Anatomy of Remittances
By Shahid Javed Burki

How can the authorities in Islamabad tap the large wealth and incomes of the expatriate Pakistanis living and working abroad? How can the resources available to the rich Pakistani community residents in North America become available for economic use in Pakistan? Is there a role for the government at all in turning to the expatriates for promoting development at home?
The government’s intervention in the past was not very helpful in bringing resources to Pakistan. In the mid-1970s, Prime Minister Zulfikar Ali Bhutto, aware of the enormous amount of aggregate income of the Pakistani workers in the Middle East, attempted to first channel the remittances through government-owned banks and then tax them to generate resources for the public sector.
He was told by his advisors that economic theory was on his side since some of the skills the workers were putting to use in the Middle East to earn large incomes had been acquired in government institutions. This was then the payback time.
Even if the government could find an economic reason for making such a move, it had not counted on the deep-seated cultural antipathy of the citizens of Pakistan towards taxes.
The workers simply stopped using government channels for sending remittances. They simply moved towards the hawala system, making it virtually impossible for the authorities to track incomes they could tax. Remittances moving through official channels declined significantly. A sobered government withdrew the tax.
The second attempt for tapping non-resident Pakistanis was made by prime minister Nawaz Sharif. He dispatched Sartaj Aziz, his finance minister, to address a gathering of Pakistani physicians in the United States, to ask them to make contributions to a special Prime Minister’s fund.
The fund was being established to pay back a part of the rapidly increasing tax burden the country was carrying. This appeal to patriotism was rebuffed and an embarrassed Aziz returned home empty-handed.
There are several lessons to be learned from these attempts. A government that presides over a weak system of tax administration cannot hope to tax incomes earned abroad by its citizens working in foreign lands.
Even the United States, which probably has one of the most efficient systems of tax collection in the world, does not target the incomes of its citizens if they are living abroad. It only taxes foreign incomes when they are earned by its residents.
Second, governments should not use a sense of patriotism to generate revenues for itself. There is, however, a bit of a history to support the view that on occasions such an approach can be justified.
In the first decade or two after Pakistan’s birth, the government was able to appeal to its citizens to contribute to various funds established for specific purposes such as refugee relief or aid for victims of floods.
Nawaz Sharif’s government was perhaps guided by these precedents. It did not succeed for the reason that reducing the burden of debt - especially when it was acquired by the government’s own profligacy - was not going to give rise to charitable impulses.
Reducing debt cannot be seen as providing relief to the victims of natural or man-made disasters and a debt relief fund was not the same thing as funds for refugee rehabilitation or flood relief. Besides, in the 1990s, much of the enthusiasm that had prompted the first generation of Pakistanis to contribute to various relief funds had largely dissipated.
These experiences do not suggest that governments have no role to play. They can make an important contribution by creating what economists now call an “enabling environment.”
A government can contribute to the creation of opportunities which would be seen as attractive by potential investors. It can provide information through various mechanisms to the expatriate communities on the opportunities available in the homeland that could earn handsome dividends for the non-resident investor.
Governments can also target their citizens living and working abroad to raise funds through various kinds of bonds. This was done very successfully by India a few years ago through the flotation of “patriot bonds.”
Although a sense of patriotism was invoked and billions of dollars flowed into these instruments, it was not because of the love of the homeland. Non-resident Indians bought the bonds for basically two reasons. They found the terms appealing and they had developed enormous confidence in their homeland’s economic future. I will return to these government roles next week.
In planning to tap resources from expatriate communities, it is important to recognize that the members of these groups send back money for a variety of reasons. At least four of these are important for purposes of policy. The first, and by far the most important reason is to help family and friends who are still living in the homeland.
This is the principal motivation for remitting money for low-income migrants, or for migrants who have relatives and friends in the home country in need for financial assistance.
My guess is that some two-thirds to three-fourths of the current flow of remittances of some $4 billion a year coming into Pakistan is provided in response to this need.
This type of flow has considerable economic benefits. It is not wasted by the recipients as was generally the belief in Pakistan in the 1970s and 1980s when billions of dollars flowed into the country’s poorer areas.
