now that we know for sure, thanks to the world bank and senator miriam defensor santiago, that corruption is alive and doing very well under gloria macapagal arroyo, lalong nakakatakot at nakakailang all the talk about stimulus funds, a whopping php330 billion, to be spent on infrastructure in aid of generating jobs, raising consumption, and weathering the global recession. u.p. economics professor, once budget secretary, benjamin diokno is right:
“Big projects take time to implement and a big chunk of the funds are usually lost to corruption,” he told reporters at the sidelines of the Export Development Council forum on Thursday at the Hotel Sofitel.
What the country needs during these difficult times, he said, are easily implementable and quickly felt initiatives.
more than ever, professor diokno’s recommendation that the exchange rate be fixed at 55php to 1$ seems infinitely more sound, if the idea is truly to pump-prime the economy before things get worse. writes filomeno s. sta. ana of action for economic reforms:
Benjamin Diokno’s proposal to peg the exchange rate at PhP 55 to a US dollar is gaining a broader constituency.The exchange-rate debate is no longer an esoteric one, confined to finance executives, exporters, and academic economists.
Those engaged in the manufacture of import substitutes now recognize that a competitive exchange rate can be a better alternative to tariffs to protect domestic industry and jobs. The tourism industry also sees the importance of the exchange rate, aside from its freedom-to-fly advocacy, for the country to draw in bigger numbers of inbound tourists.The BPO (business processing and outsourcing) industry has seen how a rapidly appreciating peso (in 2007) can sharply cut profit margins. Note that some of the Philippine corporate giants—the Henry Sy family and the Ayalas, for example—have stakes in the tourism or BPO industry.
The largest constituency that has added its voice for a competitive exchange rate is made up of the overseas Filipino workers (OFWs).They are highly organized and politically articulate.… Specifically, undervaluing the peso by fixing the exchange rate at PhP 55.00 to US$ 1.00 from the current PhP 47.00 to US$ 1.00 is a pump-priming tool to boost consumption.Thus, for every US dollar that an overseas Pinoy sends home to her family, the latter obtains an additional PhP8.00.In a manner, that’s a windfall gain of 17 percent based on the present exchange rate.In the aggregate, assuming that the US$15 billion in OFW remittances in 2008 will hold, we can expect an additional PhP 120 billion in the pockets of OFW families in 2009.
meanwhile, instead of spending the 330 billion bucks on the usual infrastructure projects in urban areas most of that stimulus fund could be spent on farm-to-market roads and irrigation systems that would pump-prime the agricultural sector so we can produce our own rice, among other crops, instead of relying on imports.
but of course we’re going to hear objections from the globalists, not least of them the gma camp. says men sta. ana:
A criticism that the Diokno proposal cannot evade is that a currency undervaluation is improper at a time of a global economic crisis.The deep recession that has hit the advanced economies requires global collective action.Beggar-thy-neighbor practices such as devaluing the currency will undermine the recovery of hard-hit countries that suffer from current account deficits and overvalued currencies.
but really it’s about time we started thinking of ourselves first, what’s best for us, which is what other nations are doing, worrying about themselves first. sabi nga ni senador manny villar:
“We have to think on our own and come out with an economic model that is suited to the Philippines,” he said.
“It is no longer automatic that what is good for others is good for us. We have the intellectual capacity to decide on the model that we should follow and not depend on other countries,” Villar said.
He said the country has a large pool of economists, both in the government and the private sector, who could be tapped to formulate an economic model for the Philippines.
Villar explained the economic models used by western governments and international organizations have turned out to be ineffective in preventing the housing credit problem in the United States from developing into a global crisis.
“The global financial crisis has crunched or destroyed some conventional economic thinking, particularly the Washington consensus. When we finally get out of this crisis we will find that things will never be the same again,” the senator said.
“First, we have been led to believe that big is good, so we encourage consolidations, mergers, combinations, like in the banking system,” he said. “However, the collapse or near-collapse of the world’s biggest banks – UBS, Citigroup, Bank of America and, of course, Lehman – has shattered this once-held gospel truth,” he pointed out. “Big is not necessarily good because being too big also means being unwieldy,” Villar added.
He also said the crisis has shattered belief that less government intervention is better.
“In reality, we know now that the damage wrought on the global economy would have been far greater if governments did not intervene,” he noted.
a new economic model, one appropriate to our strengths and cognizant of our weaknesses, is exactly what we need to turn things around, and not a copy-cat model based on whatever obama manages to work out with europe, russia, and china.
finally, wise words from a presidentiable. of course he has yet to comment on diokno’s proposal of a 55-to-1 exchange rate. if he says yes, he just might get my vote.
“I recently met with the Millennium Challenge Corporation, a US agency that provides grants to countries based on governance. They have commended our gains, contributed P1 billion to our fight against graft, and declared us eligible for more grants. Thank you!”GMA 2008 State of The Nation address
hey EQ ;) yeah, corrupt gains…
Hey Angela. Now that the whole world knows that FG seems to be at the center of all these scandal-ridden and corruption-tainted projects, I wonder what’s gonna happen next. Grabe na talaga ang kakapalan ng mukha ni FG. Grabe sa hindi lang grabe. Wala na kong masabi tsk tsk…
BTW, I love your new layout :D
thanks jenny ;) as for FG, here we go again, sana ping lacson can prove it this time…
The exchange rate is only a part of the problem or solution. And there is no magic silver bullet, like 55 or 44, etc.
The really fast-acting Keynesian policy advice is to lower taxes. Why not roll back the VAT to 6%? Why not lower the corporate income tax rate to 20%? Why not cut personal income tax rates in half?
