Category Archives: economics

Framing the Impact of Remittances from Labour Migrants in Central Asia, by Jakhongir Kakhkharov (Flinders University, Australia)

Labour migrants’ remittances are a rapidly growing phenomenon in the countries of the former Soviet Union (please see Figure 1). The size and growth of remittances in the countries of the recipients have brought the issue under the scrutiny of both researchers and policymakers alike. How can we use economic research to contribute to a deeper understanding of the interaction between the financial system, investment, remittances, household and firm behaviour, and migration? A focus on the determinants and economic impact of remittances from labor migrants allows us both to generate insights to inform theory as well as to inform real world decision makers in the areas of public policy. There may be a number of reasons why migrants send remittances, such as  ‘pure altruism’, ‘pure self-interest’, and ‘tempered altruism or enlightened self-interest’ (Lucas and Stark 1985). The case studies show that in various regions and countries different motives for sending remittances may dominate.

Figure 1. Inflows to Central and Eastern Europe, Mongolia, and the former Soviet Union (% of GDP), 2001-2012

Data source: World Development Indicators (World Bank)

The New Economics of Labour Migration (NELM), developed by Stark (1991) and others, links remittance behaviour to migration decisions. According to the NELM, migration decisions are a ‘calculated strategy’ of households aimed at improving the well-being of the whole family, and not an ‘act of desperation or boundless optimism’ (Stark, 1996, p. 26). According to the NELM, by sending a member of a household to migrate, the household aims to maximize joint income and status, and minimize risks. Thus, the NELM offers an important insight into migration decisions by linking labour migration with public policy and capital market failures in the labour-source countries. In making the decision on migration, households design their own strategy to cope with the absence of appropriate credit, insurance instruments and public protection. Remittances from a family member abroad provide an additional source of funding, insurance if the main source of family income falters, and financial protection in case of a rainy day. As such, migration and remittances associated with it can be viewed as a result of risk aversion on the part of a household that has insufficient income.

Applying NELM and testing its conclusions is difficult because frequently data on remittances is not segregated in terms of sources/origins of remittances. Therefore, having data on bilateral remittances flows from the Central Bank of Russia (CBR) is helpful. This CBR bilateral remittances dataset provides detailed information on remittances originating from Russia and flowing to countries receiving remittances from Russia. How can data on bilateral flows help us to understand the Central Asian remittance economy?  In order to answer this question, it is possible to analyse the relationships between formal remittances sent via Money Transfer Operators (MTOs), e.g. Western Union, MoneyGram, Contact and etc. alongside the fees for remitting money for a number of years using various empirical econometric approaches. In addition to macroeconomic, demographic, and financial data from World Development Indicators (World Bank), World Governance Indicators (World Bank), International Financial Statistics (IMF), and Balance of Payment Statistics (IMF) frequently employed in this area of research, this hand-picked dataset[i] used by Kakhkharov, Akimov, and Rhode (2017) includes statistics on annual transfers from Russia via MTOs to each of the remittance recipient countries, the flows of labour migrants from each country in the former USSR to Russia, the number of branches of money transfer operators in Russia, and money remittance fees charged by MTOs.

The econometric estimations show that the main factors behind the growing volume of remittances in the post-Soviet space are an income differential between Russian and post-Soviet states, a reduction in remittance transfer fees, and a depreciation of the Rouble in Russia The inverse relationship between remittance transfer fees and official remittances suggests that migrants switch from informal channels of transferring their hard-won earnings to formal/official channels to send remittances when remittance fees are low. Thus, lower remittance fees may help curb the proportion of informal flows (private, unrecorded channels) and lead to increased use of remittances in the formal/official economy. In contrast, if remittances flow through informal channels, the likelihood that they will end up in underground/informal economy increases. This is not beneficial to the society as most businesses that operate in underground economies are concealed from authorities to avoid paying taxes and meeting official market standards (e.g. safety, minimum wage) (Abdih and Medina, 2013; Buehn, Andreas, and Schneider, 2012). In addition, part of the shadow economy involves illegal activities, such as narcotics, prostitution, smuggling, and trafficking.

Despite trailing behind the top regions in the total volume of total remittances, transition economies of Europe and Central Asia lead the world in terms of remittances per capita as illustrated in Figures 2 and 3.

Figure 2. Inward remittances per capita, 2014

Source: World Bank, Migration and remittances factbook 2016, third edition.

Figure 3. Inward remittances per capita, 2014

Source: World Bank, Migration and remittances factbook 2016, third edition.

