price stabilization measures and its effects on - Philippine Institute ...

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Inflation can also erode the profitability of producers <strong>and</strong> the external competitiveness ofdomestic products if it leads to higher production costs such as wage increases, higher interestrate <strong>and</strong> currency depreciation. Price stability is critical for producers <strong>and</strong> exporters alikebecause high <strong>and</strong> volatile <strong>price</strong>s of inputs reduce the flexibility of producers to efficiently planahead. Increases in wage rates which are unmatched by increases in labor productivityeffectively result in higher production costs for the firm. This is especially important for firms orindustries which are labor intensive like the fruit-processing industry. The industry employsmanual labor for sorting, cooking, bottling <strong>and</strong> packing <strong>its</strong> products. The export industries alsoneed stable <strong>price</strong>s for their inputs to be able to respond quickly to new trends in market dem<strong>and</strong>.Otherwise, when firms are unable to do so, competition from cheap producers like China <strong>and</strong>Vietnam will capture the market.Most export industries also suffer from weak backward linkages. The garments industry,which used to be the banner export industry of the country, is forced to import more than half of<strong>its</strong> input requirements leading to high materials costs <strong>and</strong> longer turnaround time. This is alsotrue for the electronics industry which sources a great portion of <strong>its</strong> materials from abroad. Theseindustries require stable <strong>price</strong>s to maintain their presence in the global market. These industriesalso need to be able to compete in the higher end segment of their market; <strong>price</strong> stability willhelp these industries to do so. A period of stable <strong>price</strong>s will give the export industries time tofocus their strategies in improving <strong>and</strong> maintaining their global competitiveness without havingto worry about how much production costs will be because <strong>price</strong>s are rising unpredictably.Empirical Studies on the Causes of Price Instability in the PhilippinesA review of the factors affecting <strong>price</strong> stability in the Philippines will enable policymakers to implement appropriate policies to maintain <strong>price</strong> changes at a manageable level.Lim (1996) showed that cost-push <strong>and</strong> dem<strong>and</strong>-pull factors are important factors in thedetermination of the <strong>price</strong> level. The <strong>price</strong> of imported goods has the highest elasticity, followedby wages <strong>and</strong> money supply.An earlier study of Bautista (1983) showed that a large part of inflation for the period1965-1982 could be attributed to world <strong>price</strong> increases <strong>and</strong> the depreciation of the peso. Hepointed out also that the increase in oil <strong>price</strong>s put more upward pressure on inflation. However,his study did not find money supply <strong>and</strong> wages to significantly affect inflation.Another study of Lim (1985) indicated that the increase in inflation was caused by therise in interest rates which increased the cost of borrowing for working capital. This wassupported by his empirical results that indicated a positive relationship between interest rates <strong>and</strong>inflation. Meanwhile, Bautista (1991) showed that the forecast error variance of inflation due tochanges in the exchange rate was higher than that of money supply growth. However, theempirical result of his study did not show that money supply growth fuelled by fiscal defic<strong>its</strong>,was unimportant. Important items in production cost consist of wages, salaries, power rates, <strong>and</strong>energy <strong>price</strong>s. Structuralists who advocate a cost-push driven inflation have pointed out thatinflationary pressures are generated by increases in nominal wage rates in excess of laborproductivity. As <strong>price</strong>s of food commodity rise, putting pressure on wages to increase <strong>and</strong>7
engendering further <strong>price</strong> increases in the other sectors of the economy, a vicious cycle willoccur. This upsurge in the cost of living will push wages to increase independently ofproductivity movements.Wage rates in Manila are pegged at $7/day while in Bangkok, labor rates are at$5.75/day. These have greatly affected labor-intensive industries utilizing low-skilled labor likethe fruit-processing, textile, <strong>and</strong> local garments industries.Power rates <strong>and</strong> energy <strong>price</strong>s tend to influence the <strong>price</strong>s of output that causeinflationary pressures in the economy. The Philippines has the highest retail <strong>price</strong> of electricityin the ASEAN region although <strong>its</strong> electrification level is comparable with neighbors of similarlevel of development (NEDA, 1998). Electricity rates in the country in 1997 were at$0.1128/kwh while in Singapore, electricity costs were just $0.0865/kwh (Payumo, 1998).Bernardo (1999) asserted that privatization <strong>and</strong> increased competition particularly at thegeneration end could reduce power costs from the current average cost of the National PowerCorporation of P2.60/kwh to P1.60/kwh, or as much as 38 percent.TRENDS IN INFLATION IN THE PHILIPPINESThe annual inflation rate in the Philippines has almost always been positive over the pastfour decades (Table 1). Not only has CPI grown monotonically but <strong>its</strong> growth has been ratherrapid, compared to many developed <strong>and</strong> developing countries. In certain episodes of the postwareconomic history, inflation was double digit. These are much lower, however, than thehyperinflation type suffered by countries like Argentina, Mexico, Russia, <strong>and</strong> recently Indonesia.Since 1992, the average annual inflation rate has been kept at a single digit. A rate of 8.9percent was posted in 1992, a marked deceleration from the 18.7 percent in the previous year. In1993, inflation decelerated further to 7.6 percent. Inflation was higher at 9.0 percent in1994, butstill within the 9.5 percent target inflation in the economic <strong>and</strong> financial program supported bythe International Monetary Fund (IMF).8
Page 2 and 3: udget subsidy needed to implement t
Page 5: prices of imported
Page 12 and 13: Table 1. Average rates of inflation
Page 14: Table 3. Contribution to inflation
Page 17: Table 5. Philippine exports by majo
Page 21 and 22: It appears then that while
Page 23 and 24: The expected increase in productivi
Page 25 and 26: With the devaluation of the peso, h
Page 27 and 28: Before advocating the adoption of c
Page 29: Masson, Paul R., Miguel A. Savastan

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