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

ConsCons

byby

Claremont KirtonClaremont KirtonDepartment of EconomicsDepartment of Economics

University of the West Indies, Mona, JamaicaUniversity of the West Indies, Mona, Jamaica

Caribbean Diaspora Economy Research Group (CDERG)Caribbean Diaspora Economy Research Group (CDERG)

Presentation to Friedrich Ebert Stiftung (FES) Regional Seminar Presentation to Friedrich Ebert Stiftung (FES) Regional Seminar

on Migration and Human Trafficking in the Caribbeanon Migration and Human Trafficking in the Caribbean

Kingston, Jamaica 27-28 November 2008Kingston, Jamaica 27-28 November 2008

Defining RemittancesDefining Remittances International Monetary Fund (IMF) reports International Monetary Fund (IMF) reports

remittances in its remittances in its Balance of Payments ManualBalance of Payments Manual as part of current transfers in a country’s as part of current transfers in a country’s balance of payments (BOP) statistics.balance of payments (BOP) statistics.

Remittances include workers’ remittances Remittances include workers’ remittances and “other current transfers.” and “other current transfers.”

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

Measurement IssuesMeasurement Issues

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

Various informal channels used.Various informal channels used.

Difficult to measure in-kind and cash Difficult to measure in-kind and cash remittances.remittances.

MigrationMigration Over 30 million people have emigrated Over 30 million people have emigrated

abroad from Latin America and the abroad from Latin America and the Caribbean (LAC).Caribbean (LAC).

For LAC, migrants constitute one quarter For LAC, migrants constitute one quarter of their population.of their population.

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

Remittances to Latin American Remittances to Latin American and the Caribbean (LAC)and the Caribbean (LAC)

In 2006, US$230 billion remittance flows to In 2006, US$230 billion remittance flows to developing countries globallydeveloping countries globally

Latin America and Caribbean (LAC) – almost Latin America and Caribbean (LAC) – almost US$68 billion or nearly 1/3 (30%) of total US$68 billion or nearly 1/3 (30%) of total worldwide flowsworldwide flows

Mexico (US$24.2b), Brazil (US$7.4b), Mexico (US$24.2b), Brazil (US$7.4b), Colombia ($4.5b) are major remittance Colombia ($4.5b) are major remittance receivers in LACreceivers in LAC

In Caribbean, Dom. Republic (US$2.7b), In Caribbean, Dom. Republic (US$2.7b), Jamaica (US$1.9b), Haiti (US$1.0b) are top Jamaica (US$1.9b), Haiti (US$1.0b) are top three recipientsthree 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: The Remittance System: Financial Flows Financial Flows

Migrant Workers

Financial Intermediaries (Formal and

Informal)

Recipients

Government

Send money Transfer

funds to households

Regulates and sets policy

Remittances channelsRemittances channels

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

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

Market channelsMarket channels

Money Transfer Operators (MTOs)/ Money Transfer Operators (MTOs)/ agentsagents

Commercial banksCommercial banks Building societiesBuilding societies Credit unionsCredit unions Other non-bank financial intermediariesOther non-bank financial intermediaries Supermarkets, shopsSupermarkets, shops Informal Funds Transfer Systems Informal Funds Transfer Systems

Remittance Flows to CARICOM (1996-2005)

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

4000.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

US$m

n

Total and Top Three CARICOM Recipients of Remitances

0

500

1000

1500

2000

2500

3000

3500

4000

2000 2001 2002 2003 2004 2005

US$ M

N

Guyana

Haiti

Jamaica

TOTAL

Remittances/GDPRemittances/GDP

Haiti (22%), Guyana (17%), Jamaica Haiti (22%), Guyana (17%), Jamaica (15%) have the highest (15%) have the highest remittances/GDP ratios for 2005remittances/GDP ratios for 2005

In 2004, of 28 LAC countries, only two In 2004, of 28 LAC countries, only two Latin American countries (Honduras Latin American countries (Honduras and El Salvador) have ratios greater and El Salvador) have ratios greater than 15% than 15% (World Bank Study, 2006)(World Bank Study, 2006)

Remittances and Remittances and DevelopmentDevelopment

Impact on development can be either Impact on development can be either positive or negativepositive or negative

Remittances may have an impact on:Remittances may have an impact on: Poverty and income inequalityPoverty and income inequality Consumption Consumption Investment and household savingInvestment and household saving Labour marketsLabour markets Human capitalHuman capital Macroeconomic variablesMacroeconomic variables

Poverty and InequalityPoverty and Inequality Remittances positively contribute to poverty reduction in the Remittances positively contribute to poverty reduction in the

recipient households or may prevent households from falling into recipient households or may prevent households from falling into poverty:poverty:

In Mexico, studies done using national household survey data on income In Mexico, studies done using national household survey data on income and expenditure indicate that remittance recipients are less likely to be and expenditure indicate that remittance recipients are less likely to be poorpoor

In Guatemala, it is reported that remittances have the largest impact on In Guatemala, it is reported that remittances have the largest impact on the depth and severity of poverty, with poverty rates being reduced by the depth and severity of poverty, with poverty rates being reduced by roughly 20% (2005 study)roughly 20% (2005 study)

LAC region, remittances reduce poverty headcounts in 6 out of 11 LAC region, remittances reduce poverty headcounts in 6 out of 11 countries studied by the World Bank (Bolivia, Ecuador, El Salvador, countries studied by the World Bank (Bolivia, Ecuador, El Salvador, Guatemala, Haiti, Honduras)Guatemala, Haiti, Honduras)

Impact on income inequality not conclusive as this significantly Impact on income inequality not conclusive as this significantly depends on the income levels of migrants. depends on the income levels of migrants.

