Is labor export good policy for Philippine development?

There has been for some time now much hype about the surge in remittances from Filipinos overseas. It has kept the external current account in the black, eased the debt burden, boosted the peso, tamed inflation, and contributed in general to a rosy picture of the economy. These positive outcomes had encouraged the previous government to push further its labor export policy to the extent, for instance, of declaring that the country should develop “super-maids” for employment in the advanced countries.

In 2010, remittances reached a historic high of $18.8 billion — about 12 percent of GDP — having grown more than 8.0 percent from the previous year. The Philippines has for some time been the world’s fourth highest remittance-recipient country after India, China and Mexico, and highest when remittances are measured as ratios to population, GDP, and exports. What are the pros and cons of international migration from the standpoint of the home country, as can be gleaned from the international literature and analysis of Philippine data?

Because international migrants typically are among the better educated and experienced workers in the home country, their departure often results in a disruption of economic activity. Labor market outcomes would depend on the composition of emigration and the nature of labor markets in terms of flexibility, segmentation, and rates of un- and under-employment. Another important effect of migration is on the quality of goods and services, reflecting the quality of replacement workers. A deterioration in quality would not be unusual. Such is apparent, for instance, in the quality of education and health services in the Philippines as a consequence of the departure of skilled or professional workers (teachers and health workers). However, the deterioration in service quality could also be partly due to diminished real budgets for public services owing to the country’s relatively lackluster long-run average economic growth.

Some international scholars claim that while migrants are typically well educated, migration does not take away a very large share of a country’s best educated. Others, however, argue that migration leads to a significant loss of highly educated persons for a wide range of countries. One aspect of such loss relates to public funds invested in the education of the migrants. Nevertheless, the brain drain is probably not an unmitigated bane as there are compensating benefits, such as remittances, other beneficial links that the emigrants maintain with the home country, and return migration. These two latter benefits are exemplified, in particular, by the Chinese and Indian diasporas. To an increasing degree, the maintenance of links with the home country is also true of the Philippine diaspora, as illustrated by the partnerships and collaborations between members of the Philippine-American Academy of Science and Engineering (PAASE) residing here and those in the US and Europe.

The economic consequences of remittances can be considered at different levels. At the household level, a substantial portion of migrant workers’ earnings is remitted to families. Remittances serve to enhance family incomes, although whether they invariably represent substantial net increases is debatable, given that family members left behind may reduce their work effort. On balance, though, it seems clear that recipient families are better off with rather than without the remittances.

At the community level, inequality and poverty would improve to the extent that the poorer households receive the bulk of these income transfers, or income distribution would worsen if the richer families are the main recipients. Nonetheless, creation of jobs and trading opportunities often results from investment and greater demand for goods and services, with the beneficiaries in turn spending and generating further spending.

At the macroeconomic level, remittances have become a major source of foreign exchange, especially for countries plagued by fiscal deficits, external debts, persistent trade imbalances, and scant foreign direct investment. Foreign exchange inflows, however, may exert upward pressure on prices, requiring skillful monetary management. Moreover, these inflows may spur a real appreciation of the exchange rate, thereby constraining the development of export-oriented and import-competing industries. Further, the remittance windfall may dissipate the urgency for policy reform and improved governance while the citizenry is lulled into complacency.

Analysis of Philippine data shows that remittances contribute significantly to poverty alleviation, as reflected in higher family spending per capita of the lowest 40 percent of households, while controlling for the effects of other variables including physical infrastructure and human capital in the provinces. This beneficial effect rises consistently up to the fourth quintile, then peters out for the fifth quintile — which is not surprising given that the richest 20 percent of families are unlikely to have overseas Filipino workers (OFWs) or need remittances to supplement their incomes.

In sum, migration and remittances appear to benefit households, communities, and the macroeconomy. They alleviate poverty, contribute to community development, and finance fiscal and trade deficits and debt. But there are considerable costs. Migration exacts no mean sacrifices on and other psychosocial costs to OFWs and their families. It is also subject to global market swings, as exemplified by the global financial crisis cum economic slowdown, and followed more recently by the political restiveness in the Arab world. Moreover, migration arguably causes brain drain that compromises the country’s human capital requirements for its long-term development. Likewise, the remittance bonanza makes it convenient for the government to skirt the difficult task of policy reform to improve the performance of the domestic economy.

Should the Philippine government carry on with its labor export policy and let the economy depend on remittances indefinitely? The country would probably be better served if the government instead focuses on policy reforms to put the economy on a rapid and sustained growth path, as did South Korea and Thailand during their labor export heydays in the 1970s and 1980s. A robust domestic economy would make working abroad an option — not a necessity — for Filipinos.

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Ernesto M. Pernia, Ph.D., is a professor at the UP School of Economics, Diliman, Quezon City, and former lead economist of the Asian Development Bank. He is currently a director on the board of the PAASE. This note is based on his UP School of Economics Discussion Papers 0602 (July 2006) and 0801 (February 2008). E-mail at [email protected].