It is also important to understand the link between remittances and the financial system in transition countries, in particular, the link between remittances on one side, and bank credits and deposits on the other side. This issue is important for the region, as economic and finance theory documents the growth-enhancing and poverty-reducing effects of financial development. Recent research demonstrates a robust, significant, and positive link between remittances and financial development, a link that is especially strong in the Central Asian countries. This means that remittances do facilitate positive changes in the financial systems of migrant sending countries (Kakhkharov and Rhode 2019). In order to understand the broader national economic context of which remittances are a part, it is also important to consider the performance of financial systems in the less developed post-Communist economies of the former Soviet Union in fulfilling their vital functions, and to  compare this performance with more advanced transition economies, such as Czech Republic, Poland, Slovakia, Slovenia as it is done by Bonin, John, and Wachtel (2003). In general, there is significant progress being made toward building contemporary financial systems in all groups of transition economies across Central Asia, although the gap between financial systems in the less-developed post-communist countries which include Kyrgyzstan, Tajikistan, and Uzbekistan, and their above mentioned advanced counterparts in Eastern Europe remains very large (Kakharov and Akimov 2018). Given these results, the governments in the region should undertake further actions to strengthen the ability of financial systems to deliver their core functions. This will aid the economic growth in Central Asia and close the gap between the levels of development among transition economies.

Another major question related to the consequences of remittances on Central Asian economies is how remittances impact entrepreneurship in the region. As a matter of fact, transforming the remittances and savings of labour migrants into a source of financing for entrepreneurship and other development projects is the focus of many governments’ policies in migrant-sending countries. In the case of Uzbekistan, labour migrants’ remittances and savings facilitated the development of the country’s financial sector, but the degree to which these flows finance the needs of business enterprises is unclear (Kakhkharov 2018). This is a crucial issue because access to finance remains one of the most daunting obstacles to the growth of micro, small, and medium-sized enterprises (MSMEs) in the developing world. Inquiries into this issue show that financial constraints are one of the biggest obstacles to the development of entrepreneurial activities among remittance-receiving households in Uzbekistan (Kakhkharov 2019).  The empirical investigation shows that households receiving remittances invest in family business only when this inflow is supplemented with sufficient income or savings (which remittances can provide) as illustrated in Figure 4. This graph shows that, at low levels of income, receipt of remittances does not increase the probability of a households’ engaging in a family business, possibly because household savings are not sufficient, and remittances must be used for necessities. This effect becomes statistically significant only at higher levels of income. In addition, a comparison of households with similar financial constraints at higher levels of income shows that remittance-recipient households are more likely to own a family business than are those that do not receive remittances. A possible explanation for this phenomenon is that remittance senders target their funds to be invested in a family business. This serves as evidence that part of remittance income goes to finance entrepreneurship. Therefore, by financing small businesses, remittances also facilitate for job creation and economic growth in Uzbekistan. Since other Central Asian countries share many of the economic conditions and parameters of Uzbekistan, perhaps this conclusion is relevant at the regional level as well.

Figure 4. Interaction effects of remittances and income vis a vis probability of having a family business in Uzbekistan at marginal means of control variables.

To sum up, one of the attractive characteristics of remittances is the fact that these transfers are unilateral and do not require an explicit payback. However, another broadly accepted consensus – that remittances are a relatively stable source of foreign exchange flow – may not hold. The recent drastic cutback in remittances as a result of the Russian economic slowdown hurt Central Asian economies that were dependent on the Russian remittances especially badly. This observation should warn against complacency among economic policymakers in the transition economies. As remittances might be rather volatile, policymakers should support remittances with sound macroeconomic policies and a favourable business environment in order to maximize the potential benefits of this inflow.

Another policy implication is that governments in transition countries of Europe and Central Asia may want to focus on financial sector development impact of remittances instead of viewing remittances as a survival strategy for households. Particularly, policymakers may consider facilitating and encouraging the flow of remittances to enhance their positive impact on development of the financial system. This could be done by encouraging further decreases in transactions costs associated with transferring remittances through financial system. Finally, given the noted weaker effect of remittances on deposits compared to credit instruments, policies that seek to improve institutional development and depositors’ trust may improve how recipients use the benefits of remittances in deposit expansion.

Framing the impact of remittances in Central Asia shows that remittances have the potential to be a vital investment source for MSMEs if they augmented with bank credit and/or an increase in the amount of remittances. To increase the positive effect of remittances, policymakers should consider strategies to reform the banking sector to boost its role in financing micro- and small businesses, encourage migrants’ families to invest remittances into MSMEs by educating them on how to run a business, and improve the business environment.

Dr Jakhongir Kakhkharov during the Research Seminar on “Remittances and Informal Sector” at Westminster International University in Tashkent in January 2020.

References

Abdih, Yasser, and Leandro Medina. (2013) Measuring the informal economy in the Caucasus and Central Asia. No. 13-137. International Monetary Fund.

