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At the threshold of stagflation

1st June 2008, 11:08 am

LINK: ‘Note Verbale‘, Manila Times (Sunday-Career Section) – 1 June 2008 Issue

In economics, stagflation has been defined as a state or period of a slow moving or moribund economy coupled with high unemployment and rising prices.

They say that the term, which combined stagnation and inflation, was first used by a former British politician and minister, Iain Norman Macleod in a 1965 speech to the parliament. But stagflation, they say, was only acknowledged as a serious macroeconomic condition in the seventies after it had stricken many countries. Before that time, the generally accepted Keynesian economic theories of twentieth century British economist, John Maynard Keynes, assumed that inflation and stagnation are not likely to occur at the same time.

In economics, inflation pertains to the general and progressive increase in prices of goods and services. Inflation is like the cholesterol resident in the human body; it can either be good or bad.

Economists would say that mild or manageable levels of inflation have beneficial effects because it stimulates economic growth or keep the economy active. In the short-term, it encourages people to spend more now in anticipation of higher prices in the future. Borrowing money is more likely because there are less incentives to save. Expected inflation could drive the conversion of savings to take the form of investments than to see the purchasing power of these savings depreciates with inflation.

Inflation is often associated by experts with the excessive money supply circulating in the economy. And the tasks of handling, controlling and regulating this scenario fall on the lap of governments through central banking and its monetary policies. Thus, it is almost predictable for government to increase interest rates during periods of inflation to moderate money supply.

But unpredictable and high inflation rates are like bad cholesterols that could lead to a cardiac arrest of the economy. The uncertainty discourages people to invest and save. Predictably, workers would demand for higher wages to cope up with the rising prices of goods and services, which in turn lead to higher inflation. The currency may then lose its value and the normal workings of the economy is eventually jeopardized.

Having a declining economy, high unemployment, and unmanageable inflation all at the same time in a scenario called stagflation is surely unfortunate.

Many analysts say that the global stagflation in the seventies could be attributed in part to the inflation brought about by the abrupt increase in the price of crude oil. For those old enough to remember, the Organization of Petroleum Exporting Countries (OPEC) met in Tehran in 1973 and doubled the price of oil from US$5.50 to US$11.00 per barrel because, among other reasons, of the desire of the then Shah of Iran for more foreign exchange to acquire more military hardware.

Increases in crude oil prices this year are unprecedented. In December 2006, per barrel price is about US$63. By October 2007, the price rose to above US$90. In January of this year, it reached the US$100 dollar mark, and last May 21, the price breached the US$130 level only after almost five months. Several days after, the price even went up to more than US$135. Unfortunately, there are forecasts that the price could be as high as US$200 per barrel by the end of 2009. Perhaps, it could be more.

It appears that what drives the escalating prices of oil in the world market to unreasonable proportion is not so much about the economic rationale of supply and demand, although it is often used as the justification. Political conflicts and greedy speculations are.

While most people of the world would have to brace for higher prices, growing unemployment, economic collapse, and even poverty and hopelessness, a few others would reap the bounty in due course. For obvious reasons, there is nothing much heard of OPEC, an organization which is expected to ensure the stabilization of international oil market prices, even if this issue is the global talk of the town these days. Regrettably, even if the global oil situation improves and normalizes, it is next to impossible to expect that these prices would ever go down below the US$100 level. The more reasonable expectation is for the price to simply stabilize.

Meanwhile and unless oil prices remain stable, many countries in the world are in danger of stagflation. God forbids what would happen after that.

Tags: economics, economy, finance, inflation, international, money, oil, oil crisis, price, stagflation, unemployment, world
Category: Note Verbale |

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Gross national happiness

29th April 2007, 07:38 pm

LINK: ‘Note Verbale‘, Manila Times (Sunday-Career Section) - 29 April 2007 Issue

Sometime in 350 B.C., Greek philosopher Aristotle said in his work ‘Nicomachean Ethics’ that happiness “is a first principle; for it is for the sake of this that we all do all that we do.”

The pursuit of happiness is a constant aspiration since the beginning of mankind and has been the subject of continuing discussion all through out world history. People seek success, fame, wealth, health, gratification, acceptance, love and affection because of the state of happiness that they thought these human desires would bring them.

Daniel H. Pink, author of the book “A Whole New Mind”, observed that since the time of Scottish philosopher and political economist, Adam Smith, the wealth of nations is used as a proxy to determine the well-being of the nation. Whether life is better is measured in terms of gross domestic product (GDP), inflation, and similar economic tools. He noted that every American is three times richer today judging from the per capita GDP of the US, which is represented by the total value of goods and services that the country produced, divided by its population. But Americans do not feel one jot happier. He argued that there is ample evidence to prove that material wealth and broader happiness are no longer in sync in post-industrial societies.

Almost a year ago, BBC News Home editor Mark Easton reported that the science of happiness poses huge questions to politicians. Governments have succeeded in delivering greater wealth that has not translated into extra happiness. He cited the 1999 statements of UK Prime Minister Tony Blair that money is not everything but in the past governments have seemed to forget this because success has been measured only in terms of economic growth, or GDP alone.

