SY 2017 – 2018

A RESEARCH ON PHILIPPINE ECONOMY

AND THE ECONOMY OF OTHER NATIONS
_____________________________________________

In Partial Fulfilment
of the Requirements for the Subject
Basic Macroeconomics
(BusE 1)

Submitted to:
Sir Wilson Capundag Bation

Submitted by:
Cervantes, Kirk Adrian
Dagoc, Colleen Adriene
Laparan, Marco Marcelle
Lim, Bosch

August 1, 2017
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PHILIPPINES

CHAPTER 1

The Methods of Economics

The Economy of the Philippines is the world's 34th largest economy by nominal GDP
according to the 2017 estimate of the International Monetary Fund's statistics, it is the 13th largest
economy in Asia, and the 3rd largest economy in the ASEAN after Indonesia and Thailand. The
Philippines is one of the emerging markets and is the sixth richest in Southeast Asia by GDP per
capita values, after the regional countries of Singapore, Brunei, Malaysia, Thailand and Indonesia.

The Philippines is primarily considered a newly industrialized country, which has an economy
transitioning from one based on agriculture to one based more on services and manufacturing. As of
2017, GDP by Purchasing power parity was estimated to be at $878.980 billion.

Primary exports include semiconductors and electronic products, transport equipment,

garments, copper products, petroleum products, coconut oil, and fruits. Major trading partners include
the Japan, China, United States, Singapore, South Korea, the Netherlands, Hong Kong, Germany,
Taiwan, and Thailand. The Philippines has been named as one of the Tiger Cub Economies together
with Indonesia, and Thailand. It is currently one of Asia's fastest growing economies. However, major
problems remain, mainly having to do with alleviating the wide income and growth disparities
between the country's different regions and socioeconomic classes, reducing corruption, and investing
in the infrastructure necessary to ensure future growth.

The Philippine economy is projected to be the 5th largest in Asia and 16th biggest in the world
by 2050. According to the PricewaterhouseCoopers, it estimates that it will be the 12th to 14th richest
economy in the world by 2060. While this opposes other reports from HSBC Holdings PLC, that by
the year 2050, the Philippines will have been stated to surpass the economy of Indonesia due to its
yearly higher GDP growth rate of 6.5% (Second, after China). However, the economic statistics may
still vary depending on the performance of the government every year.

Despite the challenging global economic environment, the Philippines has achieved notable
economic expansion, driven by the economy’s strong export performance and inflows of remittances
that have bolstered private consumption. The absence of entrepreneurial dynamism, however, still
makes long-term economic development a challenging task.

The government is pursuing a series of legislative reforms to enhance the overall

entrepreneurial environment and develop the stronger private sector that is needed to generate
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broader-based job growth. Progress has been mixed, although some fiscal reforms have been
accomplished. Deeper institutional reforms are required in interrelated areas: business freedom,
investment freedom, and the rule of law. The judicial system remains weak and vulnerable to political
influence.

Background of the Philippines in the Economic Context

The Philippines’ diverse population, speaking more than 80 languages and dialects, is spread
over 7,000 islands in the Western Pacific. During the six-year term of President Benigno Aquino III
(2010–2016), the Philippines became one of the region’s best-performing economies. Now the
question is whether his successor, longtime mayor of Davao City Rodrigo Duterte, will maintain and
expand his predecessor’s successful policies. While agriculture is still a significant part of the
economy, industrial production in areas like electronics, apparel, and shipbuilding has been growing
rapidly. Remittances from overseas workers are equivalent to nearly 10 percent of GDP.

Implementation of laws protecting property rights is weak. Judicial independence is strong,

but the rule of law is generally ineffectual. Courts are hampered by inefficiency, low pay,
intimidation, and complex procedures. Corruption and cronyism are pervasive. A few dozen leading
families hold a disproportionate share of land, corporate wealth, and political power. A culture of
impunity is reinforced by the strong-arm tactics of the new president.

The top individual income tax rate is 32 percent, and the top corporate tax rate is 30 percent.
Other taxes include a value-added tax and an environmental tax. The overall tax burden equals 13.6
percent of total domestic income. Government spending has amounted to 18.8 percent of total output
(GDP) over the past three years, and budget surpluses have averaged 0.4 percent of GDP. Public debt
is equivalent to 37.1 percent of GDP.

Gradual improvement of the business regulatory environment includes reduction of the time
and cost involved in fulfilling licensing requirements. The labor market remains structurally rigid,
but existing regulations are not particularly burdensome. In 2016, the government used its authority
to grant special agriculture subsidies in response to El Niño drought conditions. There are price
controls on pharmaceuticals and some food and household fuel items.

Trade is important to the Philippines’ economy; the value of exports and imports taken
together equals 61 percent of GDP. The average applied tariff rate is 4.3 percent. Many agricultural
imports face additional barriers. Investment in several economic sectors is restricted. The financial
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sector remains relatively stable and sound. In 2016, the central bank announced that it would end a
17-year moratorium on the granting of new banking licenses.

Recent Studies in the Philippine Economy based on the Macro-Economic Indicators

2014 2015 2016 (f) 2017 (f)

GDP growth (%) 6.1 5.8 6.0 6.0

Inflation (yearly average) (%) 4.2 1.4 2.0 3.4

Budget balance (% GDP) 0.9 0.2 -0.4 -1.5

Current account balance (% GDP) 3.8 2.9 1.8 1.4

Public debt (% GDP) 36.4 36.3 34.8 33.8

STRENGTHS

 Electronics is a key driver of Philippines’ exports (50% of exports)

 Important role of Overseas Filipinos (OF) remittances.
 The business process outsourcing (BPO) sector is thriving.
WEAKNESSES

 Low rates of investment. Inadequate and outdated infrastructures.

 Governance shortcomings remain and high level of corruption
 Inequalities and strong demographic growth.

In 2017, the economy is expected to remain vigorous with household consumption, which
should continue to be the main driver (70% of GDP). Consumption is expected to continue benefiting
from substantial expatriate remittances and rapid credit growth. Purchasing power should not be
penalized by inflation, which stays at moderate level, though increasing, and is in line with Central
bank target rate (2-4%). Investment is still on the right path, following the new government's plans
to dedicate 5% of its federal budget allocation to infrastructure development through public/private
partnerships (allocations to Ministry of Transport have increased more than three-fold since 2011).
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Transport, communication and storage will be dynamic sectors. In 2016, the agricultural sector had
suffered from high temperatures caused by El Niño, which caused a loss of 4.5% of overall production
only between January and May 2016. However, in 2017, weather should improve with El Niña.

The budget balance is likely to deteriorate in 2017, following increased spending for the
reconstruction and development of infrastructures. However, public debt should continue to shrink.
Furthermore, although government has encountered difficulties of budget execution and public
expenditures were lower than projected in 2016, the latter is likely to bounce considering the federal
budget for 2017 that is supposed to hinge on public investment.

Regarding external accounts, current account should keep on a positive track in 2017.
Nevertheless, the trade balance should worsen due to the rapid rise in imports stimulated both by
household consumption and the input needs for industry, particularly in the telecommunications
sector, which is driven by business process outsourcing sector. In the same time, poor results in
electronics sector imply that exports are meant to decrease due to the large share of this sector in
country’s exports. Remittances are robust in 2016 and this trend is likely to continue. Foreign
investors remain cautious as evidenced by the position of Philippines peso to US dollar. In this
context, foreign currency reserves of the central bank remain high. Reform of the banking sector has
enabled a considerable reduction in the ratio of non-performing loans.

PHILIPPINES
CHAPTER 2

Scarcity, Choice and Opportunity Cost

The Philippines is one of many countries in which ecological marginalization has occurred.
High rates of population growth — over 2 percent per year — have made cropland relatively scarce
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in the fertile lowlands, forcing many farmers to move into the less productive uplands. This migration
was also encouraged by the fact that the land ownership in the lowlands was concentrated in the hands
of a few elite landholders. As the lowland-to-upland migration proceeded, rising cultivation in the
ecologically fragile uplands has led to erosion and ecological degradation, further shrinking the
supply of available cropland.

These various forms of environmental scarcity can lead to a number of potentially

destabilizing social effects, specifically: lower agricultural production, economic stagnation or
decline, migrations from areas of resource scarcity to areas of perceived opportunity, weakened
governing institutions.

While the specific process varies from case to case, Pakistan's experience over the past two
decades is illustrative. Rapid population growth, environmental degradation, and inefficient practices
led to increasing scarcity of both cropland and water by the early 1990s. This scarcity, along with the
spread of agricultural technologies that favored large landholders, helped concentrate valuable land
in the hands of the country's economic and military elite (i.e., resource capture). As a result, while
agricultural production and the national economy continued to grow, the benefits of this growth were
not enjoyed equitably and income inequality has increased. Impoverished rural residents have flooded
into cities looking for work, along with refugees from Afghanistan and returning workers from
overseas. The influx of migrants overwhelmed municipal services in cities like Karachi, where
population growth rates exceeded six percent in the mid-1990s. Squatter settlements were housing an
estimated 41 percent of Karachi's population in the early 1990s, and frequent shortages water and
electricity aggravated tensions between these and more established communities in the city.

Disruptive social effects such as these, in turn, can lead to violence under certain conditions.
If group tensions in society are high, migration and relative deprivation can be a particularly volatile
mix. In Pakistan, ethnic conflict became a serious urban problem as the influx of migrants altered the
ethnic balance in the cities. The result has been long-running but diffuse urban violence that has
simmered since the mid-1980s. The murder rate in Karachi, for example, more than doubled between
1990 and 1994, and attacks on municipal offices — particularly the electricity and water utilities —
became common.

In sum, the connection between environmental scarcity and civil violence is indirect but
important. Environmental scarcity is never the sole cause of conflict, but it is often an aggravating or
contributing factor. Future efforts at conflict prevention and resolution should take the role that
environmental scarcity plays into account, and appropriate interventions to prevent demand-, supply-
, and structurally-induced scarcity should be pursued.
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The Role of the Government in the Philippines

The first duty of the government is “that of protecting the society from the violence and
invasion of other independent societies … by means of [the] military [and the police].”

The second duty of the government is “that of protecting, as far as possible, every member of
the society from injustice or oppression of every other member of it, or the duty of establishing an
exact administration of justice….” Now, this duty needs to be expanded to include the sound
management of market and political power, and effective handling of conflict associated with market
competition and political contests, especially because they affect the ability of the government to
dispose of its duties.

