Making the most of remittances


Ben D. Kritz

FOR the time being at least, remittances – money sent home to families by overseas Filipino workers – are the biggest single source of foreign money for the Philippine economy. It will likely be passed by business process outsourcing (BPO) revenues sometime this year, but will likely still be a significant line item on the national balance sheet for decades to come.

There has always been something disturbing about this. One unavoidable conclusion is that it is an indictment of the domestic labor environment; if so many Filipinos (about 10 million) have to leave the country to find decent work, worthwhile job opportunities are obviously in short supply here. If added to the unemployment statistics, the 10 million or so jobs that are evidently not available for OFWs in their home country would drive the Philippines’ jobless rate to over 22 percent, not the attractive-sounding 4.7 percent official figure.

A bit harder to figure out, but still a factor for which a reasonable qualitative argument can be made, is the loss of added value to the economy. Jobs benefit the country in which they are located; the Philippines benefits from receiving part of the salary of a worker in, say, the UAE, but it is the UAE who benefits from having that worker’s labor create a source of revenue, form part of a supply chain, and support the wider economy through his spending on necessities and little luxuries.

The government understands the immediate importance of remittances but also tacitly acknowledges there is something inherently wrong with the Philippines’ reliance on them, which is why successive governments have made efforts to both institutionalize the export of labor and foster greater opportunities within the domestic economy. Predictably, the contradictory aims mean that results for either fall short of their aspirations.

Although the Philippines has one of the biggest overseas workforces in the world, it is by no means unique.

According to IFAD (International Fund for Agricultural Development), there are about 250 million migrant workers globally, whose remittances support an additional 750 million people; in other words, about one in seven people worldwide is impacted in some way by remittances. IFAD estimates that $500 billion annually—about 0.7 percent of the gross world product —moves around the globe in the form of remittances.

What is even more remarkable about that figure is that it represents a small fraction of migrant workers’ earnings, most of which necessarily remain in their host countries. IFAD provided a vague estimate of “$200 to $300 several times a year” being sent home by the average migrant worker; other studies put the average at between 10 and 25 percent of the workers’ earnings.

Regardless of the specific figure, the reasonable contention of IFAD and other organizations like the World Bank is that remittance income, small though it may be, is seriously underutilized by its recipients, and by extension, recipient countries. That is obvious here in the Philippines as well. Although some families are successful in maximizing their remittance earnings, most use the money for short-term consumption; if they do “invest,” it is mostly used for inefficient investments such as end-user real estate or low-return entrepreneurial enterprises—a jeepney, a tricycle, a sari-sari store.

Part of that problem is caused by character; people in general are not naturally wired to think long-term, and Filipinos, with their extensive family safety nets, are perhaps less so than people in other cultures. A part of the problem that the government and financial industry can solve rather quickly, however, is the lack of easy access to investments for ordinary people with just a little capital.

Last week, I had the chance to talk with Marvin Fausto, who is the founding president of the Fund Managers’ Association of the Philippines, the founder of IFE Management Advisers, and a consultant to online brokerage COL Financial, purveyor of the “fund supermarket” that he helped developed. All three of those enterprises—and obviously, Fausto himself—have a significant aspiration to bring investment to the masses; many of COL Financial’s customers, for instance, have portfolios of only about P10,000.

Fausto suggested that more people do not invest for their future—which, when looked at another way, is the same thing as investing in the Philippine economy’s present—because it is not sufficiently easy for them to do so.
Government agencies like the Bureau of Internal Revenue impose too many conditions and procedural steps on individuals, and banks are reluctant to do anything more than what is minimally required for compliance purposes to accommodate investors for instruments like the Personal Equity and Retirement Account (PERA), which was passed into law in 2008 but is yet to be fully implemented.

Because investment is voluntary—save for practically useless programs like the SSS (Social Security System) or GSIS (Government Service Insurance System)—most would-be investors become frustrated at the red tape and simply volunteer to do something else with their money, like spend it on a new phone, or stock for another corner store the community doesn’t actually need.

Until this changes, the Philippines collectively and the direct beneficiaries of remittances individually are going to continue to fall short of their potential; it may not be an obvious problem now, but in another 25 years or so when the country’s much-touted “demographic window” closes, the country is likely to regret it.


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