David Salmon | Jamaica’s remittance trap

It is an indisputable fact that Jamaica relies heavily on remittances to support the economy. In 2020, these inflows stood at US$2.9 billion, which at the time, was equivalent to 21 per cent of GDP. This was up from 15 per cent of GDP recorded in the previous year.

Even though there is no doubt that remittances have yielded significant benefits, there are major consequences for our increasing reliance on them. Our overreliance on these cash flows impairs growth as they incentivise Jamaicans to migrate, decrease our productive capacity, and leave us exposed to economic shocks.

While I am not arguing that remittances should cease, it is important to investigate the unintended impacts of these cash flows as we discuss the future economic structure of the island given our ambitions to become a high-income country.

INCREASE IN LABOUR EXPORTS

Unfortunately, Jamaica’s most valuable export that has been packaged, shipped, and ready for production is our people. However, this resource is fundamental to our future growth prospects. Our reliance on remittances encourages emigration as the desire to earn foreign exchange to increase purchasing power is a natural incentive to migrate. If a household’s major source of income is this cash flow, then the only factor that would prevent them from capitalising on overseas opportunities would be the receiving country’s immigration policies.

Thus, I am challenging the argument that remittances increase our economic growth. These cash flows simply do not compensate for the loss in Jamaica’s most valuable asset: its people. The IMF publication titled Unleashing Growth and Strengthening Resilience in the Caribbean highlighted this fact when it stated, “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).” It does not get plainer than that.

And yet there is a growing chorus of voices that argue that Jamaica should train our skilled professionals for export due to the prospects for remittances. This is an ill-advised proposal. There is already a case study where the implementation of this training for export model has yielded disastrous consequences.

The Philippines actively trains nurses for export. Today, it the largest supplier of this profession globally as a quarter of all the world’s overseas nurses are from there. The Philippines currently has a significant nurse shortage as a culture of migration has developed. The remittances received are chicken feed when compared to the haemorrhaging of these skilled professionals.

Today, there are not only opportunities for skilled workers to migrate, but receiving countries are also willing to accept their immediate family members. If persons can move with their families, then who would prospective remittances go to? Thus, it is an asinine argument to suggest that we should encourage migration to receive more remittances.

DECREASED PRODUCTIVE CAPACITY

The most observable challenge with remittances is that it can reduce the number of people who participate in the workforce. Quantity and quality of labour are major factors that contribute to economic performance. However, if an individual’s income can be earned from cash transfers, then what incentive would this person have to join the labour market?

This trend has been extensively documented. A 2018 International Monetary Fund (IMF) working paper entitled “Are Remittances Good for Labour Markets in LICs, MICs and Fragile States?’ identified that the labour force participation of family members who remain in a labour-sending country decreases when other family members emigrate and send remittances. This has been observed across Latin America. With a decline in labour, economic output will stall.

Remittances can also encourage individuals to move away from the formal labour market towards informal employment. The reason for this is simple. If there is an inflow of remittances, then the wage at which someone is willing to enter the labour market increases.

Rather than participate in the formal economy at the current wage level, that individual may do informal jobs or “hustling” to supplement their income. Interestingly, the IMF working paper identified that remittances can contribute to a suppression of wages as they may decrease the incentives workers have to negotiate higher renumeration as these cash flows can supplement low incomes.

Recently, several domestic industries, including construction, BPO, and tourism, have identified significant labour shortages. Ironically, these are also industries where large swathes of the workforce are involved in low-paid employment. Therefore, having incentives that discourage wage increases or discourage individuals from participating in expanding industries will only encourage further economic stagnancy.

REDUCED UNCERTAINTY?

The most positive argument in favour of remittances is that they supplement incomes during times of uncertainty. Numerous studies, including the two previously cited IMF publications, have identified this observation. However, even this benefit has consequences for the economy.

For one, remittances leave us beholden to the boom -and-bust cycles seen in countries where Jamaicans reside. If the economy slows down or there is an increase in the cost of living within these economies, then it is likely that remittance flows will decline. This already occurred in the aftermath of the 2008 global financial crisis and during the COVID-19 pandemic.

Notwithstanding that, if we accept that remittances bolster consumption for poorer households, then analysis must be done on what those households spend their additional income on. The revised Consumer Price Index indicates that 35.8 per cent of a household’s income goes towards Food & Non-Alcoholic Beverages; 17.8 per cent of income goes towards Housing, Water, Electricity, Gas & Other Fuels; and 11.2 per cent of income goes towards transportation. In other words, 64.8 per cent of household expenditure is linked to sectors that are fuelled by imports.

Additionally, most food consumed by lower- and medium-income households are imported. Consequently, it is likely that additional consumer expenditure made from remittances will go towards imported goods. This contributes to a worsening of the country’s existing US$3.47 billion trade deficit, which was recorded between January and July this year.

Even if we acknowledge the argument that some households use remittances to start businesses, this does not necessarily contribute to economic growth. According to the 2019 Jamaica Survey of Establishments, 11 percent of businesses were in accommodation and food, one-third specialized in motor vehicle sales or repair, with another third doing wholesale and retail trade or buy-and-sell. These findings show that most businesses in Jamaica are driven by imports.

So even if remittances were being used to fuel the growth of micro, small, and medium-sized enterprises (MSMEs), the bulk of those businesses are import driven, which does not improve Jamaica’s balance of trade. This is consistent with data identified in the IMF working paper that indicated that an increase in remittance flows decreases employment in agriculture and manufacturing while also increasing employment in accommodation, transport, and other low-productive services.

GOING FORWARD

Am I arguing that Jamaicans in the diaspora should discontinue sending remittances to their loved ones? No, absolutely not. What I am arguing is that policymakers should seriously examine ways to increase our economy’s productive sectors as the continued dependence on, remittances has consequences for our development.

Therefore, going forward there must be a concerted effort to reduce informality, develop industries that have higher wages, increase focus on exports, and improve economic diversification. If not, Jamaica will continue to be trapped due to its dependence on remittances.

David Salmon is Jamaica’s 2023 Rhodes Scholar and valedictorian of the University of the West Indies Faculty of Social Sciences 2022 graduating class. Send feedback to davidsalmon@live.com.