The development and the side effects of remittances in CIS countries: the case of Armenia

Type Report
Title The development and the side effects of remittances in CIS countries: the case of Armenia
Publication (Day/Month/Year) 2013
This paper looks at the economic impact of remittances for Armenia and also for CIS countries more
generally. For A rmenia regression an alysis sh ows that, over t he short run, 1 0 percent remittance
growth positively af fects GDP growth by 0.3 percentage points through its multiplying effect on
domestic demand. It is also an undeniable fact that remittances have a poverty-reducing effect and that
10 pe rcentage po int g rowth i n remittances s hould l ead t o a 1 .7 pe rcentage po int decrease in the
poverty rate. However, a key question is whether remittances also serve to promote long-run economic
growth. E mpirical r esults s how t hat a 10 pe rcentage poi nt increase in r emittances ne gatively
influences GDP growth by 0.2 percentage points over the long run.
This negative effect can create moral hazard in recipient households and, therefore, a contraction in
labor supply. Another factor is that remittances do not sufficiently promote productive investments. So
remittances have an important influence in terms of aggregate supply meaning the development of the
construction and service sectors. Finally, remittances can lead to Dutch disease, as they increase the
effective exchange rate and, therefore, non-tradable sector of economy are changed.
Countries like Armenia that receive significant remittances need to develop appropriate policies to
deal with possible negative consequences. Remittances tend to be relatively stable over long periods
so the appropriate policy response should be to learn to live with them.

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