Faulty Predictions of Falling Philippine Remittances

♠ Posted by Emmanuel in , at 8/20/2009 03:06:00 AM
Many are predicting that remittances to less-developed countries will fall in 2009 for the first time since 1987. This phenomenon is attributed to the decline in employment opportunities abroad as destination countries have undergone economic slowdown. Worker's remittances are, of course, a significant part of external funding for many LDCs, having long outstripped official development aid as a source of foreign exchange. For several countries, remittances also exceed foreign direct investment. With predicted falls in remittances, it is possible that some LDCs may suffer adverse balance of payments consequences.

The Philippines is often identified as a country of emigration, sending well over a million persons overseas to work annually. Moreover, it is the fourth largest recipient of remittances after China, India, and Mexico. It is no exaggeration to say that these inflows have become a foundation of the local economy in terms of generating consumer spending and guarding against BOP shortfalls.

There is thus no surprise that the Philippines has been expected to suffer from a sizable fall in remittances. Among those predicting a decline are the usual (subprime) suspects: HSBC, the Royal Bank of Scotland, and Citigroup. The IFIs--World Bank and IMF--also have similar expectations. Dilip Ratha, widely known as the authority on remittances, expects a 4% decline in remittance inflows. Notably, even Nouriel Roubini's RGE Monitor is in agreement that Philippine remittances will decline.

However, the methods all these entities use is not very sophisticated by their own admission. I have been at a conference where Dilip Ratha spoke. He explained how he arrived at his predictions. Basically, it involves establishing what percentage remittances to a source country are of a destination country's GDP. Next, inflows to a source country are projected by multiplying the percentage arrived at against the predicted GDP in the destination country for 2009. Unsurprisingly, using such a formula yields the negative expectations all these banks, IFIs, and research groups have as a function of declining economic activity in most destination countries.

This unanimity would be all well and good if it were not for remittances to the Philippines, er, increasing in the first half of 2009. Moreover, in not a single month has there been a year-on-year decrease in remittances. RGE casting aspersions on official predictions of a slight increase in remittances have proven to be wide of the mark thus far. While the year isn't over yet, trends are certainly not in the pundits' favor. From the Bangko Sentral ng Pilipinas (BSP):

OF Remittances Up 2.9 % in First Half at US$8.5 Billion (08.17.2009)

Remittances from overseas Filipinos (OFs) coursed through banks reached
a record high of US$1.5 billion in June 2009, posting a year-on-year growth of
3.3 percent. This positive development brought cumulative remittances for the
first half of the year to US$8.5 billion, indicating a 2.9 percent increase from
the year-ago level. Remittances from sea-based and land-based workers posted
gains of 4.5 percent and 2.5 percent, respectively.

Once again, this is likely another episode of excess hubris familiar in development history of (Mostly White) People In Rich Countries Writing About What's Happening In Poor Countries Who Don't Really Understand What's Going On There--particularly so in the case of the subprime-loving banks' research. HSBC, after all, expected a 20% decline. In my blog musings, I actively try to avoid this sort of Western bias by drawing on my personal experience of working in both worlds--both developing and developed. We don't need more (Mostly White) People In Rich Countries Writing About What's Happening In Poor Countries Who Don't Really Understand What's Going On There demonstrating this fact.

In their defense, the data on migration and remittance flows is not as comprehensive as would be desired. Nevertheless, there are blind spots that those making these predictions would be well advised to consider:

  1. How do countercyclical flows affect remittances to LDCs? There is a fairly large literature on remittances to LDCs increasing in times of difficulty. That is, emigres send back more money to their relatives when times are tough. That none of the models used by the various pundits make use of this literature is regrettable;
  2. What skill level do migrants from a particularly country have? The Philippines has made it a national policy objective to upskill its migrants to, among other things, help ensure that they aren't gotten rid of in the first instance in highly cyclical trades like basic construction;
  3. How adaptable are migrants to changing situations? Emigres who have a broad skill set may be more valued in being able to shift their tasks based on prevailing economic conditions;
  4. Related to the (2) and (3), what industries are migrants working in? The Philippines sends a lot of nurses, doctors, and other health workers. With the imminent geezerization of any number of Western countries due to demographic trends, poor economic times do not stop the aging process that drives demand for these health workers.

The subprime mess was built on a premise of ever-rising home prices. Similarly faulty logic attends to predictions of a fall in Philippine remittances that largely gloss over the four considerations identified above. Remittance inflows are not a mechanistic function of falling GDP in destination countries and I hope this episode imparts another lesson alike that made by the subprime debacle on economist types.

For the record, I never made much of these pundits' so far inaccurate estimates.