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### Recent survey-based studies on the diaspora and remittances — scope and samples
- Roberts et al. (Center for Economic Analysis, USAID financed; IDSCS fieldwork June–September 2007): survey of 1,046 remittance recipient households and 200 remittance senders.
- Mughal, Cipusheva and Abazi (2008, South East European University of Tetovo): Quality of Life Survey, July–August 2008, regional representative sample of 2,797 households.
- Petreski and Jovanovic (2013): two household surveys, 2008 survey of 1,211 households and late 2012 survey of 1,000 households.
- Economic Chamber of North-West Macedonia and USAID Small Business Expansion Project (2013): survey of 60 companies or individuals from the diaspora who had invested in the Polog region.

### Stylized facts, measurement, and channels
- Migration and diaspora
  - Cumulative outflow estimated at about 200,000 people (Bornarova and Janeska, 2012).
  - Main countries of residence: Australia, Italy, Switzerland, Germany, the United States, Canada, and Turkey.
  - Official registry (registrations of absence ≥ three months) records 125,000 Macedonians officially living abroad.
  - Destination-country-based estimate up to 550,000 Macedonians established abroad, putting emigration rate above 25 percent (Bornarova and Janeska, 2012).
  - Level of education of migrating workers has increased, highlighting “brain drain.”
- Private transfers and remittances as share of GDP
  - Private transfers fluctuated between 13 and 21 percent of GDP over the last ten years.
  - Officially recorded “workers’ remittances” (via banks and fast money transfer counters, ITRS) ≈ 2.5 percent of GDP.
  - Private transfers were 19 percent of GDP in 2013 (close to the 2010–2012 annual average).
  - For 2013, of the 19 percent of GDP of private transfers:
    - 14 percent of GDP came from cash exchange developments,
    - of which 4 percent of GDP were likely remittances,
    - the remainder related to unreported economic activity and release of savings.
  - Using these conservative assumptions, total remittance flows would be tentatively about 6.5 percent of GDP, significantly higher than FDI.
- Channels and composition (NBRM breakdown)
  - “Workers’ remittances” (official channels; ~2.5 percent of GDP).
  - “Other transfers”: (i) “net cash exchange” (largest share) recorded by banks and private exchange offices; (ii) “other private transfers” (rents, pensions, disability assistance, gifts, other private transfers to resident companies).
- Geographic origin
  - Based on World Bank estimates, more than 70 percent of remittances come from Western Europe (more than 60 percent from EU countries).
  - 2012 percent-share chart: Germany 23, Italy 22, Australia 13, Switzerland 11, Turkey 7, Austria 5, Slovenia 3, Other 15.
- Interaction with financial conditions
  - Remittances are highly correlated with household deposits and broad money developments and likely increase banking system liquidity.
  - Monetary policy relaxation by the central bank at end-2009 triggered a decline in the currency spread of deposits, coinciding with a slowdown in remittance transfers — suggesting part of remittances are interest rate-sensitive and reflect portfolio decisions.
- Measurement challenges and improvements
  - Challenges: disentangling genuine remittances from unrecorded exports of goods and services and release of dormant foreign-currency savings.
  - NBRM attempts:
    - 2007: used a CEA survey to extrapolate with household census data (project halted by interruption of the census).
    - 2011: initiated a new survey supported by an external consultancy; preliminary findings inconclusive due to absence of a recent census.

### Findings from household surveys — uses, poverty, and overall inference
- Primary uses (survey evidence)
  - Roberts et al. (2008):
    - Nearly 43 percent of recipients receive at least EUR 1,000 annually.
    - 39 percent reported remittances constitute half of their disposable income.
    - Average amount declared by recipients was US$2,486.
    - Use shares: current spending 74.1 percent, savings 13.7 percent, home construction 8.8 percent, house maintenance 5.7 percent; investment not prioritized.
  - Petreski and Jovanovic (2013) — use shares before and after crisis:
    - Before crisis (2008) — Consumption incl. Health 61%, Professional Investment 12%, Property invt. (excl. agr. land) 6%, Education 11%, Savings 6%, Debt payment 4%, Lending 0%.
    - After crisis (2012) — Consumption incl. Health 61%, Professional Investment 1%, Property invt. (excl. agr. land) 16%, Education 6%, Savings 10%, Debt payment 5%, Lending 1%.
- Poverty and inequality
  - Petreski and Jovanovic (2013): remittances reduce both poverty and income inequality and show resilience of remittances devoted to consumption through the crisis.
  - Mughal et al. (2008): document poverty reduction and consumption smoothing roles of remittances.
- Overall inference
  - Surveys indicate remittances in Macedonia primarily support consumption smoothing and poverty reduction; they appear compensatory rather than opportunistic, with nominal increases observed during the 2009–2010 downturn.

