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from ITUC-CSI

LONDON, Jan 21 (Reuters) – The International Monetary Fund will sharply cut growth forecasts this month and the world will not return to strong growth for two or three years, IMF Managing-Director Dominique Strauss-Kahn said on Wednesday.

“Things are not improving,” Strauss-Kahn said in an interview with the BBC’s “Hard Talk” programme. The International Monetary Fund’s last forecast was “not that good” and a new forecast, to be released in a few days, will be “even worse”, he said.

Asked about the fund’s forecasts for the world, U.S. and European economies, Strauss-Kahn said he did not know exactly how much these would be cut, but added: “I’m afraid that at least half a point or one percentage point down.”

In its November forecast, the IMF projected world output would grow by 2.2 percent in 2009 while the United States would shrink by 0.7 percent and the euro area would shrink by 0.5 percent but the credit crunch has tightened its grip since then.

Asked if the downwards revision meant the IMF expected a contraction in U.S. and European economies of between one and two percent this year, Strauss-Kahn said: “There is going to be this kind of contraction in the U.S., in Europe, including the UK.”

Emerging countries, while still growing, would also do worse than expected, he said. “China, India, Brazil, other emerging countries are going to experience very slow growth.

“Altogether, this first half of 2009 will be bad, the second half may show some improvement, but recovery can begin only at te beginning of 2010,” he said. “We are not going to go back to a high rate of growth before two or three years,” he added.

Strauss-Kahn said the IMF may need more funds in six months to finance bailouts of countries that fall victim to the financial crisis.

“The IMF has enough money today to deal with the countries coming today. If the crisis goes on, which is the most probable way, then down the road, in six months from now, we will need more money,” he said. “That’s why we need to organise now the way to have more money in six months, because it won’t be done overnight.”

Cielito Habito
Philippine Daily Inquirer

MANILA, Philippines – Ever notice how our economy has been behaving strangely lately? The latest strange (but welcome) behavior is how job generation based on the last two quarterly Labor Force Surveys (July and October 2008) appeared healthy even in the face of the world economic slowdown that has taken a definite toll on our economy.

In July, it was reported that about 1.3 million new jobs were created in our economy within the preceding 12 months. That was very good, given our need to create at least a million new jobs a year to keep pace with growth in the working age population.

In stark contrast, the same figure a year ago was only 392,000 jobs, and yet this was the period that our economy was recorded to have grown at a 30-year high of 7.2 percent. The latest October jobs figure, while a bit lower at 861,000 new jobs year-on-year, was nonetheless again better than the previous year’s job generation (786,000).

And yet, economic growth had already slowed down significantly to the 4 percent level this year. We had, in short, less job creation last year when we had much faster (even record) production growth, and strangely enough, more job creation this year when economic growth has been much slower.

More puzzles
You’d think looking more closely at the data would help explain the puzzle. But the puzzle deepens even more when you check the breakdown of output growth and job generation across major sectors of the economy.

The services sector has significantly slowed down from its brisk growth in past years, with last year’s growth rate (7.2 percent) cut down to just about half this year (3.7 percent). And yet, services provided 44 percent more jobs this year (699,000) compared to last year (485,000).

The industry sector posted a healthy 7.1 percent growth in the third quarter, surpassing last year’s performance (6.6 percent). And yet it had created only a thousand new jobs in the 12 months preceding last October; the same figure last year was 182,000.

Agriculture is no less a puzzle. Last year, it posted an impressive growth of 5.6 percent in the third quarter, but lost 11,000 jobs. This year its growth has slowed down to less than half of last year’s pace (2.5 percent)–and yet generated 161,000 new jobs.

Job-killing growth?
These seeming contradictions puzzle me even more in light of the general impression one gets from experience–not only in the Philippines but elsewhere as well–that the “growth-employment elasticity” is usually lopsided downwards.

In plain English, a 1-percent fall in output (or slowdown in its growth) usually results in much more job losses than the jobs that are gained when the economy grows by 1 percent.

It was in this context that the term “jobless growth” came about. Economists had begun to notice that much of the economic growth in the world’s economies in at least the past decade has not been accompanied by a commensurate growth in jobs.

In many cases in fact, there were hardly any job increases at all even as economies continued growing–hence the term. Worse, there have been episodes when growth actually speeded up, and yet jobs actually fell, as in last year’s experience with our agricultural sector. This is not just jobless growth; it is better described as “job-killing growth!”