The third duty of the government is “that of erecting and maintaining those public institutions
and public works, which […by their nature] profit could never repay the expense to any individual
of small number of individuals, and which it therefore cannot be expected that any individual or small
number of individuals should erect or maintain.”

In addition to the public institutions and public works “necessary for the defense of the
society, and for the administration of justice, the other works and institutions of this kind are those
for facilitating commerce […those for managing the environment and natural resources,] and those
for […educating] the people. The institutions for instruction are of two kinds; those for the education
of the youth, and those for the instruction of people of all ages.”

The reader might be surprised to discover that Adam Smith, the father of modern economics,
was the one who outlined the above duties of the government.

Regrettably, there is a misplaced notion that Adam Smith did not have anything to say about
the duties of the government. The fact is that Adam Smith allocated about 25 percent of his 1,000-
plus page book, “An Inquiry of the Nature and Causes of the Wealth of Nations,” (1776) to a thorough
discussion on the duties of the government.

Viewed in terms of the amount of space devoted to present his ideas, the “helping hand” of
the government is far more important than the notion of the “invisible hand” (which is mentioned
once in the whole book; p. 485 of the Modern Library edition of the Wealth of Nations).

The duties of the government can be summarized as the formation of human capabilities and
the creation and maintenance of an environment that enables all the individuals of a society to flourish
on their own and to contribute to nation-building. The task of weaving disparate activities into a
meaningful whole is left for the government.
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Opportunity Cost in the Philippine Context

People in our age are born with freedom, born with a choice. There is a quote “You are free
to choose but you are not free from the consequences of your choice.” -Unknown, this means that all
of our choices have consequences, and we will surely have to face it. Everyday, all of us make
choices, simple decisions of what to eat in the morning. Here I will explain to you opportunity cost,
when you choose to eat junk food rather than vegetables, you wouldn’t get the nutrition of the
vegetables since you chose to eat junk food. The opportunity cost there is you don’t get the nutrition
of the vegetables. Opportunity costs can be as simple as that, but also can be something that affects
us all, such as the decisions of our government. Opportunity costs tend to be more long-term than the
choice made such as the college you choose, you can’t get into all colleges, and you can’t get the
benefits of all of them. One opportunity cost of the Philippine government that took a toll on all of
us, is not putting enough money (or enough effort) to the transportation sector of our country. The
government could have put more money to improve mass transportation and lessen the traffic today,
but that was the consequence of the choice of our government, that was the opportunity cost of their
choice.

We are already given different opportunities today, it just matters which opportunities we will
choose. In choosing our opportunities, we have to be aware of the benefits and effects of all of the
possible choices, so that we can compare and choose the opportunity that would be the best choice
and will have the best effect on not only ourselves, but also other people. This is why the choices of
our government are really significant in the development of our nation. This is why, this coming
elections, we have the opportunity to choose the next leaders of our country. We have the choice of
who to trust in developing our nation. Now what I am going to tell the voters of our country is to
properly know about the people who are running for government positions so that we would make
the right choice of who will lead our country in the future, and we will be confident that they will
develop our country. We wouldn’t get the good attributes of all of the people who are running, but
we should choose the best and know that even if we choose the best, there will always be an
opportunity cost, because no one has all the good attributes and no one is the best in everything, we
just have to choose who can do the job best.
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PHILIPPINES
CHAPTER 3

Labor Market

The Philippines is widely acknowledged, within Asia, as having one of the most advanced
labor codes in the Region, affording worker protection and the right to organize. This basic law is
supported by institutional mechanisms and institutions designed to promote best practice in labor
market governance.

The fundamental story of the Philippine labor market is of a labor force growing faster than
the economy can create jobs. Its sub-plots are in the statistics within a total population of around 90
million, 56.8 million are aged 15 years old and over. About 36 million are in the labor force, 21.9
(61.3 percent) million are men, 13.8 (38.7 percent) million are women, and over 11.8 million are
between 15-30 years old.33.3 million are employed, 2.8 million unemployed, and 7.3 million
underemployed.17.7 million are wage and salary workers, 10.4 million self-employed, 1.4 million
employers, and 3.7 million unpaid family workers.10.8 million (over 30 percent) of the employed are
laborers and low-skilled workers. 5.9 million more work as farmers, forestry workers and fishermen.
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Of the unemployed, 1.4 million (51 percent) are from 15 to 24 years old and over 2 million are
between 15-30 years of age.

Greater participation of young workers in the labor force can yield a demographic dividend if
their skills can be put to productive use and active labor market measures to promote continuous skills
upgrading are in place.

Given high youth unemployment, and without adequate social protection, the young can
become a demographic burden both in the short and the long run. Women remain under-represented
in the Labor force, with just over 52 percent of those 15 years old or over participating. Overseas
employment is in many ways a boon, but the “brain drain” issue should not be ignored.

By internal measures and external perceptions, employment and decent work challenges
remains more compelling than ever. The Philippine Labor Index (PLI), a tool designed to measure
progress in achieving decent work goals identifies specific labor market gaps. The index measures
availability and acceptability of work in terms of opportunities for work and freedom of choice of
employment.

The other dimensions pertaining to decency or quality of employment are expressed in terms
of productive work, equity in work, security at work, and representation at work. The Philippines is
also ranked in the lower middle range of international competitiveness by both the Global
Competitiveness Index (GCI) and the Doing Business Index (DBI).

While it has been argued that the GCI and DBI are more in the nature of perception indices,
what cannot be ignored is that by external standards the competitiveness position of the Philippines
is weak relative to other countries. This undermines its efforts to attract investments and to create
employment.

Capital Market

The formal Philippines capital market is one of the oldest in Asia. The Manila Stock Exchange
was established in 1927.Gold and copper mining stocks dominated trading during the first five
decades of operation, and trade in oil stocks caused a boom in the late1970s. A rival financial group
established a second stock exchange in 1963. After years of conflict, the government induced the two
exchanges to merge in 1994 to form the Philippines Stock Exchange (PSE).

The stock market took on increasing importance in the late 1980s. In the five-year period
beginning in 1987, total market capitalization grew from $3 billion to $14 billion. The stock exchange
is owned by its 185 broker–dealer members. Their representative’s control the PSE board of directors.
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Because there is equal voting power among dealers, the more numerous small brokers tend to control
board decision-making.

Since the 1980s, emerging stock markets have been widely seen as the most exciting and
promising area for investment, especially because they are expected to generate high returns and to
offer good portfolio diversification opportunities. Consequently, these markets have known a
considerable expansion. Indeed, financial liberalization has been largely implemented in several
emerging countries through on-going structural adjustment programs.

As a prerequisite to the financial liberalization processes, stabilization policies have been

designed to ensure macroeconomic stability, low inflation and reduced budget deficits. As a result,
emerging market capitalization has grown from 4% of world market capitalization in 1987 to 13% in
1996 and was around 20% in 2000 in Philippines.

A large number of Asian emerging markets have launched a series of reforms in the last few
years, including the modernization and liberalization of their markets. As a result of these
developments and of the important consequences of financial liberalization on International capital
budgeting and investment, the integration of the Asian stock market has emerged as an important
body of literature. However, the intensity and efficiency of these reforms differ from one country to
another.

For cultural and historical reasons, the Philippines are probably the most welcoming country
of the Asian region for the western businessman. The Philippines trade openness ratio reached an
average of 119% over the last decade. This is essentially due to the good functioning of the ASEAN
(Association of South-East Asian Nations) created in 1965 by five countries (Indonesia, Malaysia,
the Philippines, Singapore and Thailand).

In order to promote its integration into other international stock markets, the Philippines
market has recently undergone several reforms: liberalization and privatization (since 1985),
introduction of American Depository Receipts (ADR) and country funds (1989). Therefore, the
Philippine stock market is expected to be better integrated during the post-liberalization period than
it was during the period prior to the opening of its market.

Factors of Production

Entrepreneurship in the Philippines

In the Philippines, entrepreneurship is viewed as important to empowering the poor,

enhancing production, and as an impetus to innovation. The 1987 Philippine Constitution recognizes
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entrepreneurship as an engine of economic growth. Article XII Section 1 highlights the role of private
enterprises in supporting equitable distribution of income and wealth, sustaining production of goods
and services and expanding productivity, therefore raising the quality of life.

The Philippine Development Plan (PDP) further reinforces the thrust on entrepreneurship
through trade and investment to achieve the government’s goal of economic development and job
creation. Based on the plan, measures for macro-economic stability, employment, trade and
investment, agribusiness, power-sector reforms, infrastructure, competition, science and technology,
and anti-corruption are being pursued to strengthen Philippines’s competitiveness and contribute to
job creation.

In 2011, there were approximately 830,000 business enterprises in the Philippines. Of these,
99.6 percent are classified as micro, small, and mediumsized enterprises (MSME) which are
responsible for 38 percent of total job growth.

Internationalization and Global Production Networks

The rapid integration of economies and globalization of markets has influenced the evolution
of entrepreneurship over the years. Thus, from the traditional concept of supporting the various
factors of production, entrepreneurship now entails the capacity to see an opportunity, come up with
an idea, and organize the capital, knowledge, partners and managerial skill needed to develop and
sustain business activities through internationalized value chains.

Taking advantage of liberalized trading environments is an emerging challenge for Philippine

enterprises. This is compounded by the reality of limited opportunities for productivity and
innovation. The World Economic Forum (WEF) Global Competitiveness Index identified
infrastructure, labor market efficiency, innovation, technological readiness, intellectual property
protection, R&D spending by private companies, and availability of scientists as key areas in business
and enterprise development where the Philippines is lagging.

Enterprises need to be supported by strong social and physical infrastructure, which include
among others, labor productivity, laboratories, business incubators, business planning, marketing and
branding, and conformance to international standards. All these should be linked to the supply chain
while at the same time economic clusters found in local economies need to be developed to allow
specialization and product complementarity.
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PHILIPPINES
CHAPTER 4

Planned Investment and Interest Rate

Central Bank keeps rates unchanged at its June meeting

At its meeting on 22 June, the Central Bank decided to leave the Overnight Reverse
Repurchase facility (RRP) unchanged at 3.00%, keep the Overnight Lending Facility (OLF) at 3.50%
and maintain the Overnight Deposit Facility (ODF) unchanged at 2.50%. The ODF establishes the
floor and the OLF the ceiling of the interest rate corridor system. Likewise, the Bank kept the reserve
requirement ratios untouched. All decisions were in line with market expectations.

