Critically Assess Whether Remittances Contribute To The Economic Development Process: The Case Of Trinidad And Tobago

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Title: What are remittances? For the Trinidad and Tobago Economy investigate whether remittances contribute to the economic development process?

Julianna Vanessa Crystal Baptiste

University of the West Indies

2006

International Trade Theory and Policy (Econ 3006)

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05780771 Abstract This paper intends to look at the concept of remittances and its contribution to economic development. It seeks to clarify the linkages between remittances and economic development. It is also the aim of the project to examine the major indicators that contribute to economic development and whether or not remittances have had an impact on these indicators in the country of Trinidad and Tobago. In conclusion there will be some Policy considerations/ recommendations as to what can be done to further to level and consistency of remittance flows.

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05780771 Table of Contents

List of Illustrations……………………………………………………………………………...4 Introduction……………………………………………………………………………………..5 The Concept of Remittances………………………………………….......................................7 Definition of Remittances…………………………………………………………….…..7 Measurement of Remittances…………………………………………………………….7 Literature Review........................................ ……………………………………...…………....9 Poverty and Inequality………………………….……………………………….……......9 Labour Markets………………………………………….. .. ……………...……………11 Human Capital…………………………………………………………………...………12 Investment and Savings……………………………………………….. …………...…..13 Exchange Rates, Exports and Development……………………………………………..14 Case Study: Trinidad and Tobago…………………………...………………………………..17 Remittances to Trinidad and Tobago…………………………………………. ...……...18 Remittances and GDP…………………….. ………………….………………………...19 Remittances and Exports…………………………………………………………………20 Remittances and Other Inflows…………...……………………………………………...21 Volatility of Remittances Compared to Other Inflows……...…………………………...22 Remittances and Other Indicators………………………………………………………..23 Analysis and Recommendations……….……………………………………….. ……............25 Conclusion……………………………………………………………………………………....27 Bibliography/Works Cited………………………………….…………………………………28

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List of Illustrations Table

Title

Page

1

Economic Indicators for Trinidad and Tobago, 1973-2003……………..……17

2

T&T Remittances as a percent of Total Caricom Remittances, 1988-1999......19

3

Percentage Rates of Tertiary-Educated Caribbean Migrants……….…..……...23

4

Remittances and Other Indicators……………………………………….…......24

5

Impact of Remittances on Development (Comparison of LAC)…...………….24

Figure 1

Remittances to T&T and Caricom, 1988-1999…………………………...……18

2

Family Remittances to Trinidad and Tobago, 1990-2002………………...……19

3

T&T Remittances as a percentage of GDP, 1973-2003………………...………20

4

Remittances as a percentage of Exports, 1990-2002………………………...…21

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Remittances Compared with FDI and Other Investments 1973-2003……….....22

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05780771 Introduction

The twin-island State of Trinidad and Tobago can be viewed as the economic giant of the Caribbean. Since the 1960s this economy has been characterized by heavy dependence on the production and export of petroleum and gas. Per capita GNP peaked in 1982 at US$6,600. This was followed by sharp contractions until 1988, when the Government implemented an economic reform program. The lowest per capita GNP of US$3,160 was recorded in 1989. Since then there has been steady improvement in the Trinidad and Tobago economy the country’s level of economic development has increased significantly. This is primarily due to measures of trade and currency liberalization; diversification strategies into agriculture, manufacturing (non-oil) and tourism; and restructuring and divestment.

Although the country has experienced significant economic development a number individuals have migrated to countries such as the USA, UK and Canada to name a few. A number of these migrants are highly educated individuals who travel to seek a better standard of living. Trinidad’s share of total tertiary-educated migrants stands at 46.7% and overall migration rates of the tertiary-educated are 57.2%, this is the third highest brain drain level in the world (Financial Times, March 23, 2005).

A logical consequence of the migration of workers is a reverse flow of remittances to support dependant relatives, repayment of loans, investment and other purposes. While it is usually asserted that migrant remittances have contributed in no small measure to economic development in other Caribbean countries, one must wonder whether or not it has contributed to development in Trinidad and Tobago.

In the analysis of remittance there is usually no distinction between current and capital remittances. This is mainly because, the accuracy of the estimates of migrant remittances is rather doubtful and very little empirical work has been done on the evaluation of contribution of remittances to economic development. Data on remittances are collected largely to estimate balance of payments flows and no attempt is usually made to relate such flows to income

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05780771 generation in the local economy. However the question remains. Do remittances contribute to economic development?

