Remittance inflows and economic development in Rwanda

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Kadozi, E.

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2019

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Kadozi, E. (2019). Remittance inflows and economic development in Rwanda.

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536731-L-sub01-bw-Kadozi 536731-L-sub01-bw-Kadozi 536731-L-sub01-bw-Kadozi 536731-L-sub01-bw-Kadozi Processed on: 11-10-2019 Processed on: 11-10-2019 Processed on: 11-10-2019

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Remittance Inflows and Economic Development in Rwanda

ACADEMISCH PROEFSCHRIFT ter verkrijging van de graad van doctor

aan de Universiteit van Amsterdam op gezag van de Rector Magnificus

prof. dr. ir. K.I.J. Maex

ten overstaan van een door het College voor Promoties ingestelde commissie, in het openbaar te verdedigen in de Agnietenkapel

op donderdag 28 november 2019, te 10:00 uur door Edward Kadozi

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Promotiecommissie:

Promotor: prof. dr. G.R.D. Underhill Copromotor: prof. dr. G.C.A. Junne

Universiteit van Amsterdam Universiteit van Amsterdam

Overige leden:

Institut de Researche sur le Development, Paris prof. Flore Gubert

prof. dr. Jan Rath prof. D. Mügge dr. W. Schudel dr. Luc Fransen

Universiteit van Amsterdam Universiteit van Amsterdam

De Nederlandsche Bank Universiteit van Amsterdam Faculteit der Maatschappij- en Gedragswetenschappen

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III

Dedication

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IV

Acknowledgements

It would be of no moral value to conclude this doctoral research without cherishing the significance of those who have been behind the success of my doctoral thesis.

First of all, I want to sincerely recognize and appreciate Prof. dr. Geoffrey Underhill, my promoter. Without you, I would not have gotten anywhere. You walked with me through the process of finding financial support and your advice, guidance and support helped me and encouraged me to move forward. You took the time to understand my issues, took owned them forward and helped me to work through everything. I am so grateful for your research guidance and support. You have molded and shepherded me throughout this doctorate research work. You inspired me when I was struggling to define, frame and articulate the research problem I wanted to address and you provided me with a clear direction. This was a breakthrough to me. You challenged me to think critically, to be concise and frame my arguments. Your profound influence and guidance will be forever treasured. What you did for me goes far beyond what I can express in one paragraph. Thank you for everything!

I am so grateful to the members of my supervisory committee, Prof. dr. Gerd Junne, Assistant Prof. Sijeong Lim, and Prof. Thomas Kigabo, for your valuable time. Your comments and orientation improved my technical and scholarly understanding of research and contributed to the overall improvement of my thesis. Doctor. Sijeong, your rigorous econometric analysis and attention to detail not only improved the quality of my research, but will also serve as the backbone for the rest of my scholarly work. Prof. Kigabo, I know it has not been easy for you to find time to work with me, but you have always managed to do so. Your consistent attention to the local context and implications of my research findings for local problems continuously helped me to customize my research to the Rwandan context. I have treasured your continuous encouragement.

My special thanks and recognition go to Prof. dr. Gerd Junne who has been with me on this doctoral research journey. Your kind support began when we met in Accra, Ghana, in October, 2010. You decided to make my long-term dream to pursue a PhD at the University of Amsterdam. I had no confidence in it working out, except by hope. You initiated and guided the process. Besides that, I recognize and treasure your continued support, advice, care and facilitation throughout this journey. I cannot imagine how I would have managed without you. You have been always a reliable person in times of need during this journey. You have and will always challenge me to do good (without expecting anything return) for the rest of my life.

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V

There are more people to thank both inside and outside the University of Amsterdam. Space does not allow me to thank each and every one of you, but here is a brief attempt. I am thankful to Prof. Dr. Brian Burgoon; your initial advice and research methods class helped me to situate my reasoning and the conceptual framing of my research topic and, importantly, to get started. My PhD colleagues, your support, advice and encouragement cannot be underestimated. Dr. Jessica Salvatore, your Stata support on my first paper was a breakthrough and remarkable, thank you. Dr. Joep Schaper, I always remember your kindness when you picked me up at Schiphol Airport my first time in the Netherlands when I did not know where to go. Your showed me everything that day and I was able to go from there. Thank you! Dr. Kasim Ggombe, thank you for the technical support, advice and encouragement on my second paper. Your kind support and advice will always be treasured.

I received financial support from the Amsterdam Institute of Social Science and Research (AISSR), the Belgian Technical Cooperation (BTC), and my former Institution, the Capacity Development and Employment Service Board. Without financial support from these institutions I would not have been able to conduct this doctoral research. I remain indebted to them for their distinct and kind support. Besides that, I am grateful to my institution and the Government of Rwanda for giving me permission to pursue my doctoral research.

Last but not least, my heartfelt thanks and appreciation go to my family, my wife and children. My family (on both sides), you have unfailingly supported me and my wife through this journey. You stood in for me during my absence, you encouraged me and Raissa to pursue our dream. I have no space to thank everyone that has helped me by name, but thank you sincerely. To Raissa and my children, you are special to me. I do not have the words to express my deep and sincere appreciation and gratitude for your sacrifice in this journey. I know it has deprived you of the time and care you deserved from me. Regardless of what I have learned, this doctoral journey has been a challenging, but also a good experience for me, Raissa, Ganza and Ineza. You all sacrificed a lot and I will never take that for granted. When I met Raissa, I shared with her my dream to do a PhD. She was instantly committed to supporting me. She has upheld that commitment, irrespective of the costs involved. Beyond that you have encouraged me when I was discouraged. Thank you for everything.