The Bank’s decision came as the Philippines’ economy continues to enjoy robust growth,
underpinned by strong private consumption and external demand, especially from China.
Nevertheless, although Q1’s GDP showed another quarter of healthy expansion, the reading came
somewhat below market expectations. Moreover, inflation softened in May after rising steadily until
April, moving back towards the center of the Central Bank’s target of 3.0% plus/minus one
percentage point. Inflation in recent months has been driven by higher food and oil prices and by base
effects, but as oil prices are showing notable weakness and the low base effect will fade out in the
coming months, this should translate into easing price pressures going forward. Consequently, the
Bank expects inflation remaining within its target range for 2017–2019. The decision not to move
rates gives the Bank more room to adopt a tighter monetary policy in future policy meetings when
the Bank will be able to assess the economic consequences of the Fed’s tightening cycle and observe
whether inflation remains steadily within the target range.

The statement was devoid of strong forward guidance, although some hints regarding future
developments came from mentions of inflation risks being tilted to the upside, due to possible impacts
of the government’s proposed tax reform. Coupled with likely robust economic growth going
forward, this suggests the Bank may tighten its monetary stance slightly in the near future.
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Against this backdrop, the majority of Focus Economics Consensus Forecast panelists expect
that the Central Bank will raise the RRP this year and the next, with an average forecast of 3.32% at
the end of 2017 and 3.66% at the end of 2018.

SAMPLE REPORT
5 years of economic forecasts for more than 30 economic indicators.

Philippines Interest Rate Chart

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PHILIPPINES
CHAPTER 5

Aggregate supply and equilibrium price level

A major theme that arises from this discussion is that the potentials for development in the
Philippines are not fully exploited at home. This underperformance contributes acutely to the slow
conquest of poverty. A relative measure of this underperformance can be derived from the immense
turnaround of economic prospects in 2006 just as soon as the government was able to deal with a
reform of the fiscal front. A result of these measures led to higher tax revenues being earned, thereby
saving a deteriorating fiscal problem. A lot of other benefits affecting macroeconomic fundamentals
were likewise experienced, changing the dynamics of political and economic discourse.

The aggregate supply of output is what the economy produces in the economy. In 2005,
agriculture supplied 17.8 percent of GNP; industry (which includes manufacturing) 30.7 percent of
GNP; and services 44 percent of GNP. This composition is slightly different from that of 2000, at the
turn of the millennium. Agriculture then was higher in relative composition, 18.5 percent of GNP;
industry 33.2 percent of GNP; and services 42 percent of GNP. Such slow pattern of change in
production has been happening over time.2
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In the normal case, the structural change in output predicts a rising industrial sector in terms
of total output until industrial growth has reached some kind of maturity. That is the pattern found in
most developed countries today. But these advanced economies experienced in their economic history
a process of growth in which industrial growth played a major role. The relative decline of their
industry began when rising costs at home and the effectiveness of competition from other countries
resulted in their loss of competitive advantage.

The composition of Philippine output however shows the relative decline of agriculture and
industry to total output and the rise of the contribution of services. At the current stage of
development, the pattern that is observed for the relative loss of importance of agriculture within a
growing economy is not surprising. What is less expected is the relative decline of industry in relation
to total output. With an economy that is still highly agricultural in terms of the dependence of the
general population on rural and industrial employment, the Philippine economy is actually gradually
moving away in relative terms both from agriculture and industry and towards a service oriented
economy without having reached a high degree of industrialization. The expansion of industry and
of agriculture does not catch up with the absorption of excess labor. The service sector is expanding
more rapidly than the two other sectors.

Some of the promising efforts that were designed to raise the level of industrialization through
the development of basic industries failed to grow out of the protective shell of the import substitution
framework. When the design for export markets was the target, the heavy dose of government
participation in the essentially private sector projects helped to doom the projects. The steel industry
for instance was initially designed for a small market and the project was heavily borrowed at the
start. Perhaps the more critical factor was in the poor choice of principal investor. Industrial cronyism
was part of the Philippine political economy for large projects. Strong interests backed up highly
protected industries. However, such a process was unsustainable over the long term.

Having thrived under heavy protection and governmental patronage before but still essentially
undercapitalized even with access to government financial support, these early efforts in heavier
industrial activity became victims of economic crises or financial collapse once they were exposed to
international competition and market forces. These 2 The discussion of sector output aggregates is
based on data calculated as a percent of contribution to GNP. As a result, the percentage output of all
the sectors do not add together to 100 percent This is not a discrepancy but is due to the fact that the
GNP includes estimates of output that are called net factor incomes of the nationals living outside the
country.
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These enterprises suffered the pressure of limited markets, rising cost of credit due to interest
rate and to foreign exchange depreciation. Their high level of foreign debts, lack of markets abroad,
and high costs at home caused them to buckle under greater import competition. However, there are
enterprises that were conceived under high levels of protection that had survived the shedding of
protection and had become more versatile participants in the market place as a result. Through
mergers and acquisitions and through privatization, some of the failed industrial enterprises have
thrived under changes in ownership and economic rehabilitation.

Despite these problems, new industries powered by a liberalization of foreign capital inflows
thrived very well and strengthened the country’s growth of new exports. These are the new industries
that did not depend on tariff protection or market monopolies but which thrive in the open market.
Around this framework of industrial growth has sprung the growth of new comparative advantage in
international trade. The growth of electronics exports has been propelled by the influx of foreign
direct investments in these areas. As a result, the industrial sector has become vibrant and new
directions have opened under a more competitive industrial regime.

PHILIPPINES
CHAPTER 6

Household and Firm in the Macroeconomy

1. Aggregate Demand and Supply

Using an AS/AD model, graph an economy that is currently in a recession. During a recession,
consumer spending is relatively low and fewer people have jobs. Lower consumer spending
means lower GDP and an aggregate demand curve smaller than normal. Therefore, aggregate
demand is to the left of its normal position.

2. Suppose the economy of the United State is at full employment. If Americans begin purchasing
more foreign cars, what will happen to the price level in America? The price level will decrease.
An increase in the amount of foreign cars purchased means more imports in America. This
decreases America’s net exports, lowering the GDP of America. With a lower GDP, the aggregated
demand curve shifts to the left and creates a new equilibrium point at a lower price level.

3. The economy of Japan is currently at full employment. If income taxes increase in Japan, what
will happen to the unemployment level in Japan? The unemployment level will increase. With
higher income taxes, workers receive less income in each paycheck. Consequently, workers aren’t
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able to spend as much money as they once could. This will lead to a decrease in Japan’s
consumption and investment, decreasing Japan’s GDP. The decrease in GDP will shift the AD
curve to the left. A new equilibrium point will be established at a lower economic output level
and lower employment rate. If the employment rate decreases, the unemployment rate
increases.

4. Suppose Austria is currently operating at maximum capacity. If the size of the labor force in
Austria increases, what will happen to the price level in Austria? The price level in Austria will
decrease. With an increase in the labor force, the LRAS and SRAS curves will shift to the right as
business production increases. The shifts will create a new equilibrium point at a lower price level.

5. The economy of China is currently at full employment. If the price of plastic in China decreases,
what will happen to the SRAS Curve? The SRAS curve will shift to the right. With the decrease in
the price of plastic, business costs for many Chinese factories decrease. The decrease in business
costs will lead to higher supply, and an increase in the SRAS curve.

6. GNP • VALUE refers to the measurement in money terms or Philippine pesos. • FINAL GOODS are
those that do not need further production. They are the end point of a particular production.

7. GDP • Gross Domestic Product Gawa Dito sa Pilipinas • Measures the value of output produced
in the country regardless of whether the factor of production used belongs to a Filipino national
or a foreigner. • GNP= GDP + NET FACTOR INCOME FROM ABROAD

8. Aggregate Demand • The sum of all expenditure in the economy over a period of time. • The
aggregate demand curve of an economy is simply the GDP of that economy. • When the economic
output increases in a country, the price level within that country decreases.

9. Determinants of Aggregate Demand • Gross Domestic Product – When the GDP of an economy
increases, the AD curve shifts to the right and vice versa. • Savings – An increase in savings leads
to a decrease in consumption and investment and causes the AD curve to shift to the left. •
Interest rates –changes in interest rates directly affect the investment of an economy. When the
interest rates in an economy decrease, more consumers, firms, and businesses take out loans to
buy big things. This leads to an increase in investment and an overall increase in the economy’s
GDP. Thus, when interest rates decrease in an economy, the aggregate demand curve shifts to
the right.
 20
10. Consumer confidence – When consumers lose faith in their economy, they often choose to
save more money or spend it in other markets. This leads to a decrease in consumption in the
domestic market and a consequential decrease in GDP. The aggregate demand curve thus shifts
to the left.

11. Aggregate Supply • This is the amount of real GDP that will be available by sellers at different
price levels. • The aggregate supply curve shows the relationship between a nation's overall price
level, and the quantity of goods and services produces by that nation's suppliers.

12. Short-run Aggregate Supply • A short run aggregate supply (SRAS) curve essentially displays
the supply of all businesses in an economy. The SRAS curve has a direct relationship between
economic output and price level, creating a positive slope on the graph.

13. The positive slop of the SRAS can be explained through two major theories: the sticky price
theory and the sticky wage theory. – According to the sticky price theory, prices of goods do not
change instantly when the price level rises. Because they don’t change in price right away, goods
are cheaper relative to the higher price level. Consumers are able to purchase more goods
creating a small amount of economic growth. Businesses in turn must supply more to satisfy the
increased demand for goods.

14. Wage theory: Workers often sign contracts with employers determining salaries for years
into the future. When workers are paid a smaller real income then businesses consequently have
cheaper labor. With cheaper labor, businesses hire more workers and expand, leading to a higher
output of goods and services. This leads to a positively sloping SRAS curve.

15. Long-run Aggregate Theory • Long run aggregate supply (LRAS) displays the supply of an
economy at maximum capacity. In the long run, an economy will always correct itself and make
its way back to maximum capacity (full employment). Because of this, the LRAS line is always
vertical.

16. Determinants of Aggregate Supply • Long Run Aggregate Supply – Size of the Labor Force –
Quantity/Quality of Capital – Quantity/Quality of Resources – Technology – Health – Education •
An increase in any of the determinants listed above will lead to an increase in the LRAS of an
economy.