According to the International Monetary Fund (IMF), global migrant remittances exceeded $150 billion1 in 2003, although, the actual figure may probably be significantly higher due to the remittances made through informal channels. Remittances have become a structural element of the economy in the Asian and Pacific region. In 2003, remittances constituted 39.4 per cent of GDP in Tonga, 13.4 per cent in Nepal, 9.8 per cent in the Philippines, 9.4 per cent in Tajikistan, 8.3 per cent in Sri Lanka and 5.7 per cent in Bangladesh. With remittance flows to many developing countries now exceeding official development assistance and catching up with foreign direct investment (FDI), they are fast becoming a critical form of financing the balance of payments and increasing foreign exchange receipts. Moreover, remittances manifest several characteristics that make them useful as a development tool2

Therefore, this paper attempts to investigate whether remittances contribute to the economic development process in Trinidad and Tobago. Firstly, it looks at the concept and measurement of remittances; it then looks at the existing literature regarding remittances and its contribution to economic development. The second part of the paper provides information on GDP, Exports and order of magnitude of remittances flows to Trinidad and Tobago, and the contribution of these flows to economic development. Other economic indicators such as Education and Health are also looked at to determine if remittances had any impact on them. The paper then identifies measures which would improve the level and consistency of remittance flows and some concluding remarks.

1

In the IMF Balance of Payments Framework, total migrant remittances include workers’ remittances, compensation of employees and migrants’ transfer. The data were obtained from the Balance of Payments Office, International Monetary Fund in June 2005. 2

The World Bank Global Economic Prospects 2006:Trends determinants and Macroeconomic effects of remittances

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05780771 The Concept of Remittances

Definition of Remittances According to the International Monetary Fund (IMF) remittances are “current transfers by migrants who are employed in new economies and considered residents. (A migrant is a person who comes to an economy and stays, or is expected to stay, for a year or more.) (IMF 1993) In his analysis of remittances to the Caribbean, Bascom (1990) defines remittances as “transfers made from earnings and/or accumulated stocks of wealth by individuals who are residents in a foreign country on a temporary or permanent basis…to their countries of origin for dependant support, investment, or any other purpose.” A useful classification of remittances is provided in Wahba (1991) who divides remittances into four types: 1. Potential Remittances: savings available to the migrant once all expenses in the host country have been met. These represent the maximum the migrant can transfer at any time 2. Fixed Remittances: the minimum the migrant needs to transfer in order to satisfy her family’s basic needs and other contractual obligations. 3. Discretionary Remittances: transfers in excess of fixed remittances. These together with fixed remittances constitute the level of actual remittances.

The Measurement of Remittances The measurement of remittances is very imprecise. Also flows of major items in most cases have to be estimated. Additionally, the coverage of these items is much less than 100 percent since a significant amount of these flows occur through unofficial channels and go largely unrecorded. Remittances are usually measured by the estimate of private transfers in the Balance of Payments (ECLAC 1998). According to the International Monetary Fund Balance of Payment Manual, three categories of international transactions are included under this heading: I. Migrant Transfers: this records the flow of goods and the changes in financial items which arise from migration of individuals from one country to another. These include all household and personal effects, together with any movable capital goods which are

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05780771 actually transferred from the economy which the migrant is leaving to the one she is going. Enterprises in which the migrant retains ownership after their departure and claims on other residents in the former economy are also included. In the case of Trinidad and Tobago and other Caribbean economies, these item records transactions mainly associated with returning migrants. II. Worker Remittances: This component covers unrequited transfers by migrants employed in their new economy for a period exceeding one year. It does not include persons who work in the new economy for less than one year. III. Other Private remittances: this component covers transfers in cash or kind between individuals, between non-official organizations, and between an individual and a nonofficial organization. Such transfers include gifts, inheritances, alimony and other support remittances,

non-contractual

pensions

from

non-governmental

organizations,

compensation for damages etc.

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05780771 Literature Review

This review will look at some of the existing literature on the impact of remittances on economic development. However, one must recognize from the onset that in drawing conclusions about the impact of remittances on development one must deal with a number of challenging issues.

Firstly, there are data limitations arising from the inability of official sources to account for transfers using informal channels affecting remittances statistics based on balance of payments and household surveys.3 A second challenge that researchers must grapple with is disentangling the effect of remittances on a given aspect of household welfare or development, from that of migration more broadly (INTAL, ITD 2006). A third issue has to do with the difficulty in identifying a casual relationship from remittances to household well-being (IADB 2006).Given these challenges that researchers on the subject of remittances and development face, we now turn to the existing literature regarding the impact of remittances on development.

Poverty and Inequality

Do remittances lead to reductions in poverty among recipient households? This question goes beyond mere academic interest, since it has been the subject of debate in policy circles. 4 Existing findings suggest that remittances unambiguously reduce poverty but their impact is small, with its magnitude depending on how poverty is measured.

