ETD2015-49 Great Atminaitė BD

POLITICAL INSTABILITY IN DEVELOPING COUNTRIES: THE EFFECT ON
REMITTANCE INFLOWS
A Thesis
Presented to the Faculty
of Economics and Politics programme at ISM University of Management and
Economics
in Partial Fulfilment of the Requirements for the Degree of
Bachelor of Economics
by
Greta Atminaitė
Advised by
Dr. Eglė Verseckaitė (Grzeskowiak)
May 2015
Vilnius
POLITICAL INSTABILITY: THE EFFECT ON REMMITANCE INFLOWS 2
Atminaitė, Greta. Political Instability in Developing countries: The Effect on Remittances
Inflows: [Manuscript]: Bachelor Thesis: Economics and Politics. Vilnius, ISM University of
Management and Economics, 2015.
Summary
Accelerated labour migration process has increased magnitude of remittances rapidly
during the last decade. It is claimed that remittances constitute one of the main sources of
external capital flows to developing countries. Therefore, there is a lack of academic
literature explaining variation of remittances: why some countries receive greater amount of
remittances than others? This paper analyses the impact of political instability on the
remittances inflows into developing countries. Thesis discusses the motives behind
remittances and a number of micro- and macro-economic determinants of remittances;
however, variation of remittances is not explained fully by economic determinants. Because
of this reason, this paper also examines political factors influencing remittances. Thus, I
review different approaches towards political instability. The presence of a political
instability in the country may have both a positive and a negative effects on economic
growth, also affecting remittance inflows. Political instability effects on remittances are dual:
remittances sent with the economic motive might get harmed because of an unstable political
situation, whereas remittances sent with the motive of risk-alleviating may increase during
instabilities and hardships. I raise hypothesis that higher political instability induce the
greater amount of remittances received by developing countries. In order to check empirical
validity of hypothesis I ran a panel regression analysis for a sample of 125 developing
countries. The results demonstrate that political instability within the regime has an impact on
the amount of remittances received. I verified hypothesis, therefore, the relationships are not
strong and additional research is needed.
Key words: remittances, political instability, economic growth, political violence

Table of contents
Introduction .................................................................................................................... 8
1. Remittances .............................................................................................................. 10
1.1. Definition and Variation of Remittances .......................................................... 10
1.2. Relevance of Remittances ................................................................................. 12
1.2.1. Effects of remittances on economic growth............................................... 13
1.2.1.1. Positive effects of remittances on economic growth. ......................... 13
1.2.1.2. Negative effects of remittances on economic growth. ........................ 15
1.2.2. Remittances, consumption and investment ................................................ 16
1.2.2.1. Remittances and consumption. ........................................................... 16
1.2.2.2. Remittances and investment. .............................................................. 18
1.2.3. Remittances, poverty and welfare. ............................................................. 19
1.2.4. Remittances and employment .................................................................... 20
1.3. Theories and Determinants of Remittances ...................................................... 21
1.3.1. Theories of labour migration and remittances ........................................... 21
1.3.2. Microeconomic determinants of remittances ............................................. 23
1.3.3. Macroeconomic determinants of remittances ............................................ 24
2. Political Instability ................................................................................................... 28
2.1. Definitions of Political Instability..................................................................... 28
2.2. Different Approaches Towards Political (In)Stability ...................................... 28
2.2.1. Instability within the political regime ........................................................ 29

2.2.1.1. Political stability as the absence of structural changes ....................... 29
2.2.1.2. Politically motivated violence............................................................. 30
2.2.1.3. Mass civil protest. ............................................................................... 32
2.2.2. Instability of the political regime ............................................................... 33
2.3. Effects of Political (In)Stability on Economic Growth..................................... 34
2.3.1. Political instability and negative effects on economic growth .................. 35
2.3.1.1. Political instability, political myopia and economic growth. ............. 35
2.3.1.2. Political instability, corruption, economic development and
remittances ................................................................................................................... 36
2.3.1.3. Political instability and productivity. .................................................. 37
2.3.1.4. Political instability, property rights and investment ........................... 38
2.3.2. Political instability and positive effects on economic growth. .................. 39
2.3.2.1. Political instability and household consumption. ............................... 39
2.4. Political Instability and Remittances: The Logic behind the Hypothesis ......... 40
3. Empirical research ................................................................................................... 42
3.1. Data Sample, Methodology and Variables ....................................................... 42
3.1.1. Sample selection ........................................................................................ 42
3.1.2. The dependent variable: remittances ......................................................... 43
3.1.3. The main explanatory (political) variables: political stability and polity .. 43
3.1.3.1. Political stability and the absence of violence .................................... 44
3.1.3.2. Polity. .................................................................................................. 45
3.1.4. Control variables. ....................................................................................... 45
3.1.4.1. Emigrant stock. ................................................................................... 45

3.1.4.2. GDP per capita .................................................................................... 46
3.1.4.3. Consumer price index (CPI) ............................................................... 46
3.1.4.4. Exchange rate. ..................................................................................... 47
3.1.5. Econometric equation. ............................................................................... 47
3.2. Panel Data Analysis .......................................................................................... 48
3.2.1. Normality of variables. .............................................................................. 48
3.2.2. OLS panel diagnostics. .............................................................................. 48
3.2.3. Linear time trend. ....................................................................................... 48
2.3.4. Heteroscedasticity and mulicollinearity. .................................................... 49
3.3. Comparison of Different Models ...................................................................... 49
3.3.1. Models in levels. ........................................................................................ 49
3.3.2. Models in differences. ................................................................................ 52
3.4. Interpreting the Results of the Final Regression Model ................................... 54
3.4.1. Significance of variables ............................................................................ 55
3.4.1.1. Political Stability. ................................................................................ 55
3.4.1.2. Polity. .................................................................................................. 56
3.4.1.3. Exchange rates .................................................................................... 56
3.4.1.4. Migrants_T. ......................................................................................... 56
3.4.1.5. Time. ................................................................................................... 57
3.4.1.6. Insignificant variables ......................................................................... 57
3.5. Limitations, Recommendations and Concluding Comments............................ 57
Conclusions .................................................................................................................. 60
Bibliography ................................................................................................................ 63
Appendices ................................................................................................................... 75
List of Tables
Table 1: Resource Flows to Developing Countries 1995 –

2014e.............................................11
Table 2: Top Remittances Receiving Countries 2009 - 2014..................................................12
Table 3: Comparison of Models in Levels: Dependent variable – Remittances_T; Independent
variable – Political Stability.....................................................................................................49
Table 4: Comparison of Models in Levels: Dependent variable – Remittances_T; Independent

variable - Polity........................................................................................................................50
Table 5: Comparison of Models in Differences: Dependent variable – d_Remittances_T;

Independent variable - d_Political_Stability...........................................................................52
Table 6: Comparison of Models in Differences: Dependent variable – d_Remittances_T;
Independent variable - d_Polity...............................................................................................53
Table 7: Final Model: Random-Effects: Dependent variable – Remittances; Independent
variable –
Political_Stablity.....................................................................................................................54
Table 8: Final Model: Random-Effects: Dependent variable – Remittances; Independent
variable - Polity.......................................................................................................................55
Introduction
This paper explores whether political instability has an effect on the volume of
remittances inflows in developing countries. Together with accelerated process of labour
migration, remittances have increased rapidly during the last decade and now constitute one
of the main sources of external capital flows to developing countries. Officially recorded
remittances flows to developing countries reached $414 billion in 2013, a 6.5 percent
increase compared to the previous year (World Bank, 2013). Remittances are the second
largest source of foreign exchange earnings for developing countries after Foreign Direct
Investment (FDI). Since remittances are directly received by the migrant workers’ families
who stayed behind in the workers’ home country, they are considered to have an important
impact on the household income and welfare.
There exist several theories explaining causes and results of migration and of
remittances sent by migrant workers to their country of birth. Most of the theories mainly
concentrate on the economic side of this concept, especially the neoclassical theory and the
new economics of labour migration. Some scholars also discuss the push and pull model that
provides information about the possible determinants of remittances, including both political
and economic factors. Presence of political situation, particularly political instability, is
mostly discussed as the push factor in a country of birth (Martin & Zurcher, 2008), as well as
it may cause the higher demand for remittances. Therefore, the main goal of this thesis is to
analyze whether the presence of political instability in the country of origin has an effect on
the volume of remittances inflows. To achieve this aim, the objectives of the paper are as
follows: (1) to examine economic theories and scholarly literature explaining the variance,
determinants and the consequences of remittances; (2) to analyze scholarly literature on the
political instability, the reasons behind instability and formulate the hypothesis; and (4) to test
the hypothesis empirically and formulate conclusions on the relationship between remittances
inflows and political instability in the country of origin.
This bachelor thesis paper is divided into three parts. Since remittances, the dependent
variable in my analysis, is the outcome of labour migration, in the first part I introduce
theories explaining the reasons and process of migration. Then I discuss the determinants of
remittances and the effect they generate on the home economies. The second part describes
political instability and its outcomes. I focus on the impact of political instability on the
economic growth, incentives and demand for remittances both from the sending and the
receiving actors’ perspective. The goal of the empirical part of this thesis is to find out
whether political instability has an effect on the amount of money remitted by migrant
workers. I conduct empirical research by means of statistical data analysis. Regression
analysis is run on a sample of 125 developing countries across the world. The time period of
the analysis is from 2000 until 2013. The thesis is concluded with a diversified final result.
Empirical results show that hypothesis cannot be fully rejected. I run two different regression
models – I verify my hypothesis with the first regression equation (independent variable –
political stability and the absence of violence) and I reject my hypothesis with the second
operationalization of my independent variable (independent variable – Polity IV score). In
other words, I verify that instability within the regime has a positive impact on remittances
received, while instability of the regime has a negative impact on the amount of remittances
received.
1. Remittances
International Organization of Migration (2004) defines migration as any kind of
movement of people either across an international border (international migration) or within a
state (internal migration). Commonly mentioned reasons that push people away from their
countries of origin are economic factors such as unemployment, need for capital, income,
trade, taxation and GDP per capita (Sorhun, 2011; Mihi-Ramirez & Kumpikaite-Valiuniene,
2013). In this chapter, I introduce the concept of remittances, which is very closely related to
migration; remittances are the consequence of migration processes. Also, I introduce the
determinants and consequences of remittances in developing countries.
1.1. Definition and Variation of Remittances
According to a United Nations paper by Alfieri and Havinga (2005), remittances are
defined as the sum of selected balance of payment flows. According to International
Organization of Migration (2009), remittances can be defined in more general and more
detailed ways: (1) remittances are financial flows associated with migration or (2) remittances
are monetary transfers that a migrant makes to the country of their origin. To be more precise,
according to the World Bank (2011), “remittances are personal cash transfers from a migrant
worker to a relative in the home country”. In addition, remittances can also be perceived as
funds invested, deposited or donated (both in cash and in kind) by the migrant worker (Petree
& Baruah, 2007).
In the following paragraph I describe factors that account for variation in remittances
flows. Workers’ remittances are one of the largest sources of financial flows to developing
countries (Barajas, Chami, Fullenkamp, Gapen & Montiel, 2009). Inflows of remittances to
developing countries have been significant, both as a share of gross domestic product (GDP)
and compared to foreign direct investment (FDI) and official development assistance (ODA)
(Global Economic Prospects Report, 2015). Based on the information in the Economic
Prospect Report (2015), remittances flows have risen steadily over the past decade and
currently it has averaged about 60 percent of the size of total GDP and about 80 percent of
reserves in some of the developing countries.
The situation of remittances and other financial flows (FDI, ODA, private debt and
portfolio equity) into developing countries is reflected in Table 1. I choose years 1995 –
2014e (data for 2014 is estimated) in order to show a broader picture of the situation for
particular financial flows. N/A stands for situations where information is not available. Table
1 reflects the situation where money transferred by migrant workers has outweighed ODA
since 2000 and has maintained a steady growth over the years. Officially recorded
remittances were $414 billion in 2013 in the developing countries, while global remittances
flows, including high-income countries, were $542 billion. Remittances are expected to grow
by 4.4 percent in 2015 and raise flows to US$454 billion; projections are based largely on
projected GDP growth rates in key remittance-sending countries.
Table 1
Resource Flows to Developing Countries 1995 – 2014e (US $ billions)
1995 2000 04 05 06 07 08 09 10 11 12 13 14e
Remittance 55 81 159 192 227 278 325 307 334 373 389 414 449
s
FDI 95 149 208 276 346 514 693 539 510 700 650 590 N/A
ODA 57 49 79 108 106 107 128 120 108 115 110 110 N/A
Private 83 27 93 165 211 434 157 85 280 210 330 N/A N/A
debt and
portfolio
equity
Source: World Bank database; World Bank, Migration and Development Brief, Migration
and Remittance Flows: Recent Trends and Outlook, 2013-2016, 2013.
It is complicated to track the overall amount of remittances across the world because
they are transferred to the country of origin not only using banks or other money sending
organizations, they can also be in other forms instead of money transfers, such as in the form
of cash or gifts (Carling, 2008). As a consequence, the World Bank estimates that the overall
level of remittances inflows across the globe could be 50 percent higher than it is officially
recorded.
To further provide information on remittances and their evolution process, Table 2
reflects top 2009 - 2014 remittance receipts that are officially recorded. It is possible to notice
a positive trend in most of the countries over the years. Since the amount of remittances
received by the developing countries is not yet available for 2014, the data is estimated.
Table 2
Top Remittances Receiving Countries 2009 – 2014e (US $ billions)
2009 2010 2011 2012 2013 2014e

