ECONOMIC DETERMINANTS OF INTERNATIONAL REMITTANCES IN

By

Nisar Ahmad

A Thesis Submitted to the Department of Economics In Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in Economics

DEPARTMENT OF ECONOMICS UNIVERSITY OF SARGODHA SARGODHA 2008

CERTIFICATE

This thesis “Economic Determinants of international Remittances in Pakistan” by

Nisar Ahmad is accepted in its present form by the Department of Economics as

satisfying the thesis requirement for the degree of Doctor of Philosophy in

Economics.

Supervisor ------

Chairman ------

External Examiner ------

i

CERTIFICATE

It is certified that Mr. Nisar Ahmad, Ph.D Scholar (Reg. UOS/Ph-D/Eco/05/05) has taken his M.Phil degree from BZU, Multan, which is recognized as equivalent to the degree of M. Phil of the University of Sargodha.

Moreover, it is certified that for not less than three years after passing his examination for the master’s Degree, he has pursued an Advance course of

Study and Research in Economics for Ph.D Degree.

Chairman, Department of Economics University of Sargodha Sargodha

ii

DECLARATION

I, Nisar Ahmad, Ph.D Scholar, Registration No UOS/Ph-D/Eco/05/05, University of Sargodha, hereby declare that the research work (Ph.D Dissertation) which I have submitted has not already been submitted and shall not in future be submitted for obtaining similar degree from any other University.

Nisar Ahmad PhD Scholar, University of Sargodha, Sargodha.

iii

DEDICATED TO MY LOVING SONS

ABDULLAH NISAR

MUHAMMAD SHOAIB NISAR

MUHAMMAD USMAN NISAR

MUHAMMAD JUNAID NISAR

iv ACKNOWLEDGEMENT

All thanks and praises to ALMIGHTY ALLAH (SWTH), the Merciful, the

Compassionate, who provided me the opportunity and gave me the strength to

complete this research work within stipulated time and all praises for HIS HOLLY

PROPHET HAZARAT MUHAMMAD (P.B.U.H), the city of knowledge and torch

of guidance for humanity as a whole.

I would like to express my gratitude to my supervisor and the worthy chairman;

department of economics, Dr. Zakir Hussain. I am extremely indebted to him for

his kindness. It is all due to his full co-operation from beginning to end that I

have completed this research study successfully. I learnt the art of hard work

from the personality of my supervisor. The foreign faculty was a great blessing of

ALLAH (SWTH) for the Department of Economics, University of Sargodha,

Sargodha, Therefore, I also like to acknowledge the services and guidance

provided by the foreign faculty professors Dr. Maqbool H. sial, Dr. S.J. Malik, and

Dr. Khalid Raiz. I thank them for their co-operation and proper guidance during the research work.

I would like to thank the various researchers and economists for their contribution toward writing valuable research material about the different aspects of remittances and migration. I recognize the contribution of Federal Bureau of

Statistics, Islamabad and State Bank of Pakistan, Karachi for publishing data. I

v also recognize the support of Higher Education Commission for providing Ph.D

indigenous scholarship to accomplish this task.

I am thankful to my father, brothers, relatives, friends, and colleagues who

encouraged me for completing this research work and especially to Mr. Nadeem

Sohail, Mr. Haroon Sarwar, Mr. Naveed Iqbal and Mr. Adeel Saleem, Ph.D

students. I am greatly indebted to Dr. Masood Sarwar and Dr. Abdul Saboor for

explaining econometric techniques for the estimation. I owe a word of thanks to

all faculty members of Department of Economics, University of Sargodha for their

moral supports. I have special word of thanks and appreciation for Mr. Khurram and Mr. Imran who assisted me in composing the research study.

Last but not the least I am grateful to my wife Rukhsana Kusar for her assistance

and encouragement in difficult times. She accepted all the family responsibilities

and provided me every support to complete the research work.

NISAR AHMAD

vi CONTENTS

CH # NAME OF CHAPTER PAGE No

ABSTRACT 1

1. INTRODUCTION 2

1.1 Introduction 2

1.2 Remittances in Pakistan 7

1.3 Objectives of the Study 9

1.4 Plan of Study 10

2. REVIEW OF LITERATURE 11

2.1 Introduction 11

2.2 Literature review at National Level 12

2.3 Literature review at International Level 19

2.4 Literature review about Remittances at Micro Level 19

2.5 Literature review about Remittances at Macro Level 27

2.6 Literature review about Migration 44

2.7 Summary 54

vii 3. THEORTICAL FRAMEWORK 57

3.1 Introduction 57

3.2 Theories of Migration 58

3.2.1 Neo Classical Theory of Migration 59

3.2.2 Push- Pull Theory of Migration 61

3.2.3 Dual Labour Market Theory of Migration 61

3.2.4 Migration Systems Theory 63

3.2.5 The New Economics of Labour Migration 64

3.2.6 Trans-nationalism Theory of Migration 64

3.2.7 Roy’s Theory of Migration 65

3.3 Theory of Remittances 69

3.4 Motives of Remittances 71

3.5 Hypotheses Formulation 76

4. DATA AND METHODOLOGY 78

4.1 Introduction 78

4.2 Source of Data 79

4.3 Methods and Procedures 80

4.4 Stationary, non-stationary and Order of Integration 82

4.5 The concept of Co-integration 83

4.6 Order of Integration 84

viii 4.7 Test of Co-integration 86

4.8 Co-integrating Vectors 87

4.9 Error Correction Mechanism 88

4.10 Modeling Strategy 91

5. UNIT ROOT TEST 94

5.1 Introduction 94

5.2 Unit Root Test 95

5.3 Graphical Representation of the Series 101

6. COINTEGRATION ANALYSIS 110

6.1 Introduction 110

6.2 Co-integration 110

6.3 Co-integration Analysis of Remittances Model 111

6.4 Co-integration Analysis of Migration Model 116

7. Economic Determinants of International Remittances 121

7.1 Introduction 121

7.2 Long Run Relationship 121

7.3 Error Correction Mechanism 126

7.4 Long Run and Short Run Elasticities 128

ix 7.5 Elementary Analysis of Workers’ Remittances in Pakistan 130

7.6 Impulse Response Function of Remittances Model 133

8. Economic Determinants of International Migration 136

8.1 Introduction 136

8.2 Long Run Relationship 137

8.3 Error Correction Mechanism 139

8.4 Long Run and Short Run Elasticities 141

8.5 Impulse Response Function of Migration Model 142

9. CONCLUSION AND POLICY RECOMMENDATIONS 145

REFERENCES 153

APPENDIX 162

LIST OF ABBREVIATIONS 168

x LIST OF TABLES

T. NO. NAME OF TABLE PAGE NO

5.1 Unit Root tests using Augmented Dickey-Fuller Method 97

5.2 Unit Root tests using Augmented Dickey-Fuller Method 98

5.3 Unit Root tests using Augmented Dickey-Fuller Method 99

5.4 Unit Root tests using Augmented Dickey-Fuller Method 100

6.1 Selecting the Order of the VAR for Real Remittances Model 113

6.2 Johansen Co-integration Results for Real Remittances Model 115

6.3 Johansen Co-integration Results for Real Remittances Model 116

6.4 Selecting the Order of the VAR for Migration Model 118

6.5 Johansen Co-integration Results for Migration Model 119

6.6 Johansen Co-integration Results for Migration Model 120

7.1 Regression results relating Real Remittances with Independent Variable in Pakistan 123

7.2 Regression results relating First Difference of Real Remittances With First Difference of Independent Variables in Pakistan 127

7.3 Long Run and Short Run Elasticities of Remittances in Pakistan 129

7.4 Generalized Impulse Response(s) to one S.E. shock in the Equation for LRREM 134

8.1 Regression results relating Migration with Independent Variables in Pakistan 138

8.2 Regression results relating First Difference of Migration With First Difference of Independent Variables in Pakistan 140

8.3 Long Run and Short Run Elasticities of Migration in Pakistan 142

xi 8.4 Generalized Impulse Response(s) to one S.E. shock in the Equation for LNW 143

A1 Country Wise Remittances ($ Million) in Pakistan 162

A2 Country Wise Percentage Share of Remittances in Pakistan 164

A3 Remittances as Percentage of GDP, Exports, Imports and Savings 166

xii LIST OF FIGURES

F. NO. NAME OF FIGURE PAGE NO

5.1 Real Remittances in Pakistan 101

5.2 Real GDP in Pakistan 102

5.3 Real Growth Rate in Pakistan 103

5.4 Real Wage Rate in Pakistan 104

5.5 Unemployment Rate in Pakistan 105

5.6 Literacy Rate in Pakistan 106

5.7 Bank Spread Rate in Pakistan 107

5.8 Out Flow of Migrant Workers per year from Pakistan 108

5.9 Inflation Rate in Pakistan 109

7.1 Generalized Impulse Response (s) for Remittances Model 135

8.1 Generalized Impulse Response (s) for Migration Model 144

xiii

Abstract

The international remittance is one of the important sources of foreign exchange earnings in the country. Recently, Pakistan received over $4 billion as foreign remittances in 2006. The flows of funds through foreign remittances served as a cushion for balance of payment and foreign reserves. The economic determinants of international workers’ remittances and migration in Pakistan were investigated in this research study. The time series data were used to identify the economic determinants of the international remittances and migration in Pakistan for the year of 1973 through 2005. The stationary properties of each time series were investigated and found integrated of order one. The variables of remittances and migration models were established as co-integrated.

The real remittances in Pakistan were found positively related with real GDP, real

Growth rate and unemployment rate and were negatively related with real wage rate, literacy rate and spread rate of banks in Pakistan. The migration from

Pakistan was found positively related with real remittances, inflation and unemployment rate and was negatively related with real wage rate in the country.

Based on research results, it seems imperative to introduce financial innovations and create friendly environment for migrant workers to invest in the country. The widening gap of saving-investment can also be bridged through providing incentives on the bank rate and saving schemes.

1 Chapter 1

Introduction

1.1 Introduction

The remittances were generally defined as a part of the earnings of the migrants,

who were working in other parts of country or foreign countries. The worker may move from one place to other places for their livelihood. The remittances were termed as internal remittances when sent from one region to other within the country and were known as external or international remittances when sent from

one country to other country. The workers may have migrated to different places

within their own countries, or left their countries of origin completely toward

foreign countries for the sake of more earnings. Precisely, international

remittances were the working migrant’s earnings sent back from the foreign

country to their home country in which their families were residing. Hence

international remittances were the proportion of the earned income of the migrant

workers sent to their families at home country.

The remittances may be classified into different types and groups as for example

internal remittances and external (international) remittances. Here, in this study,

the concern was about the international remittances those were further divided

into four groups (Wahba, 1991). These four types of international remittances

were: (i) Potential remittances were the amount of the savings from the total

2 earning of the worker living in the foreign country. Therefore, such type of remittances might be the maximum amount of remittances that migrant was able to send to their families at home. (ii) Fixed remittances were the remittances sent to the family of migrant worker for the fulfillment of their needs including food, clothing, shelter and education etc. Therefore, such type of remittances showed the minimum amount of remittances transferred to the home country. (iii)

Discretionary remittances were amount of remittances transferred in excess of fixed remittances. Therefore, these amounts of remittances were the actual level of remittances coupled with fixed remittances. (iv) Saved remittances showed the difference between potential remittances and the amount of remittances transferred to home country during the prescribed period. The flows of remittances were accumulated into a stock of resources of the home country, which were used to supplement actual remittances at a later date. The stock of wealth was the result of a portfolio decision by the migrant workers and these workers were encouraged to contribute their resources for the development of their home country. The types and groups of remittances might be highly important due to their different components were driven by varying motives

(Wahba, 1991).

The transfer of international remittances was linked with the pattern of international migration and mobility of the labor. Therefore remittances and migration were a key source of development and income redistribution at national as well as at international level. International migration and remittances have a

3 pivot role in generating and redistributing income among different countries during the nineteenth century (Taylor, 1994). Given the sizeable productivity differences among countries, the size of the welfare achieved from international migration might be very large according to productivity sizes of the different countries. It was estimated that the gains from international migration in world output was ranged between from 20 per cent to 40 per cent of world output

(Hamilton and Whalley, 1984).

Over the time, the remittances were increasing rapidly and played important a role in the development of different countries all over the world. The volume of remittances has jumped from $58 billion to $160 billion during the time period of

1995 to 2004. Perhaps, this volume has crossed private debt, equity flows and official assistance for the development purposes. In this way, remittances might be ranked next to foreign direct investment in the developing countries. The number of factors was responsible for the increase in the volume and growth of remittances including the rise in the supply of migrants, the fall in transaction costs of migration etc. The concerted efforts of receiving remittances governments were about strengthening, monitoring and data gathering capabilities to gauge the remittances in their countries. However, fall in remittances was associated with the increasing preference of immigration policies for the admission of high skilled workers (World Bank, 2006).

4 The volume of remittances was reduced in Africa and countries on the southern

shore of the Mediterranean due to declined migration rate witnessed in these

regions during the period from 1990 to 2000. However, the share of remittances in GDP was increased for Latin America due to its growing integration into the world economy (Docquier and Marfouk, 2004).

It was observed that the remittances bring benefits as well as socio-economic cost to the society. The people spent their remittances on conspicuous consumption; this act of unnecessary consumption caused inflation in the remittances receiving countries and pushed wages upward. The consumer demanded imported items; ultimately, it increases dependency upon imports.

Therefore, the problems of balance of payment (BOP) started to be generated in the country. The investment in the productive projects in the country started to be slow downed. The problems of brain drains and moral hazards in the developing countries were also seen due to remittances (Buch and Kuckulenz, 2002)

It was seen that the economic workers in the foreign countries spend their earned income on unnecessary consumption. Moreover, the migrant workers were not provided enabling environment for productive investment. The analysis of remittances at micro and macro level seems imperative for planner and policy makers. As a result, workers’ remittances have gained increasing interest from both researchers and policy makers over the last years. The micro and macro factors entailed important bearing on the flow of remittances. The important

5 microeconomic determinants of international remittances in literature were education and income level of the migrant, the length of the stay of the migrant worker in the host country, the number of the children at home, and the marital status of the migrant (Swamy, 1981, Lucas and Stark, 1985). The macroeconomic determinants of remittances included a number of factors such as: the number of workers, wage rates, economic opportunities available in host as well as in the home countries, situation of inflation in both countries, spread interest rate differentials in these countries, currency exchange rates between home and host countries, the level of political stability in home as well as in the host country, and facility of transferring funds from host country to home country.

The government immigration policies were also considered very important factor of the volume of the international remittances in any country (Russell, 1986,

Sakka and Mcnabb, 1999).

The volume of remittances received in the developing countries might improve the growth and development pattern of these countries and reduce poverty level in these countries. Remittances could maintain macroeconomic stability in these countries and reduce the impact of adverse shocks in these countries. The poor people in these countries mainly depended upon the amount of remittances for their basic needs including food, shelter and health; therefore, the increased remittances could reduce poverty and inequality in the country. The construction activity was found highly related with remittances inflow empirically (IMF, 2005).

6 1.2 Remittances in Pakistan

The workers remittances in Pakistan continued to be a significant component of

balance of payments and have made tremendous contribution towards overall

foreign exchange earnings of the country. The inflow of workers remittances in

Pakistan was widely fluctuating over time. The amount of remittances in Pakistan

reached to $2.88 billion in 1982-83 with continuous increasing trend. The pattern

of remittances in Pakistan started fluctuating after the period of 1982-83. The

volume of remittances has declined from $1.84 billion in 1990-91 to $1.40 billion

in 1996-97. However, the remittances again slightly rose to $1.48 billion during

1997-98 and fell to $0.98 billion in 1999-2000. In the period of 2002-03, the volume of remittances touched to a maximum of $4.23 billion and again came down to $3.87 billion in 2003-04 (SBP, 2004).

The number worker have been migrated to the Middle East during the period from 1970 to 1985.This pattern of migration to the Middle East has unique characteristics in number of ways. The young males were the principal migrants to Middle East without the migration of their whole families, their families were stayed in Pakistan and migrant workers sent a bulk of remittances to their families in Pakistan. Secondly, the majorities of migrant workers were unskilled and belong to low-income households in Pakistan. Therefore, the remittances were a windfall for these low-income households. These families were now able to set up small businesses, acquire real estate and make substantial improvements in their living standard. The construction activities were gone

7 slowly down in the Middle East in the beginning of 1990s. After 1990s, there

were less earning opportunities in the Middle East for unskilled Pakistani

workers.

The informal money markets were tightened and controlled after September, 11,

2001. Therefore, the inflow of remittances through bank channels increased from

$2.2 billion in 2001-02 to $1.09 billion in 2000-01 (GOP, 2002). The role of

remittances is very much acknowledged in reducing poverty in recent years. The

families and households could maintain or increase expenditure on basic

consumption, housing, education, and small-business formation due to the

increase in the remittances. The total inflow of remittances since 2001-02 to

2005-06 was amounted about $19 billion (Rs.1129 billion). This huge amount of remittances in Pakistan especially towards the rural areas of the country has provided support to remove the financial constraints of the receiving households.

They have increased the consumption of durables and non-durables and have

accumulated human capital with education and health facilities. The number of families has invested their remitted funds in real estate. Pakistan was receiving, on average, over $ 4.0 billion remittances per annum since from last four years.

This huge amount of remittances provided stability in exchange rate. (GOP,

2005-06).

The micro and macro economic factors have important bearing on the flow of remittances. The government of Pakistan has made concerted efforts to facilitate

8 the smooth flow of funds. But there were constraining factors which governs the

continuous flow of remittance. The government thrift policies were not encouraging to attract foreign exchange. The investment climate was not labor friendly and the investment opportunities were not readily available to the economic workers. The policy maker can understand a broad spectrum of migration and remittances in the light of the determinants of the international migration and remittances in Pakistan. Therefore, the present study will provide useful parameters for making labour policies and enabling environment for productive investment in the home country.

1.3 Objectives of the Study

The dynamics of the international remittances were quite comprehensive and have strategic importance. Due to vast scope of the international remittances, different researchers have discussed and covered various issues of the

international remittances and these aspects of international migration and

remittances were discussed in literature review. Some of the broad issues

included in the international remittances were; (a) the impact of remittances upon

poverty, consumption pattern of households and, upon investment in the home

country, (b) the trend analysis of the international remittances in which, the reasons for the fluctuation in the remittances were traced out and explained over

the time, (c) estimation of the determinants of the international remittances, and

(d) some other issues relating to the remittances.

9 However, the objectives of this research study were to explore the major

economic determinants of international remittances in Pakistan. The specific

objectives included in the research study were:

1. Determine the economic determinants of international migration in

Pakistan.

2. Assess the trend of remittances in Pakistan since 1970s.

3. Identify the factors causing fluctuations in the volume of remittances over

different periods.

4. Suggest implications for the policy makers.

1.4 Plan of Study

Nine chapters have been consolidated in this research study. The introduction of

the study has been completed in chapter 1 and the review of literature about the

remittances was given in chapter 2. The theoretical framework of the

international migration and remittances was explained in chapter 3. Chapter 4 was about the data and methodology used in the research study. The unit root test and co-integration analysis were presented in chapter 5 and in chapter 6

respectively. The determinants of international remittances were given in chapter

7 and the determinants of international migration were given in chapter 8. Finally,

conclusion and policy recommendations of the study were presented in chapter

9.

10 Chapter 2

Literature Review

2.1 Introduction

The review of literature was quite helpful to acquaint with previous related

research work undertaken in the past about the determinant of the international

remittances in Pakistan and different broad aspects of migration and remittances

at national as well as at international level. Therefore, the review of literature

about the estimation of the economic determinants of international remittances

and migration has united different the factors having impact on the economics of

remittances. As a result, the literature survey has provided help to develop the theoretical framework and to formulate a number of hypotheses that were tested in the present research study. Testability and reliability of the findings of this research about the economic determinants of international remittances and migration in Pakistan provided comparison with other studies elsewhere. The different results based upon the types of data and econometric techniques used were drawn by different researchers. Therefore, keeping in view the importance of literature relevant to research topic, the literature was surveyed about the

analysis of remittances and patterns of migration at national as well as at international level. The literature about the determinants of international migration was also reviewed in the research study. The migration was an important

11 determinant of international remittances in the light of empirical findings of a

number of research studies.

2.2 Literature Review at National Level

Amjad (1986) analyzed the uses of remittances in Pakistan by using the survey

data from ILO/ARTEP phase II migration study 1986. The time series data about

total remittances, remittances from Middle East, Gross Domestic Product (GDP)

at factor cost, net income from abroad, per capita income and balance of

payments in Pakistan for the period 1975 to 1985 were used in this study. It was

concluded that remittances financed sufficiently large part of aggregate

consumption, investments and other needs of the economy. It was about 20

percent of total remittances that were invested in the different sectors of the

economy. Pakistan was receiving the remittances from Middle East and these

remittances were at its maximum level in 1982-83. It was estimated that the remittances from Middle East contributed up to 75 per cent to the overall balance

of payments and debt servicing repayment in Pakistan. The workers’ remittances

from Middle East financed about 36 per cent of the merchandise imports and

non-factor services. The total consumption was increased in the country about

34.6 per cent with the help of remittances.

