External sources and economic growth-the role of foreign remittances: Evidence from Europe and Central Asia

Achieving higher level of economic growth in order to enhance social welfare is one of the primary motives of every country. However, developing countries have yet not achieved the desirable level of economic growth due to several socioeconomic and political factors prevailing domestically as well as globally. Therefore, the main purpose of this study is to empirically examine the effects of various external sources namely foreign remittances, foreign direct investment (FDI) and some other notable variables exports and investment on economic growth measured by real GDP per capita in 12 countries from Europe and Central Asia (ECA). This study utilizes annual panel data over the period of 1993–2013 for empirical investigation. After checking stationary properties of the data, Panel Ordinary Least Squares, Fully Modified OLS and Dynamic OLS methods have been employed as analytical techniques for parameters estimation. Empirical result reveals that foreign remittances and FDI inflows have significant positive effects on economic growth in ECA during the period under the study. In addition, the empirical results show that exports and investment also accelerate economic growth. The results of Dumitrescu and Hurlin causality test demonstrate that foreign remittances cause economic growth and economic growth causes FDI inflows. The feedback effect exists between external debt and economic growth. Economic growth leads exports validating growth-led exports hypothesis. Incoming FDI causes exports and exports cause FDI in Granger sense. Furthermore, the feedback hypothesis is valid for foreign aid and external debt, exports and external debt, exports and investment. The main points emerging from this study purport that both foreign remittances and FDI inflows are vital sources of economic growth in ECA. The findings are expected to guide the management authorities with reference to the effects of foreign remittances and incoming FDI on ECA economic growth and development. Moreover, ensuring macroeconomic stability in the recipient countries can help to create environment conducive to investment, thus, encourage immigrants and foreign investors to transfer remittances and make investments with higher degree of confidence. Consequently, it would have a positive multiplier effect on the entire macroeconomic performance of ECA economies.