Overseas Filipino Worker Remittances: Magic Bullet? Valdimir dela Cruz Abstract The paper explores the possible channels where overseas Filipino workers flow through in the local economy. Specifically, the paper examines its interactions in the micro level using household data and its possible effects on financial development. Using household survey data, it is found that remittances are used as supplementary income at best and income-substitutes at the worst case and thus heavily favors consumption use. Using quarterly data over 12 years, we find that remittances accelerate the utilization of the financial sector but also cause it to shrink. The paper concludes that remittances, at least in the Philippine scenario, only serve as a stop gap measure in terms of poverty alleviation but is currently still not an engine of growth.
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Household Service Workers 50,082 71,557 96,583 142,689 155,831
Nurses Professional 11,495 13,014 12,082 17,236 15,655
Waiters, Bartenders and Related Workers 13,911 11,977 8,789 12,238 14,892
Caregivers and Caretakers 10,109 9,228 9,293 10,101 10,575
Wiremen and Electrical Workers 8,893 9,752 8,606 9,826 10,493
Plumbers and Pipe Fitters 9,664 7,722 8,407 9,177 9,987
Welders and Flame-Cutters 6,777 5,910 5,059 8,026 9,657
Laborers/Helpers General 9,711 8,099 7,833 7,010 9,128
Charworkers, Cleaners and Related Workers 11,620 10,056 12,133 6,847 8,213
Cooks and Related Workers 5,791 5,028 4,399 5,287 6,344
Other Occupational Categories 238,920 197,372 168,782 209,283 207,800
(Chart 1). Further, we see that fewer households have savings compared to higher income
households with 60.8 percent (Table 4). We also see the consumption patterns of both the
higher income groups versus the lower income groups; with those in the lower income bracket
spending a disproportionate share of their income on food. The first income decile have higher
expenditure than income, and the succeeding income deciles have relatively close income
and expenditure. This indicates that a majority of the populace is unable or unwilling to save;
hinting at the ability of income to cover even basic expenses (Table 5 and Table 6)
Table 4.
Percentage of Households with Savings (PH)
2013 2014
Q1 Q2 Q3 Q4 Q1 Overall 24.5 22.4 24.5 26.2 28.9
Less than P10,000 14.8 12.9 14 15 17.8
P10,000-P29,999 33.2 28.9 31.6 36.9 38.2
P30,000 and over 57.1 62.1 68.5 67.3 60.8 Source: BSP CES Survey Q1 2014
Chart 1.
Source: BSP CES Survey Q1 2014
27%
30%
24%
6%
7%6%
Percentage of income allocated to savings (PH) 2014 Q1
Less than 5%
5% to 9%
10% to 14%
15% to 19%
20% to 24%
25% and over
Table 5.
Source: NSO Family Income and Expenditure Survey 2012
Table 6.
Source: NSO Family Income and Expenditure Survey 2012
Looking at OFW households and where they use their remittances, we see that almost all devote some part to food. It is encouraging to see that the households report some part of their inflow are set aside for savings and that there are more households that do so in 2014 compared to 2009. However, we see that most of where remittances are used are expenses; with investment not even reaching 10 percent. The graph is telling in that debt payments rank
fourth, with almost half of the respondents claiming it. This further paints a picture of the average Filipino family in dire financial straits. (Chart 2)
Chart 2.
Source: BSP CES Survey Q1 2014
Heaving seen the evidence above, the signs are pointing towards remittance income
being used for consumption. Additionally, the average Filipino household both remittance
receiving and non-remittance receiving, seem to be non-participants in the financial sector;
this is especially true for families in the lower income brackets.