### Theoretical considerations on macroeconomic impact — two strands
- Positive-convergence strand
  - Emphasizes remittances’ role in sustaining purchasing power, alleviating financing constraints, and fostering small-scale investment where financial systems are underdeveloped.
  - Evidence cited: Giuliano and Ruiz-Arranz (2009); Catrinescu et al., 2006; Bjuggren, Dzansi and Shukur, 2010; Jongwanich, 2007; Chami, Fullenkamp, and Jahjah, 2005; Barajas et al., 2009.
  - Findings: strong short-run consumption-smoothing effects; limited or “at best” no impact on long-term growth in some studies.
- Dutch-disease strand
  - Mechanism: remittances increase disposable income → higher demand for tradable and non-tradable goods → increase in relative price of non-tradables → resource reallocation to non-tradables and potential labor shedding in tradable sectors → appreciated real exchange rate, higher imports, shrinking export capacity, structural deterioration of trade balance.
- Country-specific amplification factors
  - Larger household consumption share for non-tradables and small elasticity of substitution between tradable and non-tradable production → larger real exchange rate appreciation.
  - Endogenous labor supply (higher reservation wages with remittance income) → decline in labor supply and upward wage pressures in tradable-goods terms.
  - Exchange-rate regime effects:
    - Flexible rates: remittances exert short-term upward pressure on nominal exchange rate (if not sterilized).
    - Fixed rates: reserve accumulation tends to increase nominal money supply over time, boosting liquidity and generating inflationary pressures.

### Dutch Disease Mechanics (Box 2) — empirical evidence and SVAR results
- Short-term ‘spending’ effect chain
  - Remittances → Higher disposable income → Higher consumption of tradable and non-tradable goods → Higher imports (tradable goods) and Increase in FX deposits → Increase in FX reserves and/or money supply → With fixed exchange rate and imperfect sterilization → Increase in non-tradable to tradable goods prices.
- Long-term ‘resource movement’ effect chain
  - Remittances → Higher wages in non-tradable goods sector → Labor shedding from the tradable to the non-tradable sector → Underdevelopment of the tradable goods sector → Higher reservation wages in both sectors → Increase in non-tradable to tradable goods prices.
- Selected empirical findings preserved verbatim
  - Almuedo-Dorantes and Pozo (2004): A doubling of workers’ remittances lead to an overvaluation of the exchange rate by 22 percent.
  - Caceres and Saca (2006): Point to an appreciation of the real exchange rate as well as increases in imports and consumer prices, intensified by the reaction of the central bank, following remittance inflows.
  - Acosta, Lartey, and Mandelbam (2009): Remittances directly lead to an increase in the relative price of non-traded goods, causing some resource reallocation toward this sector.
  - Lopez, Molina, and Bussolo (2007): Remittances trigger some significant real exchange rate appreciation.
  - Bourdet and Falk (2006): Confirm adverse effect of remittances on external competitiveness in Cape Verde but highlight mitigating impact of well-targeted policy measures.
  - Rajan and Subramanian (2005): Find that remittances do not actually hurt overall competitiveness; expansion of domestic demand may be directed toward unskilled labor-intensive activities provided by local microenterprises.
- Stylized facts for Macedonia
  - Remittances show countercyclical consumption-smoothing impact in the short run and may undermine external competitiveness by supporting excess liquidity in the long run.
  - Countercyclical behavior during the 2008–2009 crisis highlights likely altruistic motivations and use for consumption.
  - Impossibility to fully sterilize financial flows under the fixed exchange rate regime → remittances likely explain the extremely high, and trend increasing, level of liquidity in the banking sector, partly reflecting an increase in the money supply.
  - The “internal” component of the real exchange rate appears to have appreciated with remittance inflows, with correlation peaking after about nine months.
  - In the medium to long-run, remittances appear positively correlated to low employment levels across comparable countries, including FRY Macedonia, suggesting upward pressures on reservation wages.
- SVAR model — data and identification
  - Objective: evaluate cyclical properties of remittances vis-à-vis aggregate home economy demand and EU demand; understand savings channel of remittances; assess Dutch disease hypothesis via NT/T prices and remittances.
  - Data span: 2005M08 to 2013M07.
  - Model vector Y(t): Y(t) = [GDP_MKD, C_MKD, NT/T prices, Remittances, IR differential, GDP_EU].
  - NT/T prices proxied by ratio of CPI over PPI, excluding the energy sector; price measure is a nine-lagged forward CPI/PPI (excluding energy).
  - Remittance series decomposed into “workers’ remittances” and “other transfers” in robustness checks; remittances adjusted and scaled such that 2010M06=100.
  - Identification: developments abroad assumed exogenous; zero restrictions impose no spillovers from domestic to external block. One lag used. Level variables detrended by taking 100 log of their first difference. Model estimated using Bayesian shrinkage technique (De Mol, Giannone, and Reichlin (2008); Banbura, Giannone, and Reichlin (2010)).
- Impulse response and robustness results — key findings
  - Remittances are countercyclical with respect to Macedonian GDP and pro-cyclical with respect to EU GDP.
  - Elasticity of the response to EU shocks is significantly higher, highlighting the role of “push” factors.
  - Remittances are interest rate-sensitive: an exogenous increase in the interest rate differential encourages migrant workers to choose their home economy for saving.
  - Remittances put some upward pressure on the internal real exchange rate: IRFs present mild evidence of Dutch disease effects; remittance shocks push non-tradable prices higher than tradable prices, though elasticities are small.
  - Robustness: results robust to different specifications of “remittances”; subcomponents strongly correlated (correlation factor 0.77). Workers’ remittances and other transfers respond similarly to exogenous shocks, though workers’ remittances exhibit a smaller elasticity than other transfers.