India 49.20 53.48 62.49 68.82 69.97 71.00
China 41.6 52.46 61.57 57.98 59.49 64.14
Philippines 19.96 21.55 23.05 24.61 27.7 28.38
Mexico 22.07 22.08 23.58 23.36 23.02 24.23
Poland 8.09 7.57 7.64 6.93 6.98 7.95
Bangladesh 10.73 11.28 12.96 14.23 13.85 15.05
Nigeria 18.36 19.81 20.61 20.63 20.85 21.29
Pakistan 8.71 9.69 12.26 14.00 14.62 17.05
Morocco 6.26 6.42 7.25 6.50 6.08 6.81
Vietnam 6.01 8.26 8.60 10.00 11.00 11.40
Source: Migration Policy Institute. MPI Data Hub.
The time period in Table 1 and Table 2 partially corresponds to the time period of the
data selected for empirical research in this bachelor thesis and some of the countries
mentioned in the table are the part of the sample in the further research as well. Thus, it is
important to examine the reasons for the remittance variance among developing countries;
therefore, I analyze and identify them later in this thesis.
1.2. Relevance of Remittances
Migrant workers’ transferred money alleviates the poverty of their families back in
their countries of origin, enhancing households’ welfare and development. Money sent by
migrant workers is diffused to education, health and entrepreneurship activities, which leads
to improvements in human capital, raise the standard of living and provides security and
reduces uncertainty for the families during the times of economic downturns (UNCTAD,
2011; Clarke & Wallsten, 2004). The main difference between development assistance and
money remitted is that remittances are spent directly by the households of migrant workers
and this causes an income boost, especially in the developing countries (O'Neil, 2003). In the
following section I examine both direct and indirect effects of remittances among developing
countries from microeconomic and macroeconomic perspectives.
1.2.1. Effects of remittances on economic growth. There have been a plenty of
studies conducted in order to find out the existing correlation and/or causal relationships
between remittances and economic growth. Most of them have discovered that remittances
have a significant positive effect on a country’s economic growth and that remittances
stimulate the economy (El-Sakka & McNabb,1999; Connell & Conway, 2000; Glytsos, 2002;
Bouhga & Habe, 2004; Jongwanich, 2007; Acosta, Calderon, Fajnzylber & Lopez, 2008;
Thao, 2009; Vargas-Silva & Ruiz, 2009; Nsiah and Fayissa, 2011; Imai, Gaiha, Ali &
Kaicker, 2012; Chami & Fullenkamp, 2013; Salahuddin, 2013). Conversely, some
researchers share the opinion that remittances may be harming economic growth in the
recipient country (McCormick & Wahba, 2000; Chami et al., 2003; Rajan & Subramaniam,
2005; Catrinescu, Leon-Ledesma, Pracha & Quillin, 2006; Rahman, 2009; Barajas et al.,
2009; Siddique et. Al., 2010; Guha, 2013; Rabbi, Chowdhury & Hasan, 2013; Salahuddin &
Gow, 2015). In the following paragraphs I review two contrasting approaches towards the
relationship between remittances and economic growth.
1.2.1.1. Positive effects of remittances on economic growth. Many of the most recent
empirical studies, as well as and the earlier ones, argue that remittances have a positive effect
on growth of economy in developing countries. El-Sakka and McNabb (1999) argues that
most of the developing countries experience remittances as one of the major sources of
foreign exchange earnings that usually exceed private capital inflows and foreign aid in
recent years. Generally speaking, remittances have a positive impact on the current account
of the receiving economy, since they provide foreign exchange and additional savings that
might contribute to growth and shift a country’s economy towards international
competitiveness (Acosta et al., 2008).
Money transferred by the migrant workers increases the amount of funds running
through the banking system that consequently leads to financial development and economic
growth because of expanding economies of scale in financial intermediations (Chami &
Fullenkamp, 2013). Remittance recipient countries can usually invest more than they save,
import more than they export, spend more than they produce (Connell & Conway, 2000;
Glytsos, 2002). In addition, remittances comprise an important source of foreign exchange
earnings and it might be a tool helping to outweigh short-run foreign exchange shortages
when other financial flows decline due to external factors such as crises (UNCTAD, 2011;
Bouhga & Habe, 2004). Results of the empirical research conducted by Jongwanich (2007)
show that remittances comprise more than 10 percent of home countries’ GDP and are the
biggest source of foreign exchange earnings in Asia and the Pacific during the period 1993 –
2003.
Imai et al. (2012) investigated the relationship between economic growth, poverty and
remittances for 24 Asian and Pacific countries and revealed that remittances boost economic
growth and diminish poverty in the region. According to the study by Marwan et al., (2013) it
is demonstrated that there exists a long-run positive relationship between economic growth,
export and remittance. In addition, Salahuddin (2013) used ordinary least squares method in
order to evaluate the growth effects of remittances in the top remittance recipient countries
(Bangladesh, India, Pakistan and the Philippines). Scholar discovered a positive relationship;
however, the study did not find any long-run relationship. Similarly, Vargas-Silva and Ruiz
(2009) analyzed the Asian region during the period 1988 – 2007 and found that remittances
have a positive effect on home country’s GDP. Nsiah and Fayissa (2011) also concluded that
remittances have a positive impact on economic growth after analyzing data from 1985 –
2007 for 64 African, Asian, Latin American and Caribbean region countries. According to
Carling (2004), Martin (2004), Wets (2004), the short-run impacts on aggregate demand and
output can be noticed through enlarged consumption while the long-run effects on economic
growth induced by remittances in receiving countries can be felt through higher rates of
investment and savings. To sum up, remittances have a positive effect on the current account
of the receiving country; they also stimulate development of financial sector and increase
GDP of the home country of migrant workers’.
1.2.1.2. Negative effects of remittances on economic growth. Besides the number of
studies supporting the claim that remittances have a positive effect on growth of the
economy, there are critics who argue that remittances may have either a negative or at best a
non-effect on economic growth in the recipient countries. Guha (2013) refers to the Dutch
disease theory while explaining the consequences of remittances on economic growth.
Scholars introduce a micro-macro framework in order to create remittances’ transmission
channels through the economy. Results presented in the studies emphasize that remittances
might cause the real exchange rate appreciation, which leads to reallocation of sectoral
production. Further results reveal that several shocks in the remitting process might lead a
country’s economy “towards a negative growth path from the weakening of the traded sector”
(Salahuddin & Gow, 2015).
Similarly, several empirical studies propose the idea that a significant capital inflow
might cause appreciation in the real exchange rate, which can challenge the competitiveness
of the export sector (Rabbi et al., 2013; Acosta et al., 2008) and deteriorate the welfare of
families not receiving remittances (McCormick & Wahba, 2000). Barajas et al. (2009) found
a negative effect of remittances on economic growth after running research of 84 countries
during 1970 – 2004. Chami et al. (2003) analyzed the relationship between remittances and
growth of country’s economy and revealed that the impact is negative in 113 world countries.
(2005). Catrinescu et al. (2006) discovered neither a positive nor a negative relationship
between remittances and growth in study on 114 countries. Siddique (2010) exposed that in
case of Bangladesh, growth in remittances does not have any impact on economic growth.
IMF studies conducted in 2005 on 101 countries did not find a statistical relationship between
remittances and economic growth.
After discussing general effect of remittances on country’s economy, in the next
sections I illustrate the effects of remittances in more detailed ways.
1.2.2. Remittances, consumption and investment. Various empirical studies have
demonstrated that a relatively large share of remittances received by the migrants’ household
in the home country usually goes towards additional consumption, investment and savings
(Woodruff & Zenteno, 2001; Dustmann & Kirchamp, 2001). The usage of remittances
defines what effect they might have on recipient’s country economy. If remittances are
directed towards investment, they are considered to have a positive effect through increased
output and productivity. On the other hand, if remittances are directed for the sake of
consumption, they might cause multiplier effect and increase domestic demand or they might
have a negative effect on the balance of payments. In this section I review the relationship
between consumption, investment and remittances respectively.
1.2.2.1. Remittances and consumption. According to Adelman and Taylor (1992),
remittances increase the level of income in the receiving countries, which can boost domestic
output and "offset some of the output losses that a developing country may suffer from
emigration of its highly skilled workers" (Ratha, 2003, p.l64). If remittances are spent on
locally produced goods, then the multiplier effect occurs leading to indirect contribution of
remittances to economic growth by boosting investment in related industries. On the other
hand, if remittances are spent on imported consumer goods, it may have a negative effect on
the international balance of payments. Therefore, remittances may benefit home economy
directly by generating additional demand for products because money received by the
households are usually spent on the consumption purposes (Taylor & Mora, 2006) and
indirectly by increasing the income of non-migrant households (Benmamou & Lehnert,
2013). This statement is reinforced by several studies. According to Pradhan and Williams
(2010) and Incaltarau and Maha (2012), money remitted raises the income of families in the
country of birth and it leads to a higher level of consumption, which might have a multiplier
effect on aggregate demand and output. Massey and Parrado (1994) conducted a survey of 22
Mexican communities and demonstrated that two thirds of remittances are directed towards
consumption – mainly food and housing. Similarly, Adelman and Taylor (1990) deliver an
example from Mexico showing that remittances offset some of the output losses from
emigration of highly skilled workers. Scholars demonstrate that every dollar remitted to
Mexico increased its output by approximately 3 dollars (as cited in Ahmad, Khan & Atif,
n.d.) Thus, Ratha and Mohapatra (2007) in their studies emphasize that households in the
home country spend remittances on prominent consumption (land acquisition, jewelry, etc.)
and, as a result, such unproductive consumption only causes price level in the countries
upwards. Abdih, Chami, Dagher and Montiel (2008) revealed that, when talking about
remittances and consumption, government should be considered as an important actor as
well. The authors explain that when individuals spend received remittances on both domestic
and imported goods, it increases the tax base which leads to a raise in revenue from sales
taxes, import duties and value-added taxes or, in other words, money remitted might provide
the much-needed fiscal space which is reflected in countries as a rise in spending and
decrease in taxes (Abdih et al., 2008). In sum, remittances, which are directly received by the
households of migrant workers’, are usually spent on consumption and, consequently, they
increase domestic demand and foster economic development.
1.2.2.2. Remittances and investment. Developing countries should exploit increasing
amounts of remittances and spend them on investment in order to promote development and
inclusive growth. Firstly, remittances increase the rate of capital accumulation; remittances
accelerate investment in the home country by increasing the level of solvency of the
households and by reducing the risk premium because of decreasing level of output volatility.
Chami and Fullenkamp (2013) explain that remittances may improve domestic financial
intermediation and, consequently, boost efficiency of investment, or, in other words,
remittances might have an effect on formal financial system’s ability to distribute capital
(Chami & Fullenkamp, 2013). For instance, credit constraints, imposed on households
because of the existing small financial sector, may be relaxed by remittances inflows, for this
reason, remittances can help to increase GDP when financial markets are considered as
underdeveloped (Chami & Fullenkamp, 2013).
Therefore, empirical evidence shows that money transferred by migrant workers helps
to increase investment activities in the recipient countries (Ruiz &Vargas-Silva 2009). In
studies by Asiedu (2002) it is demonstrated that about 30 percent of remittances are used for
investment and construction of houses in Ghana. According to Drinkwater, Levine and Lotti
(2003), earnings from migration are more easily diverted to savings and investment compared
to the situation when primary income earners remain at home. Using data from Pakistan,
Adams (2005) explores that the marginal propensity to invest money that was received as
remittances is higher than to invest income from work. Adams (2005) explores the effect of
remittances on the spending behavior of household in Guatemala and concludes that
households that receive remittances tend to spend proportionally more on investment goods,
such as housing and education, and spend less on consumption goods like food. Using
remittances for the investment purposes also generates indirect effects because, if households
choose to invest in business, they create employment possibilities for non-migrant households
in the economy (Karpestam, 2012). Yang (2005) in his study demonstrated that during the
time of the Asian financial crisis exchange rate shocks boosted the investment of money
received as remittances, especially in transportation, communication and manufacturing
enterprises. To conclude, money remitted by migrant workers increases investment activities
in the recipient countries, which has both a direct and an indirect influence on the
development of the economy.
1.2.3. Remittances, poverty and welfare. Since the topic of remittances is not
investigated very deeply in theory, there is no formal framework to understand remittances
impact on poverty reduction (Chimhowu, Piesse & Pinder, 2005), but there exists a lot of
evidence that supports the claim that remittances are usually directly received by the poor
households which may influence the fact that remittances have an overall positive impact on
reducing poverty (UNCTAD, 2011; Serino & Kim, 2011). Therefore, according to Uruci and
Gedeshi (2003), the majority of international migrants (69.7 percent) transfer money in order
to meet “the essential needs of the family”. In the research conducted by Adams (2005), 71
developing country was explored in order to examine the influence of international migration
on poverty and it was found that remittances have a statistically significant strong negative
impact on poverty; to be more precise, a 10 percent increase of remittances inflows as a part
of a country’s GDP leads towards a reduction of 1.6 percent of people living in poverty.
According to the same researcher, since remittances inflow started to compound a great part
of the total income of households in Guatemala, squared poverty gap measure shrunk by 19.8
percent (Adams, 2005). Moreover, Rodriguez and Tiongson (2001) found that 17 percent of
households in Philippines gain income in terms of remittances, which represent 8 percent of

