05780771

1

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)

05780771

2

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.

05780771

3

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

05780771

4

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

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

05780771

5

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

05780771

6

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.

1In 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

05780771

7

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

05780771

8

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 non-

official organization. Such transfers include gifts, inheritances, alimony and other support

remittances, non-contractual pensions from non-governmental organizations,

compensation for damages etc.

05780771

9

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 index

6 ; the poverty gap

index7; and the squared poverty gap

8

3 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

05780771

10

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.

05780771

11

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.

05780771

12

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.

05780771

13

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).

10

UNICEF defines infant mortality rates as the probability of dying between birth and exactly five years of age

expressed per 1,000 live births

05780771

14

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.

05780771

15

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

05780771

16

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.

05780771

17

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 Total

Private

remittances

US$Mn

GDP

US$Mn

(rem/GDP)

%

FDI

US$Mn

Other

Investments

US$Mn

Total

Private

Savings

US$mn

Exchange

Rate

U.S.D

1973 2.8 1308.3 0.2 65.5 274.0 211.9 1.96

1974 2.7 2045.2 0.1 120.3 326.1 206.3 2.05

1975 2.9 2442.4 0.1 202.8 465.0 474.4 2.17

1976 2.0 2537.7 0.08 120.3 514.3 242.6 2.40

1977 1.7 3138.7 0.05 140.1 696.4 157.1 2.40

1978 1.8 3562.3 0.05 127.0 949.5 395.3 2.40

1979 1.8 4602.4 0.04 173.6 1165.3 526.9 2.40

1980 1.8 6235.9 0.03 143.4 1765.0 792.3 2.40

1981 2.0 6992.3 0.03 183.3 1763.4 636.1 2.40

1982 2.0 8140.3 0.02 211.0 2160.4 897.4 2.40

1983 2.0 7763.9 0.03 81.5 1914.4 332.8 2.40

1984 0.9 7757.0 0.01 113.2 1747.3 522.7 2.40

1985 1.3 7376.0 0.03 49.7 1334.4 504.9 2.45

1986 1.3 4794.4 0.03 19.9 1015.6 71.9 3.60

1987 2.5 4797.8 0.05 33.1 894.1 265.2 3.60

1988 2.1 4501.2 0.05 63.0 524.4 83.4 3.84

1989 3.6 4323.0 0.08 148.9 567.6 184.3 4.25

1990 3.7 5068.1 0.07 109.4 590.5 633.4 4.25

1991 5.4 5307.9 0.10 144.1 721.7 20.0 4.25

1992 6.8 5439.4 0.10 171.0 579.3 237.3 4.25

1993 20.4 4586.2 0.40 372.6 285.8 13.0 5.34

1994 27.2 4993.5 0.50 521.0 487.8 614.1 5.87

11

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

and Tobago

05780771

18

1995 32.0 5381.5 0.60 295.7 822.6 967.1 5.89

1996 29.6 5774.1 0.50 356.3 1045.3 681.7 5.99

1997 31.6 5739.3 0.60 999.6 728.7 454.5 6.25

1998 47.9 6061.3 0.80 731.9 1291.5 468.2 6.28

1999 56.2 6840.4 0.80 643.3 793.8 549.0 6.27

2000 40.6 8180.0 0.50 679.5 958.6 1045.8 6.28

2001 49.3 8872.1 0.60 634.9 1204.0 1421.6 6.20

2002 81.0 10655.1 0.70 684.8 6.21

2003 88.6 11482.1 0.80 534.5 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

0100200300400500600700800900

1000

1988

1990

1992

1994

1996

1998

Rem (T&T)

Rem (Caricom)

North

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

US$ Million

Years

05780771

19

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

05780771

20

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 30-

year 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

0

0.2

0.4

0.6

0.8

1

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

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

Percent

05780771

21

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

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.

Percent

05780771

22

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

-$200.00

$300.00

$800.00

$1,300.00

$1,800.00

$2,300.00

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Remittances

FDI

Other Investment Flows

US$ Million

Years

05780771

23

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

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

Lucas and Stark (1985) 15

Remittances to LAC: Issues and perspectives on development, Orozco 2004

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

05780771

24

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

05780771

25

Table 5: The Impact of Remittances on Development (Comparison of LAC)

Strong Medium Low

Guatemala

Ecuador

Nicaragua

El Salvador

Haiti

Honduras

Bolivia

Guyana

Jamaica

Mexico

Paraguay

Colombia

Peru

Dominica Republic

Brazil

Suriname

Costa Rica

Belize

Grenada

Barbados

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

05780771

26

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

05780771

27

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.

05780771

28

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.

05780771

29

Bibliography

Adams, R H. “Worker Remittances and Inequality in Rural Egypt”, in Economic Development and

Cultural Change. 47 (1). October, 1989.

