IMF team affirms weak links between OFW money, investment
by JEREMAIAH M. OPINIANO

MANILA—A TEAM from the International Monetary Fund observed that remittances from an estimated eight million Filipinos abroad have not led to increased investments.

Ever since the country’s investment ratio has steadily declined since the 1997 Asian financial crisis, increasing remittances “has not increased investment,” IMF’s Ayako Fujita and Srikant Seshadri wrote in a policy analysis paper of selected Philippine economic issues done by a six-person IMF team.

IMF’s Country Report 07/131 (released last March) analyzed selected economic issues such as reforms in the value added tax law, an analysis of the economic contributions of the services sector, and credit growth and bank balance sheets in the Philippines.

Both Fujita and Seshadri were part of a six-person team that consulted Philippine economic planning and finance officials last January as part of the lender’s periodic consultations with countries.

The weak links between remittances and investment is such even if middle-to-high income migrant families, whose main source of income is remittances from dependents abroad, are rising, says the IMF team.

The team cited data from the triennial Family Income and Expenditures Survey of the National Statistics Office, the same data that Milan Brahmbhatt and Dan Biller based their analyses for a report on East Asia for the World Bank [see related story].

Citing 1991 to 2003 data from the triennial FIES, the number of the two lowest-income migrant families receiving remittances declined from 60 percent in 1991 to 18 percent in 2003.

Likewise, the top two income brackets among migrant families that count income abroad as their main source of income rose from 40 percent in 1991 to 82 percent 12 years after.

“Given that some 80 percent of (Filipino migrant) families that receive income from abroad as their main source are now middle and high-income families, it is much more likely now than in 1991 that the uses for this income go beyond consumption and subsistence, and are put toward saving and investment,” the IMF team’s paper wrote.

But the situation surrounding remittances and investments suggests that the lack of a relationship between investment and remittances “could indeed be transitory, and that going forward, one may see a pick up in investment in physical capital” (see figure 1).


The weak links between remittances and investment, however, also occurs in many remittance-receiving countries.
“Country specific factors could determine whether a rise in external flows leads to greater consumption, including housing-related spending on the one hand, or greater investment in fixed capital on the other,”

In the case of the Philippines, the IMF team members observed that financial intermediation is a primary issue. “(Philippine banks are) still repairing their balance sheets, and are risk averse in the current environment,” IMF observed.

But even if there were financial intermediation, the IMF team thinks that remittances as a percentage of gross domestic product should have increased by three percentage points, and this situation “might have a more pronounced effect on Philippine investment, which continues to decline.

Services
THE IMF team’s selected issues paper cited remittances in the chapter on services, which is the top performing economic sector compared to agriculture and industry. Philippine economic data from 1998 to 2005 showed that services contributed 2.37 percent to the Philippines’s real GDP growth, while industry and agriculture contributed only 0.95 and 0.56 percent, respectively to GDP growth.

Citing the same years of coverage, services contributed 1.64 percent of employment, agriculture only 0.22 and industry only 0.14 percent.

The IMF team affirmed as well that the Philippines is increasingly “exporting” its labor to sustain growth, whether it is through growing remittances, or through growth in off-shoring services. Meanwhile, domestic investment has declined.

Trade and transport, storage and communication services have been the growth drivers for the Philippines in terms of services. Meanwhile, financial and real estate services provide added momentum from 2005 to 2006, says the IMF team, as overseas Filipino workers (OFWs) have been target markets for such since they “are beginning to save and invest more as they earn higher incomes” (see figure 2).

The paper, however, did not cite hard data on the number of OFWs who save.

The IMF team acknowledged that large and growing remittance inflows, a sufficient supply of skilled labor for both overseas and domestic jobs, and competitive wages in certain service sectors such as business process outsourcing are the major factors that have propelled the Philippines’s growth in services.

Remittances have reached 11 percent of GDP growth in 2005 as compared to only seven percent in 2002 since the technical skill levels and wages being earned abroad “are higher”. Thus, the IMF team said remittance inflows have also kept consumption “growing at a healthy pace… supporting domestic demand”.

The country’s bloated population and rising unemployment have led to the occurrence of the migration of skilled workers to developed economies, but the IMF team observed the rate of overseas migration “can be stemmed if more jobs become available in the high-value services sector”.

The Philippines has also been the place for business process outsourcing (BPO) investments since the country offers “competitive wages” and “cost savings” for BPO companies. The IMF team cited the Philippines’s strength in BPO sectors such as call centers, medical transcription and animation.

Data from 1975 to 2006 from the Bangko Sentral ng Pilipinas showed that formal banking channels have received over US$105 billion in remittances. Some US$12.8 billion in remittances were recorded in 2006.

Scale effect
THE Philippines, the IMF team analyzed, has relied on what it calls a scale and a quality effect.

The scale effect pertains to the sending of higher numbers of workers abroad. In 2006, the Philippine Overseas Employment Administration reported that just over a million temporary contract workers were deployed overseas.

The quality effect, meanwhile, pertains to the “exploiting of higher returns to human capital” in the form of remittances, as well as the growth of off-shoring (by) capturing a share of those higher returns domestically”.

In terms of the long-term sustainability of relying on the scale effect, which is labor export, the IMF team thinks this has “natural limits”.

The IMF team recommended necessary improvements in infrastructure for the BPO sector, as well as a “renewed emphasis” on education, particularly for the engineering and scientific disciplines, since these are essential in “high value-added overseas jobs or (in) high-value offshore servicing industries”.

But without increased savings coming from these skilled workers in the domestic and overseas service occupations, the IMF team said “the strong indirect effects from the growth of services (for the Philippines)… may not be realized” (see figure 3).

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