national income. Furthermore, in the case of Mexico, Adams, Lopez-Feldman, Mora and
Taylor (2005) found that the poverty headcount and poverty gap indices declined by 0.77 and
0.53 respectively with a 10 percent increase in remittances received. To conclude,
remittances increase the standards of living for the receiving households, and can contribute
to poverty alleviation and inequality gap reduction.
1.2.4. Remittances and employment. Another factor influenced by money transfers
from abroad is labour force participation - the percentage of the population that is working or
seeking work. However, results of the inquiry into the relationship between remittances and
employment are mixed.
On the one hand, remittances can be perceived as a factor lowering economic growth:
money transferred by migrant workers reduces recipients’ engagement in local labour market
because households in home country substitute remittance income for labour (Imai et al.,
2012; UNCTAD, 2011). Thus, money received provides households with the possibility to
work less while maintaining the same living standard (Rodriguez & Tiongson, 2001). On the
other hand, since remittances count as an addition to investment activities, Rodriguez and
Tiongson (2001) for Manila, and Funkhouser (1992) for Managua, claim that remittances
increase self-employment, and together with that, non-migrant households benefit from new
labour opportunities, as well. To contrast the argument above, it is suggested that money
transferred by migrant workers has no impact on the labour supply of household members in
Mexico (Rapoport & Docquier, 2005; Cox Edwards & Rodriguez-Oreggia, 2009). Empirical
studies by Funkhauser (1992) stress two main effect that remittances inflows may have on
labour participation decisions: (1) looking from the households perspective, the loss of one
working unit within the household might indicate that other members of the household have
to become a part of labour market; (2) remittances inflows may expand the overall aggregate
demand in the country which may lead to larger demand for labour (as cited in Kugler, 2005).
Similarly, Zachariah, Mathew and Rajan (2001) estimated that migrant household members
are less involved in labour forces than non-migrant households and, as a reason behind that,
authors suggest that emigrant households are more selective while looking for a job
opportunity and they have the advantage in terms of time, simply, they do not need to hurry
to get employed. In sum, the influence remittances inflows have on the employment pattern
in the home country of migrant workers is not straightforward and so the results that are
generated are mixed.
1.3. Theories and Determinants of Remittances
Migration theories discuss the reasons for migration as well as the characteristics of
the host countries’ that attract migrants. Since remittances are the outcome of the migration
process, I review both theories and factors that explain international migration and the
magnitude of remittance inflows.
1.3.1. Theories of labour migration and remittances. According to Haas (2010),
there are two groups of factors explaining the migration process: “pull” and “push” factors,
originating in the host country and in the country of origin respectively. According to Bagade
(2012), widely considered push factors are inadequate employment opportunities in the home
country, famine, wars, political and economic situation in the country, poverty, poor medical
conditions and natural disaster, while pull factors are job availability and higher wages, better
education prospects, safe environment, good medical care system and strong country’s
economic situation, no repressions and similar issues. However, push and pull factors provide
a very general view towards migration process and might be considered as a background of
migration theories. Migration theories described below mainly focus on explaining what
internal and external factors influence decision to migrate, what are the reasons and
consequences of the migration process, as well as what determines the country of destination.
Since there exists a variety of theoretical models explaining why international migration
occurs, I choose to describe neoclassical economic theory and the new economics of
migration theory because they discuss remittances as the consequence of the migration
process.
The neoclassical theory states that migration is a voluntary and economically rational
choice made by individuals in order to increase the income of the household and accumulate
funds for investment (IOM, 2005). The microeconomic theory of neoclassical economics,
also known as the rational choice theory, states that individuals are rational actors and make a
decision to migrate after revising cost and benefits carefully; expecting a positive net return
from migration (Todaro, 1987). The reason behind international migration is wage
differences between low wage, or labour-surplus, and high wage, or labour-scarce, countries
(Massey, Arango, Hugo, Kouaouci, & Pellegrino, 1998; De Haas, 2010). It is claimed that the
migration process itself provides individuals with an opportunity to sell their labour more
successfully, which is a prerequisite for sustainable economic growth (Rahman, 2000).
Supporters of this theory believe that migration has a positive impact on the remittance
recipient because money sent by migrant workers increase the level of income and overall
quality of life of migrants’ households (Keely & Tran 1989, as cited in Haas 2010).
The new economics theory of labour migration challenges the reasoning behind neo-
classical theory, saying that the decision whether to migrate or not is made by a larger
decision-maker unit than an individual itself – the household. People act collectively not only
because of the possibility to maximize income, but also because of minimizing risk even in
the absence of wage differences mentioned above (Massey et.al, 1998). In other words,
households are simply diversifying family income and migration is used as a tool to
overcome market failures. By sending one of the family members abroad in order to work,
households make investment decision that is believed to pay off in the near future because
migrant workers engage in the process of remitting money.

In summary, both the neoclassical economic theory and the new economics theory of
labour migration highlights the concept of capital flow as well as the motives for migration
(wages, risk, earnings). Both approaches imply that people migrate and remit part of their
money because of the two main reasons: (1) in order to acquire capital and invest, so-called
economic motive and (2) in order to diversify household income, alleviate risk and maintain
essential needs of the family.
1.3.2. Microeconomic determinants of remittances. In the studies by Durand,
Kandell, Parrado and Massey (1996) and Brière, Sadoulet, Janvry and Lambert (2002), a
migrant’s income and job situation, the number of dependents at home, marital status,
education level and age of the migrant are emphasized as important factors determining
decisions of migrant workers in terms of remittances being sent.
Migrants’ income has a positive effect on remittances, since income directly affects
the ability to remit (Carling, 2008; Buch & Kuckulenz, 2004; Unheim & Rowlands, 2012;
Ghosh (2006). For instance, Simmons, Plaza and Piche (2005) found that the amount remitted
increased together with increasing incomes by workers from Jamaica and Haiti. Thus, Lucas
and Stark (1985) calculated that a 1 percent increase in income causes 0.23–0.73 percent
increase in the amount remitted, which is likely to decline to zero when income reaches a
very high level.
While considering the age and the amount that migrant workers remit, other factors,
such as permanence of residence, the number of dependents at home, and the link between
income and age should be taken into account (Unheim & Rowlands, 2012). Usually the effect
of age on remittances is positive (Apinunmahakul & Devlin, 2008), especially at the
beginning of the labour migration process. Merkle and Zimmermann (1992) discovered that
remittances increase with age, but at a decreasing rate. In contrast, Ghosh (2006) claims that
younger migrants (those under 40) may remit more.

Considering the gender of migrant as a motive to remit, statistical significance is not
always found, but when it is, men are generally more likely to remit and in larger amounts
(Carling, 2008; Sørensen, 2005). However, other studies by Posel (2001), Rodriguez (1996)
and Merkle and Zimmermann (1992) reveal that women may remit smaller amounts but in a
substantially bigger proportion of their wage than men.
Another important factor making an impact on a remittance-sending decision is the
issue of whether migration is temporary or permanent (Buch & Kuckulenz, 2004). According
to Glytsos (1997) and Oser (1996), remittances are often considered as compulsory for
temporary migrants, while remittances sent by long-term or permanent migrants are
considered as gifts to relatives back home (a cited in Rapoport & Docquier, 2005).
1.3.3. Macroeconomic determinants of remittances. The literature on
macroeconomic determinants of remittances focuses on a number of key economic factors
that might have an effect on the volume of remittances that home countries of migrant
workers receive. Empirical macroeconomic papers usually name the following indicators
influencing remittances: wage rates and economic performance of the host country, economic
situation in country of origin for migrant workers, number of migrants, exchange rates and
relative interest rates between sending and receiving country, political risk and facilities to
transfer funds (Sarkar & Datta, 2014).
One of the most obvious determinants of remittances inflow is the stock of migrant
workers: the more individuals migrate to work in the foreign country, the greater the amount
of remittances home country receives. Freund and Spatafora (2005) in their studies estimate
that if the stock of migrants would increase twice, officially recorded remittances would
increase by 75 percent. I use migrant stock as the control variable in my empirical research in
order to have a control over the amount of migrants within the countries.
Economic activity in both home and host countries is one of the main factors
determining the amount of remittances received and sent. According to IMF (2005),
improved conditions in the country of destination let migrant worker to rise his or her
earnings, and transfer more money to their home countries. However, negative shocks in the
country of origin might boost the demand for remittances, which probably makes migrant to
send more money. Gupta (2005) claims that remittances to India rose because of a higher
number of migrant workers as well as the total amount of money they earn. Since economic
conditions are important while determining the amount of remittances, I take GDP per capita
as one of the independent variables in the empirical research, which helps to control for the
standard of living in a country of birth and the level of economic development.
Another macroeconomic determinants commonly mentioned as the factors
influencing remittances inflows are institutions and economic policies in the home country.
Macroeconomic instability (high inflation, real exchange rate hyperinflation) negatively
affects the volume of remittances in the recipient country (IMF, 2005). Similarly, according
to Hagen-Zanker and Siegel (2007), remittances are also affected by the difference in the
interest rate between home and host country, inflation, domestic income and wage rates both
in host and home countries. Hasan (2006) argues that when interest rates goes up by 1
percent, then the remittances rise by nearly 2 percent in Bangladesh. Similarly, Amuedo-
Dorantes and Pozo (2004), as well as Higgins, Hysenbegasi and Pozo (2004), explored that
both the depreciation and volatility in real exchange rate affects the volume of remittances. In
cases when currency depreciates in the home country, it may result in an opportunity to
transfer a higher amount of money. In addition, lower value of local currency might affect
decisions to remit for investment purposes, as real assets (houses, land, automobiles) become
cheaper (Orozco & Lowell, 2005). I take this into account and use inflation and exchange
rate as independent control variables in the regression analysis because they play an
important role, while explaining variation of remittances inflows. In addition, according to

