Transcript Gabrielyan_Eng - EDRC - Economic Development and

Remittances in Armenia
Stylized Facts and Theories in Progress
Vache Gabrielyan
Central Bank of Armenia
It’s Obvious: Remittances Fuel Growth
Transfers’ contribution to GDP growth during 2003-2007
GDP growth,
Contribution to
model results, p 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 matters
Sources of remittances, mil USD
1800
1600
203
61
1400
165
77
1200
1000
800
600
400
146
79
200
419
129
83
541
127
94
161
59
1371
1078
904
739
0
2004
2005
2006
Russia
2007
USA
Other
2008
2009
It’s Obvious: remittances affect… everything
Transmission mechanism of remittances in Armenia
Remittances
Real Exchange
Rate
Consumption
Aggregate
Supply
Investment
Aggregate
Demand
Import
Export
Not as Obvious: Are Remittances an Engine of
Growth or External Vulnerability?
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
During the first decade of the 2000s, remittances had
significant impact on the Armenian economy
…still, within a larger picture, the impact was much larger
elsewhere in the neighborhood...
Source: 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)
0
2004
2005
2006
2007
2008
2009
-5
-10
-15
-20
-25
-30
-35
CA/GDP
CA/GDP (excluding private transfers and seasonal workers income)
Macroeconomic effects of remittances
CBA Research
From the viewpoint of the effects on income distribution and
poverty, CBA surveys showed that 60 percent of remittance
receiving households are in middle and high income class, and 40
percent are poor and extreme poor households.

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
long run Equilibrium Real Exchange rate have appreciated by 39
percent, in which 25.5 percentage point is due to transfers
(approximately 65 percent) (“Equilibrium Real Exchange Rate
model in Armenia”, CBA Review, Q4 2007):

Macroeconomic effects of remittances
Secondary sources
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
GDP (Banaian & Roberts, "Remittances in Armenia: Size, impacts and
measures to enhance their contribution to development,”
USAID/Armenia, October 2004):

According to another study by the IMF the main impact of remittances
sent by the seasonal or resident migrants is on the consumption having
weak effect on GDP. Meanwhile other transfers which generally depend
on purchases of real estate have positive effect on investment and GDP
growth (Atoyan and Oomes, “Remittances to Armenia: Size, sources
and macroeconomic implications,” IMF working paper, 2006):

The other study of IMF concludes that benefits of remittances could be
overestimated. And the results of micro level analyses have showed that
households which receive remittances tend to decrease their labor
supply (moral hazard). (Grigorian and Melkonyan, “Microeconomic
implication of remittances in an overlapping generations model with
altruism and self-interest”, IMF working paper, 2008).

Understanding both Symptoms and Causes
A Look at the Motives: Micro Level Analysis of Remittances
 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.
Motives of Remittances
Macro Level Analyses of Remittances
Response of Remittances cycles to
GDP cycles
Response of GDP cycles to Remittances cycles
t
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
1998/12007/1
0.03
0.26
0.04
0.29
0.07
0.05
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-cyclical pattern.
 The lag of response of remittance cycles to GDP cycles is 5 quarters.
 If counter-cyclical pattern implies that migrants increase remittances
during economic downturn, which implies consumption smoothing
behavior, than pro-cyclical pattern implies that migrants increase
remittances in better times (i.e. investment decisions).
Summary
Even though the results of micro level analysis show the
dominance of altruistic or consumption smoothing motives,
at the macro level remittances are pro-cyclical, which in
contrast implies investment behavior. The jury is still out.

Remittances had significant impact on growth and are the
main driver of Real Exchange Rate appreciation in the
recent pre-crisis years.

The downside of the remittances shouldn’t be constrained
to macroeconomic “sudden stops,” but also to micro level
moral hazard of not entering the market at competitive
wages.

In
an underdeveloped market like Armenia, remittances are
hard both to control (e.g. make flows even) and harness (e.g.
fabricate financial instruments tapping their potential).