The interactive effect of remittances and civil liberties on investment and consumption

Abstract

PurposeThe purpose of this paper is to investigate the level of influence that civil liberties has on the marginal effect of remittances on gross domestic investment and consumption separately and measures it across all levels of civil liberties.Design/methodology/approachThe authors employ a two‐stage system generalized method of moments procedure and the civil liberties subset of the Freedom in the World Index as a proxy for civil liberty.FindingsThe findings indicate a substitution effect from investment to consumption as civil liberties deteriorate for developing south economies, though not for emerging economies. In addition, the marginal effect of remittances on investment diminishes less quickly as economies become less free than it increases for consumption indicating that the substitution is not quite one‐for‐one.Practical implicationsEconomies with low levels of civil liberties could benefit by improving them in ways that would encourage recipients to channel remittances into investment rather than consumption.Originality/valueThis paper differs from previous research in that the authors evaluate investment and consumption separately rather than embedding these component parts within growth. In addition, when interactions are employed in existing literature, the inference drawn is static with regard to the varying degrees of institutional development. Third, none of the prior studies directly explores civil liberties proper; they usually aggregate civil liberties with other aspects of political or economic freedom.