 273
Number of countries 15 13 51
AR(1) p value 0.04 0.03 0.01
AR(2) p value 0.07 0.75 0.68
Hansen Test (p value) 1 1 0.11
Number of instruments 28 31 30
Note: Robust standard errors in brackets.
***p < .01, **p < .05, *p < .1.

could not use the education variable when undertaking annual estimations. Instead, we used a variable to
capture labor force participation in an attempt to reflect an aspect of human capital. We also included ver-
sions of the estimation equation that controlled for economic growth in the previous period, and for the
level of financial development.19  To a substantial degree, the results from our series of robustness checks
confirmed the basic findings of our base estimations with regard to our variables of interest. To illustrate
the point, we include in Appendix 2 the results from just one of our additional estimations. Table A1
shows the results when we use annual data for a slightly larger sample of 61 countries and have a slightly
modified group of control variables.20  We report the results for ordinary least squares (OLS) estimations
 |
14       BIRD and CHOI

T A B L E 4   The effects of remittances, FDI, and aid on economic growth in Latin America and the Caribbean,
and in Africa, 1976–2015 (fixed effects)

Variables (1) Latin (2) Africa (3) All

Remittances/GDP –0.065 –0.027 –0.051***
(0.09) (0.02) (0.01)
ODA/GNI –0.039 0.156** –0.039
(0.08) (0.07) (0.04)
FDI/GDP 0.057 0.311*** 0.147**
(0.06) (0.09) (0.07)
Gross capital formation 0.212*** 0.091 0.192***
(0.04) (0.05) (0.03)
Education –1.481 –0.173 –0.263
(0.87) (1.08) (0.44)
Log real GDP per capita –1.917 –3.132 –3.553***
(2.22) (2.67) (1.12)
Population growth –1.799** 0.299 –0.537
(0.71) (0.36) (0.43)
Inflation –0.002*** 0.029*** –0.002***
(0.00) (0.01) (0.00)
Government consumption –0.250** 0.037 –0.056
(0.09) (0.06) (0.07)
Openness –0.006 0.024 0.015*
(0.01) (0.03) (0.01)
Current account balance 0.098 0.074 0.121***
(0.06) (0.05) (0.04)
Observations 87 65 273
R-squared 0.76 0.61 0.46
Number of countries 15 13 51
Note: Robust standard errors in parentheses.
***p < .01, **p < .05, *p < .1.

as well as for the GMM and fixed effects ones.21  Again a significant and positive relationship between
FDI and economic growth is uniformly revealed. The coefficients on remittances and on ODA are nega-
tive but insignificant. The robustness checks suggest that it is acceptable to attach a reasonable degree of
confidence to the underlying relationships between the three sources of external finance and economic
growth that we show in our main findings as reported in Tables 1‒6.

4.4  |  Interpretation and discussion

In this section, we offer a broader discussion of our results and suggest factors that may be underpin-
ning them. We also draw comparisons between our results and those reported in other studies and
suggest some reasons as to why results may differ.
BIRD and CHOI   
|
   15

T A B L E 5   The effects of remittances, FDI, and aid on economic growth in low- and middle-income countries,
1976–2015 (GMM)

Variables (1) Low-income (2) Middle-income (3) All

Remittances/GDP –0.026*** 0.019 –0.031***
(0.01) (0.04) (0.01)
ODA/GNI –0.015 –0.027 –0.030
(0.03) (0.06) (0.03)
FDI/GDP 0.065 0.201** 0.108**
(0.05) (0.09) (0.04)
Gross capital formation 0.099* 0.131*** 0.127***
(0.05) (0.04) (0.03)
Education 0.174 0.035 0.304**
(0.24) (0.29) (0.15)
Log real GDP per capita –1.315*** –1.256*** –1.150***
(0.46) (0.31) (0.22)
Population growth –0.743** –0.710*** –0.607***
(0.30) (0.17) (0.16)
Inflation 0.027** –0.002*** –0.002***
(0.01) (0.00) (0.00)
Government consumption –0.059 –0.130*** –0.126***
(0.05) (0.04) (0.03)
Openness 0.008 0.007 0.011**
(0.01) (0.01) (0.01)
Current account balance 0.056 0.087 0.088**
(0.04) (0.06) (0.04)
Observations 105 168 273
Number of countries 23 28 51
AR(1) p value 0.03 0.01 0.01
AR(2) p value 0.76 0.64 0.68
Hansen Test (p value) 0.65 0.39 0.11
Number of instruments 30 30 30
Note: Robust standard errors in parentheses.
***p < .01, **p < .05, *p < .1.

Where, in the presence of low domestic savings rates, external financing is seen as a binding con-
straint on economic growth, inflows of finance in the form of remittances, FDI, and foreign aid should
relax the constraint and facilitate faster rates of growth. However, where it is accepted that many
other factors influence economic growth such a straightforward connection is unlikely to exist. Things
will become more complicated, and the effects of external finance will be contingent on many other
circumstances. The results reported in the previous section confirm that indeed many factors exert a
significant effect on economic growth in developing countries. There remains considerable scope for
achieving a better understanding of the determinants of economic growth in developing economies,
and there is no reason to believe that one model will fit all.
 |
16       BIRD and CHOI

T A B L E 6   The effects of remittances, FDI, and aid on economic growth in low- and middle-income countries,
1976–2015 (fixed effects)

