How do remittances affect inequality and development over time? The case of rural Mexico

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Migration prevalence and the share of remittances in income are increasing in developing countries as they integrate more with the rest of the world. Remittances have the potential to contribute to rural development by relaxing capital constraints that prevent profitable investments. However, this potential may be dampened by inequality, if remittances are disproportionally received by those who are already at the higher parts of the income distribution, for whom the capital constraints are less binding to begin with. There is a substantial theoretical literature on the linkages between migration, remittances, rural development and inequality in sending communities. Most of this literature suggests that, although remittances tend to increase inequality in earlier stages of migration, they decrease inequality in communities with long migration histories. Empirical applications have produced conflicting findings, probably due to data limitations, as most existing studies had to rely on cross-sectional data. The proposed project will test the predictions of the theoretical literature using novel panel data from rural Mexico. Mexico is among the top receivers of remittances and a country with persistently high inequality, which makes it an important case to study the dynamics of migration, remittances and inequality. The Mexican National Rural Household Survey (ENHRUM) covers a nationally representative sample of rural households in 2003 and 2008. The survey includes detailed migration histories of all household members, as well as income, expenditure and consumption data, allowing us to test the dynamic effects of migration and remittances on inequality. This project will also identify the channels through which migration and remittances affect rural economies, which will have implications for rural development policy.