OFWs Can Use their Remittances More Profitably

This is a continuation of my previous post on the beasts of burden – the OFWs. We look at the current practices, and how we can improve it to bring about a positive bottom line – not just for OFWs but for the overall economic well being of the Philippines as well. Benigno demystifies the myth of OFW remittances contribution to the economy. In his recent GRP piece on OFW contributions he writes:

The only way OFW remittances will truly make a difference in the long-term fortunes of Filipinos is if these funds are directly channeled by their recipients towards income-generating durable assets at best. At the very least, a greater proportion of these funds need to be kept within the financial system — say, in the form of savings in a bank account. Funds saved in a bank account at least stand a better chance of getting allocated by the system to business enterprises that need capital to produce stuff. The system does this by loaning these funds to businesses or re-investing these by buying equity as in the purchasing of stocks in the shares market. Either way, the funds remain in circulation.

The trouble is, most OFW families spend the hard-earned remittances of their overseas relatives on non-durable stuff such as those Made-in-China trinkets and trendy jeans that eventually end up in landfills. Worse, they get spent on wealth-destroying purchases — money pits such as cars, cellular phones, and extramarital affairs. Filipinos have one of the lowest savings rates in East Asia. As such, it is hardly surprising that an entire generation of Filipinos can work like rats overseas and still be left with nothing to show for all that after just half a generation. Until we change the fundamental way we as a people regard wealth, we will remain nothing more than a poor wannabe in a region of high-achievers.

To make this brilliant observation more lucid, let’s refer to the diagrams on the OFW Remittance Chain – where it all begins.

Normally, we think that the OFW remittance starts with the OFW and ends with the beneficiary. This is the amount that OFWs all over the world trumpet as their “contributions” to the economy. As you see, the process does not end when the money arrives in the hands of the recipient. That money will be used, and its how we use it which determines whether the money remitted has generated wealth for the OFW and created more jobs.

As-Is - OFW Post Remittance Behavior

The current practice among OFWs is to send the money to a recipient who in turn disburses the funds based on the OFWs instructions (blessed is the OFW who finds a beneficiary who follows his/her instructions to the letter). Chart 1 illustrates the more common practice observed among OFWs: Most of the funds are disproportionately spent on ‘consummables’. The items under this category include the following:

• Food
• Entertainment (movies, cable TV, karaoke/videoke, malls, etc)
• Clothes (para “in”)
• Electricity (or puputulan ng Meralco nq kuryente); include water na rin (or puputolan ng tubig ng Maynilad)
• Communication (hanep talaga ang Globe at smart – dameng pakulo, asteg)
• Transportation – Kung eroplano – PAL; Kung barko si Gothong-ChongBian-Aboitiz

The point is when a disproportionate amount is spent on these items – the end beneficiary is not the OFW. Despite the higher expenses, no new jobs are created, the social pyramid stays the same, no new wealth is created, and the middle class remains constricted.

What can be done then?

The OFW needs to be more conscious of managing how the remittance is disbursed. The proportion given to consummables can be scaled down – and portions of the the remittance can be placed in savings and pension accounts (conservative) – or – invested (aggressive) in business enterprises that generate new jobs, generate wealth for the OFW, reduces the poorer classes, and expands the middle class. Chart 2 illustrates said pathway. An OFW can take a more proactive and aggressive stance in managing remittance disbursements.

Desired Future State - OFW Post Remittance Behavior

There are many studies that have brought out this point – and I can’t re-emphasize it enough.

The Asian Development Bank has a good read on the subject, an excerpt of its findings is presented below:

Worldwide remittances transfers have increased dramatically in recent years and Asia has been at the center of this increase. With three of the four main remittances recipients in the world located in the region, the possible impacts of these flows in receiving countries in the area have awakened the curiosity of academics and have captured the attention of key policy makers. Remittances are already being called a new development mantra, manna from heaven, and even a present-day miracle. While the evidence above suggests that the current impact of remittances on economic growth and poverty is not completely robust, that does not imply that there are no policies that Asian countries can adopt to make the most out of the inherent development potential of remittances. For instance, many countries in the region (e.g., India and Pakistan) are already providing beneficial terms (e.g., higher interest rates, tax exemptions, flexible currency conversion) to financial instruments (e.g., bonds) that are acquired by their expatriates. These types of policies promote the investment of migrants’ monies into the financial sector of the receiving economies and help enhance the financial literacy of both the migrant and the household.