But what we’re seeing right now is the exact opposite. As growth slows down, we seem to see more jobs coming about than when the economy grew much faster. This is all welcome of course, but how do we explain such perverse trends?

Job profile
I am not about to question the statistics, even though many would immediately point to that as the possible answer. There are actually answers to be found in the further details of the job numbers. Where have the latest jobs been coming from?

I examined the available tables from the National Statistics Office (NSO) website, made some calculations, and found the following: Of the surprising 699,000 new services sector jobs mentioned above, more than half were in trade. And since I am not seeing an unusual proliferation of retail stores and shopping malls in the past 12 months, I surmise that what this means is that large numbers of Filipinos have taken to the usual informal sector selling/vending activities–”nangangalakal,” as squatters near our neighborhood describe the common occupation in their area.

And this includes selling items scavenged from the neighborhood garbage piles, which they systematically pore over and collect usable items from before the municipal garbage collection trucks come to collect them.

It would seem, then, that much of the puzzles I’ve been describing simply reflect the resilience of the average Filipino. When our poor compatriots find themselves against the wall, they will find a way. Clearly, the kind of growth we have been experiencing gives us little to be happy with or gloat about even if the posted GDP growth rate is faster than that of our neighbors. What continues to elude us is quality growth, one whose benefits permeate throughout the economy such that as the saying goes, “the rising tide lifts all boats.”

The best of the holiday season to all–and here’s wishing us all a joyous new year (“prosperous” may not be quite realistic)!

Comments are welcome at chabito@ateneo.edu

Joel Guinto
INQUIRER.net

MANILA, Philippines – The government has set a P300-billion “sustainability plan” to fuel economic growth and to protect and generate jobs in the face of the global economic crisis, the full impact of which is expected to hit the country early next year, officials said.

The plan, presented to President Gloria Macapagal-Arroyo at a Cabinet meeting Tuesday, includes building and rehabilitating infrastructure, increased spending for social services,
and an expected increase in capital and consumer spending as a result of reduced corporate and individual income tax rates, Economic Planning Secretary Ralph Recto said.

Budget Secretary Rolando Andaya said the government would give priority to “quick-moving” infrastructure projects that have no right-of-way and other legal issues.

“We presented an economic sustainability plan,” Recto said at a news conference in Malacañang. “It is not a contingency plan. It is not a recovery plan—there is nothing to recover from.”

He said the plant was for “continuing what we have been doing and stretching every peso in the budget to ensure that we save and create as many jobs as possible.”

Recto noted that while millions of jobs were being lost in the United States and China, the Philippines generated about 800,000 jobs this year.

He said Cabinet members were instructed to ensure that the infrastructure projects, such as rehabilitation of roads and construction of hospitals, school buildings and irrigation facilities, would have a multiplier effect so that “more jobs are saved, secured, and
created.”

Local government units will also be encouraged to spend on infrastructure development, he added.

Recto said that despite the global recession, the worst-case projection of the government’s top economic officials was a 3.7-percent growth in the gross domestic product next year, and the high end of the projected range was 4.7 percent.

Ma. Elisa P. Osorio
Philippine Star

The Philippine Chamber of Commerce and Industry (PCCI) said the economy will only grow by three to 4.2 percent next year while exports are expected to increase by only five to eight percent.

“The country will grow by no less than three percent. That is expected given the economic situation worldwide,” PCCI chairman Sergio Ortiz-Luis said in an interview at the sidelines of yesterday’s press conference.

Ortiz-Luis, who is also the president of the Philippine Exporters Confederation (Philexport), said that the major problem of the country is the value of the peso and the shrinking client base.

The biggest market of exporters are the United States and Europe, both of which were hit by the economic crisis.

In fact, he said semiconductors export, the largest component of local sales overseas, will remain in the red.

“It (electronics export) has been negative for the last several months. It is okay as long as it will not go beyond negative five percent,” Ortiz-Luis explained.

Bulk of the growth for exports next year is expected to come from the merchandise sector with a projected three to five percent while total exports including services is expected to expand by five to eight percent.

In spite of the slowdown, Ortiz-Luis said that the industry will hit the three to five percent full year export target as first 10 months data already showed a growth of more than four percent.

According to Ortiz-Luis, the Philippine economy will fare better than our neighboring countries because the government is looking at increasing public spending.