and El-Sakka & McNabb (1999), economic policies like black market premiums and/ or
exchange rate restrictions, might be the reasons discouraging emigrants to transfer money and
may also shift remittances from the formal to the informal sector. Existence of domestic
banks in the host country together with the black market for foreign exchange strongly affects
the volume of officially registered money transfers (Schoipi & Siegfried, 2006), as well as the
development of financial sector, which makes it cheaper and easier to transfer money (Acosta
et al., 2008; IMF, 2005).
Remittances usually depend on the particular pair of countries engaged in remittances
flows, indicated as a remittances corridor (Carling, 2008). Costs of remittances vary widely
from 2,5 percent to 26 percent of the amount sent (Beck & Pería, n.d.). For example, it is
relatively cheap to transfer money from the United Kingdom to Somalia and from Norway to
Poland, but difficult from Norway to Somalia, however, many migrants remit in spite of high
costs (Carling, 2008).
In addition, the outcome of the remitting process is influenced by economic cycles
(Gupta, Pattillo, & Wagh, 2009; Ratha, 2003; Buch & Kuckulenz, 2004). According to
World Bank Development Prospects (2011), after the global financial crisis in 2009, the
amount of remittances received dropped by 5.5 percent, but rapidly recovered in 2010.
Furthermore, as per IMF (2005) report, magnitude of remittances sent might be
diminished because of the general risks present in the home country such as level of
governance, political instability, low level of law and order. Thus, it can be argued that the
demand for remittances is higher in times of economic and political instability. However,
economic factors are not enough to explain variation in the amount of remittances received –
political determinants are also important while explaining the magnitude of the remittances
sent and received. Because of this reason, I am going to discuss political instability, in the
next chapter, as one of the political factors influencing level of remittances received by
developing countries.
2. Political Instability
In the previous chapter, I mainly described relevance and economic determinants of
remittances. Political determinants should also be taken into account while considering
factors influencing the amount of remittances, however, political determinants are
complicated to analyze. Political variables are difficult to compute, their definition and
precision differ greatly among studies. In this chapter I concentrate on definition, causes and
consequences of political (in)stability and formulate a hypothesis to be tested empirically.
2.1. Definitions of Political Instability
Since the level of political instability is not directly obvious and observable, it is
challenging for many scholars to define the concept. Hence, I provide several distinct
definitions regarding political instability.
Lipset (1960) explains democratic stability by saying that it is a constant and
unbroken process of political democracy and the absence of political movement which might
oppose the democratic “rules of game”. Similarly, Morrison and Stevenson (1976) explain
that the condition of political instability is the breakdown of authority patterns. One more
definition is suggested by Sanders (1981) who discusses political instability as a deviation of
the government, regime or community compared to the previous system of “specific normal
pattern” (as cited in Akongdit, 2013). More recently, Alesina, Ozler, Roubini and Swagel
(1996) argue that political instability is a “propensity of a change in the executive power”
both by constitutional and unconstitutional means. In summary, most commonly, political
instability is defined in terms of changes in or challenges to the political system (Jong-A-Pin,
2009).
2.2. Different Approaches Towards Political (In)Stability
Political science literature on the concept of stability is quite ambiguous. As Ersson
and Lane (1983) claim, “the concept of stability in general, and of political stability in
particular, is both ambiguous and multidimensional”. The fact that this phenomenon is not
linked to any generally accepted definition makes it unclear. Some scientists explain political
stability through the absence of a specific property (change, violence), whereas others
consider it through the presence of a specific property (persistence, endurance, durability,
continuity, longevity) (Svensson, 1986). In this chapter I introduce political instability
through 2 different angles: (1) instability within the political regime and (2) instability of the
political regime.
2.2.1. Instability within the political regime. The concept of political instability
within the regime mainly constitutes of the indicators disturbing the country’s stability from
the inside. In the next subchapters I describe political instability which occurs because of the
structural changes, violence and mass civil protest.
2.2.1.1. Political stability as the absence of structural changes. In the following
paragraph, I discuss the phenomenon of political instability through institutions and office
longevity. Thus, I claim that a country is considered to be unstable if it faces a great number
of structural changes.
Instability within the regime refers to the instability of governments and/or cabinets,
which can be evaluated by looking at the number of elections, years of the largest party in the
office, the level of fractionalization and polarization, (Jong-A-Pin, 2009, p. 19). Hurwitz’s
(1973, p. 452) ideas on governmental/cabinet longevity or duration are easily understandable
and measurable: a country is more stable when fewer changes in terms of cabinet/chief
executive occur. On the other hand, Hurwitz (1973) himself acknowledges that a long time in
the office can be perceived as resistance to change, which is qualitatively different from
political stability.
According to Bueno de Mesquita (2000), political stability within the regime can be
divided into two major types: (1) longevity in the office enjoyed by national leaders; (2)
longevity of national political institutions that define the form of governance. Similarly,
Hurwitz (1973, p. 457) also considers political stability as the absence of structural change.
He points out that the absence of major structural changes in country’s basic structural
arrangements leads to politically stable country. Sanhueza (1999) agrees with Hurwitz by
declaring that if a country faces plenty of structural changes in political institutions, it can be
a sign indicating that this country is politically unstable. Verba (1971) and Flanagan (1973)
support the idea that structural changes might be a part of instability and the crisis (as cited in
Svensson, 1986). However, before measuring political instability from a structural change
perspective, it is necessary to clearly define structural change itself in order to avoid miss-
interpretations. Politically stable country may outlive a couple of minor institutional changes
and still remain resistant to flawed processes generated by the system and its environment.
Summing up, the country is considered to be politically stable if it does not face many
changes in terms of the cabinet and chief executive, or, generally speaking, fewer structural
changes occur within the country.
2.2.1.2. Politically motivated violence. In this section, I review the literature on
political violence because it provides one of the possible measurements of political instability
within a country.
Laquer (2003) argues that there is not one type of political violence but ‘a variety of
political violences’ (as cited in Hoffman & Graham, 2009, p. 462). He adds that what is
suitable for one does not necessarily apply to the others. Laquer (2003) provides the
following definition of political violence: “the systematic use of murder, injury, and
destruction, or the threat of such acts for political ends” (as cited in Hoffman & Graham,
2009, p. 462). Hoffman and Graham (2009, p.463) name the factors that may cause violence
– poverty, national and ethnic conflict. Furthermore, politically motivated violence rarely
takes place in the richest and in the poorest countries, it usually occurs anywhere between
these two extremes.
Another political science theorist, Leon Hurwitz (1973), states that a politically stable
country is peaceful, law-abiding and without civil conflicts. Furthermore, any change in a
politically stable country is supposed to be made through institutionalized decision-making
procedures, not through conflict and aggression (Hurwitz, 1973, p.449-450). In other words,
what Hurwitz (1973, p. 449-450) names as the sign of instability is violent turnover of power.
Different scholars come up with various measurements for violence. In empirical
studies by Russett (1964), violence is defined as the number of people killed during domestic
violence conflicts. According to Ivo and Feierabend (1962), political stability/instability is
“the degree or the amount of aggression directed by individuals or groups within the political
system against other individuals and groups” (as cited in Hurwitz, 1973, p. 450). In addition,
Gurr and Ruttenberg (1969) explain political instability as the intensity, duration and total
amount of civil violence in the country. In a more recent study by Cebula (2011), political
instability is also measured through the absence of violence and terrorism. Jong-A-Pin (2009)
in his studies measures politically motivated violence using indicators such as number of
assassinations and internal conflicts, revolutions, religious and ethnic tension, and civil wars.
Margolis (2010) challenges Hurwitz’s and other aforementioned scholars’ statement
by saying that the absence of violence is problematic to measure and that the concept itself
does not properly reflect the instability in contemporary societies. He provides evidence from
Japan, Italy, and the US, where governments were considered to be as unstable even though
there was no violence. Hence, presence of violence might be a component of the political
instability measure, but violence on its own does not exhaust the concept completely. In sum,
for a country to be considered politically stable, the level of civil conflicts, number of
revolutions, riots and strikes has to be low, while the decisions should be implemented
peacefully and legally.
2.2.1.3. Mass civil protest. In this section, I analyze political instability in terms of
protests occurring and argue that the more protests and demonstrations a country faces, the
more unstable that country is.
The number of riots, demonstrations and strikes can be considered to be the most
accurate indicators to reflect civil protest (Jong-A-Pin, 2009). Hoffman and Graham (2009, p.
431) suggest an initial definition of a broader concept called civil disobedience defined as
“morally justified law-breaking, normally intended to change a particular law or policy”.
Authors clarify that the concept of civil disobedience, involves the process of breaking the
law with the moral reasons justifying the actions, while the aim of civil disobedience is to
change a law or policy, not to replace the entire political system. The country is less likely to
face riots, demonstrations or strikes when individuals are satisfied with the political process
and outcomes in their country.
Hurwitz (1973, p.455) suggests one more indicator of political stability – legitimacy.
To be more precise, legitimacy is the degree to which the population accepts outputs of the
political system as right and proper. According to Hurwitz (1973), legitimacy is not a result
or a consequence of a stable system; legitimacy itself is a source of stability. He highlights
that “positive support and acceptance” can be interpreted as a sign of political stability within
the country. Hurwitz’s approach of legitimacy describes stability as a law-based
phenomenon. However, Margolis (2010, p.328) argues that social norms are of the same
importance as laws if you want to maintain stability within the country. Therefore, if the
society perceives the regime as a legitimate, then the regime and the government is
considered to be more stable and face less destructive actions, such as riots, protests and
demonstrations.
In sum, a country can be considered politically instable if there occur political
violence (in terms of revolutions, civil war and ethnic tension), mass civil protests or civil
disobedience and changes or challenges to the political system (in terms of structural
changes).
2.2.2. Instability of the political regime. In this section, I explore political instability
in terms of consistency of a regime and argue that a more inconsistent regime causes greater
level of political instability.
According to Jong-A-Ping (2009), instability of the regime can be explained through
the possibility of changes in the polity, constitution and political leaders or, in other words,
stability of the political regime itself can be described through changes in the cabinet, chief
executive, the numbers of veto players who drop from office, major government crises,
government instability and political regime changes (Jong-A-Pin, 2009, p. 19). I examine the
concept by using the theory on (in)consistent policies.
There exists a vast amount of literature showing that consistent autocracies and
consistent democracies are the most stable political systems; consistency here is described as
a set of institutions that are mutually reinforcing (Sanhueza 1999; Gates, Hegre, Jones, &
Strand, 2006). To be more precise, purely autocratic and purely democratic regimes
demonstrate greater stability than any regime type between these two extremes (Gates et al.,
2006). Therefore, higher risk of political instability is found in unconsolidated regimes (Fritz,
2007, p.34). Gates et al. (2006) applying Polity Democracy index, created by Jaggers and
Gurr (1995), explored why regimes with intermediate scores are considered to be unstable.
Authors examined three institutional dimensions: (1) election of the executive, (2) constraints
on executive decision-making authority, and (3) the extent of political participation. Scholars
revealed that lower levels of stability of intermediate regimes occur because of institutional
inconsistency along these three dimensions mentioned before. The results indicate that
regimes with intermediate scores along the Polity index are institutionally inconsistent or, in
other words, regimes that exhibit a mix of institutional characteristics of both democracy and
autocracy are considered less politically stable.
When there exists a high risk that the regime may be changed, future economic policy
gets more uncertain. In addition, the risk of possible regime change may trigger instant policy
adjustment in order to avoid major changes of the regime (Dutt & Mitra, 2008). What else
can be affected by the instability of the regime is the overall financial sector and its
development. Underdeveloped financial sector because of political instability may discourage
people to engage in financial services in general and financial transactions in particular
because of the presence of risk and uncertainty. According to Acemoglu and Robinson
(2001), in autocracies the government usually implements policies closer to median voter in
order to prevent destructive activities such as coups. Authors also demonstrate that different
redistributive policies depend on the degree of democracy or dictatorship and, consequently,
movements in or out of democracy reflect in volatility of redistributive policies. According to
Acemoglu and Robinson (2001), policy volatility is positively related to political instability.
To conclude, a politically unstable environment in the country has a strong influence on
macroeconomic policy.
2.3. Effects of Political (In)Stability on Economic Growth
Existing scientific literature is rich with the studies on the relation between political
instability and economic growth, but the results are inconclusive. Most of the scholars have
demonstrated that political instability has a negative significant impact on economic growth
of the country, whereas other scholars argue that instability boosts the growth and
development of the economy.
However, present political situation in the country impacts not only economic
development but also the level of remittances, which migrant workers send to their families
back home. In this section I review the existing literature on the relation between two
variables, as well as the studies explaining how political instability affects the economic
growth and remittances in the country.
What needs to be highlighted in this chapter is that, according to Alesina et al.,
(1996), Jong-A-Ping (2009), Aisen and Veiga (2011), Jaouadi, Arfaoui and Ziedi (2013)
there is one-way causal relation between political instability and economic growth; there is
no reverse causality and political stability affects growth, not vice versa. I take these findings
as the base for next subchapters because it allows conducting further analysis of the effect of
political instability.
2.3.1. Political instability and negative effects on economic growth. Political
instability is often considered harmful to economic performance and development of the
country. It may influence a more frequent switch of policies, creating volatility and thus
negatively affecting the macroeconomic performance of the country (Aisen & Veiga, 2011).
This subsection discusses the relationships between political instability and various factors
influencing economic growth.
2.3.1.1. Political instability, political myopia and economic growth. In the study by
Darby and Muscatelli (2004), authors claim that despite the fact of elections being peaceful
and fair, political uncertainty still has a negative effect on economic growth. Bonfiglioli and
Gancia (2013) define political myopia as the concept where politicians care about short-term
economic and social policies more than about long-term ones because of uncertain political
environment. Authors provide examples of myopia apparent in underinvestment in long-term
policies such as environment protection, education, and research and development programs.
Murphy, Shleifer and Vishny (1991) support the aforementioned argument by saying that
incumbent politicians face a threat of loosing a place in the office and, as a result, allow rent-
seeking activities that downgrade a country’s economic development. Moreover, political

