trade deficit

A Boy Scout Among Thieves

On the eve of the G20 meeting in South Korea, the Philippines through Finance Sec Cesar V Purisima voiced its aspirations for the outcome of talks to deal with the US-China disagreements over currency manipulation aimed at correcting stark trade imbalances.

On Monday’s issue of the Businessworld, he was quoted as saying that he hoped for

A framework… where there will be closer cooperation among countries in settling imbalances.

Such expressions of hope by our finance officials demonstrate not only their optimism that world leaders will put into practice their joint promises at such talk shops (when in reality they don’t-as demonstrated by the Global Trade Alert‘s findings about the increasing levels of trade protection committed by the same G20 members in violation of their first Communicade), but also the fact that they remain wedded to the development model preached by the Washington Consensus to the rest of the world regarding the reliance on free market principles that avoid government intervention in setting the prices of commodities and currencies.

The US Federal Reserve announced previously that it would exercise quantitative easing (QE) which in effect means it will print money to purchase US treasury bonds underwriting the deficits undertaken by the Obama administration. This has caused a weakening of the US dollar against other currencies which is expected to narrow their trade deficit with China.

This manipulation of the currency to “correct” trade imbalances is something that has been restricted by the WTO except that China seems to have gotten away with purposefully undervaluing its currency even after acceding to the terms of this world body. Decades earlier Japan did the same and benefited from it during its era of fast-paced growth. The US has been constantly at China for this but appears to have no qualms over effectively engaging in such behavior when it suits its interests. In the real politic of the global trading system, a nation can flout the rules for as long as it carries sufficient weight in political economic terms.

So it would seem that the Philippines remains stuck in the role of the perennial “boy scout” among nations that adheres to the rulebook while others blatantly invent their own rules. Because of the rise in the value of the peso against the US dollar, not only are exports expected to suffer, but so will the flow of imports (as much of the raw materials that go into producing these exports comes from overseas).

The Bureau of Customs which through the years has had to deal with a program of accelerated tariff reduction unilaterally set by the Philippine government ahead of international commitments will also have to deal with the rising peso in meeting its revenue targets. This along with all the perks needlessly offered to free ports and special economic zones will ensure that our budget targets will not be met.

A more proactive stance needed

In this space, I previously argued that the Philippines needs to take a more proactive stance vis-a-vis the currency wars to ensure the sustainability of its exporting industries and to guarantee the welfare of those dependent on income transfers from abroad. If we wait for a framework to be hammered out by the G20 which after all is just a loose, informal organization, then we could be waiting for a very long time indeed.

In fairness to our finance officials, they have proposed the Public Private Partnerships or PPPs as a way of generating investments in infrastructure which should lead to capital equipment and raw material imports as a means to generate demand for dollars domestically. Certainly that will help. But on the other hand, the Philippines is also issuing locally denominated bonds overseas which in effect increases the flow of dollars into the country and causes the value of the peso to rise. So it seems it is taking with the one hand while promising to give with the other.

Given that we already have the reserves to fund at least the public portion of the PPPs, I argued for a sovereign wealth fund that would along with private investments identify projects it would invest in. This could be a way of putting the dollar inflows to good use and avoid inflating our borrowings from overseas which simply help inflate the value of our currency.

Having exited the IMF program of macroeconomic stabilization after paying off its institutional loans, it is time for the Philippines to exercise some independence in setting its policies given the amount of “space” afforded by its advancing foreign reserves position. It is time we start shaping these policies by taking cognizance of the way the global economy actually works as opposed to the way we hope it would based on a literal interpretation of global accords or theoretical constructs contained in some textbook.

For this to happen, a new policy consensus has to be formed that would encompass both the officials in the executive branch as well as politicians in the legislative branch over a development framework. There does not seem to be any impetus from either branch of government to develop such a road map nor does there appear to be any public clamor for it.

Perhaps you, dear reader, have some views on this. Well then, let’s discuss them…