The government and the private sector are readying a P100-billion fund that will spur spending in the country’s infrastructure in a bid to further insulate the Philippines from the effects of the global financial crisis.

Meanwhile, PCCI chairman emeritus Donald Dee said he already has an idea who to approach in order to complete the private sector contribution.

“Contributing to the fund is attractive to private banks because they will already have a ready market,” Dee said.

He said the proponents of the fund, in coordination with the National Economic Development Authority (NEDA) will evaluate which infrastructure projects to fund.

Dee explained that the P100 billion will be released pro rata, depending on the result of each project evaluation.

Des Ferriols
Philippine Star

The economy is expected to grow by a slower 1.8 percent in 2009, with exports actually expected to contract by one percent and government deficit rising to 2.1 percent of gross domestic product (GDP).

Latest projections made by the private think-tank Economist Intelligence Unit (EIU) showed the economy screeching to a near-halt in 2009 as a result of the weakness in the global economy.

EIU said it is also projecting a deceleration in commodity prices, with the inflation rate falling to six percent because of weaker demand-side pressures and declining world commodity prices.

EIU said it is also revising its growth forecast in 2009 because of the deepening of the global financial crisis which EIU said would cause the sharp slowdown in demand for Philippine exports.

EIU said investments would slow significantly as foreign direct investments dry up and local companies find it harder to raise capital on international markets.

“Weaker external demand and domestic investment will lead to higher unemployment and will constrain consumption growth,” EIU said.

Moreover, EIU expects remittances to slow down and weaken, eroding its power to support domestic consumption which had been the powerhouse supporting the country’s growth.

“High domestic borrowing costs will also weigh on investment and consumption growth in 2009,” EIU said.

EIU said, however, that the decline in inflation rate was an upside since rising inflation had curtailed spending in 2008, eating into the disposable income of consumers.

“The main risk to our inflation forecast is the deeper than expected depreciation of the exchange rate, which would push up the price of imported goods and services,” EIU said.

EIU said there was additional risk if workers should demand higher wages which could prompt companies to raise prices. “Although the risk of a wage-price spiral is receding as inflationary pressures begin to abate,” the report said.

EIU also said President Arroyo is expected to make little progress on reforms during the remainder of her term of office, particularly the government’s main policy aim of balancing the budget.

“Considerable progress towards this goal has been made,” EIU said. “However, the government has now all but conceded that it will not be able to achieve its aim of balancing the budget by 2010, owing to its plans to stimulate the slowing economy with additional expenditures.”

According to EIU, the budget deficit would preclude the possibility of aggressive fiscal stimulus because the government would find it difficult to finance a larger external borrowing requirement in the present market condition.

“As well as the deteriorating economic environment, politics will also help prevent progress on reforms,” EIU said.

Erica Ogg
cnet News

Analysts are readjusting their expectations for the PC industry next year, and it’s not looking good.

On Wednesday, IDC released an updated forecast for the number of PCs expected to be shipped next year. In 2009, PC shipments will rise just 3.8 percent worldwide, according to the report.

That’s a drastic cut from the 13.7 percent growth IDC had predicted for 2009 earlier this year. The hardest hit areas will be the emerging PC markets of Latin America, Central Europe, the Middle East, and Africa due to falling commodity prices and the worldwide credit crunch.

But the U.S. PC market is expected to fare even worse. Next year will bring a decline in shipments of PCs by 3 percent compared to this year. However, IDC says that there will be “low single-digit” increases in the years following.

The key factors affecting PC shipments are the rate of portable PC adoption, falling prices, and the PC upgrade cycle.

“Low-cost mini notebooks will help volume, but pressure margins and revenues,” said Lore Loverde, director of IDC’s Worldwide Quarterly PC Tracker. “Consumer and commercial segments will be much more conservative in their purchases over the coming year or two, and while low prices will remain essential, they will not drive volumes as they did in the past few years.”

Rob Lever
Agence France-Presse

WASHINGTON, United States — The United States officially joined the ranks of the recession-hit economies, but debate is still raging on how long and how deep the downturn will be.

The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the panel recognized as the official arbiter of business cycles, said it made the determination the recession began in December 2007.

Although a recession is generally defined as two consecutive quarters of declining activity, the panel has its own criteria for determining a downturn, including data on employment, income and industrial output.

Because of the lag time in officially declaring a recession, some analysts say the worst is generally over by the time the news becomes public.