The increased amount of remittances from the Middle East have also contributed

much in the sectors of manufacturing especially small scale, construction,

12 transport and communication, and wholesale and retail trade. The demand for

basic consumer goods and durables was considerably increased by the

remittances receiving families in the country. Therefore, the remittances have

accelerated the growth of small-scale industries in Pakistan positively.

Adams (1996) analysed the impact of remittances upon income distribution and

assets accumulation in rural areas of Pakistan. Income decomposition technique

was used by dividing remittances into internal and external remittances. Three

years panel data was used from 727 households. Five types of rural assets were included into asset-accumulation model and these assets were: irrigated land owned, rain-fed land owned, livestock assets, agricultural capital, and non-farm assets. It was concluded that rural assets were accumulated in Pakistan due to remittances. The accumulation of agricultural capital was due to the internal

remittances and the accumulation of land was due to external remittances. It was

found that internal remittances have a positive effect on income distribution, and

the effect of external remittances upon income distribution was negative. Internal

remittances were earned mainly by lower-income groups and represent an

important component of the incomes of households in the bottom income quintile.

Therefore, internal remittances accounted for only a small part of overall income

inequality and it was less than 3 percent. The external remittances were usually

earned by upper-income groups as this group afforded high entry costs to

migration from Pakistan to other parts of the world. The external remittances in

these areas of Pakistan were a source of income inequality and accounted for a

13 12 per cent share of overall income inequality. Therefore, author suggested to policymakers in Pakistan to take steps to encourage internal migration and to more carefully consider the consequences of external migration because internal remittances have a positive effect on rural income distribution as well as on rural asset accumulation.

Burney (1988) used the time series data for the period from 1970 to 1986 to investigate the impact of workers’ remittances from the Middle East on the

Pakistan’s Economy. The ordinary least square (OLS) method was used to find out the determinants of remittances from the Middle East to Pakistan. The included explanatory variables in the model were: Pakistan’s exchange rate, crude petroleum price index, gross investment in the Middle East. It was concluded that the remittances from the Middle East supported to provide foreign exchange reserve and the availability of remittances has reduced the current account deficit in Pakistan. These remittances also reduced the external debt burden, improved debt-servicing ability and decreased the need for additional foreign loans. The impact of remittances on private consumption at macro level was also estimated in the research study. For this purpose, private consumption expenditure, gross domestic product and expected inflation rate for the period

1959-60 to 1973-74 were included in the regression analysis. It was estimated that coefficient of remittance was increased to 1.45 with inclusion of expected inflation in the model, showing that private consumption behavior was sensitive to the expected inflation rate in the country. The propensity to consume out of

14 remittances was estimated to be 0.85 when unofficial channels of remittances were included in the model. The elasticity of private consumption expenditure with respect to remittances was found to be 0.05.

Batzlen (2000) determined the impact of foreign remittances on Pakistan economy. The primary data was collected mainly from the districts of Gujrat and

Jheilum in the research study. The savings and investment functions of the migrants from Pakistan, who went abroad for employment, were estimated in the study and ordinary least square (OLS) method was employed to estimate these functions. The impact of remittances on capital formation and productive investments creating employment in Pakistan was analysed. It was found out that remittances were an important source of financing investments, particularly in agriculture sector of Pakistan. The achievements of skills have a well-built positive impact on the investment activities undertaken by migrant households.

The worker migrants who have achieved skills during their overseas coursework were relatively low paid in the home country. The laborer who went abroad to countries other than Middle East countries, showed a higher propensity to invest than those who worked in the oil exporting countries. Finally, a relatively large number of investments undertaken by migrants were characterized by low productivity expressed in the return on these investment projects.

15 Hyder (2003) established a relationship among workers’ remittances, premium

and resident Foreign Currency Account (FCA) for Pakistan during the period from

July 1993 to December 2001.The Johansen’s model selection and maximum

likelihood co-integration technique was employed to estimate the relationship

among the stated variables. The results suggested that these variables were co- integrated from July 1993 to April 1998. However, the relationship was not significant after the period of April 1998. It might be due to the two-tier exchange rate regime, freezing of FCA and tightening of foreign exchange regulations in the subsequent periods of nuclear tests in Pakistan. In addition, the causal relationships were unidirectional and were from premium to remittances and were from remittances to resident FCA before the period of nuclear tests. The direction of these relationships was reversed after the nuclear tests. The premium was the important determinate of the exchange rate, payments and trade policies in Pakistan and it has also impact upon the amount of remittances in Pakistan. A desirable high premium might undermine the allocative role of the exchange rate and was the causes of market segmentation because the workers motivated to efficient and speedy services for the delivery of the remittances. It was suggested that banking and fund transferring companies, should improve efficiency and were argued to reduce the time required for the transfer of

remittance from host country to home country. The delivery system of

remittances from on place to other was also required to be improved. Then banks will be to compete with the informal sectors used to transfer the funds. For this

16 purpose, the investment in information technology and human capital by the

banking system will be required.

Kazi (1988) used the ordinary least square (OLS) techniques to know the impact

of remittances from Middle East countries upon employment, wages, balance of

payments, exports and prices in Pakistan. The time series data from period of

1975 to 1985 was used in the research study. It was found that the rate of

unemployment in the country was positively related to the education, skill

classification and financial savings. It was estimated that the unemployment rate

of returned migrants with college or university education in urban areas was 33 per cent as compared to unemployment rates of 15 per cent and 16 per cent in the case of migrants with primary and middle school education. The

unemployment of migrants’ worker with savings of between Rs. 100,000 to Rs.

200,000 was 30 per cent as compared to 17.5 per cent of returnees with a saving

of Rs. 25,000 or less. Similarly, skill professional and technical workers had 40

per cent and 29 per cent high rates of unemployment as compared to unskilled workers who had a much lower rate of unemployment (18 per cent). It was further concluded that the shortages in the commodity producing sectors and higher imports prices were the main determinants of the rate of inflation in

Pakistan during the said period. The rate of inflation was negatively related to the increase in the amount of remittances. The negative relationship among the remittances and inflation in the country was due to the fact that the increase

17 inflow of foreign exchange through remittances might allow to imports which lead

to a constraining effect on the price level.

Malik and Sarwar (1993) estimated consumption patterns of households in

Pakistan with and without remittances using the data from the Household Income

and Expenditure Survey 1987-88. Estimations were based on ordinary least

square (OLS) using the SPSS PC+ package for three expenditure groups, which

were, consumption expenditure, durable expenditure and total expenditure. The

hypotheses were formulated to test the differences in consumption patterns of households were: with and without remittance function having the same slope but different intercepts; with and without remittance function have the same intercepts but different slopes; with and without remittance function have different intercepts and different slopes. It was estimated that the marginal propensity to consume (MPC) was low for those households who were receiving international remittances than the households receiving only domestic remittances. The MPC of both domestic remittances receiving households and the international remittances receiving households was low as compared to the non-migrant households in the rural areas of Pakistan. The MPC was found highest in the urban Punjab and was lowest in rural NWFP for the international migrant households in Pakistan.

18 2.3 Literature Review at International Level

A large body of literature about the remittances at international level was

available. The literature at international level in this research study was divided

into two broad categories; the review of literature at micro level and at macro

level. Usually, the cross sectional data based on survey sample was used for the studies of remittances at micro level. Such types of studies were conducted to know the microeconomic determinants of remittances and analyses the impact of remittances on the migrants’ household, receiving and sending countries. The published data of time series and panel were used for the analysis of remittances

at macro level. The macroeconomic determinants of remittances were found in

these studies. Similarly, the literature about the international migration was reviewed in this study at international level.

2.4 Literature Review about Remittances at Micro Level

Alburo and Abella (1992) examined the impact of workers’ informal remittances to the Philippines economy. The information from a questionnaire-based survey of a sample of 600 return migrant workers in the Philippines was used in the study. It was estimated that informal remittances in the form of foreign exchange were used to finance trade in the country and the impact of such informal remittances was as have the formal inflows of the remittances in the country.

There was net effect of the remittance on the domestic economy and not only

19 was on trade in case of funds were remitted in the domestic currency. The remittances might produce multiplier effects’ depending on the kind of expenditure in the country. It was concluded that the amount of foreign currency coming in via merchandise exports was lower than capital flight under valuation of exports was going on for some time. Similarly, there was evidence of import under valuation to evade high tariff rates on trade regulations. This import under valuation was also associated with open or technical smuggling. The contribution of these remittances to trade transactions suggested an even bigger impact that the lower inflow of exports, through under valuation exacts a greater burden on the remittances.

Castaldo and Reilly (2007) investigated the impact of migrant remittances upon the consumption patterns of Albanian households. The data drawn from the 2002

Albania Living Standards Measurement Survey was used to know the impact of domestic and international remittances upon the consumption patterns in the economy. The budget share equations were formulated and estimated for four different kinds of the commodities. These commodities were food, non-food, durables and utilities. The controlled variables were also included during the estimation of the formulated equations. These were about whether or not the household received remittances from within Albania or abroad. The study found that the consumption pattern for households in receipt of internal remittances was not statistically different from those not receiving internal remittances. The households who received remittances from abroad have less consumption of

20 food and have a higher share on consumer durables as compared to households not receiving any type of migrant remittances.

The estimated coefficient of the variables capturing the receipt of internal remittances was not statistically significant in any of the formulated budget share equations. The estimated effect for the receipt of international remittances was found to be significant for all kinds of commodities other than non-food. It was estimated that households receiving no remittances at all have 4.5 per cent lower budget share on food as compared to the households in receipt of external remittances. The receipt of external remittances induced an increase of about 25 per cent in the household’s budget share of durables and an approximate 16 per cent increase in the household’s budget share for the utilities category. It was found that households receiving external remittances displayed a higher marginal propensity to consume food items relative to those not receiving any source of remittance. This result might be explained by the fact that households which receive external remittances did not classify food as a necessary good anymore and when they became richer they tended to switch from poor quality to better quality food types. The remittances were tended to increase a household’s propensity to consume investment-type goods in the context of Albania, where households faced severe and frequent cuts in the provision of power and water.

Furthermore, with reference to the category of durables, even items that might be seen as non-investment goods, such as TV and domestic appliances, may have multiplier effects within the local economy, as increased demand for these types

21 of goods have created incentives for the establishment of new retail businesses.

Higher amounts of remittances from external sources may be expected to make

a significant difference to the overall welfare of the receiving households. It was

possible that migrant remittances may ultimately exert an impact on the local

economy through enhanced investment in small businesses. It was suggested to

the Albanian government in the light of this research study to capture the

household response to remittances and facilitate them for transferring

remittances and also channeling remittances into the productive uses in the

country. It might only be possible by creating the conditions for a stable

investment environment in the country.

Frank (2001) estimated the impact of the remittances upon the economy by using

the data from the Philippine town of Pozorrubio. It was reported that largest number of migrants from this village were working in the world. The positive impact of the remittances was estimated upon housing stock, appliance

consumption, public goods including parks, hospitals and clubs. The remaining

family members of this town have investment in education. Frank (2001) also

mentioned the social and economic cost of migration for this village that has to

pay at individual and collective levels. The author noted the increasing number of

spouses of overseas workers engaging in leisure activities and depriving the

nation of contributions they could otherwise make to productivity growth and to

output. Over time, the people of the village became dependent upon only the

22 amounts of remittances with passage of time. Therefore, the flow of remittances

might hinder economic development of the economy in the long run.

Swamy (1981) analysed the role of remittances in different countries including

Greece, Yugoslavia and Turkey. The socio-economic and demographic factors were responsible for determining the size of remittances in these countries. It was concluded that the amount of remittances was determined by the economic conditions in the host country. The economic growth and progress in the host country raised the demand for the economic workers and they have more

opportunities for earning in the host countries. Therefore, the level of remittances

goes up due to the increase in economic activity in the host country. It was

further found that 70 to 95 per cent of the variation in the amount of remittances was due to the fluctuations in the economic conditions of the host countries. A further analysis in this regard by Swamy (1981) showed that the number of migrant workers abroad and their wages together explained over 90 per cent of the variation in the remittances. In the context of the per capita remittances rather than the total amount of remittances in these countries, time spent abroad by the worker and number of children were the determinants of remittances. Lengths of stays abroad, and demographic variables such as number of females’ migrants were also found to be the determinants of remittances.

23 Benoit and Vencatachellum (2002) estimated the determinants of the internal remittances in Tunis. The primary data was collected from 500 domestic workers in Tunis for this purpose. It was the basic characteristics of the sample that all females were included in the sample and half of them were younger than 18, and were declared the child domestic workers category. The family of Tobit models was employed for the estimation of the determinants of remittances. The remittances were divided into compulsory and voluntary remittances. The compulsory remittances in the shape of full wages were obtained from the female workers having age less than 18 years old.

The results of the study showed that the family gender composition has an asymmetric impact on compulsory remittances, which were levied by the parents, and voluntary remittances, which were sent by the domestic worker. There were more compulsory remittances with the increase in the number of young females in the family because females were remitting funds to their family. The voluntary remittances were found the increasing function of the number of young brothers and independent of the number of young sisters. It was very interesting that the determinants of the decision to remit were different from the amount of actual remittances. It was concluded that parents have full control over the wages of their young daughters who were working in different cities. The Income elasticities of voluntary remittances were high because majority of the domestic workers included in the survey was young and was also dependent on their parents.

24 The relative independence of female worker was negatively related to

compulsory remittances but not the actual amount of remittances. An

independent domestic worker kept her wages and voluntarily decided to send

remittances. An asymmetric impact of male and female workers having age more

than 18 years old on compulsory remittances was found in both the standard and

Type II Tobit models while estimating the determinants of remittances. The

compulsory remittances were not found related with the number of young males

in the family. However, the compulsory remittances were increased in the Tobit

model (Standard) because of the number of sisters older than 18 years old.

Rodriguez and Horton (1994) empirically estimated the relationship among the

education and remittances in the Philippine. It was concluded that remittances

were negatively related with the level of the migrant’s education because the

skilled workers might belong to educated and wealthy families and, therefore,

have less incentive of sending remittances to home country. They also stay

longer in the host countries and have desire to unite with their families and

friends in the country of their stay. Therefore, it was concluded that the amount of

remittances decrease as the stay of migrant workers’ increases in the host country. Therefore, even a positive relation of education with remittances might even not be the evidence that the brain drain was associated with a greater amount of remittances in the home country. The direct effect of skills and education might be positive, but the overall effect due to the longer stay of the skilled worker in the host country, might be negative.

25 Faini (2006) established the relation between skill of the migrant workers’ and volume of remittances empirically. For this purpose a simple model with some

key assumptions was developed. The assumptions of the simple model included that utility of migrant worker’s was a positively related with the consumption of migrant worker, the amount of remittances and the number of reunited family members and friends. Family members were then divided into two groups, on the basis of their closeness to the migrant. Migrants received more utility by sending more amounts of remittances to their close family members. The impact of a change in the composition of migration with higher skills and wage was also incorporated in the model. The increase in wages brought two contradicting impacts up on the level of remittances. Higher earnings of the worker in the host were positively related with the level of remittances and this effect was termed as

Wage effect. The higher earnings of the migrant used to reunite him with the close family members, has a negative effect upon the level of remittances and such type of effect was known as a reunification effect. Therefore the total effect composition change with higher wages was still an empirical research. Finally,

Faini (2006) concluded in the case of Europe that skilled and more educated migrants might not return to their home countries and preferred to stay in the host country where as low skilled workers have less chances to unite with their families in the host country.

26 2.5 Literature Review about Remittances at Macro Level

The literature surveyed at macro level to know the determinants of remittances

for home country revealed a number of main factors responsible for the level and

amount of remittances in the home country. The (Russell, 1986) pointed out that

the macroeconomic determinants of remittances emphasized the number of

workers, wage rates, economic activity in host and home countries, exchange

rates relative to interest rate between labor sending and receiving countries,

political risk factors in sending country and, facility of transferring funds. (Sakka and Mcnabb, 1999) identified that inflation, interest rate differentials and

efficiency of the banking system was the main determinants of remittances.

Wahba (1991) suggested that political stability, consistency in government

policies and financial intermediation significantly affected the flow of remittances.

In a sample of five Mediterranean countries, Faini (1994) found that real

exchange rate was also a significant determinant of remittances. According to

Swamy, (1981) the real earnings of workers and total number of migrants in the

host country were consistently found to have a significant and positive effect on

the flow of remittances. Straubhaar (1986) found the relationship among the

exchange rate and remittances in case of Turkey. The time series data during the

period 1963-82 was used to know the said relationship. The study explained that

government policies for more return on the deposit to increase the flow of

remittances and changes in the exchange rates could not bring more remittances

in the country.

27 Aydas, and Ozcan, 2004 found in case of Turkey that the black market premium, interest rate differential, inflation rate, growth rates, home and host country incomes and periods of military regime in the country significantly affected the flow of remittances. Chami etl, (2005) found a significant negative relationship between the income gap of the recipient country against the US and worker remittances in percent of GDP. Swamy, (1981) and other studies found out that level of economic activity, real earnings of workers and total number of workers in the host country to have a significant and positive effect on the flow of

remittances. However, the impact of relative rates of return, exchange rate

premium, domestic income and inflation was rather mixed. In view of Glytsos

(1988), neither interest rate differentials between the host and home countries,

nor the variation in exchange rates have any effect on remittance flows. Katselli

and Glytsos (1986) said that per capita remittances were related to the interest

rate in the host country. Chandavarkar (1980) found that realistic exchange rates

and existence of necessary institutional environment significantly affect the level of remittances.

Buch and Kuckulenz (2004) considered that demographic factors have impact upon the level of remittances in any country. In these factors, the number of female employed in host country or a high age-dependency ratio in these countries were negatively related with the level of remittances. The rate of illiteracy has impact upon remittances positively. Lucas and Stark (1985) have detailed discussion about the motives of remittances. According to them, the

28 motives of remittances might be purely altruistic, self-interest, or might be due to a mutually beneficial agreement between the migrant and the family left behind.

Badawi and Rocha (1992) developed a remittances model incorporating two approaches in it. The first set of determinants of remittances was related to worker and family characteristics. According to this approach, the required level of remittances dominated by income and demographic factors and very less influenced by policy of government. The second set of determinants was related with the portfolio approach. According to this approach, the residual level of remittances was determined from the macroeconomic environment in the home and host countries.

Sakka and Mcnabb (1999) estimated the macroeconomic determinants of remittances in Egypt. The data was used from the period of 1967 to 1991.

Ordinary Least Square (OLS) regression technique was employed in their study.

It was estimated that the wage rate of worker, level of domestic income, domestic price level, the domestic and world interest rates, and the official and black market exchange rates were the determinants of remittances. The authors explained the mechanism in which inflation might influence the level of remittances in the country. The high rate of inflation in the home country reduces the real level of the income and caused to increase migration and amount of remittances in the economy. It was noted that there would be less pressure for migrants to send more remittances in foreign currency in case of depreciation of

29 domestic currency due to inflation. It was also stated that remittances might be

dependent on the allocation decisions for investment projects. The amount of

remittances was determined by the domestic rates of returns. In case of the

interest rates were found low as compared to the host country's, then migrants

will send fewer amounts of remittances. The authors suggested that in case of

black market, the workers will have choice whether to remit through official

channels or other ways in case of black market. It depends upon the difference

between the official and black market exchange rates. The workers will also adopt unofficial channels in case of taxed remittances by the government. It was

also estimated that high wage rates were positively related to the level of

remittances. The current level of remittances as well as the lagged remittances

was positively related to the domestic GDP. The GDPs of home and host

countries were important determinants of remittances.

Koksal (2006) estimated the micro and macroeconomic determinants of workers’

remittances in Turkey and also analysed the impact of remittances upon the

economy. The Central Bank of Turkey (balances of payments) and Turkish

Statistical Institute (national accounts) were the main sources of data used in the

study. It was concluded that commercial banks in Turkey and the Central Bank of

Turkey were very important for attracting remittances into the country. The major

objective of the establishment of Turkish banks in the field of migrant remittances

was to facilitate and channel the remittances into the country and to achieve the

macroeconomic stability and earning profits from the migrants’ money through

30 transaction fees were the secondary objectives. The analysis of the impact of

remittances upon the economy explored that the impact of remittances on

Turkish economy remained very limited in spite of the best practices for

channeling remittances towards development. The set of variables that explained

the determinants of remittances were the dynamics of family ties and macroeconomic stability: The family ties included the factors such as the social

status, well-being and risk-sharing by migrants and their relatives where as

factors such as inflation, growth, interest rate differentials and exchange rate

were included in the macroeconomic stability.

Schiopu, and Siegfried (2006) estimated the determinants of migrant workers’

remittances from Western European countries. A sample of neighboring

countries was selected and a country-by-country data set was constructed to

incorporate remittances and non-bank transfers in small amounts. The various

aspects of the remittances were considered in the study because data provided the information about the flow of bilateral remittances. The data contained the

information about the GDP differences between home and host country, the

difference in returns to financial assets in the two countries and costs of

remittances, the size of the financial network between two countries. The

information was also available about the skill of worker, income inequality and

the share of the informal economy in the sending country. The dummy variables

were also used to capture the impact of different time periods upon remittances.

31 A number of specifications of the model were checked in the study to know the

suitable combinations of explanatory variables.

