Contents

ABSTRACT:............................................................................................................................................... 2 1. 2. 3. 4. 5. 6. 7. 8. 9. INTRODUCTION ............................................................................................................................... 2 SOME KEY FACTS ABOUT MIGRATION AND REMITTANCES............................................................ 3 TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1976-1980 ............................................ 5 TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1981-1990 ............................................ 5 TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1991-2000 ............................................ 6 TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 2001-2008 ............................................ 7 REMITTANCES AND THEIR IMPACT ON ECONOMY:........................................................................ 9 IMPACT OF REMITTANCES ON INVESTMENT: ............................................................................... 10 ROOT CAUSE ANALYSIS: ................................................................................................................ 13

10. RECOMMENDATIONS:................................................................................................................... 14 REFERENCES: ......................................................................................................................................... 15

ABSTRACT:

Over a period of 40 years, remittances have become a major part of the Pakistani economy. Starting from a bare minimum in 1970s, the country is now ranked the 7th largest emigrant country and has received remittances worth $1.2billion a month. This paper analyzes the major trends in the inflow of remittances with the time period of 1976-2008. The paper also identifies the major impact of the remittances on the economy in general and investments in particular. The paper also identifies a key issue relating to investments of remittances and drills down to the root cause. Recommendations are provided in the end to eliminate the root cause and tackle the key issue.

1. INTRODUCTION

During the past four decades Pakistan received significant amount of remittances. These remittances have played a significant role in the economy by not only increasing the household consumption but also increasing savings and investments in the country. Studies have proven that the impact of these remittances is much impressive on the microeconomic level rather than the macroeconomic level. However, fluctuations have also been observed in the inflow of remittances throughout these four decades. Inflow of remittances also affects economic growth positively by reducing current account deficit, improving the balance of payment position and reducing dependence on external borrowings (Iqbal and Sttar, 2005). This paper gives an overview of the utilization of these remittances in the form consumption and more specifically, investments and savings. The paper is organized as follows. Section 2 presents some key facts about migrants and the remittances that have been sent home within the period under consideration. Section 3-6 provides a thorough trend analysis of remittances inflow from the 1970s to 2008. This is followed by an overview as to how these remittances
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have impacted investments in the country and the identification of a core issue in remittance utilization in section 7 and 8. Section 9 provides a root cause analysis for the core issue with remittance utilization identified in Section 8. Section 10 and 11 analyze the long term impact of the core issue and conclude by recommending certain policies that might be helpful in overcoming the core issue identified in the paper.

2. SOME KEY FACTS ABOUT MIGRATION AND REMITTANCES

During the period of 1970 to 2008, approximately 5 million Pakistanis have migrated to different countries around the world. Out of these, majority has migrated to the Middle eastern countries such as Saudi Arabia (2.3 Million) and UAE (1.3 million) followed by Oman and Kuwait. (Javid, 2012, p. 432) Another research found that 62% of the total remittances have been spent on consumption while 35% has been either invested or saved. Figure 2 shows the skill composition of migrant workers to different countries around the world. It is clear from the illustration that of the total migrant workers approximately 2% are highly qualified such as Engineers or Doctors. 7% are highly skilled while 44% are skilled while 47% are semi-skilled and unskilled workers such as technicians, electricians, carpenters and mechanics etc. (Javid, 2012)

Unskilled, 45%

Skilled, 44%

Highly skilled, 7%

Semi- Skilled, 2%

Highly Qualified, 2%

Figure 1: Skill composition of workers since 1970-2008 3

Figure 2 shows a geographical distribution of the origin of these workers. It can be seen that most of the workers belong to Punjab (48.8%) followed by NWFP (24.6%), Sindh (8.7%) and Balochistan (6.4%). The relatively low overseas migration from Sindh points to the fact that better job opportunities and business environment may possibly be prevailing there which encourages and persuade people to stay in home country (Giuliano, 2008).
Sindh 9% Baluchistan 6% NWFP 25% Azad Kashmir 6% Punjab 49%

Tribal Areas 5%

Figure 2: Geographical Distribution of Migrants

According to Nishat and Bilgrami (1993) the main determinants that drive the migrants to earn and remit are the supporting of families, self- interest of the migrants, education of children, future planning and compensating for consumption issues in the future etc.

Figure 3: Trend of remittances from 1976-2008

3. TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1976-1980

Pakistan experienced a sharp increase in emigrations starting 1976 onwards. High unemployment, abject poverty, and expectations of higher earnings abroad are some of the fundamental causes of the emigration. Most of the emigrations between 1976 and 1980 were to the Middle-East, as those countries had liberalized their policies, because of the increased demand of labor and the inability of the local market to supply that. The Middle Eastern countries demanded higher labor because of their booming petroleum sectors, and this is one reason for the increasing remittances inflow to Pakistan. Remittances experienced a sharp increase in between 1976 and 1980. Majority of the migrant workers were either unskilled or semi-skilled from low income backgrounds which allowed their families in Pakistan to establish small businesses acquire real assets and make considerable and extensive enhancement and improvement in their standard of living.

4. TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1981-1990

The decade of remittance reception (1981-1990) can be divided into the period 1981-83 and 1983-1990 respectively. In the first period the country experienced an upward trend in remittances growing to around 3000Million USD from almost half the figure three years ago. But in the second stage, a downward trend is observed with around a 17% decline from the first half decade. Also the coefficient of variation which related the responsiveness of changes in remittances to factors in the market was at 22 units which reflected high remittance responsiveness. Thus consequently, in the first period, the remittance influx improved the current account deficit as well as trade deficit for the country but it declined in

the second period thereafter, reducing rate of poverty alleviation, which are directly resolved by remittance influx (Irfan, 2011). The main premises for the different trend in the two periods were crucial in the discussion. In the first period, due to rise in demand for workers in the Middle East (Both skilled and unskilled labor), a huge labor migration took place from Pakistan. This factor, along with the remittance reception from Afghan families located overseas, to help their family members taking refuge in Pakistan, were the main cause for an upward trend in the remittances in the first period. But then, in the second period, as the Middle Eastern markets became saturated, the migrants were unable to find jobs along with less flow of remittances to Pakistan in the period due to rehabilitation of refuges already in place, a downward trend was observed in remittances to the country. This was a reflection on the trend in remittances to Pakistan between the decade (1981-1990) and the root cause analysis of the remittance trend (Burney, 1987).

5. TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1991-2000

Remittances from expatriates experienced a downfall during the years 1991-2000. Average remittances in this decade fell to USD 1426.4 million as compared to USD 2323.6 million in the previous 1981-1990 period. As figure 3 shows, remittances gradually decreased from 1991 reaching an all-time low of $997.1 Million in 1999 before picking up again. The reasons for such drastic decrease in remittances can be attributed to various factors including but not limited to the political changes in the country affecting government economic policies and the Asian financial crisis in early 1993-97.

From 1990 to 1993, Nawaz Sharif's government liberalized the economy and foreign exchange while pursuing privatization of state-owned corporations but in the absence of effective macroeconomic policies and adequate stabilization efforts the benefits from economic liberalization were seriously limited. From 1993 to 1997 Pakistan grappled with the Foreign Exchange crisis and Benazir's government was faced with intense corruption charges. Her ambitious Eighth Five-Year Plan elicited an adverse market reaction, and ended up participating in the sharp rise in unemployment and rapid deterioration in the external reserves position bringing the country back to the brink of a foreign exchange crisis in October 1995. When Nawaz Sharif returned to office in 1997, he again put forward the aggressive privatization and liberalization program; however the UN embargo following the country's Nuclear Test halted the benefits from these policies. The economy in this decade was in disarray, the GDP had fallen to 1.70% in 1995-96 and inflation was 14.5% in 1994-95. Pakistan was experiencing its second period of stagflation. Although the outflow of skilled workers was greater than unskilled labor starting from 1990, still the inflow of remittances was negatively affected by the Asian financial crisis which decreased the earnings of migrant workers in the Middle East and stagflation in Pakistan which reduced the attractiveness of remitting money back for savings and investment. In turn, these low remittances further propelled the local economy in to a foreign exchange crisis.

6. TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 2001-2008 2001 was the year when there was a phenomenal shift in the remittances inflow. After 2001, the inflow of remittances showed a sharp increase and within a passage of 8 years, the remittances increased from $1.2 billion to 7.3 billion in just 7 years. Most of the remittances were generated from the Gulf States particularly UAE. 15% of the remittances can from Europe, 21% from North American and almost 47% from the Middle East. Although the
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number of migrants for UAE had declined from in the past decade, the new migrants are usually more skilled and educated and therefore they have higher pays. As a result, the remittance amount is much higher. After reaching the level of 3.3 billion, the rate of increase of remittances slowed down because of the constrained economic conditions in UAE. From 2006 to 2008, the remittance saw a huge boost as the people started returning in the wake of the financial crisis and brought their savings with them. Studies also reveal that that the major part of the recorded remittances cover not just remittances from Pakistani workers abroad but in fact cover all remittances sent by the Pakistani Diaspora (many of whom have acquired nationality of their resident country). According to Abbasi (2010), Pakistani Diasporas are interested in and knowledgeable of social, political and economic developments in Pakistan and they not only remain connected to Pakistan but also contribute to its GNP through remittances. In early 2000, Pakistans foreign exchange system was liberalized, and since the n spreads between the official exchange rate and the curb rate have been small. This may have resulted in a shift of remittance transfers from the Hawala system (unofficial) to formal channels. Joint efforts to create this shift were made by Pakistan Remittances Initiative (PRI) with the State Bank and the Ministry of Finance. These efforts improved remittances inflow since the unofficial non-banking channels to send remittances used to cost more than the banking channel. Geopolitical events also affected remittances, especially in the case of Pakistan. In the wake of September 11, 2001 terror attacks, the United States and other Western countries increased scrutiny of bank accounts of Pakistani nationals. Some anecdotal evidence suggests that to avoid the risk of their funds being frozen or confiscated, Pakistanis abroad transferred part of their accumulated savings to Pakistan and increased the share of their monthly savings held in
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Pakistan. In the long run, the question whether Pakistan will be able to sustain the recent increase in remittances depends on whether the rise in labor migration is to continue and, more importantly, if the composition of the migrating workforce continues to tilt in favor of highly skilled workers. Obviously, any positive impact of a continued export of high-skilled labor should be carefully weighed against the potential cost of this brain drain.

7. REMITTANCES AND THEIR IMPACT ON ECONOMY:

A number of studies and researches have been undertaken in Pakistan at both micro and macro level in order to identify the impact of remittances on growth and development of the country. These studies show that remittances have a positive impact on the economy in terms of aggregate consumption, investment, reduction in current account deficit, external debt burden and improved education/skills for the households. Furthermore, labor migration is considered to be a useful source of foreign exchange earnings (Naseem, 2004). These remittances also accelerate economic growth by enabling households to finance investments and reduce liquidity constraints. Iqbal and Sattar (2005), in their research, show that real GDP growth is positively correlated to workers during 1972-73 to 2002-03 and workers remittances emerged to be the third important source of capital for economic growth in Pakistan. The following figure shows the impact of remittance on GDP from 1971 to 2010.

Figure 4: Remittance as percentage of GDP for selected countries

Consumption and savings also have a positive relation with remittances where in these variables have increased with increase in remittance inflows. With an increase in remittance income, consumption has also increased which has also proved beneficial to the economy.

8. IMPACT OF REMITTANCES ON INVESTMENT:

Research reveals that 60% of the remittances are spent on the consumption of households while the remaining 40% is spent on investments and savings. The portion of remittances allocated to consumption, investment and savings depends on a number of externalities, such as the duration of stay abroad, migrants socio demographic characteristics, etc. (see Appendix 1). People are keen on investing the remittances due to two major reasons. People invest their remittances because they believe that investment can lead to increased levels of consumption in future. The other reason is that they believe that investment can act as insurance against
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reduced consumptions in crunch financial times. Yet, we can easily see that these two reasons are disregarded when it comes to consumption. For most households, rate of time preference is greater than the rate of interest on investments or savings and therefore, the consumption level on remittances is so high. People are impatient and they consider the economic situation of the country unviable and so they are reluctant to invest or save. It is also observable that with every unit increase in remittances, consumption increases proportionally as well. The table given below provides information on average remittances received by households, average amount spent on investments and average savings, taken from ILO survey data:

Figure 5: Remittance and their utilization in savings and investments

The survey shows that households invest about 41 % of remittance money. The reason for such a large investment ratio is that the households do not consider remittance to be permanent source of income; therefore they tend to save or invest a considerable amount. This investment goes in majorly in to real estate (land and housing). According to the ILO survey about 62 % of physical investment from remittances went in to real estate. The reason why such a large portion goes in to land and housing is because such an
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investment is instrumental in improving the socio-economic status of the family, which is the primary motive behind the decision to migrate and it results in the inflow of remittances. Another reason behind the investment in real estate is that in a high inflationary economy like Pakistan real estate is a good and risk free long term investment (Kazi 1989) This pattern of investment may not be ideal for countrys long term development because this may result in the creation of a housing bubble due to the over-valuation of real estate. However from the point of view of households this investment represents the most rational after real estate another major area of attraction was Business and entrepreneurship, mostly Retail trade. Remittances lead to an increase in small scale entrepreneurial activity in a small portion also goes in to agricultural investment (purchase of farm equipment, cattle and seeds). These remittances have little or no impact on the development of local industry. According to Athukorala (1990), almost all investment efforts are directed towards ownaccount employment in order to ensure continuity of prosperity newly gained through migration. Concerning a greater weight given to real estate, the Pakistani experience parallels the patterns observed in India, Bangladesh and Philippines. So considering the entire context, it becomes pretty evident that the core issue with the utilization of remittances is that the investment is done mainly in the urban real estate sectors while investment in rural sector is even lower. This not only eliminates the chances of future increased sources of earnings, but also does not contribute to job creation, increased credit stream, technological advancement which all results from failure to invest. In the long run this would lead to increased urban rural development gap and problems related to urbanization will pop up. Inequality would increase which would lead to further underdevelopment (IRIN, 2012).

