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Journal of Policy Modeling 37 (2015) 291–307

Do refugee-immigrants affect international trade?

Evidence from the world’s largest refugee case夽
Sucharita Ghosh a,∗ , Ali Enami b,1
a The University of Akron, Department of Economics, Akron, OH 44325, United States
b Tulane University, Department of Economics, New Orleans, LA 70118, United States
Received 3 May 2014; received in revised form 22 May 2014; accepted 4 January 2015
Available online 12 February 2015

Abstract
This paper investigates the impact of refugees on a developing host country’s bilateral trade with the
source country using a Vector Error Correction model and Granger causality tests. Using the largest case of
refugee settlements in the world, we look at how refugees moving over several decades from Afghanistan to
Pakistan have affected bilateral trade both directly and indirectly. We find that changes in Afghani refugees
do not Granger cause movements in bilateral trade between Afghanistan and Pakistan but foreign aid to
Afghanistan does Granger cause trade between the two countries.
© 2015 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.

JEL classification: C32; F10; F22

Keywords: Protracted refugees; International trade; Vector error correction; Developing countries; Causality

1. Introduction

There is a vast literature on the impact that immigrants have on a developed host country’s trade
balance via their knowledge of their home economies which lowers transactions costs of bilateral

夽 We would like to thank the editor, three anonymous referees, Greg Madonia and Michael Nelson for their insightful

comments and suggestions. All remaining errors are, of course, our own.
∗ Corresponding author. Tel.: +1 330 972 7549.

E-mail addresses: sghosh@uakron.edu (S. Ghosh), aenami@tulane.edu (A. Enami).

1 Tel.: +1 504 865 5321.

http://dx.doi.org/10.1016/j.jpolmod.2015.01.011
0161-8938/© 2015 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
292 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307

trade, and through their preferences for their home economies goods (Gould, 1994; Head & Ries,
1998; Lewer & Van den Berg, 2008; Wagner, Head, & Ries, 2002; White, 2007, 2008). However,
most of these studies do not distinguish between the two broad immigrant categories, refugees
and non-refugee immigrants, and almost all of the studies look at the impact of immigration on
trade in developed countries.2 Refugee flows differ from standard migration in two ways: first, the
flow of refugees is typically a simultaneous group movement of individuals escaping persecution
in their home country versus a sequenced movement of economic immigrants who are individuals
seeking better jobs and economic security (Cortes, 2004); and second, the flow of refugees tend
to be predominantly from poor economies (Stark, 2004).
While developed countries typically accept refugees in a planned manner with predetermined
numbers, developing countries accept refugees in an ad hoc manner with no prior plans. More-
over, the impact of refugees on the host country’s economy is determined to some extent by its
stage and rate of economic development (Sesay, 2004). The United Nations High Commissioner
for Refugees’ (UNHCR) estimates that in 2011 there were 10.4 million refugees in the world
with most refugees migrating to neighboring countries and only 17 percent of refugees leaving
the geographical region (UNHCR, 2011). War, violence and oppression are shown to be the fun-
damental reasons behind why refugees are created (Hatton & Williamson, 2004) and since most
of the world’s conflicts occur in less developed countries, refugee immigration tends to primarily
affect their neighboring and, thus, similarly less developed countries (Sesay, 2004). According to
UNHCR data, at the end of 2012, an overwhelming 8.5 million refugees were hosted in developing
countries, which is equal to about 81 percent of the global refugee population. Another important
difference between the refugee issue in developing countries and developed countries is the time
period that a refugee remains in this status, what is formally known as the protracted refugee
situation (PRS). The significant socio-economic problems that protracted refugees cause to host
countries are more specific to developing host countries (UNHCR, 2004).
Refugees from Afghanistan have been flooding to Pakistan for several decades and UNHCR
describes the Afghans in Pakistan to be the “largest and most protracted refugee population in
the world” (UNHCR, 2013a). During the period 2008–2011, Afghanistan ranked as the highest
source country for refugees whilst Pakistan ranked as the highest host country (UNHCR, 2011).
The total number of Afghani refugees was 2.66 million in 2011 of which the highest percentage,
63%, reside in Pakistan (UNHCR, 2013a). The most recent report available on the UNHCR
website on Mid-Year Trends 2013 still reports Pakistan as being the top refugee-hosting country
with 1.86 million refugees, almost all coming from Afghanistan. From an economic perspective,
this flow of refugees over several decades provides us with an opportunity to study the long-term
effect of the presence of refugees on a developing host country’s international trade. Refugees that
enter Pakistan may arrive with too few resources to have a short-run impact on trade. However,
in the long run, as they assimilate into the host country the consensus in the immigration-trade
literature suggests refugees should have a positive impact on trade.
Protracted refugees could also affect the international trade indirectly. While both the sending
and the supporting countries require international aid during a refugee crisis, Czaika and Mayer
(2008) show that bilateral aid is allocated primarily to the country from where refugees originate.3

2 The exceptions are papers by Head and Ries (1998) and White and Tadesse (2010) which investigate the impact of

refugees in two developed countries, Canada and U.S., respectively.