According to the results of the study, the average remittances were positively

related to the income differential. It meant that remittances on average, people

were more in case of the home country was poorer than the host country. This

result was true in the light of remittances theories. The impact of real interest rate

differential was not significant in this case. In the light of these results, it was

concluded that the remittances were sent to home on basis of altruistic motives

rather than investment purposes. The average amount of remittances was

reduced due to large number of unskilled worker in the country because these

workers have lower wages to send remittances to their countries. Gini coefficient

was used as a measure of income inequality in the host country. Skilled workers

have more opportunities for earning in the countries having unequal distribution

where as unskilled have more in case of equal income distribution. It was

concluded that remittances from countries with a higher share of low skilled

workers was to be lower. This was an important result since existing evidence on the relationship between remittances and migrants’ skill composition was very

limited. The effect of income inequality in the sending country was inconclusive.

In case of GDP of the sending country included in the model, its impact was

positive, without affecting any of the other results and the cost of remittance did

not affect the amount of money remitted significantly. Finally, if official record was

linked with unofficial remittances, this should depress the total amount of officially

32 recorded remittances. It was found that a larger share of unofficial activity in the economy lowered the amount of (official) remittances per worker because worker used informal ways to remit money with the rise of unofficial channels.

Chami et al (2005) developed a mathematical model to know the determinants of remittance flows. The panel data was used in the study for estimation of the determinants of the remittances for the period from 1970 to 1998. The data from

World Bank data base was used for 113 countries from all over the world and both microeconomic and macroeconomic variables were included in the data set.

It was found that remittances were not source of capital of accumulation but these have negative effect upon the economic growth of the remittances receiving countries. The basic assumptions of the model used in the study were:

The motivation for remittances was altruism; remittances were compensatory and counter-cyclical in their nature. It was explored that receipt of remittances affected the decision to work because the family members who did not migrate, participated in the domestic labor market and contributed the economic growth and development in the country. It was also observed that migration brought moral hazard in the country because workers were so far away from their families to look after their children. Consequently, remittances might cause a negative and slow down of economic growth in the country.

33 Jovicic and Mitrovic (2006) explained the determinants and impact of remittances on development and poverty alleviation in the South East Europe (SEE) by using econometric techniques. The impact of European Union enlargement policy was especially tested with the migration and remittances. The dynamics and prospects of remittances per migrant pointed out the increasing importance of remittances the over time. It was due to more rapidly rise in the real GDP per capita and as a result of higher migrants' incomes in the EU host countries, and reductions in the number of migrants as compare to population in the migrants' home countries. It was revealed in the comparative analysis of the SEE countries that differences in relative remittance levels among countries were due to the income gaps among the different countries, demonstrating that SEE countries with lower and higher GDP per capita received high rate of remittances per capita as compared to the middle-income SEE countries.

The most important internal determinant of remittances found in the SEE countries was domestic labour market situation. The remittances were increased with increasing level of unemployment at the domestic labour market. It meant that more jobs in the SEE countries would destabilize the level of remittances, and therefore migration pressures to decline. GDP of SEE countries were found an important determinant of the remittance for the low-income recipient countries.

Remittances were found more intensive during the down-cycles of the economic activity in these low-income SEE countries. The remittances increased relatively in periods of crises in case of remittances were behaving counter cyclically.

34 Remittances were not impact upon the living standard of migrant families in higher-than-average-income SEE countries and growth of the home country might attract more remittances for investment purposes. The impact of GDP per capita level on the amount of remittance was found positive in case of higher- income SEE countries.

Rahman (2003) investigated impacts and determinants of foreign worker remittances in the economy of the Kingdom of Saudi Arabia (KSA). The time series data for the period from 1975 to 2001 was used in the study. The stationarity of the time series were seen in the study. The error correction model was employed to obtain the relationship among the included variables in the study. The included variables in the study were the real GDP as income variables, wages per worker, returns and parity conditions, plus some composite indices pertaining to socioeconomic factors and risk indicators in the Kingdom.

Patterns of the remittances over the time, total and per worker remittances were explored in the study. The remittances were found to be pro-cyclical with activity in the Kingdom increasing during booms. The wage rate was a positive determinant of the level of per worker remittances. A positive relationship between the level of per capita GDP and workers’ remittances was found from the Kingdom. The nominal and real interest rates which measure the return in the country and differential parity conditions in the host and home countries were negatively related with the remittances. As far as the risk variables were

35 concerned, the results of the study indicated that the stability of government, law and order situations, affected remittances negatively and increasing risks were represented by lower index scores and resulted in higher remittance outflows from the Kingdom. The models using composite socio-political instability indices were also experimented. The level of remittances was found negatively related to instability. It meant that higher the level of instability in the KSA, the lower the

composite risk score and the higher will be the flight of remittances from KSA to

other countries. It was also found that per worker remittances were more elastic

with respect to wages as compared to per capita incomes. Remittances were

found less interest inelastic in number of experiments performed.

Schrooten (2005) estimated the determinants of foreign remittances for the

number of socialist countries. The panel data for the period 1990 to 2003 was

used in their study to estimate the determinants of international remittances. The

model was specified in logarithmic form; therefore estimated coefficients were

interpreted as elasticities. It was concluded that remittances were the source of

external finance in these countries. Two models were specified in their research

study to calculate the determinants of the remittances. Remittances per capita

(REM 1) and remittances in percentage of GDP (REM 2) were kept as dependent

variables in these models. The main independent variables used in the study

were: (i) GDP per capita was used a proxy for income level in the home country to denote the economic conditions in the home country, (ii) Unemployment rate

was used to denote the situation of domestic labor market., (iii) The sum of

36 exports and imports over GDP were used to denote the standard indicator for the openness of the economy, (iv) The growth rate per capita of the economy was used to denote future economic situation of the economy. (v) The spread rate was the difference between lending and deposit rate was used to know the performance of the banking system in home countries. Moreover, two dummy variables were used to capture the general institutional situation of the countries.

The results of the both specifications in estimating the determinants of remittances were found similar and were stable over the time. It was found that the remittances increased due to the problems in the domestic economy. The coefficient of the lagged dependent variable was estimated to be 0.5 for remittances in percentage of GDP and 0.66 for remittances per capita. It meant that a rise in per capita GDP by 1 percent led to decrease of REM 1 by 0.8 percent. The short term impact of income level was observed the same for REM

2 model where as the long term impact of per capita GDP differed in both models. A high unemployment rate in the home countries was highlighted as main determinant of migration. The REM 1 increased by 0.22 and REM 2 increased by 0.29 percent in the short run due to one percent increase in the unemployment rate in the home country. In the long-run, the one percent increase in unemployment led to an increase of REM 1 by 1.3 percent and to 0.7 percentage increase of REM 2. It was found that growth has very small impact upon remittances in the short-run and has no effect in the long run as the coefficient of growth was zero in long run. The increase in the amount of

37 remittances was associated with the higher transaction costs in the domestic banking sector.

Jongwanich (2007) examined the impact of workers’ remittances on growth and poverty in some selected Asia-Pacific countries. The panel data was used for the period from 1993 to 2003 in the study. The growth and investment equations were specified and Generalized Method of Moments (GMM) was employed to estimate these equations. The problem of endogeneity might arise from including lag independent variables was also controlled in the model. The human capital and poverty equations in the model were transformed into Instrumental fixed effects. Results of the study showed that remittances were the cause of the decrease in poverty due to the increase in income, smoothing consumption and easing capital constraints of the poor, they have only a marginal impact on growth operating through domestic investment and human capital development.

The results also showed that there was no direct impact of remittances on growth. The remittances might have indirect impact on economic growth through household credit availability. The domestic investment and human capital might expand through this indirect impact of remittances. The equations including investment and human capital were estimated in the study to know the indirect impact of remittances. The remittances were found positively related with human capital and investment in these estimated equations. One per cent increase in remittances was related with an increase in human capital by 0.008 per cent and

38 investment by 0.03 per cent. These results explained that remittances might ease credit constraint and positively affect private investment. The remittances were used to finance education and health. It meant that human capital was improved

as the impact of remittances was concerned with human capital. The remittances

have created marginal positive impacts on economic growth through the

channels of investment and human capital. One per cent increase in remittances

was related with an increase in economic growth by only 0.03 per cent. It was

noted that other variables in growth equation were statistically significant and

have expected sign. The negative coefficient related with initial income has given

support to the conditional convergence hypothesis. It explained that poor

economies moved to grow faster than rich economies, once the determinants of

their steady state were detained constant. The positive and significant coefficient

of openness pointed out that trade liberalization was useful policy to Asian and

the Pacific countries in promoting economic growth. By contrast, an increase in

inflation and government consumption tended to retard long-term economic

growth.

It was also estimated that an increase in remittances could directly lead to

poverty reduction. Other things considered constant, 10 per cent increase in

remittances has reduced the poverty incidence by 2.8 per cent. It showed that

remittances could directly increase income of poor people, smooth household consumption and ease capital constraints. In addition to the direct impact, remittances have also indirect effect on poverty reduction because remittances

39 affect economic growth and human capital, were considered key determinants of poverty equation. Hence, an increase in remittances of 1 per cent could entirely improve poverty incidence by 0.43 per cent.

The authors also highlighted the apprehension of remittances with income inequality. It was because the international migration could be a costly risk so that the households capable of producing migration and sending remittances will be comfortable in this context. Poor households would not get the benefit from the flow of remittance, because of having a tendency to create inequality, poverty could increase over time. However, the coefficient related with inequality tended to be less than that of growth and human capital so that the negative impacts from inequality were improbable to control positive impacts arising from growth and human capital. This result recommended that remittances could generate incomes even for families who receive no remittances at all mainly through the multiplier effects of extended expenditures. As the families increase their consumption of services or goods produced in sectors with excess capacity due to remittances, the additional demand could create jobs for other families who in sequence spend and create further demand. Thus, such multiplier effect could lead to poverty reduction even some poor families did not directly get remittance inflows.

40 The remittances should not be considered the key instrument of the growth and

development like exports and foreign direct investment (FDI) in promoting long- term economic growth in the economy while formulating the development policy of the country. However, remittances have a significant impact on poverty

reduction; therefore the governments of host and origin countries should aim to

file the impacts of international flows of remittances, considering the poor people

especially. It might be recommended to sharpen the impacts of remittances that

government should have the policy scheme to enhance the amount of remittances, particularly through formal channel. Secondly, policy scheme should be emphasized toward the productive use of the remittances. The physical and human capital investments were found key channels through which remittances could generate the positive effects on economic development according to the results of the study. Measures that encourage remittances to such investments would enhance its developmental impact. They could be undertaken in various forms. For example, government could develop appropriate training and educational programs in the country for remittance receipts to make effective investment decision. In addition, the appropriate infrastructure should be developed to generate favorable investment climate.

Puri and Ritzema (1999) reviewed different systems that seek to channel unrecorded remittances through formal banking channels in many Asian and

Arab countries. They attempted to separate the main features of recorded and unrecorded remittances. This method to watch the impact of remittances on the

41 domestic economies of labour-sending countries concentrates completely upon

the officially recorded remittances and their effects on the different

macroeconomic variables in the formal economy. It was recognized that officially

recorded remittances usually fall short of actual overseas savings of migrant

workers and that the difference was of particular significance in countries which

have trade and exchange-rate restrictions and unsteady domestic economies,

the true magnitude of unrecorded remittances and their economic implication

have received relatively less importance. There was subjective evidence that

only a fraction of the unrecorded remittances represent pure leakages and that

the largest part of remittances through informal channels to finance domestic

consumption, investment and foreign trade dealings in the migrants’ country.

Therefore, unrecorded remittances have become one of the most critical

dimensions of the remittance systems in many Asian and Arab economies.

The authors also looked at policy measures adopted to influence and optimize

the use of remittance in the domestic economy of these countries. The potential role of microfinance with regard to the scope for linking unrecorded remittances

and investment was evaluated. A major finding of their study was that remittance

leakages were, to a large extent, an indication of the macroeconomic policy

regimes of labour-sending countries. Therefore, the best solution to the problem

of increasing their developmental significance would be to implement wide

ranging policy reforms aimed at setting the macroeconomic variables in order to

encourage remittance inflows through official channels by using micro-finance

42 tools and improving the existing banking network to effectively compete with

informal market arrangements so as to channel the funds into productive

investment.

Lu and Treiman (2007) calculated the effect of remittances sent home by South

African Black labor migrants on children’s schooling. They used cross-sectional

data for the period of 1993-1994 from Integrated Household Survey and panel

data for the period of 2002 and 2003 from South African Labor Force Survey. It

was found that both labor migration and the likelihood of sending remittances

home were much common among the Blacks as compare to other racial groups.

Therefore, the study was limited to the impact of migration and remittances upon

children’s education in case of Blacks. The receipt of remittances significantly

increased the possibility that children were in school, through three pathways:

increased household educational spending, reduced child labor, and mitigation of

the negative effect of parental absence due to out-migration. Children in households without remittances were not privileged as compared to beneficiary households of remittances, and in some respect were even worse-off than their counterparts in non-migrant households, primarily due to the harmful effect of parental out-migration with no economic compensation.

The sensitivity tests using fixed-effect and random-effect model showed that the

effect of labor migration and remittances were robust to unobserved

heterogeneity and relatively consistent across sub samples and independent

43 samples over time, although the negative effect of living in households with out-

migrants but no remittances was substantially by 2002-2003, due at least in part

to relaxed migration policies after the breakdown of apartheid. The social

consequences of remittances were also assessed in the study. It was found that

remittances helped to reduce intra-familial gender inequalities as well as inter-

familial inequalities in schooling.

2.6 Literature Review about Migration

Walsh (1974) estimated the determinants of migration in the Ireland. The time

series data was used and included variables were: net migration flow, wage and

unemployment. The net migration flow from Ireland was the dependent variable.

The wage and unemployment were the explanatory variables. The data for the

period 1951 to 1971 about the explanatory variables was obtained from Ireland

and Britain. The results explained that Irish net migration was responsive to

relative labor market conditions in Ireland and Britain. The unemployment and

wage rates differentials among the home and host countries were found

significant determinants of the net migration from Ireland.

Mayda (2007) estimated the determinants of migration inflows into fourteen

OECD countries by country of origin, for the period of 1980 and 1995. The effect

of average income and income dispersion in host and origin countries on migration was analyzed. The impact of geographical, cultural, and demographic

44 factors as well as the role played by changes in the host countries’ migration

policies was highlighted in their study. The study explained the determinants of

international migration flows and provided a framework for the impact analysis of

migration with time-series and cross-country variation in an annual panel data

set. The study looked at the determinants of international migration, and provided

a framework to analyze the impact of migration in home and host economies including the impact on living standards.

It was found that the improvements in the mean income opportunities in the host

country (“pulls factors”) significantly increased the size of emigration rates. The

impact of declining levels of per worker GDP (“push factors”) in the origin country

was often negative. The “push factors” suggested that migration quotas were

more obligatory than “pull factors”. A possible explanation of the asymmetry

between push and pull factors was provided in their study. The distance was

found one of the most important factors among the variables affecting the costs

of migration. Its effect was negative, significant and quite steady across

specifications. The demography, in particular the share of the origin country’s

population who was young, was a significant determinant of emigration rates.

The author found that the effect of both variables was more pronounced in those

years when a host country’s immigration laws became less restrictive. The author

also explained the importance of the demand side of the host countries’ migration

policies. In the theoretical framework of the model, it was assumed that migration

quotas were exogenous. Therefore, the endogenous determinants of migration

45 policy were not investigated. The results recommended that migration quotas

matter a lot. The quotas mitigated supply-side effects causing pull and push

factors, independent geography and demography. The consistent evidence with

the constraining role of migration policies was found in the study. It was found that pull effects became more positive and push effects turned negative in those years when a host country’s immigration laws became less restrictive.

Braucker and Schraoder (2005) proposed a migration model with heterogeneous agents and persistent cross country income differentials that features temporary migration and have examined the macro determinants of migration in theoretical as well as in empirical perspective. The sample employed in the study was comprised the migration data from 18 European source countries to Germany for the period of 1967-2001: the 14 other Member States of the 'old' EU, Iceland,

Norway, Switzerland and Turkey. This sample covers all European source countries with the exception of the countries of the former COMECON, Albania, and the successor states of the former Yugoslavia. The data on migration stocks and flows was used from the German Federal Statistical Office.

The model in the theoretical part established a long-run equilibrium, in which individuals can stay their entire life in the home country, migrate temporarily abroad or stay permanently in a foreign country depending upon their choices.

The migration stocks and flows were generated in the model. It was found that the number of migrants, the duration of migrant stay and the stock of migrants all

46 increases with the income differential between the host and the home country,

while net migration ceases to zero. The gross emigration and return migration

rates were related to the stocks of permanent and temporary migrants. Existing empirical migration models, estimating net migration flows, instead of stocks, may be mis-specified because the stock of permanent and temporary migrants were a positive function of the income differential. The determinants of international migration were estimated in the empirical analysis.

The results of the panel unit-root and panel co-integration test showed that the standard flow migration model was mis-specified for the data set used in the study. The traditional migration model in the empirical model explained migration flows by a number of explanatory variables including GDP per capita, unemployment rates, lagged migration stocks and institutional variables. The macroeconomic variables such as GDP and employment were non-stationary variables having order of integration one. The tests carried out in the empirical

part of the study indicated that migration rates were stationary, while migration

stocks were I (1) variables. The empirical analysis suggested that the hypothesis

of a co-integration relationship between migration stocks and the explanatory

variables cannot be rejected for the data set used. This was interpreted as

empirical support for the theoretical hypothesis that migration stocks and

explanatory variables such as the income differential and employment variables

form an equilibrium relationship.

47 The results of the study might be used for policy implications. The flow model

explained that migration did not stop before expected income levels among host

and home countries have converged to a certain threshold level, which was determined by the costs of migration. In case of determined differences in

expected income levels, either the total population will eventually migrate or

migration will not occur in the first place. In contrast, the stock model predicted

that migration ceased when the benefits of migration equal the costs to the

marginal migrant, such that a long-run equilibrium between migration stocks and

expected income emerged. Consequently, migration might stop despite the

existence of large income differential among the countries.

Poveda (2007) analyzed the determinants of rural population migration in south

of Veracruz state (Mexico) by listing three different regions of migration.

Traditional markets, the northern border and the United States were included in the said regions. A three-level multinomial logistic model was applied keeping in view the individual, family, and local characteristics of the migrants. The different

determinants of migration were found in different cases. The difference in the

determinants of the migration was due to the differences in the objectives, needs

and income of the migrants and their households.

The results of the study showed that the determinants of migration to the

traditional markets were related with certain personal and family characteristics

and with local conditions. A larger risk of migration in agricultural areas of thickly populated villages was found where families with a lesser area of agricultural

48 land. These areas were connected to the urban markets in the region and preferential contact and migrations. Some of migration were supported by family members and have attracted recent migrants from these areas. The continuation of migratory previous circumstances was only a significant family determinant in migration to traditional markets and without background the risk decreased to

35.2 per cent with respect to antecedents. The sex, age and marital status of the migrant were found the personal determinants affecting the probability of migration. The young and single man has more probability of migration to the nearby places.

The home variables played an exceptional role in the process of migration to the border areas. The growth rate of population was a one of the factor that affected the risk of migration. The areas of greater population growth rates were related with greater migration to the border during the period of 1996-1999. This relation led to definite settlement and hence, the lack of local migratory background in the region. The saturation of the resources in the area have led people to migrate to the northern border instead of within the region due to the difficulty in finding a job in the region and secondly, the greater earnings offered by the cross-border assembly plants. The place of residence has also affected the migration to the border areas.

The migration to the border came slow down from the areas where there was a greater availability of land. The border as well as cross-border, there were job

49 opportunities for the worker due to assembly plants. The migrants used their

income earned from these areas to improve their living conditions. They saved

very less for the investment motives to improve the production conditions. The

migratory antecedents was found significant variable of migration in these areas

due to family members or the migrant himself has experience of migration toward

the border. The specialization to work in assembly plants needed a little skill from

the workers. Hence, education of the worker was the main determinants of

migration to these areas and the higher the educational level was required for

better work prospects.

Davis and Stecklov (2002) explored the impact of rural migration upon the

Mexican economy by employing the data from the rural areas of Mexico. The

data from landed households in Mexico was used to avoid the ambiguous

consequences. Different hypotheses about the choice for the host country were

tested in their study. Hypothesis was maintained that people from rural areas of

Mexico could migrate within Mexico to seek jobs in the agricultural and other

sectors as well as to the United States. The composition of migration was

consisted from rural to rural, rural to urban, and rural to international migration in

their analysis. A simple aggregated migrant network was used as an explanatory variable in the used approach.

The results of the research showed that the characteristics of migrants to the

USA and non-agricultural Mexico were similar. The level of education of Mexican

50 agricultural migrants was found low, they were indigenous, and their living style was isolated. The USA migrant networks appeared more significant as compared to Mexico migrant networks in respect of influencing the migration decision to the relevant countries. Once networks were disaggregated by kinship, Mexico migrant networks became very important to the Mexico migrant decision. Failing to disaggregate migrant networks by kinship relationships and migration experience were led to inaccurate results.

