Sta. Ana is the Coordinator of Action for Economic Reforms. This article was published in the January 12 edition of the Business World, pages S1/4 to S1/5.

Benjamin Diokno’s proposal to peg the exchange rate at PhP 55 to a US dollar is gaining a broader constituency.  The exchange-rate debate is no longer an esoteric one, confined to finance executives, exporters, and academic economists.

Those engaged in the manufacture of import substitutes now recognize that a competitive exchange rate can be a better alternative to tariffs to protect domestic industry and jobs. The tourism industry also sees the importance of the exchange rate, aside from its freedom-to-fly advocacy, for the country to draw in bigger numbers of inbound tourists.   The BPO (business processing and outsourcing) industry has seen how a rapidly appreciating peso (in 2007) can sharply cut profit margins. Note that some of the Philippine corporate giants—the Henry Sy family and the Ayalas, for example—have stakes in the tourism or BPO industry.

The largest constituency that has added its voice for a competitive exchange rate is made up of the overseas Filipino workers (OFWs).  They are highly organized and politically articulate.

Benjamin Diokno’s proposal for an undervalued currency is mainly for the OFWs.  But it is more than that.  Specifically, undervaluing the peso by fixing the exchange rate at PhP 55.00 to US$ 1.00 from the current PhP 47.00 to US$ 1.00 is a pump-priming tool to boost consumption.  Thus, for every US dollar that an overseas Pinoy sends home to her family, the latter obtains an additional PhP8.00.  In a manner, that’s a windfall gain of 17 percent based on the present exchange rate.  In the aggregate, assuming that the US$15 billion in OFW remittances in 2008 will hold, we can expect an additional PhP 120 billion in the pockets of OFW families in 2009.

This innovative way of pump priming to weather the economic downturn supplements the government’s fiscal stimulus.  In fact, Mr. Diokno contends that undervaluing the currency is a better pump-priming method than relying on the government budget.  Government budget spending, especially under the administration of Mrs. Gloria Arroyo, is prone to substantial leakage due to corruption, political patronage, and other inefficiencies.

The proposal has gained traction among reform advocates. For instance, Clarita Lapus, an entrepreneur in the food processing industry (Mama Sita products) and a tireless campaigner of macro and micro reforms, has initiated a petition letter campaign in support of the exchange rate of PhP55.00 to US$ 1.00. The letter is written in Filipino since it is addressed to ordinary Pinoys, including the OFW families.

Organizations of overseas Filipinos like the Center for Migrant Advocacy (CMA) have voiced their support for an undervalued currency.  OFW groups exert significant influence in Congress; politicians cannot ignore the sentiments of a large electoral constituency.

A criticism that the Diokno proposal cannot evade is that a currency undervaluation is improper at a time of a global economic crisis.  The deep recession that has hit the advanced economies requires global collective action.  Beggar-thy-neighbor practices such as devaluing the currency will undermine the recovery of hard-hit countries that suffer from current account deficits and overvalued currencies.

Elementary economics informs us that the sum of consumption (C), investments (I), government spending (G) and exports (X) minus imports (M) accounts for a country’s aggregate demand.  The main strategy against the recession is to considerably increase C.  But a leakage can prevent an optimal increase in C, thus undermining the recovery.  The leakage can be in the form of, say, taxes and imports.

In the US, its fiscal stimulus package includes tax cuts to obstruct a source of leakage.  But if the US continues the old habit of consuming imported goods, the increase in M would lower aggregate demand. The multiplier effect of the fiscal stimulus would be low.

It is indeed tempting for countries to resort to protectionist measures during times of recession.  The Great Depression led countries to protectionism, but this also contributed to the outbreak of World War II.

The best approach is for all countries to agree to collective action by jointly having fiscal stimulus programs.  In that case, US imports for consumption spending can be offset by US exports to serve part of the increasing consumption in other countries.

Still and all, even if everyone sticks to a collective bargain, the price or the exchange rate matters.  If the currency gains strength, M will surge, especially if a country has a bigger marginal propensity to import.  This can undercut the fiscal stimulus to boost C.

Hence, the advocacy to peg the exchange rate at PhP 55.00 to US$1.00 may serve another purpose—prevent the peso from appreciating.   Since the Bangko Sentral ng Pilipinas and Mrs. Arroyo have a bias for a strong peso, no one expects them to support the Diokno proposal. But the political noise and the intense campaigning for PhP55.00 to US$1.00 can put pressure on the authorities to prevent the peso from appreciating to a level that will hurt the economy’s real sector.  This perspective from Raul Fabella augments the Diokno proposal.  It responds to political pragmatism and answers the beggar-they-neighbor criticism.