3 Using a sample of 18 donor and 146 recipient countries, Czaika and Mayer (2008) show that during 1992–2003,

short-term emergency aid to all types of refugee situations is primarily given to the countries of origin. For long-term
development aid, donor countries give even more to the home countries of refugees.
 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307 293

Thus foreign assistance to Afghanistan could potentially impact its bilateral trade balance with
their strategic trading partner, Pakistan, since closer cultural ties between two countries increases
the amount of trade (Guo, 2004) as does geographical proximity (Berthelon & Freund, 2008).
This study thus investigates the impact that refugees from Afghanistan have on Pakistan’s
international trade balances and contributes to the literature on three fronts. First, it provides
insight into the impact that immigration has on a developing country’s trade balances. Pre-
vious work on immigration-trade linkages have typically focused on developed countries as
the host country.4 Second, we focus on the impact that refugee immigrants have on inter-
national trade in the developing host country, both direct and indirect, which, to the best of
our knowledge, has not been investigated in the immigration-trade literature. Previous work
on refugees’ impact on international trade has focused only on its direct effect on developed
countries (Head & Ries, 1998; White & Tadesse, 2010). From a policy perspective, it is impor-
tant to understand whether similar positive, albeit miniscule, direct effects are seen amongst
developing countries since the literature on the impact of refugees typically reports on the neg-
ative economic effects of refugees (see Section 2 for further discussion). Also, focusing on
refugees allows us to see whether the network and cultural effects used to explain the stan-
dard immigration-trade links in the literature holds in the case of refugees or not. In the case of
developing countries, refugees typically migrate to neighboring countries which share a similar
culture, religion and, in some cases, language with the source country. Thus, the immigration-
trade linkages argued in the literature via the cultural impact may not necessarily hold in
this case (Artal-Tur, Pallardó-López, & Requena-Silvente, 2012). However, the indirect chan-
nel that stems from increased foreign aid to the country from where refugees originate might
play an important role in increasing trade between home and host developing countries. Third,
our study introduces the application of Vector Error Correction Model to study the dynam-
ics of factors that affect bilateral trade between Afghanistan and Pakistan which, to the best
of our knowledge, has not been previously used in the literature. Genc, Gheasi, Nijkam, and
Pot’s (2011) meta-analysis of the current literature shows that the main model used in many
previous studies is typically the gravity model which does not allow for the possibility of inte-
gration of the series being used, nor does it allow for the possibility of cointegration amongst
the variables. As discussed in Section 3, this can cause serious problems in the estimation of
parameters.
The results of our study show that traditional variables used in a gravity model within a
vector error-correction framework can explain bilateral trade. However, changes in the number of
refugees do not Granger cause fluctuations in bilateral trade flows. The results remain robust to
alternate model specifications and are further collaborated by Impulse Response Functions. On
the other hand, we do find that per capita inward foreign financial flow (FDI and foreign aid) to
Afghanistan Granger causes more trade between two countries. Based on the impulse-response
analysis, we find that the main driver of this relationship is foreign aid rather than FDI. Thus, the
main policy implication of our results is that even though refugees do not have any direct effect
on bilateral trade between the source and the host country, they do have a strong, indirect effect
on bilateral trade.
The remaining part of paper is organized as follows. Section 2 discusses previous work in
the literature on the economic impact of refugees and Section 3 briefly describes the protracted

4 The exception is Ehrlich and Canavire Bacarreza (2006) who study the impact of immigration and emigration on

Bolivia’s trade from 1990 to 2003.

294 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307

refuges situation in Pakistan. Section 3 describes the data and methodology. Section 4 has the
empirical results while Section 5 concludes.

2. The economic impact of refugees

There is a vast literature that looks at the impact of immigration on the host country and
on a variety of economic dimensions such as wages, employment, economic growth, trade and
international relations, fiscal outcomes, human capital, total factor productivity and technical
changes.5 From a policy perspective, policy-makers can directly control immigration which affects
population and labor market growth and this, in turn, determines the welfare of the economy
(Cobb-Clark, 1998; Shimada, 2005). However, there are a limited number of studies that provide
empirical evidence on the economic impact of refugee-immigrants on the host country. This
section briefly reviews the empirical literature on the impact of refugees on various economic
variables in the host economy and, more specifically, their impact on international trade.

