I would add a couple of points, first that out of the 10 million, many are men with families back home, these are families without the father figure, which becomes relevant when the mother tries to cope with sons nearing or in their teens by bribing with pocket money in attempts to buy peace; these sons are likely to grow up into spoilt brats, who might even turn to crime; there could be 2 sons per such family - our future generation. The second point is that the 10 million also finance the hawala market (remittances that did not come through), this is what finances the investment abroad of ill-gotten wealth, as well as under invoicing and smuggling, with all the economic consequences of that. We are a nation where Pakistanis have savings, but as a country a large portion of our PKR savings are not invested but consumed by our government, while some of our savings are invested in other economies. The irony is that Pakistanis' savings are larger than Pakistan's.
When 10% of money flows into Pakistan, it has no immediate effect on GDP. When remittances are consumed it raises consumption C by 10%. However, what if for economy as a whole it results in 10% higher import as well (ie remittances finance imports)
In this case effect on GDP is zero.
Now you can generate positive effects, but negative as well.
The broader point is remittances should not be thought of as output / growth !
But doesnt just the inflow of remittances automatically increase the spending power of the families so in turn greater consumption and hence your C goes up considerably? Or is it because maybe the I and G are not in tandem with the C?
As Atif sahib mentions, yes consumption increases GDP but is offset by increases in imports. Considering Pakistan doesn’t produce much of what its people want, then in reality most of this consumption is spent on imports.
The essential takeaways from Dr. Atif's analysis could be summarised as follows:
1. Pakistan's population of 260 million is sharply divided between an affluent minority of elite and an ever increasing majority of poverty-stricken masses, which are dependent for their survival on remittances received from their relatives abroad;
2. There's a continuous degradation in ethical & moral values: among the elite for larger aggrandisement and for the poor to stay alive. Beg, borrow, or steal is the common norm for both;
3. There's a complete cartelisation of the economy by the elite;
4. Factors for regulating or planning the economy are either not free or interested in attending to the obvious issues that need addressing to for getting us out of our predicament.
Dear Atif . A big fan of yours and would have love to see your suggestions being implemented. Regarding remittances i have a different theory which is just food for thought. I think a large part of the remittances are in fact proceeds of exports which are held abroad by exporters as they underprice exports and a bulk of exports is routed through their own companies based abroad. My logic for this is that if all the remittances were from workers then we should see a surge of remittances in first week of every month when every salaried person receives the salary and should taper down for the remaining three weeks; but daily remittance flows are very stable throughout the month with no major spikes which defies logic.
Bringing transparency between revenue and expenditure of GoP is important. That is possible only by open ledger like Blockchain. Open ledger will help eliminate/limit corruption.
Isn't the last para self-conflicting? Please help me understand the argument that an overvalued exchange rate helps rent-seeking and the sugar industry elite in their external purchasing power. Thanks.
I don’t know how is this idea of free remittance is floated in market. But the local banks are charging SAR 30 on all remittances and it works like. Whenever I send any remittance from overseas to my bank account in Pakistan the local bank is deducting SAR 30 from my account as a fee and it was imposed by State Bank almost 2 years ago, and the ironically there is a tax on that fee as well. So none of the remittance I send from overseas is free at all.
The current hike in remittance is not because all of sudden overseas Pakistanis started earning a lot but it’s a policy loop hole being manipulated by our exporters. Govt is giving a rebate on the income of IT exports which is taxed at 0.25% to 1.00%, and all of sudden so many IT companies are registered in SECP. Even Textile exports has registered such companies and bringing their money via those companies and enjoying this lower Income Tax. This is a new form of Tax Evasion solely created by the Govt and is to reward the business elite.
Also the IT companies have re-hired their permanent employees as freelancer since the IT export income do not have tax and the employee gets more in this way, otherwise he would have to pay 30% on salaries received in PKRS.
This all Remittance increase is a another way of HAWALA system propelled by Govt.
1) It is a lifeline for the government but it is also a dependency bordering on addiction, without which it will not be able to repay it's foreign currency debt or finance current account deficit. This addiction leads to more consumptions.
2) It is inherently inflationary. Goods and services are produced abroad while money circulates in local economy.
Thanks for articulating the dilemma of Pakistan macroeconomic policies using simple ratios and comparative trends. You answered the question posed in the title within the last sentence of the article. I am curious to know how many countries made up the GDP per capita band comparable to Pakistan. Did you use any other ratio to test the sensitivity of the make-up of this group.