But John Ogg, analyst at 24/7 Wall Street, said it may not be the case this time: “We still think more pain is on the way.”

That message was hammered home with a survey showing the US manufacturing sector sank to its lowest level of activity in November since 1982.

The Institute of Supply Management (ISM) said its manufacturing index slumped 2.7 points to 36.2 percent, far below the 50-percent level that separates expansion and contraction.

Analysts pointed out the overall economy will have trouble escaping deep recession with manufacturing so weak.

“The worsening credit crisis and deepening global slump have pushed the ISM index below the 41 figure that is consistent with past recessions,” said Sal Guatieri, economist at BMO Capital Markets.

“The fact that the index continues to decline points to more than your garden-variety downturn.”

Many analysts have been saying the recession has been raging for months.

“So far in 2008, employers have slashed 1.2 million jobs, and the bad news is expected to continue when we get employment data for November this Friday,” said Michael Fowlkes, analyst at Investor’s Observer.

“Recession fears have now become a reality, and the questions that remain are just how bad and for how long this recession will linger over us.”

Augustine Faucher at Moody’s Economy.com said his firm expects the downturn to last through the first half of 2009 and to be “the worst of the post-World War II era.”

“Even with a substantial stimulus package, unemployment is likely to peak close to 9.0 percent in early 2010,” he said.

According to official government data, the US economy contracted at a 0.2 percent pace in the fourth quarter of 2007 but grew 0.8 percent in the first quarter and 2.8 percent in the second quarter of 2008. It then contracted 0.5 percent in the third quarter, based on a provisional estimate.

But the gross domestic product (GDP) data may have been skewed by tax rebates that stimulated consumer spending, according to analysts.

A major factor in determining recession is employment, which has been declining since last December, the panel said. Other factors include monthly data on income, manufacturing and retail sales.

The NBER makes no forecast on how long a recession will last, but said that in the past they have run from six to 18 months. The panel said it has no definition of the term “depression.”

Federal Reserve chairman Ben Bernanke said meanwhile the current economic situation bears “no comparison” to the much deeper crisis of the 1930s Great Depression.

“I’ve written books about the Depression and been very interested in this since I was in graduate school, there’s no comparison,” Bernanke told an audience in Austin, Texas.

Bernanke said the situation in the 1930s represented “very difficult circumstances,” because “we didn’t have the social safety net that we have today.”

Brian Wesbury at First Trust Portfolios said there are signs the recession may end soon because of how it developed.

“This time around, the recession is not due to tight monetary policy, higher tax rates, or protectionism,” he said.

“It’s due to a sudden and sharp plunge in the velocity of money — what we have been calling ‘risk aversion hysteria’ — where the speed with which money moves its way through the economy slows down as both consumers and businesses decide they want to increase their cash holdings.”

Wesbury said indications that holiday shopping is better than expected “may be an early sign that the bearishness went way too far.”

Aurelio O. Angeles
Philippine Daily Inquirer

(Conclusion)

WHAT DOES it mean to the people of the United States when their economy’s current account has been on deficit not just for a year, but for 31 years?

Here are thoughts that will blow your mind.

Deficits and the American people
First, remember my statement earlier, “people make up the economy, and economics is all about people.”

The persistent current account deficit of the United States means that, on the average, Americans spend more than they earn, and they have been borrowing money from the rest of the world faster than they can earn and repay it.

The Americans–their families, government, institutions, businesses–have to work harder, earn more, be more competitive in their dealings with the rest of the world if they are to maintain their standard of living.

Or, they can live within their means.

Otherwise, their debts will catch up with them, bubbles will burst, people will default on their loans, and banks will run out of money to meet their own financial obligations.

Second, these persistent CAB can also mean the people of the United States are spending money on counterproductive projects.

Here is a good example: waging wars funded by borrowings.

If people do not provide the money for the country to go to war and its government fails to collect taxes to fund the war, there is only one way to go–the government has to borrow from the financial markets to fund these wars.

Believe it or not, with the persistent failure of the US economy to turn around its current account deficit, and of the US government to collect enough taxes to balance its budget, the wars in the last 18 years have been funded, and continue to be funded, by borrowings from the savings of the real economy within the United States and the rest of the world.

How can one repay a major financial obligation that does not pay for itself? How does one pay for a project that has become a bottomless pit of expenditures with no source of receipts?

