Building a better future at home: remittances in Moldova

• Author: Milan Cuc/Erik Lundbäck/Edgardo Ruggiero
• Position: IMF European Department
• Pages: 40-41

Page 40

In today's world, economic integration goes beyond international trade and capital movements and increasingly involves the movement of labor, too. A case in point is Moldova, where large-scale labor emigration and remittance flows have played a dominant role in shaping the country's recent economic evolution. A new IMF Special Issues paper takes a closer look at the kinds of policies that would allow Moldova to maximize the benefits of its remittance inflows.

After the collapse of the former Soviet Union, Moldova began a profound transformation as it moved from a centrally planned to a more market-based economy. The resulting dislocations led to a sharp contraction in output and massive job losses. These were compounded in 1998, when the shock waves from the Russian financial crisis hit Moldova particularly hard because of the strong trade links between the two countries. As Russia's domestic demand collapsed, Moldova's exports to the countries of the former Soviet Union-the destination for two-thirds of its exports- declined by 50 percent in the second half of 1998 compared with the same period in 1997. The cumulative GDP loss reached 10 percent between 1997 and 1999, and it is estimated that the poverty rate rose sharply, to over 70 percent by 1999 from 47 percent in 1997.

With few viable options at home, many workers were forced to seek job opportunities outside Moldova to support their families. Between 1998 and 2000, the number of Moldovans working abroad doubled, and remittances rose from $122 million to $172 million. In turn, these inflows, by providing an important supplement to household disposable incomes, helped accelerate a subsequent domestic recovery.

What is striking about Moldova's experience to date is that migration has persisted even after the domestic economy recovered strongly (see chart, left). Since 2000, Moldova's domestic economy has shown marked improvement, with GDP rising by a cumulative 30 percent by 2004. Nonetheless, migration and remittances have continued to intensify, with new migrants benefiting from the informal support of a growing expatriate community. In 2004, official estimates put the total gross inflows of workers' remittances at $700 million, almost 27 percent of GDP (see chart, right)-high in comparison even with other countries with significant remittances.

At the same time, Moldova's gross national disposable income per...