Migration and Remittances Eastern Europe and the Former Soviet Union Bryce Quillin World Bank Europe and Central Asia Region Slide 1: cover page

The Presentation Overview of Migration/Demographics Trends in Europe & Central Asia Cost-Benefit Analysis of Migration International Regulatory Framework Policies to enhance the returns to migration and remittances

Key Messages Migration in ECA is unique, significant, and likely to grow Remittances are the second most important source of financing for many and the first for poorest Good economic policies and institutions maximize gains for sending and receiving countries and migrants (“Triple Win”) Current immigration policies, largely bilateral, may not stem large undocumented migration Further study and policy experimentation may help overcome the limitations of the existing framework Since transition, migration has grown very fast a consequence of the integration of Eastern Europe and Central Asia into the world economy.

The Presentation Overview of Migration/Demographics Trends in ECA Cost-Benefit Analysis of Migration International Regulatory Framework Policies to enhance the returns to migration

Migration has followed a biaxial pattern: Eastern to Western Europe and Low Income CIS to Russia, Kazakhstan, and Ukraine The collapse of communism (and lifting of Soviet travel restrictions) encouraged large increases in internal and international migration, including a massive increase in migration in ECA, including internal movements, cross-border migration within ECA, outflow from ECA, and some inflows from other regions. The formation of many new countries following the break of the Soviet Union ‘created’ many statistical migrants—long term, foreign born residents who may not have physically moved, but were defined as migrants under UN practice. Some of the largest flows during this time included: Kazakhstan-Russia (300,000 people), Kazakhstan-Germany (190,000), Uzbekistan-Russia (112,000), Armenia-Russia (106,000), Kyrgyz Republic to Russia (85,000), Georgia-Russia (40,000).

A lot of early migration was driven by civil conflict and war In the early years of transition, migration flows were especially large as residents of the former Soviet Union returned to ethnic homelands and many were displaced by conflicts that emerged among countries in the ECA region during the 1990s: such as in Georgia, Southern Russia, and Tajikistan in the CIS…and the former Yugoslavia.

Net migration rates were volatile in Central Asia during the early years of transition

This volatility is consistent with patterns found in other parts of the CIS...

…and Central and Eastern Europe during the early 1990s

Pool of labor within ECA…Central Asia, Caucasus, Balkans In addition to differences in expectations of income disparity and quality of life, demographic pressures in the transition economies and in Western Europe will drive migration in the medium term. As the figure demonstrates, there are ten ECA countries that combine a natural increase in their population and net emigration. This includes the countries of Central Asia, the Caucasus, and many of the former Yugoslav states. With their faster-growing populations, especially youth populations, migration pressures in these countries will likely persist into the future. * Data are from 2000-2003

Losing population to emigration and demographics…Baltics, SE Europe, Poland, Ukraine and Moldova Moreover, a group of 12 ECA are experiencing a decline in their natural populations and have a negative net migration balance. This includes Ukraine and Moldova, the three Baltic states, and four Central European countries, including Poland. In all of these countries, both trends are expected to continue well into the future, causing large population declines as well as rapid ageing of their populations. * Data are from 2000-2003

Declining population despite immigration…Central Europe, Russia and Belarus A first group includes the new EU members of Central Europe (except for Poland) and Belarus and the Russian Federation which are already net immigration countries. In the case of the latter, Russia is one of the world’s largest magnets for migrants with a measured population increase of 4 percent since 1990 and perhaps and equal amount of undocumented migration. * Data are from 2000-2003

It is likely that migration will increase for five main reasons Differentials in expected quality of life increasing Demand for non-traded services from increasingly affluent and large middle class (demand needs to be factored into policy) Much lower transportation costs (esp. low cost airlines) and easier to keep in touch Only quick way to build savings and human capital Demographic decline in Europe and parts of the CIS (especially Russia)-now at an interlude Income differentials now much larger than at time of large migration of Italians and Irish to US. At the beginning of 20th century income differences of 1 to 2-4 was enough for people to board ships. Now income differences -also within ECA- are much higher, exceeding 1 to 10.

