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HE’S
been called the “the most important economist of our
time” and “the best economist in the world today.” He
has also been an adviser for the United Nations,
International Monetary Fund, World Bank, European
Commission, the Federal Reserve Board, the US Treasury
and the government of Canada.
Thus, it
was only fitting that Canadian-born economist Robert A.
Mundell, winner of the 1999 Nobel prize in economics for
his theoretical work in the 1960s on monetary and fiscal
policy in open economies and now a professor at Columbia
University in New York, would be asked to deliver the
first of a series of lectures here organized by the
International Peace Foundation dubbed “Bridges:
Dialogues Toward a Culture of Peace.”
In
remarks to media on Thursday after his lecture on
“Economic development by fitting globalization into the
national-development strategy,” Mundell said the
Philippines can implement a fixed exchange-rate system
to achieve a more stable economy “anytime it is prepared
for it.” But he cited several conditions: “You have to
have a balanced budget and enough foreign reserves, and
if government officials agree with it and have decided
on what the exchange rate is going to be.”
Mundell
explained that having a fixed exchange rate means a
process in which the central bank fixes the price of
foreign exchange and allows the money supply to move in
a direction that keeps the balance of payments in
equilibrium. For countries with rates of inflation that
do not go beyond 5 percent a year, a fixed exchange rate
could be the best monetary rule that the central bank
can adopt. That would make the Philippines theoretically
eligible if only inflation were considered, since the
country’s inflation rate has been within 2.2 percent to
3.9 percent, with the Bangko Sentral ng Pilipinas
projecting full-year inflation this year to be between 3
percent and 4 percent.
“Equilibrium under a fixed exchange rate means that the
country’s money supply is directed by its balance of
payments. When the balance is in surplus, the money
supply expands and that increases expenditure in goods
and securities and that corrects its surplus,” he said.
Mundell’s views are particularly relevant for the
country in light of improved economic conditions,
including a better-than-expected GDP growth rate this
year and the sharp increase in the value of the peso in
relation to the US dollar. The strengthening of the peso
is hurting not only our exporters, but also the OFWs who
now complain that they must send more dollars than
before to their families back home, and are urging
government to intervene to stop the peso’s strong
showing.
Mundell’s reputation as one of the foremost experts in
international economics is secured by a prodigious
amount of written works. In the 1960s, he originated the
concept of the “optimal currency area,” which framed the
debate that led to the creation of a single currency,
the euro, for Western Europe. He also demonstrated that
with a floating currency and free capital flows, fiscal
policy cannot affect overall demand because changes in
government spending trigger changes in interest rates,
exchange rates and trade flows that are exactly
offsetting.
He was a
pioneer of the theory of the monetary and fiscal-policy
mix, the theory of inflation and interest and growth,
the monetary approach to the balance of payments, and
the cofounder of supply-side economics.
In an
earlier book, Mundell said: “I believe that
exchange-rate volatility is a major threat to prosperity
in the world today. It is volatility of exchange rates
that causes unnecessary volatility in capital markets.
Whenever the exchange rate overshoots, it affects the
real value of taxes, the value of all financial assets,
the domestic price level and, eventually, wage rates. An
unstable exchange rate means unstable financial markets,
and a stable exchange rate means more stable financial
markets.”
But
Filipino economists and economic managers can learn more
from Mundell than monetary and fiscal policy. In the
preface to his book Man and Economics: The Science of
Choice, cited by Fortune magazine as “both a
readable introduction to economics and a work in which a
trained economist can find insights, formulations and
perspectives he has never encountered before,” Mundell
asserts: “Economics is the science of choice. It began
with Aristotle but got mixed up with ethics in the
Middle Ages. Adam Smith separated it from ethics, and
Walras mathematized it. Alfred Marshall tried to narrow
it, and Keynes made it fashionable. Robbins widened it,
and Samuelson dynamized it, but modern science made it
statistical and tried to confine it again.”
He
continues: “But the science won’t stay put. It keeps
cropping up all over the place. There is an economics of
money and trade, of production and consumption, of
distribution and development. There is also an economics
of welfare, manners, language, industry, music and art.
There is an economics of war and an economics of power.
There is even an economics of love.
“Economics seems to apply to every nook and cranny of
human experience. It is an aspect of all conscious
action. Whenever decisions are made, the law of economy
is called into play. Whenever alternatives exist, life
takes on an economic aspect. It has always been so. But
how can it be?
“It can
be because economics is more than just the most
developed of the sciences of control. It is a way of
looking at things, an ordering principle, a complete
part of everything. It is a system of thought, a life
game, an element of pure knowledge.”
Seen
from this perspective, therefore, economics becomes less
of an arcane science or an esoteric academic discipline
that only scholars and technocrats can fathom, but
something that’s grounded in everyday reality, and can
therefore be appreciated and understood by everyone.
That’s an important distinction; those who live under
conditions of wretched poverty may not be familiar with
interest rates and debt-to-equity ratios, but they do
know that it is government’s responsibility to help them
improve their lives, and that they can hope for more
than mere survival. |
