Overseas labor migration and remittances continue to be very important features of the Philippine economy — but less and less so.
Although the country is still adding to its stock of overseas Filipino workers (OFW) and remittances inflows continue to grow, these have been growing at slower rates, and the emergence of the business-process outsourcing (BPO) sector and the nascent broadening of the sources of Philippine growth appear to show a path towards even less dependence on migration and remittances in the future.
Recent pattern of overseas labor migration and remittances
According to data from the Philippine Overseas Employment Administration (POEA), from 2012 to 2015, OFW deployment grew less than one percent per year and changed little from 1.80 million in 2012 to 1.84 million in 2015 (Figure 1). Previous to that, from 2004 to 2012, OFW deployment grew at an average of 8.6% per year. OFW deployment in 2004, at 933 thousand, was only about half of the total in 2015. As a percentage of the country’s working age population, OFW deployment rose steadily from just 1.1% in 2004 to peak at 1.9% in 2013, but has retreated slightly to 1.8% in 2015.
The POEA classifies OFW deployment into three groups: land-based new hires, land-based rehires, and sea-based workers. The data shows that the recent decline can be attributed mainly to the substantial drop in land-based rehires (from 1 million in 2013 to 922 thousand in 2015), which historically has accounted for more than half of total deployment. This is likely due to a combination of two factors: destination countries becoming stricter in the amount of time temporary foreign workers are permitted to stay continuously in their jurisdictions (such as in South Korea); and more OFWs opting not to renew their contracts because of unfavorable terms, with pay little different from what they could get in the Philippines after taking costs into account (such as in some parts of the Middle East resulting from the drop in oil prices).
Remittances tell more or less the same story. From 2004 to 2013, according to the Bangko Sentral ng Pilipinas, overseas Filipinos’ cash remittances (in current terms) grew at an average annual pace of 12.1%, or from US$8.6 billion in 2004 to US$21.4 billion in 2012 (Figure 2). In contrast, from 2012 to 2016, cash remittances grew at only 5.9% per year and were US$26.9 billion in 2016. The growth of remittances in the past two years has been the lowest observed since 2002.
It is possible that overseas migration and remittances may have already peaked in terms of their impact on the Philippine economy.
This is not to say that remittances are no longer important. The protracted robust growth of the residential construction sector is financed in large part by overseas Filipino money, resulting in many cases of already-purchased but still-uninhabited condominium and townhouse units. In addition, according to the Philippine Statistical Authority’s (PSA) Family Income and Expenditure Survey, in 2015 about 5.8 million Filipino households (or 27% of total households) received at least some amount of remittances, and of these 1.2 million households relied on remittances from abroad for more than half their total household income.
Remittances still play an important role in supporting private consumption in the country, but certainly not as important as before. The past four years which have witnessed slower remittances growth has also witnessed the four consecutive years when private consumption growth in the country has been the highest since 1954-1957, based on PSA data. Ditto for overall GDP growth, which has also exhibited the highest four-year growth stretch since the late 1970s. And despite slower growth in OFW deployment in recent years, the unemployment rate has been at a historic low (of course with the caveat that unemployment rate before 2005 was computed differently).
How has the economy managed?
Two developments have allowed the economy not just to survive but even to thrive despite the slowdown in remittances growth. These are the resurgence of industry, in particular manufacturing, and the continued expansion of the BPO sector.
From 2011 to 2016, the industrial sector grew at an average of 7.8% per year, the highest 5-year growth spurt the sector has experienced since 1980. The years 2012 to 2015 were also the first 5 consecutive years since 1980 that the industrial sector was able to grow at greater than 5% per year. So not only has growth of the sector been high, there is evidence that it is being sustained. Manufacturing, which comprises 68% of industry, grew 7.3% per year over the same period, even higher than the 6.9% annual services sector growth in the same span.
Business process outsourcing is subsumed in the national income accounts under the ‘Real Estate, Renting and Business Activities’ subsector. This subsector has averaged 7.8% growth in the past 5 years, and has been growing consistently above 6% since 2010. At their current paces of growth, export revenues from the BPO sector could exceed overseas remittances within the decade.
Of course, industry and the BPO sector have not developed independently of overseas migration and remittances. Robust domestic consumption spurred by overseas remittances has likely played a crucial role in boosting the industrial sector, in particular manufacturing and construction. Meanwhile, the desire of many families to have a member migrate for work has resulted in large investments in tertiary education and the relative abundance (in terms of the needs of the country) of college graduates, which has made the Philippines an attractive destination for outsourcing companies, among other reasons.
A recent master’s thesis in the University of the Philippines School of Economics by Ms. Clarissa Arellano titled ‘Can the IT-BPM industry be an alternative for Filipino migrant workers?’ found that BPO workers are more closely linked in terms of socio-economic characteristics (age, education, etc.) to OFWs compared to workers in other broad sectors, and if employment in the BPO sector were not available, many would likely compete for overseas jobs.
Impact on poverty
The shift from overseas labor migration towards BPO employment is not likely to have much direct or immediate impact on poverty reduction. This is because bulk of the employed in the BPO sector are college graduates who are unlikely to have come from poor households. A study by Ducanes and de Dios (2016) estimated that 62% of BPO employees are college graduates, and another 24% are college undergraduates, and that, moreover, only one percent come from households in the poorest two quintiles based on per capita income, using PSA’s household surveys. The immediate impact on poverty, if any, is more indirect, such as via increased demand for goods and services (restaurants and spas, for example) which could then spur employment for the poor.
