The Impact of Remittances on the Economic Growth of Developing Countries: A Literature Review

Abstract: Firms, financial institutions and governments have been the main source for international financial flows to developing countries. Moreover, from the late 1990s remittances sent from migrants abroad to their home countries became a vital source of income as they exceed official development assistance or aids. Our interest concerns on how remittances affect economic growth in developing countries. However, we have come across considerable contradictory findings regarding the positive or negative contribution of remittances to a sustainable economic development. A main obstacle in detecting the effect on economic growth is due to the problem of measuring the real financial flows across countries and to the informal channels migrants use to send money. Unlike many studies, which are based on empirical method, this paper is based on a literature review as we are interested in a broader overview of the subject. Comparing various findings, we conclude that remittances contribute positively to economic growth. The level of contribution is based on how remittance receiving families use the inflows of money inflows. Both physical and human investment have a larger impact on the economic growth in a long-term perspective, while direct consumption on primary goods activate a multiplier effect of aggregate demand which results beneficial to the entire economy. Particularly attention is dedicated to the need of policy interventions to optimize the positive impact of remittances and prevent their possible bad side effects.