Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Optimizing Remittances for Development

Posted by butalidnl on 26 April 2013

We Overseas Filipinos (OFs) remit money to relatives and others in the Philippines. The money that we remit is often used by our relatives for basic needs e.g. housing, food, clothing and education. They are also used for occasional expenses like health (medicines, hospitalization), burial expenses etc. But once these kinds of needs are met, we would often begin ‘investing’- i.e. remitting money for the purpose of building up a store of capital, which could be used when we are no longer based abroad, or as an additional source of income for relatives.

Strictly speaking, all remittances contribute to Philippine national development. Remittances that fulfill the recipients’ immediate needs contribute to development: they stimulate the local economy (the multiplier effect); they prepare and nurture the workforce (education and health); etc. However, some remittances have a bigger impact on development than others. The question before us then is: how could we optimize the discretionary part of remittances towards development.

The problem is not that we do not care about making economic (developmental) investments. Rather, it is on how this could best be done. All OFs share the desire to build up resources in the Philippines, which would continue to generate income when we no longer work abroad. Let us take a look at some factors that affect our decisions on economic investments:

Scale. A single OF would have only a limited amount of resources. This means that he/she would be limited in the scale of the investments that could be made. Micro-investments e.g. tricycle, sari-sari store etc. could be readily financed from a single OF’s earnings. Bigger investments e.g. restaurant, grocery store, machine shop would need to be financed from many years of savings, or by pooling the resources of several OFs.

Relatives. OF investments are most often done through our relatives. They are the main beneficiaries of our remittances, and we expect them to also want to create an additional income stream that could generate money when we return for good. However, OF relatives tend to look upon the added income stream from the investment as a thing of the present – additional income to the regular remittance. Thus, while we view it as an ‘investment’, our relatives treat it as just another remittance – which means that they can use it for their daily expenses. This causes all kinds of problems.

But it is difficult for us not to include relatives in our investment plans. In the first place, the remittance is mainly coursed through them. Then, the relatives are usually the ones expected to manage the project. And finally, we have limited options in terms of ‘owning’ the investment – we are usually expected (or have no other choice but) to put the investment under the name of the relative.

A solution to the limiting nature of investing thru relatives is investing with the help of third-party channels. These could include rural banks, local venture-capital companies, or companies with projects open to OF investments. As of yet, these channels are not yet well developed in order to optimally serve the needs of OFs.

Information on Possibilities. OFs are often limited in the choice of which investments to make, because of the lack of information on possiblities. We usually just take on the suggestions of our relatives, or from fellow OFs. Many of us end up buying tricycles or jeepneys, or starting a sari-sari store partly because other investment possibilities are simply unknown. Because of the limited choices, we often decide against making investments. The money gets put in a savings account, we buy real estate (land, cemetery lots, condominium units etc.) or jewelry. Some OFs opt to invest their savings in their host country – by buying a house (which they live in) or investing in the stock market.

Development Intensity
While all remittances support development, we aim to maximize their developmental effect. But development can be interpreted in many different ways. When we seek to optimize remittances for development, we start from the principle that some uses of remittance money result in more development than others; and that it is possible to intervene to shift towards investments with a bigger development effect.

For this, we need to develop a concept of ‘development intensity’, in which investments with a higher intensity would be preferable to those with lower intensity. We can formulate ‘development intensity’ as a value that comes out of a number of factors:

Beneficiaries. This would include employment created for people, and the number of beneficiaries of the products from services, as well as the extent to which they benefit.

Extent it Enables. How the products and services offered increase the capability of people to provide for their own needs (e.g. increases agricultural productivity).
Long-term Viability. How durable the project is, in terms of finance and management.

Environment-Friendliness. Net effect on the environment, compared to the previous situation.

Effect on the Local Economy. How the project improves local economic activity, through its upstream (inputs acquired locally) and downstream (selling in the local market) linkages.

Appropriation of Surplus. Where eventual profits are used for.

The six components for evaluating development intensity would be difficult to measure quantitatively. Quantifying them is made difficult by the fact that the relative weights of the components and their relationships vary. However, even if we can’t yet use it quantitatively, it can be used qualitatively to make a general comparison. Take the example of comparing two investments: one, buying a jeepney; and the other, putting up of a bee-keeping business (these would cost approximately the same).

In terms of beneficiaries, both are equivalent – they employ 1 or 2 people, and the public ‘buys’ the product or service. The jeepney’s marginal utility would be small (resulting in a smaller additional benefit for consumers), since it would simply be added to an already fully served market; while beekeeping would probably be a pioneer (and thus have a bigger marginal utility). Any surplus generated goes to the OF relative. The long-term viability depends on the OF relative, and is thus equivalent. On their effect on the local economy – they both have limited linkages.
In their enabling function, the beehive increases the harvests of surrounding crops and trees, while the jeepney does nothing similar. Also, the jeepney pollutes the environment, while beekeeping is beneficial. Taken all together, we can say that the honey-bee business is more development intense than the jeepney.