Adams (2004) and Adams and Page (2005) use three different measures of poverty calculated relative to the definition of the poverty line:5 the poverty headcount index6 ; the poverty gap index7; and the squared poverty gap8

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One study of forty Central Banks in developing countries around the world indicates that about 60 percent do not record data from money transfer providers that do not settle through banks (de Luna Martinez 2005) 4 For example, representatives from the Mexican Ministry of Social Development have argued that remittances have a minimal impact on reducing poverty, based on the observation that poor household receive only a modest fraction of the overall transfer of income to Mexico (“Remesas no disminuyen pobres.-Sedesol”, Reforma, 20 June 2005) 5 The World Bank defines the poverty line as the annual cost of purchasing the minimum daily caloric requirement of 2172 calories per person plus non-food items such as health and education. 6 the share of the population whose income or consumption is below the poverty line 7 provide information regarding how far off households are from the poverty line

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05780771 Although both studies use different data sources with Adams 2004 using national survey data from Guatemala and Adams and Page 2005 macro-data from a panel of 74 low and middle income developing countries both had similar conclusions. They both showed that international remittances have a statistically significant impact on the poverty headcount index although the magnitudes are small.

Other recent studies have confirmed these findings. Remittances are believed to have reduced the poverty headcount ratio by 11 percent in Uganda, 6 percent in Bangladesh and 5 percent in Ghana (Adams 2005). Completely removing remittances for Lesotho would raise the head count poverty ration from 52 to 63 percent (Gustafsson and Makennen 1993). Taylor Mora and Adams (2005), using data from a 2003 survey, conclude that an increase in international remittances would reduce both the poverty headcount and the poverty gap.

An understanding of the impact of remittances on poverty will be incomplete without knowledge on how the former affect the distribution of income and/or assets in the receiving country. Inequality affects poverty levels to the extent that it hampers growth and, further to the extent that it reduces the marginal impact of growth on poverty abatement (De Ferranti et al 2003).

What is the relationship between remittances and inequality? Theoretically, this relationship should be viewed as a dynamic process with an early increase in inequality followed by decreases over time (INTAL 2005). Similar views were shared by Mckenzie and Rapoport (2004) who argue that at the initial stage of migration the cost of emigrating is very high as such only high-income individuals can afford to move. As the number of migrant to the destination country increases cost declines giving lower income individuals to opportunity to migrate. As a result, overtime remittances should accrue to low-income households, thereby reducing income inequality at the origin.

Other studies which support the view that remittances may lower inequality of income distribution in the country of origin include Stark, Taylor and Yitzhaki (1986) and Taylor (1992) who argue that inequality as measured by different Gini indices, decreases with remittances 8

Measures the severity of poverty by taking into account the distance separating the poor from the poverty line and inequality among the poor.

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05780771 coupled with the country’s migration history. Additionally Taylor (1992) finds that over time remittances allow for the accumulation of productive assets that increase the productivity of a country so that the long run impact of remittances on lower inequality increases.

However there are some scholars who beg to differ with the previous view. Adams (1989) and Barham and Boucher (1998) adopt an alternative approach, they view remittances as a substitute for the labor income that the household would have earned had the migrant stayed home. They argue that if one does not include in the computation of the Gini index9 without remittances what the household would have earned had the migrant stayed, then inequality among households appear to be higher and as such the gap with the Gini index that includes remittances appears to be wrongly large. Thus remittances would seem to have a larger role in reducing inequality.

Labour Markets

The second question of interest regarding remittances impact on development is how international remittances affect the labour market. Chami, Fullenkamp and Jahjah (2003) produced a model in which remittances may give rise to a moral hazard problem; they argue that remittances may reduce recipient’s motivation to work and thus slow down growth.

Similar views were shared by Funkhauser (1992) who argues that the receipt of remittances could reduce participation rates due to the income effect. He went on to argue that remittances have a negative and significant influence on the labour force participation of both males and females. He however concludes that for males, the negative income effect from remittances dominates all other effects but for females the positive but small effect of the local labour market is enough to outweigh the negative remittance effect. Similar views were shared by Galasi and Kollo (2002) who argue that the receipt of remittances could be though of as similar to the effect of increasing unemployment benefits and hence the individual’s replacement rate and there reservation wages.

9

According to the CIA Fact book, The Gini index measures the degree of inequality in the distribution of family income in a country. The index is calculated from the Lorenz curve.

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05780771 Further evidence which suggests that remittances reduce female labour supply was presented by Hanson (2005) who using the 2000 population census of Mexico found evidence showing that international remittances are associated with lower female labour supply.

