COMMENT: Remittances bring large benefits and dire consequences

COMMENT: Remittances bring large benefits and dire consequences
In the early days, the dominant currency was the US dollar for both Romania and Moldova, but this changed dramatically with Romania acceding to the EU.
By Alex M. Tanase in London May 21, 2018

For Eastern Europe, the topic of remittances was unheard of in the communist times. The powerful and dictatorial regimes used to confiscate all the foreign currency coming from abroad in exchange for weak, depreciating local currency. Of course, the situation was not the same in every country, with the former Socialist Federative Republic of Yugoslavia being the most liberal in those days.

The historical changes that swept across Central and Eastern Europe in the early '90s gave to millions of people some fundamental rights such as the right to travel abroad (without internal visas), the right to obtain and hold foreign currency, the right to information and many other rights which in Western societies were seen as standard. This led to other key developments, such as massive emigrations and hence the remittance process, about which to say that it was very convoluted would be a serious understatement. 

The cultural shock was immense. Ordinary people were able to see and touch a foreign coin or banknote for the first time in their life. Money started to be sent home by emigrants initially by the “bus driver” or other rudimentary (and illegal in most cases) ways of transport. Confidence in public institutions was too low for them to be used for money transfers. In fact, the official networks to transfer money were at a nascent phase in Eastern Europe for the good part of the ‘90s. MoneyGram, Western Union, Unistream, Anelik and other reputed international transferring firms arrived in these markets much later. The commercial banks used to undertake this task, but they have been avoided for a good period of time by the emigrants for various reasons, amongst which are the hefty fees, fear of registration of the flows of money for fiscal purposes, and, in the early days, the lack of legal status of many immigrants undertaking low paid jobs in the construction and agricultural sectors. 

The fact that the money was transferred quasi-illegally made the flows virtually uncontrollable, the statistics very tentative and unreliable and the banking services for this segment of the market almost inexistent. Almost all international financial institutions (IFIs) started to offer technical assistance to banks and non-bank financial institutions and to the citizens themselves to help with opening accounts, teach them saving techniques and make the whole process less costly and more transparent. This is yet an unfinished task while the flows of money will continue from more developed countries to developing recipient countries (a staggering amount of $459.1bn is estimated for 2018 as compared to a meagre $1.9bn in 1970). 

For many countries on all key continents (Gambia, Haiti, Honduras, the Kyrgyz Republic, Liberia, Mexico, Nepal, Serbia and many others) remittances started to become a source of economic growth. According to a report prepared by the World Bank Group together with the Global Knowledge Partnership on Migration and Development (KNOMAD  a global hub of knowledge and policy expertise on migration and development) dated April 2017, their contribution to GDP varied widely in time and geographically, but cases of material contributions (over 20% of GDP or in some cases of more than 30%) are rather frequent nowadays. 

The data presented in Table 1 regarding the money transferred to some European countries, including to Romania and Moldova, need no further presentation.

Table 1: Key European Recipient Countries, 2016 or latest



USD billion

Percentage of GDP %

Russian Federation









Republic of Serbia



Bosnia and Hercegovina






Republic of Moldova



Source: Compiled based on national data and the World Bank study dated April 2017 and WB data base;                    * = estimation; n.a. = not available


Romania and Moldova: a parallel

Like many other countries in the region, both Romania and Moldova are countries which received substantial remittances from their citizens working abroad. In the case of Romania, the massive emigration of the Romanians started immediately after the December 1989 revolution. It is currently estimated that some 5mn Romanians emigrated and work in the European Union (mainly Spain and Italy), the US, Canada, Australia, Nordic countries and in many other places. The story of the Moldovan emigration is a little bit different, and a comparative analysis to detect the various reasons and distinct features is worthwhile. 

First, the starting points for the emigration flows were different. Moldova declared its independence on August 31, 1991, almost two years later after the Romanian December 1989 revolution, by which time the emigration process from Romania was well underway. 

