Remittances and Institutions: Are Remittances a Curse?

Author/Editor:

Jihad Dagher ; Ralph Chami ; Peter J Montiel ; Yasser Abdih

Publication Date:

February 1, 2008

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper addresses the complex and overlooked relationship between the receipt of workers' remittances and institutional quality in the recipient country. Using a simple model, we show how an increase in remittance inflows can lead to deterioration of institutional quality - specifically, to an increase in the share of funds diverted by the government for its own purposes. Empirical testing of this proposition is complicated by the likelihood of reverse causality. In a cross section of 111 countries we document a negative impact of the ratio of remittance inflows to GDP on domestic institutional quality, even after controlling for potential reverse causality. We find that a higher ratio of remittances to GDP is associated with lower indices of control of corruption, government effectiveness, and rule of law.

Series:

Working Paper No. 2008/029

Subject:

Consumption Corruption Income Public employment Remittances

English

Publication Date:

February 1, 2008

ISBN/ISSN:

9781451868913/1018-5941

Stock No:

WPIEA2008029

Pages:

31

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