2.1. Non-trade effects of refugees on the host countries’ economy

A study by Alix-Garcia and Saah’s (2010) investigates how refugee camps established in
western Tanzania due to refugee inflows from Burundi and Rwanda in 1993–1994 affects the
prices of items in local markets. They conclude that native populations are hurt due to the increase
in price of non-aid and aid-related food items in nearby markets as a consequence of established
refugee camps. Baez (2011) looks at the same refugee flow event from Burundi and Rwanda to
Tanzania but focusses on the human capital impact of refugee camps on the outcomes of local
children. The paper shows that refugees have a negative impact in the short-run and long-run on
the health outcomes and education of children living close to refugee camps. Hartog and Zorlu
(2011) also look at the human capital dimension of refugees but instead focus on the education
refugees already have before arriving in Netherlands and its impact on labor market outcomes for
these refugees. Their conclusion is that the education acquired by refugees in their home country
does not pay off in higher earnings during the first 5 years in the Dutch labor market.
Studies by Bollinger and Hagstrom focus on refugees in the United States. The first study
(Bollinger & Hagstrom, 2008) looks at the food stamp program participation of refugees in the
United States and concludes that while refugees are more likely to use food stamps than other
immigrants, refugee’s usage tends to decline more rapidly than other immigrants. The second study
(Bollinger & Hagstrom, 2010) looks at the economic status of refugees and finds that holding
labor market conditions and demographic characteristics constant, refugees are less likely to be
officially poor compared to non-refugee immigrants and natives. However, refugees are far more
responsive to changes in unemployment than non-refugee immigrants or native born, with refugee
poverty increasing relative to both immigrants and natives during times of rising unemployment.
There are two theoretical studies that are worth noting which provide analytical tools in this
context. Stark (2004) discusses three fundamental aspects (i.e. fear, poverty, and group movement)
that differentiate refugees from other immigrants. On the other hand Hatton and Williamson (2004)
formalize the dynamic process that allows the economic analysis of why refugees seek political
asylum in developed countries and its impact on native-born in the host country.

5 There are several comprehensive surveys of immigrants’ impact on the host economy available in the literature (for

example see Borjas, 1999; Friedberg & Hunt, 1995; Poot & Cochrane, 2005).
 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307 295

Some studies pay more attention to the economic performance of refugees over time (Cortes,
2004; Waxman, 2001). Cortes (2004) distinguishes between “economic immigrants” and refugees
on the basis of their ability to return to their home country. The study finds that while refugees
have lower earnings upon arrival in the United States, a decade after their arrival, they earn 20%
more income, work 4% more hours and improve their English skills by 11% compared to eco-
nomic immigrants. In addition, refugees over time tend to accumulate more human capital than
economic immigrants in the host country, the United States. Waxman (2001) investigates the
long-term effect of the English skills of refugees arriving in Sydney, Australia from 3 countries,
Bosnia, Afghanistan and Iraq on their labor market outcomes. He concludes that there is a “sig-
nificant relationship between English language competency and the likelihood of being gainfully
employed” (p. 1).

2.2. Impact of refugees on international trade

We find a limited number of studies which have investigated the effect that refugees have
on international trade. In contrast, the effect of standard immigration on international trade has
received widespread attention both theoretically and empirically (Gould, 1994; Head & Ries,
1998; Lewer & Van den Berg, 2008; Wagner et al., 2002; White, 2007, 2008). The consensus in the
literature is that immigrants can influence trade via their preferences for goods as well as through
the information channel which reduces transactions costs.6 Since immigrants have a preference
for goods, especially differentiated goods, they consumed in the country of their last residence,
they have a direct impact on a country’s imports (Head & Ries, 1998). Additionally, immigrants
bring their knowledge of their home country’s opportunities, contacts, customs, law, language
and business practice which when combined with their personal contacts or business liaisons can
lower transaction costs of trade in both exports and imports (Artal-Tur et al., 2012). Meta-analysis
of the existing literature on the impact of immigration on trade shows that immigrants increase
the host country’s trade balance (Genc et al., 2011; Lin, 2011). Specifically, Genc et al. (2011)’s
meta-analysis finds that the immigration elasticity of trade is positive and approximately equal to
0.15.
Why would we expect refugees to have a different impact on international trade compared
to standard immigrants? Refugees fundamentally differ from other immigrants in that they are
unwilling to return to their home country due to the fear of persecution. Thus the standard argument
used for immigrants who can have a positive impact on bilateral trade via their network ties that
lowers trade transaction costs may not apply to refugees due to their tenuous links with their
home countries. Additionally, White and Tadesse (2010) discuss that most refugees that arrive in
developed countries do so after spending some time in a third transition country where they may
have adapted their tastes and preferences to goods and services available there. Thus refugees’
impact on the host country trade may differ from standard immigrants who often arrive directly
from their home countries and transplant their home bias consumption effects in the host country.
There are two studies by Head and Ries (1998) and White and Tadesse (2010) that differentiate
between standard immigrants and refugees arriving in a developed country. Both use the gravity
model framework to investigate how refugees influence international trade in their host developed
countries. Head and Ries (1998) look at the period 1980–1992 to determine immigrants’ impact on

