Remittances directly result from migration and are a crucial foreign exchange source for economies with lower and middle-income brackets. In 2022, these economies received remittances amounting to $592 billion, surpassing foreign direct investment (FDI) at $479 billion and official development assistance (ODA) at $192 billion. Notably, remittances serve as a stabilizing factor for foreign exchange reserves in developing economies, contributing to a steady exchange rate that, in turn, maintains overall financial market stability.
The global count of migrants reached 281 million in 2020, accounting for 3.6% of the world’s population—an increase from 2.3% in 1970 and a profound interconnectedness marked by the significant flow of remittances. Remittances facilitate the smooth flow of import payments, supporting the economic advancement of these nations. While the macroeconomic impact of remittances has been widely studied, it’s crucial to delve into their effects on household-level outcomes. This study investigates the influence of external and internal remittances on household expenditure inequality in Pakistan.
Why Pakistan?
Pakistan is striving to progress to become an emerging economy, but challenges arise from a significant population bulge and limited resource management, which curtail its progress. The scarcity of economic opportunities is primarily attributed to the migration of the Pakistani workforce. Remarkably, Pakistan ranks sixth among the top migrant-origin countries and is a notable remittance recipient globally, with remittances currently amounting to $30 billion.
These remittance inflows not only aid in stabilizing the foreign exchange market and facilitating macro-level import payments but also elevate living standards when utilised at the household level. However, it’s worth noting that while remittances often lead to improved living standards, they could also contribute to inequality, prompting further investigation.
Assessing the impact of remittances
Pakistan has undergone decades of growth driven by consumption, yet expenditure distribution at the lower end has deteriorated. The Gini coefficient, which measures inequality based on per capita expenditure, has risen from 0.252 to 0.294 in the past twenty years. The Palma and Pashum ratios have also increased, from 3.701 in 2002 to 4.610 in 2019 and from 0.401 to 0.489. These ratios signify an aggravated income distribution, reflecting an increase in the share held by the upper-income group. This rise can be attributed to diverse sources of labour and non-labour income, including remittances as a form of non-labour income. As a result, remittances can potentially contribute to expenditure inequality.
The investigation into the relationship between remittances and expenditure inequality is crucial due to its alignment with Sustainable Development Goals (SDGs) 10 and 17, outlined on the official website of the United Nations Network on Migration. SDG 10 focuses on ‘reduced inequalities,’ while SDG 17 revolves around ‘partnerships for the goals.’
Elevating households and communities through migration
The findings from our descriptive analysis reveal that households with either external or internal migrants receive remittances exceeding the country’s minimum wage. However, external migrants remit more than twice the minimum wage, whereas internal migrants remit slightly above the minimum wage level. The per capita expenditure is higher in households that receive remittances than those that do not. Specifically, per capita external remittances surpass the poverty threshold, implying that remittances can lift a family out of poverty without additional non-remittance income. In contrast, per capita internal remittances are below the poverty threshold, and non-remittance income complements poverty alleviation.
The results indicate that households receiving remittances significantly surpass those without migrants regarding per capita expenditure across the spectrum. The impact of external remittances is more pronounced than that of internal ones. It is also evident that households receiving external remittances exhibit higher income levels than those that do not. This reinforces the concept of a ‘new economics of labour migration,’ where households send migrants to boost income and mitigate community deprivation.
The impact of external remittances on household well-being
Conversely, wealthier households utilize migration to diversify income/asset risks due to domestic shocks. These migration motives stem from increased remittances, leading to higher per capita expenditure in the community. The findings empirically support that external remittances enhance household well-being by elevating per capita spending. This underscores the direct role of remittances in alleviating poverty and driving Pakistan’s economic development.
The study also confirms that the main contributor to the expenditure gap among household categories is household income, with external remittances constituting 55 to 70% of household income across the distribution. Conversely, internal remittances account for 50 to 60% of household income across the distribution. International migration within a family parallels adopting new production technology, enhancing productivity and widening the income/expenditure gap.
Similarly, external remittances alleviate credit constraints, enabling left-behind members to undertake investment projects and elevate household income. Furthermore, international migration enhances the human capital of those remaining behind, improving household characteristics that significantly contribute to the expenditure gap.
Conclusions
This study establishes that external remittances could contribute to income inequality among household groups. Addressing this issue involves strategies to reduce the expenditure gap and enhance distribution. One approach is to offer access to international migration for economically disadvantaged households and alleviate financial barriers linked to migration costs. This can be partly achieved by improving credit accessibility for these marginalised households. Additionally, the relaxation of migration policies in developed economies can play a pivotal role in facilitating migration access, thus potentially enhancing expenditure distribution.
The findings suggest that external remittances disproportionately benefit wealthier households over poorer ones, thereby widening the gap in expenditure distribution. This form of expenditure inequality focuses more on efficiency than equity. However, implementing a range of long-term policy measures is essential to directly achieve efficiency by tapping into the untapped potential of the economy, ultimately contributing to improved living standards.
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Journal reference
Shair, W., & Anwar, M. (2023). Effect of internal and external remittances on expenditure inequality in Pakistan. Cogent Economics & Finance, 11(1), 2178121. https://doi.org/10.1080/09669582.2020.1783276
