Written in 2014
Poverty in Pakistan is a matter of grave concern and significance as it is directly tied to the country’s poor economy. This paper examines the effects of remittances on poverty reduction in Pakistan. Macro-level data was used from 1990-2008, and Stata was used to carry out regression analysis. Results showed that remittances, along with GDP, are important factors in poverty alleviation.
The remittances’ co-efficient was statistically significant, indicating that as the number of remittances increases in a country, the level of poverty goes down. Inflows of remittances lead to the development of a country, and therefore remittances are crucial for states like Pakistan. Remittances improve the socio-economic conditions of an economy and hence should be carefully monitored. However, it must be noted that poverty is an extremely broad and complex concept and remittances alone cannot explain or completely pacify poverty. Many other socio-economic factors need to be considered to accurately measure poverty alleviation and only then can future policies be made for development.
In the developing world, remittances are regarded to have a hugely beneficial effect on the economy, social welfare, and poverty alleviation. Over the years, global remittances have increased vastly, especially since 1990, during which time the developing world constituted around 60% of the total global remittances. Remittances lead to growth as they directly increase the income of recipients, which subsequently increases consumption as well as investment, which is a primary source of development. Remittances are said to decrease poverty, which is measured through GDP growth, improved fiscal space, and access to foreign exchange.
According to the World Bank, remittances have almost quadrupled from 1976 to 2010. Global inflows to high-income countries accounted for almost 60% of the total remittances during 1976-1990. However, after 1990, there was a change in this trend, as developing countries became the major recipients of remittances. In 2009, almost three-quarters of remittances were directed towards developing countries. This change in the trend since 1990 has been due to foreign workers heavily migrating to developed nations.
Regions that witnessed extremely high volumes of remittance flows were South Asia and East Asia. Within South Asia, from 1976-1990, India had the highest inflow of remittances, followed by Pakistan. However, after 1996, Bangladesh started receiving higher remittances than Pakistan and became 2nd after India.
Pakistan’s golden period vis-à-vis remittances was in the 1980s when half the remittance inflow to South Asia was received by Pakistan. This number decreased over time and in 2009, Pakistan received only 12% of remittances coming into South Asia. For Pakistan, one of the biggest contributors of remittances is the Middle East, as a vast number of Pakistani migrants work in Saudi Arabia, UAE, Qatar, Kuwait, and Oman etcetera. Countries in the West such as America, Canada, and the United Kingdom have also emerged as being integral sources of remittance inflows to Pakistan.
A remittance, by definition, is a transfer of money, often by a foreign worker to their family in their home country. Remittances are generally thought to be a key factor in the development of any economy, as income coming to families is said to decrease the rate of poverty. Poverty alleviation is related to socio-economic development and so the effects of remittances on poverty must be studied carefully to analyze the consequences remittances have on both sending as well as receiving countries.
The increasing rate of poverty in Pakistan, a developing country, has been of prime concern. Poverty is a major obstacle to a country’s development and to alleviate poverty certain steps need to be taken. The paper analyzes the importance of remittances in the alleviation of poverty so that effective policies can be tailored to aid the poor.
Objective of the study
This paper analyzes the effects of remittances on poverty alleviation. The results can help the government design a policy that could lead to a stark decrease in poverty in Pakistan via the promotion of remittances.
Organization of study
The first section is an introduction to the topic and gives a background on the concept of poverty and remittances. Section 2 is the literature review, which highlights different Pakistani studies that were conducted to inspect the relationship between remittances and poverty. Section 3 examines the data and methodology used in this study (through which the paper has arrived at its results). Section 4 discusses the results and findings from the data and analysis conducted. Finally, Section 5 consists of the conclusion and recommendations for future policies. The Appendix after Section 5 includes the tables that show the results of the study.
Studies have found that remittances have a significant effect on economic growth and poverty reduction in Pakistan. Findings of studies suggest that in developing countries such as Pakistan, international migration of labor has considerable potential benefits for the poor. Over time, remittance inflow leads to sustainable growth along with welfare improvement and a better standard of life for the poor (Qayyum, Javid & Arif, 2008).
A study by Mughal and Diawara (2010)concluded that remittances have a large impact on income, poverty, and consumption inequality (all statistically significant). Remittances were found to have a stronger impact on poverty as compared to consumption and income inequality. A rise in remittances by 100% declines poverty headcount by 36 percent (Mughal & Diawara, 2010). The results of this study indicate that remittances do indeed lead to a decline in poverty.
