The end of remittance-led growth?

 The disappointment is due not only to the contrast with 2010, a banner year of recovery, whose momentum people expected would be maintained; not only because people hoped political optimism and the trust in the new administration would be mirrored in steady economic advance; but also because growth in other countries has managed to be resilient despite global uncertainties — our quondam poor cousins Indonesia and Vietnam are slated to grow at 6-7% even in a bad year such as this.

Pundits tend to lay the blame on the Aquino administration for its alleged slow spending — as if more spending was all that was needed to accelerate growth. But considering government consumption makes up all of 10% of GDP, its slump reduced the three-quarter growth rate by at most two-tenths of 1%. Even the 10% drop in construction knocked off only about eight-tenths of 1%. The real killer was net exports (exports less imports), which went from being a small plus (adding 0.36 percentage point to growth in the first three quarters of 2010) to being a net detractor (slashing growth by 3.8 percentage points in the three quarters of 2011). If exports had at worst simply stagnated and imports remained the same, the three-quarter growth rate would have been closer to 5.5% rather than its actual 3.6%.

But all this merely exposes the strategic weaknesses and limits of an economy founded on remittances. Consumption, investment, and exports themselves are all heavily import-dependent with only weak links to the domestic economy. All this is fine as long as overseas deployment is rising and remittance-inflows are increasing. A rising tide raises all ships, after all, so that even with large import-leakages, a high growth of consumption sustained by transfers from abroad is still likely to support some domestic growth and employment, especially in services such as domestic retail trade, transport and communications. Even the less import-dependent parts of investment may make a showing, especially construction related to malls, residential real estate, etc.

This type of growth is supportable-up to a point-since the massive foreign-exchange inflows make the import-dependence possible to begin with. In what Philip Medalla, Raul Fabella, and I termed the “SM-economy,” overseas workers come home, flip their dollars and riyals into pesos to spend on Chinese-made toys and clothes and Japanese cars and motorcycles. From a foreign exchange viewpoint, this is just a wash. But overseas workers’ families also sustain shopping malls, send their kids to local schools, amortize houses and condos, and take domestic trips — aside from making innumerable phone calls. This one-sentence caricature enumerates all the known growth sectors of the Philippine economy.

The problem is that once deployment and remittances flag, the fuel for this type of growth also begins to run out and the engine sputters. While there is still no real-estate bubble (thank goodness), the demand for housing by overseas workers’ families is probably close to being topped up, as is the derived demand for malls. Even consumption demand has somewhat slowed, a fact reflected in the sharp drop in value-added in retail and wholesale trade.

Those old enough to have studied the Keynesian “accelerator” models will remember that investment depends not on levels but on changes in income. (These days, of course, one would say “anticipated” changes in income.) If “anticipated” changes in income and consumption are not large, and in light of the diminished purchasing power of overseas workers, investment is unlikely to make a large contribution to GDP. This is precisely what we see: moderate consumption growth combined with a sharp decline in capital formation, especially construction. This is not just a case of slow public spending.

The big difference between the Philippines and its neighbors is that the sources of domestic demand in the latter are more varied, and the web between the domestic economy on the one hand and consumption and investment on the other is far denser. A rise in agricultural incomes, say because of a commodity boom, is likely to be a more powerful stimulus to Indonesia’s domestic economy than a similar change in the Philippines, where a good part would probably leak out as imports of motorcycles and home gadgets. Agriculture in comparable countries is more diversified and less contentious (they solved their property-rights problems decades ago); the structure of demand is simpler and more homespun; and manufacturing is capable of supplying a larger part of domestic requirements. (Remember, the multiplier is inversely related to the propensity to import.) Where the sources of domestic demand are richer and deeper, the field for potential investment also becomes wider. Investment need not stall simply because the narrow middle class of overseas workers’ families begins to penny-pinch. For there will remain the varied demand from farmers, workers from industry and services. Only then does one get “buoyancy” in the midst of global crisis.

The remittances-led economy has served the country as a palliative for almost a decade now. But its limits are evident and it is time to move on. Nor is government oblivious to the need for this diversification. But removing the decades-old structural obstacles to investment in agriculture and industry is no easy task. How to finally end agrarian reform, promote massive agricultural research and extension, reform rigid labour laws, provide cheaper power, better infrastructure and logistics, promote commercial R&D-the list of to-do’s is endless. Predictably, the government’s measure in the interim has been to pick the low-hanging fruit, substituting its own for private spending, and highlighting sectors where structural obstacles and conflicting interests are less important, i.e., these tourism, mining, and BPOs. It is not wrong to do this-it is just not sufficient.

Contrary to the flavor of the current debate, the problem is not simply one of macroeconomic stabilization, which is solvable through larger or smaller doses of public spending. The challenge is how to move away from a comfortable but now-inadequate template and create productive internal nexuses that can serve as a basis for future growth. In this — as in many other things — time, past history, and current preoccupations are not on our side.