At the beginning of 2018, the authoritative Polish paper Dziennik Gazeta Prawna published a rating of the 50 most influential people in the Polish economy.
The second place was held by Ukrainian migrants. The periodical noted that Ukrainians are a “collective hero of the Polish economy.” In this ranking, Ukrainian migrants overtook even the President of Poland, Andrzej Duda (ranked third) and all the successful personalities of the country. This indicates the crucial role of Ukrainians in the Polish economy. And what role are Ukrainian migrants playing in the economy of Ukraine?
Ukrainian migrants VS exporters
An analysis of the data of the National Bank of Ukraine on the balance of payments of Ukraine confirms that, thanks to money transfers, the country has been able to close it with a surplus for four consecutive years. And thanks to the growth in the volume of remittances, the consolidated balance of payments was increased from $0.8 billion in 2015 to $2.9 billion in 2018. Unfortunately, this did not happen thanks to exports and, moreover, due to inflow of foreign investments or debt instruments sales.
All the loud cliché statements about the growth of export revenues and its impact on the strengthening of the exchange rate are broken up by an even greater increase in imports into Ukraine. In 2018, exports of goods and services grew by 9.5% (to $59.0 billion), and imports – by 12.8% (to $70.5 billion). This means that all export earnings driven into the country are immediately bought by importers and transferred abroad. At the same time, foreign currency earnings from exporters are insufficient for importers. Therefore, it is due to the money transfers that Ukraine is able to fully satisfy the additional importers’ demand for foreign currency, and the exchange rate remains relatively stable. Simply put, every dollar or euro that you buy at the exchange office is the money received by Ukraine in the form of remittances, since all dollars and euros from exporters have long been reserved or purchased by importers.
Thus, it becomes obvious that Ukrainian migrants are heroes more for the Ukrainian economy than for the Polish. After all, stability of exchange rate, growth of gold reserves, development of all sectors of the economy, primarily construction and retail trade, depend on people’s remittances to their homeland.
Ukrainian migrants vs foreign investors
Unfortunately, attraction of foreign direct investments into Ukraine remains at a very low level. Their volume is insufficient to compensate for the negative balance of foreign trade.
For 2007–2018, there was almost a fourfold decline in foreign investments, even in spite of almost twofold improvement in the country’s position in the Doing Business rating.
As with export earnings, remittances have almost completely replaced foreign investment in Ukraine in terms of improving the balance of payments. Moreover, by their nature, remittances, unlike foreign investments (as well as foreign loans), are their ideal compensating factor.
First of all, transfers in almost 100% of cases are received in the cash form, which has a positive effect on the inflow of foreign currency into the country and the growth of gold and foreign exchange reserves. And investments, as a rule, in 40-50% of cases are coming in non-monetary form (e.g. in the form of equipment, technology, etc.).
Secondly, money transfers always come in a freely convertible currency, i.e, increase its inflow into the country. This cannot be said about investments: if an investor (and almost all of them are doing this) earns profit in Ukraine during a reporting period and decides to reinvest it, then in statistics it is shown as foreign investment as well (but there is no actual currency inflow into the country).
Thirdly, unlike international loans, in case of remittances to Ukraine there are no requirements to return the received funds in the future (and therefore, our country’s credit rating could be higher).
Fourthly, unlike foreign investments, transfers are distributed fairly evenly across the Ukrainian regions. The analysis shows how important remittances are for each region of the country. Thus, in 21 of the 22 analyzed regions, remittances substantially exceed the inflow of foreign investments, and in almost half of the regions – by a factor of ten or more. Thus, once again, we can see the importance of the role of Ukrainian migrants and remittances for the development of Ukraine and its regions.
