This paper departs from the assumption prevalent in existing empirical literature that remittances are used either to increase consumption or to increase investment in developing countries. Instead, the present investigation demonstrates that a significant portion of remittances is no longer available for domestic resource mobilization when they are used for debt servicing, capital flight, or reserve accumulation (reverse flows). Empirical results obtained by employing Pooled Mean Group (PMG) approach on a panel of 36 developing countries over the period 1980 to 2006 finds that a one per cent increase in the rate of remittance flows increased the rate of consumption by roughly 0.8%, and had no statistically discernable effect on the rate of investment. These results also indicate that approximately 20% to 27% of remittance flows have been diverted to finance reverse flows. Moreover, changes in the rate of remittance flows tended to be positively correlated with changes in debt service payment-to-income ratios and the rate of reserve accumulation relative to income.

December 24, 2010.