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Vol. Xl No.6

November?_Becember 1993

ISSN 0115-9097 I

OfMoney Supply andPriceTrends While the relationshipbetween money supply and price trends is supposed to be two-way, the country's price levels are not necessarily determined by the money supply. According to a study of Dr. Celia Reyes and Dr. JosefYap, money supply and price levelsdidnotexhibitasignificantrelationship, at least not from 1981 to 1992. Drs. Reyes and Yap in their paper "Money and Prices in the Philippines,1981-1992: A Cointegration Analysis", found that there was no causality between money supply and price levels during that period. To explain the causality between money supply and price trends based on the "econometrics sense," the study used a framework drawn from the P* literature (P* is an indicator of the long-term relationship between the money stock and the price level), and

recent developments in cointegration analysis to analyze quarterly economic data and show what factors tend to drive prices and money within tlle period.

The period 1981 to 1992 was full of highly erratic political and economicconditionswhich so affected the economy that in comparison, monetary policy was seen as a minor player. The Central Bank, constantly on the defensive, reactedtoshocksratherthan actively promoted a stable macroeconomic environment.

The result that no causality existed between money and priceshas twoimmt:Kliateimplications. One, rnonetary authorities should reveal the real intent of the policies they pursue. For instance, the Central Bank has been criticizedforcontrollingpricesthrough money supply when, in reality, it may notbe thecase. A studyshows that the Central Bank's primary target during that period was to improve exchange rates.' And, two, the period 1981 to 1992 was characterized by numerous shocks that buffeted the economy, to which the Central Bank had to continuously react to, such that it led to the divergence in the behavior of money and prices.

Table 1 shows the major economic shocks and policy responses that occurred in the Philippines from 1980 to 1992. These external shocks and other factors contributed substantially to the determination of prices. Inparticular, the Philippine economy hasbeen characterized by oligopolistic pricing behavior especially in the industry and

_"To page 2 la


Editor's Notes

I 2_TS X YD _7

BigandSmall dghtly_.Forlong,

MIMAI' Policies


race for economic development. Now, the awakening of Asia as the new bastion for growth signals the eleventll-hour call to get us out of our protective shells and take bigger, bolder steps beyond seas and boundari_.

The program called for selective cuts on expenditures,


of subsidies,




lions, but certainly, the "small" will always be there, and they will have to be aligned within the mainstream of development where the Philippines is a part of one big global community. i


1"age 3 Page



Page 7 DIA Project F,xamines

So what does it take to propel an economy like ours Into international competitiveness? Export-Orientation? Investment-Led? Import Liberalization? Therearea hundred and one prescrip-




enrollment rat_sforcertain sepoy.




Ad Fever Catches on Generics -

increase in taxesand money among others. While itcare, succeeded a certain extent, inflicted high social costs in terms of supply, more expenditures on medical lesser to nutritional intake, it and lower




Inasociety, however, whereoneofeverytwofamllles(1988statisticsshows55.2%poverty incidence) does not have the means of production, this challenge is anything but easy. Take the case of the adjustment program instituted in 1991 to correct certain macroeconomic imbalances.

ii ]1

industries _ P,_ge .!



tionship between money and prices is studies described,itdoesnotevaluatewhether LPonce the Central Bank's actions resulting to '. the described rela tions!aip, are optimal.

Of Money Supply... (From page 1) ..........

for developed



END NOTES service sectors, leadingtoinflation rates higher than what is warranted by economic fundamentals. Inflationary expectations, which are affected by the various crises and condition of

The study is based largely on the work of Funke and Hall (1992) 2, that investigated the relationship between money and the price level to determine whether the fundamental difference in



ed upward



also exert-

on prices.

The study of Drs. Reyes and Yap has limitations in that, while the rela-




Economic Federal

Germany, the United States and the United Kingdom. The findings of Drs. Reyes and Yap on money and prices is in contrast to those obtained in similar


'M.S. Gochoco,


Studies Reserve

ZM. Funke Differaltfro,n



S. Hall,

Othx, rCtmtralBanks:


PB92-04. 1992.

Is the Bun&,sbank AS:ndyBasedtm

P*,center for EconomicForecalRing, Discussion Paper No. 11-92.London Businq_sSchool,1992.

in the Philippines

External Slxeek

*Oil price shock *Recession )High world interest rates *Restricted foreign credit

*Stoppage of foreign capital inflow *Capital flight

*Negotiated debt reschedaling *Resumed multilateral and bilateral loan inflows *Net resource outflow due to debt payment

*Gulf War

Domestic Shook

*Dewey Dee rmaxtcial ¢rKsis

*Assassination of Aquino

*Take over of Aquino gov't, *Coup attempt *Earthquake

*Volcanic eruption *Energy Crisis *Presideotial


Monetary policy

*Highly expansionary couuter-cyellcul *lVmancial tiberalizallon

*Restrictive deflationary, high interest rates

*Exi)aasiouary in initial years; tight with high interest in later years

*Tight, lower real interest rates due to inflation

I'lscal policy


*C,mtradictory, concentratc_l on debt service and bailOut of govermnent corporations

