Do International Remittances Widen or Narrow Income Inequality? The Difference-Based Evidence Between Advanced and Developing Economies

Abstract

International remittances are crucial in developing economies because they offset trade balance deficits, improve the living standards of remittance recipients, increase foreign exchange reserves, and reduce dependence on foreign capital with high interest rates. Do international remittances affect income inequality? Is this effect different between advanced and developing economies? This paper looks for the answers by employing the two-step system/difference GMM Arellano–Bond (2SGMM/2DGMM) and Pooled Mean Group (PMG) estimators to study the influence of remittance inflow on income inequality for 30 advanced and 31 developing economies from 2005 until 2023. The paper presents several intriguing findings. Firstly, it reveals a counter-intuitive result: international remittances widen income inequality in advanced economies but narrow it in developing economies. Secondly, it demonstrates that economic growth reduces income inequality in advanced economies but exacerbates it in developing economies. Thirdly, the study indicates that government spending increases income inequality in advanced economies while decreasing it in developing economies. Lastly, inflation is shown to enhance income inequality in both groups. These findings highlight some implications for governments in advanced and developing economies in channelizing international remittances to reduce income inequality.