TWN Global Economy Series no. 23 The Impact of the Global Financial and Economic Turmoil on the Philippines: National Responses and Recommendations to Address the Crisis By JOSEPH ANTHONY LIM Publisher: TWN (ISBN: 978-967-5412-16-5) Year: 2010   No. of pages: 64

ABOUT THE BOOK

Prior to the crisis, economic growth in the Philippines was largely spurred by remittances from overseas Filipino workers which were channelled towards private consumption. This externally driven growth masked a lack of dynamism in domestic investment, which in turn stemmed from low investor confidence in the economy.

Economic confidence further plunged when the global crisis struck the Philippines. This paper surveys the adverse effects wrought by the crisis on the Philippine economy, including huge capital outflows, sharp currency depreciation, strong export, investment and manufacturing contractions, and an overall marked slowdown in growth. The national government’s policy response to the economic tumult has comprised a combination of fiscal and monetary stimulus, but concerns surround the effectiveness of these measures and their impact on the fiscal deficit and public debt.

In this paper, the author puts forward some alternative policy options both to counter the downturn and to prevent contagion from future crises. Among the former, he suggests monetizing fiscal deficits and establishing an Asian Monetary Fund that will provide support (including fiscal funds) to crisis-hit regional economies. In terms of preventive measures, capital and exchange controls are advanced as a means of curbing volatility in capital flows. This requires international and regional financial systems that look favourably at capital controls as an acceptable financial practice. The paper also prescribes for the Philippines a new development strategy that avoids overdependence on the external sector and focuses instead on domestic sources of sustainable growth, including investments that are crucial to building up long-run productive capacity, especially in depressed and backward regions.

ABOUT THE AUTHOR

JOSEPH ANTHONY LIM is a Professor at the Economics Department of Ateneo de Manila University in the Philippines.

Contents

1       THE GROWTH PATTERN BEFORE THE GLOBAL FINANCIAL CRASH           

         Philippine Vulnerability to Global Crisis and External Shocks            

Growth Before 2008: Spurred by Overseas Workers’ Remittances, Consumption and Net Exports; Anaemic Investment    

         Gross National Savings and Gross Capital Formation           

         Difficult Growth Period from 2002 to 2007

         Summary

2.            THE IMPACT OF THE GLOBAL CRASH ON THE PHILIPPINES

   AND ASIAN COUNTRIES      

         Capital Flow Volatilities   

         Currency Depreciation     

         The Impact on the Real Sector     

         Stock Market Crash and Increases in Sovereign Bond Spreads      

         The Fiscal Sector

         The Financial Sector        

3       RESPONSES TO THE CRISIS           

         Financial Sector Policies  

         Monetary Easing 

         Fiscal Stimulus    

4       ALTERNATIVE RESPONSES TO COUNTER

         RECESSIONARY CONDITIONS AND PREVENTIVE

         MEASURES TO AVOID FUTURE CONTAGION    

Room for Monetizing the Fiscal Deficits

Resuscitating and Remoulding the Chiang Mai Initiative: Towards an Asian Monetary Fund

and Fiscal/Social Fund     

         Protection Against Further Crisis of Currency Depreciation, Capital Flight, Debt Burden and

         Balance-of-Payments Deterioration          

         Towards a New Development Strategy and a New International Financial Architecture      

References    

Appendix: Decomposition of the Public Debt Burden         

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