However, this slow down in growth as suggested by Chami et al (2003) may not necessarily be negative, as illustrated by Duryer, Lopez-Cordova and Olmedo (2005), who show that the decline in mothers’ labor force participation lowers the incidence of infant mortality. Human Capital

Another very important question is whether or not remittances allow households to increase their investment in human capital. Either in the form of better schooling or health care expenditures. An answer to this question is very important. Since according to Lopez-Cordova and Olmedo (2005), whether or not remittances affect human capital affects not only today’s well-being, but since it allows future generations to break the cycle of poverty and since human capital improves a country’s growth prospects. Leon-Ledesma and Piracha (2001) argue that remittances indirectly increased human capital as migrants learn new skills and work practices and return with these new skills to the country of origin.

Chimhiwu, Piesse and Pinder (2003) adopted a community/family based approach to remittances; they find that remittances enable better healthcare, education, nutrition and housing. However, they argue that the spending patterns associated with remittances is dependant on the strength of migrant kinship ties and the intent to return to the country of origin; therefore, remittances may slow as ties weaken with time which would affect funding available for such things as healthcare and education. According Lopez-Cordova and Olmedo (2005) the specific impact of remittances on education may be country specific and as such it may be difficult to draw conclusions from one context to another. However, there are a number of studies which indicate that remittances improve educational attainment among children in recipient households. Edwards and Ureta (2003) estimates that the probability of dropping out of school in El Salvador. They found that remittances, irrespective of amount lower the likelihood of dropping out of school.

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Yang (2003) in his study finds that for children 17-21, a rise in remittances equal 10 percent of initial household income which leads to a 10.3 percent increase in enrolment. Lopez Cordova (2006) shows that literacy rates among children 16-14 years are lower other things being equal as the fraction of remittance receiving households in a given Mexican municipality increases. Remittances can also lead to improved access to information (Adams 1991).

Beyond their impact on educational outcomes, remittances can play an important role in countries where the public health care system is not able to provide universal health insurance and adequate treatment or preventive healthcare (IADB 2005). Yang (2003) also argued that remittances improved access to health services and leads to better nutrition; as such this as the potential to improve productivity. Almuendo-Dorantes and Pozol (2005) look at the role played by remittances in health expenditures where approximately 50 percent of a population is uninsured; they found that healthcare expenditures rise in response to the receipt of remittances.

In terms of its impact on mortality rates, Hildebrant and Mckenzie (2005) confirm that children in recipient households have lower mortality rates and higher birth rates mainly thanks to remittances. Similarly, early findings by Duryea et al (2005) suggest that remittances have a positive impact on reducing infant mortality rates10. This is mainly because remittances contribute to better housing conditions and allows mothers to stay at home and care for their children.

Investment and Savings

The following presents different authors views on the impact of remittances on savings and investment. It is often argued that remittances are mainly used for conspicuous consumption and as such little is left over to undertake productive investments (Lopez-Cordova and Olmedo 2005).

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UNICEF defines infant mortality rates as the probability of dying between birth and exactly five years of age expressed per 1,000 live births

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05780771 Remittances are being used to fund investments in the future. Families use them to pay school fees for children from the home country studying abroad thereby investing in the “human capital” for the next generation (IADB 2005a). Remittances are also funneled into investment goods such as tools or a source of operating capital for small business. Kirton (2005) in a study of a sample of Jamaican small businesses found that at least 40 percent of the start up capital for these businesses where funded by remittances. Woodruff and Zenteno (2005) also show that remittances are a significant source of capital for micro enterprises. Similar views where shared by Massey and Parrado (1998) who found that at the household level a unit increase in the log of remittances increased the probability of investing in a business by 16 percent.

Other studies have also shown that remittances make up a larger source of external funding that FDI and ODA. For example Mishra (2006) found that in 2002 total remittances constituted 13 percent of the Caribbean region’s GDP as compared to FDI and ODA which constituted 6 percent and 1 percent respectively. Similar views where shared by Orozco 2002 who argued that remittances have improved foreign currency inflows in some countries up to 9 percent of GDP.

On the savings side a number of studies show that remittances positively impact on savings. Dustmann and Kirchamp (2001) found that of return migrants become active as entrepreneurs and the capital for starting a business stems from savings abroad. Similar views where shared by McCormick and Wahba (2001) who also found that total overseas savings have a positive and significant effect on savings.

Another form in which remittances can facilitate savings is through investments in housing. Parrado (2004) analyses the impact of remittances on home ownership and housing; he found that in Latin American Countries (LAC) where individuals may not have sufficient credit and assets to own a house migration and consequently remittances may be in part conceived as a strategy to accumulate the necessary capital to buy a house or improve existing houses. He also finds that migrant houses are more likely to be in better conditions and have a larger number of rooms regardless of household size. Lucas and Stark (1985) also argued that remittances increased savings and asset accumulation (liquid and non liquid assets); they went on to argue that it increased collateral for loans and helped create liquidity in times of crisis.

