Is labor export good dev’t policy?

MUCH HYPE has been made of the surge in remittances from overseas Filipinos—and quite understandably. It has kept the external current account in decent shape, eased the debt burden, boosted the peso, tamed inflation and contributed to a generally rosy picture of the economy. These positive outcomes encouraged the previous administration to push further its labor export policy, to the extent of declaring that the country should develop “super-maids” for employment in advanced countries.

In 2010, remittances hit a record high of over $18 billion, roughly 12 percent of GDP. The Philippines has been the world’s fourth highest remittance-receiving country after India, China and Mexico, and highest when remittances are taken as ratios to GDP and exports. What are the pros and cons of international migration from the standpoint of the home country?

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 migration also impacts the quality of goods and services, reflecting the capability of replacement workers. A deterioration in quality is not unusual, as is apparent, for example, in the quality of education and health services in our country, following the departure of able 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 lackluster economic growth.

Some international analysts 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 human capital 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.

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 their 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 higher consumption and investment spending 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 weaken 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 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 workers or to need remittances to supplement their incomes.

In sum, migration and remittances appear to benefit households, communities and the economy. They alleviate poverty, contribute to community development, and finance fiscal and trade deficits and debts. But there are considerable costs. Migration exacts no mean sacrifices and other psycho-social costs on overseas Filipinos workers and their families. It is also subject to global market swings, as exemplified by the global financial crisis cum economic slowdown, 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. Lastly, the remittance bonanza makes it convenient for the government to skirt the difficult task of policy reform needed to strengthen 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 new Aquino administration instead seriously implements policy reforms to put the economy on a rapid and sustained growth path, as did South Korea and Thailand, for example, 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.

Ernesto M. Pernia, Ph.D. is with the UP School of Economics and a former lead economist with the Asian Development Bank. E-mail: empernia@skybroadband.com.ph