6 Lewer and Van den Berg (2008) measure and discuss some of the other channels through which immigrants affect

trade.
296 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307

Canada’s trade with 159 partner countries. They look at 5 classes of immigrants, family, refugee,
independent, entrepreneur, and other business class, and find that refugees increase trade by the
smallest amount. The study by White and Tadesse (2010) looks at immigrants that have arrived in
the United States from 59 countries from 1996 to 2001 and find a similar considerably lower effect
on trade for refugee immigrants comparing to non-refugee immigrants. Both studies suggest that
the reason behind this lower effect is the weaker network linkages between the refugees and their
home countries.

3. The protracted refugee situation of Afghan refugees in Pakistan

A protracted refugee situation (PRS) is defined as “one in which 25,000 or more refugees of the
same nationality have been in exile for five years or longer in any given asylum country” (UNHCR,
2013b: p. 12). Based on the latest available estimates from 2012, there are 30 such situations in
existence globally in 25 host countries which accounts for 6.4 million refugees (UNHCR, 2013b).
While the number of protracted refugees has decreased from 2010, compared to the early 1990s,
the average length of remaining in this state has increased from 9 years to almost 20 years (Milner
& Loescher, 2011).
Protracted refugee situations impose different economic, social, environmental and security
challenges on host countries (Jacobsen, 2002; UNHCR, 2004) but these are similar to what
holds for other types of immigrants (e.g. Kohler, 2004; Marr & Siklos, 1994; Rhee, Lee, & Cho,
2005; Weyerbrock, 1995). The case for positive effects of a PRS for the host country is made
both theoretically and empirically (Jacobsen, 2002) with the effects being both direct (e.g. cheap
labor) or indirect (e.g. roads that are built by UNHCR). It is argued that these positive effects for
host countries could be increased if barriers to utilize refugees’ resources, including their human
capital, are removed (Milner & Loescher, 2011).
The largest and longest case of PRS in the world is hosted by Pakistan which has 1.6 million
registered refugees with about 40 percent living in refugee camps and about 60 percent living
in urban and rural host communities all over Pakistan (UNHCR, 2014). Refugee outflows from
Afghanistan have occurred over three periods in recent history: (i) 1980–1989, during the Soviet
invasion and occupation; (ii) 1990–1999, during the political oppression of the Najibullah and
Taliban governments; and (iii) 2000–2002, during a period of severe drought in Afghanistan and
when foreign troops entered Afghanistan in pursuit of Osama Bin Laden (Groenewold, 2006).
Since Pakistan is not a signatory to the 1951 Convention Relating to the Status of Refugees
or the 1967 Protocol Relating to the Status of Refugees, Pakistan manages the temporary stay of
registered Afghan refugees in Pakistan by issuing Proof of Registration cards. These cards are
important to the Afghan refugees since it gives them the legal right to remain in Pakistan and
avoid deportation under Pakistan’s Foreigner’s Act. The refugee cards expired at the end of 2012
and were later extended for an additional 6 months until June 2013. In July 2013 the government
of Pakistan decided to further extend the temporary stay of Afghan refugees and since February
2014, Pakistan’s government with the assistance of UNHCR, has started to issue new refugee
cards to the 1.6 million registered Afghan refugees which are now valid till December 31, 2015.
Between 2002 and 2013, 3.9 million Afghans have returned home through UNHCR’s largest
voluntary repatriation program. UNHCR has spearheaded the Solutions Strategy for Afghan
Refugees inaugurated in May 2012 in Geneva. It is a regional policy arrangement between
Afghanistan, Pakistan, Iran and UNHCR to find a solution to the Afghan PRS. The strat-
egy supports repatriation, sustainable reintegration and assistance to host countries. Currently
 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307 297

UNHCR pays $150, paid inside Afghanistan, to each Afghan refugee that voluntarily returns
home (UNHCR, 2013c).

