Cash remittances sent home by thousands of Armenians working in Russia and other countries increased by more than 23 percent in the first 10 months of this year compared to 2010, RFE/RL's Armenian Service reports.
While this sounds like unambiguously good news for Armenia, it is not. Remittances can have a very similar effect as natural resources wealth – it gives rise to what is called the Dutch Disease.
Both remittances and exports of natural resources result in an inflow of foreign currency into a country. While this raises incomes, it also has some less beneficial effects: labor supply and thus production will go down; the exchange rate will appreciate thus reducing the competitiveness of the exporting sector. Consumption will also increase. While consumption of tradable goods will be accommodated by foreign countries, consumption of non-tradable goods will not, by definition, thus leading to inflationary pressure.
In short, while the increase in remittances is good news for the recipients and workers in the non-tradable sectors, it is bad news for those not having relatives abroad and or working in export industries.
Comments
Nice analysis, sorry to ask, what are the export industries in Armenia? A little bit of cooper, agriculture (a little bit), processed diamonds? What kind of export industry in a land lock country which is under the blockade of its two neighboring states? Remittances are not really like natural resources: they are not deplete, unlike say oil, it is not that difficult to make another potential worker, and it takes only 9 month for the potential worker to get born:-) Second, migrant workers do not at least in Armenia contaminate environment:-)
See, Georgia is boasting, it got a lot of FDI, my question is, where are those FDI? In 209 there was one Nikora and another small company producing sausages, with huge amount of fruits (compared to Armenia) Georgia had I guess only one or two small natural juice producers and around 2009 eventually got a chocolate producer (barambo), so where these great FDI are going? What they fuel? And why Georgian Government forget to say that all produced by FDI is GDP of Georgia, but not necessarily GNP, if of course people in Georgia understand what it means? Oh, sorry, I recall now, around 1 million was given to the guy who "designed" the funky bridge aver Mtkvari and ten times more was spent to build it and around 1 million dollars was the cost of the "flower clocks":-D
remittances are good especially for Armenia, as nobody is going to come and take them back (unlike loans taken by the Georgian Government). The money spent on consumption within a short period will be in hands of the entrepreneurs who I will find a way to invest them. Second important thing, in many countries including Armenia's neighbor Azerbaijan, money from oil resources go to the government, and even if we try to be polite and neutral, it is not a sin to assume there are many cases of corrupt usage of the money. In case of remittances, money goes DIRECTLY in the hands of the ORDINARY people and they decide how to spend them instead of looking for a relative or friend to take some piece from the "Oil Funds" of natural resources rich countries. Strictly saying, yes, huge influx of foreign exchange is generally producing negative effects (certain distortions in theory), but not in case of little Armenia who has absolutely nothing, absolutely, the only thing it has are Armenians, and migrant workers one of the ways to use these resources. Distortion caused by the Dutch disease are negative if we compare the with undistorted case, but Armenia has so many distortions that new distortions simply help:-)Isn't it a theory that distortions caused by certain asymmetries can be some how improved a little bit by introducing other set of asymmetries?:-D
One reason remittances are up is that some time after 2008 Armenia may have started experiencing another round of labor emigration. More workers abroad => more remittances. If the alternative is to have all these "surplus" workers unemployed in Armenia, then remittances are a probably a good thing.
Remittances can be a truly excellent thing if used for investment in imported capital goods. This would eliminate the upward pressure on the dram and help create jobs for those who left the country during the past few years.
What point is i.j. trying to make when comparing Armenia with Georgia? Georgia faces many of the same issues that Armenia is facing. It is not getting a lot of FDI, much less than prior to 2008, there is really not much to boast about. Remittances are at a very high level (about $1bln/year). Exports are growing but at a very slow pace, with the exception of tourism. Lari has been appreciating in real terms since 2009 thanks to foreign aid and success in borrowing (refinancing outstanding loans).
The Dutch Disease is actually quite relevant for all countries of the South Caucasus. Clearly for Azerbaijan, but also for Armenia (given the reliance on remittances) and for Georgia. Georgia is actually interesting. On one side, remittances are important as will be electricity exports. On the other side Georgia wants to develop tourism, a sector that is very sensitive to an overvalued exchange rate. Already Georgia is not a cheap destination, for a variety of reasons, not only the exchange rate.
Norway shows how to deal with the Dutch disease: http://en.wikipedia.org/wiki/The_Government_Pension_Fund_of_Norway . If the state incorporates all the windfall profits, puts them into a fund and finances public expenditures from the return to this fund (without reducing taxes for the citizens), there is no Dutch disease. Unfortunately this is no solution for the Caucasus countries. If the state would expropriate the remittances from their recipients, they would cease. Nevertheless, I am absolutely convinced that remittances are more good than bad. I could tax them and give that money to those sectors which are negatively affected.