In general, we can say that investments that benefit the wider community (rather than just one family), stimulate the local economy, and which are environment-friendly, would tend to be more development intensive than those which don’t.

Interventions
In order to optimize remittances for development, we seek not only to stimulate Overseas Filipinos to make more development intensive investments, we should also help them surpass the limitations of scale, relatives and lack of knowledge. Concretely, this could be addressed in a number of ways.

Financial Literacy
Both the Overseas Filipinos and their families in the Philippines would benefit from trainings on ‘financial literacy’. This would teach them how to be more systematic in handling their finances, including how they could save money for investments. These trainings can be given abroad, as well as in the Philippines. Ideally, the financial literacy training should be part of the pre-departure briefing, and that the potential OF should take it together with their partner.
In addition to the basic trainings, there is also a need for trainings that give them skills in setting up and running a business – a training on Business Management. This should be done in the Philippines.

Government Policy
The Philippine government could do a lot toward helping OFs’ remittances be more development intense. These would include:

Recognizing OF investments as Filipino. A law that would recognize all investments done by natural-born Filipinos, regardless of their present citizenship, as Filipino will go a long way toward encouraging OFs to invest in businesses in the Philippines. There are laws that limit business ownership to Filipino passport holders, and even to Philippine-residents; and these inhibit many OFs from investing. But more than that, there are many laws that limit government agencies’ (e.g. DOST, DTI) support to businesses only to those which are ‘100% Filipino owned’ . With this law, OF-initiated businesses can fully avail of government support.
Such a recognition would also enable OFs to invest on their own, lessening the need for them to go through their relatives.

Directing Line Agencies to Help OFs. Line agencies, e.g. DTI could do a lot more to help OFs and their families invest in business. The government could create an inter-agency body at the provincial level to assist OF investments by providing them with technical support and management knowhow, credit, etc.

Accredit Filipino Businesses Established Abroad. Many OFs have set up businesses abroad, or have formed cooperatives. There should be a speedy process of accrediting these for doing business in the Philippines.

Amending Laws that Restrict OF Investment. There are laws that block non-Philippine residents (even if they hold Philippine passports) from investing in some economic sectors (e.g. retail trade). These laws need to be amended accordingly.

Investment Projects
Educating and Assisting OFs are important things to do; but in the end, there need to be actual projects for them to invest in. These projects should be as development intensive as possible; and they would preferably be medium-sized businesses (i.e. have 10-199 employees, or P3000 to P100,000 capital). They could take the following forms:

Shares of Stock in Existing SMEs. These corporations would open up their ownership to OFs to up to 50% of the shares of stock.

SMEs with Modules than OFs can invest in. The company would offer distinct business units which OFs can buy, and which will be managed by the company. These would range from ‘time-share’ arrangements in tourist accomodations, to units of land tilled to crops or trees, etc.

SMEs set up by OFs. These would be managed either by a returning OF, or by a management team that is hired by the OFs. The OF-entrepreneur will have either invested his/her savings over many years, or be managing the money of an organization or group of OFs.
These interventions would be done by OF organizations, NGOs in the Philippines, businesses in the Philippines, and the Philippine government. In order to make investing in these SMEs attractive to OFs, they need to show that they are reliable and profitable. It would be good if the government can set up a system of investment insurance for OFs, or of accrediting SMEs for OF investment.
Not all OFs will prefer to invest through SMEs. Most probably the majority of OFs will continue to prefer investing in micro-businesses that are run by their relatives. For them, the financial literacy and business management trainings, as well as other support from government agencies, rural banks and NGOs would go a long way to making their micro-investments succeed.

Our aim will be both to empower OFs who invest in micro-businesses, and to enable a smaller number of OFs to invest in SMEs.

What OF Organizations can do
OF organizations could actively intervene in order to help OFs invest in more development intensive investments. Some of these ways include:

Organizing Trainings. We could organize trainings in financial literacy and business management to cater to their members, as well as other OFs.
Lobby. The Philippine government needs to be prodded to support more OF investments, through better laws and through the work of government agencies. The government should also amend laws that restrict OF investments. OF organizations can work with OF-supportive NGOs in the Philippines to undertake such a lobby.

Lobby. The Philippine government needs to be prodded to support more OF investments, through better laws and through the work of government agencies. The government should also amend laws that restrict OF investments. OF organizations can work with OF-supportive NGOs in the Philippines to undertake such a lobby.

Promote Investment Projects. OF organizations could set up investment projects in the Philippines themselves. Or, they could check out the possibilities offered by NGOs, businesses, government and other OF organizations in the Philippines, so as to recommend which would be good for their members to invest in.

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