myopia, which promotes politicians to care more about the short-run economic and political
performance of the county, may lead to corruption because of uncertain future. In the
following section I consider the relationship between political instability and corruption.
2.3.1.2. Political instability, corruption, economic development and remittances. A
lower degree of political stability can induce corruption because the incumbent in the
unstable environment finds it optimal to steal more today because of the high uncertainty
regarding the question whether he/she will remain in power tomorrow (Olson, 1993;
Campante, Chor & Quoc-Anh, 2009).
According to Dridi (2013), corruption tends to decrease investment incentives for
both local and foreign entrepreneurs. Gupta and Abed (2002) explicate that corruption results
in higher income inequality because it enables the wealthiest part of the society to benefit
from government-funded programs at the expense of the rest of the population. In addition,
corruption also damages new and innovative economic activities; innovative activities usually
need various import quotas or other permits that are supplied by governments. Since the
demand for these goods is inelastic, it is a source for corruption activities (Shera, Dosti &
Grabova, 2014; Hung Mo, 2001). To sum up, corruption discourages investors, reduces
productivity, distorts allocation of resources and thus lowers economic growth in a politically
unstable country.
Political corruption may increase if the country receives substantial amount of
remittances, which works in a manner similar to the natural resources curse and may cause a
moral hazard for governments (Abdih et al., 2012). The resource curse refers to the paradox
when states with abundant natural resources endowments suffer from slow economic
development (Ross, 2011), and, on the top of that, wealth correlates with high levels of
corruption. This approach compares migrant workers to an abundant source of labor that can
be exported to generate revenue for governments (Ahmed, 2012). Tyburski (2014) claims that
remittances provide governments with the possibility to cut their spending on public goods
and provide greater amount of private goods to political supporters. In addition, according to
Tyburski (2014), governments might substitute remittances wealth for their own spending on
social programs. As a result, this example of expenditure switching might increase corruption
by creating incentives for bribery and rent seeking, as citizens strive for access to growing
scarcity of public goods.
2.3.1.3. Political instability and productivity. The basic theory of growth states that
human capital is widely accepted as an important determinant for economic growth (Mankiw,
Gregory, Romer & Well, 1992). One of the main theories supporting this claim is the Cobb-
Douglas production function: Y=A*Lβ*Kα, where Y stands for total production or real GDP,
A is the total factor of productivity, L stands for labour input, and K is the capital input
(Hajkova & Hurnik, 2007, p. 467). Based on this function, it can be seen that an increase in
labour L would increase the total production Y, and that would cause economic growth. So,
human capital is an essential part in the process of economic growth (Topel, 1999; Freire-
Sere, 2001; Hajkova & Hurnik, 2007).
Political instability affects economic growth through disruptions in market activities
and labour relations, which has a direct adverse effect on productivity (Fosu, 1992; Perotti
1996a; Landa & Kapstein, 2001). Aisen and Veiga (2011) agree with the position mentioned
above by saying that political instability induces higher uncertainty about the future, which
leads to less efficient resource allocation. In addition, uncertainty caused by instability
reduces the amount of expenditures on research and development both by firms and
governments, which leads to slower process of technological progress in the country (Aisen
& Veiga, 2011). In addition, scholars clarify that, with the violent actions present in the
country (civil unrest, strikes, etc.), normal operations of firms and markets get damaged in a
way that might reduce the hours worked and destruct some installed productive capacity.
Hence, human capital accumulation may also be adversely affected by political instability,
because uncertainty about the future may discourage people from investing in education or
their own businesses that create new jobs for the economy (Aisen & Veiga, 2011).
The underdevelopment of the economy might be considered as one of the push factors
in the labour migration process. On the one hand, with increasing degree of international
migration, the magnitude of remittances received by the home country should increase as
well. On the other hand, as it is known from the first chapter, one of the motives behind the
remittances is an investment, but in order for people to invest, conditions of stability need to
be held in the receiving country otherwise individuals do not take risks and additional value
is not being generated in the economy.
2.3.1.4. Political instability, property rights and investment. Political instability, such
as revolutions and coups, indicates a tendency towards the lower level of rule of law,
therefore, it triggers a threat to established property rights (Alesina & Perotti, 1996). As a
result of the uncertainty of property rights, investment activities in the country are also
affected negatively (Giskemo, 2012). Both foreign investors and locals are scared away and
do not invest in a country where the political regime is unstable (Rodrik, 1991). In addition,
existing risk for government to be overthrown makes the future economic policy and the
protection of property rights more uncertain, and it reduces the propensity to invest
(Giskemo, 2012). Similarly, Fielding (2003) revealed that low levels of political stability
reduced labor and investment because of the attacks on property as well as the increased
uncertainty about the returns to investment.
According to the literature on remittances and investment, it is known from the
previous chapter that a small portion of migrant workers’ money they remit has an economic
motive or the purpose of investment. Thus, political instability lowers the amount of
remittances transferred for economic or investment reasons. The common approach towards
political instability proposes that instability raises uncertainty with respect to future
institutions and economic policies, thereby affecting the incentives of households, firms and
politicians (Carmignani, 2003). To sum up, unstable political environment deters propensity
to remit money, especially for investment purposes because of the possible violation of
property rights. As a result, all the process reflects negatively on economic growth.
2.3.2. Political instability and positive effects on economic growth. Besley, Persson
and Sturm (2005) indicate political instability as political competition and claim that rivalry
between actors generates economic welfare for society. In their study based on United States
of America, they exposed that increasing political competition positively affects net income
in the country. Bueno de Mesquita (2000) suggests that higher rates of government turnover
fuel economic growth. The reason behind this is that politicians invest in policies that make
the majority of the society better off in order for them to stay in the office, and this activity
increases economic growth. Bueno de Mesquita’s idea works both for democracies and
autocracies, but the benefits of government turnover are smaller in autocracies than in
democracies.
2.3.2.1. Political instability and household consumption. Fielding (2003) in his study
on “Consumption, saving and political instability in Israel” claims that political instability
needs to be considered while analyzing households’ consumption patterns, because during the
times of instability people tend to save less because of perceived risk related to savings, and
consequently they spend more. In addition, instability caused by the present government
collapse and a new government formation might lead to a shift from productive domestic
investment to consumption and capital flight (Alesina et al., 1996). New economics theory of
migration explains that one of the major aspects influencing the decision to migrate is market
imperfections in the home state, and, as a result, remittances are compensation or return to
families left behind in the home country of migrant worker (Rapoport & Docquier, 2005).
Increasing demand for money during the politically instable time period increases remittances
sent by migrant workers to their families, since one of the main motives behind remittances is
the orientation towards supporting one’s family. As a result, expansion in demand
contributes to local economy’s growth, where each dollar of remittances consumption
generates approximately four more in demand for goods and services (Stark, Taylor &
Yitzhaki, 1986; Durand & Massey, 1996).
Summing up, rising levels of political instability usually increase the demand for
money and consequently increase the amount of money transferred from migrant workers to
their families, which may lead to promotion of economic development.
2.4. Political Instability and Remittances: The Logic behind the Hypothesis
The main reason why it is interesting to investigate the relation between instability
and remittances is because remittances work in quite a different manner compared to other
financial flows that developing countries receive (FDI, ODA). Thus, for a developing country
to attract FDI or ODA, political conditions present in the country need to be favorable for
investment. Furthermore, many economists and political scientists believe that political
stability is very important for decent economic performance. As mentioned before, political
instability can lead to a decrease in productivity, a decrease in the number of laborers, a
decline in investment, and therefore a depression of economic growth and development.
Political instability makes investment a less attractive option for both foreign and local
investors.On the other hand, during the times of instability individuals usually save less and
spend more because of the uncertain future. It implies that remittances are spent on
consumption which increase domestic demand and induce economic growth.
In order to formulate a hypothesis, I need a theory, which I could base my hypothesis
on. However, since both political instability and remittances are not very deeply investigated
topics by the time, the generally accepted theory on the relation between remittances and
stability does not exit. Because of this reason I provide several assumptions I use in order to
build my hypothesis:
(1) remittance flows depend on the degree to which political instability influences the
incentives of migrant workers to remit;
(2) migrants remit for both risk-alleviating and economic reasons, therefore, the
influence of political instability can be dual: positive for risk-alleviating motives, as migrants
seek to protect their relatives from instability, and negative for economic motives, to the
extent that political instability undermines the investment climate (Adams & Page, 2005);
(3) families of migrant workers left behind in the home country directly receive
remittances, it makes them demand more money during the hardships;
(4) greater proportion of money transferred is because of risk alleviation reasons,
while only a smaller part of remittances is transferred with economic purposes.
Taking into account all the assumptions stated above, I formulate the hypothesis that
politically unstable developing countries receive higher amount of remittances inflows.
H: The higher political instability in the home country, the more remittances
inflows it receives.
The next step is to test the hypothesis empirically.

3. Empirical research
To test whether the presence of political instability in the developing countries has an
impact on the volume of remittances received, I have conducted empirical research by means
of statistical data analysis. At the beginning this chapter, I introduce data samples, variables
and the methodology of the empirical test. Next, I run the regression analysis and discuss the
results of empirical research by answering the question raised in this bachelor thesis, namely,
whether the hypothesis is empirically valid.
3.1. Data Sample, Methodology and Variables
3.1.1. Sample selection. I run regression analysis of panel data of a sample of 125
developing countries across the world (Appendix A) and 14 time periods from year 2000-
2013. In order to present potential threats for the accuracy of the model, I perform diagnostics
of the data. Diagnostics show that data I use is unbalanced - 16.19% of total data values are
missing.
The sample I use reflects almost the entire population of developing countries (125
out of 139) and is the biggest possible sample regarding the lack of data for dependent and
the main independent variables. Data set contains low-, middle- and upper middle-income
developing countries from each major region of the developing world: Latin America and the
Caribbean, Middle East and North Africa, parts of Europe and Central Asia, South Asia, East
Asia and Pacific and Sub-Saharan Africa (World Bank classification).
Starting from year 2000, remittances maintain a steady growth and have become the
main source of external resource flows to the developing world. In addition, the scale of
migration is increasing together with growing amounts of remittances. I take the year 2000 as
a beginning point where remittances start to perform strong growth and I take the year 2013
as the last period in my empirical research due to the availability of the information on the
newest trends and data sets.

