Remittances and the Direction of Structural Transformation: Evidence from Pakistan

Foreign remittances now exceed 5% of GDP in nearly a third of countries. However, despite their growing importance, we know little about how these shape the direction of structural transformation. I exploit sub-national variation in remittance dependence across districts in Pakistan to consider how these affect local labour markets both through own-district exposure and through geographic spillovers. I find that moving from the 25th to the 75th percentile of own remittance dependence raises the construction labour share by 1.0 percentage point, about 9% of the mean. However, the estimate remains imprecise. In contrast, the effect due to geographic spillover is not only large but also robust across specifications. Moving from 25th to the 75th percentile of geographic exposure raises the home district’s construction share by 3.1 percentage points and decreases the retail share by 3.2 percentage points, pointing to reallocation within the non-tradables. The construction boom also tightens regional labour market, increasing wages across sectors, including manufacturing. This pattern is consistent with a local dutch-disease channel where a boom in non-tradables increases factor prices across both non-tradables and tradables, potentially affecting competitiveness of the tradables. Data on household expenditure and input-output linkages support a demand-led interpretation.