| Description |
This paper looks at the economic impact of remittances for Armenia and also for CIS countries more generally. For Armenia regression analysis shows that, over the short run, 10 percent remittance growth positively affects 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 percentage point growth in remittances should lead to a 1.7 percentage point decrease in the poverty rate. However, a key question is whether remittances also serve to promote long-run economic growth. Empirical results show that a 10 percentage point increase in remittances negatively 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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