Commentary by William Pesek
Nov. 5 (Bloomberg) -- As Japan and the U.S. grapple with the ``R'' word, or recession, the Philippines is dealing with one of its own.
For Asia's 13th-biggest economy, the ``R'' word is remittances.
Roughly 10 percent of the Philippine population works overseas for lack of well-paid jobs at home. Their earnings support one of Asia's most vulnerable economies. In 2007, for example, overseas Filipinos sent home $14.4 billion, or 10 percent of gross domestic product.
There is good and bad news here. First the bad: The recession-bound U.S. is the Philippines' largest source of remittances from overseas nationals. The good news? Slumping U.S. growth, believe it or not.
The search for silver linings in Asia as U.S. growth drops is a challenging business. Yet there's reason to think that when this global crisis ends, people will no longer be the key export of the Philippines.
Gloria Arroyo hinted as much on Oct. 22 when the Philippine president said the nation may need a ``massive'' retraining program if events in the U.S., also its biggest overseas market, cause Filipinos to lose jobs at home and abroad.
``We will need, should there be a recession in the U.S., a massive skills upgrading and retooling service,'' Arroyo said at a conference in Manila.
Global Crisis
Too bad it has taken the worst global crisis since the 1930s to shake Arroyo's government out of complacency. Throughout the 2000s, the Philippines implicitly encouraged ever-growing numbers of its citizens to leave and support families back home. If not for immigration challenges, more Filipinos would be working in New York, Hong Kong or Riyadh.
The Philippines isn't the only government failing its people. For every doctor leaving Manila to become a nurse in Boston because the pay is far better, a young woman is leaving rural Indonesia or Sri Lanka to become a nanny or maid in London or Singapore.
Yet the Philippines gets the most remittances after India, China and Mexico. Its ``OFWs,'' or overseas Filipino workers, are often referred to as a secret economic weapon. In reality, the arrangement is a key weakness for the nation's 96 million people that's becoming apparent as global growth wanes.
Recession-Proof?
``The stark reality is that developing countries must prepare for a drop in trade, capital flows, remittances, and domestic investment, as well as a slowdown in growth,'' World Bank President Robert Zoellick said in Washington on Oct. 15.
Policy makers in Manila downplay the risks. ``Remittances are recession-proof'' because many overseas Filipinos are in medical care and ``professional jobs,'' says central bank Deputy Governor Diwa Guinigundo.
Arroyo also says Filipinos working abroad ``are in areas less sensitive to recession,'' including teaching, nursing, care- giving and information technology. Higher oil prices have fueled a Middle East construction boom that has resulted in a ``surge'' of remittances from there, she says.
If this global crisis worsens, it's not clear how many recession-proof industries there will be a year from now, if any. While the focus today is on hedge funds blowing up, it will soon be on Filipino nannies, engineers and domestic helpers losing jobs. That's why it is good to hear Arroyo talking about a so- called human-capital fund.
Future Prosperity
Far more investment is needed both to train Filipinos and keep skilled workers at home. The planned fund will amount to just 100 billion pesos ($2 billion). With unemployment at 7.4 percent, the second-highest level in the Asia-Pacific region, the Philippines must work much harder.
The $144 billion Philippine economy is a fraction of the almost $14 trillion U.S. one. Yet $2 billion is too small a percentage of GDP to expect the results the Philippines needs here. While money is understandably scarce, this is about the nation's future prosperity.
This isn't a moral judgment. The Philippines can no longer compete with China and India on a cost basis. The skills of its large English-speaking population are better suited to industries that rely on information and technology -- like the nation's big push into call centers and back-office-processing services.
Labor Force
Given high poverty rates, remittances make sense in the short run. The trouble is that the Philippines has never articulated a long-term term plan to attract back many of its best and brightest. The result is a brain drain that lowers the quality of the nation's labor force. The Philippines needs more of its human capital at home to raise living standards.
Money flowing in has an exponential effect on growth. It helps the government make debt payments, supports banks and boosts the retail, transportation, real-estate and telecommunications sectors. It's a vital stabilizer.
``Their overall impact on the economy is arguably much larger given the multiplier effect on consumption spending,'' says Ed Bancod, head of research at ATR-Kim Eng Securities Inc. in Manila.
The pain may already be beginning. Remittances were growing at a 25 percent year-over-year rate in July. In August, the pace slowed to 10 percent. As fallout from the global crisis heads Asia's way, inflows will continue slowing.
It's as clear a sign as any that exporting people like a commodity has its risks. If Arroyo works to reverse the tide, the Philippines could actually benefit from today's turmoil.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Manila at wpesek@bloomberg.net
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