Does the cost of remitting matter? Evidence from low-income countries on the effect of remittances on income distribution

Figures & data

Figure 1. Gini coefficient per average number of remittances.

Figure 2. Gini coefficient per average cost of remitting.

Figure 3. (a) Change in the cost vs Change in the amount remitted. (b) Change in the cost vs Change in the number of remittances.

Table 1. Distributional effect of remittances: pooled OLS.

Explanatory variables	Remittances to GDP	Remittances volume	Remittances per capita
(dependent variable: Gini coefficient)	1	2	3
Remittances (Log)	−1.735*** (−3.991)	−2.392*** (−5.652)	−1.786*** (−4.848)
GDP/capita (Log)	−6.461 (−0.425)	19.47 (1.241)	0.939 (0.061)
(GDP/capita (Log))^2	0.612 (0.585)	−1.074 (−1.008)	0.206 (0.199)
Number of low-skilled migrants	0.420 (1.480)	0.622** (2.202)	0.412 (1.535)
Age dependency	0.379*** (9.273)	0.263*** (5.321)	0.366*** (8.853)
Inflation	−0.330*** (−4.860)	−0.262*** (−4.226)	−0.317*** (−4.784)
Government expenditure	−3.511** (−2.099)	−7.720*** (−5.319)	−3.528** (−2.165)
Trade openness Democracy	7.010*** (5.647) 0.778*** (5.419)	3.775*** (2.867) 0.992*** (6.900)	6.977*** (5.683) 0.797*** (5.728)
Constant	5.279 (0.0936)	−27.86 (−0.520)	−36.09 (−0.627)
R-squared Country and Time fixed effect	0.554 YES	0.594 YES	0.564 YES
Observations	152	152	152
Number of countries	32	32	32

Note: ***, ** and * denote significance at, respectively, the 1, 5 and 10% levels. Robust-t-statistics are in parenthesis.

Table 2. First-stage instrument variable estimates for remittances.

Instruments
∑Remittances – Remittances i	0.099 (0.73)
Income of the migrants’ main host country	0.046 (1.03)
Exogenous variables
Cost of Remitting	−0.020** (−2.17)
GDP/Capita (Log)	−0.413 (−0.66)
(GDP/capita (Log)) ^2	0.020 (0.50)
Number of low-skilled migrants	0.004 (0.43)
Age dependency	−0.00 (−1.48)
Inflation	−0.00 (−0.45)
Government expenditure	0.037 (0.77)
Trade openness	0.051 (0.194)
Democracy	0.000 (0.894)
Constant	−1.26 (−0.35)
Observations	126
Number of countries	32
R-squared	0.99

Note: ***, ** and * denote significance at the 1, 5 and 10% levels, respectively. Robust-t-statistics are in parentheses.

Table 3. The role of cost of remitting in the distributional effect of recorded remittances (dependent variable: Gini coefficient).

(dependent variable: Gini coefficient) Explanatory variables	Remittances to GDP	Remittances volume	Remittances per capita
	1	2	3
Remittances (Log)	−4.128*** (−2.548)	−1.821*** (−3.170)	−5.057* (−1.691)
Cost of remitting	0.423 (1.591)	−0.444 (−1.340)	1.012*** (4.968)
Remittances* cost remitting	2.130*** (3.421)	0.413*** (4.776)	2.820** (2.175)
GDP/capita (Log)	28.10 (1.482)	49.00*** (3.475)	14.07 (0.720)
(GDP/capita (Log)) ^2	1.795 (−1.366)	−3.249*** (−3.349)	−0.880 (−0.643)
Number of low-skilled migrants	0.166 (0.744)	0.486** (2.254)	0.271 (1.193)
Age dependency	0.248*** (5.937)	0.141*** (2.652)	0.251*** (4.655)
Inflation	−0.282*** (−3.544)	−0.184** (−2.378)	−0.257*** (−3.650)
Government expenditure	−1.921 (−0.968)	−1.924 (−1.322)	−3.276 (−1.351)
Trade openness Democracy	6.488*** (5.526) 0.839*** (4.875)	4.367*** (3.319) 0.968*** (7.668)	6.793*** (5.783) 0.960*** (6.701)
Constant	−113.2 (−1.619)	−155.0*** (−3.058)	−83.50 (−1.114)
Statistics
Number of countries	32	32	32
Observations	126	126	126
R-squared Country and Time fixed effect	0.617 YES	0.710 YES	0.617 YES
Kleibergen-Paap (weak identification test)	29.62	39.42	22.02
Hansen-J-Statistic (over-identification test)	11.98	15.84	16.98

Note: ***, ** and * denote significance at, respectively, the 1, 5 and 10% levels. Robust-t-statistics are in parentheses. The interaction variable between remittances and the cost of remitting is instrumented by the interaction between each instrument of remittances and the cost of remitting, respectively.

Table 4. Robustness checks.