17. Short Run – Business costs – When costs of production increase, businesses cut back on
production and supply less. Thus, when business costs increase, short run aggregate supply
 21
decreases and shifts to the left. – Business taxes – When taxes increase, businesses lose revenue
and profit less from sales. Businesses will choose to supply less when taxes are high in order to
save supply for later times when profit can be higher. Thus, an increase in business taxes leads to
a decrease in short run aggregate supply. – Business regulations – Regulations cause businesses
to move and produce at slower rates as there become more “hoops” to jump through. More
government requirements must be satisfied and production is slowed down. An increase in
business regulations leads to a decrease in production and the short run aggregate supply curve.
Aggregate Supply

18. Generalization

19. Aggregate Supply and Demand Model

20. The aggregate supply and demand model (AS/AD model for short) is the most helpful graph
in determining an economy’s condition. The graph represents an economy as a whole and
displays the relationship between economic output and the price level. An AS/AD model is
composed of three major parts; aggregate demand, short run aggregate supply, and long run
aggregate supply.
 22

One of the many wonders of the Philippines:

Banaue Rice Terraces

Commonly referred by the Filipinos as the “Eight Wonder of the World,” The Banaue Rice
Terraces are a 2,000-year-old terraces that were carved into the mountains of Ifugao. It is largely
 23
believed that the terraces were built largely by hand. Presently, locals still plant rice and vegetable on
the terraces.

As a natural wonder, Banaue Rice Terraces is one of the UNESCO World Heritage Site .
UNESCO described it as; “a memorial to the history and labour of more than a thousand generations
of small-scale farmers who, working together as a community, have created a landscape based on a
delicate and sustainable use of natural resources.”

It is definitely a natural wonder that combines the harmonious interaction between people and
its environment creating a breathtaking landscape of great aesthetic beauty. Banaue Rice Terraces
should be preserved because it is vulnerable to social and economic changes.

SINGAPORE
Chapter 1 - Introduction

Singapore’s economy is one of the most open, and thus competitive, markets in the world.
According to the 2011 World Bank Ease of Doing Business Index, Singapore is ranked first in the
world for doing business – ahead of Hong Kong and New Zealand. Singapore is also ranked third in
the World Economic Forum’s Global Competitiveness Report behind Switzerland and Sweden.
The economy of Singapore is best described as a mixed economy. Although the country
strongly advocates free-market policies and practices, this has come hand-in-hand with strong
government intervention as well, particularly in macroeconomic management and major factors of
production such as land, labour and capital resources. Oddly enough, both the free market and the
state have a high degree of influence on the economy. This unique, yet highly successful, form of
economics has been dubbed as the Singapore Model.
The Singapore Model seemed to have been born out of necessity. Ever since the country was
found by the East India Company in 1819, the economy of Singapore has hinged on a free port with
a free market. Singapore relies heavily on international and regional markets as its own domestic
market is relatively small. As such, Singapore had to develop a high degree of economic openness,
free trade and free markets in order for the economy to thrive. However, the inherent vulnerability in
depending on external markets compelled the government to enact economic policies that would
safeguard the country from perturbations in the global market. The government has also been
responsible for developing new economic initiatives and industries that could respond to the needs of
the global market. To date, the Singapore Model has proven to be extremely successful. Globally and
 24
regionally, Singapore’s economy has demonstrated astounding resilience to financial crises such as
the 1997 Asian Financial Crisis or the 2008 Global Financial Crisis. Singapore is the only Asian
country to have AAA credit ratings from all three major credit rating agencies – Standard &
Poor’s, Moody’s and Fitch.
Government intervention has trickled down to various facets of society as well, from
education to transportation and to the media. Often, this has led to social policies that have been
catered towards enhancing the economy. A common label for the country is that of “Singapore
Inc.” – where the country appears to be run more like a business, rather than as a nation itself.

Singapore’s Economic Geography

After the East India Company found Singapore in 1819, it quickly became a thriving port city
due to its deepwater ports and strategic geographic location as a trade route between India and China.
Today, Singapore continues to retain strategic importance as a centre of trade around Asia. Singapore
is the busiest port in the world, above Rotterdam and Hong Kong. Many Multi-National Companies
(MNCs) have also set up their regional headquarters in Singapore, due to its high degree of
globalisation and accessibility to other markets.
Singapore has virtually no natural resources. As such, trade is highly important in order to
meet domestic demand for energy, food, and other necessities. Singapore regularly engages in
entrepôt trade, whereby industries and business import raw materials, before refining them for re-
export.
Despite a relatively small land area of 687 sq km, Singapore aims to be a global and regional
hub for multiple activities, including trade and finance. Limited land area in Singapore has led to
strong government planning and regulation for land use. Singapore is also increasingly turning to
land reclamation from the sea in order to meet the demands of a growing population.

Singapore’s Population and Labour Force

Singapore had a population of 5.165 million in 2010. 2.795 million people were considered
to be part of the labour force. Singapore’s unemployment rate for 2010 was 2.2 percent.
Singapore has one of the lowest unemployment rates in the world. The majority of the labour
force is highly skilled with compulsory primary education implemented by the government for all its
citizens. From the early 1990s, Singapore began actively inviting foreign workers and expatriates in
order to meet a labour shortage. Today, foreign workers comprise of 35.8 percent of the labour force,
with the vast majority being low waged workers from developing Asian countries who fill up jobs
 25
that regular Singaporeans wouldn’t take. In 2010, 0.1 percent of the labour force worked in
agriculture, with a further 30.2 percent in industry and 69.7 percent in services.
Apart from dealing with a labour shortage problem during that point of time, the high influx
of foreign workers and immigrants was also meant to tackle a poor population growth rate and an
aging population. Singapore’s annual population growth rate for 2010 was 0.817 percent. Singapore’s
population replacement rate is also one of the lowest in the world at 1.07. Despite having one of the
best mortality rates in the world, Singapore’s birth rate of 8.5-birth/1,000-population is one of the
lowest in the world. Singapore’s population is also aging rapidly. According to data from the CIA
World Factbook, the median age of Singaporeans has risen within a year from 39.6 years to 40.1
years. As such, without immigration or an increase in total fertility rate, Singapore is likely to face a
declining population over the next few decades.

Singapore’s Industry Sectors

Services (72.8 percent) and Industry (27.2) made up the entirety of Singapore’s GDP in 2010.
Agriculture’s contribution on the other hand was virtually irrelevant – statistically it accounted for
zero percent of the GDP.
Since the nation’s independence in 1965, Industry has been a vital part of the economy.
Manufacturing in particular has been the cornerstone of Singapore’s economy. Although Singapore
has specialised in digital and electronics manufacturing for the past forty years, the country has
diversified into other forms of manufacturing. Thanks to government initiatives and subsidies,
biomedical and pharmaceutical manufacturing are the burgeoning industries in Singapore at the
moment.
Another crucial industry for Singapore is the petroleum and petrochemicals
industry. Singapore has the third largest oil refinery in the world, behind Rotterdam and
Houston. The Singapore Petroleum Company (SPC) is a leading player in the petroleum industry and
is engaged in exploration, production, refining and distribution. Remarkably, despite not having a
single drop of proven oil reserves in the country, Singapore is a net exporter of oil - exporting 1.374
million barrels of oil/day and importing 1.195 million barrels/day. This makes Singapore the 18th
largest exporter of oil in the world.
Singapore is also a global leader in services, particularly in finance. Singapore’s banking
system is considered to be among the strongest in the world. Singapore has the fourth largest foreign
exchange market in the world after London, New York and Tokyo. The Singapore Government
Securities is the only Asian market, besides Japan, to be part of the Citigroup World Bond Index. The
Singapore Exchange (SGX) was also the first demutualised, integrated securities and derivatives
exchange in Asia-Pacific. Singapore is recognised as one of the premier asset management centres in
 26
Asia with more than 200 international asset management firms. Finally the Asian Dollar Market in
Singapore has become an influential element to the economic development of the whole of Asia with
assets of more than US$582 billion recording in 2004.
Apart from finance, tourism is the other major service industry available in Singapore. In
2010, tourist arrivals to Singapore hit a record high of 11.638 million visitors with tourist receipts of
more than S$18.8 billion. Thanks to government initiatives, tourism has diversified into niche markets
such as medical tourism, the gaming industry and the MICE (Meetings, Incentives, Conferencing and
Exhibitions) industry. With the advent of the two new integrated resorts in 2010, tourism expenditure
in sightseeing and entertainment grew by an astonishing 1,834 percent in 2010.
As such, after two years of negative industrial production growth due to the global financial
crisis, Singapore’s industrial production growth rate for 2010 was the third highest in the world at 25
percent – behind Qatar and Taiwan. The list of industries in Singapore include electronics, chemicals,
financial services, oil drilling equipment, petroleum refining, rubber processing and rubber products,
processed food and beverages, ship repair, offshore platform construction, life sciences, and entrepot
trade.
 27

SINGAPORE
Chapter 2 - Scarcity and Choice

Historically, Singapore had to rely on imported water from Malaysia due to its lack of natural
water resources, limited land space and water storage facilities.
• 1927 Water Agreement – The very first agreement signed between Singapore and Malaysia,
in which Singapore paid rent on the land in Johor to supply water and in turn, received raw
water at no cost.
• 1961 Agreement – Replaced the 1927 agreement, where Singapore paid for both land and
water, but had exclusive rights to draw water from the designated lands up till 2011. This
agreement expired in August 2011.
• 1962 Johor River Water Agreement – Valid till 2061.
• 1990 Agreement – Allowed Singapore to construct a dam across Sungei Linggui (a river in
Malaysia) to enable Singapore to buy treated water from the new dam. Singapore would bore
the building and maintenance costs of the dam.
In both the 1961 and 1962 agreements, Singapore agreed to provide Johor with a daily supply
of treated water with the raw water supplied from Johor. Today, Singapore continues to import water
from Johor under these bilateral agreements, where Singapore will have the exclusive right to draw
up to 250 million gallons of water each day from the Johor River.

• Solving water scarcity – Being self-sufficent

Having to rely heavily on a single water supplier subjected Singapore to potential hikes in
water prices. That is why the Singapore government has worked hard to handle the challenges of
providing sustainable water supply for the country so that the country does not solely rely on imported
water from Malaysia. Today, Singapore has successfully developed new sources of water and created
more efficient water catchment and treatment processes.

• Singapore’s Water Policy

Known as the ‘Four National Taps’, Singapore draws its water from four sources: Imported
water from Malaysia, local catchments to collect rainwater, highly purified NEWater and desalinated
 28
water. The Word Health Organisation has also recognised Singapore’s tap water as suitable for
drinking without further filtration.