Bonin, John, and Paul Wachtel. (2002) “Financial sector development in transition economies: Lessons from the first decade.” Financial Markets, Institutions & Instruments 12.1 (2003): 1-66.

Buehn, Andreas, and Friedrich Schneider. (2012) “Shadow economies around the world: novel insights, accepted knowledge, and new estimates.” International tax and public finance 19.1 (2012): 139-171.

Kakhkharov, Jakhongir. (2019) “Migrant remittances as a source of financing for entrepreneurship.” International Migration 57(5): 37-55.

Kakhkharov, J. (2018) “Remittances as a Source of Finance for Entrepreneurship in Uzbekistan,” in M. Laruelle, & C. Schenk (Eds.), Eurasia on the Move. Interdisciplinary Approaches to a Dynamic Migration Region. The George Washington University, Central Asia Program, 150-159.

Kakhkharov, J., & Akimov, A. (2018) Financial development in less-developed post-communist economies. Problems of Economic Transition60(7): 483-513.

Kakhkharov, J., Akimov, A., & Rohde, N. (2017) Transaction costs and recorded remittances in the post-Soviet economies: Evidence from a new dataset on bilateral flows. Economic Modelling 60: 98-107.

Kakhkharov, J., & Rohde, N. (2019) Remittances and financial development in transition economies. Empirical Economics, 1-33. DOI: https://doi.org/10.1007/s00181-019-01642-3

Lucas, R.E.B., Stark, O. (1985) Motivations to remit: evidence from Botswana. Journal of Political Economy 93 (5): 901–918.

Stark, O. (1991) The Migration of Labor. Basil Blackwell, Cambridge, MA.

Stark, O. (1996) On the Microeconomics of Return Migration. Universität Wien, Vienna.

[i] The research presented here uses data from the World Bank, IMF, Central Banks, and household surveys to test the impact of remittances and migration on various economic and financial parameters in the context of transition economies of the former Soviet Union and Central Asia.

AUTHOR INTERVIEW: The Central Asian Economies in the Twenty-First Century: Paving a New Silk Road, by Richard Pomfret

In this post we welcome Alfinura Sharafeyeva (University of Adelaide), who interviews Professor Richard Pomfret (University of Adelaide) about the course of his work and career, including his most recent book, The Central Asian Economies in the Twenty-First Century: Paving a New Silk Road, where “Pomfret considers the enhanced role of the Central Asian nations in the global economy and their varied ties to China, the European Union, Russia, and the United States. With improved infrastructure and connectivity between China and Europe (reflected in regular rail freight services since 2011 and China’s announcement of its Belt and Road Initiative in 2013), relaxation of United Nations sanctions against Iran in 2016, and the change in Uzbekistan’s presidency in late 2016, a window of opportunity appears to have opened for Central Asian countries to achieve more sustainable economic futures” (Princeton University Press).

This is the third book where you provide analysis of the economic transition in Central Asia.  Do you remember how you started your work on Central Asia?

In July 1992 the new independent states of Central Asia joined the United Nations and had to elect which of the UN’s regional bodies they would participate in.  The Central Asian countries and Azerbaijan joined the UN Commission for Asia and the Pacific (ESCAP).  The ESCAP Secretariat had little idea how to interact with these formerly centrally planned economies and appointed me in December 1992 as a Regional Advisor.  The story that I was told was that, because I had worked on Poland and on China, I should be able to understand economies halfway in between.

In 1992 the Central Asian economies were unexpectedly in transition from central planning but had little conception of what they were transitioning to.  There were no economists with training in or experience of how market-based economies functioned.  Governments received advice from international bodies, but ministers and officials had little capacity to evaluate the advice.

In the fifteen months that I was with the UN, my role was often as an educator rather than as a policy adviser, and with more success when talking to younger policymakers than to ministers and deputy ministers.

Professor Richard Pomfret and his class during the course on Economic Development of post –Soviet Central Asia organized  by the Structured doctoral programme on Sustainable Agricultural Development in Central Asia (SUSADICA) in Tashkent, June 2019. Photo credit ©SUSADICA

 As an example, on the 1992-3 big issue of the ruble zone, it was difficult to convince senior policymakers, who believed that hyperinflation was due to monopolies increasing prices, that monetary policy was the driver of hyperinflation.  Either the ruble zone had to be reformed so that monetary policy could address the hyperinflation or countries should issue national currencies.  Only Kyrgyzstan learned this lesson in early 1993, while the other four countries did not control hyperinflation until the second half of the decade.                               

What was the most challenging aspect of researching and writing about the Central Asian economies? There are some statements in your book that probably may not sound plausible to the officials of these countries. Have you ever received any criticism with this regard?

