Remittances and government expenditures on human capital in developing countries

Abstract

This paper investigates the effect that remittances have on government expenditures on human capital within a large panel of developing countries. Remittances reduce government expenditures on education by 0.23–0.84 percentage points for every 10 percentage point increase in remittances. Remittances, by contrast, increase government expenditures on health by 0.99–1.83 percentage points for every 10 percentage point increase in remittances. These findings indicate that remittances induce reallocation of government expenditures from education to health. Democratic political institutions shape the relationship between remittances and government expenditures on human capital. I present additional evidence that government expenditures on education respond differentially to remittances in Small Island Developing States, a group of countries with unique characteristics that make them vulnerable to adverse economic and environmental shocks.