Remittances and Financial Development: A Negative Net Effect Across Developing Countries
A new HAPRI study, co-authored by Canh Phuc Nguyen (HAPRI Senior Research Associate) with Nguyen Doan, Luis Chavez‐Bedoya and Christophe Schinckus, finds that international remittances have a significant negative effect on overall financial development in developing countries, with financial access as a key exception. Its main contribution is identifying three transmission channels that explain this negative result.
Context
International remittances flow into many developing countries, and earlier research on whether they help or hinder financial development has produced mixed evidence. The study looks at financial development across several dimensions: the depth, access and efficiency of both financial institutions and financial markets.
Methods
The authors analyse 105 developing countries from 2003 to 2021. They estimate the overall effect of remittances with a two‐step system GMM estimator. They then use three‐stage least squares (3SLS) estimation to examine three transmission channels (domestic savings, the shadow economy and entrepreneurial activity), and test whether the effect is conditional on national characteristics.
Key findings
Remittances have a significant negative effect on overall financial development. The effect holds across most dimensions, including the depth and efficiency of both financial institutions and markets. The key exception is financial access, where remittances have a positive effect, promoting financial inclusion.
Remittances reduce domestic savings and stimulate the shadow economy, both of which hinder financial development.
Remittances also promote entrepreneurial activity, which supports financial development, but the net effect remains negative.
The negative impact is stronger in countries with a colonial history, a civil law system, high FDI, high natural resource rents and a highly dependent population. It is weaker, or even positive, in linguistically homogeneous countries and in those with a large agricultural sector.
Policy implications
The authors conclude that policymakers must implement targeted strategies to direct remittances away from informal activities and consumption and towards formal investment and entrepreneurship to harness their developmental potential.
Keywords:
International Remittances
Financial Development
Developing Countries
Shadow Economy
Domestic Savings
Entrepreneurship
Link:
Citation:
Nguyen, C. P., Doan, N., Chavez‐Bedoya, L., & Schinckus, C. (2026). The Contribution of International Remittance to Financial Development in Developing Countries: A Further Investigation. International Journal of Finance & Economics, 31(4), 5544-5572.
