The Socio-Economic Impact of Migrant Remittances: Pros and Cons

by Claremont Kirton Department of Economics University of the West Indies, Mona, Jamaica Caribbean Diaspora Economy Research Group (CDERG) Presentation to Friedrich Ebert Stiftung (FES) Regional Seminar on Migration and Human Trafficking in the Caribbean Kingston, Jamaica 27-28 November 2008

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Defining Remittances

International Monetary Fund (IMF) reports remittances in its Balance of Payments Manual as part of current transfers in a country’s balance of payments (BOP) statistics.

 Remittances include workers’ remittances and “other current transfers.”  Workers’ remittances: “current transfers by migrants who are employed in new economies and considered residents there. (A migrant is a person who comes to an economy and stays, or is expected to stay, for a year or more.)”

Measurement Issues

 Unrecorded remittance flows through informal channels estimated at 50 per cent larger than recorded flows.

 Various informal channels used.

 Difficult to measure in-kind and cash remittances.

Migration

  Over 30 million people have emigrated abroad from Latin America and the Caribbean (LAC).

For LAC, migrants constitute one quarter of their population.

 Until recently, the United States was main destination; increasing migration to Europe and intraregional mobility have changed this pattern.

Remittances to Latin American and the Caribbean (LAC)

 In 2006, US$230 billion remittance flows to developing countries globally  Latin America and Caribbean (LAC) – almost US$68 billion or nearly 1/3 (30%) of total worldwide flows  Mexico (US$24.2b), Brazil (US$7.4b), Colombia ($4.5b) are major remittance receivers in LAC  In Caribbean, Dom. Republic (US$2.7b), Jamaica (US$1.9b), Haiti (US$1.0b) are top three recipients

In nominal dollar terms, officially recorded remittance flows to developing countries are estimated to reach $283 billion in 2008, up 6.7 percent from $265 billion in 2007.

In real terms, remittances are expected to fall from 2 percent of GDP in 2007 to 1.8 percent in 2008.

The Remittance System: Financial Flows

Migrant Workers

Send money

Government Regulates and sets policy Financial Intermediaries (Formal and Informal)

Transfer funds to households

Recipients

Remittances channels

 Cost, speed, familiarity and service reliability – impact choice of remittance channel.

 Informal systems attractive due to lower costs, culture and suitability.

Market channels

       Money Transfer Operators (MTOs)/ agents Commercial banks Building societies Credit unions Other non-bank financial intermediaries Supermarkets, shops Informal Funds Transfer Systems

Remittance Flows to CARICOM (1996-2005)

4000.0

3500.0

3000.0

2500.0

2000.0

1500.0

1000.0

500.0

0.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total and Top Three CARICOM Recipients of Remitances

4000 3500 3000 2500 2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 Guyana Haiti Jamaica TOTAL

Remittances/GDP

 Haiti (22%), Guyana (17%), Jamaica (15%) have the highest remittances/GDP ratios for 2005  In 2004, of 28 LAC countries, only two Latin American countries (Honduras and El Salvador) have ratios greater than 15% (World Bank Study, 2006)

Remittances and Development

 Impact on development can be either positive or negative  Remittances may have an impact on:   Poverty and income inequality Consumption     Investment and household saving Labour markets Human capital Macroeconomic variables

Poverty and Inequality

 Remittances positively contribute to poverty reduction in the recipient households or may prevent households from falling into poverty:  In Mexico, studies done using national household survey data on income and expenditure indicate that remittance recipients are less likely to be poor  In Guatemala, it is reported that remittances have the largest impact on the depth and severity of poverty, with poverty rates being reduced by roughly 20% (2005 study)  LAC region, remittances reduce poverty headcounts in 6 out of 11 countries studied by the World Bank (Bolivia, Ecuador, El Salvador, Guatemala, Haiti, Honduras)  Impact on income inequality not conclusive as this significantly depends on the income levels of migrants.  Jamaica: percentage of households receiving remittances increased progressively from 30.4% in poorest quintile to 54.9% in richest quintile (2006).

Consumption

 Consumption can have a positive impact on economic activity through the multiplier effect  Jamaica: 68.7% spent on normal day-to-day expenditure; 10.1% on education; 9.5% on health; 3.2% on entertainment  Positive impact may be minimized if the import content of consumption is high

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Investment and Saving

Remittances provide the opportunity for investment in new businesses or expansion of existing enterprises  Remittances provide financing opportunities for potential entrepreneurs who typically have difficulty accessing finance from formal financial sector sources  In Mexico, a study of 30 communities indicates that 31% of businesses were initially financed by remittances  In Jamaica, less than 1% used for investment; in a small study of a rural parish, 40% of start up capital for small businesses came from remittances  If remittances are transferred through formal financial sector channels, this may encourage savings among recipients and lead an increase in the pool of domestic savings available for investment

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Labour Markets

Remittances may have direct impact on the decision of recipients to participate in the labour force:  May create a certain level of dependency among recipients, thus encouraging a disincentive to work:  World Bank study indicates that remittances may reduce both labour force participation as well as hours worked per week by recipients  Reduction in labour supply is less prevalent among recipients with a higher level of schooling

Human Capital

 Remittances act as a supplement to income thus relaxing income constraints that limit human capital investment  Remittances can facilitate an improvement in household investment in human capital:   Education – greater schooling Health care expenditure

Human Capital

 Education - studies indicate that remittances improve educational attainment among children in recipient households:  El Salvador – respective of amount transferred, this lowers the likelihood of dropouts from schools  Health care – particularly important in countries where public health care systems do not offer universal health insurance:  In Guatemala and Nicaragua, children whose parents receive remittances access better health care relative to non-recipients with similar demographic and socioeconomic characteristics

Macroeconomic Effects

 Improvements to GDP through increased consumption, investment and savings  Helps to alleviate balance of payments constraints  May also be a disincentive to production  May reduce export competitiveness

Remittances and Development: Recommendation

 Priority - in Caribbean context, need for extensive research on the impact of remittances on development  This research should seek to inform policies on leveraging the development impact of remittances for the region