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05780771 Exchange Rate, Exports and Development

The empirical literature on the effects of international remittances has focused predominantly on microeconomic aspects and there exists very few studies that investigate the macroeconomic impact of remittances (World Bank 2005). However when an economy receives such important capital inflows (remittances), like any other capital inflow one could expect to see some effects on the level of the Gross Domestic Product and other macroeconomic variables. Remittances may act as a cushion against shocks many authors have observed an increase in remittance inflows following a natural disaster (Clarke and Wallsten 2004), or an economic downturn (Kapur 2003). Yang (2005) found the increase in remittances make up for 13 percent of income losses in the current year and 28 percent within four years of a hurricane. In contrast, increases in ODA and FDI make up for roughly 26 and 21 percent, respectively within four years. Economic downturns may even encourage workers to migrate abroad and begin to remit (Ratha 2001). They (remittances) act as a safety net and as a form of insurance during economic downturns (IADB 2005).

Remittances sent are mainly in small amounts, but together these flows dwarf official development assistance and surpass the value of leading exports in many countries (Freud 2005). In Latin America and the Caribbean for example, individual migrants send money home in amounts ranging from two to three hundred dollars monthly, yet when added up these remittances total more than most countries receive in official development assistance plus Foreign Direct Investment (IADB 2005).

On the economic development side, remittances are said to have improved the local physical infrastructure including the development of development institutions (Ahmed 2000; Alarcon 2002, 1998). It has also lead to the development of local capital markets that is, the availability of new services; banking, retail, trade, travel and construction (Ballard 2002).

Large and sustainable remittance inflows can also affect the exchange rate. It has been argued that remittances can cause an appreciation of the exchange rate and lower export competitiveness. Dorantes and Pozo (2002) in their studies found that a doubling of worker’s

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05780771 remittances resulted in a real exchange rate appreciation of about 22 percent. Rajan and Subramanian (2005) however, did not find any evidence that remittance flows slow down growth by affecting competitiveness. Also because remittances tend to be relatively stable over long periods, the “Dutch Disease” effects of remittances are of less concern than similar effects of natural resource windfalls and as such the real exchange rate level achieved through sensible policies may be sustainable (IMF 2005).

According (1997), in Bangladesh the increase in the relative demand of non-tradables (due in part to remittances) has changed both output and employment in favor of the non-tradable goods sector. Also, Lopez-Cordova and Olmedo (2005) investigated whether international remittances hindered export competitiveness. They found that on average a 10 percent increase in remittance inflows reduced exports between 2 and 4 percent, depending on estimation strategy.

In spite of the voluminous literature on migration and the importance of remittances to many developing countries, there are very few attempts to develop a systematic theory of remittances. The seminal works of Lucas and Stark (1985) and Stark (1991) are notable exceptions. Lucas and Stark (1985) divide theories of remittances into three groups, that is, Pure Altruism, Pure Self-interest and Tempered Altruism or Enlightened Self-Interest.

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Case study: Trinidad and Tobago Table one below presents all of the data that was collected for the Country of Trinidad and Tobago between the years 1973-2003. These include Total Private Remittances, GDP at current prices, FDI, Other investment inflows which include Private non-FDI flows, total Private Savings and Exchange Rate. This data along with such things as literacy rates and the level of health care is analyzed in the subsequent pages to determine whether or not remittances have contributed to economic development in Trinidad and Tobago.

There is not much data about the Trinidad and Tobago diaspora abroad or their specific remitting patterns. As such data which was collected by the International Monetary Fund was looked at to understand the relationship between remittances and key economic indicators. Table 1: Economic Indicators for Trinidad and Tobago between the years 1973-200311 Years

1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Total Private remittances US$Mn 2.8 2.7 2.9 2.0 1.7 1.8 1.8 1.8 2.0 2.0 2.0 0.9 1.3 1.3 2.5 2.1 3.6 3.7 5.4 6.8 20.4 27.2

GDP US$Mn

(rem/GDP) %

FDI US$Mn

Other Investments US$Mn

1308.3 2045.2 2442.4 2537.7 3138.7 3562.3 4602.4 6235.9 6992.3 8140.3 7763.9 7757.0 7376.0 4794.4 4797.8 4501.2 4323.0 5068.1 5307.9 5439.4 4586.2 4993.5

