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and Inequality The Widening Gap: An Economists View of Labor Export and Inequality Posted on December 23, 2012 by WEB ADMINISTRATOR, Written by Andre Encarnacion in UP Forum Prof. Ernesto Pernia of the UP School of Economics shares his perspective on the economic implications of labor export. On May 1, 1974, just a few years after the declaration of Martial Law, President Ferdinand Marcos enacted Presidential Decree No. 442. Also known as the Labor Code of the Philippines, one of its goals was the careful selection of Filipino workers for the overseas labor market to protect the good name of the Philippines abroad.1 For a number of experts, these words would become the foundation of what is today an aggressive overseas employment program by the government. Supposedly a stopgap measure at that time against rising unemployment and the lack of sufficient foreign exchange earnings, overseas labor migration would grow into a phenomenon that has made the country one of the worlds largest sources of foreign workers. After the enactment of the Labor Code, three agencies were created to support overseas labor: The National Seamen Board (NSB), the Overseas Employment Development Board (OEDB), and the Bureau of Employment Services (BES).2 Then, in 1982, President Marcos institutionalized the deployment of Filipino workers abroad with the issuance of Executive Order No. 797. This EO turned over the functions of all the three agencies to the Philippine Overseas Employment Agency (POEA). It is this same agency that has since regulated and protected what many consider to be the countrys most valuable export today. The question many Filipinos have asked since those days has been: was it worth it? Few can deny the benefits of remittances to both families and the economy. A World Bank report in 2010 stated that the Philippines was by then the worlds fourth-largest recipient of overseas remittances. These contributions amounted to 12 percent of the countrys GDP a year before. No wonder that World Bank lead economist Dilip Ratha called them a lifeline to poor countries like the Philippines.3 These benefits come with real risks and costs. The lack of jobs and low wages have led millions to seek work abroad, where many are abused. The psychosocial costs borne by both the migrant workers themselves and those left behind are well-documented. In response to the execution of Flor Contemplacion in 1995, Republic Act No. 8042 or the Migrant Workers Act of 1995 was enacted to protect migrant workers from abuse. Despite this and subsequent initiatives to protect Overseas Filipino Workers (OFWs), cases of abuse that sometimes lead to death have persisted. According to Migrante International, the conditions of OFWs have continued to worsen under President Benigno S. Aquino with thousands of workers languishing in jails or falling prey to illegal recruiters.4 Are the economic gains we receive from international remittances worth this heavy toll? To answer this, at least from an economic standpoint, we must look into how exactly remittances affect the whole economy, especially the poorest of the poor. If remittances could be shown to improve the lives of the countrys poorest, lifting them out of poverty, then perhaps a case could be made in favor of the countrys over-reliance on overseas labor, despite its concomitant tragedies. UP economics professor and former ADB lead economist Ernesto Pernia, however, had a less optimistic assessment.

Not a Trivial Difference Have remittances resulted in more inclusive (poverty- and inequality-reducing) economic growth? Pernia asked in an article early this year. For him, there is little doubt that these remittances have benefited everything from households to regions. He asserted that despite criticisms, the impact of remittances on poverty as a whole is not trivial. Citing data from 2009, Pernia said that remittances actually accounted for 3.8 million people getting out of poverty. One would think from such statements that the Philippines dogged reliance on remittances could, at its core, be sound economics. Surely a phenomenon that positively affects the countrys poverty incidence could lead to a more just and humane society in the longer term. The truth, unfortunately, is not so simple. And Pernia had the figures to back this up. A closer look at the data reveals that the poorest of the poor were hardly touched, he said. He also revealed that despite aggregate poverty reduction due to remittances, both the poverty incidence and number of poor people rose over the period of 2003-2009. Why would this be the case? In recent years, there has been much hype about the surge in remittances, Pernia said. It has boosted the peso, eased the debt burden, tamed inflation and contributed in general to a rosy picture of the economy. These boons have meant that labor export, far from becoming a cause for concern for the government, has even been encouraged. The countrys over-reliance on this boon is reflected clearly in the data. Despite trailing India, China and Mexico in overall remittances received, the Philippines has the highest figure among the four relative to GDP. With a massive amount flowing in to increase the purchasing power of local households, it is a wonder that the number of Filipinos in poverty remains astronomically high. What