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Coronavirus shock exposes Asian governments' addiction to remittances

Money which overseas workers send home has prevented needed reforms

| India
Repatriated overseas Filipino workers arrive at an airport after weeks of quarantine in Pasay City on May 26: they send home more than $35 billion annually.   © Reuters

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

In the past 20 years, there has been an explosion of economic growth in Asia driven by remittances, the cash workers abroad send home. From Manila to New Delhi, officials have come to rely on millions of people working abroad to send money back to their families. It is a key source of hard currency to plug holes in government balance sheets and drive domestic consumption.

Until now, the exporting-people model has been nearly bulletproof. It survived the 2008 global financial crisis and the U.S-China trade war that began in 2018. In that year, for example, Asian inflows topped $300 billion for the first time.

But coronavirus is souring the strategy. Globally, remittances hit a record $554 billion in 2019, trumping foreign direct investment for many low to middle income countries. Now, the World Bank predicts a $109 billion, or 20%, plunge in 2020 to $445 billion.

The pain will fall disproportionately on Asia as construction sites everywhere go quiet, hotels and restaurants remain shuttered, cruise ships sit in ports and sliding oil prices reduce demand for imported labor.

Take India, the destination for $83 billion of remittances, roughly 15% of the global total in 2019. The loss of so much foreign capital comes just as Prime Minister Narendra Modi grapples with the slowest economic growth in at least a decade and Moody's Investors Service downgrades New Delhi's credit outlook.

Yet India is only one of several countries at glaring risk of remittance addiction risk in Asia. In a May 15 report, analysts at Fitch Solutions raised warning flags about political instability from falling remittances in India, Indonesia, the Philippines, Pakistan and Bangladesh. Less income from abroad could foment unrest.

One worry is how nationalism whipped up in the wake of COVID-19 has led to governments clamping down on migrant worker flows. What these five economies have in common, Fitch says, are "large, relatively poor populations" where "government support is likely to be inadequate to preserve and guarantee jobs for the vast numbers that are employed in the informal sector." In other words, people without job security.

Coronavirus fallout is exposing sizable cracks in a remittance model that too many governments take for granted.

Consider the Philippines. Twelve million "OFWs," or overseas Filipino workers, send home more than $35 billion annually, or a tenth of the country's gross domestic product, and they are often lauded as heroes, with VIP aisles at Philippine airports. By enduring life away from their families in New York, Dubai or Hong Kong, they make growth possible back home.

It is a crutch, though, that has enabled government after government since the 1980s to neglect job creation. Since 2016, President Rodrigo Duterte has worked to ship even more talent abroad. Along with securing more overseas visas, Duterte created a bank with overseas branches specifically for OFWs and is trying to create a cabinet-level OFW department. In other words, he has institutionalized the policy of humans being the Philippines' main commodity.

This creates a brain drain back home. Exporting so many of your best and brightest does not just put them at risk. It weakens the local labor pool, making economies less productive and innovative.

It also makes economies uniquely vulnerable to a pandemic which has caused a global shutdown. Indonesia gets 43% of remittances from Gulf Cooperation Council states in the Middle East now suffering from falling oil prices. Vietnam relies on the U.S. for nearly half of overseas cash flows, and remittances make up 6.5% of its GDP. Meanwhile, at home, factory orders and tourist flows are disappearing and financial risks increasing.

Remittances "have become a key source of foreign earnings for economies that cannot compete in export markets," says analyst Vincent Tsui of Gavekal Research. "Cutting them could spur a spiral of poverty and protest that ends with debt defaults that suck in well-managed emerging markets."

Pandemic nationalism could easily exacerbate the problem. Fitch Solutions warns that "protectionist labor policies will likely rise significantly across Asia and the rest of the world following COVID-19." This means the World Bank's 2020 remittance estimate could prove too optimistic.

This situation calls for a variety of policy responses. Remittances are an addiction. In the short run, governments must ramp up stimulus targeted at lower-income households. That includes cash handouts and subsidies that support basic health, nutrition and income. Failure will set back Asia's impressive development gains over the last two decades.

The bigger challenge is creating more jobs at home and getting national balance sheets in order. Remittances made life too easy for governments from Manila to New Delhi. Leaders must do the hard work of building more vibrant and competitive manufacturing and service sectors at home. That would generate domestic demand and tax revenues, leaving economies less vulnerable to external events.

People should never need to be any countries' main export because the domestic economy does not offer enough opportunities. You would think populists would understand that. Sadly, it has taken a pandemic to bring this obvious fact to the fore.

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