Variables (1) Low-income (2) Middle-income (3) All

Remittances/GDP –0.036** 0.022 –0.051***
(0.01) (0.09) (0.01)
ODA/GNI 0.006 –0.072 –0.039
(0.06) (0.08) (0.04)
FDI/GDP 0.081 0.252** 0.147**
(0.09) (0.09) (0.07)
Gross capital formation 0.111** 0.238*** 0.192***
(0.05) (0.05) (0.03)
Education –0.726 –0.349 –0.263
(0.74) (0.60) (0.44)
Log real GDP per capita –3.057 –3.936** –3.553***
(1.98) (1.55) (1.12)
Population growth –0.427 –0.964* –0.537
(0.41) (0.52) (0.43)
Inflation 0.001 –0.002*** –0.002***
(0.02) (0.00) (0.00)
Government consumption –0.034 –0.124 –0.056
(0.08) (0.09) (0.07)
Openness 0.009 0.017 0.015*
(0.01) (0.01) (0.01)
Current account balance 0.068* 0.143** 0.121***
(0.04) (0.06) (0.04)
Observations 105 168 273
R-squared 0.41 0.53 0.46
Number of countries 23 28 51
Note: Robust standard errors in parentheses.
***p < .01, **p < .05, *p < .1.

Against this background, we nevertheless find evidence that, in general, economic growth is pos-
itively related to FDI. Taking our full sample, and when all three sources of external finance are
simultaneously included in the estimations, the coefficient on FDI is always significant and usually
strongly so. However, we also discover an element of heterogeneity. Using the GMM approach, the
connection is more strongly significant in Latin America than in SSA and it is found to be statistically
significant only in middle-income countries as opposed to low-income ones.22  This suggests that the
precise impact of FDI depends on other factors that vary across countries. Our result with respect to
FDI is at odds with that of Benmamoun and Lehnert (2013), who found that FDI exerted a signifi-
cantly positive effect on economic growth only in low-income countries. However, our full sample
result confirms the finding of Driffield and Jones (2013). Combined with the evidence on the impact
of domestic capital formation, it seems that investment, whether domestic or foreign, plays a key role
in generating economic growth, and it is reasonable to assume that this works through the modalities
BIRD and CHOI   
|
   17

that theory suggests in terms of enhancing productivity and efficiency, as well as by generating posi-
tive spillovers. The evidence of a positive connection between FDI and growth does not, however, rule
out the likelihood that the causality runs in both directions with foreign investment being attracted
to economies with relatively fast growth rates. There may be an element of endogeneity. Nor does it
exclude the possibility that there may be some growth-retarding effects associated with FDI, for ex-
ample, in terms of the effects on the value of the domestic currency. However, our results suggest that
these effects, to the extent that they exist, are overwhelmed by the positive ones.
Turning to remittances, our results suggest that they are generally negatively associated with eco-
nomic growth. Both the GMM and the fixed effects estimations show a strongly significant negative
coefficient. Again, both the GMM and the fixed effects estimations show a degree of heterogeneity in
that the negative coefficient is strongly significant in low-income countries but not in middle-income
ones where the coefficient becomes positive but is statistically insignificant. Although the GMM
estimations show a statistically negative relationship for both Latin American and SSA countries, the
fixed effects estimation suggests that the relationship is statistically insignificant in both regions.23 
Our results are in stark contrast to those of Driffield and Jones (2013), who discover a statistically
significant positive relationship across their full sample (which they do not disaggregate). They are
also at odds with the findings of Benmamoun and Lehnert (2013), who report a strongly positive
and significant relationship between remittances and economic growth in low-income countries but a
negative and insignificant one in middle-income countries. What might explain these differences, and
why might the relationship be as we discover it?24 
The differences in results reflect the composition of the samples, the specification of the estimation
equations and the econometric methodology used. The confidence that can be placed in our results
depends in part on the values of the diagnostic tests. In terms of the GMM approach, the values of the
AR(1) and AR (2) statistics, the Hansen test, as well as our application of the PCIVR technique, where
there is evidence to imply over instrumentation, suggest that our results are reasonably reliable. Also
the goodness of fit of our estimation equation in the case of the fixed effects model suggests that it is
reasonably well specified. In addition to these considerations, our estimations cover a lengthy period
of time and a large range of countries.
The negative relationship we report may reflect a number of things. It may be that there is still an
important element of endogeneity and reverse causality in the relationship that we are failing to iden-
tify, with countries that exhibit a relatively slow rate of economic growth attracting a larger amount of
remittances. This is consistent with the evidence cited earlier showing that remittances respond count-
er-cyclically to economic performance in receiving countries. This, having been said, further tests for
Granger causality only identified the causal connection running from remittances to growth. It may
also be that remittances, unlike FDI, largely support consumption rather than investment. Again much
of the evidence relating to remittances suggests that this is frequently the way in which remittances are
used. With enhanced consumption, inflation is adversely affected, and this may lead to an appreciation
in the real exchange rate. The implied loss of competitiveness then has a negative impact on economic
growth. The control variables in our estimations show that inflation and current account deficits have
a significant and negative impact on economic growth.
The relationship between foreign aid and economic growth is complex and works through numer-
ous channels. Again, much of the literature suggests that the effects of aid are contingent on other
factors. Our results imply that across a range of countries and over a lengthy period of time the rela-
tionship between foreign aid and economic growth is insignificant, although we do discover a signif-
icant positive effect in the case of Africa when using the fixed effects model. At the other extremes,
Driffield and Jones (2013) report a significant negative coefficient, whereas Benmamoun and Lehnert
(2013) find a significant positive coefficient in the case of low-income countries.25 
 |
18       BIRD and CHOI