### Policy implications — measurement, institutional engagement, mobilization, and macro policy
- Measurement and data recommendations
  - Conduct domestic surveys on recipient households more frequently.
  - Combine household surveys with a comprehensive census of the diaspora through consular offices to better understand location, skills, and experience of migrants.
  - Example cited: Indian government’s exercise resulting in creation of a Ministry of Overseas Indian Affairs (MOIA) in 2004 (IOM and MPI, 2012).
- Institutional and political engagement
  - Strong political engagement in support of diaspora projects is key.
  - Establish diaspora-centered institutions at various government levels (ministry, sub-ministry, local).
  - Integrate policies on migration, remittances, and the diaspora into a national development strategy.
  - Raise diaspora investment policy priority to a level similar to attraction of FDI, within public-private collaborative strategies.
- Practical measures to promote diaspora engagement and investment
  - Tap diaspora human capital through scholar recruitment, covering moving costs, funding start-ups, and partnerships in innovative research.
  - Maintain an enquiry portal for local investment opportunities and create a “one-stop” shop for diaspora entrepreneurs.
  - Use special export processing zones and projects (example: ongoing project in Tetovo’s free economic zone).
- Mobilizing diaspora savings for investment
  - Combine small personal savings into larger capital flows via private investment vehicles or public instruments.
  - Securitization of diaspora funds (diaspora bonds) as alternative sovereign borrowing to finance public investment; diaspora bonds typically long-dated and redeemable only upon maturity.
  - Israel and India have issued upwards of US$25 billion and US$11 billion of diaspora bonds, respectively.
  - Diaspora bonds can pool remittances into activities promoting long-run development, leveraging the “patriotic discount”; issuance may have a favorable impact on sovereign rating (noted that this did not seem to support ratings in India and Israel).
- Formalization of remittance transfers
  - Formalization improves security, monitoring, and access to finance.
  - Policies that increase competition among financial institutions lead to more innovative and cheaper transfer technologies.
  - Channeling remittances through the financial system limits the risk of unexpected swings in cash exchanges which may complicate liquidity management.
- Macroeconomic policy measures to limit counterproductive side effects
  - Remittance inflows can appreciate the equilibrium real exchange rate and reduce competitiveness of the tradable goods sector.
  - Recommendation: remittances should not be taxed directly.
  - Suggestion: shift towards consumption-based taxation to mitigate possible overheating of domestic demand while encouraging private saving and investment (Chami et al., 2008).
- Use of public infrastructure and institutions to attract private investment
  - Any loosening of the government budget constraint due to remittances must be used to channel remittances into activities that promote long-run development while preserving poverty-reducing effects in the short run.
  - Public expenditure should improve physical infrastructure and public institutions to enhance the development impact of remittances.
  - Poor physical infrastructure and poor governance discourage private investment; improving these raises returns to private investment.
- Diaspora bond lessons (Box 4)
  - Open the sale to all, but market strategically to the few (example: Israel).
  - Emotional affiliation does not eliminate need for financial return (example: Ethiopia’s 2008 Diaspora Bond underperformed; fixed yields of 5 percent similar to yields in migrants’ resident countries).
  - Transparency in use of proceeds is critical.
  - Project-oriented diaspora bonds with tangible outcomes and verifiable progress have good prospects.
  - Data requirements: mapping of nationals abroad and surveys of diaspora characteristics in critical destination countries; consider covering remittance fees to facilitate bond purchases (example: Commercial Bank of Ethiopia).
- Selected initiatives mobilizing diaspora funds (summarized)
  - Diaspora Invest Initiative: USAID-supported partnership to improve communication and networking between local and diaspora businesses; partnerships including NORMAK Invest for Tetovo’s free economic zone; open diaspora regional offices; develop innovative financing of local projects.
  - Macedonian Diaspora Business Center (MDBC): established 2004 to bridge Macedonian companies and international companies linked to the diaspora.
  - USAID-supported SEAF Macedonia Fund: fund for small scale projects financed by SEAF, diaspora individuals, and Macedonia 2025; targeted size EUR 10 to 15 million including complementary domestic private funds; projects selected through Homestrings; USAID provides guarantees.
  - Macedonia 2025: NGO founded in 2007 with offices in Canada and the United States to position Macedonia as a preferred FDI destination and strengthen diaspora linkages.
  - National Entrepreneurship and Competitiveness Council (NECC): NGO with 17 members including business associations and the Macedonian Development Bank; chaired by Vice Prime Minister in charge of economic affairs; houses a committee on domestic and foreign investment working on policy priorities to support diaspora investment.