Your point on partnership with local entities for technology transfer is very valid. However, I observe that Pakistan domestic business sector suffers from lack of free market practices leading to uncompetitive behaviour driven from elitism.
Overall, it is an excellent article that succinctly explore the relationship between foreign remittances and its unwitting support to wealth generation for elites.
your remittance economy has made up for the lack of an IT export sector...i think in india's case the service export surplus and remittances cover for abt 10% gdp
Thanks Atif for talking about this topic which is essentially the most important social/economic reality of Pakistan.
I would however suggest that remittances have contributed significantly to growth in Pakistan.
My own assessment is that booming private educational, health, recreational and real estate would have been impossible without remittances. They have become the foundation of a strong services economy albeit structurally challenging export led growth.
Since we have seen that elite consensus around open international trade is gone, the reality remains that export oriented growth model is no more available as a sure way to move up the ladder for countries like Pakistan.
In comparison, global demographic winter is powerful reality that offers Pakistan a very strong opportunity to grow using this model.
Its cultural value is so strong, I suspect no policy could easily replace exit corridors.
-why can't these remittances lead to consumption (in Pakistan's case cement, white goods etc - on the flip side, jewelry, and real estate which offsets the positives) and then investment - assuming the rise in C is funded by a drop in net exports perhaps assumes more than it should.
- if the Central Bank sterilizes these flows, wouldn't it lead to lower credit in the system and thus lower investments, and then consumption.
The trade off is not so straight forward - in my lay opinion
It is "predicted remittances-to-GDP" from a regression of this variable on GDP per capita and its square. The predicted value is the conditional mean from this regression for Pakistan's level of income
I would add a couple of points, first that out of the 10 million, many are men with families back home, these are families without the father figure, which becomes relevant when the mother tries to cope with sons nearing or in their teens by bribing with pocket money in attempts to buy peace; these sons are likely to grow up into spoilt brats, who might even turn to crime; there could be 2 sons per such family - our future generation. The second point is that the 10 million also finance the hawala market (remittances that did not come through), this is what finances the investment abroad of ill-gotten wealth, as well as under invoicing and smuggling, with all the economic consequences of that. We are a nation where Pakistanis have savings, but as a country a large portion of our PKR savings are not invested but consumed by our government, while some of our savings are invested in other economies. The irony is that Pakistanis' savings are larger than Pakistan's.
What percentage of Pakistan’s economy runs on remittances
Is it a big part of the gdp?
(Love your work .Have read house of debt and follow you very closely
Love from India,Atif)
10%GDP. These aren't taxes as revenue to government.
Thats not a lot, dont you think?
I have heard a lot of pakistani economists talk about remittances when talking about pakistan economy like its 30 or 40 percent
Why is that?
The effect of remittances on GDP can be zero.
Y = C + I +G - M + X
Y is GDP, ie domestic production in Pakistan.
When 10% of money flows into Pakistan, it has no immediate effect on GDP. When remittances are consumed it raises consumption C by 10%. However, what if for economy as a whole it results in 10% higher import as well (ie remittances finance imports)
In this case effect on GDP is zero.
Now you can generate positive effects, but negative as well.
The broader point is remittances should not be thought of as output / growth !
But doesnt just the inflow of remittances automatically increase the spending power of the families so in turn greater consumption and hence your C goes up considerably? Or is it because maybe the I and G are not in tandem with the C?
As Atif sahib mentions, yes consumption increases GDP but is offset by increases in imports. Considering Pakistan doesn’t produce much of what its people want, then in reality most of this consumption is spent on imports.
The essential takeaways from Dr. Atif's analysis could be summarised as follows:
1. Pakistan's population of 260 million is sharply divided between an affluent minority of elite and an ever increasing majority of poverty-stricken masses, which are dependent for their survival on remittances received from their relatives abroad;
2. There's a continuous degradation in ethical & moral values: among the elite for larger aggrandisement and for the poor to stay alive. Beg, borrow, or steal is the common norm for both;
3. There's a complete cartelisation of the economy by the elite;
4. Factors for regulating or planning the economy are either not free or interested in attending to the obvious issues that need addressing to for getting us out of our predicament.
