I apologize for the sparse posting. That probably won't change before March of 2011, when I’ll have a manuscript ready for The Empire Trap and have teaching notes done for all my cases. Plus, the World Cup! (You don’t follow my Facebook page?)
But let’s take Scott’s half-joking question: Why didn’t the Phillipine Republic’s amazing access to the U.S. market trigger a sustained export boom? Simple: the fixed exchange rate mandated by the Philippine Trade Act.
The Bell Trade Act fixed the parity of the Philippine peso at 50¢, the same as the prewar parity. That was ... how to put this? That was insane. Price levels jumped six times after the war. Nominal wages followed, but with a lag. After the war, the economy went through a brutal deflation ... which neither reduced nominal wages nor brought the real exchange rate back into line. It was economic insanity. The eurozone follies are nothing in comparison. Harry Dexter White testified before Congress about how insane it was, albeit in an understated way. “The very essence of sovereign monetary systems is that they may get out of line with each other. If you protect the loss against exchange by fixing that rate of exchange so that it cannot be altered, you may be subjecting the country to economic conditions which would be bad for the whole country.”
Had the Commonwealth of the Philippines received the status of Puerto Rico (better yet, Hawaii) its people would have emigrated en masse and it would have received far more reconstruction money. Had the United States really cared about the new Republic of the Philippines, it would have offered a perpetual customs union in return for giving U.S. investors equal treatment with Filipino ones and allowed the peso to be devalued to 20¢ before re-establishing parity. (Or better yet, a devaluation followed by dollarization.)
Neither happened. Representative Wilber Mills (D-AK) let the cat of the bag as to why. “We are attempting in the language there to safeguard the value of capital that may go from the United States to the Philippines.” That is not crazy. Devaluation would reduce the value of U.S. investments. But why not give the Philippines a head start by bringing the exchange rate into line with relative prices? Ah. Well. The Philippine Trade Act allowed the President of the United States to “establish the total amount of Philippine articles which may ... be entered or withdrawn from warehouse in the United States” whenever he find “that they are coming or likely to come into substantial competition with like articles that are the product of the United States.” Now that provision in itself did not handicap the Philippines, but a Congress that would insist on that provision was not a Congress that would allow the Philippines to adopt the trade policies that Japan, Germany, and South Korea would later adopt ... and which China (at a much larger and more damaging scale) is adopting today.
At this point, the story is pretty much done. Still, there is an important wrinkle, which is below the fold.
With U.S. encouragement, the Philippine government managed to undercut its remaining advantages in order to distribute benefits to political cronies help American transplant plants aimed at the domestic market solve balance-of-payments problems caused by the fixed exchange rate. (There is an interesting story as to why the Philippines never used the U.S. dollar, which I will blog about if there is interest.) The U.S. refused to allow its non-imperial satrapy to devalue, which would hurt American economic interests at home, but it did allow the Philippines to impose capital controls. On December 9th, 1949, facing an economic emergency as exports tanked while imports spiked and more deflation threatened, the Philippines declared its economic Pearl Harbor: with the permission of the President of the United States (as required by the Philippine Trade Act) it imposed foreign exchange controls on everything. No one could buy any dollars for any purpose without the permission of the Philippine central bank. It was an emergency measure.
That never went away.
Of course, that was not the fault of the United States. The Philippine government could have pushed for devaluation. It did not. Instead, Central Bank head Miguel Cuarderno abetted the Quirino Administration’s discovery that it could reward supporters with preferential access to foreign exchange. The controls tightened. The Nacionalistas beat the Liberals in the 1953 election, but the controls remained, despite President Magsaysay’s declaration that “my Administration is pledged to the eventual elimination of controls.” I will be the first to admit that another polity might have been able to manage the controls to the benefit of the country ... but the Philippines was not that country, and moreover nobody else tried to do something so insane in the context of a fixed exchange rate.
The Philippines devalued in 1962, but by then the implicit protectionism imposed by the exchange controls had been entrenched. Why invest in an export industry when you can make boatloads of money behind the wall of exchange controls? Neither of America’s other Asian satrapies in South Korea nor Taiwan had that worry. South Korea devalued in 1953, 1955, 1960, 1961, 1961 and 1962. Taiwan devalued in 1953, 1956, and 1961. Neither allowed exchange controls to affect the price of capital goods.
I would agree that the Philippines could have handled things better. But I would also agree that the United States made it pretty goddamned hard to do so. It mandated a fixed exchange rate and made a formal written threat to impose quotas on Filipino manufactured exports. It then allowed the Philippines to impose capital controls that were far more damaging to economic efficiency than tariffs could have ever been.
Washington Sycip’s angry response when I mentioned the Philippine Trade Act now makes more sense.
"There is an interesting story as to why the Philippines never used the U.S. dollar, which I will blog about if there is interest."
I know this blog entry was a long time ago, but I would be very interested in learning the story of why the Philippines never used the U.S. dollar.
Posted by: J.H. | November 28, 2011 at 03:53 AM