Millions of heroes
In addition, studies show that in Ukraine, the majority of foreign exchange earnings are concentrated in a small number of companies. According to Forbes, about 40% of all export earnings come into the country from just 25 holding companies (financial-industrial groups, FIGs). And according to other sources, only one FIG accounts for about 50% of all export earnings. Just imagine, what if such FIGs start “having disagreements” with the authorities / regulators or what if their products are subject to changes in global prices and conditions, what would then happen to the volume of their export earnings? Obviously, there is a permanent risk of its significant reduction and, as a result, an increase in the trade deficit.
Ukraine is also constantly at risk of foreign investments shortage. Here, in addition to political risks, the country rating and global market risks are very high as well. After all, nearly 200 countries are competing for foreign investments, and respectively, Ukraine’s chances of getting foreign direct investments are 1/200, or 0.5% of their total global volume. And if you look at the statistics for the last ten years, our country has received even less: on average, 0.2–0.3% of all foreign investments.
The chances of Ukraine to receive more than 0.5% of total annual foreign investments are very scanty. And this is a global problem. It has already been noted that 80% of all countries in the world receive small amounts of investment, less than 2 billion dollars a year. Almost all investments are channeled to three groups of countries: 1) with an investment grade level of A-AAA, 2) countries with large deposits of oil and gas, 3) countries with preferential tax treatment (including offshore zones). Our country does not belong to any of these.
Even with the two-fold improvement in the Doing Business rating for 2007–2018, the inflow of foreign direct investments into Ukraine makes about $60–80 per capita. And if the country improves its position in this rating twofold once again (for example, to the level of Japan), there are still no guarantees that the volume of investments will significantly increase (according to UNCTAD, in 2017, Japan received as little as $ 82 in foreign direct investments per capita). Even if we enter the rating’s top 10 (like, for example, Macedonia), it still does not guarantee a rapid growth in investments (in 2017, Macedonia received only $ 122 per capita in investments). We can join the EU, and the risk that the volume of investments will stay low for some time will remain. Ireland had this kind of negative experience: joining the EU in 1973, the country was still receiving foreign investments in very small volumes for another 25 years. Their influx began only after the policy of returning diaspora and its capital was activated in the country in the early 1990s. Irish diaspora played an enormous role in shaping the attractive investment climate of the home country and increasing foreign investments from $2-3 billion (1970–1990) to 20–50 billion per annum (in the 2000s).
Thus, on the one hand, Ukraine has very limited opportunities in terms of the number of exporters and foreign investors. On the other hand, the country has about 10 million migrants and members of diaspora who live in more than 50 countries of the world, work in various sectors of the economy, and their motivation to make remittances to their homeland is related to the basic development needs of their households, including by investing in the development of small and medium businesses.
If we imagine that the economy of Ukraine is a car, and foreign currency holders (exporters, foreign investors, Ukrainian migrants) are airbags, then let’s answer one question. Which is safer to drive: a car with one, ten (even a hundred) airbags or a car with millions of such safety devices? Thanks to the millions of Ukrainian migrants, the volume of remittances to Ukraine can steadily increase over the decades. And as the global experience shows, not a single crisis, not a single war is capable of greatly affecting the total volumes of their influx into the country. But, of course, this is possible only under one condition – with the creation and development of motivational policies for migrants and remittances.
Bet on Ukrainian migrants and diaspora
We have already seen that Ukraine’s chances of attracting foreign investments stand at 0.5% or even less. At the same time, the chances of attracting remittances are 50%, because Ukrainian migrants and diaspora, as a rule, have only two countries to choose from to invest most of their income – either the host country or their home country.
Ukrainian migrants and diaspora annually earn more than $100 billion abroad. And these are the most conservative estimates, because only in the USA, according to the US Census, people coming from Ukraine earned more than $27 billion in 2016.
Taking into account the global experience, immigrants from Ukraine abroad annually accumulate more than $10–12 billion in various forms (not taking into account transfers to Ukraine through official and unofficial channels). These resources are waiting for the Ukrainian government to remember them and develop a motivational policy to attract them. Unlike transnational companies and global funds that have been investing all over the world (though looking for guarantees of return on their investments), migrants and diasporas want to invest only in their home country, since, as a rule, they only understand their own country (peculiarities of business activities, connections with local partners, etc.).
