New Year’s Wish List – P55: $1

During a recent forum, Former Budget Secretary Benjamin Diokno proposed that a fixed exchange rate of 55 pesos to the dollar to create a fiscal stimulus of at least P100 billion that would pump prime the Philippine economy in the face of a global economic downturn. (Read the news report .)

Indeed, evidence has shown that sustained economic growth requires maintaining a competitive exchange rate, i.e. an undervalued currency. Dani Rodrik (2007), a professor of political economy at Harvard University ’s Kennedy School of Government noted that this was the experience of South Korea and Taiwan in the 1970’s. Since the last decade, China and India have also benefited from their undervalued currencies. Based on his research, every 10% percent depreciation adds 0.3% to GDP. He explains it thus:

“Why is currency undervaluation such a potent instrument for growth? For the simple reason that undervaluation serves to incentivize the growth-promoting sectors of the economy. It increases the profitability of manufacturing and non-traditional agricultural sectors. These are the activities with both the highest level of labor productivity in the economy and with the most rapid rate of productivity increase. It enables the economy to integrate into the world economy on the back of a strong export performance. It stimulates production (and hence employment), unlike overvaluation which stimulates consumption.”

In support of a competitive exchange rate, some businessmen and OFWs are circulating a petition, which they have sent to the Bangko Sentral ng Pilipinas. If you want to join in calling for a sound exchange rate policy, please sign the petition and send it via fax at (632) 726 0369.

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