Remittances and Competitiveness: Evidence from Moldova

1. 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.

2. 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

3. Why Moldova?

4. Moldova Remittances Levels

5. Moldova is the largest recipient of remittances in the world as a pct of GDP Workers Remittances + Compensation of Employees to GDP (2006) Source: IMF Balance of Payments Statistics.

6. 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

7. 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

8. Origin of Remittances to Moldova

9. Remittances Utilization Patterns

10. 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?

11. 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

12. 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

13. Brain Drain

14. 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

15. 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