Foreign exchange remittances
from overseas Filipino workers have a negative
effect on their families that receive them
and on the country as a whole, the IMF says
by Vic Ferrer
It
is estimated that the Philippines will get at the end of the
current year, $8 billion in foreign exchange remittances sent
in by more than seven million workers abroad.
According to a study commissioned by the International Monetary
Fund (IMF), such huge foreign exchange inflow creates a “moral
hazard.” It claims that the money, although meant to
help the overseas workers’ families during bad times,
fosters dependency, if not outright mendicancy.
In a paper entitled Are Immigrant Remittance Flows a
Source of Capital for Development?, Raph Chami, Connel
Fullenkamp, and Samir Jahjah note that recipient families
use the remittances as substitute for labor income, thus lowering
their work effort.
The recipient families become totally dependent on their
working kin abroad. Instead of contributing to the family
upkeep, their members, even those of the right age, lose their
incentive to work and begin to regard the money as a right.
In plain and simple terms, they become lazy, with the money
coming without fail, usually at the end of the month.
Chami and Jahjah are both IMF economists. Fullenkamp, on
the other hand, is a Duke University economics professor.
Government Vulnerability
Like the recipient families, the Philippine government is
vulnerable to this “moral hazard.”
The recipient families use foreign exchange remittances
primarily to buy goods and services, and the fact explains
why consumption, rather than production, is the primary driver
of economic growth in the country.
For its part the Philippines and, indeed, other countries
similarly situated, use the foreign exchange remittances to
pay for imported necessities such as oil and fuel, food and
farm products, as well as machinery and parts for the local
industry. It also regards them as a safety net when the economy
contracts, a source of regular income necessary to prop the
value of the local currency.
The government could also become complacent, ignoring the
demands of economic development, which are politically costly,
and rely totally on the in-flow of foreign exchange remittances,
hoping it will insulate the country from the negative consequences
of inaction.
The empirical evidence, the authors add, reveals that foreign
exchange remittances, “which are compensatory in nature,
have negative effects on economic growth.”
Once the amount of inflow falls, the government will be
hard-pressed to keep its exchange rates stable. In such a
situation the conditions that lead to large-scale migration
in the first place and the subsequent dependence on immigrant
remittances will be exacerbated.
The authors further assert that family members who remain
at home will also become more dependent than ever. On the
other hand, firms and entrepreneurs will rely more on local
buyers, instead of trying to compete in the world market.
Prescription
The country should wean itself from over-dependence on dollar
remittances and concentrate on development. It should transform
the dollar inflow into a capital for development. But first,
the authors say, the government should persuade family recipients
that they are better off investing a portion of their money
into productive ventures.
The authors acknowledge that it is a difficult task, given
the difficult economic circumstances of most immigrants sending
households. In the first place most of these households regard
the foreign exchange remittances as their main source of income,
to be used primarily for consumption.
Indeed, for these families sending a member abroad is an
investment by itself. They therefore consider the money they
receive as returns of human capital.
Nevertheless, the authors urge the government to persist
and channel the remittances through microfinance institutions,
whose purpose is to lend money, at affordable interest rates,
to those who want to set up their own business enterprises.
For their part multinational financial institutions should
act as monitor on behalf of the overseas workers and their
families at home.
Surge in Remittances
The final tally is not yet in, but the Philippine government
expects the amount of foreign exchange remittances to hit
the $7.6 billion mark for the year just past.
It is a safe estimate, considering the fact that as of last
October, the country’s overseas workers already sent
in $6.336 billion. Moreover, it is in last two months of the
year when foreign exchange remittances peak owing to demands
for increased consumption of recipient families in the holiday
season.
The BSP says the Philippines, along with Mexico, India,
and Pakistan, is the biggest recipient of foreign exchange
inflows from overseas workers. For the Philippines, the major
sources of foreign exchange remittances are the United States,
Saudi Arabia, Japan, Hong Kong, Singapore, and the United
Arab Emirates.
It
is estimated that the Philippines will get at the end of the
current year, $8 billion in foreign exchange remittances sent
in by more than seven million workers abroad.