Our overall results reveal a relatively large amount of heterogeneity. Although we do not report the
results in detail here, further bivariate analysis of the relationship between aid and economic growth
that we undertook provided some insights into why large sample regression analysis may obscure the
effects of foreign aid. Our investigations revealed a wide diversity, varying from strongly positive to
strongly negative. Aid takes numerous forms and has both humanitarian and developmental, as well
as political, purposes. Some types of aid may therefore be expected to be negatively correlated with
economic growth and other types positively correlated with it. Moreover, there may be an important
element of endogeneity that our estimations are not picking up, with poor-performing economies at-
tracting larger amounts of aid. Unlike in the case of remittances, or indeed FDI, in testing for Granger
causality, we found evidence of two-way causality between aid and growth.
In addition to this, differences are likely to exist between the effects of bilateral aid and multilat-
eral aid, because different donors may have different motivations. Differences are also likely to exist
between tied and untied aid, and between project and program aid. It has also been shown that the
effects of aid depend on contingent conditions including the quality of institutions and governance,
geographical location, the level of corruption, and the policy environment. There may be further en-
dogeneity where the policy environment, governance, institutional quality, and corruption influence
donors’ choices regarding the type of aid they provide. The bottom line is that an overall finding of
no significant effect of aid on growth, such as ours, tells us relatively little about the way in which aid
works, or does not work, in practice. It would, therefore, be unwise to interpret our results as suggest-
ing that aid has no significant effects, but rather that the effects are nuanced and differ markedly from
case to case. These differences may cancel out one another at a high level of aggregation.
It is also important to recall the fundamental problems that were mentioned earlier and that are
encountered by all studies such as ours. There are issues surrounding measurement, endogeneity,
simultaneity, and heterogeneity. We seek to deal with these as best we can, but there will always
be disagreement about how well the problems have been handled. In interpreting our results, these
problems need to be borne in mind. For example, how we have constructed our instrumental variables
may not completely eradicate endogeneity. Our choice of control variables may be open to debate.
Similarly the use of non-overlapping 5-year averages may not remove all cyclicality and the choice
of a 5-year period remains somewhat arbitrary. Having said this, the diagnostic tests, along with the
range of robustness checks that we undertake, suggest that a reasonable amount of confidence may be
placed in our results.26 

5  |  CO NC LUD ING R E MA R K S

The Addis Ababa Agenda in 2015 acted as a precursor to the SDGs and focused on financing for
development. Domestic saving is an important source of finance. However, external finance can com-
plement this. External finance may come in the form of remittances, FDI, and foreign aid. Much of
the existing literature focuses on the effects of foreign aid. This is unfortunate given the increasing
importance of remittances and FDI both in absolute terms and relative to foreign aid.
Having discussed the relevant theory and the existing empirical research, this article examines
the empirical evidence relating to the effects of the three sources of external finance on economic
growth in a sample of 51 developing economies. As far as possible, the analysis attempts to allow
for endogeneity and also explores areas of heterogeneity. It also takes into account the importance of
other factors that are likely to influence economic growth and applies two econometric techniques for
estimation purposes: a system GMM model and a fixed effects panel model.
BIRD and CHOI   
   19
|
An overarching conclusion that emerges from the empirical investigation relates to the significant
positive effects of FDI on economic growth. In this regard, the sharp increase in FDI in the early
years of the 2000s probably contributed to the increases in growth that were also observed at that
time. Similarly, the sharp downturn in FDI in the aftermath of the global economic and financial
crisis is a cause for concern particularly against the backdrop of the SDGs. Our evidence relating to
the growth-enhancing effects of FDI also has important ramifications in terms of the design of policy
in developing economies. The policy issues relate to the general approach to FDI, openness, trade,
and capital account liberalization, and globalization. At the macro level, it suggests that policy needs
to focus on creating conditions that attract FDI. At the micro level, it implies that tax policy and
policy toward the repatriation of profits should also be designed in a way that takes into account the
growth-enhancing effects of FDI.
In contrast to FDI, the evidence reported in this article generally suggests that remittances and
foreign aid have either no significant effect on economic growth or a negative one. Our results would
appear to imply that remittances are generally growth-inhibiting in the relatively short to medium
term. However, caution is required in interpreting this result. There is likely to be an important ele-
ment of endogeneity, and our results also discover a substantial degree of heterogeneity. This implies
that policy needs to be nuanced. The implication should not simply be to discourage remittances and
discontinue foreign aid, but rather to seek a better understanding of the modalities through which they
exert their effects and the contingent factors that influence the outcomes.
In terms of financing for development, our results are consistent with the view that remittances,
FDI, and foreign aid fulfill different purposes. Any strategy for achieving sustainable development
needs to utilize all three sources and exploit the areas in which they have a comparative advantage.

ACKNOWLEDGMENTS

The authors are very grateful to Eric Pentecost and Tom Willett for their comments on an earlier ver-
sion of this article, and to Manfred Keil for the lengthy discussions they had with him about many of
the underlying issues. The authors also acknowledge Juan Carlos Arriaza for initially drawing their
attention to the gaps in this area of research and his preliminary examination of remittances. The au-
thors are grateful for the comments from an anonymous referee and the editor, which helped greatly
in revising an earlier version of the article.

