What's the Rate Today? Relationship Between Diaspora Remittances and Home Country Distress: Evidence from Ethiopia

Abstract

This paper analyzes Ethiopian remittances within the context of an informal insurance against adverse economic conditions. An event study methodology with a difference-in-differences framework is used. The controls include Kenya and Ghana, on an annual panel from 2000 to 2023. Two sets of fixed-effects regressions and random effects regressions are estimated, based on Ethiopia's distinct adversity periods, which include the 2008-2011 inflation, the 2016 state of emergency, and the 2020-2022 conflict in Tigray. I distinguish between the impact of economic and political adversity on remittances. There are no statistically significant relationships between real GDP growth and the inflation rate and remittances in any model. By contrast, if the Political Terror Scale increases by one unit, formal remittance inflows decline by around 27 percent. The results contradict the countercyclical nature of the insurance hypothesis. Instead, it corroborates the disruption hypothesis, meaning that formal remittance systems deteriorate faster than diasporic incentives to transfer resources due to growing political violence. This paper contributes to literature in three important ways: (i) it provides the first empirical analysis of the remittance insurance hypothesis using panel data estimation techniques in the case of Ethiopia; (ii) it conducts the first-ever analysis of political repression as a distinct distress channel in Sub-Saharan Africa; and (iii) it offers an original distinction between disruption and insurance motives behind remittances.