The effect of remittances and FDI inflows on income distribution in developing economies

Abstract

This study aims to examine empirically the effect of remittance inflows, FDI, and economic growth on income inequality. We include financial development and trade openness as potential determinants of income inequality. We utilise annual data from 1980 to 2016 and consider a sample of 20 major remittance–receiving developing economies. The empirical results from the panel cointegration models confirm the presence of a long-run equilibrium relationship among the variables. Our results on long-run elasticities suggest that increase in FDI inflows and remittances raise income inequality, while economic growth reduces. The findings also establish unidirectional causality from economic growth to income inequality. Given these findings, we suggest that policy makers frame appropriate policies for the effective use of remittances and FDI inflows to reduce income inequality in developing economies.