final report de 3
TRANSCRIPT
-
8/13/2019 Final Report de 3
1/17
1
Contents
ABSTRACT: ............................................................................................................................................... 2
1. INTRODUCTION ............................................................................................................................... 2
2. SOME KEY FACTS ABOUT MIGRATION AND REMITTANCES............................................................ 3
3. TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1976-1980 ............................................ 5
4. TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1981-1990 ............................................ 5
5. TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 1991-2000 ............................................ 6
6. TREND ANALYSIS OF REMITTANCES FOR THE PERIOD OF 2001-2008 ............................................ 7
7. REMITTANCES AND THEIR IMPACT ON ECONOMY:........................................................................ 9
8. IMPACT OF REMITTANCES ON INVESTMENT: ............................................................................... 10
9. ROOT CAUSE ANALYSIS: ................................................................................................................ 13
10. RECOMMENDATIONS: ................................................................................................................... 14
REFERENCES: ......................................................................................................................................... 15
-
8/13/2019 Final Report de 3
2/17
2
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
-
8/13/2019 Final Report de 3
3/17
3
Skilled, 44%
Highly Qualified,
2%Semi- Skilled,Highly skilled,
Unskilled, 45%
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)
Figure 1: Skill composition of workers since 1970-2008
-
8/13/2019 Final Report de 3
4/17
4
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).
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.
Punjab
49%
Tribal Areas
5%
NWFP
25%
Baluchistan
6%
Sindh
9%
Azad Kashmir
6%
Figure 2: Geographical Distribution of Migrants
Figure 3: Trend of remittances from 1976-2008
-
8/13/2019 Final Report de 3
5/17
5
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
-
8/13/2019 Final Report de 3
6/17
6
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.
-
8/13/2019 Final Report de 3
7/17
7
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 2001-20082001 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
-
8/13/2019 Final Report de 3
8/17
8
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 then 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
-
8/13/2019 Final Report de 3
9/17
9
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.
-
8/13/2019 Final Report de 3
10/17
10
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
Figure 4: Remittance as percentage of GDP for selected countries
-
8/13/2019 Final Report de 3
11/17
11
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:
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
Figure 5: Remittance and their utilization in savings and investments
-
8/13/2019 Final Report de 3
12/17
12
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 own-
account 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).
-
8/13/2019 Final Report de 3
13/17
13
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.
-
8/13/2019 Final Report de 3
14/17
14
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.
-
8/13/2019 Final Report de 3
15/17
15
REFERENCES:
1) Athukorala, P. (1990) International Contract Migration and the Reintegration ofReturn Migrants: The Experience of Sri Lanka. International Migration Review 24:2
323-345.
2) Burney, Nadeem (1987). Workersremittances from the Middle East and their effect ton Pakistan Economy. The PDR 26:4, 745-763
3) Giuliano (2008). Remittances, Financial Development and Growth. Journal ofDevelopment Econmics (www.elsevier.com/locate/econbase)
4) ILO/ARTEP (1987) Impact of Out and Return Migration on Domestic Employmentin 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 toEconomic Growth in Pakistan. Research Report. Pakistan Institute of Development
Economics
6) Irfan, M. (2011). Remittances and Poverty Linkages in Pakistan. Islamabad: PakistanInstitute of Development Economics.
7) IRIN. (2012). In Pakistan, remittances from abroad radically change lives. London:Guardian Development Network.
8) Javid (2012). Impact of remittances on economic growth and poverty, AcademicResearch 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.
-
8/13/2019 Final Report de 3
16/17
16
11)Naseem S. M (2004). Overseas Migration, Outsourcing and Economic Growth inSouth 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 economicstability, British Journal of Economics, Management and Trade, 2(3): 167-185, 2012.
-
8/13/2019 Final Report de 3
17/17
17
APPENDIX
1.
FACTORS AFFECTING REMITTANCE UTILIZATION