05780771

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)

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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.

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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

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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

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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

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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.

1
In 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

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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

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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.

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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 index6 ; the poverty gap
index7; and the squared poverty gap8

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

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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.

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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.

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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.

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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

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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.

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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

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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.

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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 GDP (rem/GDP) FDI Other Total Exchange
Private US$Mn % US$Mn Investments Private Rate
remittances US$Mn Savings U.S.D
US$Mn US$mn
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

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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

US$ Million
1000
900
800
700
600 Rem (T&T)
500 Rem (Caricom)
400 North
300
200
100
0
88

90

92

94

96

98
19

19

19

19

19

19

Years

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

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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

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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

Percent
1
0.8
0.6
0.4
0.2
0
73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03
19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

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

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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

Percent

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.

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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

US$ Million
$2,300.00

$1,800.00

$1,300.00 Remittances
FDI
$800.00 Other Investment Flows

$300.00

-$200.00
73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03
19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

Years

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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

Country Tertiary Educated Share of Migration Rates of
Total Migrants 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

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

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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

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

Strong Medium Low

Guatemala Paraguay Dominica
Ecuador Colombia Panama
Nicaragua Peru Antigua and Barbuda
El Salvador Dominica Republic St Vincent and the Grenadines
Haiti Brazil Chile
Honduras Suriname Trinidad and Tobago
Bolivia Costa Rica Argentina
Guyana Belize St Kitts and Nevis
Jamaica Grenada Uruguay
Mexico Barbados St Lucia
Venezuela, RB
Source: The Inter-American Dialogue, Washington D.C

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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

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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.

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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.

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