Human Capital: The Philippines’ labor export model

In the 1970s, in order to address an escalating unemployment rate and balance of payments crisis, the Philippine government adopted a comprehensive range of policies that, among other things, systematically encouraged the export of contract labor from throughout the country. The program, developed during the long military dictatorship of Ferdinand Marcos, was rationalized as a temporary measure to address the country’s immediate problems.

Four decades later, and after a series of democratically elected governments, the labor export program is still very much in place. In 2013 alone, 1.8 million temporary migrant workers fanned out to more than 190 countries, each one bearing an employment contract issued and certified by the Philippine government. From factory and domestic workers to engineers and nurses, Filipinos fill a wide range of jobs in foreign labor markets.

The legal movement of temporary workers on this scale is unparalleled elsewhere in the developing world. For many international observers, the Philippines’ labor export system is unrivaled in its sophistication, making it a model for other developing countries hoping to access the benefits of global labor mobility. At the same time, there are concerns about the treatment of Filipino migrants abroad, as well as the potential effects of a skills drain at home. This article explores how the Philippines developed its labor export system, how it has used it to drive economic growth and what both the country and its migrants have gained and lost in the process.

Labor Export: From Laissez-Faire to Highly Regulated Market

Before the 1970s, the Philippine government played a limited role in overseas employment for its citizens. Private American recruiters facilitated small-scale migration of farm workers to work on pineapple and sugar plantations in Hawaii from the early 1900s until World War II. From that point through the 1960s, relatives of this first wave of migrants, as well as naturalized Filipino soldiers and their dependents, composed the bulk of migrants, with almost all of them going to the United States. Legislation passed as early as 1915, and subsequent legislation thereafter, dealt primarily with managing migration to the U.S.

Demand for temporary migrant workers increased in the early 1970s, fueled mainly by the economic boom in the Middle East, especially in the oil-rich monarchies of the Persian Gulf. The Philippine government quickly took advantage of the emerging contract labor market in this region, and in 1974 adopted the Labor Code of the Philippines—the key piece of legislation that institutionalized labor migration and put in place the state’s overseas employment strategy.

The Labor Code created a large bureaucracy composed of three institutions: the Overseas Employment Development Board (OEDB), the National Seaman Board (NSB) and the Bureau of Employment Services (BES). OEDB and NSB were responsible for developing the market for overseas workers, recruiting workers and securing the best possible employment terms for land- and sea-based workers, while BES regulated private recruitment agencies and functioned as a temporary government-run employment agency. The number of processed contracts almost tripled in the first three years after these institutions were created, from 12,501 in 1974 to 36,767 by 1977.

The government also created the Welfare Fund Administration (WFA) in 1980, which later became the Overseas Workers Welfare Administration (OWWA), an independent financial agency providing insurance, loans and other services to migrant workers and their families. OWWA is essentially a single trust fund pooled from the mandatory $25 membership contributions of foreign employers and land-based and sea-based workers, as well as investment and interest income on these funds and income from other sources.

Also in 1980, as part of an overall strategy to manage migrant flows, the government created the Commission on Filipinos Overseas (CFO) under the office of the president. The CFO has the dual role of promoting both economic and cultural ties between the Philippines and its diaspora. In 1982, OEDB, NSB and BES merged into what is now the Philippine Overseas Employment Administration (POEA) whose sole purpose is to manage the recruitment and deployment of Filipinos for overseas contract work. Both POEA and OWWA are entirely self-funded and receive no budget allocation from the national government. The government-funded CFO, meanwhile, focuses mainly on Filipinos who have either established permanent residence or acquired citizenship in destination countries.

In short, by the early 1980s, the government had created an extensive bureaucracy to encourage and manage labor export. But the experience of the migrants was not always positive. In 1995, in response to increasing reports of maltreatment, illegal recruitment and even deaths of Filipinos working overseas, another body, the Office of the Undersecretary for Migrant Workers’ Affairs, was created, this time under the Department of Foreign Affairs. The office focuses on migrant protection, mainly through providing legal advice and judicial support to distressed workers. In the 20 years since, it has unfortunately been kept busy.