*Source: IMF staff report excerpt, “Remittances and Economic Development in FYR Macedonia,” June 17, 2014.*

### 1. Recent Survey-Based Studies on the Diaspora and Remittances ________________________ 5

### 1. Recent Survey-Based Studies on the Diaspora and Remittances

### A. Introduction — role and dual nature of remittances
- Workers’ remittances have been the most important financing flow in Macedonia’s balance of payments in recent years, superseding both official and other private capital flows to cover trade deficits hovering around 20 percent of GDP.
- Two angles for assessing long-run impact:
  - Development perspective: remittances can reduce poverty, smooth consumption, fund small-scale investment projects, alleviate financial constraints, and improve risk diversification in public debt portfolios.
  - Risk perspective: remittances can be volatile and may support excess private demand for extended periods, preventing relative price adjustment and efficient allocation of labor and resources, thereby undermining external competitiveness and potential growth.

### B. Stylized facts and measurement
- Migration and diaspora
  - Emigration has been continuous since the late 19th century; cumulative outflow estimated at about 200,000 people (Bornarova and Janeska, 2012).
  - Main countries of residence include Australia, Italy, Switzerland, Germany, the United States, Canada, and Turkey.
  - The level of education of migrating workers has increased, highlighting “brain drain.”
  - The size of the diaspora is uncertain:
    - Official registry (registrations of absence ≥ three months) records only 125,000 Macedonians officially living abroad.
    - Based on destination-country statistics, up to 550,000 Macedonians are estimated to be established abroad, bringing the emigration rate above 25 percent (Bornarova and Janeska, 2012).
- Private transfers and remittances as share of GDP
  - Private transfers have fluctuated between 13 and 21 percent of GDP over the last ten years.
  - Officially recorded “workers’ remittances” (via banks and fast money transfer counters, ITRS) represent about 2.5 percent of GDP.
  - Private transfers were 19 percent of GDP in 2013 (close to the 2010–2012 annual average).
  - For 2013, of the 19 percent of GDP of private transfers:
    - 14 percent of GDP came from cash exchange developments,
    - of which 4 percent of GDP were likely remittances,
    - the remainder related to unreported economic activity and release of savings.
  - Using these conservative assumptions, total remittance flows would be tentatively about 6.5 percent of GDP, significantly higher than FDI.
- Channels and composition
  - The NBRM breaks private transfers into:
    - “Workers’ remittances” (official channels; ~2.5 percent of GDP),
    - “Other transfers” comprising (i) “net cash exchange” (largest share) recorded by banks and private exchange offices; (ii) “other private transfers” (rents, pensions, disability assistance, gifts, other private transfers to resident companies).
  - Measurement challenges center on disentangling genuine remittances from unrecorded exports of goods and services (e.g., health care for non-residents) and the release of dormant foreign-currency savings.
  - The authorities have attempted measurement improvements:
    - 2007: NBRM used a CEA survey to extrapolate with household census data (project halted by interruption of the census).
    - 2011: NBRM initiated a new survey supported by an external consultancy; preliminary findings were inconclusive due to absence of a recent census.
- Geographic origin
  - Based on World Bank estimates, more than 70 percent of remittances come from Western Europe (more than 60 percent from EU countries).
  - Leading origin countries indicated in the 2012 percent-share chart: Germany 23, Italy 22, Australia 13, Switzerland 11, Turkey 7, Austria 5, Slovenia 3, Other 15.
- Interaction with financial conditions
  - Remittances are highly correlated with household deposits and broad money developments and likely increase banking system liquidity.
  - The start of monetary policy relaxation by the central bank at end-2009 triggered a decline in the currency spread of deposits, which coincided with a slowdown in remittance transfers — suggesting part of remittances are interest rate-sensitive and reflect portfolio decisions.

