Remittances, Official Development Assistance, and Human Development in Africa: An Empirical Analysis

ABSTRACT Remittances are important sources of household income and foreign exchange in many developing countries. Official development assistance (ODA) also constitutes another major source of external finance for receiving countries, although it is on a relative decline. While the contributions of ODA and remittances to economic growth in developing countries have been a subject of numerous empirical studies, there is a paucity of comparable analysis on their implications for human development, especially in the context of Africa. This study assesses the relative contributions of ODA and remittances to human development outcomes in 35 African countries over three decades using panel-data estimation methods. The approach of the study includes exploring the factors that may condition the relationship between the two financial flows,on the one hand, and human development, on the other. The results of the study suggest that both ODA and remittances exerted modest favorable effects on human development in the typical country of study. The relationship between the two flows and human development index (HDI) remains positive when their coefficients are allowed to shift across different groups of the sample. However, differences are observed in their magnitude and statistical significance, suggesting the presence of factors that condition the said relationships. Accordingly, the HDI effect of ODA seems to be affected by the level of real GDP per capita, the quality of institutions, and the size and degree of instability of ODA flows. Official development assistance flows are found to exert at least as much marginal effect as remittances; and low but stable flows of ODA seem to have larger positive effect on human development than high but fluctuating ODA flows. The results of the study also suggest that recipients would benefit more from the inflows of remittances and ODA, among others, by improving the quality of their institutions.