The impact of migrant networks in the decision to migrate was not homogeneous, but was depended upon the composition of the network. In particular, the closer the kinship bond, the more important the impact was found. The impact of migrant networks was found to be non-linear, but may be increasing or decreasing at the margin depending on the type of asset and destination choice.

Important interaction effects were found not only among different types of USA and Mexico assets, but were also between USA and Mexico migrant networks.

The USA and Mexico assets served as substitutes in terms of USA migration, and complements for Mexico migration. Finally, in confirming the importance of networks, the results showed that the location of network migrants within the migrant destinations affect the location decision of subsequent migrants.

Garip (2006) formulated a model to capture the migration decision of individuals and remittance behavior and found that remittances and migration were interrelated actions. The hypotheses on the determinants of migration and

51 remittance were combined with a single framework. The data of internal Thai

migration was taken to test this hypothesis. The results of the study showed that

a common set of economic and social factors influenced both migration and

remittance behavior. It was found that rural villagers in Thailand were more likely

to migrate and send remittances in case of their households were relatively

deprived of land or other assets with respect to other households in the village.

The altruism was the main motivation for young adults to migrate to urban centers and send remittances to support their families in the home. The social factors were also found to be very important for migration and remittance.

Specifically, individuals were more likely to migrate when there were prior migrants in their household or community, which suggested the importance of social networks. Reciprocity obligations within the household and remittance norms within the village also seemed to have important effects on migrants’ decisions to remit.

The results of the study further explained a common set of social and economic factors that determine the pattern of migration and remittance. Specifically, economic needs of the family, the village networks and norms for facilitating the migration and remittances were the determinants of migration and remittance.

Methodologically, the findings showed the need for jointly modeling migration and remittance behavior, while taking into account potential endogeneity and sample selection biases.

52 Demet and Tansel (2007) presented research findings on the return intentions of

Turkish professionals residing abroad. This study used a descriptive framework

to establish the validity of several proposed models of non-return. The results were based on an internet survey of Turkish professionals abroad.

Correspondence analysis was used to examine the relationship between return intentions and various factors that may affect this intention. The results

emphasized the importance of student non-return versus traditional brain and appeared to complement the various theories of student non-return. The respondents appeared to come from relatively well-to-do families with highly educated parents. Many have earned their degrees from universities that have foreign language instruction. The recent economic crises in Turkey have negatively affected return intentions. It was verified that return intentions were indeed linked closely with initial return plans, and this relationship weakened with stay duration. Specialized study and work experience in the host country was also appeared to explaining the incidence of non-return. Return intentions were weaker for those working in an academic environment.

These results led to important policy implications, some of which include the training of individuals for academic positions at domestic institutions, supporting study abroad for shorter periods and improving academic facilities in Turkey’s newly established universities. The government may support public and private

Research and Development (R&D) centers to increase the employability of returnees, but also to improve the quality of the higher education system in order

53 to both reduce the need for education abroad and to increase the attractiveness

of universities as prospective employment places for those acquiring education

and experience abroad.

2.7 Summary

It was concluded from literature review that there was a paucity of literature about

the determinants of remittances in Pakistan. Majority of studies at national level used cross sectional data to determine the impact of remittances upon the economy. However, time series data was also used to find the determinants of remittances in Pakistan without applying latest techniques. These studies have used ordinary least square method to estimate the determinants of remittances.

The results of such studied were not reliable because the OLS method produced spurious results due to non-stationary time series used in a regression model.

Spurious results indicated a significant relationship among the variables when there was no such relationship among the variables (W.E., Griffiths, 2001).

Limited studies in Pakistan have used latest techniques for the estimation of the determinants of remittances as well as migration including Hyder (2003), which employed Johansen’s model selection and maximum likelihood co-integration technique to analyze the relationship among workers’ remittances, kerb premium and resident FCAs for Pakistan during July 1993 to December 2001.

Literature at international level for the analysis of remittances was available in abundance. These studies estimated the economic determinants of remittances

54 and migration including the microeconomic determinants as well as

macroeconomic determinants using the latest techniques of estimation of the time series and panel data. Therefore, macroeconomic determinants of international remittances and migration in Pakistan were estimated in this research study using co-integration and error correction method. It was concluded from the literature survey that remittances was influenced by the following factors: (i) The number of migrant workers at abroad, (ii) The wage rates at home and host countries, (iii) The economic activity in the host country and in the sending country, (iv) The exchange rates between home and host countries, (v) The relative interest rate between the labour sending and receiving

countries, (vi) The inflation rate at home country, (vii) The political risk at home

and host countries, (viii) The facility for transferring funds from host to home

country, (ix) The marital status of the migrant, (x) The level of education of the

migrant, (xi) The migrant whether accompanied or not by dependents, (xii) The

years since out migration and, (xiii) Household income level receiving the

remittances.

It was further concluded that the process of migration mainly depends upon the

factors including: (i) The income inequalities in the home country (ii) The wage

rates at home and host countries, (iii) The economic activity in the host country

and in the sending country, (iv) The migration policies of the home and host

countries, (v) The differential of unemployment rate between the home and host countries, (vi) The inflation rate at home country, (vii) The political risk at home

55 and host countries, (viii) The distance between home and host countries, (ix) The marital status of the migrant, (x) The level of education of the migrant.

56 Chapter 3

Theoretical Framework

3.1 Introduction

The research work about estimating the economic determinants of international remittances in Pakistan was based upon the important theories of migration and remittances in the literature. The theoretical framework was logically developed, described, and it elaborated network of relationships among the variables that were included in the econometric model through interviews, observations, and literature survey. These variables were considered quite relevant to the given research topic, Economic determinants of international remittances in Pakistan.

Thus, a good theoretical framework identifies and labels the important variables in the situation that were relevant to the problem identified. The elaborations in the theoretical framework thus addressed the issues of why or how certain relationships existed, and the nature and the direction of the relationships among the variables of interest (Sekaran, 1992).

This chapter was mainly devoted to explore the prominent pioneer work in the field of remittances. The useful theories were developed in the history to carry out the research work on the different aspects of the remittances. The researchers seek help from these theories for methods and techniques usually used for model building. The model building was considered very important for

57 the evaluation of the specific research problem. Model specification for estimating the economic determinants of international remittances in Pakistan was not an easiest topic in the applied economics. At the end, Hypotheses were developed for the determinants of the remittances in Pakistan after reviewing the theories of the remittances and empirical evidences from the research literature in the light of these theories. The theory of remittances was presented here in this chapter with brief account of migration theory.

3.2 Theories of Migration

Number of models and theories were available in the economic literature that explained the reasons and factors of migration. These models were the integral part of the theory of remittances. The process of remittances was linked with migration. The research on international migration has focused on explaining why people move from one area to another. There was no single theory to explain the causes of international migration but one of the most important economic causes was obtaining a higher income in the host country, explained the process of migration. There were also other factors that affect the decision to migrate from one country to another country, such as family and friendship networks. The most important studies were: Stark (1991); Massey et al, (1993); Zimmerman and Bauer, (1995), yet other researchers attempted to explain why international immigration occurred. The key objective was not to discuss the theories of

58 migration in this research study. Some important theories of migration were

discussed below:

3.2.1 Neo-Classical Theory of Migration

The Neo-classical theory of migration explained the reasons for migration and

these reasons might be economic reasons. According to this theory, the individual migrant tried to maximize his utility level and this level was determined from his choice to migrate. In this argument, the government of the home country

is advised to allow the people for migration so that market forces could achieve

the desired level of equilibrium in the economy (Borjas and Miller, 2003). The

microeconomic and macroeconomic variables explained the process of migration

from one country to other country according to this theory of migration.

An individual to migrate at microeconomic level decision based upon cost benefit analysis (Sjaastad 1962, Todaro 1976). The analysis declared the decision for migration if net result of cost benefit was positive. The wage differences and rates of employment among the home and host countries were important factors for emigration. The improvement in the expected earnings in the host country, in the form of increased real salary and more opportunities for employment, increased the probability level to migrate; an improvement in earnings expected

in the country of origin reduced the likelihood of emigration; and a reduction in

the costs (economic and social) of transferring from one country to another

59 increased the emigration under this approach. The costs of migration, distance

between the countries, difference of language and the existence of ethnic

networks in the host country were found to be important determinants in explaining the process of migration. Government policies have an impact upon migration decision that brought changes in the number of factors of migration, for

example, developmental policies of government those increase the wage level in

the home countries and reduce the probability of finding jobs in the host

countries. Similar, the human capital approach explained the incentives to

emigrate decreased with age and considered the decision to emigrate as an

investment for which the current costs will be recovered in the future.

In the context of macroeconomic, the neo-classical economic theory highlighted

that real wage differences among different countries was main cause of migration

and flow of capital (Lewis 1954, Todaro 1976). The new international equilibrium

was created at which the wages in real term in all the countries restored at the

same level. The geographic differences in the supply and demand of labour in

the home and host countries were the main factors that guide the decision of

individuals to emigrate. Hence, emigration occurred from countries with low wage

levels to those with higher wage levels. The second was a capital flow from

countries offering high wage rate to the low rate countries. The flow of capital

consisted upon industrial labour intensive capital and accompanies by high-

skilled labour migration. Therefore, net international labour migration was a

secular phenomenon.

60 3.2.2 Push-Pull Theory of Migration

The theory of pull and push factors examined and explained the factors of

migration in both countries including home and host countries. The factors of

migration in the home country determined the choice of migration and proved

helpful in the process of migration. The demographic factors including growth in population, economic factors like high unemployment and low living standards in the home country and socio political factors were included in these factors.

These factors were identified as push-factors. The factors of migration in the receiving country included but not limited to: labor demand, better economic and political conditions, existing rules and regulation and incentives for immigration.

These factors were identified as pull factors. Any types of migration such as domestic or international etc. might be examined in the light of pull and push factors. The negative characteristics at home country were included in the push factors and the positive characteristics at the center of destination were included in the pull factors (Datta, 2002).

3.2.3 Dual Labor Market Theory of Migration

In the dual labor market theory of migration, the institutional factors to the Neo- classical approach were added. Piore (1979) revealed that this theory of migration highlighted the importance of race and gender in the process of migration. This theory also explained the labor market segmentation. The labour

61 market was divided into primary and secondary parts according the dual labour

market theory. The primary segment of labour market was characterized by

capital-intensive techniques of production and labour-intensive production took place in the secondary segment. Skilled workers in the primary segment have more social status because they were trained to work with advanced capital.

They have higher income and better employment conditions than unskilled

workers in the secondary segment. Jobs at the bottom of the labour market were

almost found in the secondary segment.

Piore (1979) provided three explanations for the demand for international

workers in the modern industrial societies: general labour shortages, it required to fill the base positions in the job hierarchy, and labour shortages in the secondary segment of a dual labour market. The last clarification was also covered by the first two explanations. General labour shortages led to vacancies

at the bottom positions in the job hierarchy. In addition to general labour

shortages, there were specific shortages at the bottom of the job hierarchy arising from motivational problems. It brought demographic and social changes in modern industrial societies. Motivational problems came about because jobs at the bottom of the hierarchy were often related with low social status and because the opportunities for upward mobility were low. Demographic and social changes including the decline in birth rates and educational expansion in modern societies were the causes of the inflow of teenagers. These young workers were willing to take jobs at the bottom of the hierarchy to attain experience and earn money. As

62 a result of labour shortages at the bottom of the job hierarchy, employers were compelled to recruit foreign workers.

3.2.4 Migrations Systems Theory

The migrations systems theory included a variety of discipline and analysed the process of migration. The base of this theory was to synthesis the migration movements with the relations of macro and micro structures. The whole economy of the world, associations among states, and forces at regional, national and international level were included in the macro structure. The social relations among the workers in home and host countries were included in the micro structures (Miller and Castles, 2003). Migration system theory was paying attention on the structure of the world market, especially on the influence exercised by capitalist relations on non-capitalist peripheral societies through the actions of the multinationals, governments, etc. International migration occurred because labour, land and raw materials fall under the influence of market control.

International migration was not so much affected by differentials in income or employment as by policies towards external investment and towards the international flows of goods and capital. According to this theory international migration was a consequence of globalization and dissemination into markets, since modern capitalism has generated a mass of mobile work force in search of better opportunities.

63 3.2.5 The New Economics of Labor Migration

This theory dealt with family and family was considered as a single unit in the light of this theory. This single unit of family was used in the analysis for migration. The individual migrant worker was considered a subset of the family.

The costs and benefits of the migration decision were shared with migrant and his whole family. The individual migrant was part of the beneficial contract of the family members (Bloom and Stark, 1985). Families were benefited from the income generated from different sources. This phenomenon became a form of coinsurance. This theory did not reduce the importance of individual activity in decision-making for migration. The actions and performances of individuals could be explained in the framework of decision-making unit with his whole family

(Stark, 1991). This theory has established a unique relation with analytical approach of migration from an economic perspective and the more sociological view in which human behavior has been examined. Therefore, remittances among families were integral to migration according to the new economics of labour migration.

3.2.6 Trans-nationalism Theory of Migration

Trans-nationalism theory of migration was viewed in the light of expanding globalization, rapid communication system and modern technologies adopted by the countries. The migrants, due to availability of these modern facilities were able to have connections with their family members due to globalization and

64 established cross-border activities with their relatives. Trans-nationalism activities were those activities that were performed on a repeated level at borders (Portes,

1999). The author described trans-nationalism in the light of above discussion as aimed at power share by interested groups of the society, state governments,

and also trans-nationalism from below to originate from the people and

perceptions of the society. Therefore, it was a useful differentiation that

determines the nature of transnational migration.

Shiller et al, (1993) stated that trans-nationalism entailed methods in which

immigrants form and maintain dimensional social associations that connect with

their home as well as host countries. The stress given in this case was on the

immigrants framing ties and their use of framework to contain and oppose the

difficult situation of their migration occurrence.

3.2.7 Roy’s Theory of Migration

Roy’s theory (1951) explained causes and impact of income inequalities in the

receiving and sending countries upon the decision of migration. The individuals

situated in the upper part of income distribution have less incentive to migrate in

case of home country has greater inequality than the host country and people

situated in the lower part of this distribution have greater tendency for migration.

In other words if home country has less inequality than the host country, the

individuals in the lower part of distribution have less incentive for migration as

65 compare to the individuals at the top of this distribution. The negative relationship

might be established between relative inequality and migration rate in case of

sending country has a very unequal relative distribution of income. This

relationship of relative inequality and migration rate became positive in case of

sending country has a relative egalitarian distribution. Therefore, an inverted U

relation between relative inequality and migration has been established

according to this theory. For example, if average income of home country was

below the average of the host countries and the Gini ratio of coefficients was

close to one (similar levels of inequality in both countries) then the emigration

ratio would be the highest, since everyone would have an incentive to emigrate

due to income differential between the countries.

The Roy’s theory of migration also explained the relationship between

development and migration. The wages were found low and the emigration rate

was also low due to low wages in the start of the industrialization process. The

immigration rates have been increased due to developments in the advanced

countries in long term process. A decrease in the immigration rate was observed

due to reduction of the wage differential among the countries over time (Rotte

and Vogler, 1998). Therefore, an inverted U shape type relationship between

development and migration has been established. The growth of emigrations in

the first episode of industrialization may be examined by the effects of the demographic evolution occurred with industrialization. It was also due to the effects of expansion of the networks among emigrated workers and wanted to be

66 emigrated. Moreover, poverty was an impediment to migration because financing

for migration much difficult in these poorer countries (Rotte and Vogler, 1998).

The focal point of migration abroad was a higher income abroad as a principal

cause of decisions to emigrate. The other variables also exert an important

influence on decisions to migrate, including factors of war, racial prejudice and

political stability at sending country. The preference of host destination was also

influenced by the continuation of a network of family and relatives who have

migrated previously to that country (Solimano, 2003).

More scientifically, the amount and direction of flows of migration were subjective

to the following reasons of long run and cyclical in their nature. The author further

highlighted the economic determinants of the international migration theoretically.

These determinants were (Solimano, 2003):

(a) Per capita income or real wage differentials between sending and receiving countries: immigration flows were positively related to the ratio of real income in the host country and that of the recipient country. The expected wage in the place of destination compared with that of the home country was important while taking decision to migrate. Moreover, in a dynamic perspective, the current value of expected relative wage streams would be the relevant variable.

67 (b) The business and economic conditions in both sending and receiving

countries: Growing economic development and labor shortages in the host

countries tended to increase the probability of immigrants to find a job. In

contrast, in periods of sluggish growth and higher unemployment, this probability

was lower. While the decision to emigrate depended largely on real income differentials between countries, the timing of migration seems to be related with the state of the business cycle in both sending and receiving countries.

(c) Network effects: Empirical analysis of migration flow showed that high importance to friends and family was attached for the choice of host country because relatives and friends were more helpful for the support of migrant at time of migration. The information relevant to jobs and economic conditions of the host country might be obtained by the close relative or friends living in these countries.

(d) Immigration policies: Policies in host countries that were unfavorable to immigration deter migrants, although not completely, as there still remained the possibility of illegal migration to some countries.

(e) Costs of migration: There were several costs in the process of migration.

These costs might include travel costs and living expenditure in the destination country and also the cost of searching for a job in the new country. Low level of income and having less skill migrants were always suffered by such costs, which

68 may in practice be an important inhibiting factor on the international migration of the poor.

(f) Cultural differences between countries: The patterns of migrations were affected by the culture prevailing among the sending and receiving countries.

The language, way of living, customs and traditions were responsible for migration patterns. The migration pattern might be different among individuals and countries because the cultural habits were founds always different in the different regions and countries.

(g) Geographical boundaries and distance: Generally speaking, migration to neighboring countries was tended to be more common as compared to the countries situated far away. Geography therefore played an important role in determining the size and direction of migration flows.

3.3 Theory of Remittance

The research work and empirical findings on the determinants of international remittances in Pakistan was limited both in lack of theoretical understanding of the remittances process and paucity of data relevant to remittances. Different theories explained different results of the remittances depending upon the household welfare or utility functions with the remittances. The net changes in income of households, including public transfers, also affected remittances, led to

69 provide different results. The amount and structure of the remittances was also

belonging to the areas of the migrant workers whether he or she belonged to the

rural communities or from the urban areas. The number of household members,

the gender structure of the family and sex of the head of family were also bearing

factors for the amount and use of the remittances in the family. It was observed

that some family members migrate; others remain in the place of origin. The New

Economics of labour Migration (Stark and Bloom, 1985) explained that imperfections in rural credit and risk markets including farmers' inability to obtain credits, insure against income loss created incentives to participate in migration

by sending family members to work in the city or abroad. According to this view,

migrants played the role of financial intermediaries, substituting for the missing

rural bank or insurance institution. When the migrant workers reached and were established at their working places in the host countries, migrants provide the family members at the origin with needed capital, through remittances. Support of family members was a deeply ingrained in their cultural and habits in developing countries like Pakistan. The element of support to family members at home country become stronger in case of migrant worker has wife and children left with his parents to look after them. Traditional classical or neoclassical models of migration behavior (Todaro, 1969) did not explain why migrants share their earnings with their place of origin. However, remittances were a cornerstone of the NELM, representing one of the most important mechanisms through which determinants and consequences of migration were connected.

70 3.4 Motives of Remittances

Solimano, (2003) has defined and explain four motives of remittances. These

were: (i) Motive of Altruistic, (ii) Motive of Self-Interest, (iii) Motive of Loan

Repayment and (iv) Motive of Co-Insurance.

3.4.1 Motive of Altruistic

This school of thought concerned that remittances were a commitment to the household. Remittances were sent to family household due to act of love and liability of the migrant worker. It has been explained in the remittances theory that the important reason for migration other countries was poverty. Keeping in view the motive of altruistic, providing remittances to the family members for their welfare gives a utility to the migrant.

3.4.2 Motive of Self- Interest

Economic and financial self-interest was main motives for sending remittances to

the home in the light of this motive. It was argue that that migrant worker try to save more and more at every point in time. Then, the migrant worker took decision about the type of assets to be bought and the country in which the wealth to be accumulated. It was obvious that the home country was considered the best place to invest in the purchase of property, land and assets including

71 financial assets. Such types of investment in the host country might earn higher

profit with high risk attached. The investment might not be permitted in the host

country as well. Therefore, the family of the migrant worker could manage and

administer the accumulated assets of the worker during the emigration period.

3.4.3 Motive of Loan Repayment

It was discussed and explained in the New Economics of Labor Migration

(NELM) theory that in the process of remittances the family was considered a

unit of analysis rather than the individual it self. The families developed an implicit contract among the family for members to choose to migrate abroad or

stay at home. This contract has dynamic prospects because this contract migt

last for various years or decades. The elements of investment and loan

repayment were combined in the contract. According to this theory of

remittances, the family invested in the training of the out going worker and

financed the costs of migration including the cost on travel and subsistence costs

in the host country. Therefore, migrant worker has obliged to send remittances to

the family members stayed at home. This was referred as the loan or investment

part of the loan repayment motive. The repayment part of this motive started

when the worker settled in the host country and his salary was started to rise with the passage of time and the migrant started to repay the loan including principal amount and interests to his family in the shape of foreign remittances. This showed that the families try to make investment in the asset having higher return.

