RemittancesGateway.org

Study counts the cost of workers’ remittances

Monday, 01 March 2010 10:44

Source: BusinessWorld
By Don Gil K. Carreon

MONEY SENT HOME by overseas Filipino workers (OFW) has been a boon for the economy, but has also had a negative indirect impact on manufacturing and exports, a study by an economist from the University of the Philippines (UP) showed.

The study, titled: "The Macro-economic Impact of Remittances in the Philippines," by UP economist Cayetano W. Paderanga, Jr., chairman of the Institute for Development and Econometric Analysis Inc., noted that the steady inflow of dollars from remittances strengthens the peso, making labor and production costs here more expensive than those of competing neighbors in the region.

 

Hence, while a strong peso fortifies the country’s external payment position and international reserves, providing a cushion against sudden external shocks, it also erodes the competitiveness of the Philippines in terms of exports and its position as an investment location, especially for manufacturing.

"The downside of an appreciating currency is the decline in the country’s cost competitiveness...Asian neighbors viewed as more cost competitive in wages and other inputs are better havens for investment," the paper read.

"As the domestic currency strengthened, the competitive position of domestic production in the Philippines suffered," it added, noting that investments here have dropped even as remittances continue to climb.

Mr. Paderanga added that while local savings have increased with the rise in remittances, these have not been mobilized to fund local development priorities.

Despite the recession that gripped developed economies last year -- some of which hosted OFWs -- remittances grew by 5.61% to $17.35 billion from $16.43 billion in 2008, equivalent to about 10.8% of gross domestic product.

This year, the BSP expects these flows to grow 6% on the back of global economic recovery.

In a telephone interview last Sunday, Sergio R. Ortiz-Luis, Jr., president of the Philippine Exporters Confederation, Inc., agreed with the study’s observations.

"That’s true. Even exporters are saying that their dollar earnings have become negative for them, as the peso appreciates with remittances...[The appreciating peso also provides a disincentive for manufacturing] because it’s cheaper for us to import rather than manufacture," he said.

He promptly conceded, however, the benefits of remittances.

"We have already factored that [remittances’ negative indirect impact] in...It’s a problem, but not a something you can’t help... The good it gives is much more important than the [problem caused by] peso appreciation," he said.

"What we want avoided are foreign borrowings of the government and policies that favor a stronger peso rather than a competitive exchange rate."

University of Santo Tomas economics professor Alvin P. Ang, however, said not addressing this effect of remittances on the peso can have long-term implications.

"In the long run, it may lead to the stagnation of our industries...mag-import na lang tayo, wag na tayong mag-invest [People might just prefer to import and ignore the need to invest]. You won’t be creating more jobs," Mr. Ang said.

He added that "your country is left with nothing but consumers...when your main exports are people."

Mr. Ang admitted that the issue cannot be addressed immediately, since the solution lies in developing local industries that can give decent jobs to more people and, hence, dissuade them from seeking jobs abroad.

What the government can do immediately, Messrs. Paderanga and Ang said, is to develop investment products for OFWs that will allow it to harness their remittances to fund development priorities. Already, the government is considering offering foreign-denominated retail bonds to OFWs, possibly next month.