CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The relationship between remittance inflows, human capital development, and economic growth in developing countries, particularly Nigeria, has remained an important subject of academic and policy discussions. Early studies by Orozco (2003), Ambrosius (2006), and Chami et al. (2008) provided a foundation for understanding the developmental role of remittances. More recent research, particularly studies published after 2022, has further expanded discussions on the subject through new empirical findings. Remittances, which refer to money transferred by migrants to individuals or households in their countries of origin, have become an important source of development finance. In many developing economies, these transfers have sometimes exceeded foreign direct investment (FDI) and official development assistance (ODA) in terms of their volume and stability (Kudaisi et al., 2022; World Bank, 2023).

In Nigeria, the relationship between remittance inflows and human capital development is particularly important. Over the years, the Nigerian financial sector has experienced several reforms and structural adjustments aimed at improving financial intermediation, increasing its ability to absorb domestic and foreign capital, and creating favourable conditions for private sector investment (Kudaisi et al., 2022). Within this environment, remittances have become an important additional source of external development finance. The Central Bank of Nigeria (CBN) reported that remittance inflows reached a record $553 million in July 2024 alone, representing a 130 per cent increase compared with the same period in the previous year. This development highlights the increasing importance of diaspora transfers to Nigeria's economy (CBN, 2024; Owotemu et al., 2024).

At the global level, remittance flows to low- and middle-income countries (LMICs) were estimated at $656 billion in 2023, representing a moderate growth of 0.77 per cent compared with 2022 (World Bank, 2023). In Sub-Saharan Africa, total remittance receipts increased to $54 billion in 2023, with Nigeria receiving approximately $19.5 billion, representing about 35 per cent of the subregion's total remittance inflows (World Bank, 2023; Arise TV, 2024). Nigeria's remittance-to-GDP ratio, estimated at about 4 per cent, is higher than that of major economies such as India, Germany, France, and China. This demonstrates the considerable role of remittances in the Nigerian economy (Azolibe et al., 2022). According to the World Bank's Migration and Development Brief (2023), remittance flows to Sub-Saharan Africa were almost 1.5 times the value of foreign direct investment inflows in 2023, making them a major source of external finance for the region.

The importance of remittances is not limited to their contribution to national economic indicators. At the household and sectoral levels, they also support human capital development, especially through spending on education and healthcare (Nangih & Nwineewii, 2024; Adeagbo, 2024). Previous studies have shown that remittance income can help households gain better access to educational opportunities and healthcare services, with possible improvements in the Human Development Index (HDI) of recipient countries (Adeagbo, 2024; Orekoya & Tijani, 2023). Similarly, Omoniyi and Owoeye (2024) found that a 1 per cent increase in remittance inflows is associated with a 0.32 per cent increase in Nigeria's GDP in the long run. This finding highlights the potential contribution of remittances to economic development.

Despite these positive relationships, existing empirical findings are not entirely consistent. Using the Generalised Method of Moments (GMM) approach and Nigerian data covering 1990 to 2018, Kudaisi et al. (2022) found that remittances and financial liberalisation had statistically significant negative effects on economic growth. Their findings suggest that structural weaknesses within the financial sector may limit the productive use of remittance inflows. In a related study, Okwu et al. (2023) observed that although remittances were strongly associated with improvements in life expectancy and income, their effect on human capital indicators such as school enrolment was statistically insignificant. These findings indicate that the relationship between remittances and human capital development is complex and may differ depending on the prevailing economic conditions.

Another major concern is the continued use of informal channels for transferring remittances into Nigeria. A considerable proportion of these transfers still passes through informal and unrecorded systems, making it difficult to determine their actual volume and assess their full developmental contribution (Owotemu et al., 2024; Emmanuel et al., 2024). The problem of brain drain also creates additional challenges. Although migration may generate remittance inflows, the departure of skilled professionals in sectors such as healthcare, education, and technology can reduce the country's available human capital. This may weaken or offset some of the developmental benefits associated with remittances (Al-Jabieri et al., 2025; Ojeyinka & Ibukun, 2024).

This study is therefore positioned within the growing body of country-specific research examining the relationship between remittance inflows and human capital development in Nigeria. Since the effects of remittances differ across countries and depend on their individual economic and institutional conditions, findings from general cross-country studies may not fully explain the Nigerian situation (Owoeye & Omoniyi, 2024). To address this gap, the study adopts an econometric approach that examines the relationship between remittance inflows and important human capital indicators in Nigeria, particularly education spending and healthcare expenditure. The study is expected to contribute to existing knowledge and provide evidence that can support policies aimed at improving the developmental use of remittance inflows.