72 The size of remittances also depended upon other conditions as the income profile of the migrant (Solimano, 2003).

3.4.4 Motive of Co-Insurance

An alternate of remittances theory as an inherent family agreement among worker and family members stayed at home covered risk diversification. It was suggested that for the family as unit to send some family members to abroad for the diversification of the risk. The migrant supported his family members in times of need at home. The remittances played the role of an insurance claim in this motive. However, in principle, such types of contracts were implicit because these were within the family members, based upon faith within the family members (Solimano, 2003).

Keeping in view, the theories of migrations and remittances and motives of remittances, the economic determinants of remittances could be estimated with a

suitable modeling strategy. Stark and Bloom (1985) considered family as an

appropriate unit for the analysis of migration and remittance, because all the family members shared and traded off the expenditure and payback of the

remittances. In this way, the theories of remittances explaining the different

dimensions of the remittances concentrated upon roles of the family and

relationships of family members. The remittance choices could be determined by

the role played from such relationships among the family members. Majority of

73 economists before the advent of the theory of New Economics of Labor Migration considered family relationships as a form of mutual compassionate. This form of cooperation among the family members was a prime motivation for sending remittances. The initial work carried on remittances, by (Johnson and Whitelaw,

1974) explained such objective of the remittances. (Lucas and Stark, 1985) explained that surely the most apparent motive for remitting was pure altruism in which migrant considered the care for the family members at home. The utility derived from such type of objective of the remittances was introduced. This utility function explained that migrant’s utility was also the function of the consumptions of his family members. In this way, utility function explained the highest degree of the altruistic model of remittances. Indeed, this appeared the single idea in the fundamental literature of the remittances.

The freshest theories of remittances were in the view that self- interest motives of remittances nevertheless be the heart of the family as unit consideration. Such type of literature about the remittances was at rest on the family as these theories watch the family as a unit participating in business activities. The family was able to enter into the optimization behaviors due to consideration of family as unit. Several types of businesses and contracts were possible due to family unification and a variety of self-centered models of remittances were explained with the help of family as unit. (Lucas and Stark, 1985) further explained that migrants might start investments projects while he was away from home due to

74 the consideration of family as complete unit because his family members could look after his business without his stay in the country.

Stark (1991), and Gubert (2002) were opined about the functioning of the family as an insurance company because these members were provided help and protection in case of income decline from domestic resources with the help of diversification of the sources for income generation. Poirine, (1997) suggested that family worked like a bank to finance the expenditure of migration for its members. Therefore, the migrant worker sent remittances back to family members at home to repay the loans. They also remitted more loans for the interests and welfare of other individual family members. This might be considered a most consistent fact to get rid from the empirical literature written on dimension and factors of the remittances. Many researchers exploring the dimensions of remittances confirmed the altruistic behavior and very few including (Agarwal and Horowitz, 2002) experienced altruism exchange with the family planning. Lucas and Stark, (1985) found such evidence in the support of self-interest behavior in case of Botswana and Agarwal and Horowitz (2002), provided evidence in the support of altruism in Guyana.

75 3.5 Hypothesis Formulation

The review of different theories of remittances and exploring the economic history of Pakistan were found helpful for selecting the relevant variables and the construction of the econometric model to estimate the economic determinants of international remittances and migration in Pakistan. The remittances interplayed with economic, social and cultural factors that determined the scale and type of remittances and their impact on the economy. An economic framework for conceptualizing factors affecting the volume of the remittances in the economy has been developed in the light of the theories of remittances. The theory of migration has already been explained in the previous paragraph. The individual migrant characteristics and migration problems were not addressed in this research study. Given the scale of transfers, remittances could potentially be determined by the economic and social conditions of the home as well as the host countries.

The researchers have established various hypotheses for estimating the determinants of the remittances in any country. First, it was possible that the size and volume of remittances was driven by the household characteristic, including the socio-demographic factors. Second, macroeconomic determinants were more important in estimating the size of the remittances as compared to the microeconomic determinants. Third, it was possible that remittances were mostly determined by the home country conditions. Fourth, it was possible that the host

76 country economic conditions dominate the decision to send the remittances.

Last, but not least, it was possible that decisions of emigrant to send remittances

include both home and host country conditions.

In light of above stated hypotheses, it was not possible to test the every

hypothesis. Therefore, in this research study, the hypothesis was developed that the size and volume of remittances was determined by the economic conditions of the home country at macro level. Thus, the macroeconomic determinants of international remittances in Pakistan were analyzed based upon the home country conditions in the present study. Going through the theories of migration and remittances, it was concluded that the migration was the integral part of the

remittances. In the literature survey, number of studies found repeatedly migration as one of the determinant of remittances. Keeping in view, the importance of the international migration, the economic determinants of

international migration were also estimated in the present study.

77 Chapter 4

Data and Methodology

4.1 Introduction

The devising right methodology and appropriate techniques were considered as the center of any research study. Without making a right choice for methodology and analysis, the impact study was futile exercise. Therefore, very important and significant thing in conducting any analytical study was to adopt a systematic and appropriate technique. The research methodology was considered very important in the evaluation of any research problem because it completely explained the entire procedure adopted in the relevant research project. The research proposal highlights about the collection, methods, description and analysis of the data used in the research study. It aids the researcher in the allocation of his limited resources by selecting the specific choices from alternative methods (Sekaran,

1992).

Thus, the major objective of this chapter was to explain various tools and techniques employed in the research study along with selection of sample, collection, analysis and interpretation of data relating to research problem under investigation. Therefore, the methodology used for finding the macroeconomic determinants of international remittances and migration in Pakistan was explained in this chapter. The description of the data, source of data, and

78 methodology adopted for the analysis of the data were also discussed in this chapter.

4.2 Source of Data

The time series data were used in estimating the macroeconomic determinants of international remittances and migration in Pakistan for the period of 1973 to

2005 in this study. The included variables in this research study were; the volume of the remittances (US $ million), GDP at constant factor cost at 1980-81 prices

(Rs. Million), Real Growth Rate of the economy, Unemployment rate in the country, Exchange Rate in Rs/$, Daily Wage Rate of unskilled workers at Lahore,

Literacy Rate, Inflation rate, Number of migrants went to abroad from Pakistan per annum and Spread Rate of banks in Pakistan. These data series were obtained from the Federal Bureau of Statistics, Islamabad. The Federal Bureau of Statistics, Islamabad published the fifty years statistics of Pakistan and provided the time series data about all the important variables of Pakistan

Economy. The data about the exchange rate was taken from the State Bank of

Pakistan, Karachi. The statistics about the migration was taken from the Bureau of Emigration and Overseas Employment, Ministry of Labour, Manpower and

Overseas Pakistan.

However, real remittances (Rs. Million) and real wage rate were calculated with the help of exchange rate and GDP deflator. The Spread Rate of banks was

79 determined by the difference of the interest rate on advances and saving accounts. These variables were transformed into log form at the stage of model specification in order to smooth out the data. The description of variables used in this research study was given as under:

LRREM= Log of real remittances (Rs. Million),

LRGDP= log of real GDP (Rs. Million at constant factor cost 1980-81),

LGR= Log of real growth rate,

LUR= Log of unemployment rate,

LRWR= Log of real wage rate,

LLR= Log of literacy rate,

LSP= Log of spread rate,

LINF = Log of inflation rate and

LNW = Log of number of workers migrated abroad

4.3 Methods and Procedures

The time series data was used to estimate relationships among the variables included in the model, to forecasts the future value of these variables and to test different hypotheses very frequently. It was assumed that the time series data were stationary in the traditional time series econometric. The developments in the time series econometrics over the time revealed that most of the time series were not stationary and if time series were not stationary, then the use of the

80 OLS method to analyze such data was not appropriate (Thomas, 1997). Most of

the time series were trended over time and relation among these series might

produce significant results with high R2, these results were termed as spurious or

meaningless (Granger and Newbold, 1974). It was the fact that many

econometricians used standard statistical methods developed for stationary data series without checking the stationary of the data. Box and Jenkins (1970, 1976), formulated regressions in which the time series were expressed in first differences to resolve the problem of spurious results. It was assumed in this approach that non-stationary data could be converted into stationary series by taking differences repeatedly. However, this process of differencing resulted in loss of valuable information among the series. Therefore, it was the main disadvantage of this approach (Davidson et al., 1978).

The latest techniques of co-integration and error correction mechanism were used in this research study to avoid the spurious results and overcome the problem of the loss of valuable information of the used data. Granger (1981) and

Engle and Granger (1987) have introduced the concept of co-integration.

Econometric techniques based upon the co-integration considered the long run relationships among the different variables included in the model. The co- integration explained that an individual data series might move without specified pattern but when this series was paired with another series, the pairs tended to move together over time and showed relationship among them. The integrated time series were modeled using a dynamic error correction mechanism under

81 certain conditions. This model was an extension of the traditional partial

adjustment model and has taken into account the dynamics of short-run adjustment towards long-run equilibrium. The error correction model was based upon the Granger theorem, which stated that if time series were found co-

integrated, then these series exhibited long run relationship among them (Engle

and Granger, 1987).

4.4 Stationary, Non-stationary and Order of Integration

It was assumed that the time series used in the study was stationary. A series Yt

was said to be stationary if the following conditions were fulfilled for all values of t

and t = I, 2, …, T

E (Yt) = µ (constant mean) (4.1)

2 2 Var (Yt) = E (Yt – µ) = σ (constant variance) (4.2)

cov (Yt, Yt+s) = cov (Yt, Yt-s) = γs (covariance depends on s, not t) (4.3)

Equations (4.1) and (4.2) stated that the series has a constant mean and

variance, while equation (4.3) stated that the covariance between any two values

of Y from the series (i.e., auto covariance) depended only on the difference part

in time between those two values (s) and not on the point in time (t). In equation

(4.3), ‘s’ indicated the difference part of time between two consecutive values of

the time series Y and t denoted the time period. Thus, a series was stationary if

82 its mean, variance and covariance all were found independent of time. A series

was non-stationary if it’s mean, variance or covariance were the function of time.

A stationary series has a tendency to move toward its mean and to fluctuate

around mean with a constant range, while a non-stationary series has a changing

mean at different points in time and its variance changes with the sample size

(Griffiths et al, 2001).

The number of times a series needed to be differenced for achieving stationary

was concerned with the number of unit roots contained in the series. The order of

integration equals to the number of unit roots a series contained, or a number of differencing operations it took to make the series stationary. For example, a series contained d unit roots and was integrated of order d, denoted by I (d), If it became stationary after differencing d times (Dickey and Pantula, 1987).

4.5 The Concept of Co-integration

The co-integration explained the basic ideal that the included variables in the model exhibit a long run relationship among the variables. If there was a long run relationship among the variables, then divergence from the long run equilibrium path was bounded and the variables were said to be co-integrated. Two conditions were said to be satisfied for co-integration. First, the series included in the model were co-integrated of the same order and second, a linear combination of the variables exists which was integrated to an order lower than

83 individual variables. For example, if the variables become stationary after differencing once, i.e., are I (1), then the error term from the co-integrating regressions was stationary, i.e., I (0) (Hansen and Juselius, 1995). Suppose that co-integrating regression was:

Yt = α + βXt + ut (4.4)

If the series Yt and Xt were both I (1) and the error term ut was I (0), then the series were co-integrated of order I (1, 0). The β measured the equilibrium relationship between the series Y and X and ut was the departure from the long run equilibrium path in equation (4.4). The economic interpretation of co- integration was that if in the long run two series Yt and X t or more series were expressing an equilibrium relationship, then even though Yt and X t themselves were non-stationary, they would move together closely over time and the difference between these was constant (i.e., stationary). Therefore, the term co- integration represented a long-run equilibrium to which a system of series moved with time and ut may thus be interpreted as the disequilibrium error i.e., the extent to which relationship deviated from equilibrium (Johansen, 1994).

4.6 Order of integration

Numbers of test were used to find the order of co-integration of series in econometrics literature but most commonly was unit roots test. It was formulated

84 and developed by the augmented Dickey – Fuller (Dickey and Fuller, 1981).The

following equation was estimated in this test.

k ∆Yt = β1 + β2T + β3Yt-1 + Σ θi ∆ Yt-i + ut (4.5) i = 1

Where: Yt was the series for which, the order of integration was found, T was the

time trend and ut was white noise residuals. The number of lags, k, was unknown

and Lagrange Multiplier test (LM test) from general-to-specific with maximum k =

13 at 95 percent confidence level was used to know these lags (Holden and

Perman, 1994). It was assumed in LM test that there was one unit root in the

process (Dickey, Bell and Miller, 1986). However, if there was more than one unit

roots, the standard testing procedure was to test first for a unit root in the levels of series Yt; then, if the null hypothesis was not rejected then to test the first

difference i.e. ∆Yt for the presence of a second unit root and so on. This testing

procedure from lower to higher orders of integration continued until the null

hypothesis was rejected. However, Dickey and Pantula (1987) argued that it was

not a valid procedure since the ADF – tests were based on the assumption of

only one unit root. Thus, it was inappropriate to test for unit roots from lower to

higher orders when there were more than one unit root in a series and sequential method of Dickey and Pantula (1987) were followed. The null hypothesis of three unit roots was assumed and tested. Null hypothesis of two unit roots was tested on the rejection of three-unit roots hypothesis and so on until the null was accepted. The ADF – test for three unit roots was formulated as:

k

85 3 3 (Yt-1 Σθi∆ Yt-i+ ut (4.6ץ + Yt = α ∆ i=1

The stationary properties and the test of unit root in this research study were performed by the augmented Dickey – Fuller (ADF) test. The reported statistics in this study were confined to the DF (ADF) approach in levels, because in most instances the DF (ADF) led to the same conclusions. The null hypothesis of a unit root could not be rejected at the 5 percent level in the series because of integrated of order one i.e. I(1).

4.7 Test of Co-integration

Two formal approaches were commonly employed to observe the presence of co-integration among included series in the model. These approaches were: the augmented Dickey-Fuller residual-based test approach proposed by Engle and

Granger (1987) and the Johansen’s Full Information Maximum Likelihood (FIML) approach (Johansen and Juselius, 1990). The co-integration of the included variables in the model and the residual term was tested in the residual-based tests. It was the drawback of the residual-based approach that it included only two variables in the model. In this way, there will be only one co-integrating vector. However, if the number of variables were increased in the model, there was more than one co-integrating vector. In this case, the use of residual-based approach was not appropriate. Consequently, Johansen’s method, which allowed the estimation of all the possible co-integrating relationships existing among the

86 variables, was used. Its advantage was that co-integrating vectors could be

determined empirically. However, this method could not be compared with the

residual-based single equation test and system-based tests directly because they

were grounded within different econometric methodologies.

4.8 Co-integrating Vectors

Two likelihood ratio (LR) tests were used to find out the presence of a single co-

integrating vector. These tests were trace test statistic and maximal-eigen value

test. The null hypothesis of at most r co-integrating vectors against the alternative

that it was greater than r could be tested under the trace test statistic and was

explained as:

p λ trace (r) = - T Σ ln (1- λ i) (4.10) I = r+1

The r co-integrating vectors could be tested in the null hypothesis as compared

to the alternative that was r+1 according to the maximal-eigen value test and was

explained as:

λ max (r, r + 1) = - T ln (1- λ t+1) (4.11)

The critical values of these tests have been derived by Monte Carlo Simulations and tabulated by Johansen (1988) and Osterwald- Lenum (1992). Harris (1995,

87 p.89) noted that between these two LR tests for co integration, the trace test showed more robustness.

In this research study to estimate the determinants of remittances and migration, the adjusted likelihood ratio (LR) statistics (Sims, 1980) was used to find the value of k i.e order of the VAR. The conclusion of the adjusted LR were drawn on the AIC and SBC criteria. The issue of the estimated coefficients being the long- run elasticities in the co-integrating vectors was not clear. This was true when there were only two variables in the co-integrating vector, but when there were more variables in the model, the dynamics of the VAR raised some doubts about their interpretation (Lutkepohl, 1993). Nevertheless, some authors Hallam and

Zanoli, (1993) interpreted the estimated coefficients as the long-run elasticities.

In this study the estimated coefficients were interpreted as long-run elasticities of the remittances and migration because the model was specified in the logarithmic form.

4.9 Error Correction Mechanism

The error correction mechanism stated that a proportion of disequilibrium in a system (model) from one period was corrected in the next period in the said system (Engle and Granger, 1987). The error correction mechanism was first used and explained by (Sargan, 1964). It was mentioned that traditional econometric estimation assumed that the time series were stationary i.e., I (0).

88 However, most time series were not stationary and were integrated of a certain order. Mainly series were either trend-stationary (TS) or differenced stationary

(DS). A trend stationary series was rendered stationary by including a trend term

and a differenced stationary series was rendered stationary by differencing. But

the process of differencing or transforming a time series to stationary series also

leads to the loss of some important long-run information which otherwise was

required to be retained for estimation. The error correction models, however,

solved the problem of integrated data series using traditional estimation methods

without losing long-run information. The basis of error correction model (ECM)

was the Granger representation theorem. This theorem represented that if the

variables were co-integrated, there was a long-run relationship between them

and was described by the error correction model. An ECM involving the variables

Y and X in its simplest form was expressed as:

∆Y t = α ∆X t - ø (Yt-1 - δXt-1) + µ t (4.12)

Where: µ t was the disturbance term with zero mean, constant variance, and zero

covariance. Parameter α taken into account the short-run effect on Y of the

changes in X, while δ measured the long-run equilibrium relationship between Y

and X i.e.

Yt = δ Xt + µt (4.13)

89 Where: Yt-1 - δYt-1 = µt-1 measured the divergence from long-run equilibrium.

Finally, ø measured the extent of error correction by adjustment in Y and its

negative sign indicated that the adjustment was in the direction, which restored the long-run relationship (Hallam and Zanoli, 1993). Engle and Granger (1987) proposed a two-stage procedure for estimating (4.12). In the first stage, the static long-run co-integration regression (4.13) was estimated to test co-integration between the two variables. If co-integration existed, then the lagged residuals from the static co-integrating regression (4.13) was used as the error correction term in the error correction model (4.12) to estimate the short run equilibrium relationship between the variables in the second stage. The validity of ECMs

depended upon the existence of a long run or equilibrium relationship among the

variables.

The ECM has several advantages. It contained a well-behaved error term and

avoided the problem of autocorrelation. It allowed a consistent estimation of parameters by incorporating both short-run and long run effects. The major advantage of ECM was that all variables were stationary in the model. It ensured that no information on the levels of variables was ignored by the inclusion of the disequilibrium terms because ECM was formulated in terms of first difference. It eliminated trends from the variables and resolved the problem of spurious results

(Granger and Newbold, 1978).

90 The use of vector correction models (VECM) could solve the endogeneity

problem among remittances and its macroeconomic determinants. The causality ran both the ways. For example, the remittances caused GDP and GDP caused

remittances (CV, Silva, 2005). This endogeneity appeared to be present because

while some studies have found that macroeconomic variables in the home

country affected the remittances, other studies have found that remittances

affected the macroeconomic variables in the home country.

4.10 Modeling Strategy

The following important steps were involved in explaining the model strategy

used in this research study.

(i) Augmented Dickey_ Fuller (ADF) unit root test was employed to find

out the order of integration of the series used in the research study.

The stationary of these series was determined with the presence of a

unit root.

(ii) The log form of the variable was suggested (Schrooten, 2005) for

model specification for smooth pasting of data and on the basis of the

more accurate estimates of the required parameters.

(iii) Variables used in the research study were found integrated of the

same order i.e. I (1), therefore Johansen and Juselius (1990)

maximum likelihood estimation approach was used to test the co-

91 integration.

(iv) Moreover, the Engle Grange techniques based on the residual test

were also applied to test the co-integration.

(v) The lag k of the VAR model was specified before undertaking the co-

integration test. The VAR model treated every variable within the

system and the equations of these variables were estimated with

lagged values.

The variables used in the research were found co-integrated, therefore, their long

run relationship was estimated via ordinary least square (OLS) method. The

Vector Error Correction Model (VECM) was used for the estimation of short run

adjustment.

The two econometric models were specified in the research study with the guide line provided by the outlined model strategy.

(i) Real Remittances Model

Real Remittances Model was used to obtain the economic determinants of international remittances in Pakistan. The model parameters were defined keeping in view the empirical literature. The functional form of the real remittances model was:

RREM = F (RGDP, GR, UR, LR, SP, RWR).

92 The estimating econometric model was:

LRREM = β0 + β1LUR + β2LRWR + β3LSP + β4LGR + β5LLR + β6LRGD + et

(ii) Migration Model

Migration Model was used to identify the economic determinants of international migration in Pakistan. The parameters of the model were specified based on previous studies and theoretical literature. The functional form of the migration model was:

NW = F (INF, RREM, UR, RWR);

The econometric model for the estimation was:

LNW = β0 + β1LUR + β2LRWR + β3LINF + β4LRREM + et

93 Chapter 5

Unit Root Test

5.1 Introduction

The time series moved upwards or downwards without any specified patterns were known as random walks and the series showing a definite trend either upwards or downwards were known as random walks with a drift. Considered AR

(1) process

Yt = α + ρYt-1 + εt (5.1)

The AR (1) process in (5.1) was stationary if ⎜ρ ⎜< 1 and the AR (1) process in

(5.1) was non-stationary if ⎜ρ ⎜= 1. Further, the AR (1) process in (5.1) reduced to a non-stationary random walk series if α = 0 and ⎜ρ ⎜= 1. The produced series was non-stationary and called a random walk with drift in case of α ≠ 0 and ⎜ρ ⎜=

1 (Griffiths et al., 2001).

