Abstract
This article examines the relationships between remittance and financial development (financial institutions and markets) in India and China on the availability of annual data from 1984 to 2018. Human capital formation is considered as a channel of remittances in financial development functions. Institutional quality, Economic globalization, foreign direct investment, economic growth, and government investment are included as a set of control variables in the financial development function. The results of the ARDL bounds test model indicate that remittance can positively impact financial development dynamics in both countries. While considering the human capital formation, higher levels of skilled human capital (secondary and tertiary enrolments) enhance financial development, but low-level human capital (primary enrolments) fails to do so. One contradiction found from the result is that remittance is negatively but significantly affecting financial institutions in India, and also detrimental to China's financial market. Oppositely, remittance positively impacts India’s financial market and China’s financial institutions. We find the varying impacts of control variables on financial development. The outcome of this paper stresses the necessity of a higher level of skilled human capital and improved institutional quality in both countries, which provides better utilization of remittances and other foreign and domestic financial flows.
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Notes
Brain drain is the migration of skilled human resources for business, education etc. It is mainly migrating personnel for better standard of living, high perks, and more stable conditions in different places worldwide.
Bansak and Chezum (2009), and Alcaraz et al. (2012) report a positive impact of remittances on investment, whereas Combes and Ebeke (2011), and Donou-Adonsou and Lim (2016) find a positive effect on consumption and no significant effect on investment. Regarding the effects on income and growth, Pradhan et al. (2008), and Lim and Basnet (2017) find that remittances have positive influences on economic growth. Other studies, including those Singh et al. (2011), and Donou-Adonsou and Lim (2016) indicate that remittances have insignificant or even negative impacts on growth. Gupta et al. (2009) find evidence that remittances have poverty reduction effects in Sub−Saharan Africa. Still, other research suggests that the beneficial effects of remittances depend on the strength of the financial system (Bettin & Zazzaro, 2012; Giuliano & Ruiz-Arranz, 2009) or the quality of institutions (Ramirez & Sharma, 2008; Singh et al., 2011).
We took natural log (LN) to correct for its positively skewed distribution only in the series of EGLOB, GDP, and GFCF. Other variables (i.e., FD and IQ) are not converted into logarithm form and used in absolute terms owing to their zero and negative values.
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Pal, S. Does Remittance and Human Capital Formation Affect Financial Development? A Comparative Analysis Between India and China. Asia-Pac Financ Markets 30, 387–426 (2023). https://doi.org/10.1007/s10690-022-09380-w
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DOI: https://doi.org/10.1007/s10690-022-09380-w
Keywords
- Remittances
- Human capital formation
- Institutional quality
- Financial development dynamics
- India and China