macroeconomics and development - zerrabueg.com · chapter 9: macroeconomics and development 1...

LC Abueg: contemporary national

development

chapter 9: macroeconomics and

development 1

Macroeconomics and developmentPolicies and economic development

L Cagandahan Abueg

De La Salle University

School of Economics


development


development 2

The Phillips’ curveSome coincidences?

International financerole on economic development

Stabilization policies

• Expansionary fiscal policies:

i. lower the income tax rate

ii. increase public spending to create jobs and

income

• Expansionary monetary policies:

i. increase the money supply

ii. reduce interest rate and increase investment

iii. job creation through indirect inteventions on

income


development


development 3

Investment

demand

investment

interest

rate

I(r)

Monetary policiesMacroeconomics and development

Requirements of monetary policies

• An independent central banking authority, which

i. oversees a well organized financial market with

banks and saving and loan institutions

ii. promotes a strong linkage between interest rate

and investment demand

iii. administers a manageable exchange rate regime,

usually a floating exchange rate

Role of the central bank

• Issue currency of legal tender: seignorage

• Banker to the government, repository of public assets

and foreign exchange (through foreign incomes)

• Banker to domestic banks: market clearing for checks,

bank of banks, banker of last resort

• Regulator of domestic financial institutions (e.g.,

pawnshops, lending companies)

• Operator of monetary policies: required reserves,

discount rates, open market operations

LDC financial markets

• No central bank or a government-owned and managed central bank

• Financial dualism

i. Formal market: organized, but dependent

financial institution, consisting of foreign and

domestic banks

ii. Informal market: unorganized, fragmented

financial institutions, consisting of landowners and

money lenders

LDC financial markets

• Weak or ineffective link between interest rate and investment demand (low in both levels)

• Structural inflation due to import substitution strategy

• Fixed or pegged foreign exchange rate, giving rise to a

currency substitution problem (e.g., use of US dollars as

local currency: Cambodia, Indonesia, Vietnam)


development


development 4

Problems of LDC central banks

• Public agency issuing money to cover government deficit or finance the development plan (may lead to

nonmeasurability of money supply), also unskilled

central bankers

• Relative dominance of foreign-owned commercial

banks (which also behaves as MNCs)

• A fixed or pegged exchange rate

• Culture: prevalence of informal financial markets,

market activity rooted to colonial heritage

Development banks: Philippines

• Postal Bank, 1906 (now the Philippine Postal Savings Bank)

• Philippine National Bank, 1916 (privatized; roots from the

former Agricultural Bank, 1908)

• Development Bank of the Philippines, 1958 (roots from

the former Agriculture and Investment Bank, 1935):

Rehabilitation Finance Corp., had been created under

Republic Act (RA) no. 85.

• Land Bank of the Philippines, 1963: RA no. 3844

Development banks: Philippines

• Proposed merger under the B Aquino III administration

through Executive Order 198,

Feb 2016

• Disapproved under the

meeting of the banc

resolution of the Governance

Commission for Government

Owned and Controlled

Corporations on Sept 2016

Criticisms on development banks

• Excessive concentration on large-scale loans (usually complementation of infrastructure and agricultural

projects)

• Excessive concentration on financing urban-industrial

development

• Neglect of (or small allocation to) small business

expansion and rural-agricultural development

Financial repression

• Many LDCs suffer from financial repression since their central banks control the rate of interest, causing

i. A shortage of loanable funds

ii. Higher interest rate charged by the informal

financiers

• Usually related to financial dualism: small borrowers and

lenders rely on informal financial markets due to high

costs in formal markets (e.g., establishing identity, supply

of collateral, risk concerns, information asymmetry)

Financial

repression

loanable funds

r*

L1

interest

rate

Credit

shortage

Supply

L*

r1

Demand

L2

r2


development


development 5

Bangko Sentral ng

Pilipinassome historical rundown

Five hundred Peso bill,

obverse (top) and

reverse (bottom):

