The Effects of Remittances on Income Inequality in Nepal, 1995-96 to 2010-11

Abstract

This paper investigates the impact of remittance transfers on income inequality among Nepalese households between 1995-96 and 2010-11. The paper uses household level survey data from three rounds of Nepal living standard surveys spanning the given time period. The measures of inequality employed by the paper are income Gini coefficients and variance of logarithm of incomes. The paper explores the impact of remittances under two assumptions: first, remittances are exogenous transfers and second, remittances are substitutes of migrant income. Under the first assumption, migrants would not have made any earnings had they not migrated from their home. Under the second assumption, earnings and expenditures are imputed for migrants using the data for the non-migrants living in their geographical region. I find that the conclusions on the impact of remittances are sensitive to the assumptions made about the nature of remittances, urban, rural, and geographical variation, and time period under study. Although there is no one sweeping conclusion that can be made for all the regions of the country for all three years, the general pattern that emerges is that remittances reduce income inequality in Nepal if they are assumed to be exogenous, but increase it if they are assumed to be substitutes of migrant income. Furthermore, the impact of remittances on income inequality in Nepal is increasing over time.