The Impact of Remittance on Poverty and Inequality: A Micro-Simulation Study for Nepal

We estimate a household consumption function using two rounds of the nationally representative panel of living standard measurement survey (LSMS) of Nepal and simulate the impacts of remittance on poverty and inequality. We study how these impacts vary with the regional ‘incidence’ and maturity of the migration process and with the country-source of remittance. We find that remittance has conditional impacts on both poverty and 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. The national-level simulations indicate that remittance decreases the head count poverty by 2.3% and 3.3% in the first round of the survey, and between 4.6% and 7.6% in the second round. It reduces even further the depth (at least 3.4% and at most 10.5%) and severity (at least 4.3% and at most 12.5%) of poverty. Although overall remittance increases inequality, this is less so in the second round of the survey. Furthermore, remittance payment from India, which is on average much lower than from other countries, decreases inequality and has the largest impact on poverty reduction. This is due to the larger participation of the poor in the Nepal-India migration process. The region-wise simulations show that remittance has larger impacts on poverty reduction in the regions that have higher levels of migration.