The Effect of Remittances on Economic Growth in Africa: The Role of Financial Development and Institutions

ABSTRACT This paper analyzes the effect of remittances on economic growth in a sample of 28 African countries over the period 1989–2020. We also examine the hypothesis that the effect of remittances on economic growth varies with the level of financial development and institutions in recipient countries. To this end, we use the new multidimensional measure of financial development and both aggregate and disaggregated indicators of institutions. The estimates are performed using a two‐step system Generalized Method of Moments (GMM) approach. Overall, our results show that remittances have a significant positive effect on economic growth. We find a substitution and complementarity relationship between remittances and financial development. This relationship is observed both when using traditional indicators of financial development and when using modern indicators. Moreover, we also find that better institutions enhance the positive effect of remittances on growth in Africa.