Jamaica: percentage of households receiving remittances increased Jamaica: percentage of households receiving remittances increased progressively from 30.4% in poorest quintile to 54.9% in richest progressively from 30.4% in poorest quintile to 54.9% in richest quintile (2006).quintile (2006).

ConsumptionConsumption

Consumption can have a positive impact on economic Consumption can have a positive impact on economic activity through the multiplier effectactivity through the multiplier effect

Jamaica: 68.7% spent on normal day-to-day Jamaica: 68.7% spent on normal day-to-day expenditure; 10.1% on education; 9.5% on health; expenditure; 10.1% on education; 9.5% on health; 3.2% on entertainment3.2% on entertainment

Positive impact may be minimized if the import Positive impact may be minimized if the import content of consumption is highcontent of consumption is high

Investment and SavingInvestment and Saving Remittances provide the opportunity for investment in new Remittances provide the opportunity for investment in new

businesses or expansion of existing enterprisesbusinesses or expansion of existing enterprises

Remittances provide financing opportunities for potential Remittances provide financing opportunities for potential entrepreneurs who typically have difficulty accessing finance from entrepreneurs who typically have difficulty accessing finance from formal financial sector sourcesformal financial sector sources

In Mexico, a study of 30 communities indicates that 31% of businesses were In Mexico, a study of 30 communities indicates that 31% of businesses were initially financed by remittancesinitially financed by remittances

In Jamaica, less than 1% used for investment; in a small study of a rural 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 remittancesparish, 40% of start up capital for small businesses came from remittances

If remittances are transferred through formal financial sector If remittances are transferred through formal financial sector channels, this may encourage savings among recipients and lead channels, this may encourage savings among recipients and lead an increase in the pool of domestic savings available for an increase in the pool of domestic savings available for investmentinvestment

Labour MarketsLabour Markets Remittances may have direct impact on the Remittances may have direct impact on the

decision of recipients to participate in the labour decision of recipients to participate in the labour force:force:

May create a certain level of dependency among May create a certain level of dependency among recipients, thus encouraging a disincentive to recipients, thus encouraging a disincentive to work:work:

World Bank study indicates that remittances World Bank study indicates that remittances may reduce both labour force participation as may reduce both labour force participation as well as hours worked per week by recipientswell as hours worked per week by recipients

Reduction in labour supply is less prevalent Reduction in labour supply is less prevalent among recipients with a higher level of schoolingamong recipients with a higher level of schooling

Human CapitalHuman Capital Remittances act as a supplement to Remittances act as a supplement to

income thus relaxing income constraints income thus relaxing income constraints that limit human capital investment that limit human capital investment

Remittances can facilitate an Remittances can facilitate an improvement in household investment in improvement in household investment in human capital:human capital:

Education – greater schoolingEducation – greater schooling Health care expenditureHealth care expenditure

Human CapitalHuman Capital Education - studies indicate that remittances Education - studies indicate that remittances

improve educational attainment among improve educational attainment among children in recipient households:children in recipient households:

El Salvador – respective of amount transferred, this lowers El Salvador – respective of amount transferred, this lowers the likelihood of dropouts from schoolsthe likelihood of dropouts from schools

Health care – particularly important in countries Health care – particularly important in countries where public health care systems do not offer where public health care systems do not offer universal health insurance:universal health insurance:

In Guatemala and Nicaragua, children whose parents In Guatemala and Nicaragua, children whose parents receive remittances access better health care relative to receive remittances access better health care relative to non-recipients with similar demographic and socioeconomic non-recipients with similar demographic and socioeconomic characteristics characteristics

Macroeconomic EffectsMacroeconomic Effects

Improvements to GDP through increased Improvements to GDP through increased consumption, investment and savingsconsumption, investment and savings

Helps to alleviate balance of payments Helps to alleviate balance of payments constraintsconstraints

May also be a disincentive to productionMay also be a disincentive to production

May reduce export competitivenessMay reduce export competitiveness

Remittances and Remittances and Development:Development:

RecommendationRecommendation Priority - in Caribbean context, need Priority - in Caribbean context, need

for extensive research on the impact for extensive research on the impact of remittances on developmentof remittances on development

This research should seek to inform This research should seek to inform policies on leveraging the policies on leveraging the development impact of remittances development impact of remittances for the regionfor the region