Explanatory variables	Estimations based on excluding countries highly dependent on remittances 1	Estimations based on alternative dependent variable ‘the ratio of 40’ 2
Remittances (Log)	−4.465*** (−3.251)	0.131*** (5.66)
Cost Remitting	0.678*** (3.297)	0.000 (0.64)
Remittances* cost remitting	2.187*** (3.759)	−0.056*** (−5.93)
GDP/capita (Log)	19.76 (1.640)	−0.213*** (−2.98)
(GDP/capita (Log)) ^2	−1.149 (−1.390)	0.011** (2.35)
Number of low-skilled migrants	0.0565 (0.155)	0.006*** (3.37)
Age dependency	0.229*** (6.463)	−0.003 (−11.89)
Inflation	−0.180** (−2.368)	0.012*** (3.66)
Government expenditure	−3.489** (−2.433)	−0.003 (−0.17)
Trade openness	4.086*** (4.157)	−0.057*** (−3.11)
Democracy	0.693*** (4.878)	−0.006*** (−3.27)
Constant	−73.79 (−1.623)	1.76*** (6.59)
R-squared Country and Time fixed effect	0.742 YES	0.63 YES
Observations	87	163
Number of countries	24	32
Kleibergen-Paap (weak identification test)	40.97	22.94
Hansen-J-Statistic (over-identification test)	8.79	11.68

Note: ***, ** and * denote significance at, respectively, the 1, 5 and 10% levels. Robust-t-statistics are in parenthesis. The interaction variable between remittances and the cost of remitting is instrumented by the interaction between the instrument of remittances and the cost of remitting.

Table A1. List of countries by region.

Sub-Saharan Africa	Latin America	Middle East & North Africa	East Europe & Central Asia	East & Pacific Asia	South Asia
Cameroon; Ivory Coast; Kenya; Lesotho; Madagascar; Malawi; Nigeria; Rwanda; Senegal; Tanzania; Uganda; Zambia	El Salvador; Honduras	Algeria; Egypt; Iran; Morocco; Lebanon; Tunisia; Turkey; West Bank and Gaza	Kirghizstan; Ukraine	Indonesia; Lao PDR; Philippines; Vietnam	India; Pakistan; Bangladesh; Sri Lanka; Nepal;

Table A2. List of variables.

Variable	Definition	Source
Gini	Income inequality expressed as a percentage, between 0% and 100%	World Income distribution, WDI
Remittances	Personal remittances received are the sum of personal transfers and employee compensation, as defined in the sixth edition of the IMF’s Balance of Payments Manual. Personal transfers consist of all current transfers in cash or in-kind made or received by resident households to or from non-resident households. Employee compensation refers to the income of border, seasonal, and other short-term workers employed in an economy where they are not a resident and of residents employed by non-resident entities. The variable is collected in current US$. It has been adjusted for inflation (divided by the CPI), and then adjusted for PPP (divided by the price level ratio of PPP).	WDI
Cost of remitting	The average transaction costs of sending a remittance to country i is a simple average of the total percentage amount retained by each remittance service provider in the Remittance Prices Worldwide database for sending US $200.	World Bank, Remittances price Worldwide
GDP per capita	Income level per capita in current $US	WDI
Public expenditure	Government final consumption expenditure as a percentage of GDP	WDI
Inflation, GDP deflator (annual %)	The annual growth rate of the GDP implicit deflator, which shows the rate of price changes in the economy as a whole.	WDI
Ratio of demographic dependency	The ratio of people under 15 and over 64 years to the working-age population	WDI
Democracy	The level of democracy on a scale of 0–10	Polity IV
Trade openness	The degree of openness (imports + exports) to GDP	WDI
Unskilled Migrants	The number of unskilled migrants (with primary education) from developing countries to any OECD country	Brücker, Capuano, and Marfouk (2013)
The ratio of 40	The income shares of the bottom 50% to that of the middle 40%	World income data (WID)
Instrument 1	The total volume of remittances minus remittances to the country i in current US$	Authors’ calculations, based on WDI
Instrument 2	The GDP per capita of the migrant’ main destination country (i.e. which contains the largest share of migrant workers)	Determined by Authors’, based on WDI and OECD Migration dataset

Table A3. Descriptive statistics.

Variable	Mean	Std Dev	Min	Max
GINI	38.46	7.68	24	57.1
Remittances GDP	7.68	7.95	0.06	32.74
Cost of remittance	8.32	5.33	1	28.4
GDP per capita(log)	7.50	0.70	5.75	9.12
Unskilled migrants(log)	10.03	2.03	4.07	13.14
Inflation	7.30	10.30	−11.15	150
Government expenditure	13.99	6.07	2.36	40.44
Democracy	4.21	3.16	0	9
Age dependency	65.95	16.65	40.97	105.38
Trade openness	68.87	32.40	16.35	208.3
The ratio of 40	0.38	0.07	0.23	0.54

Brücker, H., S. Capuano, and A. Marfouk. 2013. Education, Gender and International Migration: Insights from a Panel-dataset 1980–2010. mimeo.

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