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Why Remittances Are a Political Blessing and Not a Curse

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Abstract

This paper reconsiders the proposition that remittances act as a political curse by reducing the poor’s demand for economic redistribution. With a newer democratization model focused on the demand for income protection from the rising groups in society, remittances may instead function as a political blessing. Since remittances increase income not only for the middle-class citizens that receive most of them, but also for the merchant and working classes that do not receive them per the multiplier effect, remittances should increase the demand for political rights to protect the economic assets of these societal groups. Using an error correction model with both country and year fixed effects, it reports a significant positive relationship between the change in democracy and net remittance inflows as a share of GDP using three different operational measures for democracy. It also reports results consistent with the underlying causal argument, showing how remittances increase national income and societal economic freedom.

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Notes

  1. While both provide “redistribution” models, Boix (2003) and Acemoglu and Robinson (2006) make different predictions about how income inequality should influence the probability of democratization. Boix posits a linear negative relationship with the probability declining with greater inequality since the rich would have more to lose with redistributive democracy. Acemoglu and Robinson offer an inverted U-shaped relationship with the greatest probability of democratization at an intermediate level of inequality, arguing that when inequality is low, the poor also have less incentive to demand a more redistributive (i.e., democratic) regime.

  2. In the Philippines, for example, estimates suggest that 80% of these remittance-receiving households fall within the middle class (Asian Development Bank 2010, 21).

  3. We lead with the weakest result in our paper. Recall that our model is a very restrictive one, including a lagged dependent variable, country fixed effects, year fixed effects, and a control for regional democracy. In fact, the LRM for Remittances would be statistically significant at the 0.10 level using a one-tailed test, but this would not be appropriate since we are testing two competing hypotheses: the remittance curse versus the remittance blessing.

  4. The results are also consistent with expectations when using the capital share of GDP measure of income inequality from Houle (2009), who expanded the dataset by Ortega and Rodriguez (2006). With the change in capital share as the dependent variable, the changes in remittances and lagged remittances are positively signed, but both are also statistically insignificant.

  5. These data begin in 1970, but are only coded in five-year intervals through 2000, so we interpolate the missing internal values to obtain a more complete time series for the countries that are covered.

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  1. University of Colorado Boulder, Boulder, USA

    David H. Bearce

  2. University of Alabama, Tuscaloosa, USA

    Seungbin Park

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Bearce, D.H., Park, S. Why Remittances Are a Political Blessing and Not a Curse. St Comp Int Dev 54, 164–184 (2019). https://doi.org/10.1007/s12116-018-9277-y

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