Both the Romanians and the Moldovans had serious impediments in obtaining visas from the receiving countries, but Romania’s accession to the EU on January 1, 2007 gave it a clear advantage versus Moldova. In fact, almost 1mn Moldovan citizens took Romanian passports in order to be able to travel to Europe much earlier than June 27, 2014 when the former Soviet Union republic and entirely East European country signed an Association Agreement and Deep Comprehensive Free Trade Area (DCFTA) with the EU. While the granting of the Romanian passports was a very disputed political process, in which the former Moldovan authorities (mainly the Communist Party of Moldova) saw a Romanian attempt to sabotage the fragile nascent Moldovan statehood, the practical result was that many Moldovans were able to travel in the EU, work and send money back home much earlier than otherwise. However, neither country is yet in the Schengen space.

The economic, human and cultural (despite speaking the same language) potentials of these two countries are very different, but the Moldovan citizen had a clear advantage in emigrating to the Russian Federation and other countries that became independent after the dissolution of the Soviet Union in the early ‘90s. Their linguistic, educational and previous cultural ties with the Russians, the structure of the Moldovan population (in which some 27% are of either Russian origin or Ukrainians) made it easier for Moldovans to start working in Moscow and other parts of the Russian Federation (currently estimated at some 400,000). For well-known historical and cultural reasons, the Romanian did not have this advantage.

The structure of the inflow of remittances by sending countries and implicitly by currencies has been quite different. A historical dimension could be also detected in a more detailed analysis. In the early days, the dominant currency was the US dollar for both countries, but this changed dramatically with Romania acceding to the EU. While the key currency received from abroad is now the euro in the case of Romania, Moldova continues to receive its largest amounts in US dollars, including the amount received from the Russian Federation (representing around 30% of total transfers during the first quarter of 2018) denominated mainly in US dollars and secondly in roubles (less than 8% of total transfers).

Moldova received during the last 10 years, on an annual basis, an average of $1.3bn-$1.4bn from its citizens currently living and working in the Russian Federation, the EU, the US, Israel, Turkey and many other countries. In some years, this represented more than 20% of the Moldovan GDP, but the large majority of this money is going for consumption/subsistence, which is not the best trend. During the same period of time, Romania also received very large annual inflows of remittances. According to the national figures published in Romania, in 2016 alone it received remittances of $3.5bn, but the contribution to GDP was much lower (below 5%) than in the case of Moldova.


Table 2: Romania and Moldova: A Decade of Remittances, 2008 - 2017, $mn


































Source: NBR and NBM Interactive Data Base (net basis, without Transnistria), respectively, and World Bank ( *Preliminary


Economic benefits

There is almost a consensus that the steady flows of remittances to developing countries has significantly supported the economic growth of the recipient countries. Remittances have had a positive impact on the living standards of millions of people, including by giving them access to basic and/or high quality foods, key services, etc. Also, they granted to many people the economic freedom of travelling abroad and access to information, developed consumption and, to a certain extent, stimulated local production and services. Moreover, a good stream of remittances contributed to the stability of the local currencies, helped in reducing the current account deficit and indirectly had a positive impact on fiscal and budgetary equilibria. 

As such, the exchange rates of both the Romanian leu and the Moldovan leu are clearly related, inter alia, to the volume of remittances as presented above. There has been and, for the foreseeable future, there will continue to be a direct correlation between the exchange rates of the two distinct leu/lei and the level of remittances. From this point of view, both Romania and Moldova and their respective currencies are illustrative cases of such a statement. No doubt pressure on the currencies will continue without a solid stream of remittances. The ratio of consumption/investments will also be influential and the increase of the investment share will help support both economies. Their contribution to GDP is a fundamental proof of their positive impact on all aspects of life, and hence they are quantified as a key factor for the prosperity of both societies.  

Dire consequences for "exporters"

However, these recognised benefits came at a cost. In some cases, the whole emigration process had dire consequences on the economic development of the “exporting” countries. Some of these key consequences are presented in Table 3 and described in more detail below.


Table 3: Romania and Moldova - Population and Labour Force, 1995 -2016, thousands







or latest



or latest

Population (as of 1 July of each year/start of year, respectively)





Active labour force (incl. agriculture sector) 





Non-active persons, of which:





 - unemployed





 - retired persons (without agriculture)





Source:  Computed based on data from Statistical Yearbooks of Romania (INS) and of Republic of Moldova (BNS), respectively, various years and IMF publications; nan. = not available; * = 1991

For both Romania and Moldova, the registered changes between 1990 and 2016/18 are dramatic, to say the least.

