Remittances and income inequality in Africa: Financial development thresholds for economic policy

Abstract

This study employs macrodata on 42 African countries to examine whether remittances and financial development (including its sub-components of access, depth and efficiency) contribute to the equalisation of incomes across the continent. Robust evidence based on the dynamic GMM estimator shows that: (i) remittances heighten income inequality in Africa, (ii) Africa’s financial system is not potent enough for propelling remittances towards the equalisation of incomes, and (iii) vis-à-vis financial access and depth, inefficiencies characterising Africa’s financial institutions is the main reason remittances contribute to the widening of the income disparity gap. Nonetheless, the optimism which we provide by way of threshold analysis shows that channelling resources into the development of Africa’s financial sector could yield shared income distribution dividends. In particular, efforts should be made to achieve a minimum threshold of 23.05 (index) for financial access, and 3.02 (index) for that of financial institutions efficiency if Africa’s financial sector is to repackage remittances towards the equalisation of incomes. A few policy recommendations are provided in the end.