Concerning the impact of remittances on inequality, studies have shown that those households that receive international, as well as domestic remittances, tend to have lower inequality. Furthermore, heads of households who receive remittances usually belong to the middle class. Studies using micro and macro data concluded that international remittances reduce inequality and poverty. Looking at some findings it can be seen that remittances reduce poverty by 35% historically (macro study) and by 2-7% from 2001-2006 (micro study) (Mughal & Diawara, 2010).
Although studies have found that an increase in remittances leads to a reduction in poverty, this is true only in the long run. In the short run, remittances have a negative impact on poverty, which is probably due to the transaction cost of migration (Qayyum, Javid & Arif, 2008).
It was found that the long-run elasticity of poverty vis-à-vis income inequality was positive and significant. This relation shows that poverty reduction is higher in countries with low inequality as compared to countries with high inequality. Therefore, the variable of income inequality is significant and positive.
One study (Siddiqui & Kemal, 2006) measured the effect of exogenous shocks of reduction on remittance inflow in the presence of trade liberalization. It was concluded that although trade rationalization induces welfare and reduces poverty, the welfare gain for urban households was higher as compared to rural households. Hence, poverty reduction in urban households is larger compared to rural households (Siddiqui & Kemal, 2006).
According to all Foster-Greer-Thorbecke (FGT) indicators, poverty increases in urban households but not in rural households. This shows that the combined shock is more damaging for urban households juxtaposed to rural households. A decline in remittances, therefore, increases poverty according to all poverty measures. Siddique and Kemal (2006) further state that in urban areas, the negative impact of remittance decline dominates the positive impact of trade liberalization. Moreover, the positive impact of trade liberalization dominates the negative impact of a decline in remittances in rural areas. Therefore, Pakistan’s increasing poverty can be attributed, among other things, to a decline in remittance inflows.
A report by Arif (2009) titled “Economic and Social Impacts of Remittances on Households” studied the pattern of migration of Pakistanis to Saudi Arabia and the volume of remittances sent. It was concluded that out of the total monthly income received by a household, around 41% was obtained through remittances (Arif, 2009). It was also found that urban households, compared to rural households, received higher remittances although workers from rural areas had a longer stay abroad. Rural workers generally earn less due to them being employed in blue-collar work juxtaposed to urban area workers earning more doing white-collar work.
Studies have also shown that there is a significant difference between pre and post-migration in terms of the economic status of a household. In the post-migration period, the perceived status of households is better than the one in the pre-migration period. Migration outside of Pakistan has also lead to improvements in children’s education and housing facilities.
Size and Distribution of Remittances
There was almost a seven times increase in the magnitude of foreign remittances from the period 1996 to 2008. On average, the annual rise in remittances has been estimated at around 3.3%. With an increase in foreign remittances, the Household Integrated Economic Survey (HIES) found that remittance inflow as a share of household incomes increased from 2.3% in 1996-97 to 5.3% in 2007-08. Most of the remittances were found to be received through banks.
There has been a three times increase in the average remittances from 1996 to 2008, which depicts that the overall level of remittances in the country has had an annual growth rate of 2.8%. Comparing the rural and urban areas, results from studies have shown that the average remittance per recipient is higher in urban areas as compared to rural areas. However, this gap has become narrower over the years, as the remittance inflow to urban areas increased by 2.4% and in rural areas, it increased by 3.3% in the period 1996-2008. There was hence a shift in the distribution of remittances as the rural areas’ share increased from 49% to 72% in the past 20 years.
Studies that have researched the relationship between remittances and its provincial distribution found that Balochistan and Sindh have low shares in remittances – these areas also faced a decline in remittance inflows from 1996 to 2008. On the other hand, the shares of Punjab and KPK rose in the same period.
Considering the distribution of remittances among people of different income groups, studies have indicated that over the years, the share of low-income groups has declined with respect to remittances, whereas those belonging to the middle and upper-income groups have experienced an upsurge in their share of total remittances. Hence, one can see that there has been an unfair income distribution, which can hinder development. Although remittances may seem vital for development, one must discern which group it is affecting the most, since development would require that all individuals get an equal share. If the rich receive most of the remittances, it will not lead to development unless the poor are given benefits and receive higher remittance inflows as well.
Data and Methodology
Macro data was used to find out the results, which was gathered from the World Bank, Economic Survey of Pakistan and IndexMundi. Yearly data from 1990 to 2008 was taken to ensure that a large data sample would allow appropriate results. OLS regression was run on the data and Stata was used to transform the data into tangible results. Macro data was used as poverty and its effects are based on macro-level analysis.
The previous literature conducted on remittances predicts that it contributes not only to the growth of the economy of the recipient country but also plays an important role in reducing poverty. Remittances increase the spending of low-income households thus alleviating their poverty. This study intends to explore the effect of remittances on poverty in Pakistan. The study specifies the following model to analyze remittances and poverty.
