The Impact of Remittance on Economic Growth and Poverty Reduction in Ethiopia

Abstract

This study examines the impact migrant remittances on economic growth and poverty reduction in Ethiopia using time series data over the period 1980-2011. Employing modem time series econometric techniques such as unit root tests, bound test co-integration approach and error correction techniques within an ARDL framework which yields more robust estimates. The results suggest that, remittances do have a significant impact on Economic growth by increasing real private investment and fixed capital accumulation which increase capital accumulation, reduction in current account deficit, external debt burden and improve education/skills of the households by improving human capital . Finding merge from this study that have a strong and statistically significant long run impact on poverty reduction, through the direct increase in the incomes of the poor, thus smoothing household consumption and easing capital constraints. The study suggested policies which aimed at sustained creases in remittances through the formal channel where significant amounts can be recorded and improve the impacts particularly to the poor. Furthermore, transaction costs in sending remittances should be lowered and also barriers to official remittance channels should be removed. For example, capital requirements on remittance services should be lowered and formal financial intermediaries should be widened by allowing domestic banks to operate overseas. Finally, it is strongly recommended that, the government could develop appropriate training or education programs to assist returning migrants or remittance receipts in making effective investment decision. In addition, the appropriate infrastructure should be developed to generate favorable investment climate and to complement investments out of remittance.