4. Data and empirical methodology

The main variables used in this study, their sources and summary statistics are presented in
Table 1. Our sample period covers 1982–2010, the most complete length of time for which all our
required data are available. We see that the average number of Afghani refugees in Pakistan for
the past three decades has been close to 2 million and exceeds 3 million in some years. Even at
its lowest level, 2009, there were still a million refugees residing in Pakistan. Based on the latest
available statistics for 2013, about 1.6 million Afghani refugees reside in Pakistan. The average
value of trade between the two countries is about $335 million and has been increasing since 2001
as has per capita inward foreign financial flows to Afghanistan, both in terms of foreign direct
investment and foreign aid to Afghanistan.7
We follow the current literature on immigrant-trade links (i.e. the gravity model) to model
the bilateral trade between Afghanistan and Pakistan (Trade) as a function of the product of per
capita real GDP of both countries (PCGDP), the number of Afghan refugees living in Pakistan
(Refugees) and Per capita Inward Foreign Financial Flows to Afghanistan (PCIFFF) which is
the sum of Per capita Foreign Direct Investment in Afghanistan and Per capita Foreign Aid to
Afghanistan.
Additionally, we control for the two events that have affected the political stability of both
countries during our sample period with a dummy variable for the Taliban regime in Afghanistan
from 1996 to 2001 (Taliban) and a dummy for the change in the political system in Afghanistan
in 2001 after the defeat of this regime (Post-Taliban). Before setting up our model, we tested
whether the variables Trade, PCGDP, Refugees and PCIFFF are exogenous or not. The results
of this test are reported in Table 2 and show that none of the variables were exogenous using the
Granger (1969) causality test and so we assume they are endogenous. Our model thus consists of
four endogenous variables, Trade, PCGDP, Refugees and PCIFFF, and two exogenous variables,
Taliban and Post-Taliban, and so the system is modeled as a Vector Autoregressive model.
We adopt the four-step methodology of Ghosh and Yamarik (2007) to examine the relationship
between Afghani refugees and bilateral trade between Afghanistan and Pakistan. The first step
entails determining whether all the variables are stationary since we would get spurious results with
ordinary least squares estimation if the variable are not stationary (Granger & Newbold, 1974). We
use the Augmented Dickey-Fuller (Dickey & Fuller, 1979) and Phillips-Perron (Phillips & Perron,
1988) unit root tests for variables in their level form and the results are reported in Table 3(a).
We find that all of the variables are not stationary but after taking a first difference (Table 3(b))
the above unit root tests show that all four variables are stationary at the 10 percent significance
level.
In the second step, since all variables have a unit root in their level forms, it is necessary to
check for the possibility of cointegration between these variables. We utilize the Johansen (1995)
test for cointegration to determine if there is any cointegration between the variables assuming

7 However, there are large variations in refugee flows, trade, and per capita inward foreign financial flows. Between 1982

and 2011, the average year-to-year (absolute value of) variation in refugee flows is 17 percent with a standard deviation
of 31 percent; the average year-to-year (absolute value of) variation in trade is 38 percent with a standard deviation of
29 percent; and the average year-to-year (absolute value of) variation in per capita inward foreign financial flows is 60
percent with a standard deviation of 82 percent.
298 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307

Table 1
Variable description.
Variable Definition Source(s) Obs Mean Min Max

Trade Bilateral trade UN-COMTRADE 30 335,608,783 4,323,919 2,046,464,420

between Afghanistan
and Pakistan which is
reported by Pakistan
and is equal to the sum
of total exports and
imports of Pakistan
from Afghanistan
PCGDP Total per capita real US-DOA, WB 44 190,762.2 120,921.6 427,206.7
gross domestic
product. It is
calculated by
multiplying real per
capita GDP of
Afghanistan with the
real per capita GDP of
Pakistan
PCIFFF Per capita inward UNCTAD, US-DOA, WB 32 58.07 1.29 235.14
foreign financial flow
to Afghanistan. It is
calculated by adding
per capita FDI in
Afghanistan and per
capita foreign aid to
Afghanistan
Refugees Number of Afghani UNHCR 33 1,896,610 758,616 3,272,290
refugees in Pakistan
Post-Taliban A dummy variable for – 29 0.34 0 1
years after the 9/11
attacks when the
Taliban regime was
replaced by a new
government and is
equal to one if the
year is equal or more
than 2002
Taliban A dummy variable – 29 0.21 0 1
which captures the
years that the Taliban
controlled the
government in
Afghanistan and is
equal to one for the
years 1996 to 2001