ORCID
Graham Bird  https://orcid.org/0000-0003-1089-8435
Yongseok Choi  https://orcid.org/0000-0002-9745-5057

ENDNOTES
1
There are definitional problems with each of these concepts. Remittances are notoriously difficult to measure because
some will occur informally and go unrecorded with, for example, migrants taking cash home when making a visit. The
IMF measures them by taking account of the compensation received by migrants residing abroad for less than a year, as
well as those making monetary transfers back home when residing abroad for more than a year. FDI is investment made
to acquire effective control over an enterprise operating outside the country of the investor. ODA is the flow of official
financing administered with a view to promoting economic development in developing countries. It is concessional, with a
grant element of at least 25% (calculated with a 10% discount rate) and can be both bilateral and multilateral. In this article,
and for convenience, we use the concepts of ODA and foreign aid interchangeably. Further details on measurement are
available on World Bank, IMF, and Organisation for Economic Co-operation and Development (OECD) websites.
 |
20       BIRD and CHOI

2
In the case of all three types of finance, the effects on economic growth also depend on the impact on the real exchange
rate. See, for example, Lopez, Molina, and Bussolo (2007).
3
Of course, if remittances are used to finance household consumption, they will tend to have a positive effect on living
standards and help to reduce poverty rates (Adams & Page, 2005). In this article, we do not directly explore the effects
of remittances on contemporary poverty, although reducing poverty may itself have an impact on future growth. Some of
the results we report later in the article examine the relationship between the initial level of real GDP per capita and the
subsequent rate of economic growth.
4
In the early days of development economics, simple dual gap analysis suggested that inflows of foreign capital could help
to close savings and foreign exchange gaps. By augmenting domestic savings and export revenue, and depending on the
incremental capital output ratio, capital inflows would relax financing constraints and lead to faster rates of economic
growth. Critics argued that aid would in fact lead to a fall in the domestic savings rate and an appreciation in the real
exchange rate that would reduce export earnings. More recent theories have pointed to a myriad of factors that influence
economic growth. These cover economic determinants such as the quantity and efficiency of capital and labor inputs and
the rate of productivity growth, but also point to political, institutional, and geographical ones. For a succinct summary of
contemporary ideas relating to growth and poverty in developing countries see, for example, Bird (2004). For a discussion
of the effect of capital flows on saving and investment see, for example, Bosworth, Collins, and Reinhart (1999).
5
While in each case, there may be elements of endogeneity, this may be more important for some sources of external finance
than others. For example, it may seem more likely that remittances and foreign aid will be less influenced by commercial
factors and therefore will be more strongly attracted to countries experiencing low rates of economic growth than FDI
would be.
6
Part of this literature deals with the impact that remittances have had on variables other than economic growth. There
is empirical evidence that covers the effect of remittances on capital formation (Yiheyis & Woldemariam, 2016), on
the real exchange rate (Amuedo-Dorantes & Pozo, 2004; Fayad, 2011; Lartey, Mandelman, & Acosta, 2008), on ed-
ucation (Edwards & Ureta, 2003), on the brain drain (Faini, 2006), and on financial development (Gupta, Pattillo, &
Wagh, 2009). Other work examines volatility aspects of remittances (Craigwell, Jackman, & Moore, 2010; Diaz Gonzales,
2009; Guillaumont & Le Goff, 2010; Jidoud, 2015) and their effect on stabilizing consumption and output (Rapoport &
Docquier, 2006). In this article, we do not concern ourselves directly with the modalities through which remittances, or the
other sources of external finance, may work but simply with their apparent overall effect on economic growth. Chami et al.
(2008) provide a useful summary of much of the work that has examined the macroeconomic effects of remittances.
7
The time dimension is also important when assessing the effects of FDI and aid.
8
Illustrative of the debates about the effects of foreign aid is the interchange of views between Roodman (2015) and Bazzi
and Bhavnani (2015) about the robustness of the results reported in Clemens et al. (2011).
9
Morrissey (2015) provides a useful and comprehensive review of the literature on aid effectiveness in terms of its impact
on economic growth. He reports the wide diversity in results and accounts for them in terms of the specific limitations in
undertaking cross country growth regressions. These cover issues of measurement, as well as simultaneity, endogeneity,
and heterogeneity. He stresses the difficulties in identifying the determinants of economic growth and in assessing the
extent to which the effects of aid will be contingent on other factors. Morrissey argues that much of the disagreement arises
from whether a fixed or random effects approach is chosen since this choice encapsulates priors about heterogeneity.
10
Part of their focus is to examine the importance of institutions in influencing the effects of the three sources of external
finance.
11
There is a debate in the literature concerning the most appropriate estimation method and we do not replicate it in detail
here (Benmamoun & Lehnert, 2013; Driffield & Jones, 2013; Giuliano & Ruiz-Arranz, 2005). The system GMM approach
is often regarded as more efficient than either the difference GMM approach or three-stage least squares, although there
remain potential problems with instrumentation and with the extent to which potential endogeneity is adequately handled.
The system GMM also better deals with potential heteroscedasticity. In this article, however, we also test a fixed effects
panel model as a way of examining the sensitivity of our results to alternative estimation approaches. The fixed effects
panel model offers a way of dealing with unobserved heterogeneity. In our system GMM estimations we use lagged ver-
sions of the explanatory variables as instruments rather than external instruments.
12
We experimented with the inclusion of a range of political and institutional variables such as voice and accountability,
political stability, the rule of law, and corruption to see whether they changed our results and whether they were more
BIRD and CHOI   
|
   21