The Dark Side of Migrant Work

The Philippine government regularly contends with issues regarding the maltreatment, illegal recruitment and even death of Filipino workers abroad. Many Filipino migrants, particularly those working in low-skill sectors, suffer from excessive recruitment fees charged by unscrupulous recruiters, underpayment or nonpayment of wages, confiscation of passports and poor working and living conditions.

Manila has also repeatedly had to conduct large-scale repatriation from the Middle East due to political instability in the region. In 2011, for instance, in the wake of the Arab Spring, around 10,000 Filipinos had to be repatriated, mainly from Libya. The repatriation highlighted problems in coordination, lack of reliable data on the Filipinos in the region and the inadequate number of government personnel abroad to protect the interests of Filipino workers.

In response to these problems, the Philippine government has introduced various measures to better protect Filipino workers, such as requiring the use of standardized employment contracts, issuing deployment bans to countries with poor migrant worker protection records and capping recruitment fees. The government has also been especially active in negotiating better working conditions for its workers in key destination countries. For instance, in 2012, the Philippines successfully negotiated a memorandum of understanding with Saudi Arabia that mandates a $400 monthly minimum wage for Filipino domestic workers, the first of its kind in the region.

The meaningful implementation of these protective measures remains a key challenge. The Philippines, like any other state, has limited options when it comes to dealings with other states and their citizens. Despite globalization, the world remains the playground of nation-states, each determined to protect its sovereignty. Once a Filipino worker leaves the Philippines, he or she is at the mercy of the laws, traditions and customs of the destination country. The Philippine government’s mandate is difficult because it must manage a global movement over which it does not have complete control.

Gains and Losses From Labor Export

Despite the sometimes-harsh conditions faced by migrants, especially those working in low-skilled and unprotected sectors such as domestic work, the Philippines has gained much from sending its workers abroad. Celebrated nationally as modern-day heroes, Filipino migrant workers send back a significant volume of remittances. These have become a major source of the country’s foreign exchange inflows, averaging 8.9 percent of gross national product (GNP) over the past five years and more than 23 percent of export earnings. According to the Central Bank of the Philippines, remittances reached $27 billion in 2014, the third-highest recorded in the world, behind only India and China.

Remittances have helped prop up the Philippine economy since the 1980s, by making up for the shortfall in foreign direct investment, portfolio investments and even exports. By the mid-1980s, remittances were high enough to equal the country’s trade deficits. Remittances help stabilize the local currency, the peso, and boost the economy through consumption and investments by providing a steady supply of foreign exchange.

Furthermore, remittances represent a constant source of income. Unlike aid, foreign direct investment and other private flows, remittances are affected less by international financial and market crises. In times of financial crisis, remittances increase as families in the Philippines rely on their relatives abroad for support, thereby functioning as a form of social protection.

There is broad agreement among scholars that the remittances Filipinos send home have not only contributed to macroeconomic stability, but have also improved access to education, at least among remittance-receiving households. One empirical study, for instance, finds that remittances lead to substantial improvements in child schooling and declines in child labor in Philippine households. Another study finds that the average educational expenditure of households that receive remittances is almost three times higher than those that receive income only from domestic sources. All things being equal, most scholars on Philippine migration would agree that remittances significantly enhance household incomes and savings while increasing spending on education.

And the effects may be even broader: The existence of opportunities overseas can inspire more people to gain additional skills and qualifications than the number who will eventually leave. In other words, there is also the possibility of “brain gain” in the local labor market; while some Filipino workers invest in their human capital by enrolling in higher education institutions and acquiring vocational training in the hope of going abroad, many of them will actually stay, resulting in a deeper domestic talent pool.