New Design series (designed by Romeo

Mananquil)

Targeted to be released in

1985 but was not pushed through due to snap

elections (claim of

electioneering)

De facto central banks

• Established under a royal decree, 1851 (issuance of pesos Fuertes, or “strong

peso”)

• Privatized in 1898 under US Federal

National Bank Acts of 1863 and 1864

• Continued to issue bank notes with

legal tender and recognized by the

Insular government (1908-1933)

Pesos Fuertes, BPI (series 1883)

De facto central banks

• Established by virtue of Act No 2612 (1916), replacing the state-owned

Agricultural Bank (established in 1908)

• Allowed by the Insular government to

issue banknotes of legal tender (1916-

1937) and ultimately withdrawn from

circulation by virtue of Republic Act

211 (1948)

Philippine Circulating Note, PNB (series 1916)


development


development 6

From CB (1949) to BSP (1992)

• Central Bank Act of 1948 (RA no. 265): established the Central Bank of the Philippines (official functions

commenced in 1949)

• New Central Bank Act of 1993 (RA no. 7653): established the

Bangko Sentral ng Pilipinas, replacing the Central Bank of

the Philippines by virtue of Republic Act and the provisions of

the 1987 Constitution

• The national government assumed the loans of the old CB

through a bailout: “retire the Central Bank liabilities and

losses at the least cost to the Government” (Ch 7 Sec 132)

BSP Complex, Manila

• Also houses the head offices of the Bureau of the Treasury (later transferred in the restored Ayuntamiento Hall), and

Department of Finance, both under the Office of the

Philippine President

• The old CB Building located in Intramuros, Manila (1949):

Aduana (Customs) Building (boxed in yellow in the next

banknotes)

One hundred Peso bill, reverseNew Design series(designed by Romeo Mananquil)

Circulation: 1987-2015 Demonetization: 2015 One hundred Peso bill, obverse

New Currency Generation series

Circulation: 2010 to present

Ayuntamiento (1920)

Intramuros, Manila

Ayuntamiento Building before 2009

Intramuros, Manila


development


development 7

Ayuntamiento Building after 2013

Intramuros, ManilaNew office of the Bureau of the Treasury

PhP 1.2 billion reconstruction project

Ayuntamiento Building (interior)Intramuros, Manila

La Intendencia General de Hacienda, 1876

(with Casa Moneda, and Aduana, 1829)

Intramuros, Manila BSP general functions

• Promulgation of monetary policies: required reserve ratios, discount rates, and open market operations

• Sole printer of money of legal tender (seignorage), and

inflation targeting: to aid goals of economic growth and

stability

• Bank of last resort (bank of banks); clearing house of banks

(e.g., checks)

• Exchange rate determination: spectrum of fixed and floating

exchange rate regimes

Evolution of the logo

revised to be compliant with the Flag and Heraldic

Code of the Philippines (RA 8491) signed in 1998

adopted by the Bangko Sentral ng Pilipinas

adopted by the Central Bank of the Philippines, which has undergone four renditions

1949

1993

2010

Fiscal policiesMacroeconomics and development


development


development 8

Prerequisites of fiscal policy

• Tax collection:

i. Equitable [or reasonable] tax scheme payments:

progressive, regressive, or proportional

ii. Effective and efficient tax collection, called tax effort

iii. Culture of tax collection (e.g., value of honesty)

• Balanced-budget requirement: tax revenue at least suffices

government expenditure

• Independent central bank with sound macrofundamentals

LDC fiscal problems

• Low level of per capita income, and high degree of income inequality

• Low and non-progressive individual and corporate

income tax rates, low property tax rate

• Excessive foreign trade tax rates, high excise tax rates

LDC fiscal problems

• Ineffective tax collection agency results

i. from corrupt tax collectors

ii. to deficit-financing growth policy

iii. and inflationary-financing growth policy

• Mounting public debt and external debt, leading to

relative dependence on foreign aid and foreign direct

investment

State-owned enterprises

• Large capital investment (called in economics as sunk costs)

