Effects of Foreign Aid and Remittances Flows on Saving and Investment in Developing South Asia: Panel Data Study

Md. Ahasan Ul Haque, Md. Golam Kibria and Md. Muhaiminul Islam Selim
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Md. Ahasan Ul Haque: Faculty Member, Department of Economics, Noakhali Science and Technology University, Bangladesh
Md. Golam Kibria: Post-Graduate Student, Department of Economics, Noakhali Science and Technology University, Bangladesh
Md. Muhaiminul Islam Selim: Faculty Member, Department of Economics, Noakhali Science and Technology University, Bangladesh

International Journal of Economics and Financial Research, 2021, vol. 7, issue 2, 21-27

Abstract: In this study, we investigate the impact of remittances and foreign aid (official foreign assistance) on investment and saving in South Asian countries. We also analyze the comparative influence of remittances and foreign aid in stimulating saving and investment. We use a sample of five South Asian countries over the period 1985-2018 and employ OLS and 2SLS methods to estimate the effect of remittance and foreign aid on saving and investment. The result reveals that remittance has a positive impact on saving but has no significant effect on investment and shows that foreign aid has no significant impact on saving but negatively influences investment. In line with our results, a rise in 10 percent of remittances in South Asia raises savings by 1.6 percent in the OLS estimates and by 1.7 percent when we use 2SLS. At the same time for a 10% increase in foreign aid decreases saving by 4.3% and 3.3%, respectively, in two methods. For the second regression, an increase in 10% remittances hamper investment by 1.3% and 1% for OLS and 2SLS, respectively. And for the analogous 10% increase in foreign aid decrease investment by 5.4% and 5.2%, respectively. However, if foreign aid is efficiently used, it can be an important complement to remittances by permitting households to overcome the minimum threshold level and they can use a bigger portion of their remittances for savings and investment motive.

Keywords: Remittance; Foreign aid; Migration; Saving; Investment; South Asia; Growth and development. (search for similar items in EconPapers)
Date: 2021
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