Does international migration increase or decrease economic inequality in developing (sending) countries? What are the possible forces that may decide whether there exists a positive or a negative relationship between the two? These are important issues because inequality is an outcome of interest in its own right and because the distribution of income conditions the extent to which liquidity constraints impinge on investment in physical and human capital. Consequently, the growth-enhancing potential of international migration largely depends on its distributional impact.
A series of recent studies covering a large sample of developing countries have demonstrated the growth potential of migration in a context of capital market imperfections, with remittances and savings accumulated abroad relaxing credit constraints on farm investment (Lucas, 1987; Rozelle et al., 1999), education (Hanson and Woodruff, 2003; Cox Edwards and Ureta, 2003) and investment in micro-enterprises. The latter channel is particularly important because it emphasizes the potential for migration and remittances to affect inequality not only through the direct effect on income but also by impacting on occupational choices (e.g., by easing access to self-employment and entrepreneurship), which can in turn affect inequality through the induced labor market adjustments. This was demonstrated first in Mesnard (1999, 2001) and Rapoport (2002), who extended Banerjee and Newman (1993) for migration.
The basic idea is that when access to self-employment is liquidity-constrained, agents may opt for temporary migration to overcome credit market imperfections at home and adopt optimal savings and migration duration strategies accordingly (Mesnard, 2004a). This is confirmed empirically for example by Ilahi (1999) for Pakistan, Mesnard (2004a,b) and Mesnard and Ravallion (2006) for Tunisia, Dustmann and Kirchkamp (2002) for Turkey, or Woodruff and Zenteno (2007) for Mexico. All these papers emphasize the high propensity of return migrants to self-select into self employment upon return and their significant contribution to the creation of micro enterprises and induced jobs at home.
However, there are also studies pointing to more negative effects of remittances and migration on investment, be it because remittances are mainly consumed (Rempel and Lobdell, 1978), generate moral hazard problems leading to lower effort or labor force participation (Azam and Gubert, 2005) or because migration may in some circumstances depress educational attainments of children (McKenzie and Rapoport, 2006).
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Remittances and inequality: a dynamic migration model
