Mr. Sta. Ana is the Coordinator of Action for Economic Reforms. This article was published in the March 02, 2009 edition of the Business World at pages S1/4 and S1/5.
Let’s face it: The Barack Obama stimulus plan by itself will not lift the US from the recession in the quickest and most decisive manner.
Some quarters—Paul Krugman, for example—have doubts about the effectiveness of the stimulus plan. Krugman criticizes the stimulus plan for lacking boldness as well as for being incomplete and inadequate.
But let us assume that the Obama administration will take heed of Krugman’s advice and adopt his more aggressive proposals. Will that lead to the definitive stimulus?
If we liken the search for a solution to the recession to a jigsaw, the key is to find the critical, central, but complex piece (or set of pieces) to complete the puzzle. For the likes of Dani Rodrik, the US plan is crucial, but something is still missing. A well-designed stimulus plan for the US is at best a necessary but insufficient condition. The missing piece is the international coordination for a fiscal stimulus.
Let us be reminded that the situation is no longer a US recession but a worldwide economic crisis. Dousing the fire in the US does not tackle the global conflagration. The US plan is most effective only when each and every country—developed and developing—contributes to the collective effort to revive the global economy.
The example of Rosie, a Filipino-American visiting Manila, illustrates a typical problem facing the US stimulus when not coordinated with the rest of the world. Our friend Rosie received from the US government a tax rebate of US$600. To help the US economy, she should have spent the money in the US to buy made-in-USA products. Oh well, she used the US$600 to shop at Rustan’s, buying assorted high-end goods made in China, the Philippines and Europe.
And here’s a US joke imitating real life, which I obtained from the blog of our friend and colleague, Manuel Buencamino (www.uniffors.com):
Below is some helpful advice on how to best help the US economy?by spending your stimulus check wisely:
If you spend that money at Wal-Mart, all the money will go to China.
If you spend it on gasoline it will go to the Arabs.
If you purchase a computer it will go to India.
If you purchase fruit and vegetables it will go to Mexico, Honduras. and Guatemala (unless you buy organic).
If you buy a car it will go to Japan.
If you purchase useless crap it will go to Taiwan.
And none of it will help the American economy.
We need to keep that money here in America. You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on prostitutes, beer (domestic ONLY), or tattoos, since those are the only businesses still in the US.
The above illustrations point out that boosting US consumption to create jobs and income at home, the objective of Obama’s stimulus, can go to naught without the cooperation of the rest of the world. Specifically, other countries must pursue their own stimulus plans so that their own citizens will increase consumption not only of local products but also of products made in the USA and elsewhere. Everyone is thus happy.
This international context provides the Philippine fiscal stimulus program additional relevance. From the limited national perspective, the fiscal stimulus rectifies the under-spending in essential services—essential for long-term growth—that the Gloria Arroyo administration resorted to as a means to narrow the public sector deficit.
But it is likewise understandable if we are skeptical of how the Arroyo administration will engineer the fiscal stimulus plan. We know from experience that the administration’s manipulation of the fiscal stimulus will abet discretion and corruption, benefit family and cronies, and buy politicians and voters.
Thus, some Filipino economists call for measures that do not exclusively rely on fiscal tools. Former Economic Planning Secretary Felipe Medalla argues that monetary policy is superior to fiscal stimulus in the present local context. Former Budget Secretary Benjamin Diokno proposes undervaluing the Philippine peso by fixing the exchange rate at PhP55 to US$1.
Diokno’s bold proposal deserves further scrutiny. From a purely national viewpoint, the proposal, despite being daring, is sensible. An undervalued currency not only creates jobs at home. It also translates into higher consumption spending arising from the additional income in pesos for those depending on the foreign exchange remittances of overseas workers.
However undervaluing the domestic currency at this time—admittedly a protectionist measure—runs afoul with the global collective action that frowns upon protectionism. Beggar-thy-neighbor practices amidst a global economic crisis worsen the situation.
The counter-argument is that the Philippines is a minor player in the global economy. Yet, this disregards the dilemma that a defection of one from global coordination can encourage similarly situated countries to defect, too, by using the same argument. Thus, to strengthen cooperation, the ASEAN (Association of Southeast Asian Nations) is calling on member countries to coordinate their exchange rates by making them move in unison and in one direction.
Nevertheless. Diokno’s proposal has a political and advocacy value, an idea emphasized by Raul Fabella, which will not necessarily penalize other countries. For Fabella, the modest and realistic objective of Diokno’s proposal is to prevent the monetary authorities from allowing the Philippine peso to re-appreciate, nay, to overvalue. Global rules can accept a “competitive exchange rate” (at least, one that avoids an overvalued currency).
Still and all, it is necessary for the Philippine to put in place a stimulus program, even if there’s a danger that the Arroyo administration will mismanage and corrupt it. The safeguards include a transparent budget, well-targeted spending to target the poverty effects of the crisis, restrictions on discretionary allocations, and close monitoring by the media and civil society groups.
A Philippine fiscal stimulus is appropriate not only to mitigate the poverty effects of the crisis and correct the under-spending for health, education, and infrastructure. It is also a way for the Philippines to contribute to the global collective action.
Of course, global collective action is not just about coordinated fiscal stimulus policies. An elaboration of what constitutes global collective action is the subject of another essay .