Emigration, Brain Drain, and Remittance Flows in the Caribbean

1. Emigration, Brain Drain, and Remittance Flows in the Caribbean Hunter Monroe Western Hemisphere Department International Monetary Fund The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

2. Scope of Presentation • Quantify emigration and brain drain and assess the impact • Evaluate the costs of emigration and brain drain relative to remittance inflows • Assess the impact of emigration on pension scheme sustainability

3. The Caribbean has the highest emigration rates in the world 3 Data Source: Docquier and Marfouq, 2004 in Mishra (2006)

4. A large proportion of the labor force has migrated abroad 4 Mishra (2006)

5. Much of this emigration has been in the form of a “brain drain” 5

6. In terms of skilled migration rates, Caribbean countries comprise most of the top 20 countries in the world 6

7. Are the costs of the “brain drain” sufficiently high to outweigh the gains from remittances? versus Mishra (2006) uses a labor demand-supply framework to show that the costs of the brain drain are, in fact, significant for the Caribbean 7

8. Why are remittances important? World-wide remittances to developing countries and emerging markets have increased more than 9-fold over the past 25 years. Current estimates of remittance flows on the order of US$200 billion in 2006. Total gross remittances are now the 2nd largest source, behind FDI, of external financial flows to these countries. 8

9. External Financial Flows(US$ billions) Spatafora (2007) 9

10. What are some of the benefits of remittances? Compared with other resource flows, typically much more stable. Unrequited transfers, so no future financing obligations as with other capital flows. Can help smooth crises, foster economic and financial development, and alleviate poverty. 10

11. Volatility of Inflows 1(1980-2003) 1Volatility is defined as the standard deviation of the ratio of the relevant inflow to GDP. 11 Spatafora (2007)

12. Cyclicality of Inflows 1(1980-2003) 1Cyclicality is defined as the correlation between the detrended relevant inflow and detrended GDP. 12 Spatafora (2007)

13. Definition of remittances Workers’ remittances—transfers from workers staying abroad for >1 year recorded under “current transfers” Compensation of employees—transfers from persons staying abroad for <1 year recorded under “income” of the current account Migrants’ transfers—flows of goods and financial assets linked to migrants’ cross-border movements recorded under “capital transfer” 13

14. Data Caveats Remittances may actually be much larger! Large share of remittances flow through informal channels Freund & Spatafora (2005)—informal remittances could be 35-75 percent of official remittances Poor data collection implies even formal remittances may be unrecorded Remittances often misclassified as exports, tourism receipts, non-resident deposits, or FDI 14

15. The Caribbean is the world’s largest recipient of remittances relative to GDP (in percent of GDP) World Bank; data for 2007, simple average 15

16. Remittances in the Caribbean are greater than either FDI or ODA (in percent of GDP) 16 Mishra (2006); weighted average

17. Total remittances for Caribbean countries(In percent of GDP, average over 1980-2002) 17 Mishra (2006)

18. Are remittances driven by altruism or portfolio (profit-driven) motives? Mishra (2005) analyzed the macro impact of remittances on 13 Caribbean countries (using data from 1980-2003): Remittances have a statistically and economically significant impact on private investment 1 percentage point increase in remittances implies 0.6 percentage point increase in private investment Remittances increase after a negative output shock (such as a natural disaster), although with a lag 1 percent decrease in real GDP associated with remittances increase of about 3 percent after a 2-year lag 18

19. The pickup in remittances after Hurricane Ivan’s devastating impact on Grenada is illustrative of an altruistic (insurance) role of remittances Hurricane Ivan 19

20. Why are remittances to the Caribbean so high? Because emigration is so high. Why is emigration so high: Pull factor—higher wages abroad Push factor—limited domestic job opportunities for the highly educated Low cost factors—geographical proximity of the U.S. and common language 20

21. Labor Demand-Supply Model: Emigration Loss Emigration Loss = Triangle B Gain to workers who have stayed behind = Region A Loss to owners of fixed factors = Regions A+B Mishra (2006) 21

22. Remittances typically outweigh the emigration loss due to high-skilled migration 22

23. But high-skilled emigration also shifts the marginal product of labor curve inwards (external effects) Emigration Loss = Triangle DEF + Area ABCD 23 Mishra (2006)

24. A major cost of high-skilled migration is due to the government subsidy on education 24 Mishra (2006)

25. Costs of High-Skilled Migration Welfare losses from changes in domestic labor supply and wages Dynamic effects of brain-drain on growth—decline in productivity Government subsidy on education of high skilled Other fiscal losses—loss to tax base of high-income earners Social goals—decrease in ability to redistribute from high-income households to low-income households 25

26. Total Costs of High-Skilled Migration vs. Benefits of Remittances 26

27. Emigration and ECCU Pension Schemes • How does emigration affect pension scheme asset depletion rates? Builds on previous work on ECCU pension funds and migration. • Context: high Caribbean debt ratios, and use of pension scheme cash surpluses to finance central government budgets.

28. Migration and Demographics • Emigration is atypically a key factor in the ECCU’s demographic transition. • For comparison, Moldovan emigration has undermined pension scheme finances—but Central American emigrants were apparently not pension fund contributors. • ECCU’s highly-educated emigrants probably were contributors, and the actuarial reviews assume slowing emigration from very high rates.

29. The ECCU’s Aging Population

30. Asset Depletion per Actuarial Reviews Source: Fund staff estimates and projections, as shown in Roache and Rasmussen (2007).

31. Sensitivity to Emigration • Actuarial projections assume a slowing rate of emigration based on the actuary’s judgment. Historical emigration rates are estimated using the residual change in population per local censuses. • Suppose emigration remains constant at the emigration rate implied by OECD census data (see next slide).

32. A large proportion of the labor force has migrated abroad 32 Mishra (2006)

33. Asset Depletion with Historical Emigration Source: Fund staff estimates and projections and Docquier and Marfouq (2004).

34. Summary of Results Remittances outweigh simple emigration losses for most countries But total losses due to high-skilled migration (emigration losses with external effects, government expenditure on education) outweigh remittances for most countries There is, indeed, some evidence for “braindrain” 34

35. But the jury is still out … due to data deficiencies, particularly remittances coming in through informal channels, results are inconclusive emigration confers benefits (not only costs), including network effects and human capital formation 35

36. Policy Issues Minimize losses Taxes on emigration? Reorient education system Maximize Benefits Diaspora approach: Networks for trade, investment and tourism Remittances Promote effective use of remittances Reduce transactions costs Better recording of data 36

37. References International Monetary Fund (2005a), Chapter II in World Economic Outlook. Mishra, Prachi (2005), “Macroeconomic Impact of Remittances in the Caribbean,” unpublished manuscript. Mishra, Prachi (2006), “Emigration and Brain Drain from the Caribbean” in The Caribbean: From Vulnerability to Sustained Growth, IMF. Spatafora, Nikola (2007), unpublished presentation. Freund and Spatafora (2005), “Remittances: Transaction Costs, Determinants, and Informal Flows”, World Bank Working Paper No. 3704. Monroe, Hunter (2009) “Pension Schemes in the Eastern Caribbean”, forthcoming. 37