With property damage potentially totaling $14.5 billion, The Philippines faces a long road to recovery in the aftermath of Typhoon Haiyan. Even before the typhoon’s devastation, the country encountered severe challenges. In October, a 7.2 earthquake struck central Bohol, killing more than 200 and displacing over 300,000. In the south, over 120,000 remain displaced as a consequence of a rebel insurgency in Mindanao. The various needs complicate relief efforts and have resulted in serious gaps in relief funding. For instance, only one-third of OCHA’s $800 million Haiyan Action plan has received funding.

But an alternative form of assistance has helped Filipinos for decades: remittances.

A Growing Trend

In 2013, remittances to developing countries is estimated to reach an astonishing $414 billion, more than five times traditional foreign aid, which is important for many countries struggling with conflict and the aftermath of devastating natural disasters like Haiyan.

Remittances serve as an important source of income for people in developing countries, as they help supplement livelihoods and absorb certain shocks, health or economic. For instance, poor rainfall may result in significantly decrease yields, hurting farmers by forcing them to take high interest loans or sacrifice important assets as collateral. For many people the money sent from relatives working abroad is extremely important in avoiding the brutal cycle of the poverty trap.

A Crucial Lifeline

To say that remittances are vital to the Filipino economy would be a gross understatement.  At over $26 billion, remittances account for 10% of GDP. Only India and China had larger remittance totals than the Philippines, a remarkable feat considering the significant differences in population totals.  Cash remittances were more than $2 billion in October, the highest level ever recorded for a month. With the onset of the Typhoon, remittance levels are expected to increase significantly, which traditionally increase in the wake of natural disasters.

The reason the Filipino economy relies so heavily on remittances is a function of deliberate government efforts during the 1970s. Former president Ferdinand Marcos encouraged the export of Filipino labor to meet the demand for contract migrant labor in Middle East that resulted from rising oil prices. The resulting migration has helped provide many with substantial supplemental income.

Unintended Consequences

While remittances can boost economic growth and help buffer economic shocks, some adverse affects exist.

  • Remittances may exacerbate income inequality since they do not address the poorest segments of the population. Those migrants able to find work abroad may have higher levels of education or more access to certain resources, which only perpetuates a cycle of growing income inequality.
  • Promoting the export of labor reduces the domestic labor supply among recipient families, which can potentially exacerbate gender differences.
  • From a macroeconomic perspective, large inflows of capital may cause currency appreciation that makes exports uncompetitive. While many consider “Dutch Disease” a problem for only natural resource rich or aid dependent countries, remittances present similar challenges.
  • Such heavy dependence on remittances (10% of GDP) disincentives government spending on important public services.

Next Steps

While remittances provide a vital lifeline for many people in the wake of the one of the most devastating natural disasters on modern record, it remains crucial to understand the nuances and any adverse effects.

The counter cyclical nature of remittances suggests that they will decrease once the Filipino economy rebounds. But one cannot measure development by economic growth alone. Poverty alleviation should remain a central focus of development efforts and the government needs to take steps to ensure remittances address long-term development issues rather than just immediate consumption.

With its location in an earthquake and typhoon prone zone, the Philippines will unfortunately encounter more natural disasters. Remittances are an important tool to help families prepare and recover, but the long-term financial sustainability of such a system needs to be examined in order to ensure that the country properly addresses these future challenges.

— Written by Jake Wheeler, with the support of Annie Alcid