Remittances in ArmeniaRemittances in ArmeniaStylized Facts and Theories in Stylized Facts and Theories in

ProgressProgress

Vache GabrielyanVache Gabrielyan

Central Bank of ArmeniaCentral Bank of Armenia

Transfers’ contribution to GDP growth during 2003-2007

It’s Obvious: Remittances Fuel Growth

 GDP growth,

model results, pContribution to

GDP growth. pp

2003 10.2 2.0

2004 12.0 4.5

2005 12.4 5.6

2006 12.6 6.3

2007 12.6 6.8

It’s Obvious: Integration mattersSources of remittances, mil USD

419 541739

10781371

9047983

94

77

61

59

146129

127

165

203

161

0

200

400

600

800

1000

1200

1400

1600

1800

2004 2005 2006 2007 2008 2009

Russia USA Other

Transmission mechanism of remittances in ArmeniaTransmission mechanism of remittances in Armenia

Remittances

Aggregate Supply

Import

Real Exchange

Rate

ExportInvestmentConsumption

Aggregate Demand

It’s Obvious: remittances affect… everything

Not as Obvious: Are Remittances an Engine of Growth or External Vulnerability?

During the first decade of the 2000s, remittances had significant During the first decade of the 2000s, remittances had significant impact on the Armenian economyimpact on the Armenian economy

……still, within a larger picture, the impact was much larger elsewhere still, within a larger picture, the impact was much larger elsewhere in the neighborhood...in the neighborhood...

Source: the IMFSource: the IMF

Dealing with Second-Hand Dutch Disease It seems that FX rate, growth

rate, real estate prices are all correlated with remittances

They, in turn are correlated with the wages of non-tradable sectors in Russia (where most of the Armenian migrant workers are employed)

This, in turn, is well correlated with world oil and gas prices

Thus, in case of labor mobility with larger and wealthier market, policy issue is rather complicated: Dealing with

Second-Hand Dutch Disease (I owe this term to Roger Robinson)

Current Account sustainability: vulnerable to all types of sudden stops (including remittances)

-35

-30

-25

-20

-15

-10

-5

02004 2005 2006 2007 2008 2009

CA/GDP

CA/GDP (excluding private transfers and seasonal workers income)

From the viewpoint of the effects on income distribution and From the viewpoint of the effects on income distribution and poverty, CBA surveys showed that 60 percent of remittance poverty, CBA surveys showed that 60 percent of remittance receiving households are in middle and high income class, and 40 receiving households are in middle and high income class, and 40 percent are poor and extreme poor households. percent are poor and extreme poor households.

1 percent increase of transfers brings 0.2 percent appreciation of 1 percent increase of transfers brings 0.2 percent appreciation of the Real Exchange Rate in the long run. From the 2004 till 2008/4 the Real Exchange Rate in the long run. From the 2004 till 2008/4 long run Equilibrium Real Exchange rate have appreciated by 39 long run Equilibrium Real Exchange rate have appreciated by 39 percent, in which 25.5 percentage point is due to transfers percent, in which 25.5 percentage point is due to transfers (approximately 65 percent) (“(approximately 65 percent) (“Equilibrium Real Exchange Rate Equilibrium Real Exchange Rate model in Armeniamodel in Armenia”, CBA Review, Q4 2007):”, CBA Review, Q4 2007):