1.2 Statement of the Problem

The continuous increase in remittance inflows into Nigeria has made it increasingly important to understand their actual contribution to national development. It is estimated that between 8 and 15 million Nigerians live outside the country, with many maintaining regular financial relationships with their families through remittance transfers (Nwajiuba, 2005; Tomori & Adebiyi, 2007). Nigeria continues to experience several socioeconomic challenges, including unemployment, inadequate infrastructure, poor public healthcare facilities, and insufficient funding for education. These conditions make remittances an important potential source of additional support for human capital investment alongside government expenditure (Azolibe et al., 2022; Adedokun, 2023).

The healthcare sector presents a particularly serious concern. Between 2000 and 2019, government health expenditure per person in Nigeria averaged only $10.44, while private health expenditure averaged $52.64 (World Bank, 2023). These amounts were considerably below the estimated $86 per person required to support universal health coverage, according to the World Health Organization (2022). Remittances received by households may help reduce this funding gap by providing additional resources for medical treatment and other healthcare needs. However, the extent to which these transfers contribute to improved healthcare access and increased health expenditure in Nigeria has not been adequately established through empirical research (Azolibe et al., 2022; Bridging Health Divides, 2024).

The effect of remittances on education also remains uncertain. Some studies have reported positive relationships between remittance inflows and educational participation. For example, Wanger and Aras (2022) in Nigeria and Sapkota and Malakar (2021) in Nepal identified positive associations between remittances and school attendance. However, Shafiq et al. (2022), using the Autoregressive Distributed Lag (ARDL) approach and Nigerian data covering 1981 to 2022, found that a one-unit increase in remittances was associated with a statistically insignificant reduction in secondary school enrolment. This suggests that households may use a greater proportion of remittance income to meet immediate needs, such as housing, healthcare, and daily consumption, rather than investing in education. The differences in these findings show the need for further empirical research focused on Nigeria.

Another major issue is the possibility that remittances are used mainly for household consumption rather than long-term investment in human capital. Adeseye (2021) reported that approximately 70 per cent of remittance inflows into Nigeria are spent on consumption, while only 30 per cent are directed towards investment activities. This pattern may reduce the potential long-term contribution of remittances to human capital development and economic growth. In addition, Owotemu et al. (2024) identified regulatory challenges and the widespread use of informal remittance channels as factors limiting the productive application of diaspora funds.

The ability of the formal financial system to direct remittance inflows towards productive activities is also affected by limited financial deepening. This can be observed through indicators such as the credit-to-GDP ratio and monetary aggregates. When financial services are not sufficiently accessible, households may find it difficult to convert remittance income into long-term investments in education and healthcare. This challenge is particularly serious among people working in the informal sector, many of whom have limited access to formal financial services (Uweis, 2022; Ali Bare et al., 2022).

In view of these challenges and the differences in existing research findings, this study seeks to examine the relationship between remittance inflows and human capital development in Nigeria. Specifically, it addresses the following research questions:

1. What is the relationship between remittance inflows and human capital investment in Nigeria?

2. What is the impact of remittances on education spending in Nigeria?

3. What is the impact of remittances on healthcare expenditure in Nigeria?

1.3 Objectives of the Study

The main objective of this study is to examine empirically the relationship between remittance inflows and human capital development in Nigeria, with particular attention to their implications for economic growth.

The specific objectives are to:

i. Examine the impact of remittances on education spending in Nigeria.

ii. Examine the impact of remittances on healthcare expenditure in Nigeria.

1.4 Hypotheses of the Study

Based on the objectives of the study, the following null hypotheses are formulated:

H₀₁: Remittances have no significant impact on education spending in Nigeria.

H₀₂: Remittances have no significant impact on healthcare spending in Nigeria.

1.5 Policy Relevance of the Study

The policy importance of this study is based on the growing contribution of remittance inflows to Nigeria's external financial resources and the continued shortage of public investment in human capital development. Government institutions and policymakers, particularly the Central Bank of Nigeria (CBN), the Federal Ministry of Education, and the Federal Ministry of Health, need reliable empirical evidence on how remittance inflows influence human capital outcomes. Such evidence can help them develop policies that encourage the effective use of diaspora transfers for national development.

Recent policy measures, including the CBN's Non-Resident Bank Verification Number (BVN) platform, which is designed to make formal financial services more accessible to Nigerians living abroad, demonstrate the government's growing interest in improving formal remittance channels (CBN, 2024). However, as observed by Owotemu et al. (2024), these initiatives should be supported by a proper understanding of how remittances contribute to human capital development. It is important to identify the specific ways through which these funds influence education and healthcare rather than treating all remittance inflows as having the same developmental effect.

The World Bank (2023) also identified the high cost of sending remittances to Nigeria as an important policy challenge. In the fourth quarter of 2023, the average transfer cost was estimated at 7.9 per cent of the amount sent, which was considerably higher than the Sustainable Development Goal (SDG) target of 3 per cent. Reducing these costs could increase the amount of money received by households and make more resources available for education, healthcare, and other developmental needs. The findings of this study are expected to provide useful evidence for policies aimed at reducing transfer costs and improving the contribution of remittances to human capital development.

