A debate has long raged among economists as to which of a country’s two key economic institutions—the central bank and department (or ministry) of finance—is more important for the stable functioning of its economy. In this country, the two institutions involved are the Bangko Sentral ng Pilipinas and the Department of Finance.
There is a body of opinion to the effect that the DoF is the more important of the two institutions. Those who are of this belief point to the DoF’s vast authority to legally exact payments from individual and corporate citizens on account of their incomes, commercial transactions, hereditary acquisitions and other things that the legislature may choose to subject to taxation. The power to tax is, after all, one of a State’s police powers.
The approval and implementation of the Tax Reform and Inclusion Law has provided fresh evidence of the power of the DoF and the awesomeness of the taxing authority. The inflationary forces that TRAIN’s excise taxes have unleashed, and the resulting debate about that law’s new exactions, have placed the DoF squarely in the center of the national stage. On the economic plane, all current discussion is revolving around TRAIN. These days it is the Secretary of Finance who is the star of the show and whose opinions are sought by the public.
However, most economists believe that the central bank is the more important of the two key economic institutions of a government and that monetary policy is more effective than fiscal policy for the stable functioning of the national economy. This superiority they attribute to two things, to wit, a central bank’s ability to control the money supply and the speed with which the instruments of monetary policy—changes in rediscount rates, required reserves, special deposit requirements and lending and borrowing limits and foreign exchange regulations—produce their impact on the operations of financial institutions, and, therefore, on the availability and cost of credit. Whereas the incidence of taxes is specific—for example, the TRAIN tax on sugar-sweetened beverages—monetary policy, operating through cost and price changes, has a pervasive impact on the levels of production and consumption. Different kinds of taxes affect people differently, but there is no escaping the effects of money-supply changes.
The power of a central bank and the effectiveness of monetary policy in effecting corrective changes in the economy has been demonstrated at two junctures in the postwar history of this country. The first juncture was the foreign exchange crisis of 1949-1950, which saw the nation’s foreign exchange reserves—much of which came from US war damage compensation—quickly dissipate in the wake of the import spree that followed the end of World War II. The then-newly-established Central Bank of the Philippines flexed its muscles and installed a regime of import and foreign exchange controls that would not be fully ended until November 1965. The second demonstration was the severe dislocation of the economy occasioned by the August 1983 assassination of former Senator Benigno Aquino Jr. The Central Bank pulled out all the monetary stops in a desperate effort to restore to normalcy the economy of a country whose government had become a pariah both at home and abroad.
At both junctures, it was the Central Bank—under the leadership of Miguel Cuaderno in 1949-1950 and under the leadership of Jose B. Fernandez Jr. in 1983-1984—not the Department of Finance—that led the effort to restore economic stability.
In the developed countries it is to the central bank—the Federal Reserve Board or the Bank of England or Banque de France—that the nation looks for corrective financial action and it is the central-bank head’s assessment of the national economic situation that is awaited with utmost interest by the rest of the government and by the business community. In the US the semi-annual report to Congress of the chairman of the Fed is an eagerly awaited event. In recent memory, the assessments made by the chairmen Paul Volcker, Alan Greenspan and Janet Yellen of the US economic environment were stand-out performances.
Because of the independence afforded them by their fixed terms, the central-bank heads of the developed countries consider themselves free to paint a true picture of their countries’ economic situation and prospects. They have commented on the economic policies of their governments, giving advice, providing polite criticism where necessary and pointing the policymakers in what they regard as the right direction.
Unfortunately, the Philippines does not have such a tradition. This country has not developed a practice where the Governor of the BSP goes beyond bland descriptions of the national economic situation and inoffensive references to the government’s economic policies.
There are numerous policies that merit either rationalization or outright scrapping. As the head of the most important economic institution in the land, the Governor of the BSP, speaking on behalf of the Monetary Board, should make his voice heard on matters that impact negatively on the Philippine economy’s stability and growth. How I—and, I am sure, the nation—would like to hear Governor Nestor A. Espenilla’s real views on TRAIN, for one.