# WPS4249

negative and significant. In other words, while for the average country of the world increase in remittances would lead to higher income inequality, the effect for the average Latin American country is either negative or non-significant depending on the specific choice of instruments. This result can be interpreted in light of the fact that remittances are more likely to have an equalizing effect on income when they are directed to a larger extent to households in the lower quintiles of the income distribution. In particular, the above results are consistent with migration costs in Latin America being lower with respect to per capita income than in other regions of the developing world, possibly because of smaller distances to migrant destinations or because of long standing migration networks – e.g. as in the case of the Mexico-U.S. corridor.

## TABLE 2 HERE

As for the magnitudes of the effects of remittances on the Gini coefficient, we find that they are very similar to those found for growth, at least for the average country in the sample, in which doubling the share of remittances would lead to increases of between 0.5 and 1.1 percent in the Gini coefficient. Note, however, that in the case of the average Latin American country, remittances have a positive effect on growth but a negative or non-significant effect on inequality. In the case of this region, considering only the specifications that yield significant remittances effects, the later are such that an hypothetical one percentage point increase in the remittances to GDP ratio for a country where that share is 4.9 percent – as in the average Latin American country – would lead to a reduction in the Gini of between 0.06 and 0.12 percent.

## _(c) Poverty Results_

The previous discussion would indicate that remittances would lead to lower poverty in Latin America. This is illustrated in table 3 which reports the poverty elasticity with respect to the remittances to GDP ratio obtained for the average Latin American country, for each of the specifications used. In building this table we have made use of the estimates for the impact of remittances on growth and inequality reviewed above and of estimates for γ and φ in equation (5) derived under log-normality and taken from Lopez and Serven (2006).<sup>18</sup>

## TABLE 3 HERE

Evidence in Table 3 indicates that there is substantial heterogeneity of results depending upon the country’s initial conditions, as given by the ratio of per capita income to the poverty line, and the Gini coefficient. This reflects the different values that the growth and inequality elasticities of poverty take as those initial conditions change (see Lopez and Serven, 2006 for a discussion). In fact, depending on the model being used and on the initial conditions, a 10 percent increase in the share remittances in GDP would lead to a reduction in poverty that varies from 0.03 to 1.5 percent – respectively for countries with high and low levels of both inequality and development. In the Latin American context, however, this range can be substantially narrowed as most countries in the region have Gini coefficients of around 0.5.<sup>19</sup> Thus, considering that in the average Latin American country remittances are 4.9 percent to GDP, a

> 18 Note that these results rely on the log normality assumption of income and that other assumptions would produce other results.

> 19 See for example Figure 4.7 in Perry et al. (2006).

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