Other possible policies that have been adopted by countries in other regions of the world include matching flows of collective remittances by migrant organizations or hometown associations (groups with members from the same region in the migrant-sending country) with government funds to enhance the development impact of these transfers.12 This policy can be implemented by national, state, or even local governments interested in development projects. In both of these cases, the government can undertake the role of liaison between the migrants and the receiving economy. However, while playing this role, the government must resist the temptation of directly managing, instead of just channeling, remittance flows. Above all, it is imperative to remember that the key aspect of remittances is that these are largely flows from migrants to friends and family back home.

International organizations may help in coordinating efforts so that remittance flows are used to alleviate some of the market inefficiencies of receiving economies. For instance, many international organizations (e.g., The Multilateral Investment Fund of the Inter- American Development Bank) are promoting the provision of loans to households for home purchasing using remittances and the migrant as collateral. This course of action can be especially valuable in developing countries where credit markets are not well developed. There is often a lack of credit services in general, other times (especially in rural areas) households have land but lack ownership titles, have crops but no deeds, and run businesses without statutes of incorporation (De Soto 2000) and as such, it is virtually impossible to obtain credit from the few sources available, given the lack of collateral.

International organizations can also help steer remittances toward loans for small businesses. This task is very relevant for Asian developing countries, because in addition to dealing with credit market shortcomings, migration can be an instrument in dealing with insurance market inefficiencies. It is possible to ponder that the possibility of receiving remittances may allow the household to enter more profitable, but riskier businesses, given that if things go south, remittances can be used as a source of support for the household. By leaving the household and moving to another region or country, the migrant will be subjected to risks that are mostly uncorrelated to those that the household faces. The income risks in Asian developing countries are multiple. Typical sources of risk include crop failure due to a drought, flooding, or frost; reduction in household labor income due to the death or illness of a productive member of the household; crime; and the possibility of government-sponsored real estate property redistribution programs (e.g., land reform). If household income is subjected to any of these jeopardies, the household would be able to diversify income risk by sending a member abroad. Furthermore, most small businesses require an initial period of investment that is not accompanied by any profits from the new venture. Remittances can help support the business during this period. Nonetheless, even with all these potential benefits of remittances in terms of small business formation, many households lack the understanding and expertise necessary to start these enterprises. International organizations can be of great assistance if they provide advice to households in this regard. Spreading this information will facilitate the use of remittances as a tool for development.

Last but not least, it is relevant to recall that migration is a phenomenon that has been present during the entire history of civilization. As such, it is unlikely to disappear during the upcoming decades. This fact has often created concerns in sending countries, given the high cost of migration for sending regions in terms of the brain drain. This, however, is not necessarily a dreadful aspect of migration. First, it is argued that the departure of the most educated individuals from a country may result in the creation of a brain bank that provides local innovators access to priceless knowledge build up abroad (Agrawal et al. 2008). Moreover, as Chau and Stark (1999) demonstrate, it is possible for per capita income in a country to be higher with migration than without migration. Moreover, they show that allowing the migration of skilled workers can increase the welfare of the home population and, hence, a brain drain can lead to a welfare gain. Previous studies also suggest that migrants are in a superior situation to invest in their home countries because they have specific knowledge that other foreign investors lack. Non-migrant locals also have this knowledge, but they often lack the valuable business expertise that is typically acquired abroad. Finally, it is often the case that migration is a two-way occurrence, with many migrants returning back home after a few years abroad. The return of highly skilled expatriates with specialized knowledge (e.g., engineers, scientists) can help improve research and development programs in Asia. In sum, countries should not be too anxious about the brain drain that accompanies migration. Instead of trying to keep locals from moving abroad, countries should embrace migration as part of humankind behavior and promote policies that make the best out of the migration of nationals to other countries.

Source: http://antipinoy.com/ofws-can-use-their-remittances-more-profitably/