Emigration,%20Brain%20Drain,%20and%20Remittance%20Flows%20in%20the%20Caribbean

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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.
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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

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The Caribbean has the highest emigration rates in
the world
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Data Source Docquier and Marfouq, 2004
in Mishra (2006)
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A large proportion of the labor force has
migrated abroad
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Mishra (2006)
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Much of this emigration has been in the form of a
brain drain
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In terms of skilled migration rates, Caribbean
countries comprise most of the top 20 countries
in the world
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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
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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 US200 billion in 2006.
• Total gross remittances are now the 2nd largest
  source, behind FDI, of external financial flows
  to these countries.

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

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Volatility of Inflows 1(1980-2003)
1Volatility is defined as the standard deviation
of the ratio of the relevant inflow to GDP.
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Spatafora (2007)
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Cyclicality of Inflows 1(1980-2003)
1Cyclicality is defined as the correlation
between the detrended relevant inflow and
detrended GDP.
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Spatafora (2007)
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Definition of remittances

• Workers remittancestransfers from workers
  staying abroad for gt1 year
• recorded under current transfers
• Compensation of employeestransfers from persons
  staying abroad for lt1 year
• recorded under income of the current account
• Migrants transfersflows of goods and financial
  assets linked to migrants cross-border movements
  
• recorded under capital transfer

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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

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The Caribbean is the worlds largest recipient of
remittances relative to GDP
(in percent of GDP)
World Bank data for 2007, simple average
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Remittances in the Caribbean are greater than
either FDI or ODA
(in percent of GDP)
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Mishra (2006) weighted average
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Total remittances for Caribbean countries(In
percent of GDP, average over 1980-2002)
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Mishra (2006)
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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

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The pickup in remittances after Hurricane Ivans
devastating impact on Grenada is illustrative of
an altruistic (insurance) role of remittances
Hurricane Ivan
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Why are remittances to the Caribbean so high?

• Because emigration is so high.
• Why is emigration so high
• Pull factorhigher wages abroad
• Push factorlimited domestic job opportunities
  for the highly educated
• Low cost factorsgeographical proximity of the
  U.S. and common language

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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 AB
Mishra (2006)
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Remittances typically outweigh the emigration
loss due to high-skilled migration
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But high-skilled emigration also shifts the
marginal product of labor curve inwards (external
effects)
Emigration Loss Triangle DEF Area ABCD
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Mishra (2006)
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A major cost of high-skilled migration is due to
the government subsidy on education
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Mishra (2006)
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Costs of High-Skilled Migration

• Welfare losses from changes in domestic labor
  supply and wages
• Dynamic effects of brain-drain on growthdecline
  in productivity
• Government subsidy on education of high skilled
• Other fiscal lossesloss to tax base of
  high-income earners
• Social goalsdecrease in ability to redistribute
  from high-income households to low-income
  households

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

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Migration and Demographics

• Emigration is atypically a key factor in the
  ECCUs demographic transition.
• For comparison, Moldovan emigration has
  undermined pension scheme financesbut Central
  American emigrants were apparently not pension
  fund contributors.
• ECCUs highly-educated emigrants probably were
  contributors, and the actuarial reviews assume
  slowing emigration from very high rates.

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The ECCUs Aging Population
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Asset Depletion per Actuarial Reviews
Source Fund staff estimates and projections,
as shown in Roache and Rasmussen (2007).
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Sensitivity to Emigration

• Actuarial projections assume a slowing rate of
  emigration based on the actuarys 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).

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A large proportion of the labor force has
migrated abroad
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Mishra (2006)
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Asset Depletion with Historical Emigration
Source Fund staff estimates and projections and
Docquier and Marfouq (2004).
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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
• brain drain

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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

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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

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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.

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