Part Two:
We propose to use a simple model:
Financial Development = Remittances + Foreign Direct investment + Exchange Rate + Interest
Rate
1. Financial Development variables :
a. deposits to GDP – utilization, scale of bank utilization with respect to the
economy; (d2logdep – the second difference of the log is used in the regression)
b. bank assets to GDP – magnitude, size of the banking industry with respect to
the economy; (dlogass – the first difference of the log is used in the regression)
2. Explanatory variables:
a. OFW remittances – main topic of interest; acts like direct cash injection into the
economy from an external source. Positive correlation is expected in theory;
given large infusion of cash, recipients must have some left over from
0 10 20 30 40 50 60 70 80 90 100
Food
Education
Medical Expenses
Debt Payments
Savings
Consumer Durables
House (Rent)
Investment
Motor Vehicle
Others
Percentage of OFW Households by Type of Use of Remittances
2009 2014
consumption and would normally be expected to enter the financial system via
deposits. Also, as incomes increase, people are expected to be involved in the
financial system through savings or investments. (dlogrem – the first difference
of the log is used in the regression)
b. FDI – foreign direct investments also lead to more funds in the system; again
we assume that private enterprise would utilize the resource productively or
would push up demand for a better financial system thus leading to higher
financial development; (dlogfdi – the first difference of the log is used in the
regression)
c. Exchange rate (USD) – increases in the exchange rate would lead to additional
savings as goods become more expensive and consumers would spend less;
(dexchange – the first difference is used in the regression)
d. Interest rate – higher interest rates should lead to an increase in deposits as
people choose to take advantage. Bank assets should also increase as banks
would need to channel the increased liability (deposits) productively. (sdr – the
monthly savings deposit rate is used as one measure; dalr – the first difference
of asset lending rate is used as the other measure)
We use Philippine remittance, banking, and BOP data from the Bangko Sentral ng
Pilipinas, time series quarterly starting 2000 to 2012 (n = 56 data points) and run four ordinary
least squares (OLS) regressions using the four combinations of variables and analyze the
resulting output. We are primarily concerned with the signs rather than the magnitude of effect
since the paper wishes to simply examine the direction of the relationship between variables.
Interpretation4
The results of the regression can be neatly summarized as thus:
Change in X variable Effect on Growth of rate of utilization growth of 1% increase in remittances Positive growth in both remittances and FDI cause bank
utilization to accelerate. growth of 1% increase in FDI
exchange rate depreciation As the Peso depreciates, utilization also accelerates
deposit rates Deposit rate hikes also cause utilization to accelerate.
growth of lending rates Lending rate hikes also cause utilization to accelerate.
4 For I(1) process, If L is price then the first difference of L = D(L) is interpreted as inflation. If Y is income, then first difference of income may interpreted as growth. The interpretation is that if inflation increase by one percent, on average the economic growth will increase/decrease by X percent and holding other factors is constant. For I(2) process, DD(L) may be interpreted as growth of inflation (which is the growth of the growth), if growth of inflation increase by one percent, on average economic growth will increase/decrease by X percent.
Change in X variable Effect on Growth of banking sector growth of 1% increase in remittances
Positive growth in remittances and FDI cause bank sector size to shrink
growth of 1% increase in FDI
exchange rate depreciation As the Peso appreciates, the banking sector grows
deposit rates Deposit rate hikes cause the banking sector to grow
growth of lending rates Lending rate hikes also cause growth in the banking sector
The regression results show that increases in remittances (and FDI) cause an increase
in the growth rate of the rate of utilization. Which may be seen as encouraging in terms of
OFW household participation; it does not however, ensure an impactful or even observable
magnitude. The second half of the results however, show that remittance (and FDI) growth
cause a deceleration of growth in banking size. This implies that accelerating growth of
remittances results in a smaller banking sector, which hints to the relationship established by
previous authors: remittances may act as an alternative to the formal banking sector.
It must be noted that the coefficients for exchange rate and measures of interest rate
(both deposit rate and lending rate) are not statistically significant.
Conclusion
It is now quite obvious that remittances are not a magic bullet. They are a force of
change to be sure, and they have localized impacts by providing much needed income to the
poor who cannot find employment in their own country. However, it could be so much more.
Even outside the financial sector, if properly harnessed, this resource could provide additional
funding to sectors that need access to it, acting as another reservoir of funds. As mentioned
by one of the authors above, entrepreneurial activity and investment in capital goods would
yield dividends.
On the other hand, if the financial sector was at a more developed and high functioning
state, then households could participate and boost the total resources available to the system
by several orders of magnitude. It can be argued that this may also have unintended
downsides, which is understandable, but it is nothing that cannot be solved by proper
regulation and vigilant oversight.
The current drive of the central bank to push for greater financial inclusion via several
financial literacy and financial advocacy campaigns is encouraging. It is also correct in pushing
for the development of micro enterprises that should grow into small and medium enterprises
if properly nurtured. On the other hand, this will prove to be futile if the national government
does not match this with complimentary programs.
As covered in the economic history of the Philippines, funding has been half of the
issue, the other half has been the encouragement of investment and the efficient execution of
projects that would stimulate the economy. Further, the government should find ways to lift
the average worker out of poverty as remittances can only do so much. Development of key
sectors such as manufacturing is critical to achieve success.