A new IMF Working Paper has found an association between remittances a country receives, and the deterioration of institutional quality in that country. It seems counter intuitive but basically they are saying that if citizens have more non-taxable income, there is less incentive for the government to spend its own resources on those citizens. The government is then more likely to blow their money on private jets and whatever else it is corrupt leaders buy (diamond mines?). The authors say it works similarly to the oil curse, which says that natural resource-rich countries are more likely to be corrupt.
As Cho points out on his blog, New Zambia, showing association doesn't prove causality, and there could easily be other factors that explain both of these phenomena. But it's a fascinating idea. If we assume that the prevailing wisdom is correct and institutions are a vital part of economic development, this report would suggest the match institution building programs with our efforts to make remittances easier to transfer.
