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Remittances and Institutions: Are Remittances a Curse?

Remittances and Institutions: Are Remittances a Curse? by Jihad Dagher
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This paper addresses the complex and overlooked relationship between the receipt of workers' remittances and institutional quality in the recipient country. Using a simple model, we show how an increase in remittance inflows can lead to deterioration of institutional quality - specifically, to an increase in the share of funds diverted by the government for its own purposes. Empirical testing of this proposition is complicated by the likelihood of reverse causality. In a cross section of 111 countries we document a negative impact of the ratio of remittance inflows to GDP on domestic institutional quality, even after controlling for potential reverse causality. We find that a higher ratio of remittances to GDP is associated with lower indices of control of corruption, government effectiveness, and rule of law.
International Monetary Fund; February 2008
31 pages; ISBN 9781452797526
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Title: Remittances and Institutions: Are Remittances a Curse?
Author: Jihad Dagher; Ralph Chami; Peter Montiel; Yasser Abdih