Remittances and Competitiveness: Evidence from Moldova

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Remittances and Competitiveness Evidence from
Moldova
Migration and Development Thematic Group 30
November 2006 Bryce Quillin
This presentation is based on the results of IMF
and World Bank studies on migration in Moldova as
well as two forthcoming regional Bank reports on
labor migration and remittances across the ECA
region. Please see IMF (2005) Republic of
Moldova Selected Issues World Bank (2005)
Moldova Opportunities for Accelerated Growth
World Bank (forthcoming 2007) Migration and
Remittances Eastern Europe and the Former Soviet
Union World Bank Forthcoming 2007) Lowering the
Costs of Remittances in Four CIS Migration
Corridors.
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Research on ECA Migration

• Moldova CEM
• Study on lowering remittances costs in four CIS
  migration corridors
• Russia to Moldova
• Russia to Kyrgyz Rep
• Russia to Tajikistan
• Russia to Armenia
• Regional study on migration and remittances

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Why Moldova?
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Moldova Remittances Levels
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Remittances Costs are High Though Falling

• 70 of formal remittances sent at high cost
  through Western Union
• Perhaps 50 of remittances sent through informal
  channels

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Negative Impact on Competitiveness Stylized Story

• Reduce poverty by increasing consumption
• Put pressure on wages and real exchange rate
• Discourages investment in sectors that do not
  benefits from remittances (including exports)
• Reduces labor force participation
• Creates policy reform moral hazard
• Generates new vulnerabilities

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Origin of Remittances to Moldova
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Remittances Utilization Patterns
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Remittances Utilization Patterns

• Between 2000-2003
• GDP per capita grew 14
• GNI per capita by 15.5
• GNDI by 18
• Fixed capital formation flat
• Suggests investment climate problems
• Moral hazard?

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Competitiveness and the Exchange Rate

• Multiple estimates indicate that exchange rate is
  undervalued despite appreciation
• Real exchange rate appreciation in line with
  experience of other transition economies
• Remittances have raised the level of the
  equilibrium exchange rate
• Remittances have countered depreciation pressures
• Deteriorating current account
• Arrears on external debt
• Large errors and omissions
• If these are remittances, current account deficit
  falls from 7 to 3 percent

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Competitiveness and the Labor Market

• Employment, Unemployment, and Labor Force have
  declined
• Appreciation on wages
• Average real wage increased by 80 percent from
  1999 to 2004
• Labor shortages
• Construction
• Transportation
• Agriculture
• Brain drain

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Brain Drain
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Policy Implications

• For remittances to have more than an income
  effect
• Household earnings need to meet basic needs
• Policies must favor savings and investment
• Econometric evidence
• Remittances contribute to growth in countries
  with higher quality institutions and policies

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Policy Implications

• What has not worked
• Control programs (e.g. Turkey during the 1970s)
• What might work
• Improve business investment environment
• Only 7 of remittances go to investment
• Encourage banks to expand product offerings to
  attract remittances
• Only 5 of remittances saved in the banking
  system
• Increase migrants access to banks abroad by
  increasing legalization rates (perhaps through
  bilateral agreements)
• Act as an information clearing house by
  increasing (potential) migrants' knowledge about
  legal migration opportunities, the various
  opportunities (and costs) of different transfer
  channels, and investment opportunities at home