Impact of Remittances on Economic Growth: Empirical Experience of Armenia Lily Karapetyan Senior Specialist Ministry of Finance of RA Cholpon-Ata, Kyrgyz Republic September 10-11, 2012

Content Review Positive Impact Negative Impact Conclusions

1. Review

Net Remittances in CIS Countries as GDP Percentage Remittances in Armenia are significant. Among CIS countries Armenia is the fourth. Source: World Bank, WDI

Armenia: Structure of Remittances (inflow, outflow, net remittances)

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). The other small part of remittances is coming mainly from Ukraine, Germany, France, Greece, Spain.

Armenia: Net Inflow Structure of Remittances by Countries

Volatility of Remittances in CIS Countries Standard deviation

2. Positive Impact

Sources of GDP Growth in Armenia After 2003 Armenia has recorded high economic growth. Remittances advanced, thus increasing the share in GDP.

Aggregate Demand Remittances Export Import Investments 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 ). In Armenian case the multiplier of expenditures estimated about 1.5 Investments Export Import 11

Remittances Spending Priorities (as percentage of the total remittances) Direction Current 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 1.7 9.5 500-1000 76.7 8.9 1.6 2.2 1 5 72.9 7.4 6.1 1.5 0.3 5.9 5000-7000 60.3 15.1 8.2 6.5 5.2 49.9 11.5 10.7 12.9 3.6 7.1 4.3 10-15000 44.3 17.1 11.4 15.7 40.0 20.0 15000- 25.0 25 30.0 The poor households are most dependent on remittances as they spend a large part of the remittances on current consumption needs. The CBA survey results show that households receiving remittances annually up to US $10,000, spent them mostly on real estate acquisition, business activities, or savings. But the results are varying from rural to urban areas. Households in rural area receiving remittances up to US 10,000, spent mostly on education and renovation (see Table 6).

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. Construction Remittances ). In Armenian case the multiplier of expenditures estimated about 1.5 Services Employment Human capital 13

Other Directions Development of financial system Development of commercial links and capital investments ). In Armenian case the multiplier of expenditures estimated about 1.5

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. expressed by moral hazard problem or reduced incentives for recipients of work, by brain drain, Dutch disease According to the Survey made in Armenia only 12% of remittance receiving households are engaged in any kind of business activity. In Armenia only 2% of remittance receiving households refused to work in any condition and any salary and about 50% agreed to work in a condition of high wages (than average).

CIS: Remittances and Employment (source: WB)

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 Remittances Downtrend cycles (HP filter)

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!