important for some types of external finance than others. For example, it might be anticipated that political factors would
have a stronger impact on the effects of ODA that is allocated to governments than they would on the effects of remittances
that are received by households. In fact, none of the political and institutional variables turned out to be statistically signif-
icant, so we do not include them in the estimations reported in this article.
13
For example, the variables we include draw on Barro (1997) and Mankiw, Romer, & Weil, (1992).
14
The AR(1) tests for serial correlation with a null hypothesis of zero autocorrelation. To pass the test a p value of <.05
is required. AR(2) tests for second-order autocorrelation. To be confident of its absence, a p value>.05 is required. The
Hansen or J test is designed to test the validity of instruments with the null hypothesis that they are valid and exogenous. It
requires a p value >.05, although a p value of >.1 is more desirable.
15
The panel used in the estimations is unbalanced but not unreasonably so. For the results reported in column 4 of Table 1,
each of the 51 countries in our sample has between 2 and 7 observations with the mean being 5.49 and a standard deviation
of 1.63.
16
In a comprehensive survey of the literature examining the effect of education on economic growth, Benos and Zotou
(2014) apply meta-regression analysis to 57 studies. They discover substantial publication selection bias toward a positive
impact of education on growth. Taking this into account, they argue that “the genuine growth effect of education” is not
homogeneous but varies according to several factors. After applying a precision effect test, they argue that iterative residual
(restricted) maximum likelihood processes, an empirical Bayes method, and a moment estimator imply “no authentic ed-
ucation effect on growth” (p. 667). They attribute the diversity in results to the way in which education is measured, often
not allowing for quality, the data used, and model specification.
17
Bengoa and Sanchez-Robles (2003) also find a strong effect of FDI on growth in Latin America.
18
As a further test of heterogeneity we examined the data taking just the period from 1976 up until 2005, and therefore
excluding the global economic and financial crisis and its aftermath. We do not provide the full results here (although
they are available from the authors), but can report that for the shorter time period, FDI is again found to have a positive
and significant relationship with economic growth. As with the longer period, remittances are found to have a significant
and negative effect. However, in contrast to the full period, the effect of ODA is found not only to be negative but also
significant. We also tested to see whether the effects of the external sources of finance change when longer lags are used.
We found some evidence of a positive and significant effect of aid on future economic growth but only when we used the
fixed effects regression equation and excluded the education control variable.
19
For further discussion of the interaction between remittances and financial development see Giuliano and Ruiz-Arranz
(2009), Ramirez and Sharma (2008), Mundaca (2009), and Calderon, Fajnzylber, and Lopez (2007).
20
The results from a series of other robustness estimations are available from the authors.
21
In the case of the OLS estimations we used the variance inflation factor (VIF) to check for multicollinearity. The VIF
test showed that multicollinearity was not a problem with 2.07 being the maximum value for any of the variables in the
estimations.
22
It may be noted, however, that the fixed effects panel estimation discovers a significant connection between FDI and eco-
nomic growth in Africa but not in Latin America.
23
Further panel VAR Granger causality tests also discovered no evidence to suggest that remittances cause economic
growth.
24
We checked to see whether the relationship we discovered changed if we ran the estimations for a truncated period that
excluded the global economic and financial crisis and its aftermath and running only up as far as 2005. However, we still
discovered a negative and significant coefficient on remittances.
25
We do not compare our results directly and in detail with those of Nwaogu and Ryan (2015) because they use a rather
different spatial framework that does not allow for a full analysis of the determinants of economic growth. Their focus is
on spatial interdependence. However, where comparison can be made, it can be noted that our results are not the same as
theirs. They find that when all sources of external finance are included simultaneously, only FDI affects economic growth
in their sample of 53 African economies, and only remittances affect growth in their sample of 34 Latin American and
Caribbean economies.
26
Another interesting line of inquiry would be to explore in detail the interactions between the three sources of external
finance. Driffield and Jones (2013) take a step in this direction. They find that FDI is positively correlated with ODA and
 |
22       BIRD and CHOI

negatively correlated with remittances. However, neither ODA nor remittances are significantly correlated with either of
the other two sources. Our GMM model shows that the coefficient on FDI increases and becomes significant when aid and
remittances are simultaneously included in the estimations. This implies a degree of complementarity. The coefficient on
remittances also increases in value. However, our fixed effects model shows little change in the estimated coefficients when
all three sources of external finance are simultaneously included. This implies that they are serving different purposes.

R E F E R E NC E S
Acosta, P., Cesar, C., Pablo, F., & López, H. (2008). What is the impact of international remittances on poverty and
inequality in Latin America. World Development, 36, 89–144.
Adams, R., & Page, J. (2005). Do international migration and remittances reduce poverty in developing countries?
World Development, 33(10), 1645–1669.
Addison, T., Morrissey, O., & Tarp, F. (2017). The macroeconomics of aid: Overview. Journal of Development Studies,
53, 987–997.
Alfaro, L., Areendam, C., Kalemli-Ozcan, S., & Sayek, S. (2006). How does foreign direct investment promote eco-
nomic growth? Exploring the effects of financial markets on linkages. NBER Working Paper No.12522.
Amuedo-Dorantes, C., & Pozo, S. (2004). Workers’ remittances and the real exchange rate: A paradox of gifts. World
Development, 32(8), 1407–1417.
Arndt, C., Jones, S., & Tarp, F. (2010). Aid, growth, and development: have we come full circle? Journal of Globalization
and Development, 1(2).
Arndt, C., Jones, S., & Tarp, F. (2015). Assessing foreign aid’s long run contribution to growth and development. World
Development, 69, 6–18.
Barajas, A., Chami, R., Fullenkamp, C., Gapen, M., & Montiel, P. (2009). Do workers’ remittances promote economic
growth? IMF Working Paper, No. 153. Washington, DC: IMF.
Barro, R. (1997). Determinants of economic growth: A cross-country empirical study. Cambridge, MA: MIT Press.
Barro, R., & Lee, J. (2013). A new data set of educational attainment in the world, 1950–2010. Journal of Development
Economics, 104, 184–198.
Bazzi, S., & Bhavnani, R. (2015). A Reply to “A Replication of “Counting Chickens When They Hatch” (Economic
Journal 2012)”. Public Finance Review, 43, 282–286.
Bengoa, M., & Sanchez-Robles, B. (2003). Foreign direct investment, economic freedom and growth: New evidence
from Latin America. European Journal of Political Economy, 19, 529–545.
Benmamoun, M., & Lehnert, K. (2013). Financing growth: Comparing the effects of FDI, ODA, and international re-
mittances. Journal of Economic Development, 38, 43–65.
Benos, N., & Zotou, S. (2014). Education and economic growth: A meta-regression analysis. World Development, 64,
669–689.
Bird, G. (2004). Growth, poverty and the IMF. Journal of International Development, 16, 621–636.
Blomstrom, M., & Kokko, A. (1998). Multinational corporations and spillovers. Journal of Economic Surveys, 12,
247–277.
Bontempi, M. E., & Mammi, I. (2015). Implementing a strategy to reduce the instrument count in panel GMM. The
Stata Journal, 15, 1075–1097.
Borensztein, E., De Gregorio, J., & Lee, J. W. (1998). How does foreign direct investment affect economic growth.
Journal of International Economics, 45, 115–135.
Bosworth, B. P., Collins, S. M., & Reinhart, C. M. (1999). Capital flows to developing economies: implications for
saving and investment. Brookings Papers on Economic Activity, 1999(1), 143–180.
Burnside, C., & Dollar, D. (2000). Aid, policies and growth. American Economic Review, 90, 847–868.
Burnside, C., & Dollar, D. (2004). Aid, policies and growth: Revisiting the evidence. World Bank, Research Working
Paper No. 3251, Washington, DC: World Bank.
Calderon, C., Fajnzylber, P., & Lopez, H. (2007). Remittances and growth: The role of complementary policies. In
P. Fajnzylber & H. Lopez (Eds.), Remittances and development: Lessons from Latin America (pp. 335–368).
Washington, DC: World Bank.
Campos, N. F., & Kinoshita, Y. (2002). Foreign direct investment as technology transferred: Some panel evidence from
transition economies. The Manchester School, 70, 398–419.
BIRD and CHOI   
|
   23

