AN EMPIRICAL INVESTIGATION OF THE INTERACTIONS BETWEEN REMITTANCE INFLOWS AND HUMAN CAPITAL DEVELOPMENT (IMPLICATION FOR THE ECONOMIC GROWTH IN NIGERIA)

ABSTRACT

This study analyzes the interactions between remittance inflows and human capital development: implication for economic growth in Nigeria. Using Nigeria most recent data set on remittances inflows, human capital development and economic growth this study investigated how remittances inflow influences education and health spending in Nigeria. To  unravel  this,  we  adopted  an  Autoregressive  Distributed  Lag  (ARDL)  model.  We estimated  an  error  correction  equation  due  to  the  long-run  nature  of  the  remittances inflows  and  human  capital  variables.  The major  finding  is that remittances  inflows  to Nigeria exert significant and positive impact on human capital development proxy by education and healthcare spending. The study found that a unit increase in remittances inflow brings about 0.80units increase to education  spending and 0.15units increase to health spending. Other findings are that GDP per capita growth rate, labour force participation  rate, gross secondary  and  tertiary  school  enrolment also have significant impact on government education spending in Nigeria. The study found that in every one unit of disequilibrium  in remittance impact of human  capital development, 100 percent adjustment is made in a year lag. This implies that any disequilibrium in 1 year lag in the influence of remittances to human capital investment, 100 percent long-run correction is made; bring it to long-run equilibrium state. Also the disequilibrium in government health spending shows that 18 percent adjustment is made in the 1 year lag of disequilibrium in model 2. The consequence of this result is that model 1 has the fastest speed of adjustment. The highest correction  of disequilibrium  is observed  in government  education  spending model compared with government health spending model. Finally, the study found that the human capital development impact of remittance-based investments tend to be nil, and that overcoming such limitations requires public interventions, such as, providing orientation and guidelines for investments, which will otherwise follow a spontaneous logic with little possibility of success, and help changing the structural conditions which inhibit or frustrate investments (chronic rural problems such as lack of irrigation, roads, energy supply, etc

CHAPTER ONE INTRODUCTION

1.1    Background of the Study

The size of remittance inflows, the importance of human capital and technological diffusion in economic growth and development process of developing countries including Nigeria have  triggered  interesting  debates  among  scholars  and  policymakers  (see  for  example, Orozco (2003;  Ambrosius, 2006 and Chami, et. al., 2008) of international and development economics extraction. There are a number of reasons why the link between remittances, human  capital and  economic  growth  and  development  would  interest  policy makers  in Nigeria. In the past two decades, the Nigerian financial sector has undergone various types of reforms and  it is progressively gathering momentum  in size and  depth, not only to stabilize the financial sector but in its readiness to absorb tremendous amount of domestic and  foreign  financial  capital.  The  country has  equally adopted  varied  policy measures aimed at exploring new initiatives to attract foreign direct investment in apparent realization that inflow of international transfers could be huge alternative sources of funding of investment projects in various sectors of the Nigerian economy.

Remittance inflow as perceived to be one of the major sources of human capital investment, external funding and poverty reduction strategy, especially in the developing economies was ignored either because of its informal modus operandi which constitutes a problem for data  required  for  its  impact  assessment  or  that  it  has  not  assumed  any  phenomenal dimension  as  to  warrant  a  closer  scrutiny.  Today,  there  is  a  dramatic  and  remarkable upsurge   in   the  volume   and   contribution   of  remittances   to   developing   economies. Remittance flows have assumed  a significant  dimension  all over the world rising from US$19.6 billion in 1985 to US$206.0 billion in 2006 (Ambrosius, 2006), with small developing poor countries depending heavily on it as source of financing development. According to World Bank report of 2009, remittances rank behind foreign direct investment (FDI) as source of external funding for developing countries.

A record  has  shown  that  remittance  flows,  especially in Nigeria  exceed  foreign  direct investment,  portfolio  flows from  financial  markets and  official development  assistance. Some countries’ total remittance receipts amount to a substantial portion of their imports

and a nontrivial fraction of GDP (Chami, et. al., 2008). This was collaborated by the study of Orozco (2003), which shows that, on average, about 65 per cent out of the total official remittances inflows to Sub-Saharan Africa (SSA) move to Nigeria. He equally estimated that about 2 per cent of global inflows of remittances come to Nigeria. Agu (2009) study corroborated the observed increased inflow of remittances to Nigeria. He submitted that there has been tremendous inflow of remittances to Nigeria since the commencement of civil rule in 1999. For instance,  from a negative growth  rate of 17.9 per cent in 1999, remittances grew to about 186.2 per cent in 2005. In 2007 remittances growth rate of 69.67 per cent stood only second to oil in terms of receipts.

