Financial development, remittances, and economic growth: Evidence from Ghana, 1979-2020

Acheampong, Kristen

Financial development, remittances, and economic growth: Evidence from Ghana, 1979-2020

Thesis / Dissertation

2023

Abstract

Over the last 40 – 50 years, there has been growing research interest in the role of remittances on developing countries' economic growth. Remittances, a source of foreign capital inflow, have grown tremendously given the rise in globalisation and the increase in international migration, mainly out of African countries. In Ghana, the value of remittances has been growing and is emerging as an important source of capital. Additionally, Ghana has the second highest magnitude of remittance inflows in Sub-Saharan Africa; however, the effects of this on economic growth are still contested in the literature and need to be further understood. At the same time, Ghana has experienced developments in its financial system, resulting in increased financial inclusion and potentially improved economic performance. However, there is no clarity on the relationship between financial development and economic growth in Ghana. As globalisation and technology lead to advances in the financial system, and as remittances into Ghana through the financial system continue to increase, it is important to examine the effect that remittances which pass through the financial system have on economic growth in Ghana. This study therefore examines the relationship between financial development, remittances, and economic growth in Ghana over the period 1979 – 2020 using four financial development proxies, namely, domestic credit to the private sector by banks and M2 money supply as the banking sector proxies, gross domestic savings as the financial market proxy, and a composite financial development index by Svirydzenka (2016) to give an overall view of the Ghanaian economy. The study employs various specifications of an augmented Solow (1957) model and estimates them by employing the ARDL Approach to Cointegration method (Pesaran et al., 2001). The study finds that financial development does not significantly impact economic growth and that remittances alone negatively affect economic growth. However, the combined effect of financial development and remittances on economic growth in Ghana is positive when remittances pass through the banking sector but negative when remittances pass through the financial market. Therefore, this study suggests that policymakers should ensure that the banking sector increases efficiencies and access to services and encourage remittance inflows through the formal banking sector to amplify its benefits to economic performance.

Keywords

Economics

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