remittances in albania

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Remittances in AlbaniaAcademic writing

Erdi Xherri Herion Neziri Arbër [email protected] [email protected] [email protected]

groups 202 201 201

date 21.06.2011

REPUBLIKA E SHQIPERISËUNIVERSITETI I TIRANËS

Fakulteti i Ekonomisë

mailto:[email protected]











I

Table of Contents

Figures ................................................................................................................................................. II

1. Introduction ........................................................................................................................................ 1

2. General aspects .................................................................................................................................... 12.1 Motives of remittances ................................................................................................................... 1

2.2 Factors that determine the remittances ........................................................................................... 1

3. Theory – the uses of remittances ....................................................................................................... 2

4. Types of remittances .......................................................................................................................... 2

4.1 According to economic-financial view .......................................................................................... 24.2 According to deliver view .............................................................................................................. 3

5. The channels of remittances ............................................................................................................... 3

5.1 Formal channels ............................................................................................................................. 3

5.2 Informal channels ........................................................................................................................... 35.3 Aspects of deliver channels in Albania .......................................................................................... 4

6. Remittances in Albania ....................................................................................................................... 56.1 An overwiew of Albanian emigration ............................................................................................ 5

6.2 The impact of remittances in Albanian economic growth ............................................................ 56.3 Distribution of remittances ............................................................................................................. 6

6.4 The use of remittances .................................................................................................................... 7

7. Conclusions ......................................................................................................................................... 8

8. References ........................................................................................................................................... 9



II

Figures

5.1 Remittances of Albanian emigrants,million USD (percent),

formal and informal channels,1994-2004 .................................................................................................. 46.1 Remittannces in Albania for 2004-2011 .................................................................................................... 6

6.2 Average amount remitted to household (at 2005 prices,leks),2005 ........................................................... 6

6.3 Uses of remittances,2005 ........................................................................................................................... 7



1

1. Introduction

In this paper we are going to discuss the economic impact of remittances in Albania.Remittances are one of

the factors that help the economy of the country to grow faster,especially countries in develop.Albania isone of the countries,where remittances have been the most important indicators to develop tha economy of

the country.

Remittances have played a great role in economic growth.The concept of economic growth has to do withthe growth of domestic product (GDP) or the increasment of aggregate incomes.We say that a country have

had economic growth if its GDP has been increased.The factors that influence in agregate incomes are :consume,investment,government expenses and neto exports.

Remittances are the amount of money transferred by emigrants,who work in foreign countries,to their

families.The remittances flow hava increased immensely,as they have become the second source afterforeign direct investment (FDI) of external funding for developing countries including Albania.According to

Korovilas (2005),from 1994 to 2002 Albanian economy has experienced the fastest rise in real GDP in

Eastern Europe.

The purpose of this paper is to discuss about impact of remittances in Albania and their uses.

.

2. General aspects

2.1 Motives of remittances

Basis for the motives that emigrant remit was first set by Stark and Lucas (1985).A survey was carried out

with some families in Botswana and the conclusion that was drawn is that main motives for remitting

money back home are “pure altruism”,“pure self -interest”,“tempered-altruism”.They found that the most

common motive for reminittances is altruism.The emigrant concerns about the financial-social situation of his family.

By this survey there were evaluated some hypotheses,which we can mention:

First,the amount of remittances should increase with the emigrants‟ income.Second,an increase of familyincome will bring a decrease of remittances.Andthird,remittances should decrease over time as the

attachment to the family gradually weakens as referred to OECD (2005).Pure self-interest is related

emigrant‟s behavior,which deals with the desire to inherit assets of their family or returnig back homelately.While in tempered altruism both emigrant and family.

2.2 Factors of remittances :

1. Number of emigrants that work abroad.This is considerably the most important factor.2. The structure of emigrants,which means age,legalisation,qualification,civilstatus,neighbourhood

with the country of emigration.

3. Labour conditions dealing with type of work,the amount of salary and opportunities to take thefamily in the country of emigration.

