ECONOMIC DETERMINANTS OF INTERNATIONAL REMITTANCES IN PAKISTAN 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.