EGALITARIAN| Macroeconomic variable analysis: the exchange rate

ANOTHER important and highly intriguing macroeconomic variable is the exchange rate. There has been wide debate about the exchange rate appreciating or depreciating. When an exchange rate appreciates which means the value of peso improves relative to dollar, some camps in the economy are hurt. If the exchange rate depreciates, meaning the peso plunges down relative to dollar, other camps pay for it. But, one may think why we are so dependent with the US dollar?

After the war, leaders and economists met at the Bretton Woods in the United States to hammer out new financial order. The war destroyed most of the countries’ resources and gold as a medium of exchange can hardly be used. Yet because the war was fought miles away from the United States, this county’s gold are intact, a gold-backed currency was established based on the dollar. With the new scheme, countries will settle their obligations in dollar, while the United States will settle its obligation in gold.

The system worked for a time, barely 15 years because of its fixed exchange rate features. This is the bottleneck of the system. If an economy pays international obligations paid in foreign currency, it won’t be for long that the country becomes insolvent if there are constant deficits in the balance of payments. The country need to buy fixed volume of international currency to pay obligations. The balance of payments (BOP) is strongly associated with the exchange rate within the framework of supply and demand for currencies.

Let’s say, if Philippines imports more than its exports, the supply of peso exceeds the demand in the market of foreign exchange. The opposite occurs if Philippines expand its exports more than its imports. By the way, the BOP includes other activities of the country like loans and investments, transactions of individuals and firms as well as the government bodies.

Countries of the world with limited capital resource prove for potential of accelerated growth through exchange rate. For one, the Dutch Miracle entered the pages of economic history as a prime example. Characterized by constant wars and political instability, the Dutch miracle was just common sense. They developed products that they are better with in production, looked for a trade partner and even grappled for monopoly trade partnership with Japan. With much export and less import, the country experienced accelerated growth ahead of neighboring European countries. The same case was extolled by Germany. After the war, they country converted their heavy production lines of tanks and war materials to agricultural machines. They choose Asia as a partner of the agricultural equipment; they also converted their vast flatlands into vineyard to produce exportable wines. After 50 years, the country able to pay all its war reparation obligations and grab the fourth most developed country of the world. I was there in Germany in time for the last payment of war reparation last October 2010 and observed how the people emerged strong from the war.

Another case is that of Japan. After the war, they converted their competent production lines to full war arsenals to electronics and gadgets known for quality and durability. They complemented their production of electronics with depreciation of their currency to the point that it reached 100 Yen to pay 1 dollar in the international market, and their workers did not complain.

Now let us take the Philippines case. Our exchange rate cannot singly be used as a tool for development. If we are to depreciate our peso then exporters would be happy, the international tourists flock in, the retirees of other countries will be attracted to settle in the country.

However, the importers won’t be happy with it. They would need more pesos to pay for the products they import. Local consumers will have limited goods to choose from when they go shopping at the malls, and the country will need more money to pay out our debts. Why these complications even if the rich countries already demonstrated the way towards growth. The answer is simple. Our exported goods have more than 50% imported ingredients. We export what we consume, and we export what we import. Yet, there is one industry that this country can make good use of, the human resource. Isn’t this too amusing? We export products we aren’t competent in producing, we produce products we are not well-endowed with so we turn to other countries for ingredients, we process, then we send them again for their consumption.

Posted in Opinion