In economics, nothing is free. In home economics, when you overcook, you burn the food.

The spectacular economic growth of the United States these past 31 years has been funded by borrowings.

Consider these figures from the IMF website, http://www.imf.org/external/pubs/ft/weo/ 2008/02/weodata/weoselgr.aspx.

The GDP of the USA has been rising from 1980 to the present: $2,789 B (in 1980), $5,803 B (1990), $9,817 B (2000) and $13,808 B (2007).

The per capita GDP of Americans is: $12,255 (in 1980), $23,208 (1990), $34,774 (2000) and $45,725 (2007).

The United States is reported to have the highest GDP and per capita GDP in the world. Right?

I tell you that expenditures for waging wars increase the nation’s GDP. People receiving income for waging wars necessarily raise the level of the nation’s per capita income.

But, because the economy is increasingly dependent on borrowing from international trade that it has no means of paying and because the government continues on its financial escapades without regard to being able to pay for them, the figures on GDP and Per Capita GDP may be truly growing as seen above, but such growth is now increasingly funded by domestic and foreign borrowings.

In such a case, the day of reckoning will come, as it does to a family which bought a grand mansion on credit without regard to the income to pay for the amortization.

Role of financial markets

Financial markets exist to do business.

It is the objective of business to look for customers, to earn money and to outdo the competition in terms of products, services, prices, distribution and frills.

So long as there are customers that buy, there will be markets that will sell. So long as business is good, there will be a growing chain of suppliers of capital that will support the industry from within and outside the economy.

If the market is free from government intervention, then the sky is the limit in offering products, services, pricing, distribution and frills.

Thus were born fixed income investments, stock markets and the “brilliant” idea of exotic derivatives, futures and options.

So, we demand: Let the government provide direction and guidelines and mandate it to intervene in the markets when necessary.

Now, why would we allow the government to interfere and provide directions in these markets when it cannot even balance its own budget for years!

People talk about recession now coming to the United States. Well, in truth, our debts have caught up with us at last.

It is the day of reckoning. It is collection time. It’s the hour for looking deep into ourselves.

Realities are simple. But our complex minds do not accept simplicity and look for reasons elsewhere.

Is there an end in sight?

Why do the financial markets continue to promote the growth of debt–or CAB deficits–in the US economy in spite of the obviousness of its inability to repay such debts from any future surplus?

First, the profit motive behind every debt paper provides the incentive. That’s free market for you. As President Bush is reported to have said: “Don’t disturb capitalism.”

Second, there is a lack of understanding among people on the impact of the chronic US CURRENT ACCOUNT DEFICIT on the world economies in general and on the financial markets in particular.

Till now, they are unable to connect these deficits with the failure of financial markets to recover in spite of massive aid.

Third, people in high places tend to equate economic prosperity with the performance of stock markets, commodities markets, futures and options markets.

If these markets are going through boom times, then there is economic growth and prosperity. If there is a bust, then the world must be in recession.

But the financial markets are just a mirror of what happens in the real economy.

Take care of the real economy, heed what the CAB has been saying for 31 years, and the financial markets will take care of themselves.

We may not grow as fast, but we will not have to kill ourselves growing.

The fourth reason for promoting debt and closing one’s eyes on the meaning of CURRENT ACCOUNT DEFICITS is hinged on the answer to this question: “Why does the US dollar appreciate in value even as the USA continues to be the center of the world’s financial crisis?”

You will read this answer from media–”The dollar remains the safest haven for the world’s currencies.” How foolish!

Why is there an increasing demand for the dollar in the various economies as the crisis engulfs the United States? Here is the first reason.

When in good times investors holding US dollars first invested funds in these economies, say the Philippines, they first converted their US dollar to peso. This brought the value of peso up in relation to the dollar. They then used the peso to engage in various forms of investments available in the Philippines.

Pinoys experienced this phenomenon when the value of the peso breached P40 to a dollar in the first quarter of 2008, after floating around P56 to a dollar in the third quarter of 2005.

Here lies the power of the volume of hot money flows.

Now with the crisis, these investors have been selling their Philippine investments in peso, converted the peso proceeds into dollars and have been repatriating their dollars to answer for their requirements in their home base.

These activities will result in a greater demand for the US dollar and the depreciation of the peso. It is the same everywhere, except in Japan where investors have to pay off their yen loans in yen.