Remittances are large as a portion of GDP in many ECA countries Workers Remittances + Compensation of Employees to GDP (2006) Source: IMF Balance of Payments Statistics

Several ECA countries lead the world in remittances receipts Workers Remittances + Compensation of Employees to GDP (2006) The balance of payments statistics may underestimate actual remittance inflows by as much as fifty percent.[1] Surveys conducted by the World Bank found that as many as two-thirds of migrants may send remittances home through transfer channels that government authorities do not or can not monitor -for example, through friends and family or by public transportation drivers.[2] Of the low-income CIS countries, only Moldova estimates remittances sent through these ‘informal’ channels, perhaps explaining why remittances to Moldova appear so much larger a percentage of GDP when compared to other countries in this sub-region.[3] Source: IMF Balance of Payments Statistics.

The Use of Remittance Transfer Channels Vary… The channels by which remittances are transferred vary, including formal and informal channels. Migrants use the organized money market (bank transfers, debit cards, check), the post office, rapid transfer systems (for example Western Union), friends and relatives traveling home, as well as individuals with whom they have no personal contact (i.e. bus drivers, train conductors). They also bring money with them when they visit home. Table 8 shows that the channels most often used for remitting are friend and relatives (approximately 30 percent overall), followed by bank transfers (25.3 percent) and rapid transfer companies (24.7 percent). It is impressive that a significant number of migrants trust their money to individuals with whom they have no personal contact (8.2 percent). It is likely that these are not accidental or occasional transfers, but rather organized informal networks that compete with the banking system and offer convenient services at lower cost. Overall, official channels are used by 59 percent of migrants. Differences among countries are however important. For example, the largest proportion of migrants from the Kyrgyz Republic choose to transfer their money via the banking system (42 percent), migrants from Tajikistan choose rapid transfers (43 percent), and migrants from Bosnia-Herzegovina send their money through friends traveling home (45 percent), proportions based on the number of migrants not the value of remittances. If one can assume that the choice of channel does not depend strongly on the value of money remitted, the finding that 41 percent of migrants send money through unofficial channels suggests that the official estimates of remittances obtained from national banking systems are seriously underestimated.

Transfer costs can be high A recent survey of ECA migrants found that remittance transfer costs range from 3.9 to 7.4 percent of the value the transferred sum (Figure 4). The average costs vary tremendously across the CIS with the percentage costs for Georgia representing the high end at 7.4 percent while Tajikistan’s costs were at the bottom at 3.9 percent. Yet, the gains from lowering remittance transfer costs can be substantial for all countries. In Tajikistan, for example, a reduction of the cost of sending remittances by $5 per transaction, and assuming an average transfer of $300, would yield direct annual savings. These costs compare to global averages of 11% (GEP). The cost charged to remittance recipients can vary significantly from country to country, and from bank to bank: it is about 2 percent for non-clients in Tajikistan, and 1 to 2 percent for clients of the transferred amount, on average for clients, if in the same currency. Also in Tajikistan, the recipient of the funds must also pay a flat fee of about US$30, irrespective of the transferred amount.

The majority of remittances in Central Asia go to fund basic subsistence Central to the discussion concerning the effects of remittances on the economic development of the receiving country and on the welfare of the receiving families in particular, are the uses into which remittances are put. It is generally recognized that migrant remittances have played an important role in raising the standard of living of recipient families through income effects. It is also recognized that there is a positive effect on the receiving economy through the multiplier effects of the increased consumption level. If remittances are used for financing investment in capital (material or human), in addition to the multiplier effects of this expenditure the receiving country improves its productive basis. On the negative side, it is often mentioned that the increased flows of remittances, i.e. of foreign exchange, may appreciate the currency of the receiving country and thus hurt its foreign trade performance by reducing exports and increasing imports. It is also argued that remittances to the members of the family in the country of origin may reduce their work effort and their supply of labor, thus creating labor bottlenecks in the development process. Generally speaking, if remittances are used as a means to alleviate the capital constraints that usually exist in developing countries, then the effects are expected to be positive. If, on the other hand, remittances are viewed and used as a welfare system financed by migrants, the development effects may be insignificant. This chart presents the results of surveys regarding the uses of money sent home. It should be noted that the numbers (and the percentages) presented refer to the people providing each answer and not to money values of remittances. In most cases, remittances are used by the receiving family for more than one purpose. Survey findings have suggested that the majority of remittance spending in the CIS is dominated by basic subsistence needs. Over 30% of migrants report using remittances for food and clothing, 8 percent use them for the education of children and about 15% report buying land or conducting home repairs. Only about 1.5% percent report starting a business. We can aggregate these categories up to: Investments in Material Capital (28%), Investment in Human Capital (9.5%), and Consumption (43%). Looking a country-level data for Central Asia: in Kyrgyz Republic, 11% report saving remittances and about 11% use remittances to educate children. In Tajikistan, about 9% report saving remittances and 2.5% report investing in business while about 11% reporting using remittances for children's’ education. Increasing the amount of migrants’ income—by reducing costs—will allow migrants to better meet these needs and—if the right incentives are in place—introduce new investment capital.

