DISTRIBUTIONAL IMPACT OF FOREIGN REMITTANCES IN PAKISTAN

Abstract

This paper studies the impact of foreign remittances on income distribution for Pakistan by collecting time series data from 1980 to 2010. The dependent variable is income inequality and the independent variables are foreign remittances, trade openness, economic growth and the inflation rate. The data on worker remittances was taken in different forms such as current U.S. dollars and total remittance receipt as a percentage of GDP. The empirical analysis was done by using Johansen’s cointegration test and vector error correction model (VECM). The results indicate that in both of the models, a long-run relationship was present among the variables and short- run analysis showed convergence towards long-run equilibrium. Remittances had a significant and positive impact on income inequality in both the cases. Similarly, trade openness had a significant and positive impact on income inequality, leading to worsening of income distribution. However, economic growth and inflation improved income distribution.