"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.’’