A tax cut is not so unthinkable. Even the experts in Washington and elsewhere believe that in recessions or depressions the problem is not price inflation but deflation. A larger fiscal deficit during these trying times can be reversed when the crisis is over.
One more thing. The balanced-budget multiplier is one; the straight Keynesian multiplier is more than one.
hey orlando ;) you’re absolutely right, the exchange rate is only a part of the solution, but the effects of fixing it at 55 would be felt quickly not only by the huge sector of ofw families… rolling back VAT is good too, i’ve advocated the scrapping of VAT in this blog, which would leave more cash in the pockets of people for spending on other necessities. i’m not sure about tax cuts though in the same breath as scrapping or reducing VAT, considering the BIR’s collection problem, esp from big earners…
i’m not sure about this. this benefit some groups (exporters, those who earn in dollars), while hurting others(importers, who also spend domestically). also, i wonder why 55? why not weaker?
but i have no strong objections perse, only, that i am at this point unconvinced that there is net stimulus effect.
Hi Angela,
I would be more cautious about P55. It may be good for $ earners but not for the rest. So it’s a difficult balancing act.
The technical way out is to declare a “clean” float, and if the market pushes it to 55, so be it. But what we have is a managed float, so we have to second guess the central bank. And the BSP (and their IMF “angels”) get to play God. Maybe they are really smarter than the rest of us. Some of them are still my friends.
But the issue of the exchange rate is a perennial.
On tax cuts, it is a much better way of putting money in the hands of all citizens. Stimulus on the spending side can be a temptation for unwise objects of the spending, totally apart from corruption, etc.
In Dumaguete, I see perfectly good roads being re-done. They could have cemented dirt roads, so there is some inefficiency in the decision-making.
Regards…
hey gabbyd ;) yes it’ll not be good for importers but good not just for ofw’s families but also for call centers and tourism… like orlando says, it’s a difficult balancing act. why 55? if memory serves from past readings, it was diokno’s estimate of what the rate might be if it were allowed to float “clean”, that is, without the bangko sentral “playing god”, that is, intervening and trying to keep it high (in aid of debt service & importers).
orlando ;) “some inefficiency in the decision-making” is putting it mildly… re tax cuts: won’t that mean less revenues for the government, which means uutang na naman nang uutang? how are we ever going to get out of that vicious cycle?
Hi! Pinsan,
The proposal of Prof. Diokno to fix the exchange rate of P55/$ has more positive benefits than negative impacts on the macro level of our economy as experts have studied. As an OFW, I favor such fix system since in an erratic market forces, currency hoarders and hedge fund managers in the world banking system can control and manipulate the exchange rate for their own profit advantage only. In a volatile economy like ours, we cannot have the luxury of speculative currency hoarding since our peso is peg to the dollar only.
On taxes, with the prevailing high cost of living for an average 3-member family, I hope lawmakers will propose the abolition of Personal Income taxes for all salaried and fixed income workers since the bulk of these sectors do not have any other source or means to augment their income for educational,health and household improvement expenditures. Hence, increases from personal expenditures saved from this taxes will stimulate the domestic GNP and will have multiplier effect to pump prime our sagging economy,saving this Banana Republic,hehe.
jojie-riyadh
Hey Angela,
it is okay to have tax cuts financed by printing money. The debt is owed only to the central bank, and gets inflated away eventually. Alternatively, the money printed can be “mopped up” when the economy is back at full employment. This is not irresponsible policy when the economy is faced with unemployment.
It is different if the tax cut is financed by borrowing abroad, but that is not the issue here.
But back to the peso-dollar. The central bank has not been intervening lately, so there is some real demand for pesos at the current 46-47. Diokno’s 55 may well be right when the full impact of the crisis hits us later on, but it also depends on how aggressively the central bank expands money to support the economy. The more money printed, the lower the peso rate (i.e. it can go to 60 or more per dollar).
uy jojie ;) talaga naman, ‘no, banana republic, whose most profitable export is ofws ;(
orlando ;) you’re an economist pala, i should have guessed. thanks for taking the time to explain things to this non-economist… interesting, that there’s a real demand for pesos these days. could be from hoarded dollars dug out from under mattresses…
hi, I agree with Prof. Diokno’s plans to peg the US$:PHP att 55 especially at this very difficult times. China gains a lot from a devalued yuan until now, so why not us? This will surely help not only families of OFWs but the remaining exporters in the country as well.
hey louie ;) oo nga, china reminds me of mahathir’s malaysia back in the late ’90s, independent enough, wise enough, to buck the worldbank-imf’s
economic orderdictates.Hi Angela, no problem. You asked about demand for pesos. Well, it’s a net demand thing of course. The OFW families demand pesos, while importers demand dollars. But with the financial crisis, there may be some who may think the Philippine stock market is relatively safe, compared to US, etc. If only because so much of it is family corporations that are listed on the exchange. There may not be that much “float” out there for such shares, so they don’t fall as much. On the upside, they don’t go up too much either. You can’t win them all.
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Hi Angela,
I thought I’d share with you something that has bugged me for some time in my “other life” in Washington, DC when I worked for the IMF and did a fair amount of banter with the WB boys across 19th St. See my new post on why we are poor at http://foolawecon.wordpress.com/2009/02/21/why-the-philippines-is-a-poor-country/
yes I agree we should peg the dollar to 55, not only the dollar but the Euro also at possibly 75, because this will pumpprime the economy by aiding the main propulsion of the economy which are the OFWs and partly the export sector. Money velocity will increase, consumption will be stimulated by more pesos floating in the economy, and gnp and gdp will increase.