Remittances, inclusive growth

The Philippines has been quite successful in taking advantage of opportunities offered by the global labor markets probably more than have many other developing countries. Thanks to its wide bench of human capital formed by prior decades of investment in education which, in turn, had been motivated by the value Filipino families ascribe 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 domestic economy. What should have been just an interim reliance on migration and remittances while policy reforms were supposed to be taking place appear to have become a staple of the economy.

There is little doubt that 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, analysis of National Statistics Office data (2000-2009) shows that while overseas remittances benefit all remittance-receiving households, the upper-income classes gain much more than the poorer ones. In fact, the benefit pattern rises monotonically (i.e., consistently upward-sloping) 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 transfers appear non-inclusive or even regressive, thereby furthering social inequality. Inequality, moreover, blunts the positive impact of economic growth 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% would otherwise have been 30.8%. The corresponding number of poor people was about 23 million but would have been 27 million otherwise. 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, nevertheless, 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 over the period 2003-2009, respectively, from 24.9% to 26.5% and from 19.8 million to 23.1 million Filipinos. These numbers tell us that besides inequality muting economic growth’s impact on poverty, rapid population growth — largely accounted for by the higher birth rates of low-income families (if mostly involuntary owing to lack of access to family planning services) — partly explains the rise in poverty.

To digress a bit, a sobering perspective is what I’ve referred to earlier as a “tale of diverging twins.” The Philippines and Thailand in 1970 both had populations of about 37 million growing at around 3% annually. Fast forward to 2010, the former had 94 million still rising at around 2% annually while the latter had 67 million increasing at just 0.6% (the difference is equal to Malaysia’s total population!). Poverty incidence in the former is 26.5% compared with latter’s 8.1%, and the respective Gini coefficients are 0.46 and 0.40 (larger number means higher inequality). To top it all, our country is reputed to be 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 made it easier for the government to avoid biting the bullet of hard policy reforms (inter alia, policies on competition, regulation, infrastructure, taxation, 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 has the economy just been muddling through over the past four decades? In the 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. Which, incidentally, is vulnerable to geopolitical vicissitudes, as reflected in the recent slower growth of remittances. In the meantime that the country has little choice but to continue relying on global labor markets, such other service exports as tourism and BPOs should be promoted in terms of more speedily moving up the value chain. –Ernesto M. Pernia, Businessworld