Friday, June 06, 2003

In the Business Week Online section on global business, there is a short interview with Philippine Central Bank Governor Rafael Buenaventura. One of the first questions turns to currency issues:
Q: Are you intervening to keep the currency strong?

A: I don't like the word intervene. We're trying to keep volatility at a minimum. It creates uncertainty if the peso depreciates or appreciates too fast. Importers and exporters get panicky. We're not setting any specific exchange rate. If there's really a stronger demand for the dollar, we'll let the peso seek its level, but not so it goes to 55 tomorrow.
We all know the turmoil that people in small impoverished countries can suffer when global finance has at their currencies. Mexico, 1994-95; East Asia, 1997; Brazil, Russia, 1998; Argentina, 2001 -- you get the idea. So these quite poor countries like to peg, but to peg they need some serious amounts of foreign currency in their pocket with which to intervene in global currency markets. The amounts of foreign currency can be quite large, in fact, and this is capital that would be put to much better use in promoting economic development rather than defending a currency peg or target.

Jubilee 2000 says that "Asian and African countries are forced, by the financial instability caused by globalisation, to maintain dollar reserves, at 14% and 7% of GDP respectively. The US in contrast holds only about 1.3% of her [sic] GDP in reserves." Some countries are forced to borrow dollars to build up their reserves when they unable to run huge current account surpluses. As Jubilee 2000 continues, "poor countries are borrowing hard currency from the US at interest rates as high as 18%; and lending this back to the US (in the form of interest on US Treasury Bonds) at 3%."

Just think how much a country like the Philippines could do with an extra $13 billion (the value of the country's foreign reserve holdings in April 2003) to invest in their own economy rather than in the US. No wonder Jubilee 2000 subtitles their report "How the poor are financing the rich."

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