4. Economic,political and social changes happening in the homeland.



2

3. Theory – the uses of remittances

The way how remittances are used is what determines their effect on the economy.If they are spent in

productive investment,education and health they have positive growth effects via increased output and

productivity.But on the other hand if they are only spent on consumption their effects depend on wether theconsumed goods are locally produced or imported.If the consumed goods are locally produced,there is

generated a multiplier effect and remittances thus have an indirect contribution to growth by encouraging

investment in related industries.But,if remittances are spent on imported consumed goods,despite thepositive multiplier effect on the economy they also tend to have a negative effect on the balance of

payments.As we mentioned on subsection 2.1 the prime motive for remitting money is altruism.That implies

that remittances are compensatory income for remittances receivers.Therefore it is logical to assume that

most of remitted money are mainly spent on consumption of daily necessities,which are consumer goods.Having mentioned that altruism and self-interest are the main motives of remittances and that they are

used mainly to provise the basic needs,but also invested in productive activities,obviously remittances

improve the standarts of living for the receiving households.The matter is wether they have a positive

growth effect on the receiving economy as whole

4.

Types of remittances

4.1 According to economic-financial view

If we refer to Wabba (1991) classification,we have four types of remittances :

a. Potential remittances, which represent the total savings of the emigrant. This can be calculatedby subtracting the personal necessary expenditures inccurred in the country of emigration

from the incomes.

b. Constant remittances, which imply the minimum income that the emigrant sends to his family

in the country of birth, intended to cover the cost of daily necessities.

c.

Additional remittances, which represent extra income over the regular amount. sent by theemigrant. This is not used to meet the most accute needs of the family, but for investments in

factual or financial undertakings.d. The spared remittances, representing the amount of savings that the emigrant doesn‟t intend to

make as a remittance, but prefers to invest in the country of emigration.

In calculation :

Y = the income of the emigrant in the country of emigrationC = the indispensable consumption of the emigrant

c = the daily necessities of the emigrant‟s family

S = emigrant‟s savings

We can write: Y = C + c + S

We can sum up the different types of remittance as follows:

R = c + aS + (1 – a)S = c + S

R = potential remittances

c = constant remittances

a = emigrant‟s tendency to send the savings



3

aS = additional remittances

(c +aS) = dispatched remittances , and (1 – a)S = spared remittances

4.2 According to deliver view

The remittances can be classified into four types including Family Remittances, Community Remittances,

Migrant Worker Remittances and Social Worker Remittances according to Remittances (2010).

a. Family Remittances: It refers to remittances that are sent by individual immigrants working in the

foreign locations to their family, relatives or friends in their home country. These remittances aresent every month and they assist the families of the migrants to survive. These remittances also help

the poor families to fight against the poverty. The family remittances are regarded as the major form

of remittances across the world where millions of workers are working hard in distant land away

from their home for earning their livelihood.

b. Community Remittances: It refers to the remittance that is sent by individual immigrants generally

and also includes the remittance sent by various hometown associations to organisations and

communities in their home country. This money has been used for the developmental activities of

communities such as in building infrastructure, church,parks, and roads. It also offers health care to

the poor. The community remittances are also used for offering health benefits, education; and

employment to big communities who need these facilities in the home countries.

c. Migrant worker Remittances : These remittances refers to the cash transfers done by migrant

workers for sending the money to the families, friends and relatives back home. The migrant worker

remittances make up a large chunk of money inflows into home country by the people who have

migrated to foreign locations in the search of money, job or education.

d. Social Remittances : These remittances basically comprise of various ideas, practices, and socialcapital that make up the backbone of many remittances that flows from workers of one country to

another. Thus social remittances assist the traditions and culture of one race or community, to

socialize with the cultures and traditions of another community. Social Remittances help in the

bonding of people and do not have money associated with them.

5. The channels of remittances

5.1 Formal channels

Formal channels,which includes Banking Sector and the Money Transfer Operator (MTO).Operations of remittances transfer via banking system is very complexed,while MTOs offer faster service,though it is

much more expensive.

