Abstract

In this paper, we examine the impact of remittances on income inequality in Cameroon. International remittances flowing into developing countries are attracting increasing attention because of their rising volume and their impact on recipient countries. In 2007, estimates indicate that such remittances to developing countries totaled US$240 billion out of the global amount of US$318 billion. Though those flows are under-reported, a high proportion of the reported flows went to Africa, indicating that the continent has been part of the overall rising global trend. Between 2000 and 2007, remittances to the continent increased by more than 141 percent, from US$11.2 billion to nearly US$27 billion. Indeed, few studies have examined the impact of international remittances on income inequality in a broad panel of African (Sub-Saharan and North African) countries. In recent years, worker’s remittances have become a major source of external development finance. In fact, over the last decade, Cameroon is said to be one of the single largest recipient of remittance in Sub-Saharan Africa as it receives between 30 percent and 60 percent of remittances to the region. However, despite the ever-increasing size of remittances, both internal and international, there has been little effort to analyze its effect on economic development especially on income inequality in Cameroon. Thus, because of the poor understanding of the impact of remittance in Cameroon’s economic and national development, remittances are poorly managed. This study, therefore, aims to analyze the impact of remittances on income inequality in Cameroon. Gini coefficient will be used to determine total inequality. I found that remittance has an impact on income inequality, which largely depends on the ‘incidence’ and maturity of the migration process and, more importantly, on how lower quintiles of the society participate in this process.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Migration, which involves a relocation of residence of various duration and nature, assumed a phenomenal dimension in Cameroon in the past decades. This was accentuated by two decades of economic stagnation and macroeconomic instability, corruption and poor resource management. Most Cameroonians, especially young people, consider migration as a panacea to economic problems. In recent years, there has been unprecedented rate of rural-urban migration and emigration into other countries of Africa, Europe and America. About movement outside Cameroon, there has been a remarkable increase in emigration to Europe, North America, the Middle East and South Africa from 1980’s following economic downturn. Thousands of professionals, especially scientists, academics, and those in the medical fields have emigrated, mainly to Western Europe, the United States and Persian Gulf States. At the same time, unskilled Cameroonians with little education have gone abroad to work as street cleaners, security guards, taxi drivers, and factory hands. Migration is considered essential to achieving success and young men who do not migrate or commute to town or abroad are often labeled as idle and may become object of ridicule.  These migrants often remit or send a sizeable portion of their increased earnings to families and acquaintances back home. In fact, worker’s remittances have become a major source of external development finance.

It is estimated that migrant remittance flows to developing countries now surpass official development aid receipts in many developing countries (Ratha, 2005). Migrants’ remittances are currently ranked as the second largest source of external inflows to developing countries after foreign direct investment. For example, in 2001, official development finance transfers to developing countries were about US$57 billion (OECD, 2003); this compares with recorded global remittances of US$72.3 billion the same year (World Bank, 2003). Cameroon was among the top 20 developing countries recipients of remittance in 2003 (Ratha, 2005). Estimate of internal remittance is not known. Some economists believe that inflows from abroad have been a key factor to the stability of Cameroon CFA franc against other international currencies in the past two years.

In 2013, inflows of remittances to sub-Saharan Africa increased by 3.5% (World Bank, 2014). The increase was not distributed evenly across the continent, however. East African countries experienced significant gains in remittance inflows while those in the West African sub-region experienced only a marginal increase (World Bank, 2014). Despite this, organizationally, the Economic Community of West African States (ECOWAS) ranks second in terms of the collective value of remittances in-flows by member-states falling behind the Southern African Development Community (SADC). Research has shown that, despite the West African countries receiving relatively less in remittances, the impact of remittances on the economies of those countries has been positive (UNECA, 2013). Remittances have helped the region reduce poverty, its most pressing challenge, supplemented household incomes, provided working capital and, above all, created multiplier effects within the economy through increased spending (UNECA, 2013).

Remittances are defined as the portions of cross-border earnings that migrants send home. There are two types, official and unofficial.  Official transfers use banks, money-transfer organization and sometimes the internet. Unofficial remittances are sent through friends or migrant themselves or through traditional network, known in some country as Hawala or Chiti, which allow money deposited with a trader in one country to be paid out by a partner in the recipient country (Enerst, L molua 2010).

