Sunday, July 7, 2013

Monetary Policy and the Philippine Economy Part 2 - Summaries of 6 Related Articles

As a result of my Google search last July 2, I came up with top 10 links, but after visiting them all, I selected seven. The first link directed me to Dr. Nye's lecture. At this point, I want to share my summaries of the content of the remaining 6 articles.

Among six articles, three are safe; two are more realistic, and; the remaining one is in between. That lone article reminds me of Dr. Nye's lecture except that part where he mentioned that Philippine economy was protected from trouble due to non-engagement.

1. Safe Articles

The recent shift in macroeconomics due to the announcement made by the Chairman of the Federal Reserve exposed the vulnerability of emerging markets. Gerardo P. Sicat claimed that though the Philippines' vulnerability was exposed as result of massive withdrawal of "hot money" from the PSE, our economic fundamentals remain intact. I think he was happy to see peso depreciation for this would benefit the export industry. However, the reduction of stock price index is bad news for domestic investors.

I just wonder why Sicat was calling for reform if the nation's fundamentals are really sound? What did he mean by reform? We read such need of reform from Dr. Nye's lecture. Do they mean the same thing or is Sicat's idea of reform one of protectionism? If he was referring to protectionism, I cannot understand how come he also advocates economic liberalization, which in fact is something commendable.

Lilian Karunungan's article from Bloomberg reminds me of PSE's jubilant celebration in 2012. The peso appreciated and also there were videos that circulated around that time claiming that the Philippine economy was positioned for growth for decades. But the celebration was short-lived. After nine months, we witnessed that the so-called growth was nothing but an outcome of temporary parking of "hot money" escaping the impact of American QEs.

This time, its the impact of Japan's QE on Asia's economy. Policy makers in Asia were afraid, but the Governor of Bank of Japan considered their action as insignificant. The Governor of the Philippine Central Bank confirmed this. And besides, Kuroda promised to monitor the impact of their monetary policy. The writers mentioned also that other central banks have been doing the same thing such as the Federal Reserve, the Bank of England, and the European Central Bank, as if, by mentioning them, the fear of policy makers in emerging countries is baseless after all.

2. More realistic articles

After defining QE, Cassandra Ty mentioned that US, UK, and Japan have all adopted this monetary policy. The goal of QE is to stimulate the economy. However, since the economy of the world is interconnected, the consequences of this action cannot be confined within the boundary of the initiating nation. Ty clearly identified that it "would have a spillover effect on the rest of the world" and that in fact a huge quantity of this new created money went into the Philippine stock market. Aside from possible currency war in the future, she saw other dangers of QEs include trade imbalance, inflation, and asset bubble.

I consider this article from Business Mirror most realistic among the six. The writer mentioned about the IMF-WB annual meeting attended by the members of the Philippine Department of Finance. And then he confidently claimed that the Philippine government is "absolutely clueless" about the nature of global crisis and predicted a dark legacy for the existing administration as one of "economic disaster" unless policy makers would start to understand the situation and make necessary changes.

The writer is highly critical of QE. After mentioning the differences in the responses of Thailand, EU, South Korea, and US to a difficult economic situation, he raised the question about the source of $5 trillion, which the US needs to have a good start. He seemed to imply that through QE, the US could get such amount from the emerging countries.

And then the writer quoted history as his basis that monetary systems using fiat currency all collapsed. He cited the experiences of Roman Empire and China's Han dynasty as his examples. In the end, he issued a warning that unless the Philippine peso will be allowed to appreciate, our economy will crash together with the continuous devaluation of the US dollar.

3. In between article - From unreliable PSE into real economy

"The biggest percentage loss since the Great Recession of 2008 and the biggest points dip in the institution's history", that's how Heydarian described the recent drop in PSE prices. He added that emerging markets "have been under siege" as a result of anticipated QE retreat. So the trend is changing in favor of central economies like US and Japan and against emerging economies such as the Philippines. So the call now is for the reform of economic policy and shift the attention from PSE into the real economy. The writer ended his article by giving credit to previous administration.

Part 1 - Dr. Nye's lecture

Part 3 - Mises' lecture

Part 4 - Biblical Critique of Inflation