5.2 Informal channels

Informal channels,where remittances are hand-carried by themselves or through family members andfriends.Another way is courier,even though not so popular.

In practise it is very difficult to figure out the amount of remittances and the remittances flow,due to that

most of remittances do not move in formal channels,which means transfer via banking system.Referring to a

survey by Korovilas (1999),the channels of transfering are : 43.8% accepted that give the money byhand,36.7% by friends or other reliable persons,0.5% in another way and only 19% say that use banking

system.These statistics deal only with legal emigrants,expelling those who are illegal.



4

5.3 Aspects of deliver channels in Albania

Mainly there are three reasons why Albanian emigrants use mostly informal channels :

1. Geographicalvicinity.Most of Albanian emigrants work in Greece and Italy,while they come to their

families in average twice per year.For this reason they prefer hand-carrying rather than transferring

via banking system.2. The culture of trust of people to the bank is not too much developed.The incomes in foreign currency

are too high.Family of emigrants exchange the money they receive by remittances by banking and by

informal systems.3. The Albanian banking system is not too much developed.Most of the banks are located in the most

important urban areas,but most of the emigrants come from small urban areas and from rural ones.

Figure5.1 :Remittances of Albanian emigrants, million USD (percent),formal and

informal channels, 1994-2004

Source : Bank of Albania,2005

As we see in Table 1,Albanian emigrants have mostly used informal channels in their early years of emigration.As the years have passed the trend has changed,where we obviuosly see that the use of formal

channels has deeply increased.The reason that explains this trend is the development of Monetary Transfer

Operators.As we have mentioned they offer a very fast and safe service.

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Informal channels

Formal channels



5

6. Remittances in Albania

6.1 An overview of Albanian emigration

The social-demographic characteristics of the surveyed emigrants indicate that majority of them are of

younger (53 % of the emigrants are below 35 years old), and of male sex (75.4%).It also shows that

they are educated (58.7% with secondary education and 24.3 % with higher education ), while themost of them (66.7%) emigrated before 1997. Most of those surveyed are married (69.6 %) and

emigrated together with their family (70.8 %), mainly to Greece (54.1%) and Italy (41%). Most of the

surveyed emigrants are legitimated in the country of emigration (81.6%) and 70.5% of them pay socialinsurance contributions. The majority of emigrants are working in the service sector (48.2%), in

industry (32.6 %), construction (9.4%) and agriculture (3.9 %). They live in rented apartments

(84.5%) and only a small contingent (9.6 %) has managed to purchase a house1.

The reason why Albanians have emigrated is related with the difficulty economic and the social situation in

their country.A report of the United Nations Organisation for the period 1991 – 1992, based on the

emigration practice from South to North Europe during the „60s, estimates that the gap between the

per capita incomes, the unemployment rate and the vision of the people about the future, represent thecrucial factors that explain the tendency to emigrate.In our case,the income per capital for Albania is more

than 10%of that available in Greece and Italy,both main countries where Albanians have massively

emigrated.

6.2 Impacts of remittances in Albanian economic growth

According to Bank of Albania remittances are the differences between the foreign currency entries and

foreign currency expenditures.TheInternational Monetary Fund (IMF) in 1994 estimates remittances at 200

million USD or 20% of GDP,but from other sources it estimates from 400 as showed by Financial Times

(1997) to 500 million USD referring to Wortman (1995).The best way to find the impact of remittances is toanalyse their relationship with export of goods and remittances per capita.In 1999 the remittances represent

134% of exports witch it meens 109 USD per capita.This is a number much bigger compered withathercountris in Central and Eastern Europe.