### C. Recent survey-based studies — scope and sample sizes (Box 1)
- Roberts et al. (Center for Economic Analysis, USAID financed; IDSCS fieldwork June–September 2007): survey of 1,046 remittance recipient households and 200 remittance senders.
- Mughal, Cipusheva and Abazi (2008, South East European University of Tetovo): Quality of Life Survey, July–August 2008, regional representative sample of 2,797 households.
- Petreski and Jovanovic (2013): two household surveys, 2008 survey of 1,211 households and late 2012 survey of 1,000 households.
- Economic Chamber of North-West Macedonia and USAID Small Business Expansion Project (2013): survey of 60 companies or individuals from the diaspora who had invested in the Polog region.

### D. Findings from surveys on uses and effects of remittances
- Primary uses
  - Roberts et al. (2008):
    - Nearly 43 percent of recipients receive at least EUR 1,000 annually.
    - 39 percent reported that remittances constitute half of their disposable income.
    - Average amount declared by recipients was US$2,486.
    - Use of flows: current spending 74.1 percent, savings 13.7 percent, home construction 8.8 percent, house maintenance 5.7 percent; investment not prioritized.
  - Petreski and Jovanovic (2013) (use shares before and after crisis):
    - Use of remittances before crisis (2008) — percent shares: Consumption incl. Health 61%, Professional Investment 12%, Property invt. (excl. agr. land) 6%, Education 11%, Savings 6%, Debt payment 4%, Lending 0%.
    - Use of remittances after crisis (2012) — percent shares: Consumption incl. Health 61%, Professional Investment 1%, Property invt. (excl. agr. land) 16%, Education 6%, Savings 10%, Debt payment 5%, Lending 1%.
- Poverty and inequality
  - Petreski and Jovanovic (2013) find remittances reduce both poverty and income inequality and show resilience of remittances devoted to consumption through the crisis.
  - Mughal et al. (2008) also document poverty reduction and consumption smoothing roles of remittances.
- Overall inference
  - Survey-based evidence indicates remittances in Macedonia primarily support consumption smoothing and poverty reduction; they appear compensatory rather than opportunistic, with nominal increases observed during the 2009–2010 downturn.