UN-COMTRADE: United Nations COMTRADE online database (2013) using Broad Economic Categories (BEC) and
the Standard International Trade Classification, Revision 2 (SITC Rev. 2); US-DOA: U.S. Department of Agriculture
online database (2013); WB: World Bank online database (2013); UNCTAD: United Nation Conference on Trade and
Development online database (2013); UNHCR: United Nations High Commissioner for Refugees online database (2013).
Note: Monetary values are in U.S. dollars.
 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307 299

Table 2
Granger-causality tests for exogenous variable (i.e. whether the value of a variable is determined out of the system).
H0: LHS does not cause RHS DF Chi-square Pr > Chi square

PCGDP, Refugees, PCIFF, Taliban, Post-Taliban  Trade 10 66.19 <0.0001

PCGDP, Trade, PCIFF, Taliban, Post-Taliban  Refugees 10 64.07 <0.0001
Refugees, Trade, PCIFF, Taliban, Post-Taliban  PCGDP 10 67.65 <0.0001
PCGDP, Trade, Refugees, Taliban, Post-Taliban  PCIFF 10 139.41 <0.0001

Table 3
Augmented Dickey-Fuller and Phillips-Perron unit root tests (models used for the tests are without intercept and time
trend variable).
Variable Augmented Dickey-Fuller unit root test Phillips-Perron unit root test

Rho Pr < Rho Tau Pr < Tau Rho Pr < Rho Tau Pr < Tau

(a) Variables in their level

Trade 5.3926 0.9999 2.08 0.9889 6.1496 0.9999 2.3 0.9933
PCGDP 2.1202 0.9867 0.87 0.8915 2.6403 0.9952 1.82 0.9806
PCIFFF 1.8604 0.9783 1.13 0.9284 1.7373 0.9728 1.18 0.9347
Refugees −5.4027 0.1002 −1.73 0.0794 −4.6062 0.1304 −1.67 0.089
(b) Variables in the first difference form
Trade −40.877 <0.0001 −2.61 0.0112 −29.0313 <0.0001 −3.29 0.0019
PCGDP −7.6458 0.0462 −1.87 0.0597 −17.0024 0.0016 −3.63 0.0008
PCIFFF −8.701 0.0319 −1.98 0.0473 −31.5936 <0.0001 −5.93 <0.0001
Refugees −33.7497 <0.0001 −3.74 0.0006 −25.8412 <0.0001 −4.85 <0.0001

Note: All the variables are standardized assuming a standard normal distribution. Moreover, the type of model that is used
for this test is without intercept and time trend variables and uses one previous (lag) value. The selection of the number
of lags is based on AICc, the corrected version of the Akaike Information Criterion.

Table 4
Johansen co-integration rank test using trace under restriction (no intercept).
H0: Rank = r H1: Rank > r Eigenvalue Trace 5% critical value

0 0 0.6502 58.609 53.42

1 1 0.5884 31.2981 34.8

no intercept or time trend variable in the model. If the variables are cointegrated then instead of
a Vector Autoregressive Model (VAR), we would use a variation of the Vector Error Correction
Models (VECM). Since this test is sensitive to the number of lag values used for the test, we
decided to use the bias corrected version of Akaike Information Criterion (i.e. AICc) developed
by Hurvich and Tsai (1989) to determine the number of lags for each endogenous variable. We find
that the best number of lags to be included in the model is two. The results of the Johansen (1995)
test, reported in Table 4 show that there is one cointegration process (i.e. Rank = 1). Typically,
the number of lags for the dummy variables to be included in the model is left to the researcher’s
discretion; we choose to use one lag value for each dummy variable.8

8 Our main result of the paper remains robust to alternative models where the dummy variables have lag values other

than one.
300 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307

Based on our above results in the second step, we thus use a Vector Error Correction Model
with Exogenous variables, VECMX (2, 1) in the third step to model the dynamics of our system.
This model is presented in Eq. (1):
Yt = AYt−1 + BYt−1 + C(Post-Talibant ) + D(Post-Talibant−1 )
+ E(Talibant ) + F (Talibant−1 ) + εt (1)
where Yt represents a (4 × 1) vector of the first difference of 4 endogenous variables (i.e. Trade,
PCGDP, PCIFFF and Refugees). Subscripts t and t − 1 refer to the current period and the previous
period, respectively. Yt−1 is a (4 × 4) matrix of endogenous variables in the previous period, t − 1,
and Yt−1 is a 4 × 4 matrix of the lagged first difference of endogenous variables. Finally, the
exogenous variables, Post-Taliban and Taliban are (4 × 1) vectors and εt is a (4 × 1) vector of
white noise. Letters A to F are used to represent the matrices of corresponding coefficients that
will be estimated for this system.
In the fourth and last step, we use Granger (1969) causality tests on the VECMX (2, 1)
model to determine whether Afghan refugees causes more bilateral trade between Afghanistan
and Pakistan. We also utilize the impulse response function to further analyze the relationship
between these two variables. The results of the third and fourth steps are discussed in the next
section.

