Chapter

Chapter 14. Emigration and Remittances in the Caribbean

Author(s):
Krishna Srinivasan, Inci Otker, Uma Ramakrishnan, and Trevor Alleyne
Published Date:
November 2017
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Author(s)
Joyce Wong

Introduction

Outward migration has been an important phenomenon for countries in the Caribbean, where emigrants account for more than 20 percent of the region’s population, compared with about 2 percent, on average, for emerging market and developing economies and 5 percent for Latin America and the Caribbean (LAC) overall. Caribbean emigrants typically emerge from the younger and more productive segment of the population—an average emigrant is between 20 and 25 years old with a higher education level. Emigrants remit substantial funds, averaging about 7 percent of the region’s GDP, to support family members back home. Remittances are now the most important external flow for the region, dwarfing foreign direct investment and official aid (Figure 14.1).

Figure 14.1.Caribbean: Remittances and Other Inflows

(Percent of GDP)

Sources: IMF, Balance of Payment Statistics; World Bank, World Development Indicators; and IMF World Economic Outlook.

Against this background, this chapter examines recent trends for, as well as the costs and benefits of, emigration and remittances to the Caribbean. Does the loss in population from emigration hurt economic growth? Do remittances compensate for this loss and function as engines of growth? Are remittances macroeconomic stabilizers? The analysis in this chapter, which is largely based on the work of Beaton and others (2017), offers three key messages for the Caribbean:

  • Caribbean emigrants are quite different from other Latin American emigrants in that they have more diversified migrant destinations (not only to the United States, but also to Canada and the United Kingdom) and are more educated, and, consequently, are more likely to be employed in higher-skilled occupations.
  • Emigration and remittances, taken jointly, are not drivers of growth in the Caribbean. The negative impact of emigration on real per capita growth (through brain drain) outweighs gains from remittances (through investment, education, and other commercial links).
  • Remittances, however, are an important macroeconomic stabilizer in the Caribbean. As one of the most important sources of external financing, remittances facilitate private consumption smoothing (for example, in the face of shocks such as natural disasters), while boosting financial sector soundness and fiscal space.

Stylized Facts About Caribbean Migration and Remittances

Migration

Emigration has been very important for Caribbean countries over the past decades. While the stock of emigrants is estimated to be about 5 percent of the population in the LAC region, it is more than 20 percent for the Caribbean alone, with significant differences across countries (Figure 14.2). Caribbean emigration has historically been driven by economic reasons and natural disasters, and has been less centered on the United States than emigration from Mexico or from Central America, Panama, and the Dominican Republic (CAPDR). About half of Caribbean emigrants settle in the United States (versus nearly all Mexican and four-fifths of CAPDR emigrants); Canada and the United Kingdom also figure prominently as key destinations (with about 15 percent of Caribbean emigrants settling in each).

Figure 14.2.Emigrants

Sources: United Nations Population Division; and IMF staff calculations.

Note: CIS = Commonwealth of Independent States; LAC = Latin America and the Caribbean. Data labels in figure use International Organization for Standardization (ISO) country codes.

Caribbean emigrants tend to be well educated. Nearly half of Caribbean emigrants to the United States have at least a college education, a ratio comparable to the U.S. native-born population (Figure 14.3). In contrast, only one-quarter of other LAC emigrants in the United States have at least a college education. These educational differences are reflected in the types of occupations of Caribbean emigrants. Whereas emigrants from Mexico and CAPDR tend to work in lower-skilled occupations (construction, maintenance, transportation, production, and food preparation), Caribbean emigrants tend to be employed in office and administration, sales, management, and health-related occupations. Caribbean emigrants also earn more: their hourly wages average about 60 percent more than those of immigrants from Mexico and CAPDR.

Figure 14.3.Educational Attainment and Wages

Sources: American Community Survey; and World Bank.

Note: JAM = Jamaica; LAC = Latin America and the Caribbean.

To truly examine brain drain from the home country, however, educational levels of immigrants in the host country are not sufficient—attainment levels in the home country are also needed. For instance, evidence for Jamaica—for which comparable educational attainment data are available—indicates significant brain drain, especially among women. Among Jamaican-born women living in the United States (who emigrated after age 22), 50 percent have at least a college education; this is double the attainment rate in the home country, where only one-quarter of women have a college education. A simple calculation implies that nearly one-third of all women with at least a college education in Jamaica have emigrated, compared with about 13 percent of those with high school or less. These patterns are reflected in the significant numbers of Jamaican nurses and health care practitioners—65 percent of Jamaican immigrants are in these sectors versus 7 percent of the U.S.-born population. For men, the statistics are less striking, albeit evidencing brain drain: whereas 21 percent of men in Jamaica are college educated, 37 percent of those who migrated to the United States have at least a college education.

