The Effects of Remittances on Output per Worker in Sub‐Saharan Africa: A Production Function Approach

• Published date: 01 September 2016
• Author: John Ssozi,Simplice A. Asongu
• Date: 01 September 2016
• DOI: http://doi.org/10.1111/saje.12100

THE EFFECTS OF REMITTANCES ON OUTPUT PER

WORKER IN SUB-SAHARAN AFRICA: A PRODUCTION

FUNCTION APPROACH

JOHN SSOZI

*

AND SIMPLICE A. ASONGU

†

Abstract

This paper uses a production function to examine the channels through which remittances affect

output per worker in 31 Sub-Saharan African countries from 1980 to 2010. Lagged remittances

increase physical capital per worker, average years of schooling and total factor productivity, but

the effectiveness of remittances varies with the income level of the recipient nation. Although

remittances have increased both physical capital and total factor productivity among the upper

middle income nations, among the lower middle income, they have increased only the physical

capital. Meanwhile a reduction in institutional risk has encouraged investment and efficiency, but

its relationship to the effectiveness of remittances has been inconclusive.

JEL Classification: F22, F24, F35, F43, F63, O15, O16, O43, O55

Keywords: Remittances, output per worker, production function, Sub-Saharan Africa

1. INTRODUCTION

According to the African Economic Outlook report (AEO, 2013), external financial flows

have quadrupled since 2000 and were projected to have reached over USD 200 billion in

2014. Fig. 1 illustrates that official remittances (REMI)1have overtaken Official

Development Assistance (ODA) and foreign direct investment (FDI) as the largest source

of international flow of financial resources into Africa. The composition of these flows has

also changed progressively with foreign investments and remittances from countries

outside the Organization for Economic Co-operation and Development (OECD)

underpinning this positive trend.

However, the AEO (2013) report points out that the aggregate numbers in Fig. 1 hide

the differences in the relative importance of the financial flows into countries at different

levels of average income, namely,the low income, lower middle income and upper middle

income countries. Among the 27 low income countries, ODA makes more than 50% of the

total external financial flows; however, as a share of gross domestic product (GDP), while

still highest, it is on a decline from an average of 13.1% in 2000-2005 to 9.5% in 2013 and

was projected to have been 8.9% in 2014. On the other hand, among the lower middle

* Corresponding author: PhD, Department of Economics, Hankamer School of Business, Baylor

University, Waco, TX 76798, USA. E-mail: John_Ssozi@baylor.edu

†Research Department of the African Governance and Development Institute.

The authors are grateful to Voxi Heinrich Amavilah, Pham H. Van,and Tiffany D. Clarkfor the ver y

constructive comments and feedback. All errors remain those of the authors.

1The data for remittances do not include the unrecorded flows through formal and informal

channels. This suggests that total remittances are a lot higher than reported.

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of Economics

income African countries, remittances are the most important, representing approximately

55% of the external financial flows, whereas among the upper middle income African

countries, private investment, on average, accounts for 70% of total external flows over

2010-2014. In addition, although remittances are the largest single external flow to Africa,

in 2013, North Africa received close to half of all remittances due to its proximity to

Europe. Our sample includes: 16, 10 and 5 respectively of the 27 low income, 13 lower

middle income and 7 upper middle income countries in Sub-Saharan Africa (SSA). When

scaled by GDP, REMI are relatively higher than ODA and FDI among the middle-income

nations of SSA, most of which are included in our sample, thus making our sample very

representative for the study of remittances to the SSA.

Given the surge in remittances during the decade when economic growth in Africa has

also been at an all-time high, it is crucial to investigate how and whether remittances have

contributed to the economic performance of Africa. This paper uses a standard

production function framework to investigate the effects of remittances on output per

worker. Remittances do not directly enter a production function, but can purchase inputs

and/or encourage investment. Hence we seek to find out the channels through which

remittances impact output per worker by investigating their impacts on inputs, i.e. on the

contributions of physical capital, human capital and total factor productivity to output

per worker, while controlling for the official assistance flows, FDI and openness.

We find that the impacts of remittances are more indirect than direct, and with a lag.

Remittances are both in cash and in kind, but remitters not only send funds and

equipment, they also send entrepreneurial ideas on how funds, tools and businesses are to

be managed. There are several ways in which remittances can increase capital stock:

sending equipment and machinery, using the sent cash to purchase machinery, while

increased consumption demand can also induce capital investment. The idea that

remittances increase capital investment is supported by the positive effect from the lag of

remittances. The effect of remittances on human capital is also found to be lagged,

10

20

30

40

50

60

70

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

FDI

ODA

REMI

Figure 1. Total external financial flows to Africa (billions USD, current)

Source: African Economic Outlook 2013 © OECD 2013.

Note: FDI: foreign direct investment; ODA: official development assistance; REMI:

remittances.

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