Remittances as a Bottom-Up Equalizer in Sub-Saharan Africa: Evidence from Nigeria, Kenya, and South Africa
Abstract
Sub-Saharan Africa (SSA) remains among the most unequal regions in the world, and its two principal external capital inflows: foreign direct investment (FDI) and migrant remittances are frequently treated as interchangeable instruments of globalization. This study tests whether that assumption holds by isolating the distinct distributional effects of remittances and FDI on income inequality in Nigeria, Kenya, and South Africa over 1990–2024. Because inequality is a structurally persistent, path-dependent phenomenon, the study departs from static Fixed and Random Effects models and instead employs the System Generalized Method of Moments (System GMM) estimator, which accommodates a lagged dependent variable and corrects for the endogeneity this persistence otherwise introduces. The results show a highly significant, negative relationship between remittances and the Gini coefficient (β = −4.91E-10, p = 0.0000), indicating that diaspora transfers systematically narrow the income gap. By contrast, FDI is statistically insignificant (β = 5.02E-11, p = 0.6646), consistent with an “enclave” pattern in which capital-intensive, extractive investment fails to generate broad-based distributive spillovers. These findings, read through the New Economics of Labour Migration (NELM) framework, position remittances as a bottom-up, household-level redistributive mechanism that operates independently of, and more effectively than formal capital inflows in the SSA context. The paper concludes with policy recommendations for lowering remittance transaction costs, mobilising diaspora capital productively, and reorienting FDI promotion toward linkage-generating, employment-intensive sectors.
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