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9. ROOT CAUSE ANALYSIS:

Where do the migrants invest? Real estate is the best option for the migrants as their earnings are not permanent and real estate has always been a lucrative option for the wealthy. Why is urban real estate a better option to invest than rural sector? The urban centers have a developed real estate market and infrastructure is present for long term investment facilitation. Why is rural sector undeveloped for real estate? Because of the urban bias that prevails and urban policies that provide incentives to only the power groups and waderas. Why are development policies favoring urban centers and not rural sectors? Those in power want to keep their power stakes alive and so they formulate policies which solidify their power base. Why is investment in working capital and financial markets discouraged by migrants? The uncertain economic condition characterized by failing industries, low returns on investment in some sectors and high default risk. Why is there uncertain economic condition? Because of the inconsistent no beneficial policies of the government. Why do government policies non beneficial for the sectors of economy? The policies are formulated to protect the vested interests of comprador groups and to enable those in power to remain in power. Why are policies made to protect the interest of those in power? Presence of cores, (Dependence Model) comprising of the elite ruling class that pursue selfish / vested interest that do not allow for development policies.

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10. RECOMMENDATIONS:

In order to tackle with the core issue identified through the analysis of remittances and their impact on investments, we need to target the root cause identified above. The root cause is the vested interests of those in power and the comprador groups who want to retain their position, power and prestige. This can only be done through land reforms and redefining of power structures. The governments need to take responsibility, and apply the concepts of distribution before growth. We need to learn from the practices of late developers such as South Korea, whose example we did in class too. When the land will be distributed equitably, the infrastructure will develop in the rural market too. The policies of the government will be no longer be stricken by urban bias. It will culminate into the elimination or a drastic reduction in congestion, and also remove the first-city bias from the minds of the general public as the policies will not be tilted towards the development of only first cities. The gap between the urban and rural sector will diminish and so, investment will flow in both sectors more equitably. The investment ratio will also increase because the people will be more inclined to invest. Moreover, land reforms will result in inclusive development, both economic and then, ultimately, political, as explained beautifully and with empirical evidence by the authors of Why Nations Fail. Also, inclusive development is required to launch our country into the stage of self-sustaining growth, if we relate and classify our economy according to American historian Walt Rostows Stages of Growth Model.

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REFERENCES:

1)

Athukorala, P. (1990) International Contract Migration and the Reintegration of Return Migrants: The Experience of Sri Lanka. International Migration Review 24:2 323-345.

2)

Burney, Nadeem (1987). Workers remittances from the Middle East and their effect t on Pakistan Economy. The PDR 26:4, 745-763

3)

Giuliano (2008). Remittances, Financial Development and Growth. Journal of Development Econmics (www.elsevier.com/locate/econbase)

4)

ILO/ARTEP (1987) Impact of Out and Return Migration on Domestic Employment in Pakistan, Volume II: Re-absorption of Return Migrants in the Domestic Economy. New Delhi.

5)

Iqbal, Zafar and Abdus Sattar (2005). The contribution of Workers Remittances to Economic Growth in Pakistan. Research Report. Pakistan Institute of Development Economics

6)

Irfan, M. (2011). Remittances and Poverty Linkages in Pakistan. Islamabad: Pakistan Institute of Development Economics. IRIN. (2012). In Pakistan, remittances from abroad radically change lives. London: Guardian Development Network.

7)

8)

Javid (2012). Impact of remittances on economic growth and poverty, Academic Research International, Vol. 2, No. 1, Jan. 2012.

9)

Kazi, S. (1989) Domestic impact of overseas migration: Pakistan. In R. Amjad (ed) To the Gulf and Back: Studies on the Economic Impact of Asian Labour Migration. 167-196. New Delhi: ILO\ARTEP.

10)

Muhammad Javid, U. A. (2012). impact of remittances on economic growth and poverty . Karachi: Academic Research International.
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11)

Naseem S. M (2004). Overseas Migration, Outsourcing and Economic Growth in South Asia edited by Debdas and Goldfield, Labor, Globalization and the State Workers, women and migrants confront neo liberalism .Routledge Taylor & Francis Group London

12)

The link between remittances and economic growth in Pakistan: A boon to economic stability, British Journal of Economics, Management and Trade, 2(3): 167-185, 2012.

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APPENDIX
1.

FACTORS AFFECTING REMITTANCE UTILIZATION

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