Archive for August 21st, 2019

Price stability or financial stability? Central Bank’s (and RBI’s) difficult balancing act

August 21, 2019

My new article in moneycontrol where I reflect on the recent speech by the Governor of RBI.

Price Stability and Financial Stability continue to pose challenges for central banks throughout their history…

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How banks lobby and capture regulations..

August 21, 2019

Superb paper by Deniz O Igan and Thomas Lambert:

In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes.

The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis.

While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.

I think in other sectors regulatory capture is not as straight forward. In financial sector it is blatant. You see central bankers and securities regulators join financial firms pretty freely.

Philippines economy: Weaving an unprecedented 20 year growth story (without much hype)

August 21, 2019

There is much hype around Indian economy and how high its growth has been all these years. There are some others who manage it without much hype.

Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (their central bank) in this speech highlights how Philippines economy has been growing for 20 years:

Let me begin with our growth story thus far in the Philippines. Our economy has experienced uninterrupted growth for over 20 years since 1999 despite challenges such as the 2004 fiscal crisis and the 2007 global financial crisis-that is 81 consecutive quarters of continuous growth, with annual growth averaging 6.4 percent in the past five years (2014-2018).

Growth in recent years has become more broad-based.

On the demand side,  private consumption remained robust in the first quarter of 2019, as in the previous quarters through the years. This is further supported by rising contribution from investments from 2010 up to present.

On the supply side, services remain the main driver of growth-but the industry sector has also stepped up in recent years.

Meanwhile, the government’s economic managers remain optimistic about achieving our GDP growth target of 6 to 7 percent this year despite the lower than expected 5.6 percent growth in the first quarter of this 2019.

Private consumption is expected to remain robust, aided by remittance inflows and sustained “cooling” inflation. Private capital formation, on the other hand, should likewise contribute more significantly to economic growth, with construction and investments in durable equipment expected to remain solid in light of the government’s projects and other infrastructure programs.

The International Monetary Fund (IMF), World Bank (WB), and Asian Development Bank (ADB) share these expectations. In fact, all three forecast that the Philippine economy will grow by about 6.2 to 6.5 percent this year.

This has been due to three measures:

The bold reforms and initiatives in the past three years have prompted the government to capitalize on and sustain these gains. It is because of this that we believe the Philippine growth momentum will be sustained moving forward.

First is the government’s ambitious infrastructure program-“Build, Build, Build” which aims to boost the economy’s mobility and connectivity, enabling equitable growth and development. At present, there are 75 high-impact national government infrastructure, with 46 projects (61 percent) already in the implementation stage. 

The government is expected to invest over PhP 4.6 trillion (or US$90 billion at PhP52:USD1) in public infrastructure from 2019 to 2022.

Second, is the recent passage of reforms aimed at strengthening our investment climate. The Ease of Doing Business and Efficient Government Service Delivery Act, the revised Corporation Code, and the Philippine Innovation Act support the government’s agenda of improving competitiveness and ease of doing business in the country, promoting transparency and cutting red tape in the government for a more conducive business environment.

At present, the Philippines’ current standing has improved based on different third-party assessors. For instance, the Philippines’ ranking rose from 68th to 56th place under the 2018 Global Competitiveness Report.

It also received an upgrade in its sovereign credit rating from Standard & Poor’s to “BBB+” from “BBB.” These favorable standings are also boosted by the improved business sentiment and the stable consumer outlook based on the BSP’s latest round of expectations surveys.  

Finally, the continued demand for Philippine skills locally and abroad are evident in the growth of our BPO industry and strong remittance inflows. This further highlights the importance of our country’s most prized resource-our labor force. Based on our estimates, production efficiency has improved over the years with the incremental capital-output ratio (ICOR) declining steadily. As you know, the higher the ICOR, the less efficient the production process is.

Recognizing the skills of our workforce, the government has invested heavily in various social programs such as the Universal Health Care Act and the Access to Quality Tertiary Education Act (RA No. 10931).

You may not know this but 40% of our budget goes to social services.

He goes on to highlight the role central bank has played and is playing to maintain the momentum.

India and its policymakers make much noise about how growth rates have been higher during their tenure and getting into a lot of mud slinging. They make it look as if India is the only country growing and they are the sole reasons for this growth. Examples from smaller countries such as Philippines tells us none of this is needed really.


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