Spatial impact of overseas Filipino workers’ remittances on the Philippine economy

Abstract

Remittance inflows from overseas Filipino workers have become the second-largest source of foreign exchange for the Philippine economy. In view of this, we assess the vulnerability of Philippine households to an exogenous shock in the form of a five-percent decline in remittances. We utilize a spatial computable general equilibrium model based on a five-region social accounting matrix. A three-level production function is specified, namely, Cobb-Douglas between labor and capital to produce value added; then Leontief between non-transport inputs and value added to produce output net of transport, which is then combined with transport inputs at the third level, using again a Cobb-Douglas production function. Capital and labor incomes accrue to the households who then allocate these to consumption and savings with a constant marginal propensity to consume. Overseas remittances enter as transfer payments to households. Consumption is allocated among different commodities, using a Cobb-Douglas utility function. Final demand is then built up in a standard way. Results indicate that in absolute terms, Northern Luzon middle- and low-income households bear the highest percentage reductions in income. On the other hand, Mindanao households are the least vulnerable. These results are then compared with those of a two-region model using a single-level Leontief production function and Cobb-Douglas utility function.

Classification-JEL: F24, D58