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Linkages between Income Inequality, International Remittances and Economic Growth in Pakistan

Shahbaz, Muhammad and Ur Rehman, Ijaz and Ahmad Mahdzan, Nurul Shahnaz (2013): Linkages between Income Inequality, International Remittances and Economic Growth in Pakistan.

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Abstract

This paper explores the dynamic linkages between income inequality, international remittances and economic growth using time series data over the period of 1976-2006 in case of Pakistan. The cointegration analysis based on the bounds test confirms the existence of a long-run relationship between income inequality, international remittances and economic growth. Our results reveal that income inequality and international remittances enhance economic growth. The causality analysis based on innovative accounting approach shows bidirectional causality between income inequality and economic growth and same is true for international remittances and income inequality. International remittances are cause of economic growth but not vice versa.

Although we find support for Kuznets hypothesis but Pakistan is yet to benefit, in terms of reducing the gaps of income inequality, from the international flow of remittances and economic growth. The paper argues that, from a policy perspective, there is an urgent need for policy makers in Pakistan to reduce the widening gap of income inequality by focusing on income redistribution policies and to go beyond the traditional factors in balancing income inequality.

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