NEWater
NEWater was first introduced in 2003. Advanced technologies are used to treat high grade
used water which is converted and made suitable for drinking and industrial use. The quality is so
high that it is used in place of potable water (drinking water). There are currently five NEWater plants
which meet about 30% of the country’s water demand, a significant breakthrough of how Singapore
addresses its water supply in an innovative manner. The Public Utilities Board (PUB), Singapore’s
national water agency plans to meet up to 55% of Singapore’s water demand by 2060, by increasing
the production of NEWater by threefold.

Local Catchment
PUB has also improved local water catchment facilities by inventing technology which
processes brackish rainwater and then shift to seawater desalination. It is estimated this new
technology will increase water catchment by up to 90% in the long term. To date, half of Singapore
is water catchment. Singapore has 17 reservoirs and through its drains, canals, rivers and reservoirs,
is one of the few countries to harvest urban storm water on a large scale for its water supply. The
country’s water catchment area will increase from two-thirds to 90% of Singapore’s land area by
2060.

Desalinated water (treated seawater)

Singapore’s first desalination plant produces 30 million gallons of water daily and meets about 10%
of the country’s water needs. Combined with its second plant, 25% of the current water needs is now
met. PUB plans to build two more desalination plants to meet up to 30% of Singapore’s water demand
by 2060.

• Let’s save and conserve water

“Although we can be confident of meeting our water needs, let us remember that every drop
of water is precious. Do continue to practise good water-saving habits and avoid unnecessary
consumption. We can make every drop count.”, said Minister Vivian Balakrishnan in 2014.
PUB has also encouraged more efficient water usage through its Water Conservation
Awareness Programme and by engaging its community. One such initiative is the “ABC Programme”
– “Active, Beautiful, Clean Waters”, introduced in 2008 to transform Singapore’s reservoirs into
 29
beautiful community spaces and encourage greater public appreciation for water. Marina Barrage, the
15th reservoir is such example and Singapore’s only city reservoir which facilitates freshwater
catchment. More than 100 potential locations have been identified for the programme by 2030

• Singapore’s water policy – Global Achievement

In 2007, Singapore received the Stockholm Water Industry Award and has been ranked in the
top 5% of water utilities in the world. The country has successfully managed its water and addressed
the water shortage issue with its water policy. Today, Singapore is recognised and transformed into
a Global HydroHub for its expertise in water technologies.

SINGAPORE
Chapter 3 - Labor Market
 30
Singapore had a population of 5.165 million in 2010. 2.795 million people were considered
to be part of the labor force. Singapore’s unemployment rate for 2010 was 2.2 percent.
Singapore has one of the lowest unemployment rates in the world. The majority of the labor
force is highly skilled with compulsory primary education implemented by the government for all its
citizens. From the early 1990s, Singapore began actively inviting foreign workers and expatriates in
order to meet a labor shortage. Today, foreign workers comprise of 35.8 percent of the labor force,
with the vast majority being low waged workers from developing Asian countries who fill up jobs
that regular Singaporeans wouldn’t take. In 2010, 0.1 percent of the labor force worked in agriculture,
with a further 30.2 percent in industry and 69.7 percent in services.
Apart from dealing with a labor shortage problem during that point of time, the high influx of
foreign workers and immigrants was also meant to tackle a poor population growth rate and an aging
population. Singapore’s annual population growth rate for 2010 was 0.817 percent. Singapore’s
population replacement rate is also one of the lowest in the world at 1.07. Despite having one of the
best mortality rates in the world, Singapore’s birth rate of 8.5-birth/1,000-population is one of the
lowest in the world. Singapore’s population is also aging rapidly. According to data from the CIA
World Factbook, the median age of Singaporeans has risen within a year from 39.6 years to 40.1
years. As such, without immigration or an increase in total fertility rate, Singapore is likely to face a
declining population over the next few decades.
Singapore has long been a popular destination for expatriates. With a booming economy, a
wealth of industries and high standards of living, it is no surprise that the tiny nation continues to
draw expatriates from around the world. However, the country has not been left unscathed by the
global economic slowdown.

Expat employees in Singapore

Singapore’s economy is as advanced as it is diversified. Whether you are seeking
opportunities in financial services, oil & gas, consulting or the hospitality sector, it seems that the
tiny island nation has something to offer. Currently, more than a third of the population is of foreign
origin, which is a testament to the wealth of opportunities present in the country.
Interestingly, in terms of skills, Singapore offers opportunities at both ends of the spectrum.
On the one hand, there is high demand for low-skilled workers, who often come from nearby South
East Asian countries, while, on the other hand, highly-skilled bankers, consultants and engineers find
it easy to peddle their talent to the highest bidders. However, no analysis of the Singaporean market
would be complete without mentioning the rising feeling of uneasiness that Singaporeans feel towards
an ever-growing expatriate population.
 31
By all measures, Singapore is still a welcoming nation and has displayed none of the extreme
forms of anti-foreigner sentiment witnessed in the United States or Europe, but the situation has
evolved negatively over recent years and nationalistic sentiments have increased. Ask any taxi driver
in Singapore where he is from, and very often you will hear “I am a real Singaporean”, followed by
a smile and a warm welcome.

Employment in Singapore
The latest figures published by the Ministry of Manpower indicate that the job market is
currently far from being rosy, even though there is a sense of optimism for 2017. The Employment
Outlook Survey of Manpower Group, a consultancy, paints a positive picture. Net employment for
the period spanning January to March 2017 is expected to increase by 9%, and six of the sectors
investigated in the report are expected to experience job growth:
• Finance, Insurance & Real Estate
• Manufacturing
• Mining & Construction
• Public Administration & Education
• Services
• Transportation & Utilities
The major casualties in terms of job losses in 2016 happened, expectedly, in the oil & gas,
marine and financial sectors. With the global and Singaporean economic downturn showing signs of
reprieve, it would be safe to expect further job creation, especially when it comes to skilled jobs.
According to the Monetary Authority of Singapore, professionals in IT, engineering, finance,
healthcare, and early childhood educators are and will remain in high demand over the coming years.
For a country as dynamic as Singapore, it is unsurprising that software developers, data analytics
professionals, and cyber security experts will find multiple suitors for their skills.

Salary and tax in Singapore

In terms of salaries, Singaporean companies offer internationally competitive rates in a low
tax environment. As an indication, Hudson, an HR consultancy, provides indicative Singaporean
salary bands, and expects a Tax Analyst to make SGD 65,000 to SGD 80,000, whereas a more
experienced Director is expected to make between SGD 220,000 to SGD 240,000. In terms of salary
growth, the outlook is also positive, with some consultancies reporting that more than 75% of
Singaporean companies expect to increase salaries during 2017.
 32

Work ethics and regulations in Singapore

The working culture in Singapore can be somewhat grueling, especially in competitive sectors
such as banking. However, the Ministry of Manpower sets clear guidelines through the Employment
Act. The Act is Singapore’s main labour law and sets out the terms and conditions for employees.
Foreign employees holding a work pass are covered under the Employment of Foreign Manpower
Act, in which the responsibilities of employers are outlined. It is important to consult the conditions
set out by the Ministry of Manpower, in order to better understand what are the legal provisions for
different types of jobs. The regulation covers hours of work, the breaks to which staff are entitled,
overtime pay as well as the number of rest days. The working conditions for foreign workers are
closely monitored, and it is essential for newcomers to know and respect the regulations in place.
Singapore is an exciting, cosmopolitan location in which to work. Even though the poor
economic performance of recent years has slowed things down, opportunities still abound in the
country, especially for the highly skilled.

SINGAPORE
Chapter 4 - Policy Effects in the Goods and Money Markets

SINGAPORE - Singapore's central bank is expected by economists to ease monetary policy on

Wednesday (Oct14) - in effect, allowing the Singapore dollar to weaken - to support a struggling
economy.
1. HOW DOES MAS MANAGE ITS MONETARY POLICY?
Most countries, including the United States and China, adopt an interest rate policy where central
banks raise or cut interest rates. Singapore is the only major economy in the world to use the
exchange rate, guiding the Singdollar higher or lower. MAS says the exchange rate is the best
 33
tool for a small, open economy like Singapore. It is a more effective way to manage inflation, as
much of the country's consumer goods are imported.
2. HOW DOES MAS' EXCHANGE-RATE POLICY WORK?
MAS lets the Singdollar rise or fall against an undisclosed basket of currencies of its main trading
partners, intervening when needed to keep the exchange rate within its unspecified target band.
To deter speculation and be more effective, MAS does not disclose what is in its basket of
currencies or specify its trading band. It adjusts the pace of appreciation or depreciation of the
Singdollar by changing the slope, width and centre of this trading band. The exchange rate that
MAS targets is trade weighted such that the currencies of Singapore's larger trading partners bear
more weight. This trade-weighted exchange rate is known as the Singapore dollar nominal
effective exchange rate or S$NEER.
3. WHAT IS MAS' CURRENT POLICY STANCE?
Since October 2012, MAS' broad policy stance has been of a "modest and gradual appreciation"
of the Singdollar. But on Jan 28, it made an unscheduled move to ease monetary policy, the first
since July 2005, after Singapore's economic growth sagged in 2014 to its weakest in five years.
MAS reduced the slope of its policy band, in effect slowing the pace of the Singdollar's gains
versus the currencies of its main trading partners. In April, at the first of this year's two scheduled
meetings, MAS refrained from further action.
4. WHAT DO ECONOMISTS EXPECT MAS TO ANNOUNCE ON WEDNESDAY AND WHY?
A majority of economists surveyed by Bloomberg and Reuters expect MAS to ease monetary
policy for a second time this year as Singapore's economic performance has worsened since its
last review in April. As with much of the rest of Asia, Singapore's trade-dependent economy has
been knocked by a sharper-than-expected slowdown in China and uncertain recoveries in US and
Europe. A Reuters poll of economists forecast third-quarter GDP to have shrunk 0.1 per cent
from the previous quarter, after a 4 per cent contraction in April-June. That would meet the
definition of a technical recession, the first for Singapore since the depths of the financial crisis
in 2008-early 2009. MAS' current policy setting does not allow for further depreciation of the
Singdollar, which would help Singapore's exports, a key driver of economic growth. With
Singapore consumer prices having fallen for 10 straight months to August, the threat of imported
inflation from a weaker Singdollar has been reduced, allowing more room for MAS to ease. But
some economists say there is a more-than 50 per cent chance of no MAS move on Wednesday.
They point to MAS' last review in which it emphasised the risks of a tight labour market driving
up inflation.
5. IF IT EASES, HOW EXACTLY WILL MAS DO IT?
Here are some moves the MAS could make, and what they would mean.
 34
a. Lower the upward slope of the band

Reducing the slope of the band allows for slower gains in Singdollar over time.This was an option
the MAS exercised in January when it joined a wave of global monetary easing. The unscheduled
move helped send the Singdollar to its weakest level since 2009 against its US dollar.
b. Move the centre of the band lower
This would signal the exchange rate should remain on the weak side in the near future. Re-
centering the policy band lower by half a band would be equivalent to a one-off devaluation of
the Singdollar by 2 per cent, DBS Group Holdings senior currency economist Philip Wee said in
a note on Oct 6.
c. Widen the band

Increasing the width of the band is technically a neutral stance intended to allow more
volatility in the local dollar. However, a Nomura Holdings survey of its clients in September showed
92 out of 100 polled anticipated the Singdollar nominal effective exchange rate will weaken at least
0.1 per cent immediately if such action was taken.

