The economic impact of international remittances on household consumption and investment in Pakistan

During the last decade there has been a phenomenal increase in the flow of international remittances received by the developing countries in general, and Pakistan in particular. In 2013, officially recorded remittances to Pakistan amounted to US $14.6 billion and were six times more than the official development assistance received. In order to investigate how the receipt of international remittances affects the average and marginal spending behaviour of households, this paper uses nationally representative household income and expenditure survey data for Pakistan to analyse households’ consumption behaviour on five different categories of goods: food, education, health, non-durables and durables. Understanding that the decision of a household member to migrate and remit money may not be taken at random and to control for endogeneity, a two-stage Heckman model is used to address the selection in unobservable heterogeneity. Two findings emerge. First, expenditure share on food for households that receive remittances would have been more if the households had not been receiving remittances. Similarly, less spending on the other four categories of education, health, non-durables and durables is predicted for remittances- receiving households had they not been receiving remittances. Second, households that receive remittances spend less at the margin on food and durables and more on education, health and non-durables. At the mean, compared to households that do not receive remittances, the households receiving remittances spend, at the margin, 10 per cent and 4 per cent less on consumption of food and durables, respectively. Moreover, the respective marginal increase in spending on education and health is 26 per cent and 6 per cent more for a remittances-receiving household than for a non-receiving household. Finally, the households receiving remittances spend, at the margin, 14 per cent more on non-durables (which includes their spending on housing, and is thus akin to investment in physical capital) than the households with no remittances. A key policy feature of these results is the likely positive impact of remittances on economic development. Remittances provide an alternative way to finance development by the way of increased spending on human capital or education as well as physical capital. Remittances-receiving households appear to look at the remittance earnings as a transitory income and therefore tend to spend remittances more on investment than consumption. This finding lends support to the permanent income hypothesis.