The Effectiveness of Remittances and Foreign Aid in promoting Savings and Investment in Sub-Saharan Africa

Yéro Baldé, Université de Limoges

This study investigates the macroeconomic impact of remittances on savings and investment in Sub-Saharan Africa (SSA). It also analyzes comparatively the effectiveness of remittances and foreign aid (official development assistance) in promoting savings and investment. We use a respective sample of 37 and 34 SSA countries over the period 1980-2004. Using OLS and instrumental variables (2SLS) estimation methods with country fixed-effects, the results suggest that both remittances and foreign aid promote savings and investment in Sub-Saharan Africa, but remittances are strongly more effective. The coefficients of remittances are 6 to 7 times higher than those of foreign aid. A 10% increase in remittances increases savings by 7% and investment by 6.5%, while the same 10% increase in foreign aid increases savings and investment by respectively 1.6 % and 1%. According to these results, remittances, although less important in volume and in percentage of GDP, are more effective in boosting savings and investment in SSA than foreign aid. However, when foreign aid is efficiently used, it can be an important complement to remittances by allowing vulnerable households to have income above the threshold subsistence’s level so they can use larger share of remittances for savings and investment purposes.