is even more troubling is the fact that the gap between the rich and the poor seems to be widening. Biting the Bullet In Pernias study Is Labor Export Good Development Policy? he sought to find the effects of international migration and remittances on individual households, human capital investment, poverty and regional development. With respect to remittances, he found that their effects could be assessed on three levels: the micro, the meso and the macro. On the micro level, one of the most disturbing issues is the possibility that members of the recipient families may reduce their work effort, depleting the local pool of workers. Evidence shows a decline in labor force participation among said recipients, with gender being determined by whether the husband or the wife was the one left at home. On a brighter note, however, Pernia cited research from Yang (2007) and Tullao, Cortes and See (2004) to show the advantages of remittances, at least on this level. For those overseas workers who experienced favorable exchange-rate shocks, the remittances they sent back helped their respective households to reduce child labor, increase spending for education and acquire more durable goods. Remittances also generally led to more human capital investment, particularly in health and education. Going a level higher, however, he discovered that the more developed regions in the country sent out more OFWs than the less developed ones. This led to more remittances being sent to these regions rather than their less developed counterparts. On the other hand, OFWs from the poorer regions tended to remit more.

Why did this happen? Pernia mentioned two theories to explain this behavior. The first is the possibility that the increased altruism of OFWs from these regions towards their less-advantaged families drove them to send more of their paycheck back home. The second explanation, not in variance with the first, he said, is that the selection of OFWs from the less developed regions tended to come from higher skilled, thus higher-paying, professions. But regardless of whether they came from higher-skilled professions or not, the lions share of the remittances is still being funnelled to more developed areas of the country which is (n)o wonder why the countrys regional development seems lopsided. Lastly, foreign exchange is the name of the game on the macroeconomic level, with remittances providing a shot of this much needed asset to developing countries. For countries like the Philippines, that are, in his words, beset by fiscal deficits, external debts, persistent trade imbalances, and scan t foreign direct investment, remittances are a godsend. Rather than the typical increase in prices that comes with inflows of foreign exchange, however, Pernia observed that the countrys reliance on imports means that the reverse happens. Moreover, he added, these inflows may spur a real appreciation of the exchange rate, thereby constraining the development of export-oriented and import-competing industries. One of the most troubling aspects of remittances is that, in Pernias view, the advantages they provide lull the recipient country into complacency with respect to pursuing important reforms. For one thing, migration seems to have helped window-dress the employment problem. It has made it easier for the government to avoid biting the bullet of hard policy reforms. The Short End of the Stick To better view the effect of remittances on poverty, Pernia studied households with and without remittances. Using data from the Family Income and Expenditure Survey (FIES), Survey of Overseas Filipinos (SOF), and Labor Force Survey (LFS), he divided them by income and looked into the specific increases due to remittances and how poorer and richer households stacked up against each other. He also used the same data to see how remittances affected the incidence of poverty across his sampleparticularly how many households were able to breach the poverty threshold with this added boon. What he found out was that the average amount of remittances received by all households increased with income in both 2000 and 2006. That means that the higher you are on the scale, the more you are likely to have your income significantly increased by international remittances. As seen in Table 1, his survey of families in the year 2000 that both did and did not receive remittances revealed that remittances raised the income of those with the lowest incomes by a mere 1.1 percent. This percentage increased as incomes rose, such that when you reach the highest bracket, Pernia found that remittances raised income by nearly thirteen percent. Similarly, in 2006, the gains of the poorest households were scant at best, with remittances only accounting for a 1.4 percent increase in income. Households with the greatest incomes, however, whose average incomes without remittances are more than ten times that of the former, raised their incomes by nearly sixteen percent. When taking into account how large the disparity of their base incomes is in the first place, the lopsided relationship between the two becomes even clearer. The difference is even more pronounced when Pernia focused solely on households that received remittances. Table 2 reveals that while at the lowest level, only about 7 percent of household received remittances in 2006, a whopping 44.7 percent of households at the top received remittances for that

