Topic 13

Remittances, Poverty and Inequality

A number of studies have examined the impact of international remittances on poverty and inequality in developing countries.  Since international remittances often represent 30 to 40 percent of migrant household incomes, and incomes earned working abroad are typically 3-5 times higher than those earned at home, most studies have found that remittances tend to reduce poverty in the developing world.  However, the impact of international remittances on income inequality is more controversial.  Since international migrants generally come from the higher ends of the income distribution, most studies find that remittances lead to a slight increase in income inequality.  However, some studies suggest that the negative impact of remittances on income distribution is not inevitable, and may dissipate over time if migration opportunities reach all income classes.

In perhaps the broadest study, Adams and Page (2005) use the results of household surveys in 71 developing countries to analyze the impact of international migration and remittances on poverty.  To control for reverse causality, the paper employs an instrumental variables approach.  The authors find that, on average, a 10 percent increase in international remittances in a developing country will lead to a 3.5 percent decline in poverty.  They also find that, on average, a 10 percent increase in the share of international migrants from a developing country will lead to a 2.1 percent decline in poverty.

In a similar study based on household surveys from 10 Latin American countries, Acosta et al (2006) estimate a “counterfactual” situation (whereby incomes are imputed for migrants had they worked at home) and use instrumental variables to identify the impact of remittances on poverty.  They find that international remittances have reduced poverty in Latin America by 0.4 percent for each percentage point increase in the remittances to GDP ratio.

At the country level, various studies by Lokshin et al (2007) in Nepal and Adams (2006) in Ghana have also found that international migration and remittances reduce poverty.  Using a maximum likelihood estimation that simulates counterfactuals for various migration scenarios, Lokshin et al (2007) finds that almost 20 percent of the decline in poverty in Nepal can be attributed to increased internal and international migration.  Similarly, in Ghana Adams (2006) finds that both internal and international remittances have reduced the level, depth and severity of poverty.

On the issue of inequality, many studies find that international remittances tend to increase income inequality.  The reason for this finding is cost:  since international migration tends to be expensive (e.g. expenses for passport, travel, job search), international migrants tend to come from middle- to upper-income groups.  For instance, using a small household survey from Nicaragua, Barham and Boucher (1998) construct a “counterfactual” situation whereby incomes are imputed for migrants had they worked at home.  They find that when remittances are included in household income the Gini coefficient rises by between 12 and 15 percent (the Gini coefficient is a standard measure of income inequality, scaled between 0 and 1, with 1 being complete inequality).  Using the same counterfactual approach for imputing incomes in Ghana, Adams (2006) also finds that when international remittances are included in household income the Gini coefficient increases by about 3 percent: from 0.402 to 0.413.

However, these findings are challenged by studies in Mexico by McKenzie and Rapoport (2007) and Jones (1998).  According to McKenzie and Rapoport (2007), the nature of migrant selectivity changes over time.  In communities with low levels of international migration, the initial effect of international migration is to increase inequality, but as levels of migration increase, international migration tends to reduce income inequality.  Similarly, Jones (1998) finds that as international migration increases, rural income distribution improves relative to urban income distribution, since most remittances are targeted to rural areas.

 

Topic 13 – Articles

Acosta, Pablo, Cesar Calderon, Pablo Fajnzylber, and Humberto Lopez. 2006. Remittances and Development in Latin America. World Economy 29 (7):957–987. (Publisher Link) 

This paper uses nationally-representative household surveys from 10 Latin American countries to examine the effect of international remittances on poverty and inequality.  The authors find that simple OLS regressions show that remittances have no statistical effect on poverty in Latin America.  However, since these results may suffer from endogeneity bias, the authors re-estimate the regressions using an IV approach.  Using this new approach, the authors find that remittances have reduced the poverty headcount in Latin America by about 0.4 percent for each percentage increase in the remittances to GDP ratio.  On inequality, they find that remittances have only a small impact on income inequality in Latin America.

