Understanding The Basics Of How Weaker Philippine Peso May Help Or Destroy The Philippine Economy

I may not be an economics graduate but I don't see any reason why I can't share my views on this one. The recent reports say that President Rodrigo R. Duterte's economic managers say that weak peso may be good for the Philippines. While it does have its cons but let's think about how currency devaluation can also be good for any country.

How currency depreciation may help the Philippines

Here's what the Global Economy has to say about in its article about currency depreciation:

When a currency depreciates, the prices of domestically-produced goods decline relative to international prices. The exporting firms become more competitive and exports increase. If the growth of exports is significant, then production and employment also expand and the entire economy accelerates. For that reason, countries sometimes try to cause a depreciation of their currencies in order to stimulate the economy.

This could mean that Philippine products can be competitive in the foreign market in terms of price. While PHP appreciation may mean that foreign firms can take advantage of the Philippines' cheaper labor. This can also mean any products made in the Philippines whether or not they are local brands or imported brands can be sold at a more affordable price in the foreign market. This would mean it would be attractive to foreign investors.

Economic issues needed to be addressed for the Philippines to take advantage of the devaluation of the Philippine peso 

The same article I linked I linked from the Global Economy about currency depreciation also reveals a downside that must be taken care of by economists to ensure economic growth:

Whether or not depreciation causes an economic expansion depends on several factors. First, does the country import many raw materials and intermediate goods? If it does, when the currency depreciates, the cost of production increases and the country does not become more competitive. For example, if a clothing company imports all of its textiles, then its cost will increase when the currency depreciates. It would not become more competitive. It may be able to switch to using domestic textile but that is a long process and it may not even be possible if there are no domestic producers of textile. 

Second, has the country borrowed extensively in foreign currencies? If it has, then the value of its international debt (expressed in domestic currency) increases as soon as the currency depreciates. If the currency value declines by 20 percent, the value of international debts immediately increases by 20 percent making it very difficult for governments, firms, and households to pay back their debts. Some firms and households (and possibly governments) may go bankrupt pushing the economy into a recession. 

Third, would the depreciation cause high inflation? In countries that import many of their essential products such as food and fuels, currency depreciation can produce high inflation. The prices of these imported products increase but people cannot stop buying them. High inflation, in turn, creates an environment of financial instability and uncertainty and leads to lower economic activity. Inflation also creates political unrest as people cannot afford essential goods and often initiate public protests against the government.

There would be the problem that the Philippines needs to address such as import of raw materials and intermediate goods. One reason why import of raw materials and intermediate goods can happen is because of too much demand and too little supply. If you want more supply and demand gaps to be filled then open up the economy to foreign investment. Having more foreign investors to join in the economic competition may even reduce the need for import of raw materials and intermediate goods since some of these imported manufacturers will be able to make their products in the Philippines.

Paying off current debt of the Philippines can helped with an open economy. If there were more foreign investors doing their businesses legally in the Philippines then wouldn't there be more revenues for the government to collect? Relying too much on local businesses for revenues and protecting them hoping to achieve the Pambansang Industriya is stupid. How can a small number of businesses in the Philippines ever give enough revenues to pay off foreign debt? That's why there's the need to open up the economy to welcome foreign investors to legally compete against the local businesses. A good illustration of the benefits of foreign competition is that there may also be more customers and more service providers to keep the economic cycle going on.

If prices of goods continue to go up due to inflation then what good will it be to devaluate the peso? The prices of goods will continue to go up as long as there's too much demand and too little supply. The supply and demand gap is natural law that can't be changed. That's why opening up the economy and not economic protectionism is part of addressing inflation. A good example is how North Korea's performance as a protectionist state is much worse than South KoreaMaoist economic policies brought China to high levels of inflation within the country. Venezuela's economic protectionism is putting it behind its fellow South American neighbors. So why are goods and services in the Philippines so expensive? It's no thanks to lousy economic protectionism. 

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