I run two different regression equations because of existing dual interpretations of
political (in)stability; both equations are structured with the same dependent and control
variables, only the main explanatory variables differ. I include 5 variables in my regression
analysis: the dependent variable – remittances (total amount of remittances received); the
main explanatory independent variable – (1) Political stability (perceptions of the likelihood
of political instability and/or politically-motivated violence) and (2) Polity IV (a score
representing the authority characteristics of states); and four control variables – GDP per
capita (nominal GDP per capita), inflation (consumer price index (CPI)), migrant stock (total
number of migrants), and exchange rates (real effective exchange rates).
3.1.2. The dependent variable: remittances. In my regression equation the
dependent variable is the total amount of remittances received (current USD) retrieved from
World Bank database for 125 countries during 2000 – 2013. World Bank defines remittances
as personal transfers in cash or in kind. The data also includes compensation of employees
which refers to any income of workers who are employed in an economy where they are not
residents. Thus, data is the sum of two items: personal transfers and compensation of foreign
employees. Possible limitations regarding this variable is that overall amount of remittances
is complicated to track because they are often transferred using channels other than banks or
money sending organizations (Carling, 2008). Hence, actual remittances inflows would be
much higher than those officially recorded. Therefore, it is important to keep in mind that the
officially recorded data I am using in my empirical research draws an imperfect picture of the
amount of remittances received across developing countries.
3.1.3. The main explanatory (political) variables: political stability and polity
Since the literature on political stability is inconclusive and there does not exists one
particular measure for this variable, I run two separate regression equations with different
political variables ceteris paribus. The first regression with political variable political
stability and the absence of violence, measures instability within the regime, while the second
equation with political variable Polity, measures the stability of the regime.
3.1.3.1. Political stability and the absence of violence. The first main explanatory
variable in the regression equation is one of the six World Governance Indicators produced
by Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi (1996). Political stability indicator
is reported in standard normal units ranging from -2,5 to 2,5 with higher values
corresponding to better outcomes. This particular variable is comprised of three components:
government stability, internal conflict and external conflict, and ethnic tensions. The
government stability measure itself contains three more components: government unity,
legislative strength and popular support. All three together make an indicator which shows
ability of the government to fulfill its electoral programs as well as government’s capability
to keep the power. Another component – internal conflict – evaluates the presence and the
amount of conflict within the country and how much the government has influenced it. The
subcomponents of internal conflicts are as follows: civil war/coup threat, terrorism/political
violence, civil disorder. Next, external conflict considers the risk through non-violent actions,
for example, diplomatic decisions, trade restrictions, and external pressure, which may
include military conflicts. Lastly, ethnic tension reflects instability through several angles:
racial, ethnic and language division. Therefore, the higher the racial and ethnic tensions
present within the country, the lower the political stability score. If there are no external or
internal tensions or violence and ethnic pressure, the country is considered to be more
politically stable. This indicator combine the view of a large number of enterprise, citizen and
expert survey respondents. Political stability and the absence of violence measures
perceptions of the likelihood of political instability and/or politically- motivated violence. As
my hypothesis predicts, I expect the regression analysis to demonstrate a negative
relationship between the dependent variable (Remittances_T) and the main explanatory
independent variable (Political_Stability).
3.1.3.2. Polity. The Polity index was built by Gurr and Eckstein (1975). Since there
are not many other options for measuring political variables, this measure has been developed
and used in plenty of studies. In my research, I use the newest data available – the Polity IV
dataset by Marshall et al. (2014) constructed using earlier Polity studies. The main
explanatory political variable – polity – represents the authority characteristics of countries
on a scale from -10 to +10, representing strongly autocratic and democratic regimes
respectively. The index is built by subtracting an institutionalized autocracy score from an
institutionalized democracy score. Both autocracy and democracy numbers have a range from
0 to +10; these scores are additive and contain several components (for the components of the
score for each regime and their respective weights, see Tables B1 and B2 in Appendix B). In
this bachelor thesis, I use Polity IV index as proxy variable. In this paper, the Polity index
scale is from 1 to 10 because I used modules to transfer the scale in order to get rid of
negative values and have better indication of the regime. This shows that the higher the score
in the scale, the stronger and more consistent the regime is, and, therefore, the more stable
country is. As with the previously mentioned political variable, I expect the coefficient of
Polity variable to have a negative sign.
3.1.4. Control variables. The regression equation has 4 economic control variables –
GDP per capita, CPI, exchange rate and migrant stock. The data sets for all three variables
are retrieved from The World Bank database.
3.1.4.1. Emigrant stock. International emigrant stock is a nominal number reflecting
the amount of individuals born in a country other than that in which they reside. Stock of
emigrant workers is one of the most obvious determinants influencing amount of remittances:
the more individuals migrate to work in the foreign country, the more remittances the country
of origin receives (Freund & Spatfora, 2005). Since data on emigrants stock is available only
for 2000, 2005 and 2010, I forecasted the rest of the data in order to avoid missing values and
inaccurate results of the regression equation. The variable Migrants_T is supposed to have a
positive coefficient in the regression model, showing that countries producing greater amount
of emigrant workers tend to receive higher amount of remittances.
3.1.4.2. GDP per capita. The first control variable is GDP per capita (current USD)
which is one of the main indicators reflecting wealth and the economic situation of a country.
GDP per capita is useful in this research because it allows for comparison between countries
and helps indicate relative performance. An increase in GDP per capita indicates growth in
the economy which may lead to an increase in productivity. Most scientists agree that
remittances inflows help to smooth economic performance, since money transferred as
remittances maintains the stable rate or even grows during times of economic hardship
(World Economic Outlook, 2005, p. 82-83). According to the literature, richer countries tend
to receive lower amounts of remittances, so I predict econometric models to have a negative
coefficient of the GPD_per_capita variable.
3.1.4.3. Consumer price index (CPI). Because the greater portion of remittances
received are spent on consumption by families of migrant workers, prices are an important
variable to control. Remittances are quite responsive to prices, which explain the motive
behind the remitting process – to expand family support when prices increase – and this
shows that remittances, to a large extent, are spent on consumption. To support this, Lowell
(2005, p. 69) revealed that a 1 percent increase in the consumer price index, increase
remittances volume three times. I use inflation measured as the consumer price index (CPI)
since it is one of the most frequently used indicator for periods of inflation or deflation. The
World Bank, where I retrieved my data from, states that “CPI reflects changes in the cost to
the average consumer of acquiring a basket of goods and services that may be fixed or
changed at specified intervals, such as yearly”. Because of this reason, the variable is
assumed to have a positive sign of the CPI coefficient, showing that countries with greater
inflation levels tend to receive more remittances.
3.1.4.4. Exchange rate. Exchange rate is an important variable because, generally
speaking, migrant workers transferring money back home is assumed to be providing a
certain level of purchasing power to the recipient. If the currency of the receiving country
appreciates, the magnitude of remittances, in terms of foreign currency, is supposed to
increase; and decrease if the value of the currency of the home country depreciates (Rajan &
Subramaniam, 2005). Fundamentally, this makes remittances directly related to the real
(effective) exchange rate – the exchange rate adjusted for movements in relative prices for the
receiving and remitting countries. I use real effective exchange rate as a measure of the value
of a currency against a weighted average of several foreign currencies divided by a price
deflator or index of costs. I expect the variable Exchange_rate to have a positive sign for the
coefficient, meaning that as the real exchange rate in the receiving country depreciates, so do
remittances, and vice versa for an appreciation.
3.1.5. Econometric equation. Two different regression equations are built with all
the variables mentioned above; dependent variable on the left side, and a constant with 5
independent variables on the right hand side. The primary econometric equations of the
regression models look as follows: (1) Remittances_T = β0 + β1* Political_Stability+ β2*
GDP_per_capita+ β3*CPI + β4* Exchange_rates + β5* Migrants_T; (2) Remittances_T =
β0 + β1* Polity+ β2* GDP_per_capita+ β3*CPI + β4* Exchange_rates + β5* Migrants_T.
β0 is a constant while β1, β2, β3, β4, and β5 represent coefficients of different independent
variables.
Due to the theory presented above, I expect β1 and β2 to have negative signs of the
coefficients, and β3, β4 and β5 – positive signs of the coefficients for both equations. Thus, I
expect the final equations to look as follows: (1) Remittances_T = β0 - β1* Political_Stability
- β2* GDP_per_capita+ β3*CPI + β4* Exchange_rates + β5* Migrants_T ; (2)
Remittances_T = β0 - β1* Polity - β2* GDP_per_capita+ β3*CPI + β4* Exchange_rates +
β5* Migrants_T . Next I conduct empirical research using Gretl software to test my
hypothesis and to identify the significance of each independent variable in order to explain
the amount of remittances inflows across the developing countries.
3.2. Panel Data Analysis
3.2.1. Normality of variables. Normality test of the dependent variable
Remittances_T demonstrates that p-values of all normality tests are small, illustrating that the
variable is not normally distributed and some transformations can be made. After the most
common transformation methods to squares and to logs of remittances variable there were not
significant changes, thus, I use the initial form of dependent variable in the model. Normality
tests for independent variables reflect that variables are not distributed normally either. After
possible transformations nothing has changed, so I continue with initial independent
variables.
3.2.2. OLS panel diagnostics. I use panel diagnostics after any change made in the
model in order to check whether I am working with recommended model and in order to
identify which model fits better and provides a better use of a panel data. The panel
diagnostics test of the primary ordinary least squares model demonstrates high p-values for
all three tests, so, instead of an ordinary least squares model, I run a random-effects model in
my further research (for panel diagnostics consult Appendix C).
3.2.3. Linear time trend. In order to have a better overall fit of the model, using
Gretl software I test whether additional variables can improve it. I added a linear time trend,
(coded as time), which changes Akaike criterion in random-effects model from 24780.80 to
24792.41, while R-squared in fixed effect model increased from 0.159554 to 0.222993,
meaning that the overall fit of each model improved. Variable time has a p-value equal to
zero and a high level of significance. Moreover, since it is known that remittances maintain
steady growth over the years and do not fluctuates over time, I chose to include linear time
trend to my regression equation (Appendix E).
2.3.4. Heteroscedasticity and mulicollinearity. In order to check for
heteroscedasticity, I run Wald‘s test. Heteroskedasticity problem signals that error terms of
the models do not have a constant variance, which may lead to bias of standard errors.
Presence of biased estimates may cause a possible problem of unreliable testing results. Since
tests for heteroscedasticity in all models indicate low p-value, I use robust standard error
when possible in order to fix or at least to reduce the possibility of biased estimates.
However, robust standard error helps me to solve heteroskedasticty problem only partially.
Robust standard error helps to reduces heteroscedasticity impact on the final results, but it
does not fix this problem fully, so I keep this issue in mind while interpreting the final results.
In addition, I run Variance Inflation Factor (VIR) which is used to describe how much
multicollinearity exists in a regression analysis. In case of the presence of mulicollinearity,
variance of the regression coefficients may increase and make them unstable and difficult to
interpret. I run VIF test and get the results that show no multicollinearity problem in my
regression analysis (consult Appendix D).
3.3. Comparison of Different Models
3.3.1. Models in levels. In this subchapter I briefly describe results of the
recommended random-effects model and compare it with the alternative fixed-effects and
OLS models (Table 1 and 2 for Political_Stability and Polity respectively) in order to
evaluate the strength of the relationships in the final random-effects model.
The comparison in the model with dependent variable Poitical_Stability (Table 1)
demonstrates that all models provide quite similar results. Political_stability is the only
variable significant in all three models while GDP_per_capita and CPI are not significant in
any model, which means that it does not help to explain variation in the dependent variable
Remittances_T. Exchange_rate and Migrants_T help to describe variation only in one out of
three models. The fact that different models in levels suggest similar results of significant
variables lead to the conclusion that the relationships of the recommended model are quite
strong, because they do not vary a lot in different types of the models.
Table 1
Comparison of Models in Levels: Dependent variable – Remittances_T; Independent variable
– Political Stability
Pooled.lvl Fixed.lvl Random.lvl

const -4,015e+09 -4,177e+09 -4,029e+09***
(2,496e+09) (3,642e+09) (1,298e+09)
[0,1084] [0,2520] [0,0020]
Political_Stability -3,105e+09** -2,504e+09** -2,470e+09***
(1,003e+09) (9,781e+08) (4,465e+08)
[0,0021] [0,0108] [0,0000]
GDP_per_capita 4,122e+05 1,631e+04 7,814e+04
(3,119e+05) (2,793e+05) (1,094e+05)
[0,1869] [0,9534] [0,4752]
CPI -8,130e+07 9,330e+06 5,217e+06
(6,315e+07) (1,179e+07) (1,620e+07)
[0,1985] [0,4293] [0,7475]
Exchange_rates 4,107e+07 3,562e+07 3,392e+07***
(2,570e+07) (2,202e+07) (1,105e+07)
[0,1107] [0,1064] [0,0022]
Migrants_T 439,9 789,3 825,6*
(285,7) (2407) (497,4)
[0,1243] [0,7431] [0,0976]
time 1,134e+08 2,780e+08** 2,579e+08***
(1,058e+08) (9,525e+07) (4,320e+07)
[0,2843] [0,0037] [0,0000]
2
Adj. R 0,1872 0,8161
Note. Standard errors in parentheses. P-values in brackets. The sign * indicates significance at
the 10 percent level. The sign ** indicates significance at the 5 percent level. The sign ***
indicates significance at the 1 percent level. This note is valid in all the following tables.
The comparison in the model with dependent variable Polity (Table 2) displays that
all models provide sufficiently uniform results as well. The main explanatory variable –
Polity – is only significant in the random-effects model. GDP_per_capita is insignificant and
does not contribute while explaining the variance of the Remittances_T in any of the models,
whereas CPI is significant in only one out of three different models. Exchange_rates and
Migrants_T are both significant in two out of three models (Pooled OLS and Random) and
help to describe variation.
Table 2
Comparison of Models in Levels: Dependent variable – Remittances_T; Independent variable
– Polity
Pooled.lvl Fixed.lvl Random.lvl

