REMITTANCES: EMPIRICAL EVIDENCE AND GROWTH STORY FOR ARMENIA Tigran Kostanyan, Economist, World Bank September 10-11, Cholpon-Ata, Kyrgyz Republic

Snapshot of the literature  There is a number of studies on potential effects of remittances, but they are of uncertain magnitude and conflicting direction;  Representing 30% of total financial flows, the remittances are supposed to have pro-poor effects: according to Adams and Page (2005) 10% increase in remittances leads to 3.5% decline in poverty level;  Mishra (2007) and Bouton et al. (2009) found that 10% decrease in labor due to migration leads 3.2-4% increase in wages;  In El Salvador remittance increase student retention rates, while in Mexico the effect is opposite…

East Asia and Pacific| Stylized Facts  Remittances to East Asia grew at an average annual rate of 15.8% vs. 7.8% for the developing world as a whole ( );  East Asia represents its own migration hub (Hong Kong, Malaysia, Singapore, Thailand, and Korea);  Most migrants in East Asia are unskilled (e.g. 67% of the migrants from Indonesia and 70% of the migrants from Vietnam have less than a secondary school education)  High level of irregular and undocumented migration  Females dominate migration flows in East Asia

East Asia and Pacific| Macroeconomic effects in labor-sending countries  Increase in consumption and reduction in poverty rates  Higher investment in education  Source for the CAD financing However,  No sustainable linkages were revealed between remittances and long-term economic growth / investment and savings rates And  Remittance flows lead to appreciation of the real exchange rate of labor-sending countries eroding the competitiveness

East Asia and Pacific| Poverty Impact of Remittances CountryEffects of remittances Philippines 10pp increase in international remittances leads to a 2.8pp decrease in the poverty headcount Fiji Poverty headcount decreased by 7% (or 2.7pp) Tonga Poverty headcount decreased by 43% (or 24.7 pp) Ghana For remittances-receiving households, the level of poverty falls by 88.1% with the inclusion of remittances LAC 1 percentage point increase in the remittance to GDP ratio reduces poverty headcount by about 0.4% Cross- country Household surveys in 71 developing countries show that a 10% increase in per capita international remittances in a country is associated with a 3.5% decline in the US $1 a day poverty rate

Global Context: The Facts to Consider the Importance of Remittances for Armenia  The share of remittances in GDP was 15.9% in Armenia (2011), while globally it was only 0.5%.  The net inflows of remittances are disproportionate to the relative size of the Armenian economy: while amounting only 0.015% of the world’s GDP, it attracts 0.4% of total remittances.

Remittances and Production Function Remittances can affect economic growth through ALL the channels of production function  Capital Accumulation  Labor Force  Total Factor Productivity

Capital Accumulation  Supplement to the domestic sources of income for investments  Lower the cost of capital  Improve the creditworthiness of investors  Augment household collateral

Capital accumulation| Supplement for investments  Being the major “consumer” of investments, the construction growth depicts the trends of remittances and stipulates the real GDP growth.  On average the inflows of remittances were equivalent to 60% of total investments over

Accumulation| Impact on Economy  There is an evidence of correlation between remittances and construction growth

Construction Pass-Through  The construction contributed more than ⅓ to the economic growth over It was also leading the economic contraction in 2009.

Implications of construction-driven growth  It expanded by 5.5 times in real terms and contributed more than 1/3 to the real GDP growth over ;  Number of employed people in this sector and its share in total employment increased by around 67%;  The salary, which is among the highest in the economy, contributed to labor income growth and thus alleviated poverty pressures.

Capital Accumulation| Financial Markets  Only a few banks consider the remittances as proof of income  The remittances are secondary source of income  Long history of sustained remittances inflows is needed

Labor Force| Quantitative and Qualitative Aspects  May REDUCE LABOR FORCE PARTICIPATION through migration and moral hazard channels.  May IMPROVE THE QUALITY OF LABOR FORCE since they reduce the need of youngsters to work. According to the study conducted by the ILO (2007) around 9% of remittances in Armenia are used for human capital development.

Use of Remittances| ILO Study

Total Factor Productivity| Real effective exchange rate  Remittances inflows may be associated with the REER appreciation implying a potential for Dutch disease effects

Total Factor Productivity| Dutch disease implications  Before the crisis non-tradable branches led the growth. Crisis collapse was also explained by them.

Total Factor Productivity| Business environment  Being a substitute for domestic income, remittances may undermine good governance, due to weaker pressures for reforms.

Remittances| Quick wins vs. sustainable growth Real GDP growth remains sluggish despite recovery of remittances

Useful facts and sources