Analyzing the Relationship between Remittances, Financial Development, and Income Inequality in the Informal Sector of the Economy of Selected Developing Countries (Generalized Moments Approach)

Khudhair Mhmood, Zinah; GHobadi, Sara; Subhi Sahib, Amjed; Sharifi Renani, Hossein

doi:10.22034/oajre.2026.570735.1183

Analyzing the Relationship between Remittances, Financial Development, and Income Inequality in the Informal Sector of the Economy of Selected Developing Countries (Generalized Moments Approach)

Document Type : Original Article

Authors

Zinah Khudhair Mhmood ¹

Sara GHobadi ¹

Amjed Subhi Sahib ²

Hossein Sharifi Renani ¹

¹ Department of Economics, Isf.C., Islamic Azad University, Isfahan, Iran.

² Department of Banking and Financial Sciences, Imam Al-Kadhum College, Wassit University, Iraq

10.22034/oajre.2026.570735.1183

Abstract

In developing countries, remittances and financial development are two key factors influencing income inequality. This study examines the simultaneous relationships among remittances, financial development, and the Gini coefficient, with a particular focus on the informal economy. The distinction between formal and informal sectors is crucial, as financial channels in the formal economy—such as the banking system, regulations, and taxation—differ significantly from informal pathways, including black markets and underground financial activities. Consequently, the effects of remittances and financial institutions on inequality may vary across these sectors. Using a simultaneous equation framework estimated with System Generalized Method of Moments (System GMM) for the period 2010–2023, the study also incorporates control variables including inflation, exchange rate, government size, education level, and trade openness. The findings indicate that remittances in the informal sector positively and significantly affect financial development, while income inequality negatively impacts it. Financial development in the informal sector significantly reduces inequality, whereas remittances in both formal and informal sectors increase income inequality. Bidirectional relationships among the main variables highlight their dynamic interactions, with the informal economic structure moderating the magnitude and direction of these effects. The results underscore the importance of strengthening formal financial institutions, enhancing financial depth, and effectively managing remittance flows to reduce inequality and improve economic performance in developing countries.

Keywords

Informal employment

remittances

Financial Development

Income Inequality