Introspective

Most potent weapon

By Calixto V. Chikiamco

WHAT IS China’s most potent weapon? The Intercontinental Ballistic Missile called "Dongfeng" that can reach the United States? Or, the Jianghu-class Chinese warship that run aground off Palawan?

No. Neither are any Chinese-built guided missile, submarine, or satellite China’s most powerful weapon.

China’s most potent weapon has been and is its undervalued exchange rate. With this weapon, which it has wielded for more than 20 years, it has been able to "invade" the economic territories of other countries with its cheap made-in-China goods. It has fired salvo after salvo with more than five successive devaluations in the past two decades, with the most significant one in 1994 when it let the yuan devalue against the US dollar by 70%. As a result, it has built a gigantic job-creating and wealth-creating machine. Those frigates and missiles are only the fruits of that machine.

However, China doesn’t have to fire a single shot over the West Philippine Sea to bring the country to its knees. It can just use its humongous reserves to buy Philippine pesos (yes, you read that right, "buy" and not "sell"), make the peso appreciate to ₱35 to $1 to impoverish OFW families, hollow out Philippine industry, destroy the BPO and export sectors, and deal deadly blows to the retail, real estate, and education sectors, which are dependent on OFW money. In short, further impoverish the country without firing a shot, and even Loida Nicolas-Lewis’s overseas demonstrators will feel the pain in their pocketbooks.

The fact of the matter is that the Philippine government seems to be clueless as to what constitutes national interest and the grave threats to it. While Chinese muscle flexing in the West Philippine Sea does raise alarm bells, there’s a much graver threat to the national interest, and it’s not just coming from the Chinese side.

According to Dr. Raul Fabella, the sole living National Scientist in economic science, India has just let its currency depreciate by 25%. It’s as if India just launched a missile about to land on our shores, yet the government seems blissfully ignorant about it. The effect of the Indian rupee depreciation and peso appreciation is to make our BPO sector uncompetitive vis-à-vis the Indian BPO industry. According to the Business Process Outsourcing Association of the Philippines, the Philippines will suffer a 30% cost disadvantage relative to Indian suppliers. While our call center agents enjoy an advantage over Indian agents in terms of accent and knowledge of Western culture, buyers will not ignore our cost disadvantage for long. If the peso value reaches ₱39 to $1 and below, one might as well have dropped a neutron bomb on our call centers. Massive layoffs will occur, not to mention the collateral damage to the fast food and office rental markets.

However, it’s not only services that will be affected, but manufacturing and agriculture as well. Motolite President Don Albert Questa warned that the country’s largest battery manufacturer may close down if the peso continues to appreciate. Local manufacturers serving the domestic market are also feeling the pinch because competing foreign goods, many made in China, have become cheaper with the appreciating peso. Last year, pork producers threatened to strike due to the massive influx of imported pork products, not realizing that the strong peso has made smuggling highly profitable.

The problem of the appreciating peso is that the economy suffers from cost rigidities, such as lack of infrastructure, monopolies in rice importation and in other strategic sectors, minimum wages, etc. -- all of which prevent exporters from adjusting to peso appreciation. A "market-driven" exchange rate only makes sense if there’s flexibility both downward or upward. In other words, a company can adjust to a lower topline due to a stronger peso by slashing costs, but that’s next to impossible given the many cost rigidities afflicting the economy.

I don’t blame the Bangko Sentral entirely for the state of affairs. They can only do so much, given their strict mandate, limited capital, and fixation with inflation targeting. The BSP also doesn’t have the political cover to do much more because none of the national government officials, from the President down to the congressmen, seem to think that the appreciating peso is a grave threat to national interests.

The problem of the appreciating peso deserves to be in the national agenda, as if Chinese soldiers have already landed on our shores. It can only be solved if the nation as a whole mobilizes to counter its effects. Some may even debate whether it’s a problem at all since it helps keep the lid on oil prices and keeps the stock market frothy. However, debate it we must, including the re-imposition of capital controls, but eventually we must mobilize against it.

Recent events have shown the Philippine state’s ineffectiveness: its incapacity to solve even the most basic of problems such as flooding, traffic, and airport congestion; capture high profile fugitives; prosecute the perpetuators of the Maguindanao massacre; and heck, even find the body of the late Jesse Robredo (a British volunteer diver with his side sonar was the one who did it). The state is also seemingly asleep on the exchange rate question.

(This is not meant as a criticism of the Aquino government in particular but of the weak Philippine state in general. The most important job of President Aquino is to strengthen state capacity, not just reduce corruption.)

On the other hand, the Chinese government, disregarding Western paeans about market-driven exchange rates, has instead used an undervalued exchange rate as an offensive weapon. If there is a currency war, the Chinese -- and the Indians, and even the Americans with their quantitative easing -- have landed, while we go around like Keystone cops preparing for the wrong war.

Calixto V. Chikiamco is a board member of the Institute for Development and Econometric Analysis. For comments and inquiries, please email us atidea.introspective@gmail.com. To know more about IDEA, please visitwww.idea.org.ph.