Trade liberalization, urban-rural remittances and income inequalities in Senegal: lessons from a CGE analysis

This paper aims at assessing how domestic urban-rural remittances can mitigate macroeconomic shocks in a developing country. When trade liberalization occurs, it may affect the national income structure and increase regional poverty, especially in a vulnerable economy where the volatility of prices and incomes are unavoidable. As underlined by Cox (1990, 2002), Cox and Jimenez (1998) and Morduch (1995), private transfers can significantly help households deal with exogenous risk and similar studies also find evidence of an efficient risk sharing between the poorest households thanks to private cash exchange (Deaton 1997, Townsend 1995, Jalan and Ravallion 1997). In order to deepen the theoretical foundations of micro-economic determinants of remittances, we design a single-country computable general equilibrium (CGE) to capture all the redistributive channels implied by domestic transfers. We then calibrate our CGE model on a recent social accounting matrix of Senegal dated from 2006. We base our work on three important Senegalese household surveys: ESAM I (1996), ESAM II (2002) and ESPS (2005) which provide specific data on disaggregated households such as: spending structures, income structures, and domestic transfers. To assess the mitigating impact of remittances on economic shocks we face two significant challenges: the theoretical ambiguity of remittance decision models and the credibility of transfer data. Identifying the determinants of remittances is puzzling and controversial within the theoretical literature. Numerous theoretical models have been developed based successively on “altruistic motive” (Becker, 1974; Stark, 1985) and “mutual exchange strategy” (Cox, 1987; Cox, Eiser et Jimenez 1998), the latter being especially relevant in the case of intergenerational transfers (Laferrere and Wolff, 2001). Other common models rely on “strategic game” analysis (Stark and Wang, 2002), “insurance strategy”, “moral hazard” (Stark and Levhari , 1982;...