The Presentation Overview of Migration/Demographics Trends in ECA Cost-Benefit Analysis of Migration International Regulatory Framework Policies to enhance the returns to migration

International market for migrant labor has large net benefits… Sending Countries and Migrants Can relieve pressures on labor markets when tight Remittances Migrants remit about 36 percent of their incomes Vast majority of Central Asia migrants remit $200 or less at a time A 10% increase in the share of migrants in a country’s population leads to a 2% reduction in poverty Human Capital and Savings 26 percent intended to start a business on return 70 percent improved job opportunities Majority of migrants improved earnings at home after migration Receiving countries fills labor market shortages and attract new skills For Kyrgyz Rep and Tajikistan, the percent of migrants who remit up to $200 is 75% and 91%, respectively. A chart comparing monthly income of migrants shows that overwhelmingly, migrants’ income after returning to Kyrgyzstan have increased compared to their income prior to migration (Figure 7). The share of migrants earning less than 25 USD per month has decreased from 34 percent to 13.8 percent. The percentage of migrants earning more than 275 USD per month has increased from 2 percent to 4.6 percent.

Yet Migration also generates costs Costs for receiving countries New competition: wages may fall as a result of migrants especially for the lower skills (DeNew/Zimmerman 1994 -0.5% for blue collar from 1 percent increase in migrants) Strain on existing social services Problems with integration of foreign workers Criminality Costs for sending countries Loss of human capital, especially if migration permanent Disruption to families and communities (may require additional Government services) Costs for migrants Heavy penalty on family life (over half return home due to family related concerns) Costs of leaving familiar and adapting to new culture

The Presentation Overview of Migration/Demographics Trends in ECA Cost-Benefit Analysis of Migration International Regulatory Framework Policies to enhance the returns to migration

Most legal migration facilitated by bilateral agreements Bilateral migration agreements proliferated rapidly during the early 1990s Externalities make bilateral agreements superior to MFN, unlike trade These agreements form a ‘patchwork’ as their designs vary tremendously and there is little coordination The majority of agreements cover migration between CEECs and EU15 though a few address migration to Russia

Problems with the Current Regime Agreements do not address the full size of the demand for migrant labor Sometimes legal quotas unfilled due to high transaction costs Creates incentives for illegal migration The system is unbalanced as a few countries account for the majority of the agreements Current system does not encourage circular migration and allows adverse selection and criminal activity

The Presentation Overview of Migration/Demographics Trends in ECA Cost-Benefit Analysis of Migration International Regulatory Framework Policies to enhance the returns to migration

Features of an Alternative Regime for Labor Migration More effectively matches the supply with the demand for international labor Reduces rents for traffickers Establishes transparent rules for remuneration, work conditions, and dismissal procedures Provides incentives for migrants to be complements, not substitutes, to domestic labor Offers employers means to hire legally the workers they need Provides incentives to encourage return home where permanent migration is not desired

One option—among many—for improving policies could be to encourage circular migration… Circular migration would/could: Utilize migrants and their acquired skills for economic development in sending country Reduce brain drain because absence is temporary Probably address some fears in receiving countries about migrants staying permanently Provide an alternative to full liberalization for receiving countries

A lot of migration is illegal… Undocumented Migrant Stock as a Percentage of Total Migrant Stock Large costs to illegal migration Exploitation of migrants (degrades human capital) Huge rents for traffickers and associated criminality Income largely untaxed Unfair competitive advantage for firms hiring illegally Affects quality of migrants (adverse selection) Risks to health and safety in the workplace Risks of importing disease Victims of crimes Stigmatization may undermine social cohesion Induces longer stays Source: Pew Hispanic Center, IOM, ILO, UK Home Office, ISTAT, Jimenez (2003), COMPAS Oxford, Council of Europe, Ministry of Labor in Finland, Sadovskaya (2002), Jandl (2003).