My biggest challenge has been linguistic.  Having to conduct most meetings through an interpreter creates an inevitable element of incomplete communication.  It also emphasizes outsider status fuelling the criticism that I do not understand the special circumstances/history/culture of a country.

Good economics applies to all economies.  However, on almost all issues application needs to take into account the particular setting.  The criticism that I misunderstood the setting is hard to refute because it may be true on many points.  However, that does not justify the extreme position that “foreign” economics does not apply to country x.  Too often that criticism is used to justify bad economic policies.  To return to the money example; it was much easier to blame monopolists for hyperinflation than to work seriously on avoiding budget deficits that could be covered by creating more money – reducing budget deficits meant higher taxes or lower government spending, either of which would trigger opposition.

The key questions you attempt to answer in the book are related to the economic systems adopted in the newly established states of Central Asia after the collapse of Soviet Union and their consequences, as well as the challenges of development for resource-rich countries. Have you found a unique answer for all five countries to the questions you pose in your book, or each country should be treated individually? How does your work on the Central Asian economies contribute to our understanding of broader theories and themes in the development economies studies?

After returning to academia in 1994 I wrote my book The Economies of Central Asia, which introduced the five countries, their economic background and the initial construction of national economies after dissolution of the Soviet Union.  In 1992, they could be treated as components of a common region with minor variations, although already in 1993-4 economic differences were strengthening.  By 2020 national differences are much stronger, although shared geography, history and culture continue to provide a common background.

The 2006 book The Central Asian Economies since Independence took the story up to the early 2000s.  A big issue in the 1990s had been the choice of transition strategy: shock therapy or gradualism, sequencing of reforms, and so forth.   The Central Asian economies had been seen as a natural experiment with five countries starting from similar initial conditions and adopting different transition strategies.  An important lesson from the 1990s was that successful transition was not simply a matter of creating a market economy, privatizing and restructuring state enterprises, having good trade and macroeconomic policies and so on. It also depended on institutional factors, widely defined.  Uzbekistan benefited from Tashkent having been the administrative centre of Tsarist and Soviet Central Asia.  The Kyrgyz Republic introduced good reforms, but suffered from lack of the institutions needed for markets to flourish (property rights and rule of law more generally, and limited trust of third parties) as well as a paucity of efficient uncorrupted administrators.

The natural experiment was never completed because, more or less coinciding with the completion of basic transition in 1999 and before long-term consequences could be observed, the resource boom began.  Kazakhstan’s economy pulled away from the rest and the countries that were poor in oil and gas, Tajikistan and the Kyrgyz Republic, fell behind.

The title of the book mentions the new (ancient) Silk Road. Do you find the answers why, being a cross-roads of Eurasia, and liberalizing their markets by joining WTO and other trade agreements, the countries’ trading potential remain realized not in full? Do you agree with the common believe that it is a landlockedness that prevent countries from boosting their trade, or there some other factors that potentially play a greater impediment rather than the region’s geographical position? How do your findings support the active involvement of Central Asian states in the China’s One Belt One Road initiative? What are the key policy recommendations you could draw based on your findings?

Landlockedness can be a boon or a bane depending on a country’s neighbours, and its own policies.  After independence the Central Asian countries were suspicious of trade and of global markets, apart from as outlets for their cotton, oil and gas, or minerals.  Most importantly, this applied to Uzbekistan, which is potentially the major transit country but until 2016 imposed large transit costs.  The situation appears to be changing after the end of the resource boom as the countries seek economic diversification and, given the small domestic and regional markets, exports are a promising destination of new goods.

My 2019 book The Central Asian Economies in the Twenty-first Century: Paving a New Silk Road  discusses the prospects for export diversification, emphasizing the need to reduce policy-imposed costs of international trade.  There is a “window of opportunity” as Eurasian rail connections have been improved, which predates the Belt and Road Initiative but can easily be linked to the Belt and Road Initiative.  Chinese investment is helping to upgrade infrastructure, although there remains an element of anti-Chinese sentiment in the region that could easily be triggered.

A PhD student at Adelaide University is working on the reason why the costs of doing international trade are especially high in Central Asia.  Such research is important to understand the nature of the main trade costs before making policy recommendations for governments to facilitate trade and hence encourage the economic diversification that they wish to promote.

The road from Nukus.  Fieldwork photo credit R. Pomfret.

Would you agree that the economies of Central Asia receive relatively little attention by researchers? What are the remaining unexplored aspects of the Central Asian economies? What sorts of research do you see being done in the near future on this subject?

Yes, although this is changing, especially with the increasing number of Central Asian scholars now producing good research.  Coverage remains patchy and incomplete, but I am constantly positively surprised by seeing a specialized article, thesis or monograph on a previously unaddressed topic.