Spend, spend, spend

Michael Alan Hamlin

Posted on April 16, 2009

Following her abrupt evacuation from the Royal Cliff Grand Hotel in Pattaya, Thailand after antigovernment protestors breached security at the site of the annual summit of the Association of Southeast Asian Nations, Philippine president Gloria Macapagal-Arryo traveled to Dubai, United Arab Emirates (UAE), trying to scare up employment opportunities for Filipinos. Dubai is home to 6.4 million people, including 5.5 million foreigners, or about 86% of the population.

Filipinos account for approximately 340,000 of the foreign population. Overseas Filipinos making a living in Dubai include professionals (19%) and skilled (38%), semi-skilled (28%), and unskilled workers (19%). Other foreign workers come mostly from the United Kingdom, Germany, Sri Lanka, and Egypt. Unfortunately for these workers, the jobs that attracted them to Dubai are disappearing fast – up to 2,000 a day by one estimate.

Because debtors can send creditors to jail in the UAE, foreign workers who lose their jobs typically pack their bags literally overnight and rush to the airport before employers have time to notify banks that they’ve been terminated, as employers are legally obligated to do. Not infrequently, the least skilled Filipino workers are terminated without being paid, and don’t have the resources to flee Dubai. This was recently the case with 120 Filipinos who sought refuge in the Philippine embassy.

Since the job market has collapsed in Dubai, why is Ms. Arroyo there? In a word, desperation. The Development Bank of Singapore (DBS) estimates that remittances by overseas foreign workers (OFWs) to the Philippines will decline anywhere from 7%-13% this year. As the Global Financial Crisis deepened last year, remittances from developed economies – the U.S., Japan, Hong Kong, and Singapore – which account for 57% of all remittances, declined. Those declines were initially offset by remittances from Middle East countries, but as the crisis spread, those remittances declined as well.

DBS also cautioned that if the recession worsens further, that remittances will decline even more dramatically. Because remittances from OFWs account for about 10% of GDP, that’s extremely bad news for the Philippine economy, which is dependent on consumer spending. When remittances decline, OFW family consumers stop spending either because they have no funds or they are determined to husband what they have to see them through hard times.

Many economists believe that the global economy could spiral further into a deep and prolonged recession reminiscent of Japan’s lost decade if consumers lack the confidence to spend and investors hesitate to get back in the game. On the other hand, consumers who have lost their jobs or worry about job security are unlikely to resume spending. Investors unsure of when markets will reach bottom will stay on the sidelines. They can’t be blamed. A report by the Asian Development Bank last month suggests that as much as 40% of the world’s wealth has been destroyed in the crisis.

For the Philippine government, which is fond of arguing that the economy is weathering the financial storm better than most, the implications of a prolonged recession are dire indeed, and reveal the inherent fallacy of the notion that marketing and physically exporting human intellectual property and labor is a sustainable source of wealth creation. Unless wealth comparable to OFW remittances is generated at home, sustainable economic growth and broad prosperity will continue to be out of reach.

There is one bright spot, as I’ve frequently noted in this space, and that is business process outsourcing (BPO). It is interesting that one of the fastest growing segments of the call center segment of BPO is collections. While in one sense it is tragic that the Philippines is benefiting from the misfortune of others, in another it is a job that must be done, and Filipinos’ ability to empathize with the unfortunate makes them very good at it.

But as promising as BPO is – which involves a myriad of services that go far beyond call center services – BPO alone is obviously not enough to offset the expected decline in OFW remittances. Another strategy is required besides lobbying for jobs in distressed markets. Whatever that strategy turns out to be, however, it is unlikely to be a short-term strategy. It will take time to develop another source of revenue as attractive as remittances and BPO.

For one thing, both remittances and BPO owe little to government. OFWs leave because there aren’t enough reasonably-paying jobs here. BPO blossomed when government liberalized telecoms to help Filipinos communicate at home, not with clients’ customers half a world away. The next great source of revenue won’t be so easy.

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