The model is written as:
LP: Measure of poverty
LREM: Remittances. Expected sign is positive/negative
LRGDP: Real GDP. Expected sign is negative
LDEBT: Public debt. Expected sign is negative
POP: Population. Expected sign is positive
LAID: Foreign aid. Expected sign is negative
β: Co-efficient of each independent variable
Poverty is the dependent variable. Poverty is measured through the Headcount ratio.
The independent variables are: total remittances, GDP, foreign aid, public debt, and total population. All the independent variables are used to measure their impact on poverty.
Remittance is the target variable.
Remittance and debt are in percentage of GDP. Foreign aid is official development assistance. Real GDP is in per capita terms.
Results and Analysis
The empirical results obtained through the regression run can be seen above. It can be observed that the population has a strong positive impact on poverty. The results show us that a 1% increase in population leads to a 0.309% increase in poverty. This variable is statistically significant with a t-stat of 4.96. In Pakistan, low and stagnant economic growth over the years led to low employment opportunities for the public. A combination of low economic growth, low employment opportunities, and high population growth lead to many people falling below the poverty line. These results from our regression are perfectly in line with the economic theory.
Real Gross Domestic Product (per capita), is another important variable used in the model. Its coefficient tells us that a 1% increase in Real GDP per capita, leads to a 0.108% decrease in poverty. The variable is statistically significant with a t-stat of 2.58 and the results are in line with the theory that tells us that an increase in GDP leads to an increase in investment, which subsequently creates employment opportunities for people. This increase in employment opportunities is followed up by a better standard of living due to a reduction in poverty.
Debt and foreign aid have also been included in the model as they too have an impact on poverty. However, in the model, the two variables, debt and foreign aid, are insignificant with t-stats 0.82 and 0.53 respectively. It should be noted, however, that economic theory suggests that the expected sign of both these variables should be negative. Debt is accumulated for investment purposes to enhance growth in the country, which leads to a decrease in unemployment. While foreign aid, as the name suggests is aid provided to a country by some external source to help them reduce poverty.
With regards to the primary topic of this study, remittances, the empirical results show us that a 1% increase in the inflow of remittances in Pakistan alleviates poverty by 0.115%. The variable is also statistically significant for the model with a t-stat of 2.47. This negative relationship between remittances and poverty shows us the importance of remittances in developing countries. Remittances in Pakistan are primarily intended to support one’s family back home – this inflow of money for recipient families increase their consumption bundles. This subsequent increase in the consumption of goods leads to an improvement in living standards of families and it pushes many above the poverty line. The R-square of this model is 0.853. This signifies that 85.3% of the dependent variable (poverty) is explained by this model.
As seen by the results of this paper, it can be concluded that remittances indeed have a strong effect on poverty. Remittances not only improve a household’s income and lifts them out of poverty but also insulates them from income shocks. Remittances not only increase income but also increase credit easing. This allows households to improve their consumption and living standards. The increase in income leads to an increase in demand for goods and services, which encourages producers to invest more – this eventually equates to higher employment and increased output. This also increases tax revenues, which are used by the government to invest in physical infrastructure and social welfare programs – which massively aid poverty alleviation.
The study confirms that remittances decrease poverty – the study found that a 10% increase in remittances leads to a 1.1% decline in poverty. Remittances are a major source of non-debt inflows, which accumulate foreign reserves. Therefore, the government of Pakistan should reduce the cost and time it takes to send remittances, which includes removing the barriers to entry in the remittance market.
Although many studies have been conducted on remittances, there, unfortunately, is still no universal definition of remittances. The International Monetary Fund (IMF) reports remittances as the sum of migrants’ transfer, employees’ compensation, and the sum of workers’ remittances. However, the problem of misclassification arises in the official data, where whitening of black money by transfers from other sectors, foreign receipts, and revenues from exports are included in remittances. Therefore, accounting practices need to be strictly monitored with the help of the State Bank of Pakistan to ensure that money laundering is not carried out and to ensure that there is no under or over-invoicing of exports and imports.
The government should focus on the results and create policies accordingly. Looking at the results of this study, the government should design a policy that would promote remittance inflows and lead to GDP growth. Remittances should also be monitored carefully, to ensure that they are being put to good use. Other than this, the government should focus on population control so that there are fewer burdens on poor families.
In addition, to reduce the rate of unemployment, the population needs to be controlled. By carefully looking at all these factors and monitoring all activities related to these, the government can surely draft some efficient policies that can successfully lead to poverty alleviation in Pakistan.
Furthermore, studies looking to measure the relationship between poverty and remittances should make sure that remittances are properly measured, and should ensure that other important social and economic factors are taken into account when measuring a macro concept like poverty.
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