Worker remittances and the Philippine economy

CROSSROADS (Toward Philippine Economic and Social Progress)

By Gerardo P. Sicat

The Philippine economy is in a sound position today in part because of the steady growth and size of remittances of OFWs (overseas Filipino workers) to the country. The volume of these remittances has continually grown over time as more and more Filipino workers have found jobs abroad.

Remittances represent a portion of the earnings of Filipinos working abroad that are transferred to their home families. Remittances sent through the international banking system are immediately caught in the country’s balance of payments which is tracked by the Bangko Sentral ng Pilipinas (BSP). The task at hand is to explore how worker remittances contribute to recent economic developments in the country.

“Impact of remittances on the national economy.” There are different ways by which to appreciate the influence of worker remittances on the economy. For this discussion, I simply discuss three : (1) the magnitude of the impact on the country’s net dollar receipts; (2) how remittances have raised domestic living standards; and (3) how the country’s macro-fundamentals are affected.

These are already heavy topics. We defer discussions of the important consequence of the improving balance of payments on the country’s economic and production structure and the social and individual costs when workers leave their homes for long periods.

“(1) Buttressing the country’s net receipts of dollars.” Remittances sent to the country have steadily risen over the last two decades. OFWs work in different countries and most of them are paid in the currencies of the countries where they work. A little part of the increase in remittances is due to the an advantageous conversion that they get because of the US dollar depreciation against many foreign currencies.

In 2001, total remittances (in US dollars) amounted to $7.7 billion; in 2005, $12.3 billion; and in 2010, $19.4. In a recent public forum, BSP Governor Tetangco reported that in the first seven months of 2012, remittances sent to the country amounted to $13.3 billion. This represents a 5.4-percent increase over the same months of 2011 so that the volume by end of 2012 will be well over $21 billion.

The significance of these numbers can be compared with the country’s earnings from exports of goods and services. Exports have improved the structure and competitiveness of the Philippine economy. However, remittances from labor when compared with export earnings have steadily increased in proportion to export earnings.

In 2001, the size of remittances was one-fourth of total exports of both merchandise goods and services. In 2005, this proportion rose to 30.5 percent. By 2010, this was 38.3 percent and by 2011, 44 percent of total exports.

Philippine exports have been much more capricious in that they respond to market boom and bust conditions. Labor remittances have, however, been much more steady in their rise in volume, partly explaining the increase in the proportion.

Another comparison of remittances is with the country’s export of services – not of merchandise – which in this case is dominated by the booming BPO (business process outsourcing) service exports. In 2001, remittances were 2.5 times the size of export of services. In 2005, remittances were 2.7 times. By 2011, remittances are still ahead, by 1.35 times as much as earnings from the export of services.

BPO services exports have risen in revenues. However, remittances from OFWs have by far dominated the earnings contributions to the country’s dollar earnings as a group for some time and are still ahead of BPO earnings.

As a group, OFW remittances have significantly contributed to a positive impact on the country’s earnings of foreign exchange. By substantially adding to the country’s earnings in foreign exchange, these remittances have contributed to the strengthening of the nation’s balance of payments position, bolstering the surpluses on current accounts.

“(2) Rising living standards across the country.” Remittances received by Philippine households translate into income flows to support the consumption and investment of these households. The process goes this way.

The receipt of remittances props up the incomes of the recipient households. If the households have any sources of domestic incomes, this adds a large increment to its disposable income.

With more income, household consumption rises. This goes in different directions – from basic needs toward an improved consumption basket of food, clothing, leisure, and then some luxuries. Hence, most families enjoy an increase in their standard of living. The recipient household’s position would depend of course on the size of the remittances received and on the incomes being currently earned by those in the country.

Beyond the immediate consumption outlays for basic other immediate needs are those types of expenditure that extend to household maintenance and family investment. The most obvious among these is in the area of home improvement. Across the country, where remittance money has reached the household, the houses also change their appearances and physical conditions. They become brighter and stronger.

An important element of this phenomenon is the impact on the typical household’s educational choices. Families have better opportunities for higher quality education for their children. To some extent, the same could also be said perhaps on the improvement of the health care budget.

The impact of remittance inflows is felt by whole communities where there are recipient households. Sustained income flows have created brisk activities in shopping malls across the country. OFWs come from a wide representation of the country’s regions. So, the spread of improved living standards can be seen at the level of barrios and towns as well as big cities and provinces.

“(3) Propping up the country’s macro-fundamentals.” As shown above, the rise of remittances in the Philippine economy produces a favorable impact on the country’s balance of payments (BOP).

The steady inflow of remittances enables the country to buy more foreign goods and services. This also means that it is now in a more comfortable position to service its external debt and other international obligations. With this comes the recognition that the nation’s finances have improved.

In the course of the decade of 2000s, and with the increase of remittances and other export earnings, the country’s problem has turned, from a balance of payments viewpoint, as one that used to have perennial deficits to one of surpluses. This is surely a turn for the better.

The requirements of national economic management in terms of the balance of payments have changed. The problems are still challenging, but they now come from a position of relative economic strength rather than one of weakness.

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