Migration and Remittances Eastern Europe and the Former Soviet Union Willem van Eeghen World Bank Europe and Central Asia Region Slide 1: cover page

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.

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.

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