Adams, Jr., Richard. 2006. Remittances and Poverty in Ghana. In World Bank Policy Research Working Paper 3838. Washington, DC: World Bank.

This paper uses a nationally-representative household survey from Ghana (1998/99 GLSS) to analyze the impact of internal and international remittances on poverty and inequality in Ghana.  Since remittances may be endogenous to household income, the author estimates counterfactual incomes for migrants had they stayed and worked at home.  Results suggest that both internal remittances (from Ghana) and international remittances (from African and other countries) reduce the level, depth and severity of poverty in Ghana.  On inequality, results suggest that when international remittances are included in household income the Gini coefficient rises by about 3 percent:  from 0.402 to 0.413.

Adams, Jr., Richard, and John Page. 2005. Do International Migration and Remittances Reduce Poverty in Developing Countries? World Development 33 (10):1645–1669.

This study uses results from nationally-representative household surveys in 71 developing countries to analyze the impact of international migration and remittances on poverty in the developing world.  Since international migration and remittances may be endogenous to poverty outcomes, the paper uses an instrumental variables approach.  Results suggest that a 10 percent increase in international migration from a country will lead to a 2.2 percent decline in the poverty headcount, and a 10 percent increase in international remittances will lead to a 3.5 percent decline in the poverty headcount.

Barham, Bradford, and Stephen Boucher. 1998. Migration, Remittances and Inequality:  Estimating the Net Effects of Migration on Income Distribution. Journal of Development Economics 55 (3):307–331.

This study uses a small, non-representative household survey (1991) of 152 households in Nicaragua to examine the effects of international migration on income distribution.  The authors find that when the observed income distribution is compared with two no-migration counterfactual situations, income inequality is higher when international remittances are included in household income.  Specifically, when remittances are included in household income, and compared to the two no-migration counterfactual situations, the Gini coefficient rises by between 12 and 15 percent:  from 0.40 to 0.43 in the first counterfactual, and from 0.38 to 0.43 in the second counterfactual.

Jones, Richard. 1998. Remittances and Inequality:  A Question of Migration Scale and Geographic Scale. Economic Geography 74 (1):8–25.

This study uses a small, non-representative household survey (1988) of 692 households in Mexico to examine the effects of international migration on income distribution.  Results suggest that income inequality decreases with international migration up to a point, after which inequality increases.  At advanced stages of international migration, households with more income benefit more.  By contrast, results suggest that at advanced stages of migration, rural income inequality improves more than urban income inequality because agricultural investments made by rural migrants enable farming elites to rise above the traditional urban business class.

Lokshin, Michael, Mikhail Bontch-Osmolovski, and Elena Glinskaya. 2007. Work-Related Migration and Poverty Reduction in Nepal. In World Bank Policy Research Working Paper 4231. Washington, DC: World Bank.

This paper uses data from two nationally-representative household surveys in Nepal (1995 and 2004 NLSS) to examine the impact of internal and international migration on poverty in Nepal.  To deal with selectivity issues, the authors use an instrumental variables approach and employ a maximum likelihood estimation that simulates various counterfactuals for different migration scenarios.  Results suggest that almost 20 percent of the decline in poverty in Nepal between 1995 and 2004 can be attributed to increased internal and international migration.  Without migration, the authors estimate that the poverty rate in Nepal would increase from 30 to 33.6 percent.

McKenzie, David, and Hillel Rapoport. 2007. Network Effects and the Dynamics of Migration and Inequality: Theory and Evidence from Mexico. Journal of Development Economics 84 (1):1–24.

This study uses two household surveys from Mexico to examine the relationship between wealth and migration, and the impact of international migration on inequality.   To control for endogeneity, the authors use an instrumental variables approach focusing on historical migration rates.  Results suggest that international migrants come from the middle of the wealth distribution.  With respect to inequality, the authors find that in communities with low levels of migration the initial effect of international migration is to increase inequality.  However, as levels of migration increase, international migration tends to reduce inequality.  In high-migration communities the benefits of international migration reach lower-income groups, thereby reducing inequality.