Impact of Remittances on Economic Growth: Empirical Experience of Armenia
Lily Karapetyan
Senior Specialist
Ministry of Finance of RA
Cholpon-Ata, Kyrgyz RepublicSeptember 10-11, 2012
Net Remittances in CIS Countries as GDP Percentage
-1.8-0.9
0.90.9
1.74.0
6.59.0
20.421.9
24.8
-5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0
KazakhstanRussia
BelarusAzerbaijanMongolia
UkraineGeorgia
ArmeniaKyrgyz Republic
MoldovaTajikistan
2010
Source: World Bank, WDI
Armenia: Structure of Remittances(inflow, outflow, net remittances)
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2004 2005 2006 2007 2008 2009 2010 2011
Inflow Outflow Net inflow
Characteristics of Remittances Remittances versus foreign direct investments are
more sustainable both in CIS countries and in Armenia.
The bulk of remittances are transfers from Russia, which continue growing. Russia accounted for 90% of transfers in 2011 versus 72% in 2004. The second place is occupied by transfers from the USA, with falling tendency (14.5% in 2004, 3.7 – in 2011).
The empirical analysis evidences that the RA remittances are dependent on the level of consumer prices in Russia (with factor =0.9), GDP of Russia (0.5), and world oil prices (0.2).
Armenia: Net Inflow Structure of Remittances by Countries
Remitances structure by countries of origin
0.0
10.020.0
30.0
40.050.0
60.0
70.0
80.090.0
100.0
2004 2005 2006 2007 2008 2009 2010 2011
years
shar
e in
tota
l.%
USA Other Russia
Volatility of Remittances in CIS Countries
0.000.200.400.600.801.001.201.401.601.80
FDI REM
Standard deviation
Sources of GDP Growth in Armenia
5.0 8.3 7.1 7.9 7.3 7.5 7.2 9.1 11.2
10.5 10.513.9 13.2 13.7
6.9
-14.1
2.24.7
-20.0
-10.0
0.0
10.0
20.0
0.020.040.060.080.0
100.0120.0
2003 2004 2005 2006 2007 2008 2009 2010 2011
Industry Agriculture Construction ServicesNet indirect taxes Remittances GDP, real growth
Aggregate DemandAggregate demand Additional consumption. In Armenia case the multiplier of expenditures is estimated at
about 1.5;
Additional investments;
Remittances promote increase of consumption and investments. Regression analysis based on the least square method demonstrated that consumption is more sensitive to impact than investments are. Data of household survey confirmed the hypothesis;
Contributed to purchase of durable goods;
Regression analysis based on the least square method demonstrates, that remittances contribute to growth of consumption and investments. However, the impact on consumption is more essential than on investments. This is confirmed also by the household survey results.
Remittances
Consumption
Investments
Export
Import
Remittances Spending Priorities(as percentage of the total remittances)
Total remittances, $
DirectionCurrent consumption
Education
Real estate, land
Agricultural machinery
Renovation
Business
Savings Consumer goods
Other
До 500
Urban 75 6.4 0.2 0.1 1.2 0.9 0.4 2.8 13
Rural 76.9 5.1 0.7 2.4 2 1.4 0.2 1.7 9.5
500-1000
Urban 76.7 8.9 1.6 0 2.4 2.2 1 2.2 5
Rural 72.9 7.4 1.6 6.1 2.8 1.5 0.3 1.6 5.9
5000-7000
Urban 60.3 15.1 0.9 0 8.2 6.5 1.4 5.2 2.4
Rural 49.9 11.5 0 10.7 12.9 3.6 7.1 4.3 0
10-15000
Urban 44.3 7.1 17.1 0 4.3 0 11.4 15.7 0
Rural 40.0 20.0 0 0 20.0 0 0 20.0 0
15000-
Urban 25.0 0 25 0 0 25 0 0 25
Rural 40.0 0 0 0 30.0 0 0 0 30.0
Aggregate Supply, Production Factors
Aggregate supply and production factors High rates of construction growth High rates of services’ growth Accumulation of human capital through positive impact on education and
health sectors. Empirical analysis demonstrates that positive impact of remittances on health sector versus education is higher.
Accumulation of physical capital.
Remittances
Construction
Services
Employment
Human capital
Other Directions
Development of financial systemDevelopment of commercial links and
capital investments
Negative Impact on Economic Growth Moral hazard: households receiving remittances tend not
to work. Regression analysis shows that growth of remittances reduces employment in Armenia;
Reduction of workforce: because the growth of remittances is mostly due to migration in previous years, which is the evidence of workforce reduction, particularly - of high-quality workforce;
Occurrence of Dutch disease: remittances contribute to occurrence of Dutch disease: increase of the real effective exchange rate reduces competitiveness and export;
There are investments, but they are not productive: according to the Survey in Armenia only 12% of households are engaged in business. The main part of remittances at the peak of economic growth was focused on housing development;
Risk of creating a trap for economic policy.
CIS: Remittances and Employment (source: WB)
Remitences and employment in CIS,2010
-5.0 0.0 5.0
10.0 15.0 20.0 25.0 30.0
30 35 40 45 50 55 60 65 70 Remittances
Employment
MDA TJK
KGZ
ARM KAZ AZE
RUS MNG UKR
GEO BLR
Cause – and – Effect Relationship
Verification of cause-and-effect relationship reliability
Are remittances the source of economic growth or vice-versa – does poor economic situation contribute to migration, which leads to growth of remittances?
Verification results
In Armenia remittances contribute to economic growth (Granger causality test) and the cycle of remittances’ activity coincides with GDP cycle.
Activity Cycles, GDP, and RemittancesDowntrend cycles (HP filter)
-.12
-.08
-.04
.00
.04
.08
-.15
-.10
-.05
.00
.05
.10
.15
1996 1998 2000 2002 2004 2006 2008 2010
Residual Actual Fitted
Econometric Analysis Results
In the short run remittances have positive impact on economic growth in Armenia
In the long run the impact is negative
The model (Pooled OLS ) used in 6 countries of CIS has also provided results similar to Armenian, with some difference in factors.