Continued Reliance on Remittances Stress the Need for Phillipines to Focus on Domestic Job Creation

In 2010, remittances accounted for 10% of GDP totaling a record high US$18.8 billion (+8.2% y/y). Remittances provide an integral crutch for domestic consumption (77% of GDP), since they tend to be used to fund education, health-care, and household expenses for family members.

Strong consumer spending helped the economy grow 7.3% y/y in 2010 and will continue to remain a key driver of growth. The outlook for domestic consumption remains robust as long as remittance inflows continue to grow and the exchange rate does not appreciate too strongly.

The growth of remittances has been fueled by overseas Filipino workers (OFWs) employed in relatively recession-proof industries (e.g. health care) and regions (e.g. the Persian Gulf). Global developments such as the Arab Spring, the slowdown in developed markets (DMs), as well as the disasters in Japan have yet to dampen remittance inflows. While remittances provide unemployment relief and help drive domestic consumption, they also highlight structural problems in the Philippine economy, specifically the lack of domestic employment opportunities, the inability to prevent the flight of human capital, and the need to improve infrastructure to expand and develop the tourism and business process outsourcing (BPO) sectors.

Source: Reuters

Labor Force

In 2010, the Philippines’ labor force comprised 36.4 million people, employing 51.8% in services, 33.2% in agriculture, and 15% in industry. Unskilled workers comprise most (32.3%) of the employed labor force, and of those employed only 35.7% work part-time. As of April 2011, the Philippines’ unemployment rate and underemployment rate was 7.2% y/y and 19.4% y/y, respectively. Structural unemployment is due to skills mismatch and rapid population growth. As domestic employment growth is too slow to keep up with rapid population growth, labor exportation helps escape low wages and high unemployment.

Figure 2: 2010 Top Ten Land-based OFWs by Destination Highlights the Importance of MENA

Source: Philippine Overseas Employment Administration (POEA)

According to UN-INSTRAW, the migrant population represents about 9% of the total Philippine population. The main destinations for OFWs are the U.S. (44%), Saudi Arabia (13%), Malaysia (8%), Canada (7%), Japan (4%) and Italy (3%). Since the 1990s, 35% of outgoing OFWs have been basic service providers, many of which have been women employed as household helpers deployed in the Middle East and North Africa (MENA) region.

While the Philippines is less reliant on MENA wages than South Asian countries, MENA is still a vital source of jobs. According to the 2009 Survey on Overseas Filipinos (SOF), 64% of land-based OFWs were deployed in MENA. In 2010, nearly half of OFWs were deployed to the Middle East. Since fighting broke out in Libya, some 26,000 OFWs have been evacuated. Meanwhile, the Philippine government ordered its 1,400 citizens in Yemen to depart. The new “Saudisation” policy, aimed at tackling unemployment by boosting employment of locals, requires private firms to ensure that 75% of jobs go to locals. The Saudi ban on Filipino domestic workers will affect 180,000, or 15% of the 1.2 million OFWs deployed in Saudi Arabia. However, the BSP is confident that Saudi Arabia’s decision to prohibit Filipino domestic helpers will have no significant effect on Philippine remittances inflows as more skilled and professional workers are deployed abroad. The BSP is confident remittances will grow by 7% y/y to US$20.1 billion in 2011.

In 2010, services (45%) comprised the largest employment share of land-based deployed OFWs, followed by production (35%) and professionals (12%). However over the past few years, there has been a rising number of OFWs deployed in the professional sector. Filipinos are moving from the construction sector to service sectors as well as into accounting and finance, which are relatively secure sectors. This increase in deployment of professionals highlights the brain drain away from the Philippines and the need for domestic job creation to retain the best and the brightest.

Figure 3: 2010 Land-based % of OFWs by Occupation Shows High Demand for Unskilled Workers

Source: Philippine Overseas Employment Administration (POEA)

Cost and Benefits of Remittances

Remittances from OFWs remained robust in May 2011, growing by 6.9% y/y to reach US$1.7 billion. For the first five months of 2011, remittances from OFWs accelerated by 6.2% y/y to reach US$7.9 billion. According to the IMF, most remittances go toward real estate, once food and education needs are satisfied; 32.9% of remittances go to savings and investments, 8.8% to pay off debts, 58.3% consumption (immediate needs); 95% of recipients use remittances for food and education. Remittances also drive foreign exchange growth, which has afforded the Philippines the ability to keep debt at manageable levels and has improved the country’s balance of payments.