Based on this trend in remittance flows, this work is particularly interested in tracing the effect it has on human capital development sectors. This is because for remittance to help in improving the welfare of the citizenry its impact on the major human capital sectors must be traced in order to draw a better policy attention that can bring about easy  flow of the channel to the poor.

1.2     Statement of the Problem

The inflow of remittances in some developing economies such as Nigeria cannot be overemphasized because of its role in human capital development. This is crucial because in Nigeria for instance, culture demands that those that are more financially vibrant would take care of a lot more than just their immediate families. As a result, the average Nigerian family consists of a mother, father, children and many dependants such as in laws, cousins, and sometimes, neighbors. Once a young Nigerian gets a job, and sometimes even before that, he or she must begin to contribute to dependants. For those living abroad, their foreign currency, when changed to local Naira can be a helpful financial addition.

Obviously,  between  8 and  15  million  Nigerians  live  abroad  and  remit money to  their various families as a way to provide financial assistance (Nwajiuba, 2005; Tomori and Adebiyi, 2007). This is crucial on a personal level because of Nigeria’s high unemployment rate. It is also reported that the money sent to Nigeria through unconventional means is actually 4 times the amount reported.

On a fiscal level, remittances act as a source of human capital accumulation, second only to foreign direct investment. Unlike foreign direct investment which rises and falls on the

whim of investors and business decisions, remittances are a stable and constant source of capital  in  the  national  economy  (Adebiyi,  2007;  Agu,  2009).  In  2005,  remittances constituted 5% of Nigeria’s GDP, with many Nigerians abroad sending remittances home for human capital investment purposes (i.e. real estate purchases, healthcare and schooling of their younger ones), and this money allows those in the Diaspora to play a role in the country’s development while bettering themselves. Unfortunately, remittances dropped between 2009 and 2011 as a result of the global economic slowdown.

Remittances, on the other hand, function as macroeconomic stabilizer and source of human capital development (Oluwaola 2007). Nigeria, like other developing economies in Africa, is typically characterized  by weak financial  institutions  and  low “financial  deepening”, measured as a low ratio of credit to GDP and a low ratio of the monetary aggregates M2 or M3 to GDP, which limits the process of human capital accumulation and hinders economic development.  A large part of the Nigeria population  and typically the small and micro enterprises of the informal sector have no access to bank credit and thus operate outside the financial sector, with low capital intensity and low productivity (Eichengreen et al. 2002).

Available data show that remittances have grown to a significant proportion to become the second largest source of foreign exchange next to oil. Golberg and Levi (2008) recorded that remittances inflow to Nigeria was about US$322 million, 14.8 percent annual increase from 1995. According to the CBN statistics, total remittances to Nigeria are in the neighborhood of US$18 billion in 2007, making her the single largest recipient in the sub- Saharan Africa. Dilip et al (2009) estimated Nigeria to be among the ten top recipients of remittances in 2008, behind India, China, Mexico, Philippines and Poland. In that direction, Nigeria accounts for more than 50 percent of the total remittances inflow to SSA which is estimated to be in the neighborhood of more than US$20.00 billion in 2008. See table 1 for details of remittances inflow to regions and Nigeria.

Table 1: Remittances inflow to developing economies and Nigeria (2002-2008)

Year	Remittances inflow $US billion				Percentage distribution of remittances inflow across regions and Nigeria
	Nigeria	Sub Saharan	Developing	World (Wd)	SSA %	SSA %	Dc % Wd	Ng % SSA
	(Ng)	Africa (SSA)	countries (Dc)		Wd	Dc

2002	1.21	5.00	116.00	170	2.94	4.31	68.24	24.18
2003	1.06	6.00	144.00	207	2.90	4.17	69.57	17.71
2004	2.27	8.00	164.00	235	3.40	4.88	69.79	28.41
2005	3.33	9.00	195.00	268	3.36	4.62	72.76	36.99
2006	5.43	13.00	229.00	307	4.23	5.68	74.59	41.81
2007	9.22	19.00	281.00	371	5.12	6.76	75.74	48.53
2008	9.98	20.00	305.00	397	5.04	6.56	76.83	49.90

Source: Data from (WB and Dilip et al, 2009)2008 estimate and is subject to revision

In  spite  of the  growing  importance  of remittances  to  the  Nigerian  economy like  most developing countries its impact on human capital investment is not known. According to a work by Lindley (2008), of the 190 million international migrants in the world sub-Saharan Africa constitutes about 8.4 percent while growth in remittances flows have assumed  a dimensional proportion in the last 20 years, yet its impact on human capital development remains unclear. Perhaps the take off point in addressing this lacuna is to continue with the momentum of country-specific studies like the present study, because like most economic variables it does not have one cloth-fit all relationship with the domestic economy. That is, the macroeconomic impact of remittances is not universal. It has a country-specific effect depending on the volume of remittances and the domestic macroeconomic policies designed to absorb it as external shock.