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VI Table of Contents Dedication ... III Acknowledgements ... IV Abbreviations ... X CHAPTER ONE ... 1 Introduction ... 1

1.0 Setting the Stage ... 1

1.1 The Focus of the Study and Research Questions ... 3

1.2 Literature Review: Remittances and Economic Development ... 5

1.3 Theoretical Approaches ... 7

1.4 Empirical Strategies ... 12

1.5 Empirical Findings ... 13

1.6 Contribution to the Field ... 15

1.7 Policy Implications ... 17

1.8 Future Research ... 20

1.9 Thesis Structure ... 22

2.0 Literature Review: Remittances and Economic Development ... 23

2.1 Definition of Key Concepts ... 24

2.1.1 Remittances ... 24

2.1.2 Consumption Expenditure per Adult Equivalent ... 25

2.1.3 Economic Development ... 26

2.2 Linking Remittances to Development ... 31

2.3 Theoretical Approaches ... 33

2.3.1 The Macroeconomic Approaches ... 33

2.3.1.1 The National Account Model ... 34

2.3.1.2 The Endogenous Growth Model ... 37

2.3.2 The Microeconomic Approaches ... 40

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VII

2.3.2.2 Determinants of Migrant Remittance Inflows and Motivations to Remit ... 43

2.3.2.1 The Altruistic Motive ... 43

2.3.2.2 The Self-Interest Motive ... 44

2.3.2.3 The Loan Motive ... 46

2.3.2.4 The Co-Insurance Motive ... 47

2.4 Empirical Debates ... 48

2.4.1 The Macroeconomic Implications of Remittances ... 49

2.4.1.1 Remittances and Economic Growth ... 49

2.4.1.2 Remittances, Institutions and Economic Growth ... 55

2.4.2 The Microeconomic Implication of Remittances ... 60

2.4.2.1 Remittances and Poverty ... 61

2.4.2.1 Remittances and Inequality ... 63

2.5 Synthesis ... 66

2.5 Conclusion ... 73

CHAPTER 3 ... 75

3.0 The Novel and Conceptual Framework ... 75

3.1 Novelty ... 77

3.2 Conceptual Framework ... 79

CHAPTER FOUR ... 87

4.0 Remittance Inflows to SSA Countries and Case Selection of Rwanda ... 87

4.1 The Case Selection of Rwanda ... 93

CHAPTER FIVE ... 103

5.0 Cross-Country Analysis: Remittances and Economic Growth in SSA Countries .. 103

5.1 Data and Descriptive Analysis ... 104

5.2 Econometric Techniques ... 107

5.3 Factors Influencing the Remittance-Growth Effect in SSA Countries ... 109

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VIII

5.4.1 Remittances and Economic Growth in SSA countries ... 112

5.4.2 Results of Instrumental Variable Techniques ... 114

5.4.3 The Conditional Effects of the Remittance-Growth Nexus in SSA Countries .... 116

5.5 Remittances and Economic Growth in Rwanda ... 121

CHAPTER SIX ... 129

6.0 Remittances and Consumption Expenditure per Adult Equivalent ... 129

6.1 Data and Descriptive Statistics ... 130

6.1.1 The Covariates and Outcome Variables ... 133

6.1.2 Descriptive Statistics ... 134

6.2 Methodology: The Ordinary Least Square Approach ... 140

6.3 Empirical Results and Discussion ... 142

6.3.1 Effects of Remittances on Household Consumption Expenditure per Adult Equivalent ... 142

6.3.2 International Remittances, Income Distribution and Development Outcomes .... 146

CHAPTER SEVEN ... 155

7.0 Remittances and Development Outcomes ... 155

7.2 The Propensity Score Matching Approach ... 158

7.3 Empirical Results and Discussion ... 162

7.3.1 Effect of Remittances on Poverty ... 164

7.3.2 Effect of International Remittances on Other Development Outcomes ... 166

7.3.3Balance Test and Common Support Condition ... 175

7.3.4 Robustness and Sensitivity Analysis ... 177

CHAPTER EIGHT ... 180

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IX

8.1 The Contribution of this Thesis ... 183

8.2 Policy Implications ... 185

8.3 Future Research ... 188

9.0 REFERENCES ... 191

10.0 ABSTRACT ... 202

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X

Abbreviations

AIC: Akaike Information Criterion ADF: Augmented Dicker-Fuller ATE: Average Treatment Effect ATT: Average Treatment on Treated BIC: Bayesian Information Criterion BoP: Balance of Payment

BPM: Balance of Payment Manual CPS: Credit to Private Sector ECM: Error Correction Model

EICV4: Enquête Intégrale sur Les Condition Vie des Ménages 4 ENR: Education Enrolment Rate

FARG: The Genocide Survivors Support and Assistance Fund FDI: Foreign Direct Investments

FE: Fixed Effects

GCF: Gross Capital Formation GDP: Gross Domestic Product

GMM: Generalized Methods of Moment GNP: Gross National Product

HQIC: Hannan-Quin Information criterion IMF: International Monetary Fund

IV: Instrumental Variables M3: Broad Money

NISR: National Institute of Statistics of Rwanda NELM: The New Economics of Labour Migration OLS: Ordinary Least Square

OPEN: Openness of the Economy PP: Philips Pera

PSM: Propensity Score Matching RE: Random Effects

Rem: Remittances Percentage to GDP

RWF: Rwandan Francs

SBIC: Schwarz Information Criterion 2SLS: Two Stage Least Square

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XI SSA: Sub-Saharan Africa

TFP: Total Factor Productivity

UNCTAD: United Nations Conference on Trade and Development VUP: Vision 2020 Umurenge Program