Paper short abstract:

Is one dollar of remittance income equal to one dollar of any other source of income? If it is not, then migrant money transfers may cause behavioral changes at the household level, and their development impact can be huge. This paper tests the assumption of fungibility of income.

Paper long abstract:

Is one dollar of remittance income equal to one dollar of any other source of income? If it is not, then migrant money transfers may cause behavioral changes at the household level, and their development impact can be huge. According to the World Bank, Kyrgyzstan is the number three country in the world by its share of personal remittances in GDP (28.5% in 2019), which makes its economy highly dependent on the money transfers by its labor migrants. On the other hand, there are frequent claims in Kyrgyz media that remittances sent by migrants are often used to finance celebratory events, which are both numerous and expensive in relation to households' incomes. This paper tests the assumption of fungibility of income and explores whether there are significant differences in the patterns of spending remittance versus other sources of income by Kyrgyz households, using a dataset “Life in Kyrgyzstan” that covers 3,000 households over five years (2010 to 2013, 2016). The results indicate that remittance income and other income are in fact not fungible and thus, mental accounting matters. Besides, there are significant differences in how remittance income and other income are spent by families in Kyrgyzstan. Contrary to the optimistic view of remittances in the literature, households spend most of their remittance income budget on consumption goods. In addition, they spend more of their remittance income on celebrations, funerals, and rituals compared to income from other sources. The findings suggest that the massive remittance inflows into the country do not have a positive development impact that they potentially could.