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
1.
2.
3.
4.
Review
Positive Impact
Negative Impact
Conclusions
1. Review
Net Remittances in CIS Countries as GDP
Percentage
2010
Tajikistan
Moldova
Kyrgyz Republic
Armenia
9.0
Georgia
6.5
Ukraine
4.0
Mongolia
1.7
Azerbaijan
0.9
Belarus
0.9
Russia -0.9
Kazakhstan -1.8
-5.0
0.0
5.0
Source: World Bank, WDI
10.0
24.8
21.9
20.4
15.0
20.0
25.0
30.0
Armenia: Structure of Remittances
(inflow, outflow, net remittances)
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
2004
2005
2006
Inflow
2007
Outflow
2008
2009
Net inflow
2010
2011
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).

Armenia: Net Inflow Structure of Remittances by
Countries
share in total.%
Remitances structure by countries of origin
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2004
2005
2006
2007
2008
USA
Other
years
Russia
2009
2010
2011
Volatility of Remittances in CIS Countries
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Standard deviation
FDI
REM
2. Positive Impact
Sources of GDP Growth in Armenia
120.0
100.0
80.0
60.0
40.0
20.0
0.0
20.0
10.5
10.5
13.9
13.2
13.7
10.0
6.9
2.2
5.0
2003
8.3
2004
Industry
Net indirect taxes
7.1
2005
7.9
2006
Agriculture
Remittances
7.3
2007
-14.1
7.2
7.5
2008
2009
Construction
GDP, real growth
4.7
0.0
-10.0
9.1
2010
Services
11.2
2011
-20.0
Aggregate Demand
Aggregate demand

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.
Consumption
Remittances
Investments
Export
Import
Remittances Spending Priorities
(as percentage of the total remittances)
Total
Direction Current EducationReal
remittanc
consump
estate,
es, $
tion
land
75
6.4
0.2
Agricultu Renovati Business Savings
ral
on
machiner
y
0.1
1.2
0.9
0.4
76.9
5.1
0.7
2.4
2
1.4
0.2
1.7
9.5
Urban
76.7
8.9
1.6
0
2.4
2.2
1
2.2
5
Rural
72.9
7.4
1.6
6.1
2.8
1.5
0.3
1.6
5.9
До 500 Urban
Rural
5001000
50007000
1015000
Consume Other
r goods
2.8
13
Urban
60.3
15.1
0.9
0
8.2
6.5
1.4
5.2
2.4
Rural
49.9
11.5
0
10.7
12.9
3.6
7.1
4.3
0
Urban
44.3
7.1
17.1
0
4.3
0
11.4
15.7
0
Rural
40.0
20.0
0
0
20.0
0
0
20.0
0
25.0
0
25
0
0
25
0
0
25
40.0
0
0
0
30.0
0
0
0
30.0
15000- Urban
Rural
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
Services
Employment
Human capital
Other Directions
Development of financial system
 Development of commercial links and capital
investments

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.
CIS: Remittances and Employment (source: WB)
Remitences and employment in CIS,2010
Employment
30.0
25.0
MDA
TJK
20.0
KGZ
15.0
10.0
ARM
GEO
5.0
30
35
40
45
MNG
UKR
BLR
0.0
50
-5.0
Remittances
AZE
KAZ
55
RUS
60
65
70
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)
.15
.10
.05
.00
.08
-.05
.04
-.10
.00
-.15
-.04
-.08
-.12
1996
1998
2000
2002
Residual
2004
2006
Actual
2008
2010
Fitted
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!