Workers’ Remittances Inflows And Per Capita Income: Does U-Shaped Relationship Exist In Case Of Pakistan?

Abstract

This study empirically investigated existence of U-Shaped relationship between workers’ remittances inflows(WRI) and per capita income(PCI) in Pakistan. WRI can increase or decrease growth in per capita income depending on whether positive effects outweigh negative effects or vice versa. It is possible that in initial phase remittances affect growth negatively and in the later phase positively or vice-versa implying non-linearity. The study applied Johansen’s Cointegration method to find long run relationship among variables using time series annual data from 1991-2017.  The Error Correction Method was used to reconfirm long run relationship. The sources of time series data were World Development Indicators, World Bank and Pakistan Labour Force Survey (Various issues), Pakistan Bureau of Statistics. The results indicated that at first stage WRI affect per capita income negatively and later on after threshold level (WRI as percentage of GDP equal to 2.34) affect positively thus confirming existence of U-shaped relationship in case of Pakistan. The negative and significant coefficient of lagged ECM term in short run model confirmed convergence of the series towards equilibrium. It takes time for the benefits of WRI to outweigh their costs in the developing countries. The policy implication of the study is that optimal use of WRI is important for improvement in PCI in Pakistan. Policy makers need to understand nonlinear relationship where remittances affect growth positively after achieving certain threshold level.