Remittances

Caribbean emigrants maintain strong connections with their home countries, transferring sizable remittances (Figure 14.4), which reached 6.7 percent of regional output in 2015. As a share of GDP, remittances flows to Caribbean countries dwarf those received by most other world regions except for CAPDR (7.7 percent of GDP). In Haiti and Jamaica, remittances exceed 15 percent of GDP.

Figure 14.4.Remittances

Sources: World Bank; and IMF, World Economic Outlook.

Note: CIS = Commonwealth of Independent States; LAC = Latin America and the Caribbean. Data labels in figure use International Organization for Standardization (ISO) country codes.

Remittances to the Caribbean grew rapidly from the mid-1990s and peaked at nearly 7 percent of regional output before the global financial crisis. Because of the Caribbean’s more diversified emigration destinations and employment in more-skilled occupations, the region was more sheltered from the financial crisis’s impact on the United States. For example, the fall in remittances observed for CAPDR countries, where the majority of emigrants reside in the United States and work in occupations hit hard by the crisis (such as construction and building maintenance), was not observed for the Caribbean. Thus, while remittances to the Caribbean remain somewhat below their precrisis peak, they have been broadly constant for the past decade.

Transferring remittances to the Caribbean is costly. Although the cost of sending remittances to the LAC region is lower than the global average of 7.4 percent of the remittance amount, it remains substantial at about 6 percent (Figure 14.5). Banks are the most expensive channel through which to send remittances, at 11 percent, followed by money transfer operators (MTO) at 8 percent; mobile remittances service providers are a low-cost option, at about 3 percent. Whereas costs have declined significantly for remittances to sub-Saharan Africa, partly because of the entry of mobile money, costs in LAC have remained broadly flat. Costs in some Caribbean countries, for example, Jamaica, have declined significantly—nearly 15 percent over the period 2001–15 (Orozco, Porras, and Yansura 2016), but remitting nevertheless remains costly. These higher transfer costs to the Caribbean partly reflect the region’s more diversified host countries (Canada and the United Kingdom), since remitting costs are generally lowest from the United States.

Figure 14.5.Cost of Sending US$200 in Remittances

Source: World Bank, Remittances Prices Worldwide.

Note: Data labels in figure use International Organization for Standardization (ISO) country codes.

The cost of remitting has also come under upward pressure from the global withdrawal of correspondent banking relationships, even though some of these effects have been dampened by new technologies in regions such as Africa. The withdrawal of global banks from correspondent banking has disproportionately affected MTOs, given the greater challenges they face in meeting the stringent know-your-customer anti-money laundering/combating the financing of terrorism standards. According to a survey carried out by the World Bank (2015), global banks have closed the correspondent bank accounts of MTOs, particularly smaller MTOs, on a widespread basis, curtailing their ability to transmit remittances. Coming under similar pressure, local banks in some countries and regions have also faced challenges in maintaining their correspondent banking relationships, with 60 percent of the Asociación de Supervisores Bancarios de las Américas reporting that remittances to LAC have been affected.

Caribbean immigrants in the United States tend to remit less than other Latin American immigrants. Only one-quarter of Caribbean households remit, compared with more than 40 percent for immigrants from Mexico and CAPDR. In addition, Caribbean immigrants also remit less as a proportion of their income—on average, 2 percent—compared with about 30 percent of income for lower-income Mexican and CAPDR immigrants (Figure 14.6). A potential driver for these differences is the fact that Caribbean immigrants have fewer family members left in the home countries, often the case when families immigrate together or single women (particularly in teaching and health care professions) pursue opportunities in the United States.

Figure 14.6.Remittance Senders in the United States

Sources: 2008 American Community Survey; and IMF staff estimates.

Note: CAPDR = Central America, Panama, and the Dominican Republic; CAR = Caribbean; MEX = Mexico; SOU = South America.

How Do Migration and Remittances Affect Growth?

Given the significant levels of emigration and remittances flows for the Caribbean, a key question is whether the net effect is beneficial for the home country. In theory, emigration and remittances can have opposite effects on growth. On the one hand, emigration can negatively affect growth because the departure of working-age people reduces the labor force and, especially in the Caribbean, human capital. Remittances could then further aggravate the decline in labor supply as recipients substitute remittances income for labor income, generating higher reservation wages. On the other hand, remittances could have a positive impact on growth by providing financial resources for investment and education.

