Update Country Report Curaçao 17 Aug 2017

Worker's remittances have long been an important support to many Latin American and Caribbean (LAC) economies, especially so for Caribbean and Central American countries. Remittances fulfil an important macroeconomic role, stabilising GDP performance and buttressing external accounts. The prospect of sending home remittances, however, also encourages outward migration of working-age individuals, which may reduce economic growth potential. A recent IMF study focused on Latin America seeks to evaluate and quantify the benefits and potential costs of remittances in the receiving countries.

The IMF document, Migration and Remittances in Latin America and the Caribbean: Engines of Growth and Macroeconomic Stabilisers?, studies the multiple effects that remittances have on the receiving countries. Overall, the IMF validates previous findings: that remittances act as stabilisers of economic activity and fiscal revenue, while reducing income inequality and poverty. However, the IMF study also found evidence showing that, when taken together, remittances and the migration that makes them possible have an overall negative effect on per-head GDP growth for the region as a whole (with some sub-regional variation).

Emigration has been a constant since the 1960s

Starting in the 1960s, LAC countries have experienced a significant amount of outward migration as migrants look to improve their economic conditions and those of their family members in their country of origin (since the 1990s, deteriorating security in Central America has also provided further impetus). Data from the UN Population Division (UNPD) estimates that the stock of emigrants from LAC equates to close to 5% of the total current population in LAC countries, although the value is much higher for Central America (almost 10%) and the Caribbean (over 20%).

Emigrants are enticed by comparatively higher wages, allowing them to increase their own quality of life and that of their family members by sending remittances back home. Most emigration from LAC countries has been towards the US, with the UNPD estimating that two-thirds of all LAC emigrants reside in that country. This relationship is more pronounced for Mexico (almost all Mexican emigrants reside in the US) and Central America and the Dominican Republic (about four-fifths of emigrants from those countries re-locate to the US).

Remittances are an important share of GDP in some countries

The large number of emigrants and their familial connections drive strong remittances flows into the LAC region; remittances averaged 1.9% of regional GDP annually in 2012-16, and The Economist Intelligence Unit forecasts that they will reach 2.4% of regional GDP in 2017. However, the share is much higher for countries in Central America and the Caribbean; we forecast that remittances to these subregions will reach almost 8% of GDP on average this year. In some countries remittance flows will substantially exceed even this high level; remittances to Haiti, for instance, will be equivalent to 31% of GDP in 2017.

In many of these countries, such inflows are a critical support to household consumption in lower-income groups. Remittances also fulfil a key role in providing foreign exchange, and thereby balance the region's external accounts. However, there is significant variance across the LAC region, with Caribbean and Central American countries markedly dependent on remittances.

According the IMF, remittances also fulfil a key role as macroeconomic stabilisers, as they represent increased national income for the receiving countries that is usually unconnected to the local economic cycle. As a result, they buttress economic growth during economic downturns or times of negative external shocks. Given that remittances to the LAC region mostly come from the US and hence are in US dollars, they also offset some of the welfare losses associated with sudden currency weakening, a common feature of instances of economic stress in LAC countries.

Remittances also support macroeconomic and financial stability because they are relatively large and are more stable than most other sources of external financing. In the case of Central America and the Caribbean, they are not only resilient-they are not subject to much volatility-but are also the largest source of external financing. Remittances, however, are less relevant in the case of South American countries, as they are overshadowed by financial flows. Regardless, remittances are, across the entire LAC region, more stable than both financial and foreign direct investment inflows and tend to offset the often pro-cyclical nature of financial and investment flows.

Emigration carries a cost

Given that emigrants, especially those from countries where remittances are more significant, are usually lower-skilled workers from the lower-income segments of the population, it stands to reason that remittances should improve income distribution in receiving countries. Despite this, the IMF study's findings do not support this view at the macroeconomic level (the IMF did, however, find that micro-level data for Mexico seems to support the view that remittances reduce income inequality).

Although the receipt of remittances themselves has a positive effect on the economic health of a country, they are only made possible by the emigration of working-age members of the population. This emigration is likely to have a negative effect on the home countries' economic growth, as it reduces the supply of younger and more productive members of the labour force. In countries where a higher proportion of emigrants are highly skilled (the so-called brain drain), this effect would be compounded as the economy's most productive or educated workers are the ones leaving. As a result, it is unclear whether, taken together, emigration and remittances will lead to increased welfare in the home country.

Although this net effect is difficult to calculate, given the nature of the data and the unclear causality between macroeconomic variables and remittances and migration, the IMF study found that, in the long term, the net effect of outward migration and remittances has a small negative effect in the LAC region's country's GDP growth rates. As expected, this negative relationship is stronger for South American and Caribbean countries, which are the most affected by instances of brain drain. By contrast, according to some of the IMF's measurements, there is a slight net positive effect for Central American countries.

Policies to retain workers needed

The IMF findings stress that the long-term negative effects of emigrating workers should not be ignored. Policies geared towards retaining workers, in particular highly skilled workers, should be pursued by LAC countries to minimise the negative impact of emigration. Retaining highly skilled workers could be achieved by fostering investments in sectors that would employ highly qualified workers (such as the medical tourism industry in the Caribbean) or having beneficiaries of public education pay fines if they abandon their country following graduation. Repatriating workers, by recognising foreign qualifications, or via public-sector employment, may also prove fruitful.

Regardless of potential policies to curb the negative effects of emigration, we expect that remittances will continue to flow into the region in 2017-18 owing to relatively strong growth in the US economy, which we expect will average 2.1% in 2017-18. As a result, we expect a steady flow of remittances into the region during 2017-18, averaging US$35.2bn a year (2.4% of regional GDP). Remittances will continue to induce macroeconomic stability and balance the region's external accounts, remaining an important pillar of Latin American economies, particularly those of Central America and the Caribbean , where receipt of remittances will average 7.6% of GDP in 2017-18.