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| ON THE OTHER HAND |
| How the Philippines Got Left Behind, Part I By Antonio C. Abaya November 13, 2001 Because of space limitations, the following paragraphs were cut off from the previous article titled �In Defense of the Much-Maligned Elite.� I am restoring them now, with additional material on how and why the Philippines got left behind by its neighbors. John Mangun is right that personal credit is very tight in the Philippines. But this is not the result of a deliberate policy hatched by the scheming elite. Again, a wider availability of credit would favor the elite as this would mean more customers for their many businesses. Restricted credit means fewer customers. To understand why credit is restricted here, one must look at the savings rate, the interest rate, and the exchange rate, all of which are interrelated. In all of East Asia, the Philippines has the lowest domestic savings rate as percent of GDP: only 20% compared to 35% in Malaysia, for example. Because of the relative scarcity of money, its cost is relatively high. That means that the interest that banks charge when they loan out their relatively scarce money is also high. Among the countries in East Asia, only Indonesia and the Philippines have been saddled with this burden for decades. Interest rates are dictated by the prime lending rate set by the Bangko Sentral and the International Monetary Fund, not by the much-maligned elite. Theoretically, the BSP and the IMF can unilaterally lower the prime lending rate to the level of, say, Japan�s, which has been exactly zero for the past several months. In this theoretical regime, John Mangun�s ideal of widely available personal credit would automatically follow. But the danger here is that, with a low prime lending rate, banks would also have to lower both their lending and savings rates. This would compel money in time deposits (from portfolio managers, corporate and pension funds as well as surplus liquid assets of the elite) to move to other investment instruments. While some would gravitate to the stock market or real estate, my sense is that the bulk of the large investments would fly off to other countries where the savings rate is higher, or at least higher than the inflation rate here. Especially in the Philippine context of recurrent political instability, unabated lawlessness, endemic corruption and pervasive lack of social discipline. This capital flight would weaken the peso as peso-holders convert their pesos into hard currency such as the US dollar, which would destabilize the peso-dollar exchange rate as well as fuel peso inflation as pesos flood the market. The BSP can defy the IMF and lower the prime lending rate unilaterally, without risking collateral damage to the exchange rate, but this would be possible only if the BSP were to tightly control the inflow and outflow of hard currencies. This was in fact what Japan, South Korea and Taiwan did during their early formative years when they were building up (rebuilding, in the case of Japan) their economies, and this is also what the People�s Republic of China has been doing since 1949, and Malaysia since the Asian financial crisis of 1997. In other words, full convertibility of the peso has to be scrapped. But this is a political decision that can be made only by the government, not by the elite. ***** Those who are looking for the reason or reasons for the failure of the Philippines to develop as fast as its neighbors should look at a) the minimum wage law, and b) our failure to build an export-oriented economy. The minimum wage law was passed in the mid-1950s, a minor monument to American social and economic liberalism and pushed through the Philippine Congress by the tireless American Jesuit, Fr. Walter Hogan, and the Ateneo�s Social Order Club (of which I was a member). In hindsight, however, it may have contributed significantly to this country�s malaise. In the 1960s, when dozens, then more than a hundred, American companies started moving part or all of their manufacturing to the Far East, most of them located those facilities in Hong Kong or Taiwan, not in the Philippines, even though most Filipinos spoke some English (most of the Chinese didn�t) and even though most Filipinos were at home with American culture (most of the Chinese weren�t). The compelling reason was that wages were lower in Hong Kong and Taiwan than in the Philippines, and there was no minimum wage law there. In the 1960s, the statutory wage here was seven pesos a day. That may look ridiculously small, but since the exchange rate then was 2-to-1, that amounted to $3.50. In 2001, the minimum daily wage is about P256 or, at the exchange rate of 52-to-1, the equivalent of only $4.92. So, in 46 years, the statutory wage in the Philippines, in dollar terms, grew by only $1.42 or 40%, or an average of less than one percent a year. In Taiwan and Hong Kong, on the other hand, even without a minimum wage law to push it up, wages have climbed up from below Philippine levels to 10 to 15 times those levels, even approaching the Australian and the southern European. This does not mean that the Hong Kong and Taiwan elites were/are more enlightened than the Philippine elite. It just means that wages are, or should be, subject to the law of supply and demand. In an economy where enterprises are flourishing, entrepreneurs compete for labor from a shrinking pool, thus pushing wages up as they bid higher to attract the employees and workers that they need, even without the help of a minimum wage law. Thus wage increase is automatically tied to increasing productivity. In an economy where enterprises, for whatever reason, are not flourishing, there are and will always be more job-seekers than jobs; thus wages stay depressed , even with the artificial crutch of a minimum wage law. Legislating wage increases, a bad habit but predictable in a country with too many lawyers, politicians and radicals and not enough entrepreneurs, divorces wages from productivity and leads only to higher inflation and a progressively weaker currency. And the biggest loser is the worker. The Philippines is the graphic example of that fact of life. Clearly, American social and economic liberalism, far from propelling this country to prosperity, has actually crippled it. ***** This article appeared in the December 3, 2001 issue of the Philippine Weekly Graphic magazine. |