Remittances at Risk for Eastern Nations

With Western Europe in recession, homeward-bound cash flow is likely to slow as jobs dry up in emigrant-friendly industries such as construction

Of all his aphorisms, carpe diem is the lyric poet Horace's most famous. But he also said, "Your own safety is at stake when your neighbor's house is ablaze."

If the global economic catastrophe has taught us anything, it's this, and the backwater nations of Eastern Europe and Central Asia are probably next in line to realize this nasty bit of wisdom.

The former Soviet Union and post-communist Eastern Europe are filled with immature economies rife with poverty, corruption, and unemployment and lacking any comparative advantage to attract investment. Many have seen large-scale emigration in recent years as workers left for opportunity in Russia or Western Europe. This work force has subsequently become a geographically distant yet vital economic foundation for their home countries – places like Moldova, Tajikistan, or Albania – through the money they send home every year, money that, for their families, can mean the difference between falling below or hovering barely above the poverty line.

But Old Europe is now in recession, and the Bear faces its toughest times since the 1998 debt default. As a result, émigrés are expected to cut back on remittances as jobs in emigrant-friendly industries such as construction dry up, making their homelands – once thought protected from the financial crisis – the latest victim.

It is "clear that the idea that developing countries would somehow be 'de-coupled' from the crisis is a myth," Supachai Panitchpakdi, secretary general of the UN Conference on Trade and Development, said recently about downward forecasts for remittances in 2009.

Tracking and predicting remittance flows is tricky because they vary greatly among countries, hinge on myriad variables, and often become part of the gray economy. The UN agency nevertheless forecasts remittances to developing countries could fall by as much as 6 percent next year.

In Eastern Europe and Central Asia, Moldova and Tajikistan are most at risk. Both have large emigrant populations in Russia (many Moldovans also go to Italy, which is in recession and not expected to be back in the black until 2010, according to a European Commission forecast) and remittances account for more than 35 percent of GDP in each country, making them the world's most remittance-dependence economies, according to the World Bank's Migration and Remittances Factbook 2008. And neither has much to fall back on.

"If you look at places like...Moldova, it's tougher because [remittances] are a large percentage of the economy, but also because there's nothing going on there," said Jon Levy, an analyst at the Eurasia Group global consultancy in New York. "The countries that have these competitive issues should be extremely worried."

Albania is also vulnerable, with money sent home from its emigrant populations in Greece and Italy comprising a hefty percentage of GDP. Likewise in Romania. Around 1.5 million Romanians work in Spain, whose economy will contract next year, according to the EC, and Italy. Many of those jobs are in construction, an especially vulnerable trade in hard times. Banks are already seeing a downward trend in the money they send home.


Like the business of tracking remittances, predicting how lower emigrant cash transfers will affect home economies is difficult. Surely, families who haven't been hoarding euros or other foreign currencies from relatives abroad will suffer. But falling remittances could also have a ripple effect for economies as a whole because this money is most often used for consumption, and a considerable amount of growth in Central Asia and Eastern Europe is consumption-based.

"Remittances are a source of demand in the economy," Levy said. "It's a direct conduit through the entire economy."

What can governments do to mitigate the pain? Not much. European Union members such as Romania can try to better utilize EU aid money available to new member states, and non-EU members such as Moldova could redirect some subsidies to help the poor.

Regardless, the coming years will be difficult. Forward-looking governments, however, just might see opportunity.

Investment, credit, and capital flows are tightening worldwide, even in the most resilient economies. So for a Moldova, Tajikistan, or Albania, why not use this time as a building period to emerge from the crisis with a stronger investment climate – one capable of attracting foreign businesses once they start spending again?

Clearly, none of these countries will afford massive infrastructure investments or other much-needed, capital-intensive improvements. But all could make significant strides in the eyes of foreign business by getting tougher on corruption or improving the legislative framework to better protect investment.

Many of these countries have unstable, it not slipshod, governments, so such reform may be simply out of reach. But, as Levy pointed out, Slovakia transformed itself from backwater into a shining reformer and Central European investment magnet within a few years.

By following its example, Moldova, Tajikistan, or Albania might manage to put a little more distance between them and their neighbors for when the next blaze erupts.

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