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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
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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)
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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)
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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)
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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.
UPSE discussion paper 2004-09
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.
UPSE discussion paper 2004-09
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?
LC Abueg: contemporary national
development
chapter 9: macroeconomics and
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