JAMAICA: REMITTANCES PROVIDING LIFELINE

UNCLAS SECTION 01 OF 03 KINGSTON 000482 SIPDIS SIPDIS STATE FOR WHA/CAR (RBUDDEN),WHA/EPSC (JSLATTERY, FCORNEILLE) SANTO DOMINGO FOR FCS AND FAS TREASURY FOR A FAIBISHENKO E.O. 12958: N/A TAGS: ECON EFIN ENRG JM SUBJECT: JAMAICA: REMITTANCES PROVIDING LIFELINE REF: 06 KINGSTON 1280 -------------- Summary -------------- ¶1. Last year, expatriate Jamaicans sent home almost USD 1.8 billion in remittances, making the country the highest per capita recipient in the region. This source is the country's second-highest foreign exchange earner, and vastly outpaced foreign aid and foreign direct investment. Most of the funds go directly to poor Jamaicans, who use a large portion to finance household expenses, making remittances an effective poverty reduction tool. However, rising transfers from abroad are generally associated with a lack of opportunities and social decay at home. The remaining population becomes over-dependent on this source of funds, while almost 80 percent of the educated labor force is lost to migration. While this is disconcerting, the socio-economic consequences could have been worse if these trained minds were left to languish in the system. It would appear that until a more accommodating environment can be created, Jamaica probably gains from the flow in net terms. End summary. -------------- Living on Remittances -------------- ¶2. Remittance has cemented its place as one of the two major pillars of the Jamaican economy (with tourism),bringing in over USD 1 billion annually since 2002. But while in recent years the threat of terrorism and natural disasters have depressed tourism earnings, Jamaican immigrants have continued to send remittances in the same volumes, highlighting the resilience of this source of income. During 2006, remittances jumped by 10 percent, ending the year at USD 1.8 billion. This is far greater than foreign aid and foreign direct investment combined, and outperformed the country's earnings from merchandise exports. While Jamaica ranks down the list in remittances as a percentage of GDP (17 percent),the country is by far the largest per capita recipient of remittances in the region at around USD 670, and is the ninth-highest recipient in absolute terms in Latin America and the Caribbean. -------------- Where does the money come from? -------------- ¶3. Estimates of Jamaicans abroad range from two to three million, forming the basis of the remittance trade, with over a million Jamaican immigrants residing in the U.S. A survey commissioned by the Canadian Foundation for the Americas in April 2005 found that 70 percent of persons receiving transfers have relatives who live in the U.S., of which 47 percent reside in New York. It is little surprise, therefore, that 60 percent of total remittances flow from the U.S., while 25 and 5 percent come from the U.K. and Canada, respectively. -------------- And where does it go? -------------- ¶4. Based on a 2006 Jamaica Chamber of Commerce survey, more than 30 percent of Jamaican households reported receiving remittances, with 25 percent of these recipients receiving money at least once per month. Of the recipients, 67 percent were female and 33 percent male. Over 85 percent of these recipients are in the 18-44 demographic, living in households with three to four persons. In addition to highlighting the matriarchal nature of Jamaican society, these figures also highlight the disproportionate number of men migrating and/or employed in the Overseas Employment Program (a seasonal farm worker program). ¶5. Contrary to popular belief, the majority of recipients, 52 percent, are "working class poor," while 31 percent are classified as "very poor." However, a number of these working class recipients may be acting as guardians for children left behind. On average, 26 percent of households get between USD 100 and USD 161 in remittances monthly. Over 40 percent of remittances are used for general household expenses, 30 percent for utilities and 20 percent for educational expenses. Only an estimated 10 percent of remittances are saved on a consistent basis. -------------- What explains the surge? -------------- ¶6. Despite the current buzz around the meteoric rise of remittances, KINGSTON 00000482 002 OF 003 the flow was hardly recognized two decades ago. However, three developments catalyzed financial transfers to Jamaica. -- A new wave of Migration: Globalization opened new opportunities for Jamaicans abroad, while political mismanagement, poor economic policies, and rising crime at home created a major push for labor to emigrate to areas where economic sustenance can be realized. -- The liberalization of the financial sector in the mid-1990s mirrored by a rising level of financial sophistication among recipients: over three quarters of Jamaican recipients utilize remittance companies, while 16 percent use banks or other financial institutions. Western Union remained the company of choice, being used 68 percent of the time. 86 percent of recipients are bank account holders, with 74 percent of these holding bank cards. This provides a clear opportunity for recipients to use their banks to receive funds, thereby reducing costs. -- Technological advances have made it easier for Jamaicans abroad to send money home: These technologies have made transfer cheaper for companies operating in the remittance sector, leading to increased competition and lower costs for the economic migrants. -------------- Remittances and Poverty Reduction -------------- ¶7. The large - and growing - Jamaican expatriate population has become a powerful force for poverty reduction. Studies have shown that remittances are the only source of external income that goes largely to the poor, directly increasing the income of the lowest socio-economic groups. In fact, data from Jamaica's Survey of Living Conditions supports the notion of a close relationship between the growth in remittances and falling poverty rates. During the last ten years (1996-2005) for which poverty data are available in Jamaica, remittances have more than doubled, while the incidence of poverty has declined from 26.1 percent to 14.8 percent. The funds have also provided insurance for poor Jamaicans in time of disasters, as observed in 2004 and 2005 when the flow spiked in response to hurricane damage. Remittances also indirectly affect poverty through the effects on growth, exchange rates, and access to credit by providing working capital for the poorest households that generally lack access to property and credit markets. -------------- Remittances and Development -------------- ¶8. But remittances are not just a poverty reduction tool; they also have become a stable source of hard currency for developing countries. World Bank findings suggest that this stability has allowed some countries to access funds on the international capital markets on better terms than they otherwise could. In the case of Jamaica, for example, Bear Stearns has consistently indicated that Jamaican bonds trade as if the country's credit rating was higher, which might be due to the country's high stock of international reserves, buoyed by remittances. ¶9. At the microeconomic level, in addition to augmenting income, the money also provides a growing share of capital that can be used to invest in micro-enterprises. While studies show that most of the money is used for direct consumption, survey data confirm that a rising portion is being saved in Jamaica. Over time this saving is expected to provide a pool of funds for investment and by extension growth and development. But even if the funds are consumed it still has indirect economic benefits through the generation of positive multiplier effects. Additionally, the relative financial sophistication of Jamaicans provides a solid platform for bankers and policymakers to leverage a growing portion of remittances for development. Finally, the migration of Jamaicans relieves labor market pressure and facilitates skills transfers if migrants return. -------------- Some Concerns -------------- ¶10. Behind the relief that remittances bring is growing concern that the flow leaves a trail of negatives in its wake. At the macro-economic level, private transfers might push up the value of the country's currency, making it less competitive. This "easy money" stokes consumerism and stifles entrepreneurial efforts among the poorest groups, as they become over-dependent, reducing incentives to invest in their own income generating activities. Like any other form of wealth earned by others, remittances can foster idleness and anti-social behavior among beneficiaries. Add KINGSTON 00000482 003 OF 003 to this the risks of terrorist financing and money laundering and the negatives multiply. ¶11. Worse yet, studies by the IMF and World Bank have posited that the loss of skilled and qualified labor could be crippling to Jamaica's development. In the last decade alone, the Overseas Employment Program has more than doubled to 14,000 annually. Reports indicate that almost 80 percent of Jamaican university graduates live abroad, mostly in the U.S., placing Jamaica among the top 20 countries with the highest tertiary-educated emigration rates. One study suggests that the majority of Caribbean countries have lost greater than 30 and 50 percent of its labor force in the secondary and tertiary education segments, respectively. This led CARICOM Secretary General Edwin Carrington to speculate that total losses due to skilled emigration far outweigh the recorded remittances for the region, both on average and for individual countries. -------------- Comment -------------- ¶12. It is inaccurate to assume that rising remittances are an indication that Jamaica is losing out in net terms. It is equally likely that if these economic migrants languished in Jamaica, unemployed or at best underpaid, it would have led to other socio-economic problems. Until the root causes of migration have been addressed, Jamaica might well be better off exporting its excess labor. The task facing Jamaican policymakers is to maximize the benefits of remittances, while minimizing the associated socio-economic and political costs. This is particularly important as migration and remittances are expected to increase in the near and medium terms as the government grapples with the twin threats of economic stagnation and crime. If nothing else, the poor can expect to continue reaping direct benefits as remittances remain their primary external source of funds, making it an effective way to alleviate poverty on the island. HEG