Impact of Remittances on Income Inequality: Evidence from South Asia

Abstract

This study examines the impact of remittances on income inequality in South Asia over the period 1990-2022. The analysis employs panel estimation techniques, including Fixed Effects (FE), Random Effects (RE), and Fully Modified OLS, to ensure robust results. Cointegration and Granger causality tests are applied to explore the long-run relationships and causal dynamics among the variables. The empirical findings indicate that remittances (REM), capitalization (CAP), urbanization (URB), and exports (EX) contribute to widening income inequality (INEQ) in the region. Results confirm that an increase in remittances exacerbates the income gap between rich and poor. The Granger causality analysis reveals that income inequality leads to changes in capitalization and exports, highlighting a unidirectional relationship. Moreover, bidirectional causality is observed between remittances and inequality, as well as between urbanization and inequality. The results further indicate a unidirectional causal flow from capitalization to remittances and from urbanization to capital. In addition, bidirectional causal relationships are found between capitalization and remittances, urbanization and remittances, exports and remittances, and exports and urbanization. Overall, the study provides strong evidence that remittances, while beneficial for income generation, may also intensify income disparities in South Asia, underscoring the need for policies that promote inclusive growth.