The time series data was used in this research study to find out the determinants of the real remittances and migration in Pakistan. Therefore, it was necessary to know about the properties of the time series data used in the study. The stationary of time series data was explored with the help of informal and formal

94 approaches available in the econometrics literature including the Auto Correlation

Functions and Unit Root Tests respectively. However, the results of formal

approaches like the Unit Root Test were reported in the study. The graphs of

these series were also drawn to ascertain the pattern of these series over the

time.

5.2 Unit Root Test

The stationarity of series used in the study was determined with the estimation of

a unit root. Dickey Fuller (DF) unit root test might be estimated from the following

forms of equations.

1. Without constant and trend; Yt = ρYt-1 + ε t (5.2)

2. With constant; Yt = α + ρYt-1 + ε t (5.3)

3. With constant and trend; Yt = α + ρYt-1 + βT+ ε t (5.4)

Where: Yt was the relevant time series, α was constant (Intercept), T was time trend and ε t was the residual term. This test was carried out on levels and first differences. The null hypothesis was that the variable has a unit root i.e. ρ = 1

against the alternative hypothesis having no unit root. If null hypothesis was

accepted, then Yt series was non- stationary time series. The null and alternative

95 hypotheses were stated as: H0: ρ = 1 and H1: ρ ≠ 1 and the decision rule for

testing these hypotheses was framed as: The null hypothesis was rejected and

concluded that unit root not existed if ADF* > t critical value and null hypothesis

was not rejected and concluded that unit root existed in case of ADF < t critical

value.

Equations 5.2, 5.3 and 5.4 might be transformed into differenced equations by

subtracting Yt-1 on both sides of these equations and were given in the following

forms to obtained results.

4. Without constant and trend; ∆Yt = δYt-1 + ε t (5.5)

5. With constant; ∆Yt = α + δYt-1 + ε t (5.6)

6. With constant and trend; ∆Yt = α + δYt-1 + βT+ ε t (5.7)

Where: ∆Yt = Yt - Yt-1 and δ = ρ - 1. The null and alternative hypotheses

formulated in the light of new regression form equations were H0: δ = 0 (Unit

Root) and H1: δ≠ 0 (No Unit Root). Augmented Dickey Fuller (ADF) unit root test was based on the following regression equation.

∆Yt = α + βT + δYt-1 + γ i ∆Yt-i + ε t (5.8)

96 Various regression forms were estimated to find the presence of the unit root in the data series and results of the unit root test were reported in Table 5.1 through

Table 5.4. It was found that all the time series used for estimating the determinants of international remittances and migration in Pakistan were non- stationary and their order of integration was one i.e. I (1). The variables in the

study were transformed into log form while specifying the model for carrying out

the research.

Table 5.1: Unit Root tests using Augmented Dickey-Fuller Method Variables Without trend With trend

RREM -2.07 -2.14

RGDP 2.60 1.23

GR -2.91 -2.71

UR -.74 -2.32

RWR -2.91 -2.85

LR 1.03 -1.40

SP -1.22 -2.53

INF -2.69 -2.18

NW 2.3 -0.59

• Critical value for the augmented Dickey-Fuller statistic with intercept and without trend was –2.96 (p = 0.05 per cent) • Critical value for the augmented Dickey-Fuller statistic with intercept and trend was –3.56 (p = 0.05 per cent)

The reported statistics in this study was, however, confined to the ADF (AD)

approach including intercept with and without trend. AD and ADF up to level

97 three were calculated to know the real situation. Informal test like auto correlation function and partial correlation function were also performed but not reported.

The results of the unit root tests of the series RREM, RGDP, GR, UR, RWR, LR,

INF, NW and SP were reported in Table 5.1. These series were found non- stationary on the basis of the augmented Dickey-Fuller statistic. The null hypothesis was not rejected because t calculated was greater than the ADF critical value. Thus, the unit root was existed and confirmed that the series were non-stationary.

Table 5.2: Unit Root tests using Augmented Dickey-Fuller Method Variables Without trend With trend

LRREM -2.94 -2.56

LRGDP -.12 -1.43

LGR -2.02 -2.93

LUR -1.51 -2.69

LRWR -2.80 -2.73

LLR -.30 -1.86

LSP -2.04 -2.79

LINF -2.68 -2.73

LNW .008 -2.54

• Critical value for the augmented Dickey-Fuller statistic with intercept and without trend was –2.96 (p = 0.05 per cent) • Critical value for the augmented Dickey-Fuller statistic with intercept and trend was –3.56 (p = 0.05 per cent)

98 During the model specification, log form showed robust results. Therefore, log transformation was applied to all the data series to ascertain the stationary of the series. The results of the log form of the variables were reported in the Table 5.2.

It was concluded in the light of results that all series remained non-stationary after log transformation.

Table 5.3: Unit Root tests using Augmented Dickey-Fuller Method Variables Without trend With trend

∆RREM -3.98 -3.90

∆RGDP .72 -.59

∆GR -5.16 -5.14

∆UR -4.16 -4.06

∆RWR -3.78 -3.64

∆LR -1.91 -2.01

∆SP -5.05 -4.99

∆INF -5.87 -6.26

∆NW -2.98 -2.86

• Critical value for the augmented Dickey-Fuller statistic with intercept and without trend was –2.96 (p = 0.05 per cent) • Critical value for the augmented Dickey-Fuller statistic with intercept and trend was –3.57 (p = 0.05 per cent) • ∆: Indicate the first difference of the series.

The unit root test was applied after differencing once each series and results were reported in Table 5.3. ∆RGDP and ∆LR series were found non-stationary on the basis of these results. All other series were stationary after differencing

99 once. In order to solve this problem, log transformation was applied after differencing once and results were reported in Table 5.4. Therefore, log transformation was justified on two grounds. It was more appropriate for model specification and it also solved the problem of stationary. The results in Table 5.4 indicated that all the series were stationary. Therefore, it was concluded that all series used in this research study were of the same order i.e. I (1).

Table 5.4: Unit Root tests using Augmented Dickey-Fuller Method Variables Without trend With trend

∆LRREM -3.58 -361

∆LRGDP -2.98 -3.61

∆LGR -5.30 -5.25

∆LUR -3.99 -5.25

∆LRWR -3.35 -3.28

∆LLR -3.31 -4.25

∆LSP -5.38 -5.32

∆LINF -4.62 -4.66

∆LNW -2.98 -3.89

• Critical value for the augmented Dickey-Fuller statistic with intercept and without trend was –2.96 (p = 0.05 per cent) • Critical value for the augmented Dickey-Fuller statistic with intercept and trend was –3.57 (p = 0.05 per cent) • ∆ : Indicates the first difference of the series.

100 5.3 Graphic presentation of the Series

In this section, the graphs of all the time series data were drawn to ascertain the pattern of series over time. The graphs of time series were helpful for assessing the properties of the series, as the conditions for stationary were difficult to grasp.

The graph of real remittances (RREM) in Pakistan was shown in figure 5.1. The

time period from 1973 to 2005 in years was taken on horizontal axis and real remittances (in Rupees) were shown on vertical axis respectively. The graph of

real remittances represented as random walk with drift because this graph

showed a definite upward trend. Therefore, real remittances were non stationary

series.

Real Remittances

50000 40000 30000 Series1 20000 10000 0

Real Remittances 1970 1980 1990 2000 2010 Years

Figure 5.1: Real Remittances in Pakistan

101 The graph of real gross domestic product (RGDP) in Pakistan was shown in

figure 5.2. The time period from 1973 to 2005 in years was taken on horizontal

axis and real domestic product (in Rupees) of the country was shown on vertical

axis respectively. The graph of real GDP looked like random walk with drift because this graph showed a definite upward trend. Therefore, real GDP were non stationary series.

Real GDP

1,000,000 800,000 600,000 Series1 400,000 200,000 Real GDP 0 1970 1980 1990 2000 2010 Years

Figure 5.2: Real GDP in Pakistan

102 The graph of growth rate (GR) in Pakistan was shown in figure 5.3. The time

period from 1973 to 2005 in years was taken on horizontal axis and growth rate of the economy was shown on vertical axis respectively. The graph of real growth

rate looked like random walk. Therefore, real growth rate were non stationary

series.

Real Growth Rate

10 8 6 Series1 4 2

Growth Rates 0 1970 1980 1990 2000 2010 Years

Figure 5.3: Real Growth Rate in Pakistan

103 The graph of real wage rate (RWR) in Pakistan was shown in figure 5.4. The time period from 1973 to 2005 in years was taken on horizontal axis and real wage rate (in Rupees) were shown on vertical axis respectively. The graph of real wage rate looked like random walk. Therefore, real wage rate were non stationary series.

Real Wage Rate

50.00 40.00 30.00 Series1 20.00 10.00 0.00 Real Wage Rate Real 1970 1980 1990 2000 2010 Years

Figure 5.4: Real Wage Rate in Pakistan

104 The graph of unemployment rate (UR) in Pakistan was shown in figure 5.5. The time period from 1973 to 2005 in years was taken on horizontal axis and unemployment rate in Pakistan was shown on vertical axis respectively. The graph of unemployment rate looked like random walk with drift because this graph showed a definite upward trend. Therefore, unemployment rate were non stationary series.

Unemployment Rate

10 8 6 Series1

Rate 4 2 0 Unemployment Unemployment 1970 1980 1990 2000 2010 Years

Figure 5.5: Unemployment Rate in Pakistan

105 The graph of literacy rate (LR) in Pakistan was shown in figure 5.6. The time

period from 1973 to 2005 in years was taken on horizontal axis and literacy rate

in the country was shown on vertical axis respectively. The graph of literacy rate looked like random walk with drift because this graph showed a definite upward trend. Therefore, literacy rate were non stationary series.

Literacy Rate

60 40 Series1 20

Literacy Rate 0 1970 1980 1990 2000 2010 Years

Figure 5.6: Literacy Rate in Pakistan

106 The graph of spread rate (SP) in Pakistani banks was shown in figure 5.7. The

time period from 1973 to 2005 in years was taken on horizontal axis and spread

rate of banks in Pakistan was shown on vertical axis respectively. The graph of

the spread rate looked like random walk. Therefore, spread rate were non

stationary series.

Bank Spread Rate

10 8 6 Series1 4 2 0

Bank Spread Rate Spread Bank 1970 1980 1990 2000 2010 Years

Figure 5.7: Bank Spread Rate in Pakistan

107 The graph of number of workers (NW) migrated from Pakistan to other countries

per annum was shown in figure 5.8. The time period from 1973 to 2005 in years

was taken on horizontal axis and number of workers migrated from Pakistan per

annum were shown on vertical axis respectively. The graph of the number of

workers looked like random walk with drift because this graph showed a definite

upward trend. Therefore, flows of migration rate were non stationary series.

out flow of migrant workers per year

250000 200000 150000 Series1 100000 50000

Number of workers of Number 0 1970 1980 1990 2000 2010 Years

Figure 5.8: Outflow of Migrant Workers from Pakistan per annum

108 The graph of inflation (INF) in Pakistan was shown in figure 5.9. The time period

from 1973 to 2005 in years was taken on horizontal axis and inflation rate in

country was shown on vertical axis respectively. The graph of the inflation rate in

Pakistan looked like random walk. Therefore, inflation rate were non stationary

series.

Inflation Rate

40 30 20 Series1 10

Inflation Rate 0 1970 1980 1990 2000 2010 Years

Figure 5.9: Inflation Rate in Pakistan

109 Chapter 6

Co-integration Analysis

6.1 Introduction

The real remittances model and migration model were specified in this research study to investigate the economic determinants of international remittances and migration in Pakistan. The co-integration among the variables used in these models was found out using two approaches. These approaches were

Augmented Dickey-Fuller (ADF) residual-based approach designed by Engle and

Granger (1987) and the Johansen’s Full Information Maximum Likelihood (FIML) approach planned by Johansen and Juselius (1990). First of all the co-integration of the real remittances model was presented with brief introduction of the co- integration. Later on, the co-integration among the variables used in migration model was determined.

6.2 Co-integration

The basic idea underlying the concept of co-integration was to identify the equilibrium or a long run relationship among the variables. For instance, if series of the variables Y t and X t were stationary after differencing once i.e. I (1) and error term u t from the co-integrating regressions was stationary, i.e. I (0), then the series Y t and X t were co-integrated of order I (1, 0), (Johansen and Juselius,

110 1995). As already pointed out the co-integrating equation was

Y t = α + βX t + u t (6.1)

If the series Yt and Xt were both I (1) and the error term ut was I (0), then the

series Yt and Xt were co-integrated of order I (1, 0). In equation (6.1), β measures

the equilibrium relationship between the series Yt and Xt and ut was the

departure from the long-run equilibrium path. In other words, the series of at least

two variables were co-integrated if a linear combination of these variables existed

which was integrated to an order lower than individual variables.

6.3 Co-integration Analysis of Remittances Model

In the first step, the co-integration among the variables used in the real

remittances model was analyzed based upon the residual test. All the variables

in the real remittances model were non-stationary and were of integrated order

one i.e. I (1) in equation (6.2).

LRREM = β0 + β1LUR + β2LRWR + β3LSP + β4LGR + β5LLR + β6LRGD+e t (6.2)

The equation (6.2) was estimated by OLS method to apply the residual test.

ADF-test was conducted upon the residual et obtained from equation (6.2). The

calculated ADF value of et was -5.99 at .05 per cent level without trend and was -

111 5.89 at .05 per cent level with trend where as the corresponding critical values of

these ADF were -2.96 and -3.57 respectively. It showed that calculated values

were less than the critical values. Therefore, it was concluded that residual et was stationary having integrated order zero i.e. I (0) and other variables including depend as well as explanatory in the model were integrated order one i.e. I (1).

Therefore, co-integration among the variables in equation (6.2) was existed. The co-integration among the variables used in the remittances model was also determined by employing the Johansen’s Full Information Maximum Likelihood

(FIML) approach to overcome the problems encountered in the residual test. For this purpose, the order of VAR was found out and described in the following section.

6.3.1 Order of VAR

It was important to find the order of Vector Auto regression (VAR) model before estimating the Johansen’s co-integration tests. Therefore, the specification of the significant order of lags (p) of the Vector Auto regression (VAR) model was estimated. The order of lags considered to be p = 1 for the annual data (Pesaran and Pesaran, 1997).

112 Table 6.1: Selecting the Order of VAR for the Real Remittances Model List of variables included in the unrestricted VAR:

LRREM LUR LRWR LSP LGR LLR LRGDP

List of deterministic and/or exogenous variables

CONSTANT

Order AIC SBC Adjusted LR test

10 -6.51 -16.16 ------

9 -5.60 -14.68 .04[.83]

8 -5.04 -13.56 .28[.87]

7 -4.09 -12.05 .31[.96]

6 -5.36 -12.74 1.49[.83]

5 -5.59 -12.40 2.13[.83]

4 -5.18 -11.42 2.43[.88]

3 -4.25 -9.93 2.47[.93]

2 -3.47 -8.58 2.59[.96]

1 -3.48 -8.02 3.11[.96]

0 -9.99 -13.97 7.03[.72]

Note: p – values in the parentheses.

AIC=Akaike Information Criterion SBC=Schwarz Bayesian Criterion

Equation 6.3 was used to specify the order of lags of unrestricted vector auto regression (VAR) for VECM modeling in Johansen procedure.

Z t = A t Z t -1 + … + A k Z t -K + µ t (6.3)

113 Where: Zt was (n×1) and each of the Ai was a (n×n) matrix of parameters.

Adjusted LR tests with a maximum of ten lags were carried out to determine the

order of VAR. The results of the real remittances model were given in Table 6.1.

Adjusted LR test statistics, Schwarz Bayesian Criterion (SBC) and Akaike

Information Criterion (AIC) were provided in the Table 6.1 for the selection of the

order of the VAR. The order of VAR was selected as p = 1 on the basis of SBC to

avoid over-parameterization of a time series.

6.3.2 Vectors of Co-integration

The vector of co-integration represented a stationary linear combination of non- stationary variables. There might be more than one co-integrating vectors of the

relevant variables used in the research. In other words, the series of at least two

variables of the same order has at least one co-integrating vector if a linear

combination of these variables existed, which was integrated to an order lower

than individual variables (Johansen and Juselius, 1990). Therefore, it was

necessary to test the presence of co-integration and to determine the number of

co-integrating vectors among the series used in the real remittances model. The

unrestricted intercept and no trend model were used to find the co-integrating

vectors in the Johansen co-integration model. The results of the co-integration

were provided in the Table 6.2. Six co-integrating vectors were selected on the

foundation of the Eigen Value Test. Therefore, it was concluded that the included

variables in the real remittances model were co-integrated.

114 Table 6.2: Johansen Co-integration Results for Real Remittances Model Relationship Hypotheses Eigen values Critical values

H0: r Ha: r

LRREM, LSP 0 1 157.73 46.47

LRWR, LUR, 1 2 64.86 40.53

LG, LRGDP, 2 3 44.18 34.40

LLR 3 4 31.33 28.27

4 5 23.51 22.04

5 6 21.25 15.87

6 7 8.11 9.16

The critical values were given (p = 0.05 per cent) levels for Co-integration.

Table 6.3 provided the co-integration results estimated on the base of Trace

Value Test with unrestricted intercepts and no trends. Six co-integrating vectors were also selected on the basis of Trace Value Test and it was concluded that the included variables in the real remittances model were co-integrated. The results of co-integration presented in Tables 6.2 and Table 6.3 revealed that real remittances model was having six co-integrating vectors on the basis of Eigen

Value Test as well as on the basis of Trace Value Test.

115 Table 6.3: Johansen Co-integration Results for Real Remittances Model Relationship Hypotheses Trace Values Critical values

H0: r Ha: r

LRREM, LSP 0 1 350.98 132.45

LRWR, LUR, 1 2 193.25 102.56

LG, LRGDP, 2 3 128.39 75.98

LLR 3 4 84.21 53.48

4 5 52.87 34.87

5 6 29.36 20.18

6 7 8.11 9.16

The critical values were given (p = 0.05 per cent) levels for co-integration.

6.4 Co-integration Analysis of Migration Model

The co-integration among the variables used in the migration model was analyzed using the both approaches as in case of real remittances model. In the first step co-integration among the variables used in the migration model was analyzed based upon the residual test. The variables included in the migration model were non-stationary and were of integrated order one i.e. I (1) in equation

(6.4).

LNW = β0 + β1LUR + β2LRWR + β3LINF + β4LRREM + et (6.4)

116 The equation (6.4) was estimated by OLS method to apply the residual test.

ADF-test was conducted upon the residual et obtained from equation (6.4). The

calculated ADF value of et was -4.86 at .05 per cent level without trend and was -

4.52 at .05 per cent level with trend where as the corresponding critical values of

these ADF were -2.96 and -3.57 respectively. It showed that calculated values

were less than the critical values. Therefore, it was concluded that residual et was stationary having integrated order zero i.e. I (0) and other variables in the model were integrated order one i.e. I (1). Therefore, co-integration among the variables in equation (6.4) existed. The co-integration among the variables used in the migration model was also determined by employing the Johansen’s Full

Information Maximum Likelihood (FIML) approach. For this purpose, the order of

VAR was found out and described in the following section.

6.4.1 Order of VAR

The estimation of the order of Vector Auto regression (VAR) model was important before the application of the Johansen’s co-integration tests.

Therefore, the order of lags (denoted by p) of the Vector Auto regression (VAR) model were specified and estimated here in this section. Equation 6.5 was used to specify the order of lags of unrestricted vector auto regression (VAR) for

VECM modeling in Johansen procedure.

Z t = A t Z t -1 + … + A k Z t -K + µ t (6.5)

117 Where: Z t was (n×1) and each of the A i was a (n×n) matrix of parameters.

Adjusted LR tests with a maximum of ten lags were carried out to determine the

order of VAR.

Table 6.4: Selecting the Order of VAR for the Migration Model List of variables included in the unrestricted VAR:

LNW LRREM LUR LINF LRWR

List of deterministic and/or exogenous variables

CONSTANT

Order AIC SBC Adjusted LR test

10 7.49 -1.02 ------

9 8.49 .54 .005[.95]

8 5.32 -2.06 2.89[.24]

7 4.87 -1.93 3.91[.27]

6 .83 -5.40 7.41[.12]

5 1.81 -3.86 7.42[.19]

4 2.15 -2.96 7.89[.25]

3 1.40 -3.14 9.10[.24]

2 1.96 -2.02 9.42[.31]

1 -1.38 -4.78 12.43[.19]

0 -1.81 -4.65 13.42[.20]

Note: p – values in the parentheses.

118 The results of the migration model were given in Table 6.4. Test Statistics and

Choice Criteria for Selecting the order of the VAR Model was based on 30

observations from 1976 to 2005 including p = 10 i.e. the order of VAR. Adjusted

LR test statistics, Schwarz Bayesian Criterion (SBC) and Akaike Information

Criterion (AIC) were also provided in the Table 6.4. The order of VAR was

selected as p = 1 on the basis of SBC to avoid over-parameterization of a time

series.