5. Empirical results

Eq. (2) reports the parameter estimates for the coefficients in Eq. (1).9
Tradet = −0.83Tradet−1 + 0.14PCGDPt−1 + 0.45PCIFFFt−1 − 0.15Refugeest−1
(0.22) (0.04) (0.12) (0.04)

+ 0.10Tradet−1 − 0.51PCGDPt−1 + 0.26PCIFFFt−1

(0.18) (0.33) (0.21)

+ 0.17Refugeest−1 + 0.09Post-Tabilant + 0.05Post-Tabilant−1

(0.08) (0.20) (0.23)

− 0.10Tabilant − 0.06Tabilant−1 (2)

(0.18) (0.17)

Since there is one cointegration process in the system, a long run relationship between endoge-
nous variables of the model exists which can be only identified if one of the parameters is
normalized to one. For the purpose of this study, the parameter of Trade is normalized to one and
therefore the resulting vector of long run parameters becomes (1, −0.17, −0.54, 0.18).10
The final step is the Granger causality test which identifies the relationship between the main
variables of the model and is reported in Table 5. These tests determine whether refugees have any
direct or indirect positive effects on trade which has potential policy implications. From the trade
point of view, if refugees do not Granger-cause international trade then this could be interpreted
as a sign of neutrality of trade to any volunteer or forced repatriation of refugees. However, if

9 While all four dependent variables are estimated based on the previous values of all variables (including dummy

variables) for the purpose of parsimony we only report the coefficients which are related to the model when Trade is the
dependent variable. We use Maximum Likelihood Estimation and standard errors are reported in parentheses.
10 This vector should be viewed as: Trade = 0.17PCGDP + 0.54PCIFFF − 0.18Refugees.
 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307 301

Table 5
Granger-causality tests.
H0: LHS does not cause RHS DF Chi-Square Pr > Chi square

Refugees  Trade 2 2.69 0.26

Trade  Refugees 2 0.33 0.84
PCGDP  Trade 2 10.99 0.0041
Trade  PCGDP 2 9.68 0.0079
PCFFFA  Trade 2 32.51 <0.0001
Trade  PCFFFA 2 2.23 0.33

refugees do Granger-cause international trade then any type of refugee repatriation would harm
bilateral trade. On the other hand, if the tests show that the only effect of refugees on bilateral
trade is indirect, then the policy of volunteer repatriation should be continued since it reduces
the negative effects of protracted refugees on the host country without harming the trade balance
between two countries.
Table 5 shows that Refugees do not Granger cause Trade (and vice versa).11 This supports
the idea that refugees by having more tenuous links to their home country do not have the
network advantage that standard immigrants have which lowers transaction costs and increase
exports and imports. Additionally, unlike standard immigrants who move directly to a host
developed country and transplant their bias for home country goods preferences to the host
country, refugees may not have this need. We know from UNHCR data that an overwhelm-
ing majority of refugees move directly from their home developing country to a neighboring
host developing country. Thus in the case of refugee-migration amongst developing countries
the similarity of consumer goods reduces the need for importation since the goods may be
available locally. The insignificant effect of refugees on bilateral trade in this study also pro-
vides further evidence that future studies in this area should not combine different groups of
immigrants since refugees tend to have minimal or no effect on international trade; we get
better insight into the effect of immigration on trade by differentiating between the immigrant
groups.
We find some other important causal relationships as shown in Table 5. As expected, according
to the standard gravity model of international trade, greater GDP leads to more trade, and vice
versa. One of the more interesting results of the Granger-causality tests is the fact that inward for-
eign financial flows in terms of both foreign direct investments and international aid to Afghanistan
has caused trade between Afghanistan and one of its major partners, Pakistan, to increase. How-
ever, more trade has not Granger-caused more foreign financial inflows. In order to determine
whether it is the FDI component or the foreign aid component of PCIFFF that Granger-causes
more international trade we use impulse response analysis. As it is shown in Fig. 1A and B,
bilateral trade between two countries responds much more to a shock to per capita foreign aid
to Afghanistan rather than a shock to per capita FDI in this country. Combining this result with
the earlier findings of the Granger causality test of refugees on trade, the general conclusion of
these tests is that while refugees do not have any direct effect on trade, refugees do have a positive
indirect effect, through foreign aid, on trade.

