Philippines is an interesting story of contradictions, almost. From being the sick man of Asia to being one of the fastest growing economies today, it has come a long way in the last 10 years. I wouldn’t be going to far to say that the back bone of Philippines economy has been the Overseas Filipino workers and their remittances. Today, they contribute upto 10% of the GDP. Philippines was the least affected Asian economy in the Asian crisis, thanks to these remittances. A CNN take on the workers sums up the Philipino overseas worker issue. Although dated 2012, I fear that the the story in unchanged..
The infographic below shows where these remittances come from and how they compare with other economies.
The growth of Remittances and where they come from
The 2014 Government debt to GDP ratio is 49% (Source: Trading Economies) while the remittances have recently declined from their all time high in 2013. While the graph shows that remittances have increased year over year, the wages of OFW’s have remained stagnant as can be seen in their national income accounts and mentioned here. Thus the Central Banks projections to increase remittances and export workers might be hit. GDP under the Aquino III administration has declined despite positive expectations of the government.
Why remittances matter:
To quote Dilip Ratha “Remittances remain an especially important and stable source of private inflows to developing countries, as they bring in large amounts of foreign currency that help sustain the balance of payments. In 2013, remittances were significantly higher than foreign direct investment (FDI) to developing countries (excluding China) and were three times larger than official development assistance.
“Remittances to developing countries grew this year by 5 percent. Remittance inflows provided stable cover for substantial parts of the import bill for such countries as Egypt, Pakistan, Haiti, Honduras, and Nepal. India and China lead the chart with projected remittance inflows of, respectively, $71 and $64 billion in 2014. In addition, India and the Philippines benefit from having migrants with the most diverse destination spread, thereby creating buffers against regional shocks. Given the growing importance of this sector, the World Bank’s Migration and Development Brief has become an essential tool for global development policy experts,” said Kaushik Basu, Senior Vice President and Chief Economist of the World Bank Group.”
So what are the opportunities and problems related to migrants and remittances that Philippines faces which it must consider now that it is on a path to a sustainable growth.
Philippines has been one of the largest recipient of remittances, but most of it is being used up for consumption. Increasingly people are being educated to save these and thus further increase domestic investment. But unfortunately, OFW’s cries for better use of their remittances are not being heard. The thrust of Aquino III Development Plan (2011-16) is on public private partnerships, export-import dependance – majorly through reliance on foreign investment. An intensive labor export policy is a big part of Aquino administration. Its cheaper to earn the remittances than take loans. This migration international blog sums up the problems of OFW’s. The remittances are still not channeled productively.
It is well known that the official channels for remittances are costly. Recently US has reduced its remittance businesses citing their channeling to terrorists. But that poses a threat to Philippines. Money might now be sent more and more through unofficial channels. It also brings up the fact that Philippines cannot rely on labor export to fix its economic problems. Increased remittances are seen as a substitute to FDI. But increased remittances, increasingly funding real estate will cause inflation as there is not real GDP growth to counter-balance the increased money supply. This further undermines investor confidence in the country. The story of El Salvador and its currency appreciation due to remittances is an economic fact that Philippines cannot ignore, especially now that the economy is developing. This also means transitions of economic shocks will be more visible
Abuse of migration workers has been an issue for long. This spans racist comments to as far as killings of Filipino workers. With a stable government, these workers might consider coming back and further putting a stress on the amount of remittances. Although this may not be an immediate threat, I think the new government should certainly consider its effects.
What are Aquino’s opportunities among all this:
1) Land reforms so that remittances are not used up for buying land
2) Channeling remittances productively in hopes to keep up the remittance inflow
3) Ensuring that the peso does not appreciate due to these remittances and Philippines can maintain its productivity
The economy is still under control and taking remittances for granted might not be a good strategy. Thus how the country shapes it future policies, especially regarding remittances, will be important. Since the Development Plan 2011-16 does not talk a lot about OFW’s, I think the government should look at this issue separately. People are warning on Philippines growth being a bubble in disguise, so the cross roads is decisive.
Key Stats Remittances: http://www.bsp.gov.ph/statistics/keystat/ofw.htm