ACCORDING to the Bangko Sentral ng Pilipinas, remittances from overseas Filipino workers (OFWs) reached an all-time high of $25.35 billion in 2013. As of July, these were already tallied at about $15 billion, and could reach $27 billion at year-end. Many economists agree that these large transfers, which already surpassed official development assistance and foreign direct investment inflows, have actually fueled the Philippines’s economic growth for the last two decades. Analyzing historical data for gross national income (GNI), we see a shift in the share of net primary income (NPI) to GNI from a negative territory to a positive one, starting in the 1990s. The chart below shows that NPI is the only component of GNI that has actually accelerated its share in the last 20 years, while most have decreased their share to GNI in the last 50 years.
But what is NPI? According to the Organization for Economic Cooperation and Development, NPI is the difference between the total values of the primary incomes receivable from and payable to nonresidents. These inflows and outflows are further categorized as compensation and property income. Remittances from overseas workers that consist of mostly compensation already make up 98 percent of total inflows, as seen in the table below.
Remittances have also catalyzed the growth of sectors that currently contribute the most to the country’s domestic output. These include food manufacturing, retail and wholesale trade, real estate and renting, transport and communications, and private construction. And, of course, these flows have made consumption expenditure stable for the last several years. Finally, remittances have become an automatic stabilizer for the macroeconomy, increasing in volume during crises.
While the growth rate of remittances has plateaued to about 6 percent to 7 percent in the last few years, these transfers will be a sustainable source of domestic demand in the next decade. Skilled Filipino workers and professionals will continue to explore the global labor market as long as huge wage differentials exist vis-à-vis the local labor market. With greater labor mobility being allowed within Southeast Asia and within other trading partners, our highly competitive workers will continue to reap higher and better returns for their human capital.
Some economists, meanwhile, suggest that remittances have become our own “Dutch disease”, which has hampered our manufacturing and agricultural sectors. It has also caused the continued appreciation of the peso, which, in turn, has hurt Filipino exporters. This phenomenon, some analysts say, have also resulted in a dependency problem at both the household and macroeconomic levels. Household members rely solely on the incomes of their relatives working overseas and lose interest in looking for work and joining the labor force. Meanwhile, the government has been lulled by the bonanza offered by these inflows to such an extent that economic policy-making related to domestic job creation has been found wanting.
While these arguments continue to be debated in various fora, what should be done at once is to transform a large portion of the OFWs’ savings into productive investments. Gross domestic capital formation, as a percentage of gross domestic product, has remained low at 19 percent to 20 percent, compared to the other members of the so-called Association of Southeast Asian Nations 5 (Asean 5).
Innovative financial products, including those related to the equities markets, can harness the increased savings accumulated by OFWs. Thus, the financial and stock markets have to become more aggressive in attracting these savers. More savings options resulting from greater economic integration in the Asean can possibly benefit not only savers, but also the entire economy.
And so, are remittances a boon or a bane to the Philippine macroeconomy? We see it as a key source of economic growth today and in the next few years. What we need to do is to diversify these sources of expansion. The information technology and business-process outsourcing sector continues to develop, while the manufacturing and tourism sectors continues to perform well. The government’s initiative in responding to the constraints identified in the various industrial road maps is a big step toward broadening these pillars of economic growth. At the same time, the government must finally accept that international migration cannot be ignored in the formulation of economic policy and should devise a specific migration and development strategy. All said, we should be able to continue our journey to higher levels of economic growth in the next decade.
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Fernando T. Aldaba, PhD, is a professor of economics at the Ateneo de Manila University and a senior fellow of Eagle Watch, the school’s macroeconomic forecasting unit.
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