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)
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