6.4.2 Vectors of Co-integration

The unrestricted intercept and no trend model were used to find the co-

integrating vectors in the Johansen co-integration model.

Table 6.5: Johansen Co-integration Results for Migration Model Relationship Hypotheses Eigen values Critical values

H0: r Ha: r

LNW, LRREM, 0 1 39.58 34.40

LINF, LRWR, 1 2 32.23 28.27

LUR 2 3 19.57 22.04

3 4 8.61 15.87

4 5 3.44 9.16

The critical values were given (p = 0.05 per cent) levels for Co-integration.

119 The results of the co-integration based on Maximal Eigen Value of the Stochastic

were given in Table 6.5. Two co-integrating vectors were selected on the basis of

the Eigen Value Test. Therefore, it was concluded that the included variables in

the migration model were co-integrated.

The results of the co-integration based on Maximal Trace value of the Stochastic

Matrix were given in Table 6.6. Two co-integrating vectors were also selected on

the basis of Trace Value Test and it was concluded that the included variables in the migration model were co-integrated.

Table 6.6: Johansen Co-integration Results for Migration Model Relationship Hypotheses Trace Values Critical values

H0: r Ha: r

LNW, LRREM, 0 1 103.43 75.98

LINF, LRWR, 1 2 63.85 53.48

LUR 2 3 31.62 34.87

3 4 12.05 20.18

4 5 3.44 9.16

The critical values were given (p = 0.05 per cent) levels for co-integration.

The results of co-integration presented in Tables 6.5 and Table 6.6 revealed that

migration model was having two co-integrating vectors on the basis of Eigen

Value Test as well as on the basis of Trace Value Test.

120 Chapter 7

Economic Determinants of International Remittances

7.1 Introduction

The economic determinants of international remittances in Pakistan were

explored in this chapter. The literature review demonstrated that the remittances were dependent upon unemployment rates, wage rates, literacy rates in home as

well as host countries. Similarly, remittances were also related with the economic

conditions of the sending and receiving countries. Therefore, the estimates of the

remittances were considered very important for the policy maker to expand the

remittances and formulate suitable policy. The micro and macro determinants

have an important bearing on the flow and quantum of remittances. In this study,

only macro determinants were explored and their long run and short run effects

were analyzed.

7.2 Long Run Relationship

The variables in the real remittances model were co-integrated exhibiting a long

run relationship. Their long run relationship was determined with ordinary least

square (OLS) method. The results of the OLS estimates were reported in Table

7.1. The first column of the table represents the variables (already defined) in log

form whereas C was the intercept in the first row. The estimated coefficients

were reported in 2nd column. The estimates were significant on the basis of t

121 statistics. No serial correlation among the residuals was detected on the basis of

D-W statistics.

The results in Table 7.1 explained that the real remittances were positively related with the unemployment rate in the country. The coefficient of unemployment rate was estimated 0.718 and was highly significant at 0.01 probability level. It was the partial elasticity of remittances with respect to unemployment because remittances model was specified in the log form. It meant that remittances were increased 0.718 per cent due to one per cent increase in the unemployment rate of the country. It showed that when there was unemployment in the country, people felt unease and frustrated in the country and moved to foreign countries for their livelihood. In this way, migrant brought more remittances in the country. However, the study did not go into the details of the types of unemployment due to limitation of data. Schrooten, (2005) also estimated the determinants of remittances and found unemployment rate as one of the determinants of remittances for the former socialist countries. The results of the present study were robust and consistent with the previous studies.

The real remittances were positively related with the real growth rate and real

GDP of the country. The estimated coefficients of these variables were 0.236 and

3.818 and were found significant at 0.10 and 0.01 probability levels respectively.

122 Table 7.1: Regression Results relating Real Remittances with Independent Variables in Pakistan Variable (Ln) Coefficient Std. Error t-Statistic Prob.

C -9.641 4.858 -1.984** 0.058

UR 0.718 0.346 2.072*** 0.049

RWR -2.164 0.498 -4.341*** 0.0002

SP -0.430 0.144 -2.984*** 0.006

GR 0.236 0.144 1.637* 0.114

LR -6.576 1.460 -4.504*** 0.0001

RGDP 3.818 0.794 4.807*** 0.0001

R2 0.83 Adjusted R2 0.79 Durbin-Watson 2.15

* Indicated that the coefficient was significantly different from zero at 0.10 probability level. ** Indicated that the coefficient was significantly different from zero at 0.05 probability level. *** Indicated that the coefficient was significantly different from zero at 0.01 probability level. Ln indicated that variables were in the logarithmic form.

The real growth rate and real GDP were the signs of prosperity in the country

and attracted more remittances in the country. The migrants tend to send more

remittances for investment motives, thus augmented the real GDP of the country.

Sakka and Mcnabb (1999) concluded that the amount of remittances was

affected positively by the gross domestic product (GDP) of the home country

during the estimation of the macroeconomic determinants of the remittances. The

results of the study also showed that the domestic GDP positively affected the

123 flow of remittances in both its current and lagged forms. However, Schrooten

(2005) showed that growth rate has little impact upon remittances in the short-run

and no effect in the long run. Several other researchers (Rahaman, 2003; Aydas,

2004; Schiopu and Seigfried, 2006) found a positive relationship between the

growth rate and the remittances. The results of this study were consistent with other researchers. However, Chami et al. (2005) found a negative relationship between the growth rate and the remittances.

The real remittances were found negatively related with the spread rate of banks in Pakistan in this study. The estimated coefficient was –0.43 and was highly significant at 0.01 probability level. This indicated that the migrant were not motivated to keep their savings in Pakistani banks. The migrant deposited their saved money in foreign banks due to large spread rate in Pakistan. However,

Schrooten (2005), found a positive relationship between the spread rate and the remittances due to financial innovations in the socialist countries.

The real remittances were negatively related with the literacy rate in Pakistan.

The estimated coefficient of literacy rate was –6.576 and was found significant at

0.01 probability level. The skill, training and education of the migrants and literacy rate of the receiving country were found as the determinants of remittances in literature. Buch and Kuckulenz, (2004) established positive relationship between the illiteracy rates and funds remitted to the home country.

The negative effects of brain drain were counterbalance by the amount of

124 remittances sent to home country from migrant workers (World Bank, 2003).

Rempel and Lobfell, (1978) established weak relation of the remittances toward the level of skills. The flow of remittances started to decline with the stay period of the migrants in the host country (Lucas and Stark, 1985). Therefore, the positive coefficient of education with remittances did not provide any evidence that the brain drain was a cause of a larger flow of remittances. Rodriguez and

Horton (1994) showed that the education of the migrant worker has no impact on the flow of remittances in the case of the Philippines. Faini (2006) recommended that, in general, more skilled migrates were connected with a lesser flow of remittances.

Finally, the real wage rates in Pakistan affected the inward flow of remittances negatively and the estimate of the real wage rate was –2.164. These results were also compared and contrasted with other studies. Swamy, (1981) showed that the number of migrant workers and their salaries in the host country collectively brought 90 per cent changes in the amount of remittances into the home country.

Sakka and McNabb, (1999) found out that wage rate available to the migrant in the host country has a positive and significant impact on the amount of remittances in case of Egypt.

125 7.3 Error Correction Mechanism

The shock led to a short term departure from the co-integrating equilibrium path

in the real remittances. The model was estimated using the error correction mechanism. The short run relationship among the variables was captured by

taking the first difference of the variables included in the model. The results of the

error correction mechanism were reported in Table 7.2. The first difference of real remittances was the dependent variable with the first difference of some

selected explanatory variables in Pakistan. The one year lag of the first

difference of real remittances was also included in the explanatory variables

along with other selected independent variables. This regression analysis

included a sample of 31 observations from 1975 to 2005. The information of two

observations was lost due to inclusion of first difference of variables and lag of

the dependent variable. The estimates of the regression were found significant

on the basis of t statistics.

The results in Table 7.2 revealed that the real remittances were positively related

with the real growth rate and unemployment rate in Pakistan in the short run

period. The estimated coefficients were 0.234 and 0.563 and were significant.

The real remittances were negatively related with literacy rate and spread rates

of the banks in Pakistan. The estimated coefficients were -4.346 and 0.216 and

were significant.

126 The et was the error correction term in this regression model and was calculated

from the long run relationship of the real remittances with the selected

independent variables in Pakistan. The parameter of error correction term was

called adjustment parameter.

Table 7.2: Regression Results relating First Difference of Real Remittances with First Difference of independent variables in Pakistan Variable (Ln) Coefficient Std. Error t-Statistic Prob.

C 0.130 0.069 1.894* 0.0703

∆RREM (-1) 0.494 0.129 3.828*** 0.0008

∆SP -0.216 0.068 -3.167*** 0.004

∆GR 0.234 0.075 3.129** 0.005

∆LR -4.346 2.139 -2.031*** 0.053

∆UR 0.563 0.219 2.568*** 0.017

*** et (-1) -0.944 0.161 -5.835 0.000

R2 0.66 Adjusted R2 0.58 Durbin-Watson 1.72

* Indicated that the coefficient was significantly different from zero at 0.10 probability level. ** Indicated that the coefficient was significantly different from zero at 0.05 probability level. *** Indicated that the coefficient was significantly different from zero at 0.01 probability level. Ln indicated that variables were in the logarithmic form.

127 The value of adjustment parameter was found to be –0.94. The negative sign of

this parameter indicated that level of the real remittances in the short run was

above the level of real remittances in the long run. Therefore, the level of real

remittances showed downward trend and the volume of real remittances was

corrected downward in the short run period approaching to its long run

equilibrium.

7.4 Long Run and Short Run Elasticities

The elasticities of the real remittances with respect to its selected determinants

were considered very important from the point view of policy implications. The

results reported in Table 7.1 and Table 7.2 was useful for estimating the long run

and short run elasticities. The estimates in Table 7.1 and Table 7.2 were

transformed into equation 7.1 and 7.2.

Log RREM = -9.64 + 0.72 Log UR - 2.16 Log RWR - 0.43 Log SP + 0.24 Log GR

- 6.58 Log LR + 3.82 Log RGDP (7.1)

∆ Log RREM = 0.13 + 0.49∆ Log RREM (-1) - 0.21∆ Log SP + 0.23∆ Log GR -

4.34∆ Log LR + 0.56∆ Log UR - 0.94 et (-1) (7.2)

The long run and short run elasticities of the real remittances were calculated by differentiating equation (7.1) and (7.2). The sign ∆ in equation (7.2) denoted the short run relationship among the variables. The results of these elasticities were

128 reported in Table 7.3. The real remittances were considered very sensitive to

determinants having elasticity greater than one. For example, in this study, the

elasticity of real remittances with respect to literacy was very high and explained

that the literacy has long-term and short-term negative effect on the real

remittances. The estimated elasticities of real remittances in Pakistan with

respect to unemployment rate were 0.718 and 0.563 in the long run and the short

run respectively in the present study. Schrooten, (2005) estimated long run and

short run elasticities of remittances with respect to the unemployment rate in the

home country and were .3 and 0.29 respectively. The results were found consistent with the present study.

Table 7.3: Long Run and Short Run Elasticities of Real Remittances in Pakistan Variables Long Run Elasticities Short Run Elasticities

UR 0.718*** 0.563***

RWR -2.164*** Nil

SP -0.430*** -0.216***

GR 0.236* 0.234***

LR -6.576*** -4.346***

RGDP 3.818*** Nil

* Indicated that the coefficient was significantly different from zero at 0.10 probability level. ** Indicated that the coefficient was significantly different from zero at 0.05 probability level. *** Indicated that the coefficient was significantly different from zero at 0.01 probability level.

129 The estimated elasticity of real remittances in Pakistan with respect to real GDP

was 3.818 significantly different from zero at 0.01 probability level in the long run period. However, Sakka and McNabb, (1999) found that the elasticity of remittances with respect to home country GDP was positive in the long run but reported negative in the short run equal to –0.8. The estimated elasticities of real

remittances with respect to spread rates of banks in Pakistan were –0.430 and –

0.216 in the long run and short run periods. Schrooten, (2005) calculated the

elasticity of spread rate in socialist countries and was reported to be 0.19.

7.5 Elementary Analysis of Workers’ Remittances in Pakistan

It was useful to analyze the remittances data during the period 1973 to 2005 to

know the trend of remittances in Pakistan after the empirical investigation of the

Economic Determinants of International Remittances in Pakistan. Therefore, in

this section, the trend of the international remittances in Pakistan and country

wise remittances has been described. The remittances as a percentage of GDP,

Imports, Exports and Savings in the country have also been calculated to know the importance of international remittances in Pakistan. The results were provided in Appendix Table A1, Appendix Table A2 and Appendix Table A3.

130 7.5.1 Trend and Country Wise Remittances in Pakistan

The trend and country wise remittances ($ Million) were presented in Appendix

Table A1 while Appendix Table A2 provide information about the Country Wise

Percentage Share of Remittances in Pakistan. It was revealed that remittances

from the United States were $10 million in 1973, $61.5 million in 1980 and were

$146 million in 1997. It meant that the percentage share of remittances from USA remained around 3 percent to 10 percent between the periods 1973 to 1997. This share of remittances from the USA reached from 11 percent to 33 percent during the period from 1998 to 2005. Therefore, USA emerged as the single largest source of official remittances in Pakistan during 2003 showing 32.6 percent share of total remittances. The annual average share of the United Kingdom in total remittances declined continuously from 53 percent to 5.2 per cent during the period from 1973 to 1984. Similarly, remittances from Saudi Arabia declined from the peak level of 52 per cent in the 1984 to 13.7 per cent in 2003. Remittances from United Arab Emirates increased from 10.4 percent in the 1975 to 19.8 percent in 2003.

The aggregate level of remittances was $136 million in 1972-73, $139 million in

1973-74 and was $1747 million in 1979-80 in Pakistan. The amount of remittances in Pakistan reached to $2.88 billion in 1982-83 with continuous increasing pattern. The pattern of remittances in Pakistan was fluctuating after the period of 1982-83. The volume of remittances has declined from $1.84 billion

131 in 1990-91 to $1.40 billion in 1996-97. However, the remittances again slightly

rose to $1.48 billion during 1997-98 and fell to $0.98 billion in 1999-2000. In the

period of 2002-03, the volume of remittances touched its maximum amount to

$4.23 billion and again came down to $3.87 billion in 2003-04. The volume of

remittances was observed $4.17 billion in the period 2005.

7.5.2 Importance of International Remittances in Pakistan

Pakistan has been one of the major labour exporting countries to the Middle

East. These workers sent a significant amount of their earnings to Pakistan. The

results of remittances as a percentage of GDP, Imports, Exports and Savings in

the country were provided in Appendix Table A3. These results showed that in

the 1973, the international official recorded remittances were equivalent to 2.2

per cent of GDP, 16.9 per cent of exports, 17.2 per cent of imports and were 18.7

per cent of national savings in the country. The remittances were equivalent to

1.7 per cent of GDP, 13.5 per cent of exports, 10.2 per cent of imports and were

22.3 per cent of national savings in 1974. It was observed that the level of remittances were reached in the country during 1980 as equivalent to 8.2 per cent of GDP, 73.9 per cent of exports, 36.9 per cent of imports and 57.6 per cent of national savings. Trend in remittances was reversed during the 1990s. The remittances declined tremendously to 5.5 per cent of GDP, 39.2 per cent of exports, 28.0 per cent of imports and 34.3 per cent of national savings in the

1990s. The decline in oil prices, slowing down in economic activities in the major

132 labour importing countries, in particular in the Middle East, together with

increased competition with other labour exporting countries, and freezing of

foreign currency accounts led to a decline in workers’ remittances during the

1990s.

7.6 Impulse Response Function of Remittances Model

The Impulse Response Function (IRF) traced out the response of the dependent

variable in the VAR system to shocks in the error terms. This shock changed the

dependent variable in the current as well as future periods. Therefore, the

Impulse Response Function (IRF) traced out the impact of such shocks on the

variables included in the relevant model for several periods in the future. The

results of generalized Impulse Response Functions (IRF) for the real remittances

models were given in table 7.4 and figure 7.1. The results showed that one

standard error shock to real remittances caused initial response of 32 percent

after first year till it returned to long run equilibrium. One standard error shock to

the real remittances showed an initial response of -0.002 percent in RGDP that

continued slightly rising to 0.02 percent. In the same way, one standard error

shock to the real remittances regarding growth rate attained long run equilibrium

after first year, unemployment rate received long run equilibrium in the first year,

literacy rate got equilibrium after third year with trend and furthermore real wage rate and spread rate were in the stable long run equilibrium quite in the first year.

133 Table 7.4: Generalized Impulse Response(s) to one S.E. shock in the Equation for LRREM Horizo LRRE LRGDP LGR LUR LLR LRWR n M LSP

0 .2884 -.0019 -.06312 .0040 -.0023 -.0050 -.0828

1 .3221 .0011 .1009 .0213 -.0001 -.0110 -.1070

2 .3231 .0043 .08575 .0228 .0014 -.0110 -.1044

3 .3270 .0073 .0863 .0256 .0029 -.0115 -.1042

4 .3306 .0104 .0855 .0283 .0045 -.0121 -.1038

5 .3342 .0135 .0849 .0311 .0060 -.0126 -.1033

6 .3379 .0166 .0842 .0339 .0076 -.0131 -.1029

7 .3416 .0196 .0835 .0366 .0092 -.0136 -.1025

8 .3452 .0227 .0829 .0393 .0107 -.0141 -.1020

9 .3488 .0258 .0822 .0421 .0122 .0146 -.1016

10 .3525 .0289 .0816 .0449 .0138 -.0151 -.1012

134 Figure 7.1: Generalized Impulse Response(s) For Remittances Model

135 Chapter 8

Economic Determinants of International Migration

8.1 Introduction

The research studies have investigated that the number of migrant workers

(Migration) was the important determinants of the international remittances. The remittances were positively related with number of migrants (Russell, 1986), so it was one of the determinants of remittances. The real earnings of workers and total number of migrants in the host country were consistently found to have a significant and positive effect on the flow of remittances (Swamy, 1981).

The determinants of international migration were explored in this chapter because the causality ran both ways. The remittances were repeatedly found positively related with migration. Therefore, the estimates of the migration were considered very important for the policy maker to enhance the process of migration. A comprehensive and sound migration policy could be formulated on the basis of the estimated result to fetch more remittances in the country.

Therefore, it was imperative to study the determinants of international migration with remittances.

136 8.2 Long Run Relationship

The variables in the migration model were found co-integrated exhibiting a long run relationship. Their long run relationship was determined with ordinary least square (OLS) method. The results of the OLS estimates were reported in Table

8.1.The estimates were significant on the basis of t statistics. No serial correlation among the residuals was detected on the basis of D-W statistics. The results explained that the migration was positively related with the unemployment rate in the country. The coefficient of unemployment rate was 0.709 and was highly significant at 0.01 probability level. It showed that when there was unemployment in the country, people were compelled to leave the home country for their livelihood. Resultantly they move to foreign countries at very high psychic and unbearable logistic costs.

The migration was negatively related with real wage rate in the home country.

The estimated coefficient was -1.58 and was highly significant. The low wage rate forced the workers to move out and caused a massive brain drain from country especially the skilled and professional workers. The recent initiative of the Higher Education Commission to provide salary package commensurate with international level, attracted qualified people to teach in the home country.

The results of the study were compared and contrasted with other studies. Walsh

(1974) estimated the determinants of migration in the Ireland and concluded that

137 the wage rate and unemployment rate differentials between the home and host

countries were significant determinants of the net migration from Ireland. The

results were comparable with the present study.

The migration was found positively related with inflation rate in country and was

highly significant at 0.01 probability level. Therefore, people started to migrate

abroad for fulfilling their basic needs with earned remittances. Particularly, the

worker from the low income segments of the society migrated to foreign countries

under such circumstances.

Table 8.1: Regression Results relating Migration with Independent Variables in Pakistan Variable (Ln) Coefficient Std. Error t-Statistic Prob.

C 9.444 2.094 4.509*** 0.0001

INF 0.453 0.143 3.167*** 0.0037

RREM 0.562 0.111 5.052*** 0.0000

RWR -1.580 0.485 -3.255*** 0.0030

UR 0.709 0.153 4.616*** 0.0001

R2 0.80 Adjusted R2 0.77 Durbin-Watson 1.82

* Indicated that the coefficient was significantly different from zero at 0.10 probability level. ** Indicated that the coefficient was significantly different from zero at 0.05 probability level. *** Indicated that the coefficient was significantly different from zero at 0.01 probability level. Ln indicated that variables were in the logarithmic form.

138 The migration was positively related with the size of the real remittances received

in the country. The estimated coefficient was 0.562 and was highly significant. It

indicated that the increased volume of remittances due to favorable economic conditions in the host countries provided incentives for the migration.