What are some of these home-base requirements? They need to answer margin calls for their dollar investments; they need to pay their dollar loans and other obligations; they need to consolidate their dollar position.

Here is the second reason. Where is the financial center of the world? Where is the New York Stock Exchange, the New York Mercantile Exchange, the Chicago Mercantile Exchange, the Philadelphia SE, the Nasdaq? In the United States, of course!

To what currency must the peso, the dinar, the pound and ringgit be exchanged if people wish to transact business in these exchanges? The US dollar, of course!

Can we imagine the 2007 volume of equity shares traded in these exchanges? It is unbelievable but true–US$45.2 trillion! (Source: World Federation of Exchanges website, http://www.world-exchanges.org/WFE/home. asp?menu=436).

This is 3.3 times bigger than the GDP of the USA!

Here is the third reason.

What is the medium of exchange involving foreign trade transactions all over the world? What currency must a Taiwanese buy to trade with his relatives in China? The US dollar, of course. Which economy prints the US dollar? The US economy, of course.

People have no other choice in transacting international business. It is the way banks have been set up since after the Second World War, when the dollar was enthroned as king of foreign currencies.

So, it is foolish to say the value of the dollar is going up because “America, for all its problems, is still seen as the safest place to put one’s money.”

Current Account Deficit

and the US dollar

What has the universal use of the dollar as a means of exchange got to do with the growing debt of the US economy?

Take a look at the dollar bill and you will read that it is a legal tender for debts, public and private. Legally, they are liabilities of the Federal Reserve Banks and obligations of the US government.

Well, this explains why banks are tough on Argentina, Thailand and Iceland, but are patient and long suffering with the United States.

This also explains why the financial markets are adverse to the devaluation or depreciation of the US dollar.

And why is the dollar devaluation beneficial to the US economy?

It is a principal strategy for the USA to be competitive in the world market of real goods and services, to increase its net EXPORTS and turn around its CAB from negative to positive figures over time. Remember the Chinese yuan?

In short, the universal use of the dollar in finance, trade and exchange provides a massive challenge if the CURRENT ACCOUNT DEFICIT is to be turned around.

Truly a complex, interconnected world.

The leaders of the Group of 20 recently met in the United States. President Bush is reported to have offered the following list of solutions: bolstering accounting rules; setting up a central clearing house for credit default swaps; reinforcing rules for manipulation and fraud in trading of stocks and securities; enlarging the list of nations with voting power in the IMF and the World Bank.

And the Australian Prime Minister is said to have warned against rewarding executives of financial firms for high-risk investments and is said to have called this “dumb, wrong and bad.”

And more governments are providing billions of dollars to boost the liquidity of banks.

Good start. But the problem is larger than international finance, which is merely a reflection of the real economy.

The Group of 20 must address the roots of the 31-year-old international economics problem–the CURRENT ACCOUNT DEFICIT of the USA and its growing foreign debt.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is an entrepreneur who wrote the books “The Peso Exchange Rate: Why Are We So Poor?” and “The Philippine Economy: Do Our Leaders Have A Clue?” Feedback at map@globelines.com.ph. For previous articles, please visit map.org.ph.

Cielito Habito
Philippine Daily Inquirer

THE THIRD QUARTER GDP growth figures are out, and the numbers are as everyone expected. The economy has slowed down in the face of the shocks from abroad, and what kept it from slowing down as much as most of our neighbors did was the deliberate pumping up of government spending to prop up demand.

The government fiscal data say it all: October spending was up 20 percent even as revenue was up by only 11 percent from last year. Thus, rather than move closer to the originally targeted balanced budget this year, the year-to-date government deficit is 56 percent over what it was last year, now standing at P62 billion. What this means is that the government has had to borrow more again this year, and while this buys us better growth than otherwise for now, it will catch up with us as a heavier debt service burden down the line, with all its attendant adverse implications that we have all seen and felt before.

Triple shocks
The external shocks we face come in three forms. First is the financial turmoil which has led to tighter access to credit by governments and firms, depressed the equity markets and led to adverse exchange rate movements in terms of both levels and greater volatility. Second is the recession in major economies led by the United States, Japan and Germany, and the economic slowdown almost everywhere else. This translates directly into reduced exports, tourism, foreign direct investments and remittance flows, along with tighter government fiscal pressures, as already manifested in our own government’s finances seen above.

