Effects of Remittances on Income Inequality in Kenya

Abstract

The role of remittances on inequality in developing countries has remained a debatable topic in developing literature, and a consensus has not been reached on whether remittances reduce inequality or not. This paper examines how remittances affect income inequality in Kenya by specifically establishing the nature of remittance-receiving households in Kenya and further determining how remittances affect income inequality in Kenya. The paper used the 2015/2016 Kenya Integrated Household Budget Survey (KIHBS) data. By estimating the treatment effect model and counterfactual approach, the study established that the nature of remittance-receiving households in Kenya is purely remittance dependency. There was an 80 per cent reduction in the working hours among the households who received remittances, which implied that the nature of remittance-receiving households in Kenya is accompanied by the income substitution effect where the household members reduce their working hours, and labour supply, as they receive the non-labour income flows, this is labour supply distortive in nature. On the second objective, the IV/2SLS model on the income remittance inequality impact established the existence of a negative and significant correlation between household consumption and remittance at the bottom quantile, by contrast, the relationship is positive and significant for the top quantile. If the share of remittance increases by Kenya Shillings 1, then per capita consumption of the poorest quantile decreases by 262.3 per cent while the per capita consumption increases by 51.8 per cent for the top quantile households. The impact of remittance on inequality which has been identified as being positive and significant among the rich as per the study findings implies that migration tends to increase inter-household inequality since richer households are likely to secure remittances through inheritance hence financing more family members to migrate. This study, therefore, concludes that; receiving remittances tags along prospects of lowering inequality in Kenya. Poor households may, however, be limited in accessing migration benefits due to ix difficulty in financing the movement. Adjusting for the counterfactual effect in the top quantile will have more households receiving remittances and increasing remittance amounts, which suggests that remittances could potentially lead to skewing of income inequality across households (the poor and the rich). The study recommends policies aimed at enabling poor households to send their migrants to developed countries, such as the provision of more credit opportunities, enhancing education facilities to enable them to gain skills required for international migration, and making information regarding migration/ remittances easily accessible to poor households and finally strengthening the legal status of contracts among potential migrants and foreign employers.