Labour Emigration and its Effects on the Economies of South Asia

Abstract Since the mid-1970s hundreds of thousands of workers have left the South Asian countries for the Middle East on the basis of temporary labour contracts. Their remittances have become their home countries’ most important source of foreign exchange. This paper investigates the impact of this phenomenon on the economic development of India, Pakistan, Bangladesh and Sri Lanka, focussing on growth and structural change. The results suggest that the South Asian countries experienced a short-term boom due to workers’ remittances. However, disaggregation reveals that behind this apparent boom are sectors which have lagged behind in development. The sectors which derive the strongest stimulation are construction and services while agriculture typicaUy displays very much below average growth rates. With the exception of Pakistan, the labour-exporting countries are still characterized by large-scale unemployment, so that the additional demand can to a large ex- tent be satisfied by domestic production. Nevertheless, a considerable share of the additional purchasing power is spent on easily tradable imports. At the same time it is obvious that labour export means only a short-term boom for the South Asian countries; they have not been able to derive any long-term growth effects from it. Only a very small proportion of the billions of dollars of foreign exchange which were remitted to these countries was spent on productive investment, and the migrants themselves have not benefitted by learning new skills which could be useful to the domestic economies. Moreover, the declining demand for South Asian labour makes the destabilizing effects of the migration boom, such as inflation, establishment of an import-oriented consumption pattern, brain-drain and social unrest, apparent.