Saturday, March 21, 2015

Foreign Aid 16: ADB on OFW Remittances

A news report last Wednesday, March 18, 2015. I think the ADB President, Takehiko Nakao, is wrong here. OFW remittances are private funds, 100% of it, not PH government or ADB fund. Why would he suggest that remittances "be intermediated for public investments such as infrastructure"? 

Remittances by Overseas Filipino Workers (OFWs), some $25 B last year, are several times larger, and sevveral times more useful, than foreign aid money, WB + ADB + USAID, etc. combined. Foreign aid is government to government. That is why foreign aid is often tainted with corruption and wastes. Remittances, like trade, is people to people, direct. Thus, its use is more prudent, less wasteful, more productive.

When an OFW sends money to repair their old house, or build a new, bigger house, it is "for development" as it creates lots of jobs at the grassroots, at the barangay and municipal levels. Construction workers, hardwares, furniture shops, local foremen and architects, etc. Money is received and used/consumed by the people, direct. No middlemen like bureaucracies that appropriate, disburse, monitor the money.
Five economist friends made good comments and reactions.

1. Jun: the very tight (BSP) regulations on banks like adopting of basel 3, stringnet KYC, AMLA, FATCA rules which appear to be motivated by protectionism that our OFWs end up remitting through undercapitalized couriers, Pawnshops and other similar entities instead of safe, well capitalized and more efficient financial institutions in the private sector. Relatives of OFs claim their money from couriers located in malls end as (mall) spending (instead of saving).

2. Joey: It depends Noy on what is "intermediated" re private funds. If it is designed like PPP where remittances are invested voluntarily, then it is still a private decision and a private fund. The process and outcome how this will come out is debatable. I'm just referring to remittance as private funds.

3. Patrick: A few bitcoin companies are realizing the PH remittance market and started to offer bitcoin remittance. Check, and Completely bypasses BSP. offers bitcoin conversion into cash via ATMs.

4. Adora: hold your horses, Noy. re-read the article. no mention of OFW remittances being treated as public funds. these will remain private. intermediation is to be done through financial inclusion (i.e., developing investment products where OFWs could invest on). it had been tried in the past through diaspora bonds but not many OFWs were able to invest (i.e., not financially inclusive enough) due to low financial literacy, among others.

5. Teresa: Noy, if the remittances are deposited in the financial system, then they can very well be intermediated. Ikaw naman - Econ 121 yan. Money and Banking.

I thanked them all for their good points. My rejoinders:

(1) It is a valid observation by Jun. More banking and financial regulations by the government (BSP in this case) make the regulated players to pass the cost of additional bureaucracy to the public -- in the form of more papers to fill up, higher bank charges. The less regulated but undercapitalized players like money couriers can act guerilla type and have many outlets, like public markets and malls. So many OFWs send their money to these couriers (LBC, Cebuana, Palawan, Western Union, etc.). The temptation for instant spending is higher if one is inside malls or public markets. And even if we assume that it is a "non-productive" spending, to eat and buy at malls, it is still the households who benefit. It may just be a once a month treat at Jollibee or McDo.

(2) On "Spending these "expended" dollars in consumables will be inflationary, but spending in development infra maybe not." may not be true. During barrio or city fiesta for instance, local and micro entrepreneurs anticipate high consumption of pork, chicken, cattle, etc. so they produce these farm products with target harvest period on those 2 or 3-days of fiesta. High household spending fueled by OFW remittances do not create permanent inflationary pressure because local supply of consumables also rise. High supply meets high demand, the price remains at its old equilibrium point.

(3) It is another proof that as government regulates more, the cost of regulations and bureaucracies are ultimately passed to the public. So other players sprout to evade regulations while offering more ease, less cost to the public.

(4) and (5) There is something wrong if ADB chief thinks that current spending by OFWs and their families are not "for development" and that "remittances should be channeled to funds that would contribute to economic development".

a. Most spending by OFWs currently are "for development" already. Like having a new, bigger house, buying a new agri or residential land, or a new tricycle or jeepney, or sending kids to more prestigious schools.

b. Most of OFW remittances are channeled to the formal banking system already. "Cash remittances Filipinos coursed through banks grew to $1.814 billion in January from $1.804 billion a year earlier."

So what is that something new that the ADB head suggests, at least from that news report? It seems nothing. Now if he suggested that PH income taxes should drastically be cut from 32 percent down to 22 or 12 percent, that is really new. Many Filipino professionals leave partly because their take home pay here is small, only 68 percent is left and from that, various consumption-based taxes and fees are further collected -- VAT, excise tax, property tax, vehicle registration tax, etc.

So Mr. Nakao is barking at the wrong tree. If the goal is "more development" for the country and OFWs and their families here, the bigger problem is not with remittances and how they are sent or spent here. The bigger problem are PH government policies, which are partly supported by foreign aid like ADB, like high personal and corporate income taxes, multiple business taxes and permits, from national down to local governments.

See also: 

No comments: