Cross-Border Remittances and Poverty Reduction in Developing Countries​

As a significant source of external funding for developing countries, international remittances have been widely studied for their impact on development in general, as well as their effects on economic growth, employment, foreign exchange, welfare, and poverty; and their links to consumption and investment. On poverty, two opposing views persist. The optimistic view holds that remittances reduce poverty by increasing incomes; supporting greater investment in physical assets, education, and health; and enabling access to a larger pool of knowledge. In contrast, the negative view observes that poor households have limited access to migrant labor markets due to liquidity constraints, as well as high transport and entry costs of migration. If migration is costly and risky, migrants may come from the middle or upper segments of the rural income distribution rather than from the poorest households. This study thus examines the impact of international remittances on poverty reduction in selected developing economies. It also examines whether human capital is a channel through which remittances can reduce poverty. The study employs dynamic panel techniques to estimate the results and address methodological issues of endogeneity and test for robustness. The study also uses three poverty indicators—(a)poverty headcount, (b) poverty gap, and (c) poverty severity—across three international poverty lines (US$3.00, US$4.20, and US$8.30) to capture the prevalence, depth, and intensity of poverty in the sample and to test for robustness. The results show that remittances are significant in reducing poverty using these different poverty measures. The findings also show that education, as proxy for human capital, has a moderating effect on remittances in reducing poverty.