Do international capital flows discourage labour productivity in the Caribbean? An empirical investigation of Jamaica

Abstract

International capital flows can be harnessed to catalyse economic prosperity in developing nations. Correspondingly, they can have unintended consequences that keep these countries in a low productivity trap. As of 2020, Jamaica’s labour productivity has not eclipsed its historical high in 1976 despite being one of the top remittance-receiving destinations globally and a magnet for FDI inflows for tourism and global services. Leveraging linear and flexible orthodox and machine-learning tools, we empirically explore the dynamic heterogeneous impact of Remittances, FDI and ODA on labour productivity in the Caribbean nation. In the short run, a 10% increase in remittances has a contemporaneous impact of $-0.9\text{\%}$ on Jamaica’s labour productivity on average. At higher levels of labour productivity (greater than US $16,594.80), the adverse impact of remittances on labour productivity becomes more detrimental. Over longer horizons, the results reveal that positive (negative) shocks to remittances reduce (increase) Jamaica’s labour productivity. Also, remittances negatively impact Jamaica’s labour productivity at lower remittance inflow levels or higher levels of ODA. FDI and ODA exert adverse effects. Overall, we find that aggregate wage, labour force participation and GDP are plausible channels for the adverse remittance effect on Jamaica’s labour productivity.