Money Sent Home by Overseas Workers: Blessing or Curse?

In a sense, two of the Philippines’ most notable overseas workers face destiny this week. One is Mary Jane Veloso, who left home carrying a backpack, was given a borrowed suitcase filled with heroin, and was due to be shot in Indonesia. The other is boxer Manny Pacquiao, who faces the richest paycheck from a prizefight in history in Las Vegas. [Veloso was spared a firing squad death at the last minute after an agreement to allow her to give evidence against the drug trafficker who allegedly hired her.]

They are hardly typical overseas workers. But in a sense they represent the variegated tapestry of at least 10 million Filipinos, 1.8 million of whom left in 2013 alone for overseas jobs, sending home US$23 billion to their families, contributing 13.5 percent to the domestic economy – an astonishing third-largest segment of the country’s gross domestic product.

The Philippines pound for pound is the biggest recipient of inward remittances, despite being outweighed in population by bigger countries. Numerically it is the fourth largest after China, India and Mexico. The question is whether this is a good thing, or if it stunts domestic industries, starves important labor sectors – particularly healthcare in the Philippines – disrupts families and provides a cushion that shields governments from taking hard decisions to move their economies forward.

The Philippines is hardly alone. Across the region, a huge flow of remittances has helped to reduce poverty levels, mostly through increased spending on food and other essential items, housing, and education. According to the Asian Development Bank, it is estimated that remittances helped reduce the poverty level by 1.5 percent in Bangladesh, 5 percent in Indonesia, and 2 percent in Vietnam from 2000 to 2005.

“The remittances growth is a reflection of high worker migration from developing countries to wealthier economies such as those in the Middle East,” according to a report by Mayumi Ozaki for the ADB, which estimates that inward remittances have skyrocketed globally, from US$92 billion to US$246 billion in developing countries between 2005 and 2013, with little or no support from the public sector or from donor agencies that have few projects to directly support migrant workers and remittances.

The simple fact of those remittances masks the horrific scenes of hundreds of drownings in the Mediterranean, deaths by exposure from Mexico into the United States and racial and religious tensions across many countries as migrants increasingly find cheap and available transport to other regions.

“We in fact know little about remittances beyond the headline numbers,” according to Mayumi. “How are they transmitted? How exactly do migrant worker households spend that money? How can remittances be better channeled to reduce poverty? Have remittances really contributed to inclusive, sustainable economic growth in receiving countries? And above all, how can governments make use of remittances to create more domestic job opportunities, and thus reduce the need for so many workers to leave?”

Remittances, Mayumi wrote, can contribute to economic growth if the receiving household saves or puts the money into the formal financial system that would channel it into public and private investments. Households spend most of the remittances they receive. In Bangladesh, 84 percent of remittances are consumed. Only 14 percent is saved, mainly due to transaction costs such as fees to open a bank account, lack of trust in financial institutions, regulatory barriers like official identification documents that many poor people lack, a dearth of information and financial literacy, social constraints, and behavior barriers.

According to a corresponding report by Pacific Strategies & Assessments, a Manila-based risk firm, far too often the money is spent at the mall than invested or saved. In 2014, private consumption accounted for about 70 percent of the economy, according to the Philippine Department of Finance, against investment which accounted for only about 20 percent.

“The focus on service workers, driven by remittance-fueled private consumption, has starved the other important labor sectors in the [Philippine] economy,” PSA said, “Agriculture, which is a key sector in a national effort to reduce poverty, makes up only about 10 percent of the economy, down from 14 percent in recent years. Manufacturing, which has been the springboard to prosperity for the neighbors of the Philippines, has remained flat at about one third of the economy in recent years.”

An ADB-sponsored forum on the subject said that if remittances are to be channeled for investment, “it is essential to expand access to formal financial services,” particularly through using digital finance, which can help include poor people in the formal financial sector and enable them to save and invest in financial assets.

Capital market instruments such as diaspora bonds and securitization of future flows of remittances are available to capture remittances for investments on a national level. To tap diaspora investment, however, the ADB recommends that countries develop the right structure, marketing and distribution channels, and build long-term relationships with target investors.

So what is the way forward? Financial education must be improved, digital finance must be developed and expanded, and remittance-linked capital market instruments must be developed, the ADB said. Governments should promote financial education for migrant workers before they go abroad. Donors can support developing financial sector infrastructure IT systems such as core banking system, e-payment and networks to promote digital finance.

Given these impediments, while employment is improving in the Philippines, it is at a much slower pace than the economy given the government’s dependency on remittances rather than building manufacturing, agriculture and other components of GDP. “The massive wealth being created in the country by the expanded gross domestic product is not being translated into good jobs at a fast enough rate,” PSA said.

While 93 percent of people of working age say they are involved in some kind of labor, far too often that includes large numbers of street venders hawking newspapers, trinkets, bottled water and other products between cars on the streets, household workers receiving little or no pay, and millions of people with part-time jobs without benefits. Much of it just entails hustling.

Almost one fourth of the unemployed in the Philippines are young people and half of those have finished high school. Nearly 40 percent of the total unemployed of all ages are people who have education beyond high school. The stories of Filipino college graduates driving taxis and working as maids in Hong Kong remain true.

“There is no magic bullet that will turn high GDP growth rates into good jobs. Broad and complex national strategies have been needed for other countries to achieve the same goal,” according to the PSA report. “A key element of all successful national strategies in this regard is the development of infrastructure that will bring in foreign investors, particularly those interested in manufacturing. If exporters have the reliable electricity, good roads and ports, and other basics, they can turn impoverished farmers into workers with jobs good enough to pay to educate their children.”