Prudent macroeconomic policy and a stable political and legal environment have been the
keys to Singapore’s continuing success in maintaining a strong and dynamic economy. Well-secured
property rights promote entrepreneurship and productivity growth effectively. A strong tradition of
 35
minimum tolerance for corruption is institutionalized in an effective judicial framework, strongly
sustaining the rule of law.
Singapore’s openness to global trade and investment and its transparent and efficient
regulatory environment encourage vibrant commercial activity, and the private sector is a prime
source of economic resilience and competitiveness. However, state ownership and involvement in
key sectors remain substantial. A government statutory entity, the Central Provident Fund,
administers public housing, health care, and various other programs.

Background:
Singapore is a democratic state that has been ruled by only one party, the People’s Action
Party (PAP), since independence in 1965. In the September 2015 election, the PAP won 83 of the 89
parliamentary seats and 69.9 percent of the vote. Prime Minister Lee Hsien Loong has led the
government since 2004. Certain civil liberties, such as freedom of assembly and freedom of speech,
remain restricted, but the PAP has embraced economic liberalization and international trade.
Singapore is one of the world’s most prosperous nations. Its economy is dominated by services, but
the country is also a major manufacturer of electronics and chemicals.

Rule of Law
Property rights are enforced. In 2015, the World Bank ranked Singapore first in enforcement
of contracts and 24th in registration of property. Commercial courts function well, but the
government’s overwhelmingly successful track record in court cases raises questions about judicial
independence. Singapore is one of the world’s least corrupt countries, although the power of deeply
entrenched political elites continues to raise concerns.

Government Size
The top individual income tax rate has been raised to 22 percent. The top corporate tax rate is
17 percent. The overall tax burden equals 13.4 percent of total domestic income. Government
spending has amounted to 18.2 percent of total output (GDP) over the past three years, and budget
surpluses have averaged 3.3 percent of GDP. Public debt is equivalent to almost a full year’s GDP.

Regulatory Efficiency
The overall entrepreneurial environment remains one of the world’s most transparent and
efficient. The business start-up process is straightforward, with no minimum capital required. The
labor market is vibrant and functions well, supported by flexible labor regulations. The government
 36
funds generous housing, transport, and health care subsidy programs and influences other prices
through regulation and state-linked enterprises.

Open Markets
Trade is extremely important to Singapore’s economy; the value of exports and imports taken
together equals 326 percent of GDP. The average applied tariff rate is 0.0 percent, and most sectors
of the economy are open to foreign investment. The efficient and well-developed financial sector is
highly competitive. The government continues its ownership in the sector but has steadily been
opening the domestic market to foreign banks.

SINGAPORE
Chapter 5 - Causes of Inflation

Introduction: Causes of Inflation in Singapore

What is inflation? Inflation occurs when there is a persistent and sustained rise in the general
price level of goods and services, and is a macroeconomic problem when the rise in general price
level is persistent and inordinate. With inflation, a given amount of nominal income buys fewer goods
and services than before, which poses socio-political problems in countries that suffer from inflation.
Inflation caused by the demand-side is known as demand-pull inflation while inflation
caused by the supply-side is known as cost-push inflation. This paper argues that both demand-pull
and cost-push inflation are present in Singapore, but cost-push is far more important to the Singapore
economy, especially when it comes to imported inflation in Singapore's case.

Demand Pull Inflation in Singapore

What is demand pull inflation? Firstly, demand-pull inflation occurs in Singapore when
Aggregate Demand (AD) rises as the economy is at or near the full employment level of national
income.
Why would AD rise, or what are the factors causing AD to rise? There are many reasons why
AD will rise, but they can all be attributed to the components forming AD, which are C, I, G, and (X-
M), as AD = C + I + G + (X-M).
 37

First, it can be argued that AD will rise if there is a decrease in interest rate as when there is
a decrease in interest rate, it becomes cheaper and easier for people to consume and invest causing
consumption and investment to increase. However, this is not that likely in Singapore's case, given
her unique context.
Secondly, AD will also rise when there is a decrease in personal income tax as people will
tend to have more disposable income and this increases their purchasing power and will cause
consumption to increase. Since AD comprises C + I + G + (X-M), which are consumer spending,
investment spending, government spending, and net exports, a rise in consumption and investment
spending will cause AD to rise. This is slightly more likely in Singapore's case.

Lastly, factors like increases in government spending (G), for instance on the Singapore
Armed Forces or Singapore Police Force, and increases in net exports (X-M), due to foreigners
buying more of our domestically produced exports, will also cause AD to rise, leading to demand-
pull inflation in Singapore as the GPL increases. This is also quite likely in Singapore, but there are
also supply side factors to inflation to consider.

Cost Push Inflation in Singapore

On the other hand, demand is not the full picture when it comes to inflation.

What is cost push inflation?

Cost-push inflation occurs when Aggregate Supply (AS) rises due to economy-wide rises in
production costs. As labour cost is often the largest component of total costs in Singapore, a sudden
rise in wages can cause significant cost-push inflation in Singapore.
However, having said that, rising food, fuel, property prices, exchange rates and the foreign
sector are also factors that cause AS to rise, leading to cost-push inflation as the general price level
increases when the AS curve shifts upwards.

Imported Inflation in Singapore

Imported inflation can lead also lead to cost push inflation. As Singapore is a small and open
economy with limited natural resources (factors of production), she has to depend heavily on imports
from other countries for both her consumption goods and factor inputs. In fact, Singapore's exports
are made from imported inputs. Thus, the biggest threat to inflation in Singapore would be the
depreciation of the Singapore Dollar (SGD). This could be due to lack of export competitiveness
 38
which lowers the demand for Singapore's currency, or this could also be due to Singapore dollars
flooding the foreign exchange market.

If the Singapore dollar depreciates too quickly, it causes severe imported inflation which
impacts households directly through rising goods, food, and energy prices. Imported inputs also
become more costly, thus raising production costs and product prices, and since Singapore's exports
depend on imported inputs this has a massive knock on effect on Singapore's exports.

With small domestic market, highly export-oriented Singapore is dependent on external rather
than domestic demand. If the Singapore dollar were to appreciate too quickly, her exports and hence
AD would plummet and this potentially could trigger a recession. Hence, Singapore’s central bank,
the Monetary Authority of Singapore (MAS) has a primary objective to promote price stability
through Singapore's version of monetary policy, which is a kind of exchange rate policy.

Conclusion
Hence, imported inflation is the most important factor affecting Singapore's economy and is
the most likely cause of inflation in Singapore, along with cost push inflation, and with demand pull
inflation being the least likely form of inflation in Singapore.
 39

SINGAPORE
Chapter 6 - Productivity and the Business Cycle

Singapore's low productivity levels are the result of low economic growth and also due to
short-term business cycle fluctuations, according to a research report - PHOTO : SPH
Singapore's low productivity levels are the result of low economic growth and also due to
short-term business cycle fluctuations, according to a research report.
The Institute of Chartered Accountants in England and Wales (ICAEW) also said that long-
term productivity growth may be achieved by focusing on expanding the finance and infocomm
technology (ICT) sectors.
Singapore's output per hour worked declined 3.5 per cent year-on-year in the fourth quarter
of 2012 across the three main sectors of construction, manufacturing and services. This does not mean
that Singapore has lost its edge and is doomed to gradual decline, according to the report.
"Given the long-term nature of the productivity concept, such an interpretation would be
premature," the report titled "Economic Insight: South East Asia" said. It cautions that the statistics
can be volatile in the short term and that the downturn could reflect the business cycle rather than
fundamental overall changes.
"Productivity will determine Singapore's prosperity in future years, but it's best looked at as
an outcome of the economy's structural transformation than a determinant itself."
Since rebounding from the global financial crisis in 2009, labour productivity in Singapore
has been in negative territory since the fourth quarter of 2011. The report, commissioned by ICAEW
and produced by the Centre for Economics and Business Research (CEBR), stated that the fall in
labour productivity is sharpest in the manufacturing sector, which had exceedingly high annual labour
productivity growth rates in 2010.
"However, this was a fundamentally cyclical event as output had plunged during the financial
crisis and the subsequent recovery boosted output per worker."
In construction, the pattern is less clear, but rates of negative 3.5 per cent growth in the last
quarter of 2012 are well below the series average of 2 per cent overall. Services have also seen an
 40
erosion of labour productivity and for the economy as a whole, output per hour worked was down 3.5
per cent year-on-year in the fourth quarter of 2012.
ICAEW economic adviser and CEBR head of macroeconomics Charles Davis, said:
"Singapore's long- term prosperity depends on raising productivity levels and raising real wages right
across the population. However, this slowdown should not be seen dooming Singapore to decline;
productivity levels should be seen as a outcome, not a determinant. For example, the sharp fall in
manufacturing was down to the financial crisis and the subsequent recovery boosted the figures."
If Singapore manages to grow high value-added sectors, then its overall productivity will rise.
The report explained that the latest productivity figures offer a positive indication of this as the biggest
improvement in the last quarter of 2012 came in the finance and ICT sectors.
"If Singapore grows its high-value productive sectors - such as finance and ICT - overall
productivity will increase . . .However, it will be important to focus on structural change to raise
productivity. Singapore will need to adjust as it moves away from over-dependence on cheap foreign
labour," said Mr Davis.
He also said at a briefing in Singapore yesterday that Singaporeans may earn higher wages
than many of their international counterparts but they work extremely long hours even though they
produce less than in most other high-income countries.
At current birth rates, productivity increases are necessary to maintain output and raise living
standards. Mr Davis added that although limits on immigration are understandable in a country such
as Singapore, from an economic perspective, it remains important to attract foreigners with key skills.
ICAEW undertakes a quarterly review of South-east Asian economies, with a focus on the
five largest countries; Indonesia, Malaysia, the Philippines, Singapore and Thailand and provides its
140,000 members with a current snapshot of the region's economic performance.

