Do Remittances Have a Dark Side in Haiti?

The Context

In the last 10 years, Haiti has turned into one of the most remittances dependent countries in the world. Indeed, migrants’ transfers went from 12 percent of GDP in 2012 to more than a quarter of it in 2022 at around US$3.5 billion. They are by far the country’s main source of foreign exchange, amounting to 3 times the value of exports, 21 times the value of official foreign aid and 70 times the amount of foreign direct investment. Theses remittances mainly help sustain private consumption, pay for school fees as well as healthcare and thus end up improving the country’s human development outcomes and mitigate the incidence of poverty. For instance, a World Bank study credited them in helping driving down the extreme poverty rate from 31 percent in 2000 to 24 percent in 2012.

Figure 1: Remittances as a percentage of GDP in Haiti

Source: Elaborated by author.

Indirectly, remittances are also critical for the state. Haitian public authorities depend heavily on custom revenues levied on imports (25 percent to 30 percent of all tax receipts) while these imports are mainly financed by remittances. This is not even counting internal taxes such as sales taxes levied on imported goods. Moreover, since 2011, the Haitian state has been collecting a US$1.50 fee on every remittance. Furthermore, they prevent the Haitian currency from depreciating even more against the US dollar. In a country so dependent on imports, it means that remittances keep prices relatively low for basic imported goods such as food, medicine, and fuel. In addition to that, one can even make the case that remittances have incentivized financial inclusion as more households chose to open a bank account to receive their transfers directly in US dollars ($) whereas if they collected it in cash, they would be paid in local currency at a lower exchange rate. At the same time, remittances are likely contributing to the use of mobile money as you can directly receive cross border transfers on your digital wallet.

The Specter of Dutch Disease

Despite all these mostly positive impacts, one can still worry about potential negative effects of remittances. Indeed, it is often reported that countries who receive large inflows of foreign exchange without increases in productivity tend to suffer from “Dutch disease.” This economic predicament mostly occurs with natural resources exporters and it is the often mentioned reason why countries such as Venezuela and Argentina in the 1930’s, Saudi Arabia, or Nigeria have trouble diversifying their economies. In the affected countries, many other goods and services they could produce beside their main export become too expensive, thus hurting their international competitiveness. The term was coined in 1979 when large exports of natural gas from the Netherlands were followed by increased prices for their other exports, making them less competitive abroad. While they are related, the Dutch Disease is not to be confused with the “Resource Curse.” The latter reflects the broad consequences of natural resources dependency on economic growth, governance, or conflicts. The former focuses on how flows of foreign exchange hurt price competitiveness and reinforces the reliance on a “free” flow of cash.   

While Dutch Disease was initially used to describe natural resource dependent countries, nothing prevents it from occurring in places where the largest financial flows are unrelated to the country’s productivity. For instance, in recent years, researchers have looked at whether large amount of foreign aid can lead to Dutch Disease in recipient countries. My colleague Dudley Augustin and I look at a similar question for remittances in Haiti in our research.   

Tradables vs. Non-Tradables

So how do natural resource exports, foreign aid money or remittances lead to lower competitiveness? The first thing these flows of foreign exchange do, is to increase the capacity of a country to import while keeping the exchange rate with the US dollar at a lower level than it would be otherwise. This makes foreign goods cheaper while hurting the country’s other exports as well as import competing goods, which economists call tradables. At the same time, the foreign exchange flow increases demand for goods and services in the economy. And if these goods and services cannot be imported, their prices rise as the country is not productive enough to increase their supply. These goods and services that can’t be imported, or non-tradables in economist lingo, are mostly low value added services (retail trade, transport, telecommunications, personal services, housing construction, …) and some goods that are sometimes too expensive or impractical to move across borders, think ice cubes for instance.

Overall, these inflows make a country’s tradable sector less interesting to entrepreneurs by submitting it to stronger competition from imports while making the non-tradables more appealing, given increased demand and little competition from imports. Thus, instead of producing more foodstuff, textiles, or furniture, entrepreneurs in the receiving country find it more profitable to invest in supermarkets, beauty salons, or telecommunications. While there’s nothing wrong with providing pedicures or selling airtime credit, these activities do have their economic limitations. They can only be sold to the small domestic market, create few formal jobs, and bring no foreign exchange when compared to agriculture, manufacturing, or tourism. In order to keep the same level of consumption and access to basic good imports, a vicious circle has set in. The economy has to rely even more on that free flow of cash, which is remittances in the case of Haiti.

This is what my colleague and I found for the Haitian economy. Over the long term, increased levels of remittances as a percentage of GDP are associated with an appreciation of the real exchange rate. The real exchange rate is economist’s preferred way to measure international price competitiveness. It takes into account the nominal exchange rate (units of local currency per US dollar) as well as the price level difference between a country and its trade partners. Remittances limit the level of nominal exchange rate depreciation while increasing the price of non-tradables. The final result is an appreciating real exchange rate that makes the country’s tradables more expensive. In Haiti’s case, it means that sectors such as agriculture, manufacturing, and tourism that could create the most needed jobs, improve the country’s productivity, and bring more foreign exchange are hurt the most.

Doesn’t Haiti Have More Urgent Things to Worry About?

Of course, Dutch Disease is far from the only problem affecting Haiti’s competitiveness. The country’s challenges are numerous, ranging from a full-blown security crisis, chronic political instability, corruption, a weak state and so on. These issues are urgent and understandably attract most of the attention.

However, if one day Haiti manages to solve its security issues, achieve peaceful transitions of power, fight corruption and so on, one major challenge will remain with the potential to setback any progress that is made. That challenge will be for its labor market to absorb hundreds of thousands of young people every year. If the economy doesn’t grow in a way that offers increased opportunities for that young and abundant labor force, poverty and inequality will persist in a way that continues to fuel violence and instability. Unfortunately, agriculture, manufacturing, and tourism (in other words tradables) are exactly the type of activities hurt by the Dutch Disease while they would offer the best hopes for job creation, productivity increases, and foreign exchange generation.

But why should we worry about remittances dependency hurting Haiti’s competitiveness? After all, there are other countries even more dependent on remittances and the question of whether it’s good or bad for their economy hasn’t been a central issue. Indeed, if you look at the latest World Bank data for remittances as a percentage of GDP, Haiti comes in ninth place. However, among the 10 most remittances dependent countries, only Somalia could be classified as poorer than Haiti. The other countries have a higher GDP per capita while being more stable politically. Even if these countries suffered from some form of Dutch Disease, it will make their economy a bit less dynamic but in Haiti’s case it will prevent one of the poorest countries to make the best use of its potential in agriculture, manufacture and tourism.

What Can Be Done?

So, is there anything that could be done? After all, even if remittances have unwanted effects, Haiti badly needs them in the short term. The most sensible way forward seems to fully acknowledge how they are changing the country’s economic structure, while using targeted policies to mitigate the undesirable effects. This means that economic policy should go beyond the standard measures aiming at putting public finances in order, fighting inflation, and improving the general business climate. It should also include policies that support the tradable sectors which are unlikely to attract large investments given the Dutch Disease effect of remittances. What should these policies be? One can debate the details but they could be as diverse as crop insurance for farmers, low cost power generation for factories, or tourism Special Economic Zones such as the one in Labadee with Caribbean Cruise Lines. But surely, the most promising sectors for the Haitian economy, left to their own devices, won’t grow by themselves.