8.3 Error Correction Mechanism

The short run relationship among the variables in the migration model was

estimated using the error correction mechanism. The short run relationship among the variables was captured by taking the first difference of the variables

included in the model. The results of the error correction mechanism were

reported in Table 8.2. The first difference of number of migrated workers i.e.

migration was the dependent variable with the first difference of some selected

explanatory variables in Pakistan. The results in Table 8.2 indicated that

migration was positively related with inflation rate, unemployment rate and real

remittances received in the country in the short run. The negative relationship was observed between migration and real wage rate of the workers in the country.

The adjustment coefficient was -0.54 showing the dynamic process of long run.

The negative sign of this parameter indicated that level of the migration in the short run was above the level of migration in the long run.

139 Table 8.2: Regression Results relating First Difference of Migration with First Difference of Independent Variables in Pakistan Variable (Ln) Coefficient Std. Error t-Statistic Prob.

C -0.010 0.047 -0.226 0.822

∆INF 0.272 0.114 2.380** 0.024

∆RREM 0.442 0.182 2.423** 0.022

∆RWR -0.717 0.497 -1.441 0.161

∆UR 1.283 0.366 3.505*** 0.001

*** Et (-1) -0.544 0.175 -3.095 0.004

R2 0.76 Adjusted R2 0.73 Durbin-Watson 1.75

* Indicated that the coefficient was significantly different from zero at 0.10 probability level. ** Indicated that the coefficient was significantly different from zero at 0.05 probability level. *** Indicated that the coefficient was significantly different from zero at 0.01 probability level. Ln indicated that variables were in the logarithmic form.

Therefore, the level of migration showed downward trend and this level of migration was corrected downward in the short run period approaching to its long run equilibrium.

140 8.4 Long Run and Short Run Elasticities

The elasticities of migration with respect to selected determinants were considered important for policy implications. The results reported in Table 8.1

and Table 8.2 was useful for estimating the long run and short run elasticities of

migration. The estimates in Table 8.1 and Table 8.2 were transformed into

equation (8.1) and (8.2).

Log NW = 9.44 + 0.453 Log INF +0.562 Log RREM – 1.580 Log RWR + 0.709

Log UR (8.1)

∆ Log NW = -0.010 + 0.272 ∆ Log INF + 0.442 ∆ Log RREM -0.717 ∆ Log RWR

+ 1.283 ∆ Log UR- 0.544 et (-1) (8.2)

The long run and short run elasticities of migration were calculated by

differentiating equation (8.1) and (8.2). The sign ∆ in equation (8.2) denoted the short run relationship among the variables.

The results of these elasticities were reported in Table 8.3. The process of migration was very sensitive to determinants having elasticity greater than one.

For example, in this study, the elasticity of migration with respect to wage rate in the long run was greater than one and showing that people will migrate with extended gestation period, however the elasticity of unemployment was greater

141 than one in the short run and people tend to migrate abroad immediately due to

unemployment in the country.

Table 8.3: Long Run and Short Run Elasticities of Migration in Pakistan Variables Long Run Elasticities Short Run Elasticities

INF 0.453** 0.272***

RREM 0.562** 0.442***

RWR -1.580 -0.717***

UR 0.709*** 1.283***

* Indicated that the coefficient was significantly different from zero at 0.10 probability level. ** Indicated that the coefficient was significantly different from zero at 0.05 probability level. *** Indicated that the coefficient was significantly different from zero at 0.01 probability level.

8.5 Impulse Response Function of Migration Model

The results of generalized Impulse Response Functions (IRF) for the migration

model were given in table 8.4 and figure 8.1. The results showed that one

standard error shock to the migration caused initial response of 30 percent after

first year till it returns to long run equilibrium. One standard error shock to the migration showed an initial response of 0.04 percent in real remittances that continued slightly rising to.01 percent in the seven year and became smooth after the seven year. In the same way, one standard error shock to the migration regarding real wage rate and inflation attained long run equilibrium after second

year with slightly rising trend.

142 Table 8.4: Generalized Impulse Response(s) to one S.E. shock in the Equation for LNW Horizon LNW LRREM LUR LRWR LINF

0 .2849 .0163 .0513 -.0024 -.0145

1 .3019 .0400 .0571 -.0042 -.0269

2 .3135 .0606 .0616 -.0044 -.0402

3 .3208 .0763 .0649 -.0039 -.0517

4 .3251 .0874 .0670 -.0032 -.0604

5 .3274 .0946 .0683 -.0025 -.0666

6 .3284 .0989 .0691 -.0020 -.0706

7 .3287 .1014 .0695 -.0016 -.0729

8 .3286 .1025 .0696 -.0013 -.0743

9 .3285 .1030 .0697 -.0011 -.0749

10 .3282 .1031 .0696 -.0010 -.0752

143 Figure 8.1: Generalized Impulse Response(s) for Migration Model

144 Chapter 9

Conclusion and Policy Recommendations

It was observed that international remittances were increased over time in

Pakistan with fluctuating pattern. However, the amount of remittances in Pakistan was found more fluctuating during the period’s from1983-84 to 2004-05. Pakistan received the volume of remittances $136 million in 1972-73, $139 million in 1973-

74. The amount of remittances in Pakistan reached to $2886 million in 1982-83

with continuous increasing pattern. The volume of remittances was declined from

$1,848.3 million in 1990-91 to $1,409.5 million in 1996-97. However, the

remittances again slightly rose to $1,489.5 million during 1997-98 and fell to $983

million in 1999-2000. In the period of 2002-03, the volume of remittances reached to maximum level amounted to $4237 million and again came back to

$3872 during 2003-04.

Pakistan has been receiving international remittances from the different countries of the world because Pakistan has been one of the major labour exporting countries to the Middle East and other countries of the world. These workers sent

a significant amount of their earnings to Pakistan. It was revealed that

remittances from the United States were $10 million in 1973, $61.5 million in

1980 and were $146 million in 1997. It meant that the percentage share of

remittances from USA remained around 3 percent to 10 percent between the

periods 1973 to 1997. This share of remittances from the USA reached from 11

145 percent to 33 percent during the period from 1998 to 2005. Therefore, USA emerged as the single largest source of official remittances in Pakistan during

2003 showing 32.6 percent share of total remittances. The annual average share of the United Kingdom in total remittances declined continuously from 53 percent to 5.2 per cent during the period from 1973 to 1984. Similarly, remittances from

Saudi Arabia declined from the peak level of 52 per cent in the 1984 to 13.7 per cent in 2003. Remittances from United Arab Emirates increased from 10.4 percent in the 1975 to 19.8 percent in 2003.

The results of remittances as a percentage of GDP, Imports, Exports and

Savings in the country explained the importance of remittances over the time in

Pakistan. These results showed that in 1973, the international official recorded remittances were equivalent to 2.2 per cent of GDP, 16.9 per cent of exports,

17.2 per cent of imports and were 18.7 per cent of national savings in the country. The remittances were equivalent to 1.7 per cent of GDP, 13.5 per cent of exports, 10.2 per cent of imports and were 22.3 per cent of national savings in

1974. It was observed that the level of remittances were reached in the country during 1980 as equivalent to 8.2 per cent of GDP, 73.9 per cent of exports, 36.9 per cent of imports and 57.6 per cent of national savings. Trend in remittances was reversed during the 1990s. The remittances declined tremendously to 5.5 per cent of GDP, 39.2 per cent of exports, 28.0 per cent of imports and 34.3 per cent of national savings in the 1990s.

146 The remittances were a permanent source of foreign exchanges in the country and provided supports to the balance of payment. The remittances were used in the country for different purposes at individual and country level. The households have utilized their remittances for consumption and for the expansion of their business. It was the fact that the utilization of remittances was biased toward

consumption rather than investment. It was due to wide spread of poverty and want of investment opportunities in the country. Therefore, it was necessary to provide investment friendly atmosphere in the country to enhance investment for

earning more foreign exchange.

The present study examined the effect of various macroeconomic determinants

on the flows of remittances in Pakistan. The home country variables at macro level were used to obtain determinants of international remittances in Pakistan.

The economic determinants of international migration in Pakistan were also explored in the study. Two econometrics models were specified to estimate the determinants of international remittances and migration. The time series data were collected from secondary sources (i) Federal Bureau of Statistics,

Islamabad; (ii) State Bank of Pakistan, Karachi; and (iii) Bureau of Emigration and Overseas Employment. The unit root test was applied to know the stationaitry of the time series data. Most of the time series data were not stationary. All the data series were stationary after differencing once each series.

Thus, it was concluded that all series used in this research study were of the same order i.e. I (1). Two approaches were utilized to know the co-integration

147 among the included variables in the remittances and migration models. These approaches were the augmented Dickey-Fuller (ADF) residual-based test and the Johansen’s Full Information Maximum Likelihood (FIML) approach. The variables used in the research were found co-integrated. The long run relationship was determined among the variables in both models with the help of ordinary least square method because the variables were co-integrated.

However, error correction model (ECM) was used to observe the short run relationship and adjustment mechanism toward the long run.

The results of the study showed that the real remittances were positively related with the unemployment rate as the coefficient of unemployment rate was estimated 0.719 and was highly significant. The real remittances were also positively related with the real growth rate and real GDP of the Pakistan. The estimated coefficients of real growth rate and real GDP were 0.236 and 3.818 and were found significant. The migrant workers sent more remittances under the circumstances of healthy economic activities for investment motives, which support the balance of payment in the country. Real growth rate and GDP were the indicators of the healthy economy. The coefficient of spread rate was significant with its value –0.43. The coefficient of literacy rate was –6.576 and was also found significant. Finally, the real wage rates in Pakistan affected the inflow of remittances negatively and the co efficient of the real wage rate was –

2.164 and was significant.

148 The determinants of migration from Pakistan were also estimated in the study

and results showed that the migration was positively related with the

unemployment rate in the country. The coefficient of unemployment rate was

0.709 and was highly significant. The real wage rates in the home country have negative impact upon migration with the estimated coefficient of -1.58 and this co efficient was highly significant. Migration was found positively related with inflation rate in the country and was highly significant at 0.01 probability level.

The migration was also positively related with the size of the real remittances received in the country. The estimated coefficient was 0.562 and was highly significant. The findings of the study were comparable with previous studies.

The government policies are considered very important to accelerate the migration from Pakistan to the rest of world to fetch more remittances. The policies those are labour friendly can encourage more remittances in the country.

The bulk of remittances can be used for longer-term growth and income security in Pakistan. The remittances are private transfers; therefore, it is desirable that the policy measures adopted for the promotion of remittances must be incentive- oriented. The following measures were suggested for long run promotion of remittances in Pakistan.

(i) Pakistan is over populated country having shortage of job vacancies.

The niche markets for labour must be searched through proactive

149 labour policies. This will reduce unemployment and increase the

amount of remittances in the country.

(ii) The saving rate was very low in Pakistan due to wide spread of poverty

in the country. The saving can be mobilized through the foreign

remittances in the country. Therefore, Government must streamline the

saving schemes in country to attract the foreign remittances.

(iii) The policies can be formulated keeping in view the creation of

investment climate and provide incentives to the migrants to promote

domestic commerce in Pakistan. Therefore, policies include facilities to

the migrants for importing machinery and equipment at concession

duty rate for investment in forms of enterprises. Pakistani economic

workers must be provided investment opportunities in export

processing zones.

(iv) The guidance should be provided to the migrants for release of

information by the Overseas Pakistani Foundation (OPF) on the

available credit facilities, savings schemes and business advisory

services. Business counseling should also be provided to the migrant

workers for establishing their business in productive sectors.

(v) The effectiveness of incentive schemes in promoting remittances

depends crucially on the ability of the existing banking network to

compete with the informal market. There was a need to realign the

exchange rate with competitive foreign currencies. It is more realistic to

150 introduce financial innovations to capture migrant remittances as

deposits and channel them to existing small and micro-enterprises.

(vi) The effective strategy for attracting remittances into the formal banking

system should include attempts to expand the branch network further,

in order to effectively link overseas workers with the remittance

receiving families and to take on more of the desirable features of the

services offered by the informal network.

(vii) The elasticity of migration with respect to real wage rate was found

negative and was greater than one. The brain drain in the country

might be controlled by higher salary offers to the skilled persons in the

country.

The research field of remittances is vast and various topics about remittances may further be questioned, including: (i) The role of micro financial institutions in linking informal remittances to development of the country can be explored. (ii)

The migrants’ savings can be pooled to form mutual or pension funds for the welfare of the society (iii) the efficiency of formal and informal channels used for the remittances can be compared and improvements may be suggested in the existing banking system in its ability to compete effectively with informal channels. (iv) The impact of remittances upon the different macroeconomic variables can be estimated to know the further importance of the remittances in the country. (v) The role of government policies about the incentive schemes to channel remittances in productive uses can be assessed. (vi) The different

151 prospects of brain drain in Pakistan due to migration can be highlighted and their

solution can be presented.

These questions are considered important for the future avenues and may

provide some help to the researchers working relating to international migration

and remittances in future. Therefore, further issues can be explored on the same topic in the light of the results of present research study.

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161 APPENDIX

Appendix Table A1: Country Wise Remittances ($ Million) in Pakistan Saudi

Years/Countries Arabia UAE UK USA Others Total

1973 7.9 0.0 72.1 10.0 46.0 136.0

1974 10.5 0.0 55.4 14.4 58.7 139.0

1975 17.3 22.6 74.1 19.2 82.9 216.0

1976 46.4 62.4 54.4 25.8 150.1 339.0

1977 158.8 117.8 49.3 29.3 222.5 577.7

1978 464.1 208.3 76.7 51.5 355.7 1156.3

1979 594.4 205.8 119.1 53.6 425.0 1397.9

1980 795.5 216.8 149.7 61.5 523.6 1747.1

1981 984.3 265.4 184.9 71.0 610.3 2115.9

1982 1129.5 224.9 121.3 72.1 677.1 2224.9

1983 1442.0 344.7 161.7 133.5 803.6 2885.5

1984 1441.1 309.0 141.8 105.8 739.8 2737.4

1985 1245.2 301.3 136.0 105.4 658.0 2445.9

1986 1162.9 311.5 223.3 194.5 703.2 2595.3

1987 945.5 278.2 204.9 191.9 658.0 2278.6

1988 821.8 216.6 215.9 177.5 580.9 2012.6

1989 691.6 161.2 171.1 174.8 698.3 1897.0

1990 626.4 143.0 178.2 209.2 785.5 1942.4

Source: Calculated from Handbook of Statistics on Pakistan Economy (2005), SBP

162 Appendix Table A1: Country Wise Remittances ($ Million) in Pakistan (Cont..) Saudi

Years/Countries Arabia UAE UK USA Others Total

1991 682.0 172.0 180.1 190.2 624.0 1848.3

1992 516.2 105.1 137.0 150.3 558.9 1467.5

1993 525.9 97.8 114.0 157.8 666.7 1562.2

1994 493.7 99.4 101.2 122.5 628.9 1445.6

1995 554.1 178.3 110.0 141.1 882.7 1866.1

1996 503.2 161.9 109.7 141.9 544.4 1461.2

1997 418.4 164.4 97.9 146.3 582.5 1409.5

1998 474.9 207.7 98.8 166.3 541.9 1489.6

1999 318.5 125.1 73.6 82.0 461.1 1060.2

2000 309.9 147.8 73.3 80.0 372.9 983.7

2001 304.4 190.0 81.4 134.8 375.9 1086.6

2002 376.3 469.5 151.9 779.0 612.3 2389.1

2003 580.8 837.9 273.8 1237.5 1306.9 4236.9

2004 565.3 597.5 333.9 1225.1 1149.8 3871.6

2005 627.2 712.6 371.9 1294.1 1163.1 4168.8

Source: Calculated from Handbook of Statistics on Pakistan Economy (2005), SBP

163 Appendix Table A2: Country Wise Percentage Share of Remittances in Pakistan Saudi

Years/Countries Arabia UAE UK USA Others Total

1973 5.8 0.0 53.0 7.3 33.8 100.0 1974 7.6 0.0 39.8 10.4 42.2 100.0 1975 8.0 10.4 34.3 8.9 38.4 100.0 1976 13.7 18.4 16.0 7.6 44.3 100.0 1977 27.5 20.4 8.5 5.1 38.5 100.0 1978 40.1 18.0 6.6 4.5 30.8 100.0 1979 42.5 14.7 8.5 3.8 30.4 100.0 1980 45.5 12.4 8.6 3.5 30.0 100.0 1981 46.5 12.5 8.7 3.4 28.8 100.0 1982 50.8 10.1 5.5 3.2 30.4 100.0 1983 50.0 11.9 5.6 4.6 27.8 100.0 1984 52.6 11.3 5.2 3.9 27.0 100.0 1985 50.9 12.3 5.6 4.3 26.9 100.0 1986 44.8 12.0 8.6 7.5 27.1 100.0 1987 41.5 12.2 9.0 8.4 28.9 100.0 1988 40.8 10.8 10.7 8.8 28.9 100.0 1989 36.5 8.5 9.0 9.2 36.8 100.0 1990 32.2 7.4 9.2 10.8 40.4 100.0 Source: Calculated from Handbook of Statistics on Pakistan Economy (2005), SBP

164 Appendix Table A2: Country Wise Percentage Share of Remittances in Pakistan (Cont..) Saudi

Years/Countries Arabia UAE UK USA Others Total

1991 36.9 9.3 9.7 10.3 33.8 100.0 1992 35.2 7.2 9.3 10.2 38.1 100.0 1993 33.7 6.3 7.3 10.1 42.7 100.0 1994 34.1 6.9 7.0 8.5 43.5 100.0 1995 29.7 9.6 5.9 7.6 47.3 100.0 1996 34.4 11.1 7.5 9.7 37.3 100.0 1997 29.7 11.7 6.9 10.4 41.3 100.0 1998 31.9 13.9 6.6 11.2 36.4 100.0 1999 30.0 11.8 6.9 7.7 43.5 100.0 2000 31.5 15.0 7.4 8.1 37.9 100.0 2001 28.0 17.5 7.5 12.4 34.6 100.0 2002 15.8 19.7 6.4 32.6 25.6 100.0 2003 13.7 19.8 6.5 29.2 30.8 100.0 2004 14.6 15.4 8.6 31.6 29.7 100.0 2005 15.0 17.1 8.9 31.0 27.9 100.0 Source: Calculated from Handbook of Statistics on Pakistan Economy (2005), SBP

165 Appendix Table A3: Remittances as Percentage of GDP, Exports, Imports and Savings Year GDP Exports Imports Savings

1973 2.2 16.9 17.2 18.7

1974 1.7 13.5 10.2 22.3

1975 2.1 20.8 10.2 32.1

1976 2.8 29.8 16.4 25.1

1977 4.2 50.6 24.8 33.6

1978 7.2 88.2 41.2 47.8

1979 7.8 81.8 38.0 62.0

1980 8.2 73.9 36.9 57.6

1981 8.5 71.5 39.1 49.8

1982 8.0 90.3 39.6 50.8

1983 11.2 107.1 53.9 59.2

1984 9.9 98.9 48.2 58.4

1985 8.7 98.2 41.4 60.8

1986 9.0 84.5 46.1 54.7

1987 7.6 61.8 42.4 40.3

1988 5.9 45.2 31.5 38.5

1989 5.3 40.7 27.0 33.6

1990 5.5 39.2 28.0 34.3

Source: Calculated from Handbook of Statistics on Pakistan Economy (2005), SBP

166 Appendix Table A3: Remittances as Percentage of GDP, Exports, Imports and Savings (Cont..) Year GDP Exports Imports Savings

1991 4.6 30.1 24.3 28.6

1992 3.4 21.3 15.9 17.6

1993 3.4 22.9 15.7 22.3

1994 3.1 21.2 16.9 17.7

1995 3.4 22.9 18.0 21.3

1996 2.5 16.8 12.4 19.6

1997 2.5 16.9 11.9 19.2

1998 2.6 17.3 14.7 16.4

1999 1.8 13.6 11.2 14.4

2000 1.4 11.5 9.5 8.5

2001 1.6 11.8 10.1 9.3

2002 3.6 26.2 23.1 17.9

2003 5.5 38.0 34.7 24.7

2004 4.3 31.4 24.8 21.5

2005 4.0 29.0 20.2 25.0

Source: Calculated from Handbook of Statistics on Pakistan Economy (2005), SBP

167 LIST OF ABBREVIATIONS

ADF Augmented Dickey Fuller AIC Akaike Information Criterion ARTEP Asian Regional Team for Employment Promotion BZU Bahauddin Zakariya University ECM Error Correction Mechanism EU European Union FCA Foreign Currency Account FCBC Foreign Currency Bearer Certificate FEBC Foreign Exchange Bearer Certificate FIML Johansen’s Full Information Maximum Likelihood GDP Gross Domestic product GOP Government of Pakistan ILO International Labor organization IMF International Monetary Fund IZA International Zeolite Association KSA Kingdom of Saudi Arabia LR Likelihood Ratio MPC Marginal Propensity to Consume NWFP North Western Frontier Province NELM New Economics of labour Migration OECD Organization for Economic Co operation and Development OLS Ordinary Least Square SBC Schwarz Bayesian Criterion SBP State Bank of Pakistan SEE Southeast Europe S&E Science and

168 LIST OF ABBREVIATIONS (Cont..)

SPSS Statistical Package for Social UK United Kingdom UOS University of Sargodha USA United State of America VAR Vector Auto Regressive

169