Thursday, January 31, 2008

Performance measure of a global economy

I just phoned my son in Singapore and asked him how much money we have in our unit investment trust fund and he says, "it is as it was a year ago today. It moved up and down and now it is on an even keel."

Should I be happy or sad? Should I take my money out of the bank and invest it somewhere else? Should I put it in some business idea I am entertaining right now? Or should I just splurge in travel or shopping spree?

Last Monday, the guest speaker at the Rotary Club of Mandaluyong North regular meeting was Rey Angeles, author of two must-read books, The Peso Exchange Rate: Why Are We So Poor? and the newly released The Philippine Economy: Do Our Leaders Have A Clue?. There was a lively discussion considering that the members are entrepreneurs, bankers and one judge.

Rey says that before the onset of globalization, it was alright for economists to measure economic performance principally with one yardstick - Gross Domestic Product. And it might have been alright then to consider just interest rate adjustments and control of inflation rate as the principal policy instrument. "In the age of the global economy, however, these are not enough, for the customers of a country are no longer its citizens, but the rest of the world. Globalization later debunked the validity of INWARD-looking policies of the USA and showed the wisdom of the economic policy framers of Japan, Korea, Taiwan, and now China."

"Ironically, the USA has always been the greatest advocate of globalization, the reduction of tariffs, the opening up of markets, and the free movement of capital across continents.

"In the now global economy, the real measure of performance is Current Account Balance--the difference between inflow of dollar earnings of an economy and the outflow of its dollar expenditures in its business with the rest of the world.

"Briefly, the major components of the current account balance are net trade balance (exports of good and services less imports of goods and services) and net factor income (inward remittances of labor income and investment income of a country's citizens abroad less outward remittances of foreigners of their income earned in the country).

"In practical terms, the current account balance measures the earning capacity in US dollars of an economy with respect to the rest of the world and it also shows the economy's lack of earning capacity or competitive advantage with respect to the world.

"If the balance is consistently positive, meaning consistently in surplus, then it has competitive advantage with the rest of the world. If the balance is consistently negative, meaning always in deficit, then the economy lacks competitive advantage with respect to the world."

My initial question nags me: What should I do with my hard-earned savings to make it last until my judgment day?

Rey continues, "In the end, the underlying earning asset of our economy is not the performance of its financial markets or the income on savings accumulated for centuries and placed in capital markets. These are mere mirrors of the performance of the real underlying assets-- its working people, their entrepreneurial expertise, their level of production of goods and services and the competitive value of their exports that serve the real needs of the people of the rest of the world."

Rey finally concluded that we need strong sound economic fundamentals and that we use the proper measure of our economic performance. One move should be to let the peso seek its own level. A strong peso will hurt our economy in the long run. On the positive side, now is the time for our manufacturing sector to buy machineries and other capital assets when the dollar is down. The dollar will not stay down all the time.

As to my money in the bank, let it stay there until I am determined (soon!) to go into a business that could be exported to earn dollars. As Rey said, "our economic growth comes from serving customers all over the world, not just your own relatives and neighbors.";

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