The Dutch disease

An important takeaway from the World Bank reclassification that makes us an upper-middle income country is how we got there. Vietnam got there by building up its manufacturing base to make the country an export powerhouse. We got there by exporting our people.

I found an article on the FINEX website written by Ronald Goseco last March that expressed worry about our economy catching the Dutch disease.

The Dutch disease is an economic phenomenon where a large inflow of foreign currency causes a country’s domestic currency to appreciate, making the nation’s other exports uncompetitive, leading to the decline or “withering” of local manufacturing and agriculture.

Despite the steep nominal depreciation of the peso, major macroeconomic research suggests the peso remains structurally overvalued relative to its long-term economic fundamentals.

It is called the Dutch disease because it was first observed in The Netherlands during the late 1950s and 1960s when the country suffered an economic crisis after a massive stroke of good fortune.

The term as an economic concept highlights a paradox: how a windfall of wealth (like finding oil, gold or OFW remittances) can destroy a nation’s broader economic health by leading to de-industrialization and economic decline in other economic sectors.

OFWs and BPOs provide significant forex inflows and employment but these have not translated into broad-based, sustainable economic development.

OFWs and BPOs support household consumption, but not productive investment. They fuel imports but do not expand domestic manufacturing or agriculture. This reliance on overseas and outsourced employment also makes our economy vulnerable to global shocks and geopolitical risks.

As the Finex paper observed: “They are not engines of structural transformation, and the country stays dependent, unequal and vulnerable.

“We desperately need to get cured of this Dutch disease by shifting from labor export toward high-value domestic industries. To do this, the government must quickly resolve corruption issues and start advancing national industrial policies.”

We are doomed. Our politicians will never give up corruption because most are in politics precisely for it.

The warning sign is clear: the decline or stagnation of the domestic manufacturing sector could be a symptom of Dutch disease.

The upgrade to upper-middle income status exposed how our country dramatically lags behind regional neighbors like Vietnam because it skipped the traditional export-oriented manufacturing phase, leaping straight from an agrarian society to a service-based economy.

There is another warning sign: The cash injected into the economy by the BPO and OFW sectors fuels consumer spending (shopping malls, real estate developments, imported luxury items) rather than funding factories, tech innovation or agricultural modernization. This makes the country highly dependent on imports for food and other basic commodities.

The Finex paper’s verdict: The Philippines is afflicted with a “modified” Dutch disease. The economy is only different from the Dutch case because the domestic appetite for imported goods drains foreign currency out of the country just as fast as BPOs and OFWs bring it in.

That’s why people’s lives are continually miserable. High domestic inflation acts as a powerful economic equalizer, severely eroding the premium purchasing power typically enjoyed by BPO workers and OFW families.

Even though both groups earn higher-than-average incomes or benefit from favorable foreign exchange rates, inflation keeps them economically insecure.

BPO employees are primarily domestic salary earners paid in local currency, making them highly vulnerable to domestic price shocks. The starting salary in many BPOs no longer guarantees a comfortable middle class discretionary spending mode.

The real purchasing power of the peso has steadily declined over recent years.

The night-shift premium is lost because BPO workers heavily rely on Grab/taxi rides, 24/7 convenience stores and fast-food delivery. With transport inflation at 12.8 percent and restaurants at seven percent, their daily expenses are draining their take-home pay faster than daytime workers.

While consumer prices fluctuate monthly, corporate BPO salaries and allowances are generally adjusted only once a year. This creates a painful time lag where workers must absorb rising utility and housing costs (up 7.8 percent).

OFW families, on the other hand, experience the illusion of the weak peso. Because OFW families received more pesos for every dollar sent home, a weaker peso looks good on paper. But domestic inflation consumes the gains.

Independent cost-of-living trackers show that Metro Manila is consistently one of the most expensive and financially stressful cities in Southeast Asia for a middle-class lifestyle, trailing only Singapore.

Inflation is actually a worse problem outside Metro Manila, thanks to a supply chain penalty.

According to the latest data from the Philippine Statistics Authority (PSA), while headline inflation nationwide sits at 6.4 percent, areas outside Metro Manila are enduring a higher inflation of 6.7 percent, compared to only 4.9 percent within the National Capital Region (NCR). Central Visayas (which includes Cebu) is facing a punishing 10 percent inflation.

As basic survival in the Philippines becomes more expensive, families are forced to ask their overseas relatives for emergency increases. This forces OFWs — many of whom are facing inflation in their host countries as well — to work overtime or cut back on their own living expenses abroad.

Because OFWs are stretched thin, nationwide cash remittance growth slowed to a near four-year low of two percent last April, meaning families cannot rely indefinitely on larger overseas wire transfers to outpace local inflation.

As we have long been pointing out, dependence on just two legs or the twin engines of OFWs and BPOs is the ultimate danger. Our economy is totally exposed to external disruptions we are now familiar with.

Artificial Intelligence, automated chatbots and advanced voice synthesis pose an existential threat to low-skilled customer service roles.

If AI triggers mass layoffs in the BPO sector at the same time that global geopolitical tensions disrupt OFW employment, we are screwed.

Jobless Pinoys can’t all run to Congress for ayuda. Unfortunately, we have allowed politics to become the only viable industry and politicians have been bad for the economy for the last 80 years.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco