Remittance-Growth Nexus: Does Financial Development Mediate? Evidence from Nepal and Tanzania

Abstract

The international labor movement is possible after economic globalization, and remittance maintains profound economic relations across countries. Having limited comparative studies, this study examines the impact of remittance on economic growth with the mediating role of financial development in Nepal and Tanzania, covering time series data from 1995 to 2023. This study applied the Autoregressive Distributed Lag (ARDL) model to examine the long run cointegration among variables. Long-run results revealed that remittance has a positive relation with economic growth in Nepal but does not significantly influence the growth of Tanzania. Regarding the interaction term of financial development and remittance, it hurts growth in Nepal and does not significant impact on growth in Tanzania. However, financial development positively influenced the economic growth in Tanzania, whereas no significant impact on growth in Nepal. Furthermore, physical and human capital and inflation have a negative relationship; rural population has a positive relationship; and trade openness has no significant relationship with growth in Tanzania. In contrast, in Nepal, trade openness has a positive relationship, rural population has a negative relationship, and physical capital and human capital have no significant relationship with growth. Moreover, in the short run, financial development positively influenced the growth in Tanzania, and the financial mediation negatively impacted the growth in Nepal. The findings, therefore, recommended that the government should channel remittances to human and physical capital formation that may foster sustained growth; otherwise, relying on import-led growth and a blithe attention to other sectors' development may lead to Dutch disease.

Keywords:       human capital, physical capital, trade, inflation, ARDL.