Empirical analysis confirms the mixed results. Figure 14.7 shows the potential range of the estimated cumulative joint impact on growth of actual emigration and remittances for 2003–13. The net effect points to a potential negative impact on growth, which is most pronounced in the Caribbean because of the high levels of brain drain. Remittances, however, have positive (though not always statistically significant) growth effects, which are largest in the high-remittances-receiving subregions such as the Caribbean and CAPDR. On balance, the Caribbean could have lost as much as 10 percent of GDP in cumulative growth as a result of the joint negative effect. Isolating the effects of only migration or remittances is difficult because of their high correlation (remittances cannot occur without migration). However, given the significant negative impact from emigration and brain drain, remittances are an unlikely driver of durable growth for the Caribbean.

Figure 14.7.Net Effect of Migration and Remittances on GDP Growth, 2003–13

(Percent of GDP)

Source: Beaton and others (2017).

Note: LAC = Latin America and the Caribbean.

Are Remittances Macroeconomic Stabilizers?

Even if emigration and remittances have negative net implications for growth, remittances could still play a significant role as a macroeconomic stabilizer. Empirical analysis suggests that remittances support consumption smoothing and generate fiscal revenues with little evidence of possible adverse “Dutch disease” effects. In a region vulnerable to natural disasters, remittances also appear to respond to them.

Remittances can help smooth consumption in the home country as emigrants send additional funds to cushion economic shocks. For example, remittances (as a share of GDP) jump when a natural disaster hits the remittances-recipient country (Figure 14.8). This effect appears to be especially important for the Caribbean, likely driven by its higher susceptibility to large natural disasters. Using an event analysis, the average remittances-to-GDP ratio increases from 4.4 percent in the year before a natural disaster to 5.4 percent in the year of the disaster.

Figure 14.8.Remittances and Natural Disasters

Sources: EM-DAT database; and IMF staff calculations.

Note: EMDE = emerging market and developing economies; LAC = Latin America and the Caribbean.

Remittances also reduce income volatility in the home country (Figure 14.9). For most LAC countries, overall income including remittances is less volatile than domestic income. This effect is more important for LAC countries than for emerging market and developing economies as a whole, and even stronger for the Caribbean.

Figure 14.9.Remittances and Income Volatility

Sources: IMF staff calculations.

Note: EMDE = emerging market and developing economies; LAC = Latin America and the Caribbean. Standard deviations of income (domestic income plus remittances) are plotted on the vertical axis and GDP standard deviations are plotted on the horizontal axis. Dots below the 45-degree line indicate that remittances lower income volatility.

Remittances can also support stabilization through the fiscal accounts (Table 14.1). Remittances help raise fiscal revenues, although they typically are not directly taxed.1 Instead, remittances-supported consumption is part of the base for indirect taxation. For large remittances-receiving countries, empirical analysis finds that a higher remittances-to-GDP ratio is positively associated with a higher revenue-to-GDP ratio. In the Caribbean, a 1 percentage point increase in the remittances-to-GDP ratio is associated with an increase in the revenue-to-GDP ratio of 1.2 percentage points;2 this is significantly higher than the 0.4 percentage point effect for CAPDR, the other high remittances-receiving region in LAC. Furthermore, higher remittances in the Caribbean are also associated with improved fiscal balances, in contrast to CAPDR where they are instead associated with higher public expenditures.

Table 14.1.Macro-Stabilizing Effect of Remittances
Effect onPriorsResults
Fiscal Revenues+Yes. Significant for CAPDR and Caribbean.
Real Exchange Rate+ (appreciation)Results generally insignificant and not strong.
Inflation+Yes. Significant for Caribbean and CAPDR.
Source: IMF staff calculations.Note: CAPDR = Central America, Panama, and the Dominican Republic.
Source: IMF staff calculations.Note: CAPDR = Central America, Panama, and the Dominican Republic.

Although remittances support stabilization, these benefits may be counteracted by risks to competitiveness and inflation through pressure on nontradables prices and interest rates. The empirical analysis of Beaton and others (2017), however, does not point to a significant impact of remittances on the real effective exchange rate, likely reflecting leakage of remittances through imports given the small size and openness of many Caribbean countries. This theory is in line with the findings of Izquierdo and Montiel (2006), who find no impact of remittances on the equilibrium exchange rate in Jamaica. With regard to inflation, empirical results indeed confirm that the level of remittances is positively related to some inflationary pressure in the Caribbean. These results are consistent with the literature (for example, Ball, Lopez, and Reyes 2013), which has found that inflation effects from remittances are more pronounced in fixed exchange rate regimes because of the absence of a shock absorber that would help relative prices adjust quickly between the tradables and nontradables sectors.

