Competitive currency a fundamental competitiveness strategy, say experts

MANILA, Philippines - For a developing country bereft of political, technological, and institutional conditions to be highly competitive, a competitive currency serves as a fundamental competitiveness strategy.

Replete with a smorgasbord of competitiveness constraints, any developing country that wishes to be globally competitive will have a strong policy preference for a weak currency, said Filomeno Sta. Ana of Action for Economic Reforms.

Unlike in the developed economies, local entrepreneurs in the country are operating in an unfavorable business environment characterized by prohibitively high transportation costs, weak energy and technology infrastructure, and bureaucratic red tape, among others.

Amid all these constraints, the last thing these entrepreneurs need is an overvalued peso, especially if other developing countries have undervalued their currencies, Sta. Ana stressed.

While the Philippine peso is overvalued by 20 percent, the Chinese yuan is undervalued by 70 percent denting the price competitiveness of Philippine products that are directly competing with Chinese goods.

The rationale for adopting a competitive exchange rate goes beyond price competitiveness.

According to former Finance Secretary Ernest Leung a competitive currency does not only help buoy price competitiveness, it is crucial in improving the country’s overall competitiveness.

Noting the pivotal role in enhancing national competitiveness, Leung stressed that a strong peso is a very costly strategy and an inappropriate one for addressing the country’s huge import dependence and managing the sizeable external debt obligation. 

Combined with efforts to simplify the tax system and further develop the capital markets, a competitive currency will be facilitative of many positive developments.

With a competitive currency, the local industries are less inclined to seek tax exemptions or engage in tax evasion. Combined with a simple tax system, this should translate to a much-improved revenue performance needed to fund productivity-enhancing measures, Leung explained.

Leung likewise pointed out that with a competitive currency, overseas Filipino worker (OFW) remittances can provide a much greater stimulus to the local economy. With more developed capital markets, these remittances can be easily tapped to fund productive investments and not just spent on consumer goods.