Does the cost of remitting matter? Evidence from low-income countries on the effect of remittances on income distribution

Abstract

Part C of the United Nation’s (UN) 10th Sustainable Development Goal to reduce inequality addresses the high transaction costs faced by migrants when sending money home. The target is to reduce transaction fees to a maximum of 3%. To test the strength of these targets in reducing income inequality, we conducted instrumental variable (IV) estimations on 32 low-income countries for the period 2008–2021. The results show that remittances – typically made by low-paid workers–help reduce income inequality in the home country and that high transaction fees probably reduce the average remitted amount, rather than discouraging migrants from sending money home. Both remitting behaviors contribute to widening the income gap. Based on our estimations, the ‘affordable level’ is up to 1.93%. Fees greater than this would result in fewer remittances given the budget constraints faced the remitters–often employed in unskilled jobs in high-income countries. Hence, our results do not support the SDG 10.c target of 3%, and suggest that the UN should thus revise the target and set fees to be no higher than 2%.