*Initially expan_sinaaey, in later years concentration on domestic borrowings and tax reforms

*Tight, cutback on operation and expeudltures and capital outlays

Trade and industry imlky

*Beg_g of QRs

*Suspension of trade liberalization, laxatina of tradeables, rationing or foreign exchange, devaluation

*Trade tiberalizatioa slowly depreclatiog peso in 1990

*Continued liberaliT_atioa, focus oa AFTA, sharply appreciatlag peso, emphasis oa energy projects

Combined effects

*Slow growth *Inflation

*Deep economic recession *lligh inflation

*Economic recovery Ul) tO 1989, inCreaSing current acCOunt deficits, slow growth in 1990.

*Recession, surge or inflation ha.1991 *hallow of "h)oth)ose" foreign capital

Private response

*Unfavorable, reduced savings, capital flight but coutluned investments spurred by government pumpprlm-'no

*Collapse of business confidence

*Renewed confidence initially, erratic behavior in later years

*Renewed confidence doe to peaceful traasition or power *Sharp decline due to energy crisis

of removal


Bank of San Francisco,


and Policy Responses

Instruments, a_td

Monetary an Pacific Open Economy: A GARCH Application, Policy Centerin for Ba sin Monetary and

Note: Summary of key events is based on Table 3.1 of M. tamberte, O. Lim, R. Vos, J. Yap, E. Tan and S. Zingapan, Philippine External Finance, Domestic Mobilization and Development in the 1970s and 1980s, PIDS: Makati, 1990.

MIMAP toLinkPolicies of industrial


and the roar of

Pandoy not are grasp the "good modern could vehicles alien, Mang news" of a radio commentor that "government will devalue the peso so that Philippine products can become more competitive globally." That, to him, is a vague promise. What he understands though is that the few pesos he gets from selling his catch from the sea will now buy lesser items for his family. There are numerous Mang Pandoys in a country that struggles between structural reforms until the economy flourishes. Like any other changes, structuraladjustmentsarenot without flleir trade-offs. And ifyouare smallandweak, chancesare, youwould get trampled when the wheels of reforms take to the road. Of course, the government realizes that adjustment policies have differentialeffectsonvariousgroupsof society and often, file more vulnerable ones bear most of the adjustment costs, Sadly, it is not so equipped to identify these effects, much less qualify and quantify them so that policymakers couldimplementtheappropriatemeasures to offset or soften their adverse effects, THANK GOODNESS Precisely to correct this, tlle Micro Impact of Macro Adjustment Policies (MIMAP) Project was born. Under the auspices of tile International Development Research Centre, PIDS developed a general framework for analyzing the micro impacts of macroeconomic adjustment policies (See Figure 1). In tile review ofliterature, researchers found many studies looking at the macro level and several others examining the proximate determinantsofhouseholdorindividualwelfare. However, no study links the two.


Major issues concerning transmechanisms and hypotheses






a good




the impact of adjustment policies

about the relationships of policies and households were identified in fl_ejustconcluded second phase of file project headed by Dr. Mario Lamberte, PIDS Vice-President. In tile third phase of the project, the researchers, led by Dr. CeliaReyes, PIDSResearchFellow, will develop a monitoring system that would track down the effects of macroeconomic policies at the firm, household and individual levels. The overall goal of the projectis toprovide policymakers with a good information base on the possible impact of adjustment policies, MIMAP ill Projectis expected to last for five years. The major activitiesoftheprojectare: (1) assessment of monitoring systems and quantitative models; (2) data collection and processing; (3) quantitative model building; and (4) conduct of policy studies, FIRSTTHING FIRST The firstactivity takes off,from the assessment of tlle existing PhilippineStatisticalSystemintermsofmonitoringand measuring relevantindicators on human welfare. The review covers special barangay-based surveys andmonitoringsystemsofvariousgow ernmentagenciesandnon-gOvernment organizations (NGOs). Thusfar, theprojectisevaluating the followingspecial survey/monitoring systems presented in several meetings hosted by the project monitoring office: (1) Community-Based

ChildMonitoringSystem(CBCMS);(2) Barangay Integrated Development Approach to Nutrition Improvement (BIDANI) for tile Rural Poor; (3) Social WelfareandCommunityDevelopment Indicator System (SWCDIS); (4) Child Survival, Protection and Development Information System (CSPDIS);and (5) lntegratedRuralAccessibilityPlanning (IRAP) Project. PROPOSED MONITORING SYSTEMS Tile CBCMS is a program to monitor the condition of children and women at the barangay level. The objectives of the program, according to Mr. joseph Lalo, are: (1) to develop and institutionalize the capability of the community to generate data on fl_e situation of children and women; (2) to provide early warning on impending problems affecting the relevant popu_ lation; and (3) to enhance linkages and support mechanisms for service delivery systems. Tile BIDANI program headed by Dr. Josefa Eusebio is based on a "dynamicmodel"derivedfromacausal model that identifies the causes and mechanisms of a specific problem and theircorrespondinginterventions. The activities are then translated into the HIPPOPOC (hypothetical input, process, output, outcome) table which shows how inputs and processes converge to a cormnon social/economic goal.