Macroeconomic effects of remittances CBA Research

According to the research conducted by the IMF and USAID, in the According to the research conducted by the IMF and USAID, in the long-run 1 USD increase in remittances lead to the 0.2 USD increase in long-run 1 USD increase in remittances lead to the 0.2 USD increase in GDP GDP ((Banaian & Roberts, "Remittances in Armenia: Size, impacts and Banaian & Roberts, "Remittances in Armenia: Size, impacts and measures to enhance their contribution to development,” measures to enhance their contribution to development,” USAID/Armenia, October 2004):USAID/Armenia, October 2004): According to another study by the IMF the main impact of remittances According to another study by the IMF the main impact of remittances sent by the seasonal or resident migrants is on the consumption having sent by the seasonal or resident migrants is on the consumption having weak effect on GDP. Meanwhile other transfers which generally depend weak effect on GDP. Meanwhile other transfers which generally depend on purchases of real estate have positive effect on investment and GDP on purchases of real estate have positive effect on investment and GDP growth (Atoyan and Oomes, “Remittances to Armenia: Size, sources growth (Atoyan and Oomes, “Remittances to Armenia: Size, sources and macroeconomic implications,” and macroeconomic implications,” IMF working paperIMF working paper, 2006):, 2006): The other study of IMF concludes that benefits of remittances could be The other study of IMF concludes that benefits of remittances could be overestimated. And the results of micro level analyses have showed that overestimated. And the results of micro level analyses have showed that households which receive remittances tend to decrease their labor households which receive remittances tend to decrease their labor supply (moral hazard). (Grigorian and Melkonyan, “Microeconomic supply (moral hazard). (Grigorian and Melkonyan, “Microeconomic implication of remittances in an overlapping generations model with implication of remittances in an overlapping generations model with altruism and self-interest”, altruism and self-interest”, IMF working paperIMF working paper, 2008)., 2008).

Macroeconomic effects of remittances Secondary sources

Understanding both Symptoms and Causes

Microanalyses of remittances conducted by CBA (based on a survey of CBA-WB in 2006) show the dominance of altruistic motives.

At the same time altruism could be overestimated as the same migrant can behave simultaneously with strategic kind of self-interest motive motives which are very difficult to differentiate in practice.

The other self-interest motives (inc. inheritance and insurance) coexist under some conditions.

A Look at the Motives: Micro Level Analysis of Remittances

  Response of GDP cycles to Remittances cycles

  Response of Remittances cycles toGDP cycles

t -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6

1998/1-2007/1

-0.03

0.26-

0.04-

0.29-

0.070.05 0.05 0.12 0.03 0.20 0.22 0.29* 0.17

* t statistic is significant

Correlation coefficients show that remittances have pro-Correlation coefficients show that remittances have pro-cyclical pattern. cyclical pattern. The lag of response of remittance cycles to GDP cycles is The lag of response of remittance cycles to GDP cycles is 5 quarters.5 quarters. If counter-cyclical pattern implies that migrants increase If counter-cyclical pattern implies that migrants increase remittances during economic downturn, which implies remittances during economic downturn, which implies consumption smoothing behavior, than pro-cyclical consumption smoothing behavior, than pro-cyclical pattern implies that migrants increase remittances in pattern implies that migrants increase remittances in better times (i.e. investment decisions).better times (i.e. investment decisions).

Motives of RemittancesMacro Level Analyses of Remittances

Summary Even though the results of micro level analysis show the Even though the results of micro level analysis show the dominance of altruistic or consumption smoothing motives, dominance of altruistic or consumption smoothing motives, at the macro level remittances are pro-cyclical, which in at the macro level remittances are pro-cyclical, which in contrast implies investment behavior. The jury is still out.contrast implies investment behavior. The jury is still out. Remittances had significant impact on growth and are the Remittances had significant impact on growth and are the main driver of Real Exchange Rate appreciation in the main driver of Real Exchange Rate appreciation in the recent pre-crisis years. recent pre-crisis years. The downside of the remittances shouldn’t be constrained The downside of the remittances shouldn’t be constrained to macroeconomic “sudden stops,” but also to micro level to macroeconomic “sudden stops,” but also to micro level moral hazard of not entering the market at competitive moral hazard of not entering the market at competitive wages. wages. In an underdeveloped market like Armenia, remittances are In an underdeveloped market like Armenia, remittances are hard both to control (e.g. make flows even) and harness (e.g. hard both to control (e.g. make flows even) and harness (e.g. fabricate financial instruments tapping their potential).fabricate financial instruments tapping their potential).