### E. Theoretical considerations on macroeconomic impact
- Two strands of literature
  - Positive-convergence strand:
    - Emphasizes remittances’ role in sustaining purchasing power, alleviating financing constraints, and fostering small-scale investment where financial systems are underdeveloped.
    - Remittances may boost investment and long-term growth in economies with weak financial intermediation (e.g., Giuliano and Ruiz-Arranz, 2009; Catrinescu et al., 2006; Bjuggren, Dzansi and Shukur, 2010), though effects decline with institutional improvements.
    - Some studies (Jongwanich, 2007; Chami, Fullenkamp, and Jahjah, 2005; Barajas et al., 2009) find strong short-run consumption-smoothing effects but limited or “at best” no impact on long-term growth.
  - Dutch-disease strand:
    - Remittances act like other exogenous inflows (e.g., resource windfalls) by increasing household disposable income (spending effect), raising demand for tradable and non-tradable goods.
    - With exogenously given tradable prices, excess demand raises the relative price of non-tradables (real exchange rate appreciation), induces resource reallocation toward non-tradables (resource movement effect), and can cause labor shedding in tradable sectors.
    - Net outcome: appreciated real exchange rate, higher imports, shrinking export capacity, and structural deterioration of the trade balance proportional to the remittance-driven spending.
- Country-specific amplification factors
  - Larger household consumption share devoted to non-tradables and smaller elasticity of substitution between tradable and non-tradable production => larger real exchange rate appreciation and competitiveness loss.
  - Endogenous labor supply (higher reservation wages with remittance income) => decline in labor supply and upward wage pressures in tradable-goods terms, further reducing tradable-sector profitability and output.
  - Exchange-rate regime effects:
    - Flexible rates: remittance inflows exert short-term upward pressure on the nominal exchange rate (if not sterilized), worsening export competitiveness if wages do not adjust down.
    - Fixed rates: reserve accumulation tends to increase nominal money supply over time, boosting liquidity and generating inflationary pressures, particularly on resources used across sectors.

*Source: IMF staff report excerpt, “Remittances and Economic Development in FYR Macedonia,” June 17, 2014.*

### Box 2. Dutch Disease Mechanics

### Box 2. Dutch Disease Mechanics

### Short-term and long-term transmission mechanisms
- Short-term ‘spending’ effect chain (as presented):
  - Remittances → Higher disposable income → Higher consumption of tradable and non-tradable goods → Higher imports (tradable goods) and Increase in FX deposits → Increase in FX reserves and/or money supply → With fixed exchange rate and imperfect sterilization → Increase in non-tradable to tradable goods prices.
- Long-term ‘resource movement’ effect chain (as presented):
  - Remittances → Higher wages in non-tradable goods sector → Labor shedding from the tradable to the non-tradable sector → Underdevelopment of the tradable goods sector; firms preserve margins in non-tradable goods sector → Higher reservation wages in both sectors (labor supply assumed endogenous) → Increase in non-tradable to tradable goods prices.

### Empirical findings from literature (selected items preserved verbatim)
- Almuedo-Dorantes and Pozo (2004): A doubling of workers’ remittances lead to an overvaluation of the exchange rate by 22 percent.
- Caceres and Saca (2006): Point to an appreciation of the real exchange rate as well as increases in imports and consumer prices, intensified by the reaction of the central bank, following remittance inflows.
- Acosta, Lartey, and Mandelbam (2009): Remittances directly lead to an increase in the relative price of non-traded goods, causing some resource reallocation toward this sector.
- Lopez, Molina, and Bussolo (2007): Remittances trigger some significant real exchange rate appreciation.
- Bourdet and Falk (2006): Confirm adverse effect of remittances on external competitiveness in Cape Verde but highlight mitigating impact of well-targeted policy measures.
- Rajan and Subramanian (2005): Using a very disaggregated cross-national dataset, find that remittances do not actually hurt overall competitiveness; expansion of domestic demand may be directed toward unskilled labor-intensive activities provided by local microenterprises.

### Stylized facts for Macedonia
- Remittances show countercyclical consumption-smoothing impact in the short run and may undermine external competitiveness by supporting excess liquidity in the long run.
- Countercyclical behavior of remittances during the 2008–2009 crisis highlights likely altruistic motivations and use for consumption.
- Given the impossibility to fully sterilize financial flows over extended periods under the fixed exchange rate regime, remittances likely explain the extremely high, and trend increasing, level of liquidity observed in the banking sector, partly reflecting an increase in the money supply.
- The “internal” component of the real exchange rate (proxy for prices of non-tradable to tradable goods) appears to have appreciated with remittance inflows, with correlation peaking after about nine months.
- In the medium to long-run, remittances appear positively correlated to low employment levels across comparable countries, including FRY Macedonia, suggesting upward pressures on reservation wages.