_-To page 4

.... ]:i::: i: ]veanwhiiei :flie assessment: of: i ;: (7) :iiithe :NGO; monitoring:sys[ems will fo-: : t:i:cipafi:_i_;(9)fam-il cuson I those: used::by the Philippine:i i:


_e:tw0rk: 0fagencies serviees;:: !c_N6i:i:,



:Pt_ili P pii_e:RuralRec0nstrucei0nM0v:e: " 7 : men_:(PRRM);:and: tl_e: Philippines: :: i ::: Canada: Human:; Res0urces Develop:ill : : iii:

ment Programlcouncil for People's: ITi_6CSPDiSi:: a¢c0rding to Mr:i: :Development (PCHRDLCPD), ::I uses: an:area:based ap_ i ....: :: ::: : : .........



the b0t:tom-u i ........

pesG: Ma,ig tt_ei: :relief at theend o_tl_eday knowing that i: : istem{il liiS:family!simmediateneedswillnot:::: iiiiii c0mmu-:: be:sacri fieed: for tlia t:dream float is yet G0 come: __ OSalcedo : ......

............ iS attributes:


gand Return C_mmodity: ProducerGroups .... ....





tl_e money tt_eyspend for ads redound to them in terms of add ed:_les; If some of the benefits:are

! !i

: i


are: tl_e Sl_ort-run


:i i

: :

advertising {o : : ..... Ideally) i :

::intei',d, f6, __

: :: 3:3:::: : miili_

by the

:i wl_olesalers and retailers; then these igroups should: propor ti0na teiy: share in the Cost of advertising: ...... : i




ne:w:i:B:Uf @l_a_i f : ........ ....:tlie: :ca_ of: i : I b6foi:6 : ........... ..... :Dent


:a d verti Sing an d pr0nio ti on: sliift tl_e i:cteintmd: fuikction 6pward (See Figure : 2), Supply_:iprices and revenues in!: creaseiand farmers:arehappier:: Inthe long:run;hoWever, as priCes:go


produ Cer,q resDond, by: m0ving__ along_ ....... ..... the stipply function, Thistxehavior tends to dilute fl_e impact of advertising and promOti:Oi_ because costs escalate and gMns fr0m a d ver tising Sl_rink ................ ................ .......... .......

.......... :............................... ....... :: : iii::i::i:


t4iiliist,.ate i: hop into:the bandWagOn for generies.!:i ,t:_oexport ii W!i9 nOt:;ib_it:Wait_ does tl_e goverm : ment 'et_ :_ OSalcedog_,,_ : .... l_ave: the bud g" '

i i ......

:7.¸: :. :: :::c :

i 15wiilbe_snbjected:to:zer0toSpercenti: :i : :::: ................... i::tariiL andall i_0n::tariffba:rrieVsSl_ould:;: i::i: :.... v,<_, have been ehmmated, i he 1luhppmes ..... must link Witl_ ASEAN producers be:i ....... _ ................. cause ASEAN member-c0untries have l :ii ::i::anatUraldiviSionoflabori:Mr.Custodi0: (: : : ii



TI"_R/_:E _,.__K:_N_ .......



: ....

Tl_efeare tlwee fi:i_anciaifaciliL :: could pOSsibly be used in: :: fnture export tranSa:Ctior_s:2-:bimker's: :i/:

......... --

::oversea sbuyergetscted:i: :::::


edrama: ::giobali2:


tions: are normaliy: in::iarge volume: : i:


Mr2Derek Hill

d o_n iarif




Ur_der_ ciiity i:nti_e near both : '2:i: d0m:es{icand expui:t transacti0nS, The :: ts basiC::idea:iitoturnacc0unts reCeivable:i:: X?titionand :i: inio:Cash;:eii!_er:on a recourse 0r:a non-: :)i: :: iOi{2:: :::::: : : reeour._.bagisi:ltiganexp6nsive:facila: :


.............. ca


: is able to tnrn hiS:acc0untS receivable : :::: in to casl_ b:ecause o f tills marketaN e security: Tliis typeof facilityispopulari: i in:deVeloped: fi: :






to2 :: tire.

7 " 2.




