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Remittances
and institutions: Are remittances a curse?
International
Monetary Fund (IMF)
February
01, 2008
http://www.imf.org/external/pubs/cat/longres.cfm?sk=21634.0
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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.
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