Real Decreto Ley 14/

We present our results inTables 3.2and3.3. Each table has three different specifications. In Table 3.2, we use three different variables to capture political stability. In the first specification, political stability is proxied by the democracy variable defined in the data section, whereas regime dur- ability and the institutional quality variables are used as a measure of political stability in the second and third specifications, respectively. InTable 3.3, we add the interaction term of political stability and remittances variable.

We can see fromTable 3.2(all specifications) that personal remittances have no significant effect on the economies of OIC countries, suggesting remittances do not promote growth in these countries. Our results are consistent with the findings of Barajas et al. (2009) and Adams and Klobodu (2016). Our results also correspond to those of Chami et al. (2005), who argue that remittances are not profit-driven and, hence, have

Table 3.2 Remittances, political stability, and economic development

Dependent variable 1 GDP per capita 2 GDP per capita 3 GDP per capita

M2 0.409*** 0.436*** 0.410*** (0.000) (0.000) (0.000) FDI 0.0140* 0.0153** 0.0125* (0.055) (0.036) (0.084) Trade −0.133* −0.157** −0.0345 (0.053) (0.025) (0.579) Schooling 0.583*** 0.578*** 0.530*** (0.000) (0.000) (0.000) Remit 0.0196 0.0159 0.015 (0.241) (0.197) (0.158) Democracy 0.00527* (0.088) Durability −0.0151 (0.241) Institutions −0.275*** (0.007) CONS 4.153*** 4.208*** 4.870*** (0.000) (0.000) (0.000) N 220 200 223 R2(between) 0.22 0.23 0.22 p-values in parentheses *_{p< 0.1,}**_{p< 0.05,}***_{p< 0.01}

no effect on economic development. Further, our results are also in line with the endogenous migration approach, which argues that there are altruistic motives behind remittances. Our results are not surprising because many OIC countries are affected by the war and terrorism, and hence we believe most remittances are made out of altruism. Interestingly, our remittance variable becomes significant (in the case of regime type and institutions) when we add the interaction term of political stability and remittances.

Our political stability variable measured by democracy is found to have a significant and positive effect on economic development in OIC

Table 3.3 Remittances, political stability, and economic development

Dependent variable 1 GDP per capita 2 GDP per capita 3 GDP per capita

M2 0.235*** 0.423*** 0.415*** (0.003) (0.000) (0.000) FDI 0.0241** 0.0139* 0.00911 (0.049) (0.063) (0.202) Trade −0.08 −0.131* −0.0153 (0.391) (0.069) (0.803) Schooling 0.700*** 0.583*** 0.552*** (0.000) (0.000) (0.000) Remit 0.150*** −0.0218 0.677*** (0.000) (0.436) (0.001) Democracy 0.0592*** (0.000) Interaction (1) −0.0751*** (0.000) Durability −0.0176 (0.186) Interaction (2) 0.0127 (0.153) Institutions −0.233** (0.021) Interaction (3) −0.194*** (0.001) CONS 3.844*** 4.138*** 4.518*** (0.000) (0.000) (0.000) N 187 200 223 R2_{(between) 0.47 0.2 0.23} p-values in parentheses *_{p< 0.1,}**_{p< 0.05,}***_{p< 0.01}

countries. Our results are in line with those of Grier and Munger (2006) and Adams and Klobodu (2016). Both of these studies also suggest that democratic countries grow faster than autocratic ones.

On the other hand, political stability proxied by regime durability variable suggests it has no significant effect on the growth of these coun- tries. This result suggests that it is not the longevity but the form of government that matters since thefirst specification suggests that democ- racies are expected to grow faster than dictatorships.

Finally, when we measure political stability by the institutional quality variable (specification 3), our findings reveal that institutional quality lowers growth. Although this variable does not directly capture political stability, the results are very surprising. We expected the quality of institu- tions to have a positive effect on OIC economies.

Looking at Table 3.3 in which we introduce the interaction terms in our estimations, we can see that the interaction term is negative and significant except when that term is the regime durability–remittances variable. More precisely, our results indicate that political stability and remittances are substitutes rather than complementary in promoting development. On the other hand, the regime durability–remittances inter- action term suggests that the effect of remittances is independent of the longevity of a government. To conclude, we can say that the effect of remittances is lower in democracies and countries with better institutions. With regard to other control variables, our results are usually in line with those found in the literature. For instance, thefinancial development vari- able, proxied by M2, has a positive effect on development. This result is in line with the vast majority of the literature, which suggests that the associa- tion between the two is positive (King and Levine 1994; Easterly and Levine 2001). The channel through which financial development affects economic growth is by reducing transaction costs and bridging the gap between lenders and borrowers. A goodfinancial system should promote increased savings and investment by improving available information on

firms, managers, and other aspects of organizations (Levine2005). Likewise, FDI and schooling also have a positive impact on OIC economies. In contrast, ourfindings suggest that the impact of trade is insignificant, except when political stability is used as a proxy for regime durability, where the coefficient is negative and significant.

The positive impact of FDI aligns with findings in earlier literature (Romer 1993; Carkovic and Levine 2002; Chowdhury and Mavrotas 2006). For instance, Romer (1993) suggests that there is an idea gap 3 REMITTANCES, POLITICAL STABILITY AND ECONOMIC DEVELOPMENT… 37

between rich and poor countries and that foreign investment can reduce that gap through technology transfer and, thus, can have a positive impact on development. Similarly, the education variable is also in line with

findings in the literature (Barro2001; Pelinescu2015). This result is not surprising since education is expected to improve the skills and capabilities of the labor force, which eventually leads to greater productivity and, hence, spurring economic development.

3.5

C

Although the literature on remittances and economic development is growing, the topic has been ignored in the case of OIC countries. Even though the importance of personal remittances in promoting development is debatable, we nevertheless revisit the debate for the case of 16 OIC countries for the 20-year period from 1993 to 2012. The countries and time period were chosen deliberately, and the choice depended on data availability. We also examined the role of political stability in influencing the impact of remittances.

Our results suggest that the inflows of personal remittances have no effect on economic development. These results imply that other forms of

financialflows, such as FDI (FDI is found to have a significant effect on our estimations), may matter more for these countries than remittances. Thus, developing the infrastructural facilities can be beneficial for these countries as they can help attract more FDI. On the other hand, political stability proxied by regime durability and institutions also has no signifi- cant effect. However, when we measure political stability by the democ- racy variable, ourfindings suggest that democratic countries grow faster than autocracies. Overall, our results suggest that it is not the duration of government but the form of government (democratic/autocratic) that matters. This is a significantfinding and has serious implications for our sample countries as a substantial number of our sample countries have experienced dictatorship for decades.

Finally, the interaction terms suggest that the effects of remittances and political stability are not complementary as the coefficients are negative. Overall, our results imply that the effect of remittances is lower in coun- tries with greater political stability. This implies that countries with greater political stability do not necessarily have to rely on remittances even if the countries have low saving rates and large budget deficits.

N

1. The average economic growth in OIC countries was 3.8% in 2014. 2. We employed Random effect estimations.

R

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Mohsin Ali is an ex-banker-turned-researcher. He is currently pursuing his Ph.D.

in Islamicfinance at INCEIF. His area of interest is Islamic banking andfinancial inclusion.

Dr. Wajahat Azmi holds a doctorate in Islamicfinance from INCEIF. He spe-

CHAPTER 4

Mitigating Shadow Economy