They say that the idea that politics should be about ‘creating the greatest happiness of the greatest number’ dates back to the 18th century when British philosopher Jeremy Bentham advocated his principles of utilitarianism.

In 1972, King Jigme Singye Wangchuck of Bhutan coined the term Gross National Happiness (GNH) in an attempt to define the quality of life of his people in a more holistic and psychological terms as distinguished from GDP. The King wanted to build an economy that would serve his country’s unique culture based on Buddhist spiritual value. When he abdicated his throne on December 14, 2006, Bhutan’s economy grew by 14 percent and its standard of living is one of the best performing in South Asia.

They say that conventional development models stress economic growth as the ultimate objective. GNH, on the other hand, is based on the idea that true development of human society would take place only when both material and moral development is achieved by complementing and reinforcing each other. They further say that there are four pillars of GNH, namely: promotion of equitable and sustainable socio-economic development; preservation and promotion of cultural values; conservation of the natural environment; and establishment of good governance.

In 2006, British think-tank, New Economics Foundation, released its Happy Planet Index (HPI) based on the rationale that the ultimate aim of most people is not to be rich, but to be happy and healthy. In that index, Vanuatu, Columbia and Costa Rica were ranked as the first three countries with the highest HPI. The Philippines placed 17th while Bhutan ranked 13th. UK and the US were on the 108th and 150th spot, respectively. Zimbabwe was at the tail end.

The index seems to show that being rich is not the end all to attain happiness. People are happy for as long as circumstances of stability, peace, love and fairness exist in their midst.

British Conservative Leader David Cameron is probably right when he said: “We should be thinking not just what is good for putting money in people’s pockets but what is good for putting joy in people’s hearts.”

In the end, government’s determination towards progress and development would lose all its sense when people are not happy after all.

Tags: economy, happiness, Happy Planet Index, life, mind, people, psychology
Category: Note Verbale |

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A ‘camouflage’ economy

7th January 2007, 09:15 am

LINK: ‘Note Verbale‘, Manila Times (Sunday-Career Section) - 7 January 2007 Issue

The year 2007 started with some good news about the country’s economic performance.

Among other economic accomplishments, government reported that:

First, the exchange rate of the peso against the US dollar closed at 49.03 in 2006, the highest in nearly six years. And the peso continues to show sustainable strength.

Second, the Bangko Sentral reasonably expects foreign exchange remittance of overseas Filipino workers to post a staggering new record of almost US$12 billion for the year 2006 as soon as all the data are in. And government anticipates a 10 percent increase in such remittances this year. By the way, the figure only reflects remittances coursed through the banking system and formal channels.

Third, the Department of Labor and Employment reported that as early as November 2006, the country had already breached the one million mark in terms of documented deployment of Filipino workers abroad. It represents an increase of no less than 12 percent compared with the previous year.

One need not be an economist to understand that the first was the result of the second and third accomplishments.

There is no dispute that a peso getting stronger each day is music to the ears of government not only because it strengthens the country’s gross international reserves. More importantly, it significantly eases the pressure brought about by the country’s huge foreign debt. It also means lesser peso spent for the import of essential commodities like crude oil.

As of 2004, the Commission on Filipino Overseas estimated at least 8 million Filipinos already staying abroad. By adding the number of Filipinos leaving the country for greener pastures in another land two years after, it is fair to say that there are at least 10 million Filipinos away from home as of the year 2006.

Using conservative and basic mathematical assumptions, if all the 10 million Filipinos abroad had put in the US$12 billion foreign remittance in 2006, it means that each of them remitted only US$1,200 for the year, or US$100 per month. What does this mean then?

First, it could be that Filipinos overseas do not trust the country’s economy enough, or perhaps the way the government manages it, that they would rather have rather leave behind in the country where they stay a substantial part of their foreign earnings. In which case, the receiving country becomes the real beneficiary of the diaspora.

Second, it could also mean that the so-called record breaking foreign remittances in 2006 is just a tip of the iceberg because overseas Filipinos would rather remit their earnings through underground channels than the usual banking system that is perceived to take advantage of the workers’ money to earn more money for the banks.

If these first and second assumptions are not correct, then it is possible that no less than 10 percent of the country’s population are unfortunately toiling abroad with their sweat and blood but chose to just close their eyes as they earn pitiful and meager salaries simply to keep the economy of their respective families afloat.

If from the extrapolation earlier shown that each overseas Filipinos only remit US$100 per month, it may be too much to assume that on the average each of them earns at least US$500. But even the amount of US$500 is only about P25,000 per month.

Meanwhile, the continuing appreciation of the peso also diminishes the purchasing power of the families of the country’s overseas Filipinos.

The current situation of the Philippine economy therefore is a great contradiction. Behind the good news is the bad news that the country has a ‘camouflage’ economy, with the harsh realities waiting to unfold in the future.

Tags: economics, economy, employment, exchange rate, growth, labor, peso-dollar, standard of living, wage, work
Category: Note Verbale |

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www.soriano-ph.com

At the threshold of stagflation

Gross national happiness

A ‘camouflage’ economy

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