same year. A similar asymmetrical relationship between the highest and lowest divisions is also evident six years before. A closer look at the numbers indicates that while the average income from the poorest households of nearly P44,000 was raised by 18.7 percent in 2006, households with average incomes more than ten times that amount at the opposite end of the spectrum further increased their incomes by 35 percent. The data also reveal that there were far more numerous rich households that benefited from remittances than there were poorer ones. Persistent and Worrying What are the effects of remittances then on poverty reduction? In the absence of remittances, said Pernia, there would have been more than 28 million persons, or 37 percent of the total population considered poor belonging predominantly to the first two quintiles. Despite this good news, Pernia still discovered that though remittances had a significant effect on poverty, the poor benefit from them far less than those from richer households. In fact, Table 3 reveals that in 2000, remittances practically wiped out poverty in the top three quintiles in households that received them, while the bottom quintile was barely touched. In 2006, on the other hand, remittances contributed to lowering poverty incidence from about 28 percent without remittance to 12 percent with remittance. Compared to the richest households, however, which experienced an almost complete eradication of poverty with remittances, the poverty incidence among those with the lowest incomes, was much less significant, reducing by only 14.5 percent. Despite some of the positive effects on poverty reduction that the numbers imply, the reality remains that the welfare-enhancing effect of remittances rises consistently with income quintilea persistent and worrying trend. International remittances appear to raise average incomes for all households for all income groups but more so for the richer households than for the poorer ones, Pernia concluded. Despite the perception that international remittances tend to uplift many of the poorest households, the reality is that the higher you are on the scale, the more likely you are to be a beneficiary of remittances, and receive bigger amounts of them. In fact, Pernia discovered that domestic remittances are more welfare-enhancing for lower-income households than international remittances. First quintile households managed to raise their average incomes in 2006 by 17.4 percent with domestic remittances compared to only 7.7 percent for the fifth quintile. And though all things being equal, international remittances do significantly enhance incomes, raise spending, and help lift households out of poverty; the overall increase in regional incomes seems to benefit higher income households more than their counterparts on the lower end of the scale. A Tale of Diverging Twins We must now return to the initial question: Is this trajectory a sustainable one for the country? For Pernia, the answer was a resounding no. (I)t would seem that labor export cannot be relied upon as a policy for reducing poverty, redressing income inequality and, for that matter, fostering the countrys long-run development, he said. He even predicted that the global labor markets demand for higher level professional and technical workers could result in a persisting social inequality. When combined with the aforementioned psychosocial costs and the brain drain caused by the migration of more skilled members of the

workforce, the future does not exactly look rosy. Pernia saw the countrys current stance on migration as dangerous to the countrys future human capital requirements. The human capital industry has its limits. Pernia compared the Philippines to its Asian neighbors South Korea and Thailand to highlight exactly where he thinks our country got it wrong. In contrast to the latter two, whose governments adopted labor export as a temporary measure, the Philippines has not pursued the necessary reforms on both the labor demand and labor supply sides to enable a strong and sustained path of growth. A tale of diverging twins is how Pernia described the contrasting fates of Thailand and the Philippines. While in 1970, both had populations of about 37 million, growing at 3 percent annually; in 2010, Filipinos already numbered around 94 million, increasing about 2 percent annually. In contrast Thailand had about 67 million, with an increase of just 0.6 percent that year. Furthermore, poverty incidence in the Philippines stood at 26.5 percent at the timeall this while remaining one of the largest rice importers in the world. Poverty in Thailand on the other hand stood at 7.8 percent and it is, in contrast, one of the biggest rice exporters. The actual story may be more complex than the numbers show. But there is little doubt, especially for Pernia, that a long hard look at our countrys policies is needed if we ever hope to make up for lost time. The views and data in this article were largely taken from Prof. Ernesto M. Pernias articles, Do remittances foster inclusive growth? published in BusinessWorld, Introspective 2 April 2012; and, Is Labor Export Good Development Policy? (UP School of Economics Discussion Paper, October 2008), with permission from Prof. Pernia. Email the author at forum@up.edu.ph