THE EFFECT OF INTERNATIONAL REMITTANCE ON ECONOMIC GROWTH AND INVESTMENT IN ETHIOPIA

Abstract

In recent times remittance sent by Ethiopian migrants has increased tremendously, generating reliable, most stable and even higher foreign currency compared to foreign direct investment (FDI), official development assistance (ODA) and the volatile export earnings. However the effect of remittance on overall economic growth is a most contested topic. Some findings relate remittance with increased consumptive behavior, increased domestic price, increased in equality and moral hazard. Conversely, others relate remittance with reduced poverty, increased investment on human capital, increased investment due to its potential as a source of capital and increased aggregate demand and employment due to consumption multiplier effect,. This study assesses the effect of remittance on economic growth and investment level of Ethiopia employing a time-series data mainly from NBE and MOFED for the period between 1984/85-2016/17. ARDL Bound testing approach incorporating Error correction model is employed to estimate the long-run and short-run effect of remittance on economic growth and investment. The result reveals that in the short-run remittance affects both economic growth and investment negatively due to remittance’s consumption smoothening role in the short run. Conversely, in the long run remittance affects both economic growth and investment positively, this shows the consumption multiplier effect on one hand and on the other the potential of remittance to serve as an alternative source of capital for investment and entrepreneurial purposes, in a face of credit market failure existed in most of developing countries. To enhance both the size and the positive role of remittance, government policies should concentrate on developing policies that attracts potential migrants investment, encourage/discourage formal/informal channels of remittance flow, discourage parallel exchange market, decrease cost of remittance and improve recipients accesses to banking in rural areas to improve saving habits. Keywords: