Contribution of workers’ remittances to economic growth in Pakistan: exploring the role of financial sector development

Abstract

Since overseas workers’ remittances are the most important source of foreign exchange earnings in Pakistan, their contribution to economic growth has not been rigorously analysed. In this study, we attempt to investigate whether a country’s absorption capacity affects remittances’ response to economic growth or not. The absorption capacity is confined to the development of local financial sector that comprises three different components of financial development. The index of financial sector development is constructed through principal components analysis. To test our hypothesis, we used the autoregressive distributed lag-bound testing approach of co-integration, which is based on time-series data over the period from 1972 to 2011. Our empirical findings validate the hypothesis that the local financial sector development enhances the contribution of overseas workers’ remittances to economic growth in Pakistan.

Keywords:

• workers’ remittances
• economic growth
• financial sector development
• co-integration

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Remittance flows to developing countries increased from $325 billion in 2010 to $351 billion in 2011 with almost 8% growth that could be grown at the same rate until 2014 (World Bank, 2012).

2. According to Government of Pakistan, Government of Pakistan, 2013, working age population can become the asset of a country and can help the country to prosper at a greater rate. It is estimated that the median age in Pakistan is 22 years, which means Pakistan is among those countries which have the highest young population. The total population of Pakistan in 2012–2013 was 184.35 million; out of this, the working population was 110 million. Moreover, the working age population was almost 60% of the total population.

3. In the fiscal year 2011, the inflow of overseas workers’ remittances to Pakistan grew by 25.5% and was placed as the fifth largest overseas workers’ remittances receiving country in the world.

4. For instance, in the fiscal year 2012, Pakistan has received $ 13.786 billion as overseas workers’ remittances.

5. Egypt, Iran, Jordan, Libya, Oman, Pakistan, Qatar, Syria and Tunisia.

6. The increase in M2/GDP ratio increases the financial intermediation and hence financial deepening (King & Levin, 1993).

7. King and Levin (1993), Abu-Bader and Abu-Qarn (2008) and Carrananza, Sancher, and Biscarri (2010); state that the ratio of private credit to nominal GDP is related to quality and quantity of private investment and hence economic growth.

8. Arestis and Demetriades (1997) argue that increases in the ratio of stock market capitalization to nominal GDP improve the ability of capital mobilization.

9. For CUSUM and QUSUMQ figures, see Appendix A.

10. Statistically significant at the 15% level of significance.

11. Statistically significant at 12% level of significance.

12. Statistically significant at the 15% level of significance.