Is the Relationship Between Remittances and Political Institutions Monotonic? Evidence from Developing Countries

• Date: 01 December 2018
• Published date: 01 December 2018
• DOI: http://doi.org/10.1111/saje.12199
• Author: Kevin Williams

© 2018 Economic Society of Sout h Africa . doi : 10.1111/ saje .12199

449

South African Journal of Economics Vol. 86:4 December 2018

IS THE RELATIONSHIP BETWEEN REMITTANCES AND

POLITICAL INSTITUTIONS MONOTONIC? EVIDENCE

FROM DEVELOPING COUNTRIES

KEVIN WILLIAMS*

Abstract

Remittances have become one of the most important sources of household income in developing

countries, empowering recipients to be more politically independent. Using a dynamic estimator

and panel data for 84 developing countries over the 1982–2011 period, this paper investigates the

effect that remittances have on political institutions. Controlling for country and time fixed effects

and using an exogenous source of variation to instrument remittances, the baseline results show

that remittances start having a positive effect on democratic institutions when remittances reach

22% of GDP. This evidence suggests that remittances can influence the relationship between

recipients and political elites, providing incentives for recipient households to hold their political

representatives more accountable.

JEL Classificati on: F24, F2, D72

Keywords: Remittances, democratic institutions, system‐GMM

1. INTRODUCTION

This paper investigates the effect that the large and persistent inf lows of migrant

remittances have on political institutions in developing countries. Remittances, finan-

cial resources sent by migrant residents from abroad, have increased significantly over

the past three decades, from US$47 billion in 1980 to US$426.40 billion in 2013 and

are projected to reach US$429 billion in 2016 (World Bank, 2017). These large capital

inflows are a stable source of foreign income for developing countries and they have

important effects on political institutions, but also on recipient households’ welfare.

At the household level, Acosta et al. (2008) and Gupta et al. (2009) demonstrate that

remittances reduce poverty in L atin America and Sub‐Saharan A frica (SSA), respectively.

Although the evidence is mixed, on the macroeconomic front, remittances can improve

economic growth (Giuliano and Ruiz‐Arranz, 2009; Ahamada and Coulibaly, 2011;

Hassan et al., 2016) and financia l development in developing countries (Willia ms, 2016 ).

*Corresponding author: L ecturer, Department of Economics, The University of the West

Indies, St. Augus tine, Trinidad and Tobago. E-mail: Kevi n.Wil liams@sta.uwi.edu or

Kev_Williams2000@yahoo.com

South African Journal

of Economics

© 2018 Economic Society of Sout h Africa .

South African Journal of Economics Vol. 86:4 December 2018450

On the political level, the heart of this paper, international migrants are increas-

ingly using their remittances to influence political reforms in their country of origin

(O’Mahony, 2013). They do so by funding legitimate political par ties that support dem-

ocratic institutions or by funding irregular forces with the aim of replacing autocratic

incumbent (Collier and Hoeffler, 2004; Mascarenhas and Sandler, 2014). Because of

the sizable financial resources available to international migrants, both opposition and

incumbent government compete for the support of their diaspora. Aware of the politi-

cal leverage that their remittances entail, international migrants are able to play a more

central role in domestic politics. For example, Mexicans residing in the U.S. can now

participate in presidential elections as absentee voters. They won this concession in part

because of the contribution of their remittances to the macroeconomy and to other social

programmes at the local level (Adida and Girod, 2011).

Motivated by the large inf lows of migrant remittances (15% of GDP on average), there

is an ongoing debate in Jamaica whether members of the dia spora should have an elected

representative in the House of Parliament (Alleyne et al., 2008). In Jamaica the two

major political parties al so compete for the financial backing of the dia spora community.

Given the key role that money plays in national elections in developing countries, inter-

national migrations can use their remittances to inf luence the outcome of an election.

Hence, through their remitted income, international migra nts exert enormous influence

in domestic politics of their country of origin.

By investigating the impact that migrant remittances have on political institutions

in developing countries, this paper advances debate on the role of remittances in politi-

cal reforms. With their huge f inancial resources and experience in democracies abroad,

the impact of international migrants’ remittances on domestic politics sends a powerful

message that it does not require a foreign power using milita ry intervention to transform

the political landscape i n developing countries from an autocratic regime to a democratic

regime. Combining their political views with remittances, international migrants can

potentially shape the political culture of their country of origin.

However, developing countries have generally poor democratic institutions. The mod-

ernisation literature argues that per capita income is positively related to democratic

institutions (Barro, 1999). Since remittances are an alternative source of income, under-

standing the effe ct that remittances have on democratic institutions can create an avenue

to improve democratisation in developing countries. And because democratisation pro-

motes economic growth (Acemoglu et al., 2014), developing countries can possibly reap

this growth dividend.

To test the relationship between remittances and political institutions, the paper uses

five‐year panel data for 84 developing countries over the 1982–2011 period within a dy-

namic estimation setting. This panel data framework enables control for country fixed

effects, an important step towards identifying consistent estimates of the relationship

between remittances a nd political institutions. Country fixed ef fects control for time‐in-

variant count ry‐specific factors that jointly affect remittances and political institutions.

An issue with estimating the effect of remittances on political institutions is the pos-

sibility of political institutions themselves affecting remittances. For example, interna-

tional migrants may leave their country of origin because of poor political conditions

and in turn send money home to fund political parties that support democratic insti-

tutions. To address this endogeneity, the paper uses lagged real GDP per capita income