Catrinescu, N., Leon-Ledesma, M., Piracha, M., & Quillin, B. (2006). Remittances, Institutions, and Economic Growth.
IZA Discussion Paper No. 2139, Bonn: IZA.
Chami, R., Barajas, A., Cosimano, T., Fullenkamp, C., Gapen, M., & Montiel, P. (2008). Macroeconomic consequences
of remittances. IMF Occasional Paper, No. 259, Washington, DC: International Monetary Fund.
Chami, R., Fullenkamp, C., & Jahjah, S. (2003). Are immigrant remittance flows a source of capital for development?
IMF Working Paper, No.189. Washington, DC: International Monetary Fund.
Clemens, M. A., Radelet, S., Bhavnani, R., & Bazzi, S. (2011). Counting chickens when they hatch: Timing and the
effects of aid on growth. The Economic Journal, 122(561), 590–617.
Collier, P., & Dollar, D. (2002). Aid allocation and poverty reduction. European Economic Review, 46, 1475–1500.
Collier, P., & Dollar, D. (2004). Development effectiveness: What have we learnt? The Economic Journal, 114(496),
F244–F271.
Craigwell, R., Jackman, M., & Moore, W. (2010). Economic volatility and remittances. International Journal of
Development Issues, 9, 25–42.
Dalgaard, C. J., Hansen, H., & Tarp, F. (2004). On the empirics of foreign aid and growth. The Economic Journal,
114(496), F191–F216.
Diaz Gonzales, E. (2009). The impact of remittances on macroeconomic stability: The cases of Mexico and Central
America. CEPAL Review, 1–19.
Doucouliagos, H., & Paldam, L. (2008). Aid effectiveness and growth: A meta-analysis. European Journal of Political
Economy, 24, 1–24.
Dreher, A., Eichenauer, V., & Gehring, K. (2013). Geopolitics, aid, and growth. Center for Economics Studies and IFO
Institute, Working Paper No. 4299, 49pp.
Driffield, N., & Jones, C. (2013). Impact of FDI, ODA and migrant remittances on economic growth in developing
countries: A systems approach. The European Journal of Development Research, 25(2), 173–196.
Easterly, W., Levine, R., & Roodman, D. (2004). Aid, policies and growth: Comment. American Economic Review, 94,
774–780.
Edwards, A. C., & Ureta, M. (2003). International migration, remittances and schooling: Evidence from El Salvador.
Journal of Development Economics, 72, 429–461.
Faini, R. (2006). Remittances and the brain drain. IZA Discussion Paper No. 2155, Bonn: Institute for the Study of
Labor, 1–21.
Fajnzylber, P., & López, J. H. (2007). Close to home: The development impact of remittances in Latin America.
Washington, DC: World Bank. 89 pp.
Fayad, G. (2011). Remittances: Dutch disease or export led growth? OxCarre Research Paper Series, 57, University of
Oxford, 1-31.
Giuliano, P., & Ruiz-Arranz, M. (2005). Remittances, financial development, and growth. IMF Working Paper 05/234,
Washington, DC: International Monetary Fund.
Giuliano, P., & Ruiz-Arranz, M. (2009). Catrinescu,Remittances, financial development, and growth. Journal of
Development Economics, 90, 144–152.
Globerman, S., & Shapiro, D. (1999). The impact of government policies on foreign direct investment: The Canadian
experience. Journal of International Business Studies, 30, 513–532.
Guillaumont, P., & Le Goff, M. (2010). Aid and remittances: Their stabilizing impact compared. FERDI, Working
Papers on Development Policies, 12, 35pp.
Gupta, S., Pattillo, C. A., & Wagh, S. (2009). The effect of remittances on poverty and financial development in Sub-
Saharan Africa. World Development, 37, 104–115.
Haddad, M., & Harrison, A. (1993). Are there positive spillovers from direct foreign investment? Evidence from panel
data for Morocco. Journal of Development Economics, 42, 51–74.
Hansen, H., & Tarp, F. (2000). Aid effectiveness disputed. Journal of International Development, 12, 375–398.
Hermes, N., & Lensink, R. (2003). Foreign direct investment, financial development and economic growth. Journal of
Development Studies, 40, 142–163.
Hsiao, C., & Shen, Y. (2003). Foreign direct investment and economic growth: the importance of institutions and urban-
ization. Economic Development and Cultural Change, 51(4), 883–896.
Imai, K., Gaiha, R., Ali, A., & Kaicker, N. (2011). Remittances, growth and poverty: New evidence from Asian coun-
tries, Economics Department Working Papers, No. 1125, University of Manchester.
 |
24       BIRD and CHOI