National Economic and Development Authority (NEDA) Director-General Cayetano W. Paderanga, Jr., notes that “while the easier flow of remittances has led to growth and the increased liquidity has allowed interest rates to remain low, OFW remittances have not resulted in cascading beneficial economic changes, and these fund flows may have spawned an economic environment that is difficult for export competitiveness and employment. New industries have had difficulty developing, and at the same time, old industries have been squeezed by the competitive shock of an open economy and the appreciation of the currency. This pincer movement has caught the Philippine economy in vise, unable to grow even with increasingly available investment funds. This has reduced the multiplier effect that one would have expected from the inflow of OFW remittances. Finally, the increase in reservation wages in the economy coupled with slow industry growth has reduced the potential for employment in a growing economy, and so the level of unemployment has proven stubbornly difficult to reduce.” However, thankfully for the Philippines, domestic employment opportunities in the BPO and tourism sectors look promising, which may provide a counterbalance to the country’s reliance on OFWs and remittances.

Figure 4: 2010 Employed Persons by Industry Stress the Need for Multi-Sector Development

Source: National Statistics Office, Republic of the Philippines (NSO)

Employment Opportunities: BPO and Tourism

The World Bank ranks the Philippines among the best performers in service exports, especially in the business process outsourcing (BPO) sector. The country also has potential growth in the tourism sector. After India (37%) and Canada (27%), the Philippines is the third largest BPO center in the world, comprising 15% of the global BPO market share. The BPO sector employed nearly 500,000 people and generated US$9 billion worth of exports in 2010. By 2016, industry annual revenue targets are set to reach US$25 billion while employing 1.3 million people. NEDA Director-General Paderanga noted the BPO sector was starting to generate jobs even in secondary cities, which “was particularly helpful in lessening the country’s need for remittances to help spur the domestic economy.” Benedict Hernandez of BPO industry leader Accenture notes that opportunities presented by local outsourcing would push the Philippines as the best source of the best finance, accounting and technical professionals, rather than a “lower cost destination” and haven of “telephone operators.”

Tourism accounts for 7% of GDP and employs 3.5 million people. Impediments to tourism growth lie in weak ground and air transport infrastructure, which lowers accessibility to tourism destinations and discourages private sector investments in accommodation facilities. The governments PPP infrastructure projects will help develop and expand the tourism sector. The growth of BPO and tourism outside major urban areas provide an incentive for people in the countryside to learn new skill sets and provide new services; this will only serve to strengthen the structural labor base of the Philippines. Employment opportunities in the BPO and tourism sectors will also help mitigate the inflow of returning OFWs.

Outlook

The lack of domestic employment opportunities perpetuates the need for the Philippines to export labor to alleviate unemployment. However, exporting the country’s best and brightest is not the best long-term policy. While global events such as the slowdown in DMs, disasters in Japan, and events in MENA will affect OFWs and remittances, the Philippine government aims to offset these shocks by deploying OFWs to help the Canadian government focus on alleviating temporary labor shortages. The Philippines is also looking into sending OFWs to assist flood ravaged Australia and possibly earthquake stricken New Zealand. When the Philippines launches its infrastructure public-private partnership (PPP) programs in Q4 2011, the country will need construction workers, which will help absorb returning OFWs from the MENA region. The Philippines must also continue to strengthen ties with Asia powerhouses China and India in the export of labor. In 2010, Philippine Overseas Employment Administration (POEA) data showed these countries attracted merely 8,954 (0.74%) and 842 (0.07%) land-based OFWs, respectively. In the short-term labor exportation will help the Philippines economy remain robust and keep unemployment at manageable levels. In the long-term, however, the Philippines will continue to be plagued by its structural problems unless it can reverse the brain drain, improve infrastructure, and develop sectors to generate employment.

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