Again,  in recent times, there are limited  studies to address analytical issues relating to remittances  and human  capital  investment  in  the  Nigerian  economy irrespective  of the emerging trend in the volume of remittances inflow in Nigeria. Empirical researches were in the area of microeconomic impact of remittances such as, poverty and inequality. For instance Hernández-Coss and Bun (2007) focused on the analytical issues relating to UK- Nigeria  remittances  corridor;  Chukwuone  et  al  (2008)  investigated  the  poverty  and inequality implications of remittances using micro level data; Nwajiuba (2005) whose work was based on general characteristics of migrants in the southern Nigeria and Odimuko and Riddell (1979) dealt with urban-rural cash remittances in the South-Eastern Nigeria. But, remittances in a wider sense transcend micro impact assessment and may have more serious implications for major human capital variables like education expenditure, healthcare spending, training in relevant fields etc. that would ultimately affect internal and external

balances of the recipient country. Hence, given the large size of aggregate remittance flows, they are expected to have significant human capital effects on the economies that receive them. In addition, remittances have been identified as a potential source of funding for human capital development (Chami, et.al, 2008).

Furthermore, there are two opposing forces that determine the impact of remittances on human capital development – a pull and push effect. That is, it could pull an economy out of poverty by increasing the standard of living of households as well as push an economy into  poverty by posing  a human  capital  demand  management  problem  and  instability. However, its impact on the human capital investment depends on the preponderance of either of these two opposing forces (Udah, 2011).   Thus, the study investigates the interactions  between   human  capital  investment  and  remittances   in  Nigeria.  It  also investigates if the pull-effect can off-set the push-effect by developing a small-scale econometric model that links remittances to other human capital sector variables in Nigeria. The study therefore answers such questions like: do remittances spur human capital investment? Do remittances enhance and sustain human capital investment? Do remittances enhance or hamper healthcare in Nigeria? Do remittances affect schooling and in what magnitude?

1.  What are the interactions between remittances and human capital investment?

2.  What is the impact of remittances on schooling in Nigeria?

3.  What is the impact of remittances on the healthcare utilization in Nigeria?

1.3     Objectives of the Study

The objective of this study is to establish the nexus between remittances and human capital investment in Nigeria. Specifically, the study examines the following:

i)    The impact of remittances on education spending in Nigeria.

ii)   The impact of remittances on the healthcare spending in Nigeria.

1.4 Hypotheses of the Study

Based on the above objectives of this study, the following hypotheses are formulated

1)  There is no significant impact of remittances on education spending in Nigeria.

2)  There is no significant impact of remittances on the healthcare spending in Nigeria.

1.5     Policy Relevance of the Study

Let’s  state  here  that  despite  the  ever  increasing  size  of remittances,  both  internal  and international, and importance of remittance and human capital development trend for policy making purposes, there has been little effort to analyze its effect on human capital development in Nigeria, (Adams, 2005). However, the policymakers are getting interested in what might end up being the greatest pool of untapped human development resource mine. But they will definitely need help – help to understand the market, help to institute relevant policies to aid growth and help to use the proceeds from remittances to catalyze human capital development. A study like this intensifies the attempts to increase the significance and impact of remittances on human capital development. The understanding of the impact of remittance on human capital development and the market for the provision of remittance services is still low and this study is aimed at contributing heavily to these.

Finally,  there  is  a  question  of  whether  remittance  inflows  are  channeled  to  human investment or mere consumption spending. That is, the question of the relative impact of remittances on direct consumption and human investment spending. This study attempts to clarify this question. The result here is expected to reinforce the microeconomic evidence of the impact of remittance on the economy. That is, survey on what recipients do with these remittances.

1.6     Scope of the Study

This study is limited to examining the impact of remittances on human capital development in Nigeria, so it is a Nigerian based study. It uses data on the part of remittance inflows that move into the human capital development sectors (mainly education and healthcare). Remittance here is defined as the portion of the earnings in foreign currency that migrants send to their family members in Nigeria which is viewed to have a crucial income smoothening effect and contribution to improved human capital accumulation and general welfare of the households in Nigeria. The study covers from 1970 to 2010.

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