International Monetary Fund (IMF). (2005). Two current issues facing developing countries. World Economic Outlook,
April, Washington DC, 3–39.
Jidoud, A. (2015). Remittances and macroeconomic volatility in African countries. IMF Working Paper, No. 49,
Washington, DC: International Monetary Fund.
Kilby, C., & Dreher, A. (2010). The impact of aid on growth revisited: Do donor motives matter? Economics Letters,
107, 338–340.
Lartey, E. K., Mandelman, F., & Acosta, P. A. (2008). Remittances, exchange rate regimes and Dutch disease: A panel
data analysis. Federal Reserve Bank of Atlanta, Working Paper 12.
Li, X., & Liu, X. (2005). Foreign direct investment and economic growth: An increasingly endogenous relationship.
World Development, 33, 393–407.
Lopez, H., Molina, L., & Bussolo, M. (2007). Remittances and the real exchange rate. World Bank Policy Research
Working Paper, 4213, Washington, DC: World Bank, 33pp.
Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of economic growth. Quarterly Journal
of Economics, 407–437.
Mekasha, T. J., & Tarp, F. (2013). Aid and growth: What meta-analysis reveals. Journal of Development Studies, 49,
564–583.
Mencinger, J. (2003). Does foreign direct investment always enhance economic growth? Kyklos, 56, 491–508.
Morrissey, O. (2015). Why do economists disagree so much on aid effectiveness? Aid works (in mysterious ways),
Initial Draft paper for presentation ant the IMF-CFD Conference on Financing for Development, Geneva, April
15–17, 2015, 18pp.
Mundaca, B. G. (2009). Remittances, financial market development and economic growth: The case of Latin America
and the Caribbean. Review of Development Economics, 13, 288–303.
Nowak-Lehmann, F., Dreher, A., Herzer, D., Klasen, S., & Martínez-Zarzoso, I. (2012). Does foreign aid really raise per
capita income? A time series perspective. Canadian Journal of Economics, 45, 288–313.
Nunnenkamp, P., & Stracke, R. (2008). Foreign direct investment in post reform India: Likely to work wonders for
regional development? Journal of Economic Development, 33, 55–84.
Nwaogu, U. G., & Ryan, M. J. (2015). FDI, foreign aid, remittances and economic growth in developing countries.
Review of Development Economics, 19, 100–115.
Rajan, R. G., & Subramanian, A. (2008). Aid and growth: What does the cross-country evidence really show? Review
of Economics and Statistics, 90, 643–665.
Ramirez, M. D., & Sharma, H. (2008). Remittances and growth in Latin America: A panel unit root and panel cointe-
gration analysis. Yale Economics Department Working Paper, No. 51.
Rapoport, H., & Docquier, F. (2006). The economics of migrants’ remittances. IZA Discussion Paper, No. 1531, Bonn,
Germany.
Ratha, D. (2003). Workers’ remittances: An important and stable source of external development finance. Global
Development Finance 2003: Striving for Stability in Development Finance, 157–175, Washington, DC: World Bank.
Razin, A., Sadka, E., & Yuen, C. W. (1999). Excessive FDI under asymmetric information. NBER Working Paper, No
7400, Cambridge, MA: National Bureau of Economic Research.
Roodman, D. (2007). The anarchy of numbers: Aid, development and cross country empirics. World Bank Economic
Review, 21, 255–277.
Roodman, D. (2015). A replication of “counting chickens when they hatch”, (Economic Journal, 2012). Public Finance
Review, 43, 256–281.
United Nations. (2015). Report of the Third International Conference on Financing for Development, Addis Ababa, July,
United Nations, New York.
Yiheyis, Z., & Woldemariam, K. (2016). The effect of remittances on domestic capital formation in select African coun-
tries: A comparative empirical analysis. Journal of International Development, 28, 243–265.

How to cite this article: Bird G, Choi Y. The effects of remittances, foreign direct
investment, and foreign aid on economic growth: An empirical analysis. Rev Dev Econ.
2019;00:1–30. https​://doi.org/10.1111/rode.12630​
BIRD and CHOI   
   25
|
APPENDIX 1

Data definitions, summary statistics, and sample

Variable Description (World Bank ID)
Growth (annual %) GDP per capita growth based on constant 2010 US$ (NY.GDP.PCAP.
KD.ZG)
Remittances (% of GDP) Personal remittances comprise personal transfers and compensation of
employees (BX.TRF.PWKR.DT.GD.ZS)
FDI (% of GDP) Foreign direct investment, net inflows (BX.KLT.DINV.CD.WD)
ODA (% of GNI) Net ODA received (DT.ODA.ODAT.GN.ZS)
Gross capital formation (% of GDP) Formerly gross domestic investment (NE.GDI.TOTL.ZS)
Education Average years of secondary schooling (Barro & Lee, 2013)
Log real GDP per capita Log of GDP per capita (constant 2010 US$) (NY.GDP.PCAP.KD)
Population growth Annual population growth rate (SP.POP.GROW)
Inflation Measured by the consumer price index (FP.CPI.TOTL.ZG)
Government consumption (% of GDP) General government final consumption expenditure (NE.CON.GOVT.
ZS)
Openness (% of GDP) Sum of exports and imports of goods and services measured as a share
of gross domestic product (NE.TRD.GNFS.ZS)
Current account balance (% of GDP) Sum of net exports of goods and services, net primary income, and net
secondary income (BN.CAB.XOKA.GD.ZS)
Source: World Development Indicators, World Bank.

