Lowering interest rates key to robust economy

Chairman of the Board
Chamber of Real Estate and Builders Association

(First of two parts)

Poverty is the root of most evils. Its all-pervading impact respects no age, gender, color or culture. The problems facing our country today — breakdown in peace and order, political instability, social unrest, graft and corruption, ignorance and apathy, and many others — are all traceable to widespread poverty. Solve poverty, and in time we will have resolved all these ills. Pay lip service to it, and we will witness EDSA I successively progressing to EDSA 10.

It is not impossible to eliminate poverty, for no problem can ever be bigger than man to solve. As the saying goes: "where there is a will, there is a way." Indeed, all it takes is will — political will.

Poverty in our country stems from the ever-widening gap between income and cost of living — a gap arising from the combined impact of extremely low wages on one hand, and high prices of goods and services on the other.

It has been determined that in order to live decently, a family of six must earn at least P509 daily. With the current minimum wage of only P285, and the prices of basic commodities, transportation, electricity and water as they are now, a family with a single breadwinner would, therefore, survive only under subhuman conditions.

The demands of labor for an increase in the minimum wage, and of consumers for lower prices, therefore, are anything but unreasonable. Rather, it is a socio-politico-economic imprerative — nay, a moral and Constitutional imperative — for government to meet these demands expeditiously.

Poverty can be stamped out by raising wages and at the same time lowering prices. And this can be achieved as speedily as government would wish, at no cost to government and the business sector, by simply re-engineering our economic structure in such manner that among the three major costs of production — cost or money, raw material and labor — labor as the human resources is accorded the preference it justly deserves. For as the saying goes: "There can be no labor without capital, nor there be capital without labor."

The country’s cheap labor force — which the government touts about as an enticement for foreign investors — should not be a source of pride but rather of shame. So should the country’s perennial regime of excessively high interest rates. For it is precisely this abnormal combination of cheap labor and high cost of money that not only prevents the country from attaining an "independent economy effectively controlled by Filipinos," but also perpetuates the situation where the country’s poor continue to get poorer while the rich continue to get richer.

Difficult as it may sound, reversing this abnormality — as the only way to eliminate poverty — really requires nothing more than just the political will to take that single all-important step: imposing a fixed and reasonable ceiling on bank leading rates.

History will show that for many decades when the Anti-Usury Law was in force from 1916 to 1976, economic instability of this prolonged duration and endemic poverty of the current magnitude were realtively unknown. Statistics will show that the country’s woes set in and took hold only when the tempering influence of the Anti-Usury Law was removed and interest rates were allowed to float freely, to their present range of anywhere from a low 16 percent to a high of 24 percent — and this is only during "normal" times. That these rates are excessive by any standard can be readily seen when compared to those of other countries, which governments strive to contain at no more than three percent to seven percent.

The corrosive impact of high interest rates spares no one, not even government, as it serves to trigger a chain of cost-and price — inflation across the entire economic spectrum — be it in terms of raw materials or finished goods or services, and be it in industry, agriculture, utilities, commerce or services.

As a leading economist puts it: "High interest permeates all levels of society with such corrosive effects. Due to high interest rates, the cost of all goods and services unduly spiral (the price) of low-cost homes increase by three or four times their original costs. High interest shrinks markets, stifles the economy, discourages investments, fuels inflation, decreases wages and income. It is responsible for increasing the deficits of government, the imbalance of trade, the cost of basic utilities — water, power, transport, etc.

"It tilts the balance widely in favor of the capital-rich foreign investors, to the chagrin and despair of local entrepreneurs, makes Philippine goods and service uncompetitive in the world market. Yes, high interest makes American apples and oranges cheaper than the local Philippine mangoes and for that matter, many foreign goods over locally manufactured goods."

Conversely, low interest rates mean lower prices of all goods, services and utilities. This in itself not only improves the peso’s purchasing power, but also enables businesses to generate cost-savings from which they can draw to meet the demand for increased wages. Just as importantly, improved purchasing power enables people to buy more of everything, thereby raising effective demand, which in turn sparks greater business activity and expansion — for it is only when the millions of our bread-earners are financially able to buy their needs may the country’s producers continue to operate and provide.

Clearly, therefore, lowering interest rates is the key to a robust economy and in turn, to social quietude and effective governance.

It has become evident that it is neither wise nor practicable to leave such a vital task as the determination of interest rate levels entirely to the discretion of monetary authorities who are, after all, not infallible in their perceptions or predispositions — as evident, for instance:

1. In the recent juetengate fiasco when the interest rate tool was used by the BSP to resolve a problem that it later admitted was due to political and external factors beyond its control;

2. In the BSP’s policy of raising reserve requirements — a move that invariably jacks up interest rates — allegedly to mop up "excess liquidity" and arrest the fall of the peso against the dollar, when such peso fall is not due to a peso oversupply but rather to an increased demand for dollars during peak seasons on one hand, and on the other, because of an undersupply of dollars due to low export receipts, further exacerbated by depletion of dollar reserves resulting from the BSP’s largely futile intervention in the foreign exchange market; and

3. In several previous instances when the BSP — at the slightest sign of "capital flight" — sacrificed the interest of local investors and the local economy by triggering abrupt rises in interest rates in futile attempts to retain the so-called hot money of foreign portfolio investors.

Neither is it tenable, with the country’s flawed banking system, to allow the "free interplay of market forces" in determining the cost of money, when such so-called market forces are not entirely free — in view of the apparent existence, however publicly belied, of a banking cartel. To do so would perpetuate the present situation where the entire economy is a helpless hostage to exploitative banking practices.

Nor should banks be allowed to unilaterally raise interest rates by simply invoking the so-called "demand-supply squeeze" allegedly caused by government’s competition with the private sector for credit, considering that such "squeeze" is in fact due to the preponderance of DOSRI loans and corporate loans to the preferred giant conglomerates. It is bad enough that banks are allowed to practically dictate upon the government the rates it must pay for Treasury bills. Worse, when government allows banks to set lending rates for private sector loans based on the present formula of a one percent to seven percent spread over Treasury bill rates — depending on whether the borrower is "prime" or "non-prime" — it is in fact allowing these "prime" DOSRIs and conglomerates to enjoy unlimited credit at the cheapest rates, while at the same time condemning the "non-prime" SMEs — already suffering as they are from extreme difficulties in availing of credit — to still pay the maximum price for what little of it is made available to them. (To be continued)