Development and Side Effects of Remittances in the CIS Countries: The Case of Belarus

Abstract

The objective of the present paper is to evaluate the potential development impact and any possible side effects of remittances in Belarus. Our main finding, based on VAR modelling, is that we cannot consider remittances as a driver of economic growth in Belarus: their positive influence on GDP growth is not statistically significant. In fact, in the next period GDP responds negatively to remittances growth (p-value is 0.005). To some extent this may be a result of a productivity decrease conditioned by possible brain-drain effects. Remittances appear to be strongly pro-cyclical with respect to Russian GDP and mildly pro-cyclical with respect to the GDP of Belarus. Analysis shows that negative influence of remittances on GDP is not caused by Dutch disease and inflation: neither exchange rate appreciation nor growth in consumer price is induced by remittances. Instead, lagged REER devaluation Granger causes growth in remittances inflow (Wald test p-value is 0.051): when in a crisis devaluation takes place in Belarus more people go abroad to support their families and more transfers come from abroad. There are no reliable micro-data providing information on remittance receivers; nor are there any reliable data about the ways remittances are spent by receiving households in Belarus. Nevertheless, available statistics and surveys suggest that remittances have only a limited impact in terms of poverty reduction. Remittances are only invested in a limited extent, something in line with their relationship with GDP. At the same time we can conclude that due to remittances supporting household spending, employment remained nearly unchanged, despite an unfavourable economic climate. However, the underdeveloped capital market and lack of investments can result in the failure to modernize so that capacities can react, in a timely fashion, to demand fueled by remittances. Thus, there is a need for effective policies to channel remittances for investment purposes so that they support economic growth. Proposed policy recommendations follow.