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ON THE RIGHT: Remittances not an unmixed blessing


BEA DOTTIN, [email protected]

ON THE RIGHT: Remittances not an unmixed blessing

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Remittances have risen significantly over the last two decades. Official World Bank estimates suggest that in 1990, global remittances stood at US$68.5 billion, and since then grew by an average of 10.9 per cent per annum to reach US$443.5 billion in 2008.
Interestingly, this rapid pace of growth seems to be driven by developing countries, where remittances account for a significant portion of GDP and now constitute the second largest source of external finance after foreign direct investment.
Commensurate with the upsurge in remittance flows has been a widening interest in their economic impact. Indeed, the literature has identified several benefits that remittances can bring. For instance, remittances have been shown to “loosen up” the budget of the receiving household and so, is associated with reductions in poverty and possibly income. Some studies even show that remittances may raise the level of children’s education and alleviate liquidity constraints in the absence of well-functioning capital markets.
But, remittances are not an unmixed blessing. There is some evidence to suggest that remittances can reduce the recipient’s incentive to work, lead to an appreciation in the real exchange rate or even facilitate money laundering and finance terrorism.
The relationship between the remittance cycle and business cycles in the home country is also important. But, the nature of this relationship is not straight forward and largely depends on whether remittances are sent for altruistic purposes or for portfolio decisions regarding saving and/or investment.
Under a theory of altruism, remittances are expected to move countercyclically with the economic cycle of the recipient country. The altruistic motive assumes that migrants remit funds in order to support their families. So, any deterioration in the standard of living or a negative income shock would lead to greater remittance inflows.
But, remittances are not sent for altruistic purposes alone: remittances are profit-driven and so move procyclically with the home country’s output. If remittances are indeed profit-driven, then, they cannot be used to offset economic fluctuations in the receiving countries.
The Caribbean region, in this author’s opinion, provides an excellent case study. These islands have historically been among the largest recipients of remittances as a share of GDP. Of course this is not surprising, given that the region has one of the highest emigration rates in the world. Specifically, estimates from the Migration And Remittances Factbook 2010 suggests that ten Caribbean countries were among the top 30 emigration countries (as a percentage of population) and eight Caribbean countries were among the top emigration countries of tertiary education.
Given the importance of remittances to these states, it is critical to investigate the cyclical fluctuations of these flows and their correlations with cyclical fluctuations of income in the receiving country and that of United States – the preferred destination of Caribbean migrants.
Based on the theoretical literature, remittances received should be positively related to economic activity abroad, but may be either procyclical or countercyclical with respect to the receiving county’s income. The results are quite interesting. Results suggest that only remittances to Barbados and Jamaica are significantly influenced by their domestic business cycles. Meanwhile, both Dominica and Trinidad seem to be more affected by the United States business cycle than economic developments in Dominica and Trinidad, respectively.
• Mahalia Jackman is head of model development, Antilles Economics Barbados.

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