const -6,421e+09* -5,630e+09 -5,975e+09***
(3,706e+09) (4,682e+09) (2,005e+09)
[0,0838] [0,2299] [0,0030]
Polity 5,211e+08 3,591e+08 3,902e+08**
(3,442e+08) (2,216e+08) (1,840e+08)
[0,1307] [0,1058] [0,0345]
GDP_per_capita 1,209e+05 -2,312e+04 9471
(3,039e+05) (3,326e+05) (1,240e+05)
[0,6909] [0,9446] [0,9392]
CPI -5,471e+07 2,591e+07* 2,231e+07
(6,558e+07) (1,515e+07) (1,771e+07)
[0,4046] [0,0880] [0,2084]
Exchange_rates 4,233e+07* 3,130e+07 3,050e+07**
(2,518e+07) (3,079e+07) (1,385e+07)
[0,0935] [0,3101] [0,0282]
Migrants_T 729,0* 880,4 1143**
(382,5) (3221) (560,9)
[0,0573] [0,7848] [0,0421]
time 2,296e+08* 3,641e+08** 3,492e+08***
(1,372e+08) (1,243e+08) (4,982e+07)
[0,0949] [0,0036] [0,0000]
Adj. R2 0,0957 0,7871
Significant variables in different models have coefficients that are similar to one
another and it leads to the conclusion that not only the random-effects model, which is
recommended by panel diagnostics, but other models as well, show similar trends. It can be
stated that relations in the recommended random-effects model is quite strong because
different models in levels indicates similar results in all three different models.
3.3.2. Models in differences. In order to test the strength of the empirical findings
revealed in the previous models, the same equations need to be run using first order
differences of variables. To claim that results of the research are empirically strong and valid,
the model in difference has to show similar results. Instead of the overall numbers of
variables, models in differences evaluate change of variables. Models in differences are as
informative as models in levels if data shows similar tendencies.
Comparison of all models in differences is seen below in Table 3 and Table 4 for
d_Political_Stability and d_Polity respectively.
Table 3
Comparison of Models in Differences: Dependent variable – d_Remittances_T; Independent
variable – d_Political_Stability
Pooled.dif Fixed.dif Random.dif

const 2,072e+08** 1,893e+08** 1,968e+08**
(8,890e+07) (5,675e+07) (9,271e+07)
[0,0202] [0,0009] [0,0344]
d_Political_Stability -3,068e+08* -6,509e+07 -1,772e+08
(1,665e+08) (1,687e+08) (3,095e+08)
[0,0661] [0,6998] [0,5671]
d_GDP_per_capi 2,775e+05 3,491e+05* 3,130e+05**
(2,110e+05) (2,115e+05) (1,269e+05)
[0,1893] [0,0996] [0,0140]
d_CPI 9,080e+06** 9,305e+06* 9,209e+06
(4,235e+06) (4,927e+06) (5,792e+06)
[0,0326] [0,0597] [0,1126]
d_Exchange_rat 8,729e+06 3,926e+06 6,293e+06
(1,211e+07) (1,033e+07) (1,038e+07)
[0,4714] [0,7040] [0,5445]
d_Migrants_T -264,2 -343,1** -298,7
(485,3) (115,2) (696,1)
[0,5865] [0,0031] [0,6681]
Adj. R2 0,0217 0,0410
The results of models in differences provided in Table 3 (political variable –
d_Political_Stability) vary greatly from the results of models in levels provided in Table 1.
In the model in differences the relationship between dependent and the main independent
explanatory variable is only found in one (pooled OLS) out of three models, while the
significance of other independent variables shows completely different patterns. Moreover,
models in differences have low value R-squared. This suggests that the relationship
discovered in the model in levels may be weak and spurious. I take into account this fact
when finalizing the conclusions on the empirical test.
Table 4
Comparison of Models in Differences: Dependent variable – d_Remittances_T; Independent
variable – d_Polity
Pooled.dif Fixed.dif Random.dif

const 4,924e+08** 4,298e+08** 4,479e+08**
(1,594e+08) (1,086e+08) (1,751e+08)
[0,0021] [0,0001] [0,0109]
d_Polity 6,244e+07 2,838e+07 4,109e+07
(3,822e+07) (3,125e+07) (9,784e+07)
[0,1031] [0,3644] [0,6747]
d_GDP_per_capi 2,860e+05 3,595e+05* 3,320e+05**
(2,012e+05) (1,961e+05) (1,244e+05)
[0,1560] [0,0675] [0,0079]
d_CPI 8,671e+06** 8,463e+06** 8,550e+06
(3,703e+06) (3,745e+06) (5,430e+06)
[0,0197] [0,0244] [0,1161]
d_Exchange_rate 7,323e+06 2,805e+06 4,431e+06
(7,972e+06) (6,199e+06) (8,513e+06)
[0,3588] [0,6512] [0,6030]
d_Migrants_T -370,5 -342,5** -348,8
(461,3) (131,0) (722,5)
[0,4223] [0,0093] [0,6296]
time -2,754e+07* -2,190e+07 -2,417e+07
(1,495e+07) (1,518e+07) (1,675e+07)
[0,0661] [0,1500] [0,1497]
Adj. R2 0,0216 0,1457
Analyzing models in levels and models in differences for independent variable Polity
results are similar as in the regression for Political_Stability variable. The results and
significance of the variables are not compatible in models in levels and models in differences.
Also, the later model has low R-squared. As in the previous regression, results of the models
in differences signals that the relationship discovered in the model in levels for political
variable Polity may be weak and spurious. I take this into account while building the
conclusions of my research.
3.4. Interpreting the Results of the Final Regression Model
Table 5 expose that the final model of the regression analysis (with political variable
Political_Stability) supports the hypothesis stating that countries with higher political
instability receive higher amounts of remittances. The final obtained econometric regression
model has the following equation: Remittances_T= -4,029e+09 –
2,470e+09*Political_Stability + 7,814e+04*GDP_per_capita + 5,217e+06*CPI +
3,392e+07*Exchange_rates + 825,6*Migrants_T + 2,579e+08*time.
Table 5
Final Model: Random-Effects: Dependent variable – Remittances; Independent variable –

Political_Stablity
Variable Coefficient Std. Error t-ratio p-value Significance
const -4.02869e+09 1.29839e+09 -3.103 0.0020 ***
Political_Stability -2.47012e+09 4.46453e+08 -5.533 0.000 ***
GDP_per_capita 78142.9 109353 0.7146 0.4752
CPI 5.21700e+09 1.10457e+07 3.071 0.7475
Exchange_rates 3.39196e+07 1.10457e+07 3.071 0.0022 ***
Migrants_T 825.608 497.435 1.660 0.0976 *
Time 2.57883e+08 4.32035e+07 5.969 0.000 ***

The second regression analysis with political variable – Polity (Table 6), however,
does not support the hypothesis which states that higher political instability prompts higher
amounts of remittances received. The second obtained econometric regression model has the
following equation: Remittances_T= -5,975e+09 + 3,902e+09*Polity +
9471*GDP_per_capita + 2,231e+07*CPI + 3,050e+07*Exchange_rates + 1143*Migrants_T
+ 3,492e+08*time.
Table 6
Final Model: Random-Effects: Dependent variable – Remittances; Independent variable –
Polity
Variable Coefficient Std. Error t-ratio p-value Significance
const −5.97535e+09 2.00481e+09 −2.981 0.0030 ***
Polity 3.90196e+08 1.83981e+08 2.121 0.0345 **
GDP_per_capita 9470.51 123999 0.07638 0.9392
CPI 2.23073e+07 1.77086e+07 1.260 0.2084
Exchange_rates 3.05003e+07 1.38510e+07 2.202 0.0282 **
Migrants_T 1143.24 560.905 2.038 0.0421 **
Time 3.49196e+08 4.98210e+07 7.009 8.66e-12 ***
3.4.1. Significance of variables. I shortly describe each independent variable relation
with the dependent variable. I indicate interpretation with signs (1) and (2) when talking
about two different regression equations with different main explanatory variables – (1)
Political_Stability and (2) Polity respectively.
3.4.1.1. Political Stability. The first regression model implies that political stability
has an impact on remittances inflows with a 1% significance level (p-value <0,0001). The
coefficient of the variable Political_Stability is -2,470e+09. The negative sign of the

coefficient support the hypothesis raised in this bachelor thesis. Thus, increasing the levels of
political stability decreases remittances inflows into developing countries. To be more
precise, remittances fall by 2,470 with every score increase in political stability. This means
that greater instability leads to greater increase of amount of remittances, which allows to not
reject the hypothesis.
3.4.1.2. Polity. The second regression model with the main explanatory variable
Polity suggests different results that the first regression equation. This model indicates that
political stability measured as Polity has an impact on remittances received with a 5%
significance level (p-value is 0,0345). However, the sign is different from what was expected.
The second regression equation with independent variable Polity implies that levels of
remittances increase with every score increase in political stability. Thus, I reject my
hypothesis when operationalizing the political variable as the module of Polity score.
3.4.1.3. Exchange rates. (1) Exchnge_rates is also a significant variable helping to
explain variation of remittances (p-value equals to 0,0022). Its coefficient is positive and
equals 3,392e+07. This means that an increase in exchange rate raises amount of remittances
received by 3,392e+07. (2) Variable Exchange_rates is significant (5% level) in the second
regression equation with a coefficient equal to 3,050e+07. This means that when the currency
in the home country appreciates, the amount of remittances in terms of foreign currency in
the receiving country increases.
3.4.1.4. Migrants_T. (1) Emigrant stock variable in the first regression model has
10% significance and p-value equal to 0,0976. Coefficient is equal to 825.608 meaning that
an increase in the number of emigrants, rises amount of remittances received by 825. (2)
Emigrant stock in the second equation shows higher level of significance (5%) and p-value is
equal to 0,0421. In this particular case the results illustrate that expended number of migrant
workers increase remittances by 1143. This shows the positive trend and proves that more
migrants produce greater amount of remittances.
3.4.1.5. Time. Additional independent variable – time – has a very high level of
significance (1%, p-value equals to 0) and helps explain variance of remittances in both
regression equations. The significance of a linear time trend might be understood that the
dependent variable contains a high inertia of values. Therefore, positive time coefficients
(2,579e+08 and 3,492e+08) illustrate that remittances maintain a clear tendency of growth
every year for the last decade.
3.4.1.6. Insignificant variables. Other explanatory variables, such as CPI and
GDP_per_capita do not contribute while explaining the variance in remittances in either of
the regression equations (p-values are insignificant). Therefore, I do not interpret coefficients
and signs of these variables.
3.5. Limitations, Recommendations and Concluding Comments
In this bachelor thesis I conducted two regression analysis with different independent
main explanatory variables – (1) political instability and the absence of violence and (2)
polity IV score – ceteris paribus.
The first regression analysis verifies the empirical validity of the hypothesis that
higher political instability in developing countries induces higher amounts of remittances
received. Empirical test discloses that political stability and exchange rates are the most
significant variables helping to explain the variation in remittances. Political variable has a
high significance (1%) and a negative coefficient, which illustrates that instability within the
regime has an influence on the remittances in the direction suggested by the hypothesis.
The results of the second regression equation suggest that the hypothesis should be
rejected. In this case, political variable Polity is significant but has a sign of the coefficient
which is not in favor of the hypothesis. According to the second regression equation I tested
empirically, higher political stability increases the amount of remittances received by
developing countries. Therefore, it can be claimed that instability of the regime does not have
the expected positive influence on the amount of remittances received. I did not conduct
explicit research on the relationship between regime consolidation and financial sector
development, but I assume that unconsolidated regimes I was talking about in the Chapter
Two may affect the overall environment of the financial sector and may stimulate distrust of
individuals. It logically leads to the lower amount of money transactions in the country,
including remittances. There is a room for additional research on this topic.
As I mentioned in the second chapter of this thesis, political instability does not have
one generally accepted measure and this might be the reason I got diversified results, which
illustrate that hypothesis cannot be fully rejected.
One of the possible limitations in my empirical research is the fact that remittances
data draws an imperfect picture of the overall amount of remittances received across the
developing countries, because remittances may be transferred using informal channels other
than banks or money sending organizations and this side of data is not officially identified. In
addition, there is a lack of data on some of the variables, so it is advisable to wait for data to
be fully accumulated in order to use it.
In the first chapter of this thesis, I described two main motives behind remittances:
risk alleviating and economic. According to the results of my empirical research and the
theoretical part in chapter one, it can be stated that migrants remit more money to the
politically unstable countries (in terms of violence) once the situation gets more unstable. On
the other hand, it can be claimed that migrants remit more money to the politically stable
countries and economic or the so-called investment motive outweighs the risk-alleviating
motive of the remitting process. Since the numbers I use to measure remittances are the
overall amount and those two motives cannot be separated in the aggregate empirical data
that might be the reason I got diverse results.
Finally, it is important to mention that, even though both operationalizations of the
main explanatory political variables show significance, and one of them verifies the empirical
validity of my hypothesis, conclusions need to be considered with caution. Models in
differences illustrates quite different results compared to the recommended model in levels.
Because of this reason and limitations stated above, the obtained relationships might not be
sufficiently strong in order to verify the theory empirically.

