Download Impact of Remittances on Growth

Why and How will global economic crisis
effect Armenia's economy?
Vahram Ghushchyan, Ph.D
School of Corporate Governance
2009 Yerevan
Global Economic Crisis
 Real estate market collapse in the US (2007-2008),
 Sharp increase in oil, gold, wheat and other








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commodities prices,
Financial crisis in the US, Western Europe and Asia:
Scarcity of financial resources,
Large scale loses,
Loss of customer confidence,
Layoffs
Fall of aggregate demand,
Sharp decline in oil prices (Fall, 2008),
Slow down of Russian Economy (Fall, 2008),
Decrease in private transfers from Russia to Armenia
(October 2008).
Individual, non-commercial transfers from
RF in 2008
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Dynamics of private transfers from Russia in 2008
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The role of individual, non-commercial
transfers from RF
Tra nsfe rs from R F a nd U SA
1600
1400
Mln. USD
1200
1000
² ØÜ
è¸
800
600
400
200
0
2004
2005
2006
2007
 12% of GDP
 15% of private consumption
 More than 40% of private investments
2008
Aggregate Demand (AD) and
Aggregate Supply (AS)
AS
P
AD1
AD2
GDP2
GDP1
Real GDP
GDP Structure
 Y = C + G + I + EX - IM
 C – Private Consumption,
 G – Government Expenditures,
 I – Private Investments,
 EX – Export
 IM – Import
Estimating the AD
Yt  Ct  Gt  I t  EX t  IM t
Ct  a0  a1W _ Put 1  a2W _ Prt 1  a3TR _ rust 1  a4TR _ rust 
 a5TR _ usat 1  a6TR _ usat  u1t
Gt  b0  b1Yt 1  b2 IM t 1  u2t
I t  c0  c1 int_ ratet  c2W _ Put 1  c3W _ Prt 1  c4TR _ rust 1  c5TR _ rust 
 c6TR _ usat 1  c7TR _ usat  u3t
EX t  d 0  d1ex _ ratet 1  d 2 deflatort 1  d 3OilPt  u4t
IM t  e0  e1deflatort 1  e2ex _ ratet 1  e3W _ Put 1  e4W _ Prt 1  e5TR _ rust 1  e6TR _ rust 
 e6TR _ usat 1  e7TR _ usat  u5t
Three stage Least square
I version
II version
Consumption
Private sector average wages
Transfers from the US (t-1)
Transfers from the US (t)
Transfers from RF (t-1)
Time trend
Constant
2.33*
4252.08**
4834.64**
2009.32*
-4699.63*
-70924.97*
R2
0.84
2.18*
6.38*
-3142.13*
-67318.55*
0.85
Gov. Expenditures
Imports
Constant
0.87*
-25694.52*
R2
0.70
0.88*
-26404.94*
0.70
Investments
Discount Rate (CBA refinance rate)
Transfers from RF (t-1)
Transfers from RF (t)
Time trend
Constant
-11856.88*
649.04*
1298.75*
-1726.48*
40419.61*
R2
0.84
1.86*
3.05*
-56300.97*
0.86
Export
GDP deflator (t-1)
Constant
-630.88*
97592.29*
R2
GDP deflator (t-1)
Transfers from RF (t)
Time trend
Constant
R2
Number of observations
0.31
-594.05*
93776.33*
0.31
Import
-611.8*
300.03*
361.12*
108341.6*
0.84*
456.89*
41454.44*
0.82
0.78
53
53
The impact of transfers from RF
 Increase of transfers from RF by $1 mln. in time t  increase
GDP by 1260.83 mln. drams in time t and an additional 2658.35
mln. drams in time t+1.
Y
C
I
G
EX
IM





 1260.83
tr _ rus tr _ rus tr _ rus tr _ rus tr _ rus tr _ rus
Y
C
I
G
EX
IM





 2658.35
tr _ rus _ 1 tr _ rus _ 1 tr _ rus _ 1 tr _ rus _ 1 tr _ rus _ 1 tr _ rus _ 1
 Increase of transfers from RF by 1 dram in time t  increase
GDP by 2.95 drams in time t and an additional 8.24 drams in time
t+1.
Y
C
I
G
EX
IM





 2.95
TR _ rus TR _ rus TR _ rus TR _ rus TR _ rus TR _ rus
Y
C
I
G
EX
IM





 8.24
TR _ rus _ 1 TR _ rus _ 1 TR _ rus _ 1 TR _ rus _ 1 TR _ rus _ 1 TR _ rus _ 1
Limitations
 Partial equilibrium,
 Labor Market,
 Data limitations (53 obs. only),
 From an average 30% growth trend to 30%
decrease  60% deviation from previous trend,
 Stationarity.
Simulations
10%
decrease
20%
decrease
30%
decrease
Years
2009
2010
2009
2010
2009
2010
GDP
-36.06
-1.10
-50.29
-1.42
-64.51
-1.99
-26.28
0.00
-36.73
0.00
-47.19
0.00
-43.93
0.00
-65.69
0.00
-87.45
0.00
Expenditures
-18.57
-4.35
-23.52
-4.63
-28.48
-4.95
Export
-34.90
-11.52
-34.90
-11.52
-34.90
-11.52
Import
-14.78
-2.75
-18.06
-2.86
-21.34
-2.98
Private
Consumption
Private
Investments
Gov.
So, How to Fight the Crisis
 Simulate aggregate supply?
 It is a long time solutions:
 Simulate aggregate demand?
 Yes and sooner better:
 But How?
 Economic theory suggests the use of following
tools:
 a) decrease taxes,
 b) increase government spending,
 c) use both tools together.
So, How to Fight the Crisis
 What is the most efficient for Armenia?
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Increase government expenditures:
 What are the risks?

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Inefficient use of resources,
Financing import:
 How to decrease risks and increase
efficiency?

Implement situation specific projects
 Can YOU be more specific please?
Projects
 1) Finance the private construction outside Yerevan.
This will result in:
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Increase demand for domestic products,
Decrease unemployment,
Strengthening the tax collections in construction sector,
Decrease regional disparity,
 2) Expand Armenia’s competitiveness infrastructure:
North-South highway and railway,
 3) Concessional financing of SME’s ready to invest in
R&D in construction sector.
Financing of construction should be channeled trough
mortgage fund. Its assets can latter be securitized,
which will help to payoff the external borrowings.