Furthermore, understanding whether remittances are mainly used for household consumption or directed towards human capital investment is important for effective policy planning. As discussed by Adeseye (2021) and Owotemu et al. (2024), encouraging a greater proportion of diaspora transfers to support education and healthcare could strengthen their long-term developmental contribution. The findings of this study may therefore assist policymakers in developing appropriate incentives and financial strategies that encourage productive remittance utilisation.

1.6 Scope of the Study

This study focuses on examining the impact of remittance inflows on human capital development in Nigeria. It uses secondary time-series data to investigate the relationship between remittances and expenditure in the major sectors associated with human capital development, particularly education and healthcare. In line with related studies such as Adeagbo (2024) and Orekoya and Tijani (2023), human capital development is considered in terms of investment in education and health, which are regarded as two important channels through which remittances can influence development.

The study covers the period from 1970 to 2010, while developments up to 2024 are also considered where relevant data are available. The research is restricted to Nigeria and does not seek to extend its findings to other Sub-Saharan African countries or developing economies. This limitation recognises that the effects of remittance inflows may differ across countries because of their unique economic and institutional conditions (Owoeye & Omoniyi, 2024).

1.7 Definition of Terms

Remittances: In this study, remittances refer to the portion of foreign earnings transferred by migrants, particularly Nigerians living abroad, to individuals, families, households, or communities in Nigeria. They include personal financial transfers between residents and non-residents, as well as compensation received by individuals working in an economy where they are not officially resident. In accordance with the World Bank (2023) definition, remittances provide an important source of household income and can support consumption, poverty reduction, and investment in human capital.

Human Capital Development: Human capital development refers to the improvement of people's knowledge, skills, productive abilities, and health. In this study, it is measured through two major indicators: (i) government and private expenditure on education, and (ii) government and household expenditure on healthcare. This approach is consistent with the Human Development Index (HDI) framework of the United Nations Development Programme (UNDP), which recognises education and health as important non-income dimensions of human development (Adeagbo, 2024; Nangih & Nwineewii, 2024).

Economic Growth: Economic growth refers to a continuous increase in the production of goods and services within an economy over a period of time. It is commonly measured using the growth rate of real Gross Domestic Product (GDP) or real GDP per capita. In this study, economic growth serves as a reference outcome for considering the possible long-term effects of remittance-supported human capital investment.

Foreign Direct Investment (FDI): Foreign direct investment refers to investment made by an individual, organisation, or business from one country into an enterprise located in another country, with the intention of establishing a lasting interest and significant influence in that enterprise. In this study, FDI provides a basis for comparing the volume and stability of remittance inflows with other sources of external finance.

Official Development Assistance (ODA): Official development assistance refers to financial aid provided by governments to support the economic development and welfare of developing countries. It is used alongside FDI as a reference point for assessing the importance of remittances as an external source of development finance in Nigeria.

Brain Drain: Brain drain refers to the movement of highly educated and skilled individuals from developing countries, such as Nigeria, to more developed countries in search of better employment, income, and living conditions. In remittance studies, brain drain presents a development challenge because migration can increase remittance inflows while simultaneously reducing the supply of skilled professionals available in the country of origin. This may reduce some of the human capital benefits associated with remittances (Al-Jabieri et al., 2025; Ojeyinka & Ibukun, 2024).

Human Development Index (HDI): The Human Development Index is a combined measure developed by the United Nations Development Programme (UNDP) to assess progress in three major areas of human development. These include a long and healthy life, measured by life expectancy at birth; access to knowledge, measured through mean years of schooling for adults and expected years of schooling for children; and a decent standard of living, measured by gross national income (GNI) per capita at purchasing power parity (PPP). The HDI is used in several related studies as an indicator of human development and human capital outcomes (Adeagbo, 2024; Nangih & Nwineewii, 2024).

Diaspora: The diaspora refers to Nigerians who live outside the geographical boundaries of Nigeria, either temporarily or permanently, but continue to maintain economic, social, cultural, or family connections with the country. Members of the Nigerian diaspora constitute the major group from which the remittance inflows examined in this study originate.

Financial Deepening: Financial deepening refers to the expansion of financial services, institutions, and instruments within an economy, making financial resources more accessible to individuals and businesses. It is commonly measured using indicators such as private sector credit as a percentage of GDP and monetary aggregates such as M2 or M3 as a percentage of GDP. Limited financial deepening in Nigeria is identified in existing studies as one of the factors that may restrict the productive use of remittances for human capital investment (Uweis, 2022; Ali Bare et al., 2022).

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