Forfaiti,.G,:iopeiia:ie:s or_ce the ii :: terms: : ¢:ate:com! i With:0ut recourse:::i Tl_e::for fai ter pays; i :i::::i the ::::ou t:to tl_e exporter U_oii:sl_ipmm_t;but : i : iilhe::actualiy:turn s {0 a bank or a g:uaran-i : : : tee tocover :tiierisk This facility isuSed::

gnifi: :: the private sector: in September, ........ .'i:capitai:intensity, : ..... :i:i : : ::: i : :: ,and other mdlca-ON M ......L;,,_,_,,,,'k,_,uE. _:A _I_,,,,_ ,v ,,,_,k,,_ ........... l_ese m-e m0:t0rCycles arid parts, : ,/repair: and: i M0tOrC:ycies:and componentS ii i arein:Eist B(for review) 0f the remaim process-:: ing regulated iinport s (liberalization Tlleregearchersprea :: was:scheduled: : in :1988).:::Under the: _ results of their: 10cai :content progran, :0fi:ti_e goVern-: inAu=: meritS: required,-, to:


:= :

FI _, r_ " _, fl _ ...... r,'_a'._e _C_t, ltC ,aeoe ..._,..,-

....... ......



....: ...... ...................................

due to low Volume ofproduc_::i tion. Table 2 Shows that the industry earned US$936,000in: sales: in: 1991: Whicli : only 2 percent Sales:::

:: ::::i:::: ::wa:s

:QRS ::0t_:::....

:30::i:: .....




:313:::: :323: : :i_:ii_ger:i ....... :: ::::i [l'l:e::: i'l:_ .......

:s3z:::::: : 342

33_:: 3._3:

......... .........




.......... :

3_=1: 362::: : 3_3


i: : i: : :

Of the total ins i .... ..... :i:: ....



: ECoi_brnies: iaf:scale: iS : iasgocia[ed With: laiGe i)roduc _ tior/volumewl_ich requires tl_e :: :: existei_ceofabig market The market: for .... m0torCycies ig ?ela tively slow : because ot!i mffavorable eco-: .... iSom.iC COlad iti¢:iii> low: per cap: : high financing rate)i and the rnispe_'Ception aboui otorcycle rid ing (dangerous; :


:369 ]:

..... that gov: encour= of both effi..... cient and inefficient firms in ?i tl_e mot0rc parts in_ i .try: gain _. used by the :more effiCiei_t producers.: : i emmenti_tervention :3_ :::

:3s_ 390:::::

i: i:

;try: in :terms: 0f: market structure opennesS;:: market concen:i ......


i :i ::i:i : )

i :i:i:EXporls!i: :i:: : :: i

: ::

tra tion:,andprofitaNli:ty):and perform-: ance(efficiency, productivity; and ex: ii port earnings)#: among otlmrs: :: ::

...... : i i i :: :........

served increases in tt_edegreeofO en: ness;: reduction in market ¢Oncentra, :i fion; and:: impr0vetnent: inl efficiency. I : Tl_ese results;lmweVer;arenotconclu2 1 :: : : ::: i:ii :::::i::::::::::i: i isive because liberaliza tion ]las not been i: ii ............... ........ :completed: :: ........ ..........i: i




ii resource_isai

:ciei_ey ....


ivemmefif: re:vefiues ........ ::,,,8:


ii:additi0n:t0 tradewoteCtien: Tl_estudy: I i:i : i i suggests tt_at future policy: direCtions :i iII shouldfocusondevelopingthesuppli-i: i i iler induStrieg and enceuraging exports:: :i


........ :

eia eraic tea


1........\ _............. ........... ..........

i:_tudy::Of:Mri: :EdWin:Cii Mendoza asSesseS tl_e:im:pact:of trade::






enco:uraged the: _onents

l:::ii_i6 ::i::

c0i_tent,: :Tl_at : i [l_atgave :: t_l"mpOr t +( ed


, alum: ::iS:i:I¢Sg:: ti_a ::O:nl

:iii::i::: :::i:iI::::::.......: :,







:/: recOmmended th6 following: (1)mon-:i: : ::

technicMassistanceandsupporttoin_ : ::::::, ::,:,,,:::,

:: :::

h assMations; :emillatio_ and ;_fmal.ket (4_ pr°duc': il_f¢)r.::: :::::,;:;;:: :;::

........ ThoSona;and ; ... veSiaccordi:iG t6S:ei_RSul:: :


e: (D: ::Roco and Cong; Fehclto:l ayumo who ..... !::aiid a lab iiity ::::we re::i:gU s tS :of: i_6i_ ::::d u _i,i:g,_th e:i ::i: :: ,:in:di:fe_c!:i:6xpor t_: synp0siui'n:;:: : alrea:dy: ::w0rki:_G:on : :: :ci!edit


Pulong Saliksikan Series: Lessons from Uncle Sam Ad Fever Catches on Generics