1. Remittances in Armenia Stylized Facts and Theories in Progress Vache Gabrielyan Central Bank of Armenia

2. Transfers’ contribution to GDP growth during 2003-2007 It’s Obvious: Remittances Fuel Growth GDP growth, model results, p Contribution to GDP growth. pp 200310.22.0 200412.04.5 200512.45.6 200612.66.3 200712.66.8

3. It’s Obvious: Integration matters Sources of remittances, mil USD

4. Transmission mechanism of remittances in Armenia Remittances Aggregate Supply Import Real Exchange Rate Export InvestmentConsumption Aggregate Demand It’s Obvious: remittances affect… everything

5. Not as Obvious: Are Remittances an Engine of Growth or External Vulnerability? During the first decade of the 2000s, remittances had significant impact on the Armenian economy 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... …still, within a larger picture, the impact was much larger elsewhere in the neighborhood... Source: the IMF

6. 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 )

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

8.  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 CBA Research

9.  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). Macroeconomic effects of remittances Secondary sources

10. 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

11. Response of GDP cycles to Remittances cycles Response of Remittances cycles to GDP cycles t-6-5-4-3-20123456 1998/1- 2007/1 - 0.03 0.26 - 0.04 - 0.29 - 0.07 0.05 0.120.030.200.220.29*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). Motives of Remittances Macro Level Analyses of Remittances

12. 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).