Great post! Does this include crypto/USDT remittances? The numbers could be even higher
Dear Atif . A big fan of yours and would have love to see your suggestions being implemented. Regarding remittances i have a different theory which is just food for thought. I think a large part of the remittances are in fact proceeds of exports which are held abroad by exporters as they underprice exports and a bulk of exports is routed through their own companies based abroad. My logic for this is that if all the remittances were from workers then we should see a surge of remittances in first week of every month when every salaried person receives the salary and should taper down for the remaining three weeks; but daily remittance flows are very stable throughout the month with no major spikes which defies logic.
Bringing transparency between revenue and expenditure of GoP is important. That is possible only by open ledger like Blockchain. Open ledger will help eliminate/limit corruption.
Isn't the last para self-conflicting? Please help me understand the argument that an overvalued exchange rate helps rent-seeking and the sugar industry elite in their external purchasing power. Thanks.
I don’t know how is this idea of free remittance is floated in market. But the local banks are charging SAR 30 on all remittances and it works like. Whenever I send any remittance from overseas to my bank account in Pakistan the local bank is deducting SAR 30 from my account as a fee and it was imposed by State Bank almost 2 years ago, and the ironically there is a tax on that fee as well. So none of the remittance I send from overseas is free at all.
The current hike in remittance is not because all of sudden overseas Pakistanis started earning a lot but it’s a policy loop hole being manipulated by our exporters. Govt is giving a rebate on the income of IT exports which is taxed at 0.25% to 1.00%, and all of sudden so many IT companies are registered in SECP. Even Textile exports has registered such companies and bringing their money via those companies and enjoying this lower Income Tax. This is a new form of Tax Evasion solely created by the Govt and is to reward the business elite.
Also the IT companies have re-hired their permanent employees as freelancer since the IT export income do not have tax and the employee gets more in this way, otherwise he would have to pay 30% on salaries received in PKRS.
This all Remittance increase is a another way of HAWALA system propelled by Govt.
1) It is a lifeline for the government but it is also a dependency bordering on addiction, without which it will not be able to repay it's foreign currency debt or finance current account deficit. This addiction leads to more consumptions.
2) It is inherently inflationary. Goods and services are produced abroad while money circulates in local economy.
3) Good for poor families to survive
Thanks for articulating the dilemma of Pakistan macroeconomic policies using simple ratios and comparative trends. You answered the question posed in the title within the last sentence of the article. I am curious to know how many countries made up the GDP per capita band comparable to Pakistan. Did you use any other ratio to test the sensitivity of the make-up of this group.
Your point on partnership with local entities for technology transfer is very valid. However, I observe that Pakistan domestic business sector suffers from lack of free market practices leading to uncompetitive behaviour driven from elitism.
Overall, it is an excellent article that succinctly explore the relationship between foreign remittances and its unwitting support to wealth generation for elites.
your remittance economy has made up for the lack of an IT export sector...i think in india's case the service export surplus and remittances cover for abt 10% gdp
Excellent analysis, these remittence income and high pensions make our young lot lazy and idle. They are getting used to of easy money. Thanks
Thanks Atif for talking about this topic which is essentially the most important social/economic reality of Pakistan.
I would however suggest that remittances have contributed significantly to growth in Pakistan.
My own assessment is that booming private educational, health, recreational and real estate would have been impossible without remittances. They have become the foundation of a strong services economy albeit structurally challenging export led growth.
Since we have seen that elite consensus around open international trade is gone, the reality remains that export oriented growth model is no more available as a sure way to move up the ladder for countries like Pakistan.
In comparison, global demographic winter is powerful reality that offers Pakistan a very strong opportunity to grow using this model.
Its cultural value is so strong, I suspect no policy could easily replace exit corridors.
Doc Sahib,
-why can't these remittances lead to consumption (in Pakistan's case cement, white goods etc - on the flip side, jewelry, and real estate which offsets the positives) and then investment - assuming the rise in C is funded by a drop in net exports perhaps assumes more than it should.
- if the Central Bank sterilizes these flows, wouldn't it lead to lower credit in the system and thus lower investments, and then consumption.
The trade off is not so straight forward - in my lay opinion
May I please ask which country is the "similar income country' in your comparison chart
It is "predicted remittances-to-GDP" from a regression of this variable on GDP per capita and its square. The predicted value is the conditional mean from this regression for Pakistan's level of income
Is this also a lesson for software remote workers to build in Pakistan and getting to an SF tech salary level of revenue here is worth far more?