Adams, R H “Remittances and Poverty in Guatemala”, in World Bank Policy Research Work Paper. No.

3418, September, 2004

Adams, R and J Page. “The impact of International Migration and Remittances on Poverty” in

Remittances, Development Impact and Future Prospects. Samuel Munzele Maimbo and Dilip

Ratha, Eds. Washington DC. World Bank 2005

Ahmed, I.. “Remittances and Their Economic Impact in Post-War Somaliland.” Disasters 24(4): 380-

389. 2000

Alarcon, R. “The Development of Hometown Associations in the United States and the Use of Social

Remittances in Mexico”. Dept. of Social Studies, Colegio de la Fronter norte, Tijuana, Baja

California, Mexico. 2002

Bascom, Wilbert.. Remittances Inflows and Economic Development in Selected

Anglophone Caribbean Countries . Working Paper No. 58. Commission for the Study of

International Migration and Co-operative Economic Development, Washington, D.C. 1990

Ballard R. “A Case of Capital-Rich Under-development: The Paradoxical Consequences of Successful

Transnational Entrepreneurship from Mirpur”. University of Manchester. UK. 2002

Barham, Bradford and Stephen Boucher. “Migration, Remittances and Inequality: Estimating the Net

Effects of Migration on Income Distribution”, in Journal of Development Economics, 55. 1998.

Chami, R., C. Fullenkamp, and S. Jahjah. “Are Immigrant Rmittances Flows a Source of Capital for

Development?” in IMF Staff Papwer, 52 (1). 2005.

Chimhowu, Admos O; Piesse J and C Pinder. “The Socioeconomic Impact of Remittances on Poverty

Reduction.” in Remittances, Development Impact and Future Prospects. Samuel Munzele

Maimbo and Dilip Ratha, Eds. Washington DC. World Bank 2005

De Ferranti, D; Guillermo E. Perry; Francisco H. G Ferriera and M Walthon (Eds). Inequality in Latin

America and the Caribbean: Breaking with History? Washington D.C World Bank 2003

Duryea, S; Ernesto Lopez-Cordova and Alexandra Olmedo. “Migrant Remittances and Infant Mortality:

Evidence from Mexico” ,IDB 2005.

Dustmann, C and O Kirchkamp. “The Optimal Migration Duration and Activity Choice after Re-

Migration”, IZA Discussion Paper Series, No. 266. February 2001.

05780771

30

Funkhouser, E. “Migration form Nicaragua: Some Recent Evidence”, in World Development, 20 (8).

1992.

Hanson, Gordon H. “ Emigration, Remittances, and Labour Force Participation in Mexico”. Paper

commissioned by the IDB. 2005

Hildebrant, Nicole and David McKenzie. “The Effects of Migration on Child Health in Mexico”, in

Policy Research Working Paper, 3573. World Bank 2005

Kapur, Devesh. “Remittances: The New Development Mantra?” G-24 Discussion Paper Series. No. 29.

UNCTAD. April, 2004.

Lopez Cordova , Ernesto and Alexandra Olmedo. “International Remittances and Development:

Existing Evidence, Polices and Recommendations”. Mimeo. IDB. 2005

Lucas , R. B,. and O. Stark. 1985. “Motivations to Remit: Evidence From Bostwana” in The Caribbean

Economy (Ed) Pantin D. 2005

McCormick, B and J. Wahba. “Overseas Work Experience, Savings and Entrepreneurship Amongst

Return Migrants to LDCs”, in Scottish Journal of Political Economy,48 (2) May, 2001

Mckenzie, D and Hillel Rapoport. “Network Effects and the Dynamics of Migration and Inequality:

Theory and Evidence from Mexico” Mimeo, Stanford University, 2004.

Mishra, Prachi. “Emigration and Brain Drain: Evidence from the Caribbean” IMF 2006.

Orozco, M. “Worker Remittances: The Human Face of Globalization.” Working Paper, Multilateral

Investment Fund, IADB, Washington D.C. 2002

Orozco, M. “Remittances to Latin America and its Effects on Development.

IADB Washington” D.C. 2002

Taylor, Edward. “Remittances and Inequality Reconsidered: Direct, Indirect, and Intertemporal Effects”

Journal of Policy Modeling, 14 92). 1992.

Wahba, S., (1991), "What Determines Workers Remittances?" Finance and development, Vol. 28, No. 4,

December, pp. 41- 44.

Yang, Dean. “Remittances and Human Capital Investment: Child Schooling and Child Labour in the

Origin Households of Overseas Filipino Workers”. University of Michigan 2003

Yang, Dean. “Remittances Migration, Human Capital and Entrepreneurship: Evidence from Phillipine

Migrants’ Exchange Rate Shocks” Mimeo. University of Michigan. 2005.