0.2 0.1 0.1 0.08 0.05 0.05 0.04 0.03 0.03 0.02 0.03 0.01 0.03 0.03 0.05 0.05 0.08 0.07 0.10 0.10 0.40 0.50

65.5 120.3 202.8 120.3 140.1 127.0 173.6 143.4 183.3 211.0 81.5 113.2 49.7 19.9 33.1 63.0 148.9 109.4 144.1 171.0 372.6 521.0

274.0 326.1 465.0 514.3 696.4 949.5 1165.3 1765.0 1763.4 2160.4 1914.4 1747.3 1334.4 1015.6 894.1 524.4 567.6 590.5 721.7 579.3 285.8 487.8

Total Private Savings US$mn 211.9 206.3 474.4 242.6 157.1 395.3 526.9 792.3 636.1 897.4 332.8 522.7 504.9 71.9 265.2 83.4 184.3 633.4 20.0 237.3 13.0 614.1

Exchange Rate U.S.D 1.96 2.05 2.17 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.45 3.60 3.60 3.84 4.25 4.25 4.25 4.25 5.34 5.87

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Data was collected from The Central Statistical Office of Trinidad and Tobago and the Central Bank of Trinidad and Tobago

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05780771 1995 1996 1997 1998 1999 2000 2001 2002 2003

32.0 29.6 31.6 47.9 56.2 40.6 49.3 81.0 88.6

5381.5 5774.1 5739.3 6061.3 6840.4 8180.0 8872.1 10655.1 11482.1

0.60 0.50 0.60 0.80 0.80 0.50 0.60 0.70 0.80

295.7 356.3 999.6 731.9 643.3 679.5 634.9 684.8 534.5

822.6 1045.3 728.7 1291.5 793.8 958.6 1204.0

967.1 681.7 454.5 468.2 549.0 1045.8 1421.6

5.89 5.99 6.25 6.28 6.27 6.28 6.20 6.21 6.26

Remittances to Trinidad and Tobago Overall, for the country of Trinidad and Tobago remittances increased from US$ 2.8 million in 1973 to US$88.6 million in 2003. Despite this significant increase, remittances to Trinidad and Tobago have remained fairly constant over the thirty year period. This can also be seen when compared to total remittances to the Caribbean. Figure one below shows that although total remittances to Caricom countries have increased significantly from US$172 million in 1988 to US$850 million in 1999. Remittances to Trinidad and Tobago have remained constantly low over this time period not even surpassing US$60 million. Figure 1: Remittances to T&T and Caricom (1988-1999)12 US$ Million

19 98

19 96

19 94

19 92

Rem (T&T) Rem (Caricom) North

19 90

19 88

1000 900 800 700 600 500 400 300 200 100 0

Years

Also, although Trinidad and Tobago is considered to be the economic power house in the Caribbean, remittances as a percentage of total remittances to Caricom countries was only 1.2%

12

Data was collected from the Central Statistical Office (CSO) of Trinidad and Tobago

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05780771 in 1988. And although the overall percentage increased between 1988 and 1999 it still consisted of a very small percentage of total remittances to Caricom countries (Table 2).

Table 2: T&T Remittances as a % of Total Caricom Remittances 1988-1999 Years Caricom T&T (%) T&T/Caricom 1988 172 2.1 1.2 1989 222 3.6 1.6 1990 242 3.7 1.5 1991 240 5.4 2.3 1992 257 6.8 2.6 1993 310 20.4 6.6 1994 601 27.2 4.5 1995 807 32.0 4.0 1996 821 29.6 3.6 1997 819 31.6 3.9 1998 864 47.9 5.5 1999 850 56.2 6.6

Although remittances to Trinidad and Tobago constituted a small percent of total Caricom remittances, the volume or remittances sent by immigrants living outside of Trinidad & Tobago has grown steadily since 1990 (figure 2), with an average growth rate of 30%. In 2002, remittances totaled over US$80million an amount 12 times larger than the amount reported in 1992.

Figure 2: Family Remittances to Trinidad and Tobago 1990-2002

Source: World Development Indicators 2005

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05780771 Remittances and GDP for Trinidad and Tobago Although remittances for Trinidad and Tobago increased from US$2.8million in 1973 to US$88.6million in 2003; the share of remittances as a percentage of GDP is very negligible. Remittances represent an average of 0.3 percent of GDP in Trinidad and Tobago during the 30year period under study, having increased from 0.2 percent to 0.8 percent.

This maybe so because unlike other Caricom countries who are reliant on tourism and the agricultural sector among other things. The Trinidad and Tobago economy is dominated by the energy sector (need data). Over the thirty year period under investigation remittances to Trinidad and Tobago accounted for less than 1 percent of GDP.

