Working Paper Series: Special Edition of 2016 to 2018 Interns

3. Review of Literature I.

Theoretical Framework Literature on remittances identified two main theories explaining the motives to remit. The two theories are the Pure Altruism Theory and the Pure Self-interest Theory. The Pure Altruism theory states that the welfare statuses of family members in the domestic country are what drives remittances inflow. Chami et al. (2008) reported that the migrant’s utility is a function of his family consumption function, implying that the migrant is satisfied when the welfare of his family is better off. They also stated that the migrant is motivated to remit more funds to his family when there are unfavourable economic conditions prevailing in the home country. Therefore, under the Pure Altruism model, remittances are countercyclical and tend to increase in times of deteriorating economic conditions domestically. They concluded that remittances are received by households with a higher marginal propensity to consume. The predominance of consumption in the end uses of remittance funds all indicate that remittances attempt to compensate the receiving economy for poor economic performance, and therefore, may not direct significant quantities toward investment. This is an important role in the altruism theoretical framework. Russell et al (1986) suggested that capital flows such as FDI are profit driven, and have a positive correlation with GDP growth. Their empirical estimations also revealed considerable evidence that remittances are negatively correlated with per capita GDP growth, suggesting that they are used to offset poor current economic situation of households. This led them to believe that remittances differ greatly from private capital flows in terms of their motivation, and they do not serve as capital for economic development. Feeny, Iansiraroj and McGillirray (2013) said that remittances, if are perceived to be permanent, may tend to stimulate additional consumption rather than investment, even in the presence of credit constraints. This would imply positive effects on household welfare, but not necessarily on aggregate economic growth. Ukeje and Obiechina (2013) complimented Feeny et al (2013) by highlighting that remittances undermine productivity and growth in low-income countries because they are readily spent on consumption likely to be dominated by foreign goods rather than on productive investments which will subsequently enhance growth.

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