### SVAR model: data and identification (model specifications preserved)
- Objective of the SVAR model:
  - Evaluate cyclical properties of remittances with respect to the aggregate home economy demand and EU demand.
  - Understand the savings channel of remittances.
  - Assess the Dutch disease hypothesis by looking at the relationship between non-tradable to tradable (NT/T) prices and remittances.
- Data span: 2005M08 to 2013M07.
- Model vector Y(t) used:
  - Y(t) = [GDP_MKD, C_MKD, NT/T prices, Remittances, IR differential, GDP_EU].
- NT/T prices proxied by ratio of CPI over PPI, excluding the energy sector; price measure is a nine-lagged forward CPI/PPI (excluding energy).
- Remittance series:
  - Decomposed into “workers’ remittances” and “other transfers” in robustness checks.
  - Remittances further adjusted and scaled such that 2010M06=100.
- Identification: Developments abroad assumed to exogenously impact the domestic economy; zero restrictions impose no spillovers from domestic to external block. One lag used. Level variables detrended by taking 100 log of their first difference. Model estimated using Bayesian shrinkage technique (De Mol, Giannone, and Reichlin (2008); Banbura, Giannone, and Reichlin (2010)).

### Impulse response and robustness results (key findings)
- Remittances are countercyclical with respect to Macedonian GDP and pro-cyclical with respect to EU GDP.
  - The elasticity of the response to EU shocks is significantly higher, highlighting the role of “push” factors.
- Remittances are interest rate-sensitive: An exogenous increase in the interest rate differential encourages migrant workers to choose their home economy for saving.
- Remittances put some upward pressure on the internal real exchange rate: IRFs present mild evidence of Dutch disease effects; remittance shocks push non-tradable prices higher than tradable prices, though elasticities are small.
- Robustness: Results are robust to different specifications of the “remittances” variable.
  - Subcomponents of remittances are strongly correlated; correlation factor is 0.77.
  - Workers’ remittances and other transfers respond similarly to exogenous shocks, though workers’ remittances exhibit a smaller elasticity than other transfers.

### Policy implications — managing remittances (recommended actions and initiatives)
- Measurement and data recommendations:
  - Domestic surveys on recipient households should be conducted more frequently.
  - Combine household surveys with a comprehensive census of the diaspora through consular offices to better understand location, skills, and experience of migrants.
  - Example cited: Indian government’s exercise resulting in creation of a Ministry of Overseas Indian Affairs (MOIA) in 2004 (IOM and MPI, 2012).
- Institutional and political engagement:
  - Strong political engagement in support of diaspora projects is key.
  - Establish diaspora-centered institutions at various government levels (ministry, sub-ministry, local).
  - Integrate policies on migration, remittances, and the diaspora into a national development strategy.
  - Raise diaspora investment policy priority to a level similar to attraction of FDI, within public-private collaborative strategies.
- Practical measures to promote diaspora engagement and investment:
  - Tap diaspora human capital through scholar recruitment, covering moving costs, funding start-ups, and partnerships in innovative research.
  - Maintain an enquiry portal for local investment opportunities and create a “one-stop” shop for diaspora entrepreneurs.
  - Use special export processing zones and projects (example: ongoing project in Tetovo’s free economic zone).
- Mobilizing diaspora savings for investment:
  - Combine small amounts of personal savings into larger capital flows via private investment vehicles or public instruments.
  - Securitization of diaspora funds (diaspora bonds) as an alternative instrument of sovereign borrowing to finance public investment; diaspora bonds are typically long-dated and redeemable only upon maturity.
  - Israel and India have issued upwards of US$25 billion and US$11 billion of diaspora bonds, respectively.
  - Diaspora bonds can pool remittances into activities promoting long-run development, leveraging the “patriotic discount” element.
  - Potential additional benefit: issuance of diaspora bonds may have a favorable impact on sovereign rating (noted that this did not seem to support ratings in India and Israel).

### Selected initiatives mobilizing diaspora funds (summarized from Box 3)
- Diaspora Invest Initiative: USAID-supported partnership aiming to improve communication and networking between local and diaspora businesses, establish partnerships including with NORMAK Invest for Tetovo’s free economic zone, open diaspora regional offices, and develop innovative financing of local projects.
- Macedonian Diaspora Business Center (MDBC): Established in 2004 as part of the Macedonian Chambers of Commerce to bridge Macedonian companies and international companies linked to the diaspora.
- USAID-supported SEAF Macedonia Fund: Setting up a fund for small scale projects financed by SEAF, individuals from the diaspora, and members of Macedonia 2025; targeted size of the Fund (EUR 10 to 15 million) will include complementary funds from domestic private financial institutions; projects selected through Homestrings; USAID provides some guarantees.
- Macedonia 2025: NGO founded in 2007 to position Macedonia as a preferred FDI destination and to strengthen linkages with the diaspora; has offices in Canada and the United States.
- National Entrepreneurship and Competitiveness Council (NECC): NGO with 17 members including business associations and the Macedonian Development Bank; chaired by Vice Prime Minister in charge of economic affairs; houses a committee on domestic and foreign investment working on policy priorities to support diaspora investment.