Figure 2 below also shows that remittances as a percentage of GDP remained below 0.2 percent up to 1993 after which it increased. However, total remittances as a percentage of GDP still remained under 1 percent up to 2003.

Figure 3: T&T remittances as a percentage of GDP, 1973-2003 Percent 1 0.8 0.6 0.4 0.2

20 03

20 01

19 99

19 97

19 95

19 93

19 91

19 89

19 87

19 85

19 83

19 81

19 79

19 77

19 75

19 73

0

Rem % GDP T&T

Remittances and Exports Although remittances to Trinidad and Tobago constitute a small percentage of GDP, the economy may have benefited from remittances. This is because remittances offer a small but stable stream of money. In terms of exports, remittances as a percentage of exports have increased and decreased throughout the periods 1990-2002. In 2002, remittances comprised a

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05780771 little over 2 percent of exports, a number over 4 times higher than in 1992. This is illustrated in figure four below. Figure 4: Remittances as percentage of Exports 1990-2002 Percent

Source: World Development Indicators, 2005

Remittances and Other Inflows Remittance flows rank only behind foreign direct investment (FDI) as a source of external funding for developing countries. In 2004, workers’ remittance receipts in developing countries exceed US$126 billion, much higher than official development assistance and private non-FDI flows, and more than half of total FDI flows to developing countries13

Most of the existing literature on remittances shows that for the developing world Remittances flows are very high even surpassing private non-FDI flows. Throughout the 30 year period FDI flows were much greater than remittances to Trinidad and Tobago (figure 3). This supports the existing literature. However, other investment inflows were greater than remittances throughout the period under study accounting for approximately 11 percent of GDP in 2000 as compared to remittances which accounted for only 0.5 percent of GDP in that same year. 13

Ratha D. Workers’ Remittances: An Important and Stable Source of External Development.

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05780771 The Volatility of Remittances Compared to Other flows in Trinidad and Tobago A number of literatures put forth the view that remittances respond to dramatic changes in economic activity in recipient countries. However, when looking at figure three which shows Remittances and other inflows between the periods 1973-2003, Other Investment flows increased significantly in the boom years of Trinidad and Tobago from US$274million in 1973 to an all time high of US$2160.4million in 1982 after which it declined, which can be attributed to the recession which occurred in Trinidad and Tobago in the 1980s.

Remittances however did not have an overall increase at any time during the recession years as one would have expected. In fact it remained relatively stable. Remittances only showed any major increase from the year 1990 after the recession had begun to subside.

Figure 5: Remittances Compared with FDI and Other investments 1973-2003 US$ Million $2,300.00

$1,800.00

$1,300.00

Remittances FDI Other Investment Flows

$800.00

$300.00

20 03

20 01

19 99

19 97

19 95

19 93

19 91

19 89

19 87

19 85

19 83

19 81

19 79

19 77

19 75

19 73

-$200.00

Years

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05780771 Remittances and Other Indicators The theory of Enlightened Altruism argues that the level of migration would be higher among more educated members of the house hold and the level of remittances from the more educated is greater, not only because their earnings would be higher but the remittances represent higher implicit loan repayments to the family which was has invested in their education14. Table 3 below represents percentage rates of Tertiary-Educated Caribbean Migrants. Trinidad and Tobago has the greatest share of migrants who are tertiary educated as a percentage of total migrants. However, their level of remittances when compared to other Caribbean economies is very low. The economy is suffering from brain drain and as such the theory that remittances replace the loss of educated individuals cannot necessarily be argued here

Table 3: Percentage Rates of Tertiary-Educated Caribbean Migrants Country

Tertiary Educated Share of Total Migrants

Migration Rates of Tertiary Educated

Dominican Republic

22.6

14.2

Jamaica

41.7

67.3

Trinidad and Tobago

46.7

57.2

Guyana

40.7

77.3

Source: Adapted from Carrington and Detragiache, 1998

The cost to send remittances to Trinidad and Tobago has remained relatively high in comparison to transaction for other LAC countries. As of June 2004, the transaction cost to send US$200 from the United States to Trinidad and Tobago was 11.28% (Orozco 2004)15

This may account for why remittances to Trinidad and Tobago are so low even though the level of skilled migrants is so high when compared to other Caribbean countries. Additionally there is not sufficient information to write about the key players in the Trinidad and Tobago remittance transfer business or to comment upon the level of competition within the industry. The relatively high transaction cost might indicate that there is little to no competition within the market.