Conclusions
In the beginning of the thesis I raised the aim to verify whether political instability has
an impact on the amount of remittances received by developing countries. In the first part I
reviewed the literature regarding variation in remittances, as well as their determinants and
consequences. What can be emphasized from the first part is several points: (1) remittances
have a mostly positive effect on economic growth, they increase the standard of living and
help to reduce poverty; (2) remittances may have a negative effect on economic growth
because of the possibility of the Dutch disease; (3) remittances received by the migrants’
household usually go towards additional consumption and investments; (4) the amount of
remittances received is determined by micro- and macro-economic factors such as the
number of migrants, the number of dependents at home, marital status, education level and
age of the migrant, wage rates and economic situation in the host country, economic situation
in the country of origin, exchange rates and relative interest rates between sending and
receiving country. However, variation of remittance inflows cannot be explained with only
economic factors, political risk should also be taken into account.
In the second part of this thesis, I described different definitions and approaches
towards political instability, because political science literature does not provide one
conclusive definition and measurement of this phenomenon. After that, I have illustrated the
relation between political instability and economic growth. The presence of political
instability mainly affects productivity, causes higher levels of corruption, deters investment
because of possible violation of property rights, and together with that deters the amount of
remittances transferred for investment purposes. On the other hand, instability increases
uncertainty which promotes people to save less for the future and spend more; this leads to an
increase in consumption, leading to an increase in demand.
Since the effect of the political situation in the country on the overall economy and
remittances is not completely clear, I decided to test it empirically. As described in the first
chapter, a large part of remittances is transferred because of risk-alleviating reasons rather
than economic motives. Families of migrant workers left behind in the home country demand
more money during the hardships and instabilities. Therefore, country with high levels of
political instability needs more money to be sent by migrant workers residing in the host
country. Based on this I formulate the hypothesis which states that greater degree of political
instability in the country generates higher amount of remittances received.
Finally, in the third part of this bachelor thesis I ran two different regression analysis
with different main explanatory political variables ceteris paribus. I tested how instability
within the regime and instability of the regime may influence the amount of remittances
received by developing countries. The first regression analysis with political variable
measured as political stability and the absence of violence verifies the empirical validity of
the hypothesis that higher political instability trigger greater amounts of remittances received.
According to the empirical test, political stability and exchange rates are the most significant
variables that contribute to the explanation of the variation in remittances. However, a second
regression equation with the main explanatory political variable measured using Polity IV
rejected the hypothesis suggested in this bachelor thesis. The variable itself is significant, but
the coefficient, suggests that political instability influences remittances in a different direction
than hypothesized. The results I obtained in my empirical research are not strong enough, so
for the future analysis I recommend to come up with different transformation or empirical
methods while working with Polity IV variable, as well as use a longer time period and better
balanced data if it becomes available. Those improvements could lead to more reliable
conclusions regarding the relationship between political instability and the variance in the
remittances.
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Appendices
Appendix A
Table 1
A list of all countries in the sample by region
East Asia & Pacific Europe & Central Asia Latin America & Caribbean
Cambodia KHM Albania ALB Argentina ARG
China CHN Armenia ARM Belize BLZ
Fiji FJI Azerbaijan AZE Bolivia BOL
Indonesia IDN Belarus BLR Brazil BRA
Kiribati KIR Bosnia and Herzegovina Colombia COL
Lao PDR LAO BIH Costa Rica CRI
Malaysia MYS Bulgaria BGR Dominica DMA
Marshall Islands MHL Georgia GEO Ecuador ECU
Mongolia MNG Hungary HUN El Salvador SLV
Myanmar MMR Kazakhstan KAZ Grenada GRD
Papua New Guinea PNG Kosovo Guatemala GTM
Philippines PHL Kyrgyz Republic KGZ Guyana GUY
Samoa WSM Macedonia, FYR MKD Haiti HTI
Solomon Islands SLB Moldova MDA Honduras HND
Thailand THA Montenegro MNE Jamaica JAM
Timor-Leste TLS Romania ROU Mexico MEX
Tonga TON Serbia SRB Nicaragua NIC
Vanuatu VUT Tajikistan TJK Panama PAN
Vietnam VNM Turkey TUR Paraguay PRY

Turkmenistan TKM Peru PER
Ukraine UKR St. Lucia LCA
Uzbekistan UZB St. Vincent and the
GrenadinesVCT
Suriname SUR
Venezuela, RB VEN
Middle East & North Africa South Asia Sub-Saharan Africa
Algeria DZA Afghanistan AFG Angola AGO
Egypt, Arab Rep. EGY Bangladesh BGD Benin BEN
Iran, Islamic Rep. IRN Bhutan BTN Botswana BWA
Iraq IRQ India IND Burkina Faso BFA
Jordan JOR Maldives MDV Burundi BDI
Lebanon LBN Nepal NPL Cabo Verde CPV
Libya LBY Pakistan PAK Cameroon CMR
Morocco MAR Sri Lanka LKA Chad TCD
Syrian Arab Republic SYR Comoros COM
Tunisia TUN Congo, Dem. Rep. COD
West Bank and Gaza PSE Congo, Rep. COG
Yemen, Rep. YEM Ethiopia ETH
Gabon GAB
Ghana GHA
Guinea GIN
Guinea-Bissau GNB
Kenya KEN
Lesotho LSO
Liberia LBR
Madagascar MDG
Malawi MWI
Mali MLI
Mauritania MRT
Mauritius MUS
Mozambique MOZ
Namibia NAM
Niger NER
Nigeria NGA
Rwanda RWA
Senegal SEN
Seychelles SYC
Sierra Leone SLE
South Africa ZAF
Sudan SDN
Swaziland SWZ
Tanzania TZA
Togo TGO
Uganda UGA
Zambia ZMB
Zimbabwe ZWE
Source: The World Bank database. Retrieved from: http://data.worldbank.org/about/country-

and-lending-groups
Appendix B
Table B1
The Composition of an Institutionalized Autocracy Score
Note. From Marshall, M. G., Gurr, T. R., & Jaggers, K. (2013, April 21). Polity IV Project:
Dataset Users’ Manual. Retrieved from Center for Systemic Peace:
http://www.systemicpeace.org/inscrdata.html; p.16.
Table B2
The Composition of an Institutionalized Democracy Score
Note. From Marshall, M. G., Gurr, T. R., & Jaggers, K. (2013, April 21). Polity IV Project:
Dataset Users’ Manual. Retrieved from Center for Systemic Peace:
http://www.systemicpeace.org/inscrdata.html; p.16.
Appendix C
Table C1
Panel Diagnostics for Pooled OLS, Dependent Variable – Remittances_T; Independent

Variable – Political_Stability
Test p-value Hypothesis Results

Joint significance of 6,90107e+018 A low p-value counts against Pooled
differing group means the null hypothesis that the
pooled OLS model
is adequate, in favor of the
fixed effects alternative
Breusch-Pagan test 0 A low p-value counts against Random-
statistic the null hypothesis that the effects
pooled OLS model
is adequate, in favor of the
random effects alternative
Hausman test statistic 0,455082 A low p-value counts against Random-
the null hypothesis that the effects
random effects
model is consistent, in favor of
the fixed effects model
Table C2
Panel Diagnostics for Pooled OLS, Dependent Variable – Remittances_T; Independent

Variable – Polity
Test p-value Hypothesis Results

Joint significance of 3.4222e-115 A low p-value counts Fixed-effects
differing group means against the null hypothesis that
the pooled OLS model
is adequate, in favor of
the fixed effects alternative
Breusch-Pagan test 0 A low p-value counts Random-effects
statistic against the null hypothesis that
the pooled OLS model
is adequate, in favor of
the random effects alternative
Hausman test statistic 0.6881 A low p-value counts Random-effects
against the null hypothesis that
the random effects
model is consistent, in
favor of the fixed effects model
Appendix D
Table 1
Variance Inflation Factors
Variable Values
Political_Stability 1,216
GDP_per_capita 1,145
Exchange_rates 1,029
Migrants_T 1,077
CPI 1,112
Note: Minimum possible value = 1.0
Values > 10.0 may indicate a collinearity problem

Appendix E
Table 1
Variation of Dependent Variable over Time

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POLITICAL INSTABILITY IN DEVELOPING COUNTRIES: THE EFFECT ON

Presented to the Faculty

of Economics and Politics programme at ISM University of Management and

in Partial Fulfilment of the Requirements for the Degree of

Dr. Eglė Verseckaitė (Grzeskowiak)

Atminaitė, Greta. Political Instability in Developing countries: The Effect on Remittances

Management and Economics, 2015.

Accelerated labour migration process has increased magnitude of remittances rapidly

external capital flows to developing countries. Therefore, there is a lack of academic

remittances and a number of micro- and macro-economic determinants of remittances;

however, variation of remittances is not explained fully by economic determinants. Because

review different approaches towards political instability. The presence of a political

greater amount of remittances received by developing countries. In order to check empirical

strong and additional research is needed.

Key words: remittances, political instability, economic growth, political violence

1.1. Definition and Variation of Remittances .......................................................... 10

1.2. Relevance of Remittances ................................................................................. 12

1.2.1. Effects of remittances on economic growth............................................... 13

1.2.1.1. Positive effects of remittances on economic growth. ......................... 13

1.2.1.2. Negative effects of remittances on economic growth. ........................ 15

1.2.2. Remittances, consumption and investment ................................................ 16

1.2.2.1. Remittances and consumption. ........................................................... 16

1.2.2.2. Remittances and investment. .............................................................. 18

1.2.3. Remittances, poverty and welfare. ............................................................. 19

1.2.4. Remittances and employment .................................................................... 20

1.3. Theories and Determinants of Remittances ...................................................... 21

1.3.1. Theories of labour migration and remittances ........................................... 21

1.3.2. Microeconomic determinants of remittances ............................................. 23

1.3.3. Macroeconomic determinants of remittances ............................................ 24

2. Political Instability ................................................................................................... 28

2.1. Definitions of Political Instability..................................................................... 28

2.2. Different Approaches Towards Political (In)Stability ...................................... 28

2.2.1. Instability within the political regime ........................................................ 29

2.2.1.1. Political stability as the absence of structural changes ....................... 29

2.2.1.2. Politically motivated violence............................................................. 30

2.2.1.3. Mass civil protest. ............................................................................... 32

2.2.2. Instability of the political regime ............................................................... 33

2.3. Effects of Political (In)Stability on Economic Growth..................................... 34

2.3.1. Political instability and negative effects on economic growth .................. 35

2.3.1.1. Political instability, political myopia and economic growth. ............. 35

2.3.1.2. Political instability, corruption, economic development and

2.3.1.3. Political instability and productivity. .................................................. 37

2.3.1.4. Political instability, property rights and investment ........................... 38

2.3.2. Political instability and positive effects on economic growth. .................. 39

2.3.2.1. Political instability and household consumption. ............................... 39

3. Empirical research ................................................................................................... 42

3.1. Data Sample, Methodology and Variables ....................................................... 42

3.1.1. Sample selection ........................................................................................ 42

3.1.2. The dependent variable: remittances ......................................................... 43

3.1.3.1. Political stability and the absence of violence .................................... 44

3.1.3.2. Polity. .................................................................................................. 45

3.1.4. Control variables. ....................................................................................... 45

3.1.4.1. Emigrant stock. ................................................................................... 45

3.1.4.2. GDP per capita .................................................................................... 46

3.1.4.3. Consumer price index (CPI) ............................................................... 46

3.1.4.4. Exchange rate. ..................................................................................... 47

3.1.5. Econometric equation. ............................................................................... 47

3.2. Panel Data Analysis .......................................................................................... 48

3.2.1. Normality of variables. .............................................................................. 48

3.2.2. OLS panel diagnostics. .............................................................................. 48

3.2.3. Linear time trend. ....................................................................................... 48

2.3.4. Heteroscedasticity and mulicollinearity. .................................................... 49

3.3. Comparison of Different Models ...................................................................... 49

3.3.1. Models in levels. ........................................................................................ 49