Economics, politics, and policies

"Here’s the Bangko Sentral’s deputy director speaking."



Public policy is a complex subject that was underlined in the 2018 Pilipinas Conference organized by independent think tank Stratbase ADR Institute (ADRi) where key  government servants, policymakers  and stakeholders  got together to share their assessments on the current economic and  socio-political  environment and  what we may expect in the near future.

The keynote message by Bangko Sentral ng Pilipinas  Deputy Governor Diwa Guinigundo elaborated on how the science of  economic policy involves the politics of  economics and the economics of  politics. Here are excerpts from the sage insights of DG Guinigundo:

“The legacies of  the Global Financial Crisis have painfully taught policymakers around the world that economic policies  do not operate in a vacuum.   Political issues  can potentially cause a systematic  grit on the wheels  of  policymaking and alter  their  intended outcomes. Similarly, sub-optimal economic policies can potentially fuel discontent among the public which could lead to adverse political events that can at times have widespread and enduring effects on the broader economy.”

Guinigundo rightly points out that “Bad Politics Begets bad Economics” saying that “this  interaction has been particularly evident in the current economic environment where uncertainty has remained elevated.  For many observers, this uncertainty has been driven more by political  developments  instead of  the usual economic interplay of demand and supply factors in the markets.”

“Take for instance, the rising trend of  populist sentiments which has fueled a greater incidence of  zero-sum outcomes. We have already seen nations leave economic unions, as with the Brexit. More recently, concerns over rising trade barriers have materialized as US and China have been embroiled in a tit-for-tat trade strategy in recent months. In September 2018, the Trump  Administration finalized tariffs  on more than US$200 billion of  Chinese imports.  

Certainly, these political events could have adverse effects on economic growth. First, these shocks can lead to transitory capital flow volatility and bouts of financial market turbulence.    

Second, higher volatility could also dampen animal spirits and  lead  to what psychologists  call an “affect heuristic” among economic agents. Long after the original trigger has dissipated, risk  perceptions endure and  make people  more cautious about the future.  This translates to less investments and ultimately lower growth.

Third, there is  also  the direct impact of  protectionist policies  on trade and  growth. In fact,  the  International Monetary Fund estimates that an escalation of the trade war could shave off 0.8 percentage point of the global growth by 2020.

In addition,  the precipitation  of  all these risks  can  also complicate the conduct of  economic policy, particularly in emerging economies including the Philippines.”

On the other hand DG Guinigundo points out the good side of the relationship between economics  and  politics wherein “Good Economics Begets Good Politics.. He cited the work of Daron Acemoglu and James Robinson, in their book “Why Nations Fail,” which argues that developed countries attain  wealth because of  institutions, programs, and economic systems that are inclusive because they create  incentives  for people  to innovate, enable productivity growth through education and  infrastructure, and  maintain peace and order across geopolitical boundaries.

“Our main thrust in the Philippines for the past 25  years  has been  to embark  on  often difficult and painful reforms-ones  that are necessary  to build  and strengthen our institutions.“

He credits these reforms for having propelled the economy to an impressive streak of 79 consecutive quarters of uninterrupted growth for the 19  years and  three quarters  since  the 1st quarter  of  1999. 

“The structural reforms have been translated into higher potential output for the economy. Our estimates show that potential output growth has been rising, averaging 6.0 percent for the period 2010–2017.  So the talk about the large output gap is without basis. Our output gap is either a small positive or a small negative. So the issues about overheating is quite misplaced.”

DG Guinigundo then described the BSP’s stewardship role in the changing and increasingly complex operating environment with its policy imperative to enhance existing monetary framework and operations to be more responsive to emerging challenges.

“The BSP has made it a policy imperative to enhance our existing monetary framework and operations to make our policies more responsive to emerging challenges. 

“First, we  recognize  that economies  have evolved to be extensively interconnected and open.  As  such, price and financial stability is no longer affected by normal dynamics of demand and supply of goods and services, but also by non-economic factors such as politics, the speed of technological innovation and even geopolitical conflict. Thus, we have been sharpening continuously our  frameworks  to  consider these emerging trends and tipping points.”

“Second, we  have proactively  engaged in  dialogues relating to the issue of  inequality. While  it could appear for now as a non-monetary concern, we have witnessed how this issue could later on transform itself into a major disruption if it feeds into political unrest or dissatisfaction… We  are committed in advancing our financial inclusion, financial education, and consumer protection agenda to ensure that no one is left behind and everybody is given the opportunity to ride  the economic growth our country is presently enjoying. “

“Third, we intend to leverage on technological innovations and digitization to further our goal of more inclusive growth. We are encouraging digital innovations and fintech solutions through an enabling regulatory environment while raising the bar for guarding against cybercrime and  related risks. With digital innovation and fintech, the reach of financial services in the country will expand  to the unbanked and the underbanked  and at much lower cost.   I think  this  is  the essence of inclusive growth.”

“Fourth, our  focus on income inequality has also reaffirmed our commitment to price stability. In an emerging and developing economy like the Philippines, keeping prices within target benefits  the poor most, specifically the lowest income classes of  the population. The BSP  tracks  inflation rates for the poorest segment of Philippine society, cognizant of  the difference in their  basket of  goods  and  economic behavior. We observe that this segment relies heavily on the ability of  monetary policy to  rein  in inflation, especially because they feel a heavier brunt if we miss the target. Hence, monetary policy directly affects  the people’s  welfare and, in turn, affects economic opportunity and income distribution.”

DG Guinigundo concluded his well-rounded and masterful sharing of his thoughts with a sober call for our political and industry leaders, well aligned with the spirit of the Pilipinas Conference.

“We  need to look at the bigger picture because  good policymaking is  about  good economics, good politics  and their interaction.’’

Topics: Orlando Oxales , Economics , politics , policies , 2018 Pilipinas Conference , Stratbase ADR Institute
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