Third, and not directly the offshoot of the financial meltdown but coincident with it, is the adverse relative price movements, particularly in traded goods. Many countries are now facing higher prices for their imports (particularly oil and food) but lower prices for their commodity exports–what economists call worsening terms of trade, which directly translates to lower real income, and ultimately, lower general welfare.

Prior practice
As implied above, with governments going into fire-fighting mode to cope with the external shocks, it is well worth considering what longer-term implications this crisis and the responses to it will have for people in both the present and future. In particular, what are the human and environmental costs of the financial meltdown to countries like ours caught in the contagion?

We in East Asia are no strangers to this situation; we had “practice” in 1997-98 with our own financial crisis. And from that experience, one may expect at least six manifestations of the human and environmental costs of the current difficulties. These are increased poverty, reduced social investment, damaged social capital, relaxed environmental standards, reduced environmental investments, and adverse migration movements.

Impacts and responses
Poverty rose region-wide with the Asian financial crisis, and it will again with the current one. This is because the economic slowdown or even recession in some economies (as in Singapore) directly translates into more joblessness. This has, in turn, led before and will lead again to higher school drop-outs as parents keep children out of school, either because they can no longer afford the cost, or because they need them to help earn the family living. It has and will again lead to higher incidence of malnutrition and illness.

We are also likely to again see substantial public spending cuts on social services and human development, meaning education, health and social welfare. Private provision of the same will likewise suffer due to higher costs. And a decline in social capital will be manifested in rising incidence of crime, domestic violence, child abuse and street children, along with breakdown in community cohesion and cooperation. Experience tells us that in difficult times, individuals and families become more self-centered and less altruistic.

Grow now, clean up later
Experience likewise shows that when times are hard, governments, firms and people become more short-sighted. Governments tend to relax environmental policies and standards and become lax in enforcing them, as their concern shifts to keeping businesses alive. In the need to cut costs, firms shelve or abandon planned investments in environmentally sound technologies, and even stop operating environment control facilities already in place. There is also heightened pressure on environmentally sensitive exports (like logs and minerals) in the concern to sustain foreign exchange earnings. And for the most vulnerable members of society, for whom the environment is their only “social security system,” there is a rush to the uplands and coastal areas, where already fragile ecosystems face even greater population pressures.

The risk we face now is the same risk we faced in 1997-98: What we do now for the sake of short-term stabilization may be at the expense of our longer term welfare–including that of our children and grandchildren, here and yet to come. We would all do well to take a longer view of things as we deal with our current economic challenges. What worries me is that too many of our current political leaders have not exactly shown the capacity to see beyond the short term.

Comments welcome at chabito@ateneo.edu

Iris C. Gonzales
Philippine Star

Government economic managers should push for reforms that would help the Philippines cope with the impact of the global financial turmoil, Senator Edgardo Angara said yesterday.

The lawmaker noted for instance that the government should push for the amendment of the charter of the Bangko Sentral ng Pilipinas (BSP) to give the monetary agency more regulatory powers.

“Reforms such as the amendment of the charter that will authorize the Central Bank to extend its supervision to subsidiaries and affiliates must be carefully considered,” Angara said.

Angara, chairman of the Senate committee on Banks, Financial Institutions and Currencies, said strengthening the regulatory powers of the Philippine central bank would help isolate the financial institution from the current global financial turmoil.

He also reiterated previous calls on the government to abandon its balanced budget goal and instead use the money to pump-prime the economy. The government has a goal to balance the budget by 2010 but some economic managers already conceded that this might be difficult to achieve given the current situation of the world economy.

“What the government needs is good fiscal and financial management,” said Angara.

Latest Finance data showed that the National Government’s budget deficit swelled to P9 billion in October from a deficit of P1.5 billion in the same month last year as the state spent more than it earned during the period.

Expenditures amounted to P101.6 billion in October, up 19.3 percent compared to the P85.2 billion disbursed in the same period last year. Revenues reached P92.6 billion during the month, a growth rate of 10.7 percent compared to the P83.7 billion it earned in the same period last year.

The October deficit brought the January to October budget gap to P62.3 billion compared to the P41.5 billion recorded in the same period last year.

Total expenditures for the 10-month period amounted to P1.03 trillion or 10.4 percent higher than what was recorded in the same period last year of P937.4 billion. Total revenues, on the other hand, amounted to P972.6 billion, an increase of 8.5 percent from last year’s P896 billion.