February 12, 2015

Shielding the Economy from Financial Crisis

Makati Skyview
Makati Skyline By j_0_n [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons


In the midst of financial crisis, strengthening the domestic market, by supporting domestic goods and services(through government and private initiatives), would lower the demand for imported goods and thus would lower the demand for foreign currency (e.g. Dollar) which will strengthen the value of local currency (Peso).

When there is a financial crisis, we would probably see a decline in the value of stock market, because foreign holders will withdraw their stocks due to declining value of local currency, and in reverse – increasing value of foreign currency. Thus stock investors would think that the best time to fly back their money would be the said time - because that would be the time for highest foreign exchange conversion. As a result, foreign currency reserve will decline and, as a result, would limit our access to foreign goods and services.

Another scenario would be, because global economy is slowing, locals who are working abroad would be forced to return back to our country; Business Process Outsourcing (BPO) would also slowdown. Thus, the result would be slowdown in foreign money remittances – which again would result to decline in the supply of foreign currency. Global economic slowdown would also affect the exports negatively.

If we are highly dependent on foreign goods and services, the effect on the economy would be fatal, because the effect would reach the bottom line; the common people. Imagine if basic living needs were imported by our country, like water, food, energy, and building materials, how are we going to survive? If basic living needs were imported, the price of these goods would significantly increase, which could negatively affect the well-being of the society; and the multiplier effect scenario could be worst.

This is not to recommend that a country should be a closed economy – this is to say that an economy should be subsistent while operating globally. By doing this, chained economic crisis will be prevented.

When there is only one piece of onion in your country, and you can’t import because you have no foreign reserve, can the price of that one onion spur to 1,000,000 Pesos (USD 23,256)? Think about it.

It is projected that global economy will slow down in the next 50 years due to declining labor force.


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