First and foremost, the massive migration of Romanians and Moldovans over almost three decades of transition to a market economy has created dangerous disequilibria on the labour markets. There are sectors (mainly infrastructure, agriculture, health services and education) in which the demand for workforce is much higher than the existing availability. In the agriculture sector, large areas of land remained uncultivated for many years as the labourers went abroad.

The structure of the population in general has deteriorated, with many villages and small cities being literally depopulated. Normally, the people emigrating were the young ones and many traditional activities were simply lost as there was nobody able to take over from the ageing population.

The young emigrating Romanians and Moldovans are now working in developed countries, they pay their taxes in their newly adopted countries and the majority of their incomes remained basically in the host countries. Both Romania and Moldova have registered large budget deficits (Romania: 2.9% of GDP and Moldova: 1.9%  in 2017 (est.)) for many years as the labour force has decreased dramatically as presented in Table 3 above. 

Moreover, these workers do not pay any social contributions to maintain an adequate national health system. The existing hospitals are depleted of doctors, nurses and auxiliary staff with grave consequences for the general health of the population. Finally, the emigrants do not contribute to the pension system any more. Payment of pensions to an increasing number of retired and ageing people became a national issue on a general background of mis-management of the scarce financial resources. Many times, the pensions have been paid from international borrowings, including from the International Monetary Fund (IMF) and the World Bank. This is extremely serious but has been ignored and continues to be ignored by the politicians and macroeconomic policy-makers.

Usually, the salaries paid to immigrants (especially in the early stages after their arrival) are lower than those of the similar local workers which gives yet another competitive advantage to large companies in the domestic and international markets. Only a small portion of their net incomes are sent home, via money transferring channels against hefty fees cashed by Western firms. 

In some cases, some Romanians and Moldovans tried to return home and start their own private businesses with the experience and little capital gained while abroad. During general and local elections, politicians promised large subsidies to this segment of new entrepreneurs, but all failed to deliver. The economic environment has been actually quite hostile to them. Corruption, bureaucracy and bribery were present everywhere. Most of them gave up. 

Quo vadis

It was easy to describe the current status, but when coming to the thorny question of what could or should be done, the answer is not so simple or straightforward. The situation is so convoluted that a simplistic approach would be dangerous. The IFIs, including the European Bank for Reconstruction and Development (EBRD), granted free technical assistance to Romania in early days of transition and to Moldova (and other CIS countries) to educate the public at large on how to make such transfers via official channels (banks, money-transfer chains, etc.) and, even more, how to utilise such important resources for investments. This was good but not nearly enough to solve this fundamental issue.

In spite of a risk of over-simplification, a few directions for immediate actions are very clear though. The countries themselves, such as Romania and Moldova, should design and implement economic policies to stop migration and to stimulate the former migrants to return home. Eradication of corruption in both countries will help a lot to improve the economic and social climate, which finally will result in reversing the flows of migration. In both cases, (and maybe more so in the case of Romania), investments (including with money from remittances) should be vigorously promoted as compared to the present situation in which the economic growth is based mainly on consumption. The SME sector should be encouraged to offer jobs and entrepreneurial opportunities to those returning. Carefully designed subsidies will help. Also, the EU should allow full access to structural funds aiming to encourage the return of migrants, who will bring Western expertise and mentality with them. Local banks and IFIs should offer dedicated loans at accessible interest rates and trade facilities to support exports, tourism and local services.

All of these will need some time to bring the much needed results and to restore the equilibria. Therefore they — the countries themselves first, the EU, IFIs, development banks, development agencies, etc. — have to act now before the situation becomes uncontrollable and unsustainable, which is a real risk.

Alex M. Tanase is an independent consultant and former associate director, senior banker at the EBRD and former IMF advisor. This article represents the author's personal views, and are not those of the EBRD, the IMF or any other institution quoted. The assessment and data are based on information as of mid-May 2018.