Claims Of The Peso’s Dutch Disease Is A Symptom Of Political Hysteria

``The basic problem is well known and has been frequently illustrated throughout history. Democracy responds to the mob of voters; and the mob wants bread and circuses – at someone else’s expense, of course.”-Bill Bonner

The famous investor Peter Lynch tells us to use objectivity and common sense in parsing at events. However, when a person gets blinded or fanatically obsessed with a particular theme, example with politics, the underlying biases usually skews their logic to the point of losing common sense.

For example, we read an article where an expert bellyached about the Peso’s rise as a “Dutch Disease” impact to the domestic economy. Unfortunately by definition alone Dutch Disease, which is a “natural resource curse” where rising revenues from natural resource exports negatively affects the manufacturing sector via the transmission channels of currency appreciation, does not even seem to fit the bill (OFW remittance is not a natural resource-it is a human resource). Yet as a refresher, OFW remittances-which account for a substantial 10% of the GDP-does not equal to 100% of the Philippine economy in impact. Why do you think consumer spending in the Philippines continue to expand when purchasing power of the OFWs have shriveled? We discussed this in What Media Didn’t Tell About the Peso.

Besides, the US isn’t the only country which the Philippines deal with. In short, it isn’t ONLY about the Peso-US dollar. In fact as we noted in Is the Philippines Resilient Enough to Withstand A US Recession?, there has been a diminishing trend of exposure to the US which is offset by the growing transactions within the region. This means an objective perspective should be seen through the looking glass of the Peso against the rest of the world or in the context of competition with its contemporaries (emerging markets) or possibly its neighbors.

So using the Dutch Disease as an excuse for blaming policy mismanagement is equivalent to barking at the wrong tree. In fact, as noted in a recent post in my blog, The Cost of Currency Intervention: BSP Recapitalization by Issuing Bonds, our central bank the Bangko Sentral ng Pilipinas (BSP) has reportedly been suffering from heavy losses arising from intensive currency intervention-some Php 62.5 billion-which will require the Bank’s recapitalization by issuance of bonds (translation: taxpayers funding the losses!). Yet our so-called expert is exactly asking for more of these losses to protect certain groups!

As an aside 45 years ++ of peso depreciation did nothing to improve our economy, yet instead of dealing with the roots of the problem they look only at superficial solutions which will penalize the country’s future-the children-by burdening them with undue obligations (increased taxation).

It’s a pity how we use data mining and slippery slope arguments to uphold our political biases, when in truth these experts are aware that such premises are nothing but political bunk.

Figure 6: Yahoo.com: China Yuan to Peso (left) Euro to Peso (right)

True, the Peso has climbed about 18% against the Euro and about 17% against the Chinese Yuan since the Peso’s belated run in 2005 as shown in Figure 2.

But this doesn’t necessarily mean that our manufacturing is shifting entirely to these countries due to currency appreciation impelled loss of competitiveness. As pointed out in Philippine Politics: Systemic Defects of the Pork Barrel Political Economy, the ADB has alluded to our narrow industrial base as one of our economic hurdles, and this has been even when the Peso has been depreciating for 45 years!

Besides, as one can note the Peso has recently lost some meaningful ground against the Yuan and the Euro whose economies seem to have evinced little signs yet of contagion impact from the US slowdown.

So it is recommended to adhere to Cambridge University’s Joan Robinson judicious advice (highlight mine) ``The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."