• Usual examples: public utilities, transportation and

communication systems, financial institutions, [social]

services, natural resources, agriculture, and

manufacturing

State-owned enterprises: problems

• Inefficiency: employment rather than profit maximization

• Monopoly: most state-owned enterprises act as a

monopoly, aligned with protectionist economic policies

• Higher wages inducing rural-urban migration, also an

avenue of government’s job creation interventions

• Import-intensive ISI strategy

• Managerial issue: lack of trust and accountability, and

prevalence of corruption

State-owned enterprises: solutions

• Efficiency criterion: adopt a bottom-line focus in managing public enterprises

• Privatization: sell ownership of public enterprises to

private investors

• The Latin American and East Asian NICs have been

active in the privatization of SOCs

• Philippines: privatization (F Ramos), build-operate-

transfer or BOT (G Arroyo), public-private partnerships (B

Aquino III)


development


development 9

State-owned enterprises: Philippines

• Locally known as the government-owned and controlled corporations (GOCCs)

• Contributes to a large part of total public debt

• Total public debt continuously increases, up to an

alarming rate of almost 78% of the total value of GDP in

2003 (UPSE Discussion paper 2004-09)

UPSE discussion paper 2004-09

The national government’s total debt stood at 3.36 trillion pesos as of the end of 2003, split almost equally between

foreign and domestic liabilities. This was as large as 78

percent of GDP in 2003. The outstanding debt of the

public sector as a whole (the consolidated public sector

debt) was running at more than 130 percent of GDP

(Chart 1). Both are on the uptrend.


Creditors are on edge over whether in the near future the government should default and they will be unable to

get their money back; investors on the other hand would

hesitate to invest in a country that seems headed

inexorably for another crisis. The growing size of the debt

and the deficit are undoubtedly the biggest reasons that

investment and growth in this country have remained

sluggish – fully seven years since the start of the Asian

[financial] crisis.


The next Argentina?

• Thanks to continuous OFW remittances, the Philippines have evaded the fate of Argentina in the 1980s

(popularly shown in the romantic rendition of the story

of Evita Peron)

• Usual symptom of Latin American LDCs: ballooning

government deficits turning into [unsustainable] public

debt

• Recall: sovereign versus private debt (on collateral)

The story of Venezuela

• Dependence on oil supply cheaply sold to China in exchange of foreign aid and investments, coupled with

unsustainable fiscal policies due to the socialist-populist

regime

• Anecdote: parallelisms with the current Philippine

president on fiscal pronouncements and policies?


development


development 10

The Economist26 October 2016

Economic crises in

Venezuela after tolls on

debt-driven economy

from China, in

exchange of oil reserves

The story of Venezuela

A bakery manager weighs banknotes in Caracas, Venezuela.

It’s also one of the clearest signs yet

that hyperinflation could be taking

hold in a country that refuses to

publish consumer-price data on a

regular basis. Cash-weighing isn’t

seen everywhere but is increasing,

echoing scenes from some of the past

century’s most-chaotic hyperinflation

episodes: Post-World War I Germany, Yugoslavia in the 1990s and

Zimbabwe a decade ago.

Philippines’ “mickey mouse” money

Money, Money, money,

worthless money, Manila,

Philippines, 10 April 1945. Commander S. J. Wilson looks over a worthless pile of

Japanese occupation paper

money he found in a building

he owned in Manila. The

Japanese had operated the building as a bank. (AP

Wirephoto, via John T Pilot,

Flickr.com)

Philippines’ “mickey mouse” money

Crates of notes being

bulldozed by US soldiers.

end of chapter 9contemporary national development

macroeconomics and development - zerrabueg.com · chapter 9: macroeconomics and development 1...

Documents