Do workers' remittances promote human capital formation in Sri Lanka?

Abstract

This study explores the effect of workers’ remittances on human capital formation in Sri Lanka by using the annual time series data over the period of 1975-2017. To our knowledge, there are no significant studies on this issue in Sri Lanka. This study, therefore, tries to fill this gap. The following variables: education expenditure, health expenditure, gross domestic product and workers’ remittances are used as independent variables of this study. The data for those variables were collected from the World Bank database and the data for the variable of human development index (HDI) were gathered from various issues of human development reports of the World Bank. The human development index is used as a proxy variable for human capital formation in Sri Lanka. The standard unit root tests (Augmented Dickey-Fuller and Philips Perron) indicate that the HDI is non – stationary, I(1) and other variables are stationary at level, I(0). The Auto regressive Distributed Lag (ARDL) bounds test shows that there is a long-run equilibrium relationship between workers’ remittances and human capital formation in Sri Lanka. The result from the error correction model also indicates that 37% of disequilibrium error is corrected each year and the response variable of human capital formation moves towards the long-run equilibrium time path. In addition, findings from Pairwise Granger’s causality and VAR Granger Causality tests indicate that the workers’ remittances Granger cause human capital formation. Furthermore, the findings of long-run causality from error correction term confirm that there is a long-run causality between workers’ remittances and human capital formation in Sri Lanka. Our results imply that workers' remittances have a significant role in human capital formation in Sri Lanka. Further, the workers’ remittances Granger causes human capital formation, in short term and in long term, hence the higher human capital formation can stimulate skilled workers to migrate and get more workers’ remittances so that the economy can benefit sustainable economic growth and economic development in Sri Lanka.