Where Does All the Money Go?

Remittances, Consumption and Corruption in the Philippines

Remittances mainly arrive from the USOne of the cruel ironies of Philippine national life is the reliance on remittances as an economic crutch. There have long been suggestions that the staggering amount of money flowing into the country from emigrants abroad – the Bangko Sentral ng Pilipinas puts it at US$14.4 billion for 2007 alone, or around 10% of GDP – is beneficial for domestic savings and economic growth in the depressed rural regions. That’s what University of the Philippines economist Ernesto Pernia argues in a discussion paper released earlier this month. But why is almost all of the country still dirt poor?

Pernia has part of the answer – most of the money goes to the relatively better off, who can afford to send a family member overseas in the first place. Another indication that something is amiss came from the World Bank chief in the Philippines, Bert Hofman, when he commented last week that there were “too little investments [sic] in this country”. Leaving aside investment by foreign companies, you might presume that the remittance wealth is trickling down into a modest amount of domestic investment, but that doesn’t seem to be the case.

In one way the government is acting in quite the opposite direction. Last month, President Gloria Macapagal-Arroyo launched a scheme that will enable overseas workers to sell franchised Filipino products and earn extra income. So the start-up investments will go to other countries and the export-earning equivalent in any increased remittances should be very small – most of these goods will pass between overseas workers on relatively low incomes.

But curiously enough, the National Economic Development Authority has quite a different viewpoint. Two weeks ago the acting director, Augusto Santos, announced his desire to expand the economy enough to bring overseas workers home.

The whole point is that small scale investment based on remittances just isn’t happening. But large scale spending is. Alvin Ng of the University of Santo Tomas in Manila argued just this point in a conference paper presented last year, although he called his evidence “anecdotal”. Bert Hofman of the World Bank was more direct: remittances were fuelling a “consumption-led economy”, as BusinessWorld put it.

Spend some time in the provinces and this becomes painfully obvious.

Bacolod’s Masskara Festival: are they happy behind the masks?SM, the country’s major mall operator, has been expanding aggressively into otherwise depressed rural areas. Let me give you an example of a city with which I’m familiar: Bacolod on the island of Negros. The so-called ‘City of Smiles’, housing both neat suburbs and a riverside slum rivalling the squatter areas of Manila, celebrated the opening of SM City last year. According to the Visayan Daily Star there are now an extra 60,000 square metres of consumer dreams: this in an area still reliant on a declining sugar industry run as a collection of feudal estates.

An interesting point made by the international observer mission stationed in Bacolod during the May election last year was that the

extreme conditions of poverty, wide disparity in wealth and income, large-scale unemployment, the existence of powerful land owning groups, provide a very disturbing context for the conduct of free and fair elections.

The consumption economy fuelled by remittances hasn’t reversed absolute poverty, and neither is it likely to given the stranglehold of wealthy landowners on the political process.

It could even be that remittances are increasing corruption. Yasser Abdih, Ralph Chami, Jihad Dagher and Peter Montiel released an IMF working paper on this topic at the beginning of the month. Based on a study of 111 countries, they tentatively argue that remittances could be diverting government attention from the creation of durable institutions and the provision of public services such as schooling and healthcare.

When a family in the Philippines, for instance, uses remittances to send its children through the catholic school system instead of the public system it relieves pressure on the government to create a better school system. Substitute one family for a thousand or even a million and you’ll get the point.

Fine, you might say, the market rules. But what if this lack of interest in providing services means that public money not spent is merely going into the private pockets of politicians? This is very much like the resource curse in Africa, which has effectively crippled economic growth and ruined lives.

It pays to remember that the concept of exporting Filipino labour rather than goods was the brain child of Ferdinand Marcos, one of the more corrupt leaders in world history. Former president Joseph Estrada, only recently released from house arrest for economic plunder after a dubious pardon, famously labelled overseas workers “modern day heroes”.

Manila is currently jumping with the now customary charges of corruption against President Macapagal-Arroyo. In her defence she has pushed the country into better economic shape than it has been for 30 years. But some of the mud is beginning to stick and the big question is how much better the situation could have been. We also need to ask more about the extent to which capital inflows from remittances might have directed attention away from an otherwise parlous state of affairs.

Sakadas - contracted seasonal cane cuttersSomewhat fittingly, Macapagal-Arroyo’s husband – implicated as an intermediary in the latest scandal – is a large hacienda owner refusing to redistribute illegally held land near Isabela, just to the south of Bacolod.

There’s a fine line between reform and reinforcement in this puzzling world.

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