According to Robert Obrzut, Remittances are an important measure derived from balance of payments, which have received some major attention in past years in economic literature. Remittances represent an important source of external funding for households, in developing countries, and thus can measure the economic contributions of major industrial nations to poorer nations in terms of financial flows, as well as poorer nations’ dependence on this type of income.

Using several cross-sectional and panel data methodologies, this research provides evidence of the existence of an inverted U-shaped relationship between international remittances and income inequality in a cross section of 78 countries. Our analysis supports previous theoretical work that describes how, at the first stages of migration history; there is an inequality-increasing effect of remittances on income inequality. Then, as the opportunity cost of migrating decreases due to this effect, remittances tend to lower inequality (Valerie koechlin & Gianmarco Leon 2007).

 

1.2 Problem Statement

Remittances flows, money sent by emigrants are an important source of income for most of developing countries. The trend of remittances can have an important implication for the economies seen both in micro and macro perspective. In microeconomic perspective, remittances directly affect household’s income and consumption, whereas in macroeconomic perspective, remittance influences poverty reduction (Adams and Page, 2005). In fact, remittance could flow towards the neediest groups of the population and therefore directly contribute to poverty reduction. Thus, it is possible that even if these flows are fully consumed, a concern mentioned by several practitioners, they have significant positive welfare effects (Acosta et al., 2007). In addition, with imperfect insurance and financial markets, remittances can also contribute to higher investment in human and physical capital. In this regard, these financial flows may potentially contribute to raising the country’s long run growth potential through higher rates of capital accumulation.

However, despite the ever-increasing size of remittances, both internal and international, there has been little effort to analyze its effect on income inequality. Adams (2005) observes that little attention has been paid to examining the economic impact of these transfers on households in developing countries like Cameroon despite the ever-increasing size of official international remittances. In fact, notwithstanding that remittance has been implicated as a vital source of income with crucial income smoothening effect and contribution to improved standard of living, its effect to Cameroon is not known. Thus, because of the poor understanding of the impact of remittance in Cameroon’s economic and national development, remittances are poorly managed. There are some concerns that remittances would not benefit the poor. Stahl (1982) argues that because the international migration can be an expensive venture, it is going to be better-off households who will be more capable of producing migration and sending remittances. While poor households would not get the benefit from such remittances flows, they tend to generate inequality so that poverty tends to eventually increase. Moreover, remittances may raise reservation wages and negatively affect labor supply (Rodriguez and Tiognson, 2001).

Given the potential counterbalancing effects associated to a surge in remittances, it may be quite difficult to determine not only the magnitude of the potential development impacts of remittances but also even the direction of these impacts.

According to Lucas (2004), the socioeconomic consequences of remittances are wide-ranging though difficult to be generalized. Thus, empirical evidence is needed to ascertain the signs and orders of magnitude of the different economic consequences of remittances flows (Acosta et al., 2007). Formerly a land of welcome of immigrants during the two past decades after the independences, mainly because of its political stability and its economic prosperity, Cameroon is now one of the largest countries in international migration in Africa. According to the Ministry of Foreign Affairs, the number of Cameroonians living abroad is estimated at four million (4,000,000) for a population estimated at 20 million (20,000,000). On the other hand, according to the World Bank, in 2010, remittances from Cameroonian migrants were estimated in US $148 million, approximately 0.8% of GDP and 2.7% of ODA. These remittances are constantly increasing. Indeed, their amount moves from 11 million US dollars in 2000 to 103 million in 2004 and 148 million in 2010.

Despite the large volume of the Cameroonian population living abroad and the increasing importance of remittance inflows in Cameroon, few studies have analyzed the impact of these remittances on the living conditions of beneficiary households. For the best of our knowledge, there is no study in Cameroon analyzing the impact of remittance on income inequality. Thus, the key policy question is: What is the impact of remittances on income inequality in Cameroon?

Specifically, the following questions must also be addressed;

1. What is the impact of remittances on income inequality in Cameroon in the short run?
2. What is the impact of remittances on income inequality in Cameroon in the long run?

 

1.3 Research Objectives

The main objective of the study is to ascertain the impact of remittances on income inequality in Cameroon.

Specifically, the study seeks to;

1. Examine the impact of remittances on income inequality in Cameroon in the short run.
2. Examine the impact of remittances on income inequality in Cameroon in the long run.

 

1.4 Hypothesis of the Study

The research will be guided by the following research hypothesis:

H0: There is no impact between remittances and income inequality in Cameroon.

H1: There is a significant impact between remittances and income inequality in Cameroon.