Another indicator is the ratio of remittances to the number of emigrants witch is lower for Albaniaemigrants if compared to other countries in Mediterranean.In 1991 the amount of an Albania emigrants was

1/10 of Portugal and Yugoslavia emigrants.This can be explained by the low pay of emigrants compered of

other emidrants.According to Bank of Albania in 1992 was 150 million USD ,up to 274.8 USD in 1993 and378 million in 1994 a number proportional to the number of employees abroad..In 1995 we see a decrease of

the emigration rates due to family unification and improvement of living starndarts in Albania.1997 the

pyramid schemes absorbed 1.2 billion USD.In short term remittances retio is going to grow due to a larg

factors such increased of emigrants ,theirlegalization,and ability to share their income with family inhomeland.So, until 2007 there was no noticeable decrease in remittances in Albania. IlirGedeshi,

expert in Albanian migration issues, proposes 3 reasons for this:

1. Migration in Albania has been on the rise during the whole period since 1991.2. There has been a trend in migration away from lower income countries (Greece, Italy) towards higher

income countries (USA,Canada). 3. “Dirty money” (earned from illegal activities) is also recorded as remittances in official accounts.



6

Figure 6.1 : Remittances in Albania for 2004-2011

Source : Bank of Albania,2011

According to the Figure 1,we see that remittances in Albania have had an increase trend until 2007.This

trend have influencedpossitively the economic growth.After 2007,due to the financial global crisisremittances have been decreased.Experts estimate that though remittances have helped the AlbanianEconomy to grow,in the upcoming years this trend will slowly fade.

6.3 Distribution of remittances

According to Living StandartMeasurementSurvey (2002), remittances from emigrants represent 13% of

household income, while for recipient households they represent 47% of the income as reffered to

International Monetary Fund (2005).Before we can analysethisitis important to notice that 44.5% of emigrants is from coast, 39% from central regions, 10.5% from Tirana and only 7% from mountain

regions.However the largest receivers are from mounted region(77.4 % emigrants send remittances) and the

lowest from costal(60%).To Tirana is 70 % and central region is 65%.This is very interesting,we can seethat a small number of emigration comes from the mountain regions,but they send morethan theircounterparts from urban areas in the same region.Thisdoeshave positive effects because the majority of poor

is from rural parts.

Figure 6.2:Average amount remitted to household (at 2005 prices, leks), 2005

Source :LSMS,2005

0

100

200

300

400

500

600

700

800

900

1000

2004 2005 2006 2007 2008 2009 2010

Incomig

Transfers by

emigrants



7

6.4 Uses of remittances

According to a study conducted by Centre forEconomic and Social Studies (CESS) with 1000 emigrants

randomly selected in 6 prefectures prioritize remittances to finance living expenses (61.5%),3.8% for other

purpose and only 3.2% for businessinvestment.If speaking for education,itcames in second places with only0.9% of income.

Similar results were found by De Zwager and Gedeshi (2005). They found that the primarily

remittances go to finance family daily needs,then comes building or investing in home,20%-30% have saveda part of remittances.If we see remittances in macroeconomy level we see that remittances have been crucial

for the economic survival and poverty alleviation in Albania.The most important is that remittances are the

strongest factor in reducing trade deficit.Remittances have financed between50% and 75% of the tradedeficit during the period 1996-2005.Albania have a poor industrial infrastructure and export sector, and

relies heavily on imports.Labor is the country main export. However we have two sectors: Construction and

Tourism that have benefits from remittances. In 2007 the export earnings from tourism reached a level of 1

billion euro, which is 27 times higher than income from the export of goods according to Bank of Albania(2005).

According to Bank of Albania remittances have increased the number of capital invested to the country.The

result from survey by Kule et al (2002) show the remittances contribute about 17% to the establishment of

businesses.According to this survey is a positive relationship between pastmigration and businessownership.

Figure 6.3 : Uses of remittances,2005

Source : CESS,2005

First use means the main use of remittances.That means which are the first products bought after the get

the remittances,second use consists of the uses of remittances after main ones.The same thing stands even

for third use.