Summary statistics
Variable Obs Mean SD Min Max
Growth rates 378 1.68 3.20 –18.68 12.88
Remittances (% of GDP) 343 8.16 18.01 0.01 194.80
ODA (% of GNI) 368 6.27 7.05 0.01 61.66
FDI (% of GDP) 377 2.71 4.17 –3.56 52.07
Gross capital formation (% of GDP) 376 22.87 7.10 3.06 63.76
Inflation rate (CPI) 345 40.05 241.70 –0.80 2692.45
Government consumption (% of GDP) 368 13.76 5.41 3.69 37.53
Openness (% of GDP) 377 72.62 36.12 13.38 235.67
Current account balance (% of GDP) 368 –4.85 7.06 –34.16 36.72
Education (years of secondary schooling) 408 1.88 1.38 0.06 6.44
Log real GDP per capita 374 7.35 0.84 5.61 9.14
Population growth 406 1.84 1.14 –2.34 6.60

List of countries in full sample

Albania
Algeria
Armenia
Bangladesh
Benin
 |
26       BIRD and CHOI

Bolivia
Cambodia
Colombia
Costa Rica
Dominican Republic
Ecuador
Egypt
El Salvador
Fiji
Gambia
Guatemala
Guyana
Haiti
Honduras
India
Jamaica
Jordan
Kenya
Kyrgyz Republic
Lesotho
Liberia
Mali
Mauritius
Mexico
Moldova
Mongolia
Morocco
Nepal
Nicaragua
Pakistan
Paraguay
Peru
Philippines
Senegal
Serbia
Sierra Leone
Sri Lanka
Sudan
Swaziland
Tajikistan
Togo
Tonga
Tunisia
Uganda
Ukraine
Vietnam
(51 countries)
BIRD and CHOI   
|
   27

Countries by region
East Asia and Pacific
Cambodia
Fiji
Mongolia
Philippines
Tonga
Vietnam
(6)
Middle East and North Africa
Algeria
Egypt
Jordan
Morocco
Tunisia
(5)
Europe and Central Asia
Albania
Armenia
Kyrgyz Republic
Moldova
Serbia
Tajikistan
Ukraine
(7)
South Asia
Bangladesh
India
Nepal
Pakistan
Sri Lanka
(5)
Latin America and Caribbean
Bolivia
Colombia
Costa Rica
Dominican Republic
Ecuador
El Salvador
Guatemala
Guyana
Haiti
Honduras
Jamaica
Mexico
Nicaragua
Paraguay
 |
28       BIRD and CHOI

Peru
(15)
Sub-Saharan Africa
Benin
Gambia
Kenya
Lesotho
Liberia
Mali
Mauritius
Senegal
Sierra Leone
Sudan
Swaziland
Togo
Uganda
(13)
Countries by income level
Low-income countries (23)
Bangladesh
Benin
Cambodia
Gambia
Guyana
Haiti
Honduras
Kenya
Kyrgyz Republic
Lesotho
Liberia
Mali
Moldova
Nepal
Nicaragua
Pakistan
Senegal
Sierra Leone
Sudan
Tajikistan
Togo
Tonga
Uganda
Middle-income countries (28)
Albania
Armenia
Bolivia
Egypt
BIRD and CHOI   
|
   29

El Salvador
Fiji
Guatemala
India
Mongolia
Morocco
Paraguay
Philippines
Sri Lanka
Swaziland
Ukraine
Vietnam
Algeria
Colombia
Costa Rica
Dominican Republic
Ecuador
Jamaica
Jordan
Mauritius
Mexico
Peru
Serbia
Tunisia
 |
30       BIRD and CHOI

APPENDIX 2

T A B L E A 1   Pooled and panel ordinary least squares (OLS), fixed effects vs GMM (annual data), 1976–2015

Variables Pooled OLS Panel OLS Fixed Effects System GMM

Remittances/GDP –0.006 –0.006 –0.022 –0.007
(0.01) (0.02) (0.04) (0.02)
ODA/GNI –0.002 –0.002 0.013 –0.006
(0.02) (0.01) (0.02) (0.02)
FDI/GDP 0.098*** 0.098*** 0.108*** 0.091***
(0.03) (0.03) (0.02) (0.03)
Gross capital formation 0.090*** 0.090*** 0.107** 0.120***
(0.02) (0.03) (0.04) (0.03)
Labor –0.009 –0.009 –0.018 –0.009
(0.01) (0.01) (0.04) (0.02)
Log real GDP per capita –0.604*** –0.604*** 0.200 –0.532***
(0.14) (0.15) (0.85) (0.18)
Population growth –0.730*** –0.730*** –0.919*** –0.761***
(0.12) (0.13) (0.24) (0.14)
Inflation –0.001*** –0.001*** –0.001*** –0.001***
(0.00) (0.00) (0.00) (0.00)
Government –0.120*** –0.120*** –0.204*** –0.154***
consumption
(0.02) (0.03) (0.05) (0.04)
Openness 0.008*** 0.008** 0.024*** 0.009**
(0.00) (0.00) (0.01) (0.00)
Current account balance 0.061*** 0.061*** 0.071*** 0.059**
(0.02) (0.02) (0.02) (0.03)
Observations 1,266 1,266 1,266 1,266
R-squared 0.259 0.258 0.211 0.252
Number of countries 63 63 63 63
Note: Robust standard errors in parentheses.
***p < .01, **p < .05.