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

Content

1. Review2. Positive Impact3. Negative Impact4. Conclusions

1. Review

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

2. Positive Impact

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

Conclusions

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.

Thank you for attention!