A Study on Determinants and Economic Impacts of Remittances: The Case of Armenia

Abstract

For over the past few years remittances have represented the largest source of foreign income in a number of developing economies. Even though scholars agree that diaspora is an important source for the economic, social and political development, the key empirical question is whether remittances encourage long-run economic growth. For the past several decades, remittances appear to be one of the stable and important sources of financial flow to Armenia. Armenia is a small country, having poor economic fundamentals, however, due to the countrys very large diaspora, Armenia receives large remittance inflows. Despite of its limited geo-economic possibility, Armenia is among the 15 largest remittance recipient countries in the world. Thus, macroeconomic effects of remittance have become an important aspect in defining the development of the country. Even though there is a number of existing literature on the impacts of the remittances on the household and the national economy, more research is needed to study the reasons behind remitting decision of Armenian migrants, and the economic impacts of the remittances. This paper intends to examine main determinants and motivations behind the Armenian migrants decision to remit based on previous studies, as well as to estimate the impacts of remittance on the Armenian economy, by testing the hypothesis that the impact of remittances on growth is affected by the level of financial development and the quality of institutions in the home country. The results show that macroeconomic factors, such as home and host GDP per capita, exchange rates and interest rates have significant impacts on the Armenian remittance receiving trends. Also, among the motivations behind the migrants remitting decision, self-interest motive dominates altruistic intentions. This can be explained by the close ties of the migrants with the families in the home country, as well as the tendency of short-term migrations over long-term ones in case of Armenia. Although the results of the estimation of impacts of remittances on the economic growth are negative, nevertheless, countries with well-established domestic institutions and financial stability are proved to be significant in enhancing remittance contribution to the economic growth.