Singapore businesses fear worse economic situation in 2017: SBF survey

The economic climate in Singapore has deteriorated this year, according to companies polled
in a new survey, with almost half expecting the coming year to be even worse.
This was one of the findings of the latest annual National Business Survey conducted by the
Singapore Business Federation.
The survey polled more than 1,100 companies across all major industries about the outlook
for 2017, their view on government policies, and key challenges faced.
The survey showed that operating costs and manpower remain key concerns for companies,
with about two-thirds of survey respondents citing those as major challenges.
 41

Businesses are also hoping for more government assistance to tide over this period of slowing
economic growth. Only 28 per cent of all companies polled said they are satisfied with existing
government policies. Among small and medium-sized enterprises (SMEs), only 27 per cent said they
were satisfied, compared with 39 per cent of larger companies.
More than a third of SMEs and large firms polled called for more support measures to counter

worsening economic conditions.

The survey also found that businesses are keen to expand abroad but might lack the necessary
expertise to do so.
 42
Eight in 10 of firms polled said Asean is the preferred region for overseas expansion.
One of the many wonders of Singapore:
Gardens By The Bay – 21st Century Botanic Garden

The Gardens by the Bay is Singapore’s 21st-century botanic garden, it covers a span of more
than 101-hectare of reclaimed land. The Gardens by the Bay is a hi-tech garden with attractions like
the flower dome, cloud forest, super tree grove, etc. The Gardens by the Bay has a series of events.
In April – May, the flower dome has the Tulipmania Floral Display, while in July, The Singapore
Garden Festival is on display. The Gardens by the Bay is located near to the Marina Bay Sands and
is accessible by the Bayfront MRT Station.
 43
BRAZIL
Chapter 1 – Introduction

Brazil has the world's ninth largest economy by nominal GDP, and the eighth largest by
purchasing power parity. The Brazilian economy is characterized by an inward-oriented economy.

Brazil's economy is the largest of Latin America and the second largest in the Americas. From
2000 to 2012, Brazil was one of the fastest-growing major economies in the world, with an average
annual GDP growth rate of over 5%, with its economy in 2012 surpassing that of the United Kingdom,
temporarily making Brazil the world's sixth largest economy. However, Brazil's economy growth
decelerated in 2013 and the country entered a recession in 2014. In 2017, however, the economy
started to recover, with a 1% GDP growth in the first quarter.

According to the World Economic Forum, Brazil was the top country in upward evolution of
competitiveness in 2009, gaining eight positions among other countries, overcoming Russia for the
first time, and partially closing the competitiveness gap with India and China among the BRIC
economies. Important steps taken since the 1990s toward fiscal sustainability, as well as measures
taken to liberalize and open the economy, have significantly boosted the country's competitiveness
fundamentals, providing a better environment for private-sector development.

In 2012 Forbes ranked Brazil as having the 5th largest number of billionaires in the world, a
number much larger than what is found in other Latin American countries, and even ahead of United
Kingdom and Japan. Brazil is a member of diverse economic organizations, such as Mercosur,
Unasul, G8+5, G20, WTO, and the Cairns Group.

Background:

 Brazil is an upper middle income country in South America with a population of 195 million
people

 Gross National Income (GNI) per capita in 2010 was $9,390 – this was well above the upper
middle income average of $5,884 – can Brazil (one of the BRIC countries) escape the middle-
income trap?

 Brazil has one of the highest rates of urbanisation in the world with 87% of the total population
living in urban areas compared to a 57% average for upper middle nations

 Life expectancy at birth is 73 years, 91% of the population aged 15 and over is literate
 44
 Brazil hosted the 2014 soccer World Cup and the 2016 Olympic Games – both events have
required a huge rise in investment spending to boost Brazilian infrastructure and tourist
facilities

 Brazil's main trading partners are China (15%), the USA (10% of exports) and Argentina (9%)

 Brazilian transnational corporations are becoming increasingly prominent in the world

economy. In 2011, Petrobas was ranked 5th in the world by market capitalisation

 Agriculture contributed heavily to Brazilian growth – the value of output in Brazil's

agricultural industry, nearly quadrupled between 1996 and 2006, and the country is now one
of the world's largest net exporters of grain, soybeans, beef, oil and iron ore.

 Brazil is the world's biggest exporter of chicken, orange juice, coffee and sugar! It runs a trade
surplus in farm output with China and India.

 Brazil's agriculture sector is one of the world's biggest users of GM technologies

 The country runs a current account deficit, largely because Brazil is a heavy importer of
consumer goods especially from China and the United States

Methods of Economics

During the last twenty years, the share of GDP from agriculture has fallen from 8.1% in 1990 to 5.8%
in 2010. Manufacturing has just 16% of Brazilian GDP.

Brazil has been called by some economists a “commodity country" vulnerable to the effects of a
natural resource curse, but now Brazil is attempting to build competitive advantage in high value-
added manufacturing, tourism and other service industries.

Brazil's future progress is constrained by a number of weaknesses including high taxes, a tendency
towards import protectionism, weak infrastructure, corruption, crime, and dominant monopolies. In
Rio, the public transport network is the city's most serious infrastructure problem. The city and its 6.1
million populations have just one underground train line.

The political scene has gone from bad to worse in recent weeks, jeopardizing the economy’s
recovery. The attorney general charged President Michel Temer with accepting millions of dollars in
bribes on 26 June, making him the first sitting leader in Brazil’s history to face criminal charges. The
move was the latest in a lengthy inquiry that has seen dozen of politicians, including cabinet members,
placed under investigation or charged for corruption. While at this point, it seems unlikely that Temer
 45
will be found guilty—two-thirds of the Lower House of Congress must vote in favor of a trial for the
case to move to the supreme court—the accusations have further dented Temer’s already abysmal
popularity and are threatening his economic reforms. On 30 June, a nationwide protest was held
against labor and pension reforms. The political unrest dampened both consumer and business
confidence in June, although less-recent hard data suggests that a moderate recovery is underway.
Industrial production expanded for a second consecutive month and the unemployment rate fell in
May.
 46
BRAZIL
Chapter 2 - Scarcity, Choice, and Opportunity Cost

 Energy

The Brazilian government has undertaken an ambitious program to reduce dependence on

imported petroleum. Imports previously accounted for more than 70% of the country's oil needs but
Brazil became self-sufficient in oil in 2006–2007. Brazil is one of the world's leading producers of
hydroelectric power, with a current capacity of about 260,000 megawatts. Existing hydroelectric
power provides 90% of the nation's electricity. Two large hydroelectric projects, the 19,900 megawatt
Itaipu Dam on the Paraná River (the world's largest dam) and the Tucurui Dam in Pará in northern
Brazil, are in operation. Brazil's first commercial nuclear reactor, Angra I, located near Rio de Janeiro,
has been in operation for more than 10 years. Angra II was completed in 2002 and is in operation too.
An Angra III had a planned inauguration scheduled for 2014. The three reactors would have a
combined capacity of 9,000 megawatts when completed. The government also plans to build 19 more
nuclear plants by the year 2020.

 Water

Brazil has a large population – 203 million people. While access to safe water and sanitation has
increased since 2010, there are still deep inequalities in access among the country’s geographical
regions, rural and urban communities and households. Currently there are four million people without
access to safe water and 35 million without proper sanitation.

For those who do have access to safe water, the water supply downtime, disruption in service and
deficiencies in drinking water systems remain challenging. At the same time, there is a growing set
of financial institutions with interest in expanding their services to offer solutions for water and
sanitation needs to people in need. With microfinance expanding, Brazil is a market well-suited for
our WaterCredit solution.

Economic System and the Role of Government

 47
The Brazilian government continues to dominate many areas of the country’s economy,
undercutting development of a more vibrant private sector. The efficiency and overall quality of
government services are inadequate, and the government seems to be more skilled at collecting taxes
than at implementing needed reforms.

The personal income tax rate is 27.5 percent. The standard corporate rate is 15 percent, but other
taxes, including a financial transactions tax, bring the effective rate to 34 percent. The overall tax
burden equals 32.8 percent of domestic income. Government spending has amounted to 39.5 percent
of total output (GDP) over the past three years, and budget deficits have averaged 6.4 percent of GDP.
Public debt is equivalent to 73.7 percent of GDP.

 Control and reform

Among measures recently adopted to balance the economy, Brazil carried out reforms to its social
security (state and retirement pensions) and tax systems. These changes brought with them a
noteworthy addition: a Law of Fiscal Responsibility which controls public expenditure by the
executive branches at federal, state and municipal levels. At the same time, investments were made
towards administration efficiency and policies were created to encourage exports, industry and trade,
thus creating "windows of opportunity" for local and international investors and producers.

With these alterations in place, Brazil has reduced its vulnerability: it doesn't import the oil it
consumes; it has halved its domestic debt through exchange rate-linked certificates and has seen
exports grow, on average, by 20% a year. The exchange rate does not put pressure on the industrial
sector or inflation (at 4% a year), and does away with the possibility of a liquidity crisis. As a result,
the country, after 12 years, has achieved a positive balance in the accounts which measure
exports/imports, plus interest payments, services and overseas payment. Thus, respected economists
say that the country won't be deeply affected by the current world economic crisis.

In 2017, President Michel Temer refuses to make public the list of companies accused of "modern
slavery". The list, made public since the presidency of Lula Da Silva in 2003, ad to oblige companies
to settle their fines and to conform to the regulations in a country in a country where corruption of
the political class by the private sector would have risked to compromise the respect for the law. The
relations of the president-in-office with the "landowner lobby" are denounced by the dismissed
president Dilma Rousseff on this occasion.

 Consistent policies
 48
Support for the productive sector has been simplified at all levels; active and independent, Congress
and the Judiciary Branch carry out the evaluation of rules and regulations. Among the main measures
taken to stimulate the economy are the reduction of up to 30 percent on manufactured products tax
(IPI), and the investment of $8 billion on road cargo transportation fleets, thus improving distribution
logistics. Further resources guarantee the propagation of business and information telecenters.

