But how is the money spent by households? Do they invest it? Apparently it has mainly gone into consumer spending fuelling years of consumption-led growth. This article by Philip Bowring points to the dangers as remittances are cyclical and as the global economy slows, the remittances fall. Sure, there are a lot of Filipino workers in all over East Asia and the demand for Filipino labour remains high, but the largest source of OFW remittances is from the US and the stronger Peso (vis a vis the US dollar) means trouble.
The stronger Peso and expected falling remittances this year could spell trouble on many fronts, including politically as Bowring notes:
Most of the success as the Arroyo government has achieved in terms of economic growth can be attributed to the remarkable rise in overseas remittances over the past five years.
In the not so obvious department, it seems entrepreneurial activity in the Philippines is linked to remittances, as families that receive remittances from relatives working overseas start more of their own businesses, on average. That finding and further analysis was found in a recent study by Aubrey D. Tabuga at the Philippine Institute for Development Studies (PIDS). PIDS produces short, crisp and to-the-point Policy Notes regularly and Tabuga’s is called How do Filipino families use the OFW remittances? The Tabuga piece concludes:
Remittance income, temporary as it is, is not the solution to the chronic problems of the society but is a potential tool. If the country grabs the opportunities presented by the large inflow of remittances and if more attention is focused on pursuing effective reforms to improve the country’s economic condition, then the Filipino labor force will not have to seek greener pastures abroad.
Perhaps external factors this year which could cause the remittances (income from external sources themselves) to decrease, could spur some much needed domestic reforms. Let’s hope the adjustment costs won’t be high.
Amen to that. The Philippine government should identify ways of creating more jobs in the country using OFW remittances. Stop milking OFW cash cows!
Shiro,
YouNotSneaky! (via Chris Blattman’s Blog) has an excellent post about this. I’m going to quote him directly (my connection is playing up, so this may come through a little convoluted. I suggest googling YouNotSneaky! for the full post):
” Bottom line is that most of the so called “gains from remittances” are straight up gains from IMMIGRATION. Or in other words, they are gains from the fact that some person from a poor household in a poor county has managed to make their way to a rich country and now has a richer income. Strictly speaking the gain from remittances is just the gain from INTER-HOUSEHOLD reallocation of income between the migrant and those who stay behind, not the overall increase in household income due to migration.
…All that basically means that the observed benefits from remittances that people rave so much about are mostly just straight up benefits from LABOR MIGRATION. Which are huge, but somehow that just isn’t being said.
…And all that means is that most likely the majority of “remittances” flows that we observe are in fact meant to facilitate consumption. In other words, they’re there for grandmas and brothers in poorer countries to be able to enjoy a standard of living which otherwise would be unattainable. And if you increase somebody’s income they might work less (since there’s no change in the wages they face this would be a pure income effect). But that’s a good thing. In a similar way, the recipients may not spend their received remittances on investment (rationally, since the return to these investments in typical home countries is low) but instead buy themselves a cell phone or just some extra food. Is there anything wrong with that?
No, nothing wrong with that, and I get your point.
I’m just pointing out some of the problems of the entire economy relying on the remittances – 11 percent of their GDP is from remittances, which has spurred consumption led growth, they could be in for some tough times (not just the government but the grandmas too).
Instead, reforms should have taken place while there was a good buffer – the adjustment would potentially be a lot less painful. The Tabuga study shows that while it isn’t a problem that remittances are spent on consumption (mobile phones and food), it has given those families captial to be entrepreneurial. At least that was a way out of reliance on relatives overseas. Take that away and less food and mobiles for grandmas and cousins.
Joe Narvaez is right, if there were serious strucutral reform measures at home (and the government could create jobs with sensible economic policy), there would be less need to work abroad and also less dependence on that money at home.
YouNotSneaky! makes a couple of other decent points though, which I’ll just try to remember rather than quoting. He argues that returns to investment are higher in the rich country than the remittance receiving country for the same reason returns to labour are higher. So if you migrate and earn a higher wage, why would you send enough money home to start up a business in the Philippines when you could send just a little back (to cover consumption costs) and invest the rest in the rich country for much higher returns?
Based on this argument, the current equilibrium outcome is individually rational, globally utility maximising, but not utility maximising for the migrant’s home country as an aggregate unit. (I think).
Hi Dominic! That is a good point. However, I think some migrants would prefer investing back home because they know it would help their country. This is partly happening now in the Philippines, but again, government support is lacking. Thus, most migrants would not want a repatriation. Instead of monitoring and developing remittance schemes, the government should find ways to entice OFWs to invest in the country. This would help create more jobs—a long-term solution I believe.
Agree with joe. Another perspective which can be considered (if not already studied/surveyed/written on) is that a significant % of Filipino migrants if given a choice and or opportunity, would prefer to make that same amount of income back home. A common saying by migrants is that life is easy in the Philippines (if you have the income). I wouldn’t be surprised if a greater majority of migrants would prefer to retire in their homeland even if they had the opportunity to settle where they were earning the income.
Support for OFW’s is there but should not be limited to those working outside the country or sending people outside the country but more importantly, support for those recieving the remmitances should be more structured to provide incentives for the use of these remmitances for entrepreneurial initiatives. If the philippine government can give so much incentives to FDIs… it should give as much if not more for OFWs’ families. I think the OFWs would prefer coming home earlier when the steadier income is there.
My experience,
My wife remits money regularly to her family. She never receives a thank you card, a mothers’ day card or a Christmas card. She only gets requests for more money. Only 1 family member is doing anything to improve her life. She is going to college. I am proud to pay for her. It is my feeling that my wife’s families’ job is to get money from her.
It is not the Filipino way and Remittance reduces the dignity of a great people.
Just a minor correction on the posted article’s paragraph 2 – Most remittances come from the Middle East. It only looks like it came from the US because the corresponding banks (the process the remittances) are from the US.
Moreover, I would like to highlight that OFW remittances are covering basic necessities such as education and shelter (based on latest BSP data, some remittances are meant to purchase real estate), which aren’t unsustainable consumption. In the long-run, however, these remittances-dependent households would have extra income that may be be invested in entrepreneurial or income-earning activities. I agree with the suggestion that the Philippine government should spearhead endeavors that would make the OFWs aware of investment instruments that they may opt to tie with their remittances. Perhaps, the ASEAN countries may tap future OFW investors for the Asian Currency Note Programme under the Asian Bond Markets Initiative.