Conclusions and Policy Implications

For the Caribbean, remittances and emigration, on net, adversely affect growth. Although remittances are beneficial for the home country, the negative impact on labor resources and productivity outweighs growth gains from remittances. Given the Caribbean countries’ highly educated emigrants, the negative effect from the loss of labor resources and human capital is large.

Nevertheless, accepting the existing stock of emigrants as a “sunk cost,” remittances flows can still play key financing and stabilizing roles. They are the most important external flow to the region and facilitate private consumption smoothing and fiscal revenues, without strong evidence of harmful competitiveness effects through shifts in the real exchange rate.

Thus, policy measures to support remittances should focus on reducing the cost of remitting while facilitating formal intermediation. Given the recent challenges associated with correspondent banking relationships and the strengthening of anti-money laundering/combating the financing of terrorism frameworks, exploring regional solutions for cooperation can help improve Caribbean countries’ regulatory environment and keep formal financial channels open.

Development of and enhancements to payments systems (including through new solutions like mobile money) and ensuring remittances-service providers’ access to them would help foster competition and reduce prices. Educating consumers about the costs of remittances can also help users make informed decisions. Improving transparency on the cost of remittances, as the World Bank has done with its Remittance Prices Worldwide database, can help in this regard.

Steps to curb brain drain from the Caribbean are especially important. Because emigrants linked to brain drain typically remit less per person, the net effect for the Caribbean can be especially negative. A case can be made for development of measures to retain potential emigrants, either through structural reforms that foster job opportunities for the highly educated (for example, development of a medical tourism industry) or actions to limit the subsidizing of brain drain with public funds (for example, through bonding schemes whereby people who have benefited from public funding for education must remain in the home country for some years).

More generally, improvements in the business environment and strong institutions can help raise productivity and thereby limit incentives for outward migration. Productivity can also benefit from steps to promote return migration by skilled workers, for example, through the recognition of foreign qualifications and experience in professional regulations and public sector hiring, or the provision of portable social security benefits. Effective policies to improve the security situation in some Caribbean countries may also relieve key bottlenecks to productive use of remittances, including their greater use for investment. Countries could also seek to leverage economic ties with diasporas, which could bolster foreign direct investment and tourism receipts. The adverse impact of a real appreciation on competitiveness, if there were to be a spike in remittances inflows, can be cushioned using steps to reduce labor and product market rigidities and to support the provision of credit to firms.

References

    BallC.C.Lopez and J.Reyes. 2013. “Remittances, Inflation and Exchange Rate Regimes in Small Open Economies.” World Economy36 (4): 487507.

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    BeatonK.S.CerovicM.GaldamezM.Hadzi-VaskovF.LoyolaZ.KoczanB.LissovolikJ. K.MartijnY.Ustyuogova and J.Wong. 2017. “Migration and Remittances in Latin America and the Caribbean: Engines of Growth and Macroeconomic Stabilizers?” In Western Hemisphere Regional Economic OutlookAprilInternational Monetary FundWashington, DC.

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    IzquierdoA. and P.Montiel. 2006. “Remittances and Real Effective Exchange Rate in Six Central American Countries.” Unpublished Inter-American Development BankWashington, DC.

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    OrozcoM.L.Porras and J.Yansura. 2016. “The Costs of Sending Money to Latin America and the Caribbean.” Inter-American DialogueWashington, DC.

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    RathaD. 2017. “Why Taxing Remittances Is a Bad Idea.” https://blogs.worldbank.org/peoplemove/why-taxing-remittances-bad-idea.

    World Bank. 2015. Report on the G20 Survey on De-Risking in the Remittance Market. Washington, DC: World Bank.

This chapter is based on work by K. Beaton, S. Cerovic, M. Galdamez, M. Hadzi-Vaskov, F. Loyola, Z. Koczan, B. Lissovolik, J. K. Martijn, Y. Ustyuogova, and J. Wong. For further details, see Beaton and others (2017).
1The few countries that tried to tax remittances directly later repealed these taxes. Examples include the Philippines, Tajikistan, and Vietnam (see Ratha 2017).
2The high elasticity of revenues to remittances is driven by a combination of (1) high elasticity of revenues to consumption (usually more than 1) and (2) positive elasticity of consumption to remittances.

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