IMF warns on dollars remitted by overseas Filipinos

By NORMAN P. AQUINO, Senior Reporter

Dollar remittances from workers overseas may be bad for the economy since they create "moral hazards" for individual recipients as well as the government.

The International Monetary Fund (IMF) said that for one, dependency on these inflows induced recipient families to use them as substitute for labor income and thus lowered their work effort.

Governments, too, may choose to ignore economic imbalances and avoid politically costly steps to address them in the hope that remittances will insulate them from negative consequences.

"Our empirical estimations reveal considerable evidence both that remittances tend to be compensatory in nature and that they have negative effects on economic growth," said Ralph Chami, Connel Fullenkamp and Samir Jahjah in their paper, entitled: "Are Immigrant Remittance Flows a Source of Capital for Development?"

The authors noted that remittances differed greatly from private capital flows in terms of their motivation and effects. Remittances, at least currently, did not appear to be a significant source of capital for economic development, they pointed out.

Mr. Chami is deputy division chief while Mr. Jahjah is an economist in the IMF Institute. Mr. Fullenkamp is a visiting professor from Duke University's Department of Economics.

Money sent by overseas Filipino workers (OFW) to their families grew 4.8% in eight months to August to $5.063 billion from $4.832 billion in the same period last year.

OFW remittances are a major source of regular foreign exchange income, which props the peso's value and spur economic growth. They are a major fallback for the country's slow economy.

They also help the country raise more foreign currency to pay for imported necessities such as oil and fuel, food and farm products produced abroad, and imported parts and components used by local industries.


In their study, the authors noted that while money sent by overseas workers were meant to help their families during bad times, they also created incentives that led to moral hazard problems.

Because recipients of remittances are price takers, they do not see that this raises the probability that output will be low and they will need more remittance transfers in the future.

Local firms where families of the overseas workers work may also try to reduce fringe or insurance-type benefits of wage contracts or even favor hourly wage over long-term contracts.

"No matter how the market reacts to the moral hazard problem, the result will be risk shifted back to the households, and less efficient production," the IMF paper said.

Governments of countries that receive big remittances may also succumb to the so-called moral hazard.

Since remittances provide a major source of foreign exchange for many countries, it is likely that in their absence, these countries' exchange rates and in their domestic economic policies will come under greater pressure.

Therefore, the government may be able to ignore imbalances and, worse, it can intentionally pursue politically beneficial but economically unwise policies, in the expectation that remittance flows will continue to insulate the economy from negative consequences.

"Such policies would likely exacerbate the conditions that led to large scale migration and remittance transfer, leading to heavier dependence on immigrant remittances and decreased effort on the part of domestic workers, firms and entrepreneurs," the IMF study said.

But a central bank official said that while the IMF analysis may be true for individual recipients, the government did not rely on OFW remittances to fill up any shortfall in dollar receipts from other sources.

"They cushion the impact of any unexpected shortfall, but they are not expected as a substitute," the Bangko Sentral official said, noting that for this year, the central bank had projected flat growth for OFW remittances.

The official also noted that while it was true that remittances were used primarily to buy goods, private consumption was still the primary driver for economic growth during the 1997 Asian financial contagion.

The IMF paper said there was evidence that remittances moved countercyclically and that they did have a negative impact on output growth.

The IMF paper said the prospect of converting remittances to development capital was even more daunting if overseas workers' remittances were thought of as returns of human capital across national boundaries.

In other words, sending family members abroad may already represent the family's main investment project.

If this is the main motivation behind migration, then it implies that remittances are intended to be a main source of family income and will be devoted primarily to consumption.

IMF said transforming remittance flows into development capital would require changing the very nature of remittances, from compensatory transfers to investments.

"This, in turn, implies that policies would have to convince remitters and their recipients that they would be better off by investing a greater portion of these flows into productive investments," the IMF study said.

But this can be a difficult task, given the economic circumstances of most immigrant-sending households.

IMF said some way around the moral hazard problem would have to be found. The problem lies in the fact that there was no way to monitor how recipients use the money sent in, it said.

The Fund noted that remittances could potentially be channeled through microfinance institutions, development and multinational financial institutions that would play the role of delegated monitor acting on behalf of the immigrant.


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