Migration, remittances, and inequality

The Philippines has taken advantage of opportunities offered by overseas migration probably more than have other developing countries. Thanks to its wide bench of human capital formed by prior decades of investment in education which, in turn, had been spurred by the importance Filipino families generally give to schooling. Unfortunately, however, migration has been dictated by necessity — not by choice — owing to past policy failures on both the demand side (labor-absorbing economic growth) and supply side (population growth) of the labor market in the economy. What should have been only a temporary reliance on overseas labor markets appears to have become a regular main feature of the economy.

Undoubtedly, migration and remittances have benefited households, local communities and the regions directly or indirectly through multiplier effects (i.e., successive rounds of consumption or investment spending). But these positive effects are not straightforward. The question is: have remittances resulted in more “inclusive” (i.e., poverty- and inequality-reducing) economic growth?

In the case of the direct benefits, the data (2000-2009) show that while overseas remittances benefit all remittance-receiving households, the upper-income classes gain much more than the poorer groups. In fact, the benefit pattern rises monotonically (or consistently) from the poorest to the richest quintile. Interestingly, the effect of domestic remittances is just the reverse (or downward sloping), meaning that poor households gain more than the more affluent ones. Which may not be surprising at all considering that domestic remittances are largely from migrant service workers in the cities sent back home to their poor families in the countryside.

What these patterns suggest is that while domestic remittances are inclusive, overseas remittances appear non-inclusive or even regressive, thereby furthering social inequality. Inequality blunts the positive impact of economic growth — and remittances, for that matter — on poverty. This partly explains why the country’s poverty problem has been a tough nut to crack.

Still, the impact of remittances on poverty as a whole is not trivial. Owing to remittances, poverty incidence which was officially recorded in 2009 (latest data) at 26.5 percent, would otherwise have been 30.8 percent. The corresponding numbers of poor people were about 23 million and 27 million, respectively. Putting it differently, poverty incidence dropped by 4.3 percentage points, and poverty count by 3.8 million people.

A closer look at the data, however, reveals that the “poorest of the poor” were hardly touched as those lifted out of poverty were persons just below or above the poverty threshold. Despite aggregate poverty reduction due to remittances, both poverty incidence and number of poor people rose in 2003-2009 from 24.9 percent to 26.5 percent and 19.8 million to 23.1 million Filipinos, respectively. These numbers tell us that besides inequality muting economic growth’s impact on poverty, rapid population growth — largely accounted for by higher fertility rates (mostly involuntary owing to lack of access to family planning services) of lower-income households — also partly explains the increase in poverty.

To digress a bit, a sobering perspective may be what I’ve referred to earlier as a “tale of diverging twins.” The Philippines and Thailand in 1970 both had populations of 37 million growing at about three percent annually. Fast forward to 2010, the former has 94 million still growing at around two percent while the latter has 67 million increasing at only 0.6 percent (this difference in population is equal to Malaysia’s!). Poverty incidence in the former is 26.5 percent compared with latter’s 8.1 percent. To top it all, our country is reported as the world’s largest rice importer while our neighbor is among the biggest rice exporters.

Further compounding the inequality effect of migration is its regional distribution. Most labor migrants originate in the country’s more developed regions, such as Central and Southern Luzon and Metro Manila. Likewise, the bulk of remittances go to these richer regions while smaller shares reach the less developed ones, such those in Mindanao, Bicol, and Eastern Visayas. No wonder why the country’s regional development remains lopsided.

The benefits to the macro-economy seem less ambiguous. For one thing, migration appears to have helped window-dress the employment problem. For another, remittances have kept the external current account in the black, eased the debt burden, strengthened the peso, moderated inflation and, in general, contributed to relatively good economic fundamentals. But then again, these positives are not without a downside. Which is that the remittance bonanza has probably made it easier for the government to avoid biting the bullet of hard policy reform (inter alia, policies on competition, regulation, infrastructure, and population).

In sum, it would seem that labor export cannot be relied upon as a policy for inclusive growth — reducing poverty and inequality — and fostering the country’s sustained long-run development. If it could, why have we just been muddling through over the past four decades? In future, as the global labor market demands higher professional and technical skills, and to the extent that — rather, if — our labor supply can respond, social inequality could well persist. Moreover, our human capital stock may be reaching its limits, what with our education/training systems slipping, not to mention the brain drain. There seems to be no alternative to resolutely implementing long-delayed reforms to fortify the health of the domestic economy and lessen its dependence on labor migration. In the meantime that the country has little choice but to continue relying on global labor markets, other service exports, such as tourism and BPOs, should be promoted in terms of rapidly moving up the value chain. –Ernesto M. Pernia, Ph.D. (The Philippine Star)

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Ernesto M. Pernia, Ph.D., recently retired as professor of economics of the University of the Philippines, and is currently professorial lecturer at the UP School of Economics. He is a director on the current board of the Philippine-American Academy of Science and Engineering. He is a former lead economist at the Asian Development Bank.

E-mail at empernia@skybroadband.com.ph.