1. 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

2. Content
Review
Positive Impact
Negative Impact
Conclusions

3. 1. Review

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

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

6. 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 versus 72% in 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.

7. Armenia: Net Inflow Structure of Remittances by Countries

8. Volatility of Remittances in CIS Countries
Standard deviation

9. 2. Positive Impact

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

11. 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

12. 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
76.7
8.9
1.6
2.2 1 5
72.9
7.4
6.1
1.5
0.3
5.9
60.3
15.1
8.2
6.5
5.2
49.9
11.5
10.7
12.9
3.6
7.1
4.3
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).

13. 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

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

15. 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).

16. CIS: Remittances and Employment (source: WB)

17. Conclusions

18. 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.

19. Activity Cycles, GDP, and Remittances
Downtrend cycles (HP filter)

20. 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.

21. Thank you for attention!