While this is a good subject for policy research, it would be safe to assume that a significant amount of this flow goes into poverty redressal and into human development. It is put into health care, education, shelter, clothing, and improving the water supply.
All these are basic needs that the poor are not able to adequately satisfy from their own meager resources. I have argued in some of my writings that remittances from abroad had a great deal to do with the sharp reduction in the incidence of poverty in the 1980s.
There are at least two roles governments can play in facilitating this type of flow and in making its use more efficient. They can help to bring down the cost of transmission by requiring the banking system to reduce what is called the float - the time that elapses between the placement of the amount at a particular bank for remittance and the time when it is released to the beneficiary.
This is a popular way for the banks to increase their incomes from handling remittances. The government’s regulatory system can also prescribe the fee banks are allowed to charge these customers.
Governments can also help the recipients to handle the windfall incomes that remittances sometimes represent. They can introduce savings instruments the poor can use and which are easily accessible to them.
Some countries use post offices to sell such instruments; in some other countries retail outlets have been allowed to charge a small commission for selling small denomination government bills to potential investors; in some places governments have used “mobile banks” that travel from village to village or between small towns to sell such instruments. Regulatory systems should also encourage commercial banks and thrift institutions to reach the small savers.
The second type of remittance by non-residents working abroad is charity, a significant proportion of which is given to the poor by the members of the expatriate communities on home visits.
Some of this money also goes into the funding of non-government organizations that have developed programs of assistance the expatriates like. Giving for charity depends on the average incomes of the communities resident abroad; the higher the incomes the more likely that this type of flow will go through organized channels.
Fund raising functions - dinners and various kinds of galas - have become part of the social life of the well-to-do expatriate communities in the United States. Most of these are sponsored by non-government organizations that have registered themselves with the authorities, and which allows them to receive contributions that are tax-exempt.
In this way a dollar worth of contribution effectively pulls in about 20 to 25 cents worth of US government money into charity. Some of the better organized non-government organizations that began life in Pakistan have also set up affiliates in the United States to take advantage of this provision in the tax code.
The Edhi Foundation and Shaukat Memorial Hospital are two examples of Pakistan-based charities that periodically bring their fund-raising activities to the United States.
The third type of remittance is of relatively recent origin and is directed at providing resource-starved social sectors of additional funds. The non-resident Indian community, the NRIs, have been very active in this area. A group of wealthy expatriates from India who had made fortunes in the sectors of finance and high-tech founded a foundation that raised hundreds of millions of dollars to fund the establishment of a world-class business school in Hyderabad.
The school is now up and running and is affiliated with the prestigious Wharton School of Pennsylvania University and Kellog School of Chicago University. Within a few years, the Hyderabad institute has put itself on the map for advance training in business and financial administration.
The Pakistani community in the United States had yet to move in this direction. If anything, Pakistan needs institutions such as the one in Hyderabad more than India does.
What is perhaps keeping the Pakistani communities in the United States from venturing into this area is the same set of reasons that has inhibited human development at home.
There is now some recognition that without skill development, Pakistan will not be able to modernize its economy and become fully integrated into the global economic system.
This has led the private sector to invest in building institutions such as the Lahore University of Management Sciences and the Beacon House University, also at Lahore. Institutions such as these could become the focus of charitable giving by the Pakistani communities in the United States.
Pakistani expatriates in America are taking some interest in assisting organizations that aim to bring literacy to the more backward areas in the country. The Association of Pakistani Physicians of North America - better known by its acronym, APPNA - played a pioneering role in this area. Some of the active members of this well-established organization have founded non-government organizations that are raising money from the expatriates to establish and manage schools in several remote areas of the homeland.
The innovative skills now being deployed by the management of the Human Development Foundation in Pakistan were learned by its founder while doing charity work under the aegis of APPNA.
Finally, the fourth type of flow that produces the remittance stream is made up of various types of investments being made by the members of the expatriates community. There is an enormous potential in this flow; it could increase manifold from the current relatively low levels. I will return to this subject in the article next week. (Courtesy Dawn)


Editor: Akhtar M. Faruqui
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