11 These results are similar to what is found for developed host countries by Head and Ries (1998) and White and Tadesse

(2010) where refugees have the least effect on the bilateral trade of the US and Canada, respectively.
302 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307

Fig. 1. Impulse Response Function: response of trade to impulse in (A) per capita foreign aid and (B) per capita FDI in
Afghanistan (with 2 standard errors).

To check the robustness of our main result that Refugees do not Granger-cause Trade we
conduct the Granger causality tests with three alternative models which are reported in Table 6.
First, we only estimate the model for the time period up to the attacks of 9/11 which resulted in
the end of the Taliban regime, 1982–2002 (Alternative Model 1).12 Second, instead of PCIFFF,

12 We cannot estimate the model for the time period after 2002 since the time frame is insufficient for a VECMX (2, 1)

model to be estimated.
 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307 303

Table 6
Granger-causality tests for alternative models.
H0: LHS does not cause RHS DF Chi-square Pr > Chi square

Refugees  Trade 2 3.41 0.1817

Alternative Model 1
Trade  Refugees 2 0.77 0.6788
Refugees  Trade 2 2.82 0.2445
Alternative Model 2
Trade  Refugees 2 0.12 0.9418
Refugees  Trade 2 2.69 0.2606
Alternative Model 3
Trade  Refugees 2 0.33 0.8480

we use Foreign Direct Investment (FDI) in Afghanistan for the entire sample period, 1982–2010
(Alternative Model 2). Third, we consider the alternate way that per capita GDP is often included
in gravity models which is to take the per capita GDP of each country individually (Alternative
Model 3). In all three alternate models, our main result remains robust since we find that changes
in the level of Afghani refugees do not Granger-cause bilateral trade between Afghanistan and
Pakistan (and vice versa).
Finally, Figs. 2 and 3A–C are the Impulse Response Function graphs that show how Trade
responds to shocks in Refugees in the main model as well as in the three alternate models used in
the robustness tests. Each graph has 2 standard error lines and based on the standard error lines in
all of these models we find that trade does not respond to an impulse in Refugees which further
collaborates our earlier Granger causality results.

Fig. 2. Impulse Response Function: response of trade to impulse in refugees (with 2 standard errors) in main model.
304 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307

Fig. 3. Impulse Response Function: response of trade to impulse in refugees (with 2 standard errors) in (A) Alternative
Model 1, (B) Alternative Model 2 and (C) Alternative Model 3.
 S. Ghosh, A. Enami / Journal of Policy Modeling 37 (2015) 291–307 305

6. Concluding remarks

Despite the vast literature on how immigrants affect the trade of the host country, this study
is the first to investigate the impact that refugees can have on a developing host country’s trade
balance with the source country using a vector error correction model. In fact, to the best of our
knowledge, none of the previous studies in the international trade-immigration literature have
accounted for the cointegration between trade, GDP and immigration, whilst some of them have
not accounted for the problem of endogeneity when estimating the effect of immigration on trade
controlling for GDP. This study does both, and thus, from a modeling perspective it is one of the
first applications of VECM models in the context of immigration-trade linkages. Moreover, this
study is the first to differentiate between the indirect and direct effect that refugees have on the
international trade balance of a developing host country.
Our study shows that while there has been a massive influx of Afghani refugees in Pakistan
over the past three decades, refugees do not Granger-cause bilateral trade between these two
countries over the period 1980–2011. Our results remain robust to other specifications of the base
model and are in line with previous studies on developed countries which have found the effect of
refugees on bilateral trade to be minuscule. While we find no direct impact of refugees on bilateral
trade, we do find that refugees have a significant indirect effect on bilateral trade via the foreign
financial aid given to Afghanistan. This implies that policy makers in Pakistan should pursue a
volunteer repatriation program to reduce the negative effects of protracted Afghani refugees in
Pakistan since these programs would not harm ties between the two countries and thus not affect
the trade balance between them. Similar protracted refugee situations exist in about 30 developing
countries currently and, hence, the conclusions of this study are useful for policy makers in these
countries. Moreover, the results reaffirm that future studies in the immigration-trade literature
should not consider immigrants as a homogenous group. This is primarily because immigrants’
motives to migrate and the host country’s development status play an important role on the impact
that immigrants have on bilateral trade relations between the host and source countries.

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