Remittances and Inequality - a Case Study of Albania

Abstract: The importance of migrants' remittance transfers in global capital flows is steadily growing. A large body of literature has been dedicated to the study of remittances, its underlying causes, and its effects on development in receiving countries. Albania, one of the poorest countries in Europe, experienced massive emigration in its post-communist transition era, and remittances have since constituted a crucial source of income, helping to lift a large share of Albanians out of poverty. Although the effects of remittance transfers on poverty are quite clear, their implication on the income distribution is less evident. This study explores the net effect of remittances on income equality in Albania by employing a Gini decomposition by income sources proposed by Stark et al. (1986) to World Bank Living Standard Measurement Survey data from 2005. Theory argues that remittances and inequality display an inverted U relationship over time, implying that remittances should be prone to increase inequality in Albania due to its short migration history. Conversely, the results of this study unveil that the marginal effect of remittances on the income equality in Albania is small but positive. This study therefore suggests that the nature, and not the length, of the migration process determines the initial effect of remittances on the income distribution.