Remittances and Reverse Flows in Jamaica

Abstract

Reverse flows characterize a situation in which external inflows, such as remittances, are used to service external debt, finance capital flight, and/or accumulate foreign reserves. The existing literature on the impact of remittances in developing countries suggests that remittances are used for consumption and/or investment. However, the ultimate development effect of remittances will depend on how much of this external flow is absorbed domestically. If all remittances are not used for domestic consumption and/or investment, the residual amount will flow out of the country in the form of reverse flows. The objective of this paper is to identify the long run amount of reverse flows out of remittances in Jamaica, one of the largest recipient of remittances in the Caribbean. To examine the relationship between remittances and reverse flows in Jamaica, we estimate a net exports equation using the autoregressive distributed lag technique. We then calculate the marginal effect of remittance on reverse flows from the estimated remittance coefficient in the net exports equation. The dataset used in the paper covers the period 1976 to 2017. This determination is a first for Jamaica. The central finding is that, in the long run, approximately $0.24 of every dollar of remittances is used to finance reverse flows. Therefore, only 76 percent of any additional amount of remittances is domestically absorbed in the form of consumption and/or investment in Jamaica. These results suggest that the ultimate development impact of remittances will be overstated if reverse flows out of remittances are not taken into account. Our results echo earlier findings in the existing literature on reverse flows. The overarching policy implication of our finding is that policymakers should design growth policies of remittances after considering its reverse flow impact. Future research should focus on the reverse flow impacts of other external flows such as foreign aid. Further, future research should also identify reverse flows for other Caribbean countries. These findings are not only important for Jamaica but also have significance for other remittance-recipient developing countries.