The very key economic and organizational mechanisms of such a policy aimed at increasing remittances have already been discussed in the study entitled “Bleeding”. If we launch the key mechanisms to stimulate the inflow of remittances, Ukraine would be able to receive $25–30 billion per annum, which will allow to quickly increase the foreign exchange reserves to $50–70 billion and significantly reduce the risk of national currency devaluation.
Hero-locomotives of economic growth
We have already reviewed the experience of individual countries which, by stimulating the flow of remittances from migrants and the diaspora, managed to accelerate the development of the economy, such as Israel , Ireland, and the Philippines.
We have also analyzed 32 developing countries for which the inflow of remittances is an important component, reaching more than 5% of their economies’ GDP (excluding small island countries), and divided them into two groups: those developing motivational policies in the field of migration and remittances, and those who practically do nothing in this area. As a result, countries focused on increasing remittances during 2010–2017, showed 2-3 times better GDP growth rates than those countries that did nothing to increase the volume of transfers. It is noteworthy that countries that stimulate the inflow of remittances have even a smaller remittances to GDP ratio (12.9%) compared to those countries that do little or nothing in this regard (14.9%). Unfortunately, they probably continue to develop a policy of attracting foreign investments, the share of which has five times less impact on the development of their economies and, as a result, their GDP grows 2-3 times slower than that of the active group.
Back in the 1970s, such countries as Portugal, Turkey, South Korea, and Israel realized that if they continue to wait for foreign investment, they would remain poor. They actively developed a policy of attracting remittances from their migrants and diaspora, which allowed them to significantly increase their volume. During the 1970s–1990s, Portugal, thanks to programs for migrants, attracted more than $80 billion in remittances (and only $18 billion in investments), Turkey raised $70 billion in remittances ($10 billion), and South Korea – more than $50 billion in remittances ($30 billion dollars in investments). And only after 30 years of active remittance attraction policy did these countries see the inflow of large amounts of foreign investments. Thanks to remittances (including for investment purposes) these countries actually created the basis for the inflow of foreign investments. It was the first investment transfers of the diaspora and their successful returns that gave the green light to large amounts of investments from transnational companies and investment funds in the 2000s.
Ukraine will have to take a similar path. It is already clear that in the next ten years we should not hope for a significant increase in foreign investments. Preparation for a new financial crisis, Brexit, Trump’s policy, trade wars – all of these factors globally reduce the influx of foreign investments in the world.
Since the peak year of 2015, foreign direct investment inflows declined by 25% in 2017. And according to UNCTAD, in the first half of the year 2018, they fell by another 41%. Therefore, remittances to Ukraine will remain an important source of currency inflows to the country.
Using the best international experience, Ukraine needs to build a motivational ecosystem (deposit, investment, mortgage, insurance, investment services; tax, customs, organizational, mentoring programs, etc.), which should be aimed at attracting income and savings of Ukrainian migrants and diasporas in the amount exceeding $25 billion a year. It is thanks to these funds that our country will be able to solve the problems of constant leaps in the exchange rate, quickly fill up gold reserves, significantly reduce the cost of credit resources for businesses, increase local budget revenues and channel them to infrastructure development evenly across all regions, and not just in metropolitan cities.
The conclusions are obvious. Taking into account the volumes and structure of foreign capital obtained in 2010–2018, Ukraine enjoys a fairly high level of trust from Ukrainian migrants and diaspora, which cannot be said about foreign investors. But it depends only on government policy whether it would be possible to convert this trust into a qualitative and quantitative amount of foreign capital in the form of remittances. And only in the future, having earned economic and financial confidence of migrants, Ukraine will be able to count on other components of the international capital market, including foreign direct investments.