Skeptics warn, however, that the outflows have actually resulted in brain drain. Indeed, despite the robust supply of workers in the Philippines, there is a concern that emigration—coupled with ineffective local training institutions—has contributed to labor shortages in key industries such as science, technology, engineering and mathematics (STEM), medicine and aviation. The Department of Labor and Employment (DOLE) JobsFit Labor Market Information Report for instance, notes the challenges created by the “widespread practice of piracy and poaching of trained workers” and Filipinos’ “preference to work abroad.”

A 2010 stakeholder meeting between DOLE and business leaders from the banking, retail, education, transport and manufacturing sectors also identified “skills drain” as contributing to the local labor market’s depleting talent pool. A report outlining the results of this meeting noted that the Philippines “has become the trainer of people around the world.” It highlighted in particular how the Philippine airline industry “spends millions to train aircraft mechanics for ten years only to lose them to foreign competitors.” It also acknowledged concern among local businesses that “losing to competition with foreign employers has become inevitable” due to much lower salaries in the local labor market, emphasizing the “need for companies to integrate ‘employee exits’ in their plans.”

The preference to work overseas might also contribute to skills mismatches in the local labor market, as students choose professions that are in high demand abroad but not at home. For instance, international demand for nurses since the early 1990s has led to an increase in nursing graduates—the number of nurse training programs rose from 40 or so in the 1980s to approximately 470 in 2010.

Worse still, many of these graduates are unable to pass licensing exams due to the proliferation of nursing “diploma mills,” or schools offering poor-quality nursing education. An investigation by the Commission on Audit (COA) found that from 2001 to 2005, only 42 percent of the nursing schools across the Philippines managed to have at least 50 percent of their graduates pass the Professional Regulation Commission licensure exams, with 7 percent of these schools failing to have even a single graduate pass. As a result, there are currently 200,000 nursing graduates in the Philippines who are unemployed.

Indeed, while the Philippine government receives accolades from the international community for its migration policies, it continues to attract criticism at home. Tapping the global labor market seems to effectively ease immediate problems at home, such as unemployment and balance of payments crises. However, for many local observers, the Philippine government’s overseas employment strategy has also exacted unimaginable costs on migrants whose rights were not fully protected while abroad.

The wisdom behind a deliberate policy of sending workers abroad, including the most talented, is obvious in a time of lingering economic problems, political instability and a general lack of opportunities at home. It could be argued that over the past 40 years, remittances have more than compensated for whatever cost the departure of skilled workers has imposed on the Philippine economy.

However, the economic context has changed significantly since the 1970s and 1980s, when the Philippine labor export program was initiated and further refined. The Philippines’ average growth between 2010 and 2014 reached 6.3 percent, the highest five-year average in the past 40 years. It is now one of the fastest-growing economies in Asia. The Philippines’ gross domestic product (GDP) grew by 7.5 percent in the second quarter of 2013, matching the pace of China and outpacing other Southeast Asian growth rates, including Indonesia’s 5.8 percent, Vietnam’s 5 percent and Malaysia’s 4.3 percent. The Organization for Economic Cooperation and Development (OECD) predicted earlier this year that growth will continue to 2019 at an average rate of 6.2 percent, the highest forecast in Southeast Asia.

Three major ratings agencies—Fitch Ratings, Standard & Poor’s and Moody’s—also upgraded the Philippines’ credit rating from speculative to investment grade in 2013. The upgrades are expected to spur investment, which would lead to more job creation. As real wages in China increase, companies will look for opportunities to transfer their investments to other, less costly countries like the Philippines, which could lead to more employment opportunities for Filipinos than ever before.

Structural changes are taking place. The National Economic Development Authority, the economic planning ministry, attributes the growth to sound macro fundamentals, reforms in fiscal and monetary policy and good governance.

Now that the Philippines has taken a much more decisive road toward development, building the local talent pool has taken on new importance. To capitalize on the country’s growth momentum, the Philippine government has adopted a road map that, over the next two years, will prioritize massive infrastructure development, job creation—particularly in high-quality and highly productive industries that employ many workers—higher governance standards, improved access to health care and education, and direct poverty relief.