Brain drain may be a concern

Circular migration is consistent with many migrants’ preferences for short periods of time abroad Though data is very poor, it is believed that large amounts of the migration in the region is of a short-term, seasonal, and circular nature. Circular migration refers to a pattern where migrants travel for short periods of time abroad—to build financial and human capital—and return home, perhaps with the expectation of traveling abroad again. According to surveys conducted with returned migrants, the majority of migrants reported a preference for spending shorter periods of time abroad. Source: World Bank Surveys (2007)

Policies to lower remittances costs* Expand access to the formal financial sector (through legal migration) Improve financial infrastructure Promote competition among transfer providers Enhance market transparency on costs On average, migrants in ECA pay between 4.7 and 7.4 percent of the value of the remittances transaction to send funds to family and friends at home, and these fees likely do not include costs created by disadvantageous foreign exchange spreads. As remittance costs are regressive and in most cases relate to access to services and financial sophistication, these expenses are borne disproportionately by the poor. Thus if remittance transfer costs could be decreased, this would translate in increases in the purchasing power of the poorest households. Lowering these costs could contribute to the broader poverty reduction strategies of economies heavily reliant on international migration. In addition to this, building a conducive infrastructure by improving for example security, transparency or the payments system, would increase confidence in the formal financial system and possibly reduce the level of informal transfers, with evident benefits for financial sector development and growth. A recent study of remittances corridors in the CIS concluded that there is some scope for policy interventions to lower remittances costs. The most important means to lower remittances costs—and increase the security of their transmission—is to expand migrants’ access to the formal financial sector. Undocumented migrants do not have access to many elements of the formal financial sector. Improvements to immigration policies—as has already been discussed—which increase the opportunities for legal migration will thus have a positive impact on migrants access to banks and other financial institutions abroad. In addition, it might be useful to explore the creation of the US-Mexico matricular consular which serves as an identity card to allow migrants to open bank accounts Improvements to the framework and infrastructure for intermediation would improve access to financial services and decrease transaction costs. Issues like building cashless societies by improving the payments systems and developing the safety nets, including deposit insurance, are the most closely related to remittances and money transfers. Building on the network for financial intermediation would be essential in ensuring greater access to remittance and money transfer services, and to ensure increased access to finance and banking to migrants and their relatives. In turn, better access and banking would increase intermediation (both deposits and credits) with positive and multiplying effects on the economies. [3] competition should be promoted among remittances transfer systems and firms. In the first instance, this can take the form of preventing exclusivity arrangements between money-transfer operators (such as Western Union) and the distributional networks provided by entities such as banks and postal systems. In ECA, the costs for Western Union transfer fell dramatically after Western Union lost a 2002 Russian anti-monopoly court case for have exclusivity contracts with commercial banks. This has allowed a host of smaller, more efficient operators to begin offering low costs services. The impact of these exclusivity contracts on remittance fees can be substantial. In the France-Morocco migration corridor, where Western Union has an exclusivity arrangement with the Moroccan postal system, their fees are 12% on a $200 remittance while competitors Money Gram charge 5% for a $200 transfer. [4] Remitters and migrants face a variety of options in sending money to the families and relatives, but information on pricing and general services is generally difficult to access or to thoroughly understand. Rarely are banks and MTOs’ clients are well informed of the final cost of a remittance, as many small prices and fees might be attached. For example, a website of one large MTO in Armenia advertises remittance costs of 2 percent per transaction, irrespective of the transferred amount. However, the MTO further discloses that communication and processing fees will be added to the advertised 2 percent, without specifying such charges. Central Banks and Governments should endorse market transparency practices and require banks and MTOs to fully and thoroughly disclose all transaction costs in a readable and understandable manner. *Input provided by World Bank (2007) “Remittances in the CIS Countries: A Study of Selected Corridors,” ECA Chief Economist’s Regional Working Paper Series, 2, 2, Washington, DC.

Policy experimentation and pilots could be useful World Bank is working on implementing pilot migration schemes with several EU member-states

More information and data are available at: http://www.worldbank.org/eca/migration