14 15

Lucas and Stark (1985) Remittances to LAC: Issues and perspectives on development, Orozco 2004

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05780771 Table 4: Remittances and other Indicators

Source: The Inter-American Dialogue, Washington D.C A look at remittances flows and their manifestations in Latin American and the Caribbean show the presence of three distinct groups as they relate to the impact these funds have in each country. One group is represented by those countries whose flows have an effect in most if not all the indicators mentioned above. This means that remittances have an important presence both in the country’s national and per capita income, as well as in the inflow to a household’s income, which is at least twice the average per capita income. A second group is one wherein the effect of remittances is felt in half of these indicators, and the third group is that which is minimally impacted by remittances. Trinidad and Tobago is not even represented on this table. The three categories are summarized in Table 5 below. Trinidad and Tobago is in the category where remittances has the lowest impact

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05780771 Table 5: The Impact of Remittances on Development (Comparison of LAC) Strong Guatemala Ecuador Nicaragua El Salvador Haiti Honduras Bolivia Guyana Jamaica Mexico

Medium Paraguay Colombia Peru Dominica Republic Brazil Suriname Costa Rica Belize Grenada Barbados

Low Dominica Panama Antigua and Barbuda St Vincent and the Grenadines Chile Trinidad and Tobago Argentina St Kitts and Nevis Uruguay St Lucia Venezuela, RB

Source: The Inter-American Dialogue, Washington D.C

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05780771 Analysis and Conclusion For the Trinidad and Tobago Economy, the level of migration particularly skilled migration to other countries is very high when compared to its other Caricom counterparts. As such, one would expect the level of remittances to be very high. However, this is not the case. Remittances to Trinidad and Tobago when compared to other Caricom countries are very low. However, although low, these flows are relatively stable over time; this can be seen when looking at the flow of remittances during the recession years of Trinidad and Tobago.

One would have expected as predicted by theory a massive inflow of remittances during the economic downturn of the 1980s in Trinidad and Tobago. This however, was not so; remittances continued to fluctuate at a low level and did not respond to this macroeconomic shock. Thus one can argue that remittances although low represent a constantly low flow of funds to the Trinidad and Tobago economy.

When compared to GDP, remittances throughout the entire period of study (1973-2003) although increasing, represented less than one percent of GDP. This can be attributed to the fact that Trinidad and Tobago is heavily reliant on the Energy Sector, products such as oil and more so today Natural Gas, represent a great part of Trinidad and Tobago’s comparative advantage when trading thus this sector along with other diversified sectors (manufacturing, agriculture..) contribute greatly to the GDP of Trinidad and Tobago making the contribution of remittances to GDP negligible.

The cost of remitting to Trinidad and Tobago is also a major determinant of flows to this economy. The cost when compared to other LAC countries is very high. As such where the economy should be receiving increasingly high flows remittances due to the level of skilled migration away from this economy, the cost of remitting may be a major inhibiting factor of remittance flows and consequently its contributions to economic development.

Because of the low level of remittances to Trinidad and Tobago its impact on the level of education and health is minor. Trinidad and Tobago once again is characterized by dependence on the production and export of petroleum and natural gas. The international price of these

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05780771 commodities would determine the level of revenue into Trinidad and Tobago and consequently the level of economic development this is illustrated in the “bust” years where the price of these commodities fell which led the Trinidad and Tobago economy into an economic recession.

Overall, this paper looks at the contribution of remittances to economic development in Trinidad and Tobago. It discusses the various types of remittances along with how these remittances are measured. Existing literature was looked at to determine the implicit and explicit links between remittances and economic development.

Existing data surrounding major economic indicators of development was collected and these where compared to remittance flows to determine whether or not these flows contributed to economic development in Trinidad and Tobago. The data revealed that in general remittance flows accorded qualitatively with the migration flows experienced by most Caribbean countries, However for the country of Trinidad and Tobago, the level of remittances appear to be low given the magnitude of net migration experienced by this country.

Based on the ratio of remittances to GDP and to exports for Trinidad and Tobago; when analyzed closely they play a role in the level of economic activity. However, this does not discount the fact that the Trinidad and Tobago economy is greatly reliant on its energy sector. As such, remittance flows to this country may seem somewhat negligible.

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05780771 Recommendations

Discussions on measures to improve the flow of remittances and consequently its contribution to development must take into account the differences between various types of remittances as discussed by Wahba. Policy makers cannot do much about fixed remittances as these are related to motives and contractual obligations which are outside of the control of authorities. This is not so for discretionary remittances since these are associated with the level of saved remittances

Trinidad and Tobago has the potential to benefit significantly from remittance flows due to its migration levels. As such authorities to increase the flow of both fixed and discretionary remittances must seek to improve money transfer mechanisms. The efficiency of money transfer mechanisms is related to the cost, certainty and speed of transfers. As such, for remittance flows to play a significant role in the development process they must be systematic, predictable and consistent.

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