The Impact of International Remittances on Expenditure Patterns of Urban Households in Ethiopia

Abstract

This study sheds light on the effect that international remittances have on expenditure patterns of urban households in Ethiopia. It makes use of primary household survey data collected in 2013 from four major urban areas—Addis Ababa, Gonder, Hawassa, and Mekelle. It uses the Working-Lesser model based on Engle’s curve to ascertain the objectives. The study finds that households which receive remittances from abroad spend, on average and ceteris paribus, a higher share of their budgets on investment-type goods such as education, health, and housing and a lower share of their budgets on food compared to households which do not receive remittances. Moreover, looking at the effect of international remittances on marginal spending behavior, households which receive no remittances have higher marginal propensity to consume food items but low marginal propensity to consume investment-type goods compared to those who receive international remittances. Thus, the evidence from this study suggests that the inflow of international remittances to Ethiopia is affecting household expenditure behavior across several consumption goods. Hence, to use these as a tool to fight poverty in Ethiopia remittances should be channeled toward investments rather than toward consumption.