While the government cannot and should not prevent skilled workers from leaving if they choose to, the current challenge for the Philippines is to create more opportunities for overseas Filipinos to return and use their skills at home—especially in the sectors and occupations most critical to the country’s development.

Building Local Industries With Talent Honed Abroad

One idea that is gaining currency in local policy circles is the need to support, and in some cases build, industries within the country that reflect the skills and training Filipinos acquired overseas. In short, instead of labor export, there is a larger opportunity to develop domestic industries that would capitalize on the existing Filipino talent pool abroad.

For instance, the government considers the local maritime industry to be a vital component for achieving economic growth. The Philippines is a huge archipelago, and shipping remains the major means of linking the islands and moving goods as well as people. Filipino seafarers are already in management positions onboard ships and in ancillary services worldwide. Industry insiders see a tremendous opportunity to take advantage of this talent pool by developing a maritime industry cluster within the Philippines that would offer the same full suite of services—including ship management, training and business process outsourcing—as international competitors, such as Singapore, London, Hong Kong, Rotterdam and Hamburg. Instead of sending Filipino seafarers to manage ships abroad, the government could focus on hosting ship management companies within the country. The Philippines could also train seafarers from other countries through its universally recognized maritime schools.

Similar opportunities exist in the booming “medical tourism” industry. Developing state-of-the art domestic medical facilities to service foreign demand for treatment could address the nursing surplus and even encourage the return of experienced Filipino nurses working abroad. The Philippines could develop international and medical retirement havens offering holistic medicine, health and well-being services. The country is already a key destination for retirees from neighboring countries like South Korea, and potentially could attract a wider clientele from within the region and in countries with large Filipino diasporas, such as the United States.

A related and interesting development in the medical field is the $4 billion scientific-process outsourcing (SPO) global industry, which provides knowledge-based services. An increasing number of SPO companies are establishing operations in the country, attracted by the large pool of highly qualified Filipino medical professionals. For instance, U.S.-based Sciformix, an SPO company that studies the adverse effects of drugs, recently opened an office in Manila, citing the Philippines’ U.S.-style educational system, work culture and high English-language proficiency. Sciformix, which has a staff of 50 Filipino doctors, most of whom returned after working overseas, expects to hire 200 additional doctors and nurses to service the needs of 23 multinational drug companies utilizing its pharmacovigilance services.

Maritime shipping, medical tourism and SPO are just three of the many local industries that overseas Filipinos can support. The challenge for the government now is in identifying similar emerging industries and in enticing Filipinos abroad with much-needed skills to finally return home. Since talent follows opportunity, the prospects of the Philippines in meeting this challenge now have never been higher.

Conclusion: Linking Migration With Development

In an ideal scenario, overseas employment would not be an end in itself but a means to a higher end. Although labor emigration, even among the highly skilled, is far from the panacea it is sometimes purported to be, it can have a positive impact on key aspects of development in the country of origin, including human capital formation, poverty reduction and macroeconomic stability. However, the Philippine experience also shows that governments of migrant origin have limited control. Migrants work in places where the exporting country cannot enforce its domestically focused employment regulations and labor relations. To work more effectively, labor migration will always require collective efforts at many levels in both sending and receiving countries. In other words, the Philippines must find that elusive balance: maximizing deployment without sacrificing migrants’ welfare.

Ultimately, success will also depend on a sound national development policy, to which an overseas deployment strategy may contribute. Remittances, like the other benefits that can accrue from global labor mobility, do not exist in a vacuum. The Philippines must continue on its trajectory toward more economic growth and social progress by deepening the reforms already made, particularly in improving governance and making growth more inclusive. Without a strong development policy at home, maximizing overseas employment benefits will be difficult, if not impossible. –Dovelyn Rannveig Mendoza, http://www.worldpoliticsreview.com/articles/15998/human-capital-the-philippines-labor-export-model

Dovelyn Rannveig Mendoza is a senior policy analyst with the Migration Policy Institute, an independent, nonpartisan, nonprofit think tank in Washington, D.C. dedicated to analysis of the movement of people worldwide.