[Side note: The impact of free tuition in state universities and colleges (SUCs) on the college graduation of the poor (and thus employment in the BPO sector or other sectors that require high education) is not as straightforward as it may appear. Although it will reduce the cost of college education for the poor, it may also lead more of the nonpoor to compete for slots in SUCs, and thus end up reducing the poor’s access to SUCs, if there is no increase in admissions and assuming at least some of them are more qualified based on admission requirements.]
The resurgence of manufacturing, however, especially if further sustained, could have a greater impact on poverty. A high school diploma is the modal educational requirement in manufacturing, and many of the poor, especially the younger population, have achieved this level. In addition, manufacturing employment, especially for companies in the export sector, typically pay significantly more than the minimum wage.
Overseas employment outlook
Demand for overseas employment will among Filipino workers will not go away, although the country’s improving economic prospects and expanding employment opportunities should lead to some abatement. But average wage in the country remains just a fraction of those in developed countries (one-eighteenth that of Singapore according to an ILO study), and the working age population is still increasing while those in many migrant-receiving developed countries are declining. Even at its current pace of growth, the Philippines will take more than a decade to reach the current per capita income levels of Malaysia and Thailand.
But opportunities for labor migration will not be as abundant. As the pace of global economic growth slowed down since the global financial crisis, so has the outlook towards migrants, and not just in the US. During times of economic difficulty it is fairly common for native workers to treat migrants as competition rather than complement (doing work that native workers cannot or are unwilling to do). Low oil prices has already led to a slowdown in deployment to the Middle East, traditionally the biggest destination market for OFWs.
Among aspiring OFWs, low-skilled workers are more likely to be affected by weaker demand and competition from other migrant-sending countries. Filipino domestic workers in Hong Kong face competition from Indonesian domestic workers, for example, and in fact there are now more Indonesian than Filipino domestic worker in the territory. Destination countries, including the US most recently, are putting greater emphasis on skills-based migration. Even recent developments in the country, such as the Marawi siege and confirmation of the presence of ISIS-affiliated terrorists in the country are likely to add to the difficulty of the country’s lower-skilled workers in obtaining working visas abroad.
Much has been written about the perceived impact of greater ASEAN integration on the Philippine economy. But it appears unlikely to have much of an impact on OFW deployment, except for a handful of high-skilled occupations and only then to a very limited extent. Mutual recognition arrangements are supposed to be the tools to facilitate cross-border skilled migration across ASEAN countries, but the great heterogeneity of educational and training institutions not only across countries but even within countries will make this operationally very difficult to implement. To date, there are only ASEAN MRAs in eight professions (engineering, nursing, architecture, surveying, accountancy, medical practitioners, dental practitioners, and tourism professionals), and they have not resulted in any substantial migration across ASEAN countries. In the first place, the migration of professional and technical workers make up only around 11 percent of new OFW deployment, and that is to all destinations.
The ASEAN Declaration on the Protection and Promotion of the Rights of Migrant Workers signed by heads of state in Cebu in January 2007, potentially could have a greater impact on lower-skilled migration. But more than nine years later, there is still no agreement on the legal instrument which was to operationalize the Declaration because of conflicting interests between ASEAN labor migrant-sending (which includes the Philippines) and labor migrant-receiving countries. Receiving countries have been reluctant to commit to a legally binding document, whereas ASEAN sending states, in contrast, continue to push for an expansive legal document covering also the families of migrant workers as well as irregular or undocumented workers.
Conclusion
Even as President Duterte has promised to establish a separate Department of Overseas Filipino Workers in the near future, it is possible that the Philippine economy has already started to move away from over-reliance on OFW deployment and remittances. Regardless of the slowdown in deployment, the stock of OFWs will remain high, and so there still has to be continued focus on advancing their rights and their protection in destination countries, whether via bilateral or multilateral agreements with destination (and sending) countries, through the provision of better pre-departure training, and greater support at destination such as via greater presence of labor consulates. Whether a separate department is necessary to accomplish these is an open question that needs further study.
The shift towards business process outsourcing is not without its risks. It is subject to competition from other countries and to technological developments, such as automation. But so far it has been a large positive for the country in terms of creating better economic opportunities for the highly-skilled and reducing the pressure for them to migrate to get well-paying work.
What appears like the revival of industry, especially manufacturing, has likewise been a large positive, in particular because it is more broadly shared across workers of different skill levels. There is a need to look more deeply at the data but it may be an important reason for why official poverty incidence was observed to decline rapidly from 2012 to 2015. Like business process outsourcing, it is also subject to possible disruption from automation, not to mention completion from other countries.
Overseas migration and remittances have played a critical role in keeping the economy afloat and stabilizing it even in periods of internal and external crises. It is too early to say for certain but the Philippine economy might be turning a new leaf, which comes with its promises and possible pitfalls.
Note: The author was assistant professor at the U.P. School of Economics at the time this article was written. It is part of the Asian Center Bugkos Research Program which is supported by the Emerging Interdisciplinary Research Program of the University of the Philippines.
