Collective impotence and the peso

Raul V. Fabella

Posted on November 05, 2012

THE RESOLUTION submitted by the PCCI to Pres. Aquino at the closing of the just-concluded Philippine Business Conference is notable. It called for the arrest of the continuing appreciation of the Philippine peso to safeguard our dollar earning industries. I will not comment on the specific recommendations but only in the general direction -- a more assertive attitude towards the value of the peso. When, in early 1994, a group of us (Noel de Dios, Benjamin Diokno, Cayetano Paderanga, Toti Chikiamko and myself together with PHILEXPORT which is celebrating its 20th anniversary on Nov. 30, 2012) called for the deliberate weakening of the peso -- a cause carried in a speech by the then Senate President Edgardo Angara at the first plenary session of the 1994 National Economic Summit -- we were treated worse than lepers. One mouthpiece of the then central bank governor labelled us the "jukebox economists": singing any tune the moneybags call. The implied moneybags, IMF and the World Bank, did not even know they were calling our tune; they were, in fact, calling the CB’s tune. They had a catatonic fixation for floating the exchange rate which, at that point of considerable dollar inflow, pointed to appreciation. And PCCI? It was firmly on the CB governor’s side. But even labor unions whose jobs we were trying to save called for our heads. Note that this was after the People’s Republic of China devalued its currency 40% early 1994. The yuan then stayed at about 8.30 per US dollar for 10 years despite ever larger trade surplus and howls of protest from the West. One did not need atomic physics to glean that PRC’s move would devastate Philippine manufacturing and employment. This was a plea for economic survival!

The CB governor himself responded to the proposal with the defiant "Over my dead body!" To the business complaint of high domestic interest rate (to support the overvalued peso), the central bank’s response was: "Borrow in dollars." It was a counsel for disaster. Borrow with vengeance they did, especially the banks. After all, with appreciation a one way bet, you get low interest rate and a sure appreciation gain! The ‘Over my dead body’ boast being a portfolio inflow come-on and the consequent massive private foreign borrowing forced the peso upwards to ₱24/$. And this omen of an impending debacle was hailed a success! In other words, the Philippine economy got poison disguised as medicine. Two years later, the Asian Financial Crisis, the bitter harvest of private over-borrowing and asset bubbles, wiped out the gains slowly built up the last five years. The CB’s strong peso policy had aborted the Ramos growth momentum!

This rebuff of economic common sense is a source of great sadness for me personally. Toti Chikiamco summed up our collective despondency at the Summit’s rejection: "We lost our balls!" Meaning, we as a people failed a massive collective action test: we let ignorance among our central bankers and among the business community short-change our future. Had we moved the exchange rate as proposed, there would not have been excessive private foreign borrowing and the Asian Crisis would have spared our shores. The banks would have remained whole and the Ramos growth inertia would have continued into the next decade. Instead, we experienced a decade of painful curettage to sweep away the poisonous residues (bank NPAs, etc.) of that abortion. Our romance with sado-masochism marched on.

Such is the power of the CB: it can shatter a budding future. In this case, the strong peso was the sledgehammer. And this was not the first time the CB officiated in the abortion of a potential breakout in the post-EDSA era. The sledgehammer in the first was the interest rate cure administered through the JOBO Bills that shrank the economy to fit the overvalued peso: it found common cause with misguided military elements to abort the momentum of the post-EDSA Philippines. But that deserves its own re-telling.

Fast forward to 2012. The air is once more pregnant with promise. The signs are all pointing in the right direction. As if on cue, however, that same abortive sledgehammer rears its head. Will we overcome the collective action challenge this time? Now that the players and the economic realities have changed. Now that there is a new and more open dispensation in the BSP. Now that even such sworn enemies as the PCCI has switched lanes. Now that OFW remittance is the country’s lifeblood. Now that BPO is the sunshine industry and the big conglomerates have dollar earning assets. Now that the old global monetary consensus has become tired and misguided. Now that the challenge - keep the exchange rate from dipping below ₱42/$1 -- is much simpler than in earlier times.

I dare take heart. A new collective consensus seems a-building. We the people should now take the bull by the horns and not leave it to bureaucrats. Would that this time we will not lose our balls. Let not collective impotence again mock our hopes. Even if it should happen twenty years late!

Raul V. Fabella is the chairman of the Institute for Development and Econometric Analysis, a professor at the UP School of Economics, and a member of the National Academy of Science and Technology. For comments and inquiries, please email us at idea.introspective@gmail.com. To know more about IDEA, please visit www.idea.org.ph.