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 !
Prof. Mian, Is it reasonable to think that the marginal consumption generated by remittances has relatively high import content in aggregate, given Pakistan’s dependence on imported fuel, edible oil, and other key inputs, even if households themselves are mostly buying domestically provided goods and services?
My sense is that this mechanism may be particularly relevant because remittances from the Gulf largely accrue to workers from lower‑income households in Pakistan, who have high MPCs, whereas higher‑income households (who are more likely to consume obviously imported final goods) have lower MPCs.
At the same time, barring directly import‑intensive items like fuel and edible oil, it is not obvious at the micro level how large the “visible” remittance footprint is in final import demand. Would you view the main channel as operating through the import intensity of domestic production, rather than through households explicitly purchasing imported consumer goods?
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.
You're missing a critical point: Wealthy industrialized countries are aging out and that remittance flow will soon dry up. Better to develop domestic consumption than to rely on exports or remittance flows.
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.
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.
Kerala has between 20-35 percent remittance dependence. It has undergone demographic transition and has good HDMI and is attracting a lot of migrants from North India.. But neighbouring TN has expanding manufacturing sector which is generating more wealth. The danger for Kerala is that second and third generation won't return home. Their big houses are empty and not paying property tax. Let us see if CM Vijayan can turn around the economy such that high value adding industries burgeon.
What makes remittances dangerous at scale isn’t just Dutch disease, but political equilibrium lock-in. Once external income substitutes for domestic productivity, elites face less pressure to reform, and the state becomes structurally addicted to exit rather than growth. The tragedy is that migrants’ sacrifice stabilizes the very rents that keep the economy stagnant.
much of this remittance money is spent on buying real estate and storing it as assets. The real estate investment, like gold in pakistan, is a dead investment. not contributing to any economic activity in the short run.
Also, Dr Mian— how do you think governments can regulate this higher spending on imported goods? more taxes?
Man, you are so right! Same crisis in Bangladesh. Not a single person in power sees this. Old school Structural monitorists are ruining the economies. Folks who siphon money and wealth abroad are the largest beneficiaries of an overvalued currency. Unfortunately, they are always in power, hence things won't change.
Prof. Mian, Is it reasonable to think that the marginal consumption generated by remittances has relatively high import content in aggregate, given Pakistan’s dependence on imported fuel, edible oil, and other key inputs, even if households themselves are mostly buying domestically provided goods and services?
My sense is that this mechanism may be particularly relevant because remittances from the Gulf largely accrue to workers from lower‑income households in Pakistan, who have high MPCs, whereas higher‑income households (who are more likely to consume obviously imported final goods) have lower MPCs.
At the same time, barring directly import‑intensive items like fuel and edible oil, it is not obvious at the micro level how large the “visible” remittance footprint is in final import demand. Would you view the main channel as operating through the import intensity of domestic production, rather than through households explicitly purchasing imported consumer goods?
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 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 !
Prof. Mian, Is it reasonable to think that the marginal consumption generated by remittances has relatively high import content in aggregate, given Pakistan’s dependence on imported fuel, edible oil, and other key inputs, even if households themselves are mostly buying domestically provided goods and services?
My sense is that this mechanism may be particularly relevant because remittances from the Gulf largely accrue to workers from lower‑income households in Pakistan, who have high MPCs, whereas higher‑income households (who are more likely to consume obviously imported final goods) have lower MPCs.
At the same time, barring directly import‑intensive items like fuel and edible oil, it is not obvious at the micro level how large the “visible” remittance footprint is in final import demand. Would you view the main channel as operating through the import intensity of domestic production, rather than through households explicitly purchasing imported consumer goods?
Import does not have to be due to family receiving the remittance in GE
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.
You're missing a critical point: Wealthy industrialized countries are aging out and that remittance flow will soon dry up. Better to develop domestic consumption than to rely on exports or remittance flows.
https://endtropy.substack.com/p/the-remittance-loop?r=6xx7nz
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.
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.
Tyler Cowan wrongly accused Prof. Mian of 'Junker fallacy' https://socioproctology.blogspot.com/2019/12/the-junker-fallacy-is-fallacy.html
Kerala has between 20-35 percent remittance dependence. It has undergone demographic transition and has good HDMI and is attracting a lot of migrants from North India.. But neighbouring TN has expanding manufacturing sector which is generating more wealth. The danger for Kerala is that second and third generation won't return home. Their big houses are empty and not paying property tax. Let us see if CM Vijayan can turn around the economy such that high value adding industries burgeon.
What makes remittances dangerous at scale isn’t just Dutch disease, but political equilibrium lock-in. Once external income substitutes for domestic productivity, elites face less pressure to reform, and the state becomes structurally addicted to exit rather than growth. The tragedy is that migrants’ sacrifice stabilizes the very rents that keep the economy stagnant.
Also sustain the purchasing power of the military. Where do you think dollars are coming to buy billion dollar weapon systems.
much of this remittance money is spent on buying real estate and storing it as assets. The real estate investment, like gold in pakistan, is a dead investment. not contributing to any economic activity in the short run.
Also, Dr Mian— how do you think governments can regulate this higher spending on imported goods? more taxes?
Man, you are so right! Same crisis in Bangladesh. Not a single person in power sees this. Old school Structural monitorists are ruining the economies. Folks who siphon money and wealth abroad are the largest beneficiaries of an overvalued currency. Unfortunately, they are always in power, hence things won't change.
Prof. Mian, Is it reasonable to think that the marginal consumption generated by remittances has relatively high import content in aggregate, given Pakistan’s dependence on imported fuel, edible oil, and other key inputs, even if households themselves are mostly buying domestically provided goods and services?
My sense is that this mechanism may be particularly relevant because remittances from the Gulf largely accrue to workers from lower‑income households in Pakistan, who have high MPCs, whereas higher‑income households (who are more likely to consume obviously imported final goods) have lower MPCs.
At the same time, barring directly import‑intensive items like fuel and edible oil, it is not obvious at the micro level how large the “visible” remittance footprint is in final import demand. Would you view the main channel as operating through the import intensity of domestic production, rather than through households explicitly purchasing imported consumer goods?
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.