*Source: _cr14232 - Box 2. Dutch Disease Mechanics (IMF staff content).*

### 24. Increasing the formality of transfers is important for leveraging remittances. The

### 24. Increasing the formality of transfers is important for leveraging remittances. The

### Formalization of remittance transfers
- Formalization makes transfers more secure, easily monitored, and potentially makes access to finance more effective.
- Policies that increase competition among financial institutions lead to more innovative and cheaper technology for money transfers.
- From a monetary policy perspective, channeling remittances through the financial system limits the risk of unexpected swings in cash exchanges which may complicate liquidity management.
- Empirical reference: Comstock, Iannone, and Bhatia, 2009 cited for country experiences of financial institutions’ remittance-based products and mechanisms.

### Macroeconomic policy measures to limit counterproductive side effects
- Remittance inflows can appreciate the equilibrium real exchange rate and reduce competitiveness of the tradable goods sector.
- Recommendation: Remittances should not be taxed directly.
- Empirical suggestion: Shifting towards consumption-based taxation may provide the correct incentive; it can help mitigate a possible overheating impact on domestic demand, while reaping the benefits from a resulting increase in private saving and investment (Chami et al., 2008).

### Use of public infrastructure and institutions to attract private investment
- Any loosening of the government budget constraint due to remittances must be used to channel remittances into activities that promote long-run economic development, while preserving their poverty-reducing effects in the short run.
- Public expenditure should improve public infrastructure (physical infrastructure and public institutions) to enhance the development impact of remittances.
- Poor physical infrastructure and poor governance are the main factors discouraging private investment; more remittances raise the quality of public infrastructure required to induce a given amount of private investment.
- Using improvements in public infrastructure and institutions to increase returns to private investment is crucial given the difficulty in finding a robust positive effect of workers’ remittances on economic growth (see Catrinescu et al., 2006).

### Box 4 — Lessons Learned from Experience with Diaspora Bonds
- Open the sale to all, but market strategically to the few.
  - Example: Israel does not restrict the investor base; road shows and bond features (including the pricing) were mostly aimed at Israeli nationals.
- Emotional affiliation does not eliminate the need to make a financial return.
  - Example: Ethiopia’s 2008 Diaspora Bond underperformed partly due to political concerns, capacity-to-pay concerns, and fixed bond yields of 5 percent that were similar to yields on certificates of deposits in migrants’ resident countries.
- Transparency in the use of proceeds is critical.
  - Diaspora bonds are generally issued for financing projects appealing to the diaspora, such as infrastructure projects, housing, and social amenities; accountability to this investor group is important.
- Project-oriented diaspora bonds have good prospects for success.
  - Tangible outcomes and verifiable progress matter to bondholders even from a distance.
- Data requirements and marketing considerations:
  - A mapping of the country’s nationals abroad is needed to identify a critical mass of solvent diaspora members.
  - Surveys of the diaspora’s characteristics in critical destination countries are important, as are reviews of the means for transferring remittances to inform Diaspora Bond design.
  - Example: The Commercial Bank of Ethiopia covered any remittance fees associated with the purchase of the 2011 Diaspora Bond.

### Key policy implications and takeaways
- Increase formality of remittance channels to improve security, monitoring, financial inclusion, and monetary management.
- Favor competition among financial institutions to lower costs and spur innovation in remittance transfer technology.
- Avoid direct taxation of remittances; consider consumption-based taxation to mitigate overheating and encourage saving and investment.
- Use remittance-related fiscal space to invest in public infrastructure and institutional quality to attract private investment and enhance long-run development impacts.
- When considering diaspora bonds:
  - Ensure transparency on use of proceeds and project orientation.
  - Market strategically while keeping issuance open to all.
  - Conduct diaspora mapping and surveys; consider covering remittance fees to facilitate bond purchases.

*Source: _cr14232 - 24. Increasing the formality of transfers is important for leveraging remittances. The*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14232.pdf_