8

7. Conclusions

As we have discussed remittances are one of the factors that impact greatly in the development of a

country.They are the money that is transferred by emigrants who work abroad to the homeland.The main

motive that migrants remit their money is altruism,but other motives that we mentioned are self-interest andtempered-altruism.Usually this is widely common in developing countries.If remittances are spent on

investments they have a positive effect on economy growth.If they are used for local consumer goods,their

effect is positive in economy too.But if the money that is remitted is being used for imported consumergoods than there is negative effect on development of economy.We have classified remittances in two

aspects : economical-financial view and deliver view.Referring to the first view we have

potential,constant,additional and spared remittances.According to the second view we have

family,community,migrant‟s and social remittances.There are two types of deliverchannels:formalones,which include banking system and monetary transfer operators and informal channels,

which consists of money that is transferred by friends,relatives or couriers.The most common channel in

Albania is informal one,while formal channels have recently improved their services and the number of

emigrants who use formal ways is going to grow up.There are three reasons why Albanians emigrants haveused mostly informal channels:geographicalvicinity,the culture of trust of people ti the bank is not so much

developed and most of banks in Albania are not well-developed.Remittances have been vital factor to

develop the economy of Albania.It consists of nearly 15-20% of GDP. But most of these money have beenused for consume rather than investments or savings.Tendency of the past years has shown that more

remitted money is invested in building houses and for school purposes.Most of the Albanian emigrants are

younger (53% are below 35 years old) and of male sex (75.4%).Most of them have emigrated before 1997(66.7%). Remittances are a decisive factor to cover the trade deficit.Remittances have helped to soften the

poverty in rural areas.But the most of remittances have been used for consumptions reasons rather than

investments or other related issues.



9

8. References

Bank of Albania (2005),Annual Report 2004,Tirana

Bank of Albania (2007),Annual Report 2006,Tirana

Centre for Economy and Social Studies (2005),URL : http://www.cess.ac.in/cesshome/cessmain.asp

date of access 16.06.2011

International Monetary Fund 2005,Chapter two: Two current issues facing development countries, page 69

in“World Economic Outlook”, IMF

Bank of Albania 2011, URL

:http://www.bankofalbania.org/web/Statistika_Hyrje_230_1.php?crd=0,3,0,0,0,230&uni=201106092007402

01160920071307642&mode=alone&format=1&ln=1&id=536&p_id=5&agr_shfaq=graf&graf_shfaq=0&pe

riudha_nga=1088&periudha_deri=1191&cregfld_bashkesi=1343500,1343501,1343502, date of access

09.06.2011

De Zwager, N., Gedeshi, I., Germenji, E., Nikas Ch., (2005) ”Competing for remittances”

Financial Times (1997) “Country Survey: Albania”.

Gedeshi, I., Mara, H., Dhimitri, R., Krisafi, K. (1999) “Emigration of Intellectual Elite from Albania

over transition period”, Luarasi, Publishing House, Tirana.

International Monetary Fund 2005,Chapter two: Two current issues facing development countries, page 69

in“World Economic Outlook”, IMF

Korovilas, J.P. (2005) “Remittances and Pyramind investment schemes in Albania” chapter 9

in Remittances- Development Impact and Future Prospects,Maimbo, S.M, Ratha D (editors).

Korovilas J. P.(1999), The Albanian economy in Transition: the Role of Remittances and Pyramid

InvestmentSchemes, Post-Communist Economies, Vol. 11, No. 3

Kule, D.,Mancellari A., Papaganos, H., Qirici S., Sanfey, P. (2002) ”The causes and

consequences of Albanian emigration during transition: evidence from micro-data.

International Migration Review 36, 229-39

Living StandartMeasurementSurvey (2002),URL :http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTLSMS/0,,contentMDK:21610833~pagePK:

64168427~piPK:64168435~theSitePK:3358997,00.html date of acces 16.06.2011

Lukas and Stark (2005), URL:http://assets.cambridge.org/97805214/74191/excerpt/9780521474191_excerpt.pdf date of access 15.06.2011

http://www.cess.ac.in/cesshome/cessmain.asp


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Remittances (2010) URL : http://www.remittance.in/types-of-remittances.html date of access 10.06.2011

Wahba, S. (1991) “What determines workers‟ remittances?” Finance & development , December,

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remittances in albania

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