The policy for industry, technology and foreign trade, at the forefront of this sector, for its
part, invests $19.5 billion in specific sectors, following the example of the software and
semiconductor, pharmaceutical and medicine product, and capital goods sectors.
 49
BRAZIL
Chapter 3

Labor Market

Labour market conditions continue to improve and the OECD average employment rate
finally returned to its pre-crisis rate in the first quarter of 2017, nearly ten years after the global
financial crisis erupted. The OECD-average unemployment rate continues its slow descent, but
remains slightly above its pre-crisis level because employment has not increased enough to fully
offset a rising trend in participation rates. The unemployment rate is projected to fall back to its pre-
crisis level in late 2018 or early 2019. The recovery remains very uneven across countries and
different groups within the workforce.

• Between 2007 and 2014 Brazil sustained high employment rates, well above the OECD average.
The country has historically high participation rates for men and women, as well a relatively low
unemployment rate.

• However, the percentage of Brazilian population employed started falling in the second quarter of
2014 in a context of economic and political crisis that started in the beginning of that year. As a result,
the employment rate fell from 61% at the start of 2014 to an all-time low of 58% at the end of 2016.

• After years of steady decline starting in 2009, unemployment began to rise in early 2014. It increased
substantially from 6.8% before the crisis to 12.6% at the end of 2016.

• The OECD projections point to a small additional fall in employment and rise in unemployment
during 2017. However, forecasts for 2018 draw a more hopeful picture, with employment rising again
and unemployment retracting. These projections corroborate the predicted closure of the crisis and
regaining of economic confidence.
 50
Capital Market

Brazil has the third-largest manufacturing sector in the Americas. Accounting for 28.5 percent
of GDP, Brazil's industries range from automobiles, steel and petrochemicals to computers, aircraft,
and consumer durables. With increased economic stability provided by the Plano Real, Brazilian and
multinational businesses have invested heavily in new equipment and technology, a large proportion
of which has been purchased from US firms.

Brazil has a diverse and sophisticated services industry as well. During the early 1990s, the
banking sector accounted for as much as 16 percent of the GDP. Although undergoing a major
overhaul, Brazil's financial services industry provides local businesses with a wide range of products
and is attracting numerous new entrants, including U.S. financial firms. On 8 May 2008, the São
Paulo Stock Exchange (Bovespa) and the São Paulo-based Brazilian Mercantile and Futures
Exchange (BM&F) merged, creating BM&F Bovespa, one of the largest stock exchanges in the
world. Also, the previously monopolistic reinsurance sector is being opened up to third party
companies.[26]

As of 31 December 2007, there were an estimated 21,304,000 broadband lines in Brazil. Over
75 percent of the broadband lines were via DSL and 10 percent via cable modems.

Proven mineral resources are extensive. Large iron and manganese reserves are important
sources of industrial raw materials and export earnings. Deposits of nickel, tin, chromite, uranium,
bauxite, beryllium, copper, lead, tungsten, zinc, gold, and other minerals are exploited. High-quality
coking-grade coal required in the steel industry is in short supply

Factors of Production

 Entrepreneurship

According to a search of Global Entrepreneurship Monitor in 2011 Brazil had 27 million adults
aged between 18 and 64 either starting or owning a business, meaning that more than one in four
 51
Brazilian adults were entrepreneurs. In comparison to the other 54 countries studied, Brazil was the
third-highest in total number of entrepreneurs. Ipea, a government agency, found that 37 million jobs
in Brazil were associated with businesses with up to 10 employees.

Even though Brazil ranks internationally as one of the hardest countries in the region to do
business due to its complicated bureaucracy. There is a healthy number of entrepreneurs, thanks to
the huge market and the government programs.

The most recent research of Global Entrepreneurship Monitor revealed in 2013 that 50.4% of
Brazilian new entrepreneurs are men, 33.8% are in the 35–44 age group, 36.9% completed high
school and 47.9% earn 3–6 times the Brazilian minimum wage. In contrast, 49.6% of entrepreneurs
are female, only 7% are in the 55–64 age group, 1% have postgraduate education and 1.7% earn more
than 9 times the minimum wage.

BRAZIL
CHAPTER 4 - Planned Investment and the Interest Rate

Investors from over 42 countries and 22 sectors of the economy will attend the Brasil Investment
Forum (FIB) 2017, organised by the federal government and the Inter-American Development Bank
(IDB).
 52
The event, organized by the Ministry of Planning, Development and Management, Apex-Brasil
and the IDB, will be held in São Paulo on 30 and 31 May and as of the first fortnight of this month,
over 1,400 executives had already enrolled to attend.

Representatives from companies based in China, United States, Japan, United Kingdom,
Germany and other countries have confirmed their attendance, including over 200 CEOs from
multinationals like Fiat, Bayer and Siemens. The event's opening ceremony will be attended by
President Michel Temer.

“Our country is offering an extraordinary opportunity for domestic and foreign investment", said
Michel Temer. For him, FIB will be a unique discussion forum for domestic and foreign investors to
be introduced to potential business opportunities in Brazil, including concessions and privatisations.
Moreover, economic reforms undertaken and in progress will be presented, in order to encourage
investment and growth.

The Ministers of Finance, Henrique Meirelles; Planning, Development and Management, Dyogo
Oliveira; and Foreign Affairs, Aloysio Nunes, will attend the first day of the Forum. Right after the
opening, they will take part in a special session that will address the international and economic
environment, as well as the reforms in the country.

“Brazil is going through a special moment of transformations in the economic area. Several
actions by the government and society are generating a situation of economic stability, both in the
fiscal and the monetary areas", says the Planning Minister.

The Forum will promote meetings between Brazilian government officials and executives from
private companies. At the meetings, the regulatory framework of each sector will be detailed, as well
as the legal certainty framework for investments.

The country is putting into practice the biggest set of reforms in recent years, which is allowing
the economy to start growing again. Signs of how successful these changes have been include, among
others, the fall in inflation, the expected growth of the gross domestic product (GDP) still in 2017 –
after two years of recession, the drop in the basic interest rate (the Selic) and the reduction in the
country risk.

Brazil is often known for soccer, samba and pristine beaches. Among investors, something else
also stands out about Brazil: double-digit interest rates that are significantly higher than its peers’
(see chart). That may soon change.
 53
We have long debated the causes of Brazil’s structurally high (nominal and real) interest rates:
constitutionally embedded and unsustainable fiscal pressures; a dual credit system in which half of
all credit is extended at subsidized interest rates, which means the other half, linked to the policy rate
(SELIC), needs much higher rates to compensate for this subsidy; and a history of high and volatile
inflation exacerbated by the widespread practice of indexing contracts to inflation. All of these issues
have been entrenched in the economy for a long time.

Now, for the first time in decades, Brazil has a golden opportunity to tackle some of these
underlying factors and structurally reduce interest rates to single digits. On our recent research trip to
Brazil, we found that the deep economic crisis and recent political turmoil have come with a silver
lining: In effect, they have propelled policymakers and politicians to work together with President
Michel Temer’s interim government to undertake difficult and unpopular reforms ahead of the 2018
presidential elections.

So far, Brazil’s Congress has approved a ceiling to limit government spending and is trying to
approve social security reform that would help balance fiscal accounts in the long term. The
government is also gradually replacing the subsidized credit rate (TJLP) with a market-determined
rate to be phased in over five years. This should improve not only the potency of monetary policy but
also public debt ratios, as the state development bank (BNDES) will be less subsidized by Treasury.
And finally, with inflation moving rapidly lower under the new central bank governor, Ilan Goldfajn,
there is credible potential for lowering the country´s inflation target below 4.5% for 2019.

A lower target would help break Brazil’s inflationary inertia, lower inflation expectations further
and contribute to reducing Brazil’s neutral interest rate.

A unique investment opportunity

Just as this is a once-in-decades opportunity for Brazil, it is also a unique opportunity for
investors. We don´t see double-digit interest rates very often today, particularly in a country with
improving fundamentals, a stable currency supported by firming external accounts and an ongoing
reform agenda.
 54
While there are risks – including the unpopularity of the proposed measures, the ongoing
corruption investigations and the upcoming 2018 elections – Brazil stands out among emerging
markets as moving in the right direction to transition toward sustained lower interest rates.

BRAZIL
CHAPTER 5 – Aggregate Demand

One explanation for how the external sector has caused slower economic growth since 2010
is based on a popular belief among “new developmental” economists that the manufacturing industry
in Brazil was hurt by an overvalued real exchange rate. The way the story goes, aggregate demand in
the period 2011-2014 continued to grow fast but, due to the real exchange rate, an increasing part of
it leaked out of the country, through imports of goods and services. This view is usually illustrated
 55
by comparing some index of retail sales (as a proxy of demand for industrial goods) with industrial
output, as the former kept increasing while the latter have remained stable since 2011. A big problem
with this analysis, however, is that a retail sales index is totally inadequate as a proxy for the demand
for industrial goods, and it is surprising that so many analysts use such an indicator. First of all, this
index does not include, of course, the sales or the demand for capital goods, and as we shall see the
rate of growth of investment in machinery and equipment fell drastically in 2011-2014. And second,
it does not include industrial exports, which also stagnated.

There is, however, a much better proxy for the domestic demand for industrial goods: the
index of apparent consumption of manufacturing industry. Apparent consumption means production
minus exports plus imports, and is equal, by definition, to domestic demand plus the accumulation of
inventories. Assuming that over a longer period of time the accumulation of inventories (positive or
negative) must be small, the index becomes a good proxy for the evolution of domestic demand for
manufactured goods. Using the available estimates in Figure 2, it can be seen that, after growing
about 40 percent in the 2002-2010 period as a whole, domestic demand for manufactured goods
stopped growing and at the end of 2014 was a bit lower than its peak in 2010. As the demand for
Brazilian exports of industrial goods also fell, the stagnation of Brazilian industry is largely explained
by the stagnation of both domestic and foreign demand for Brazilian industrial goods.

Note also that in Figure 2 below there is a change in the difference between apparent
consumption and industrial output. From 2004 to 2008, industrial production grew faster than
apparent consumption or domestic demand (abstracting for inventories), which means that industrial
exports increased faster than imports in the period of real exchange rate revaluation. On the other
hand, in the period after 2010, industrial production grew less than domestic demand. But, this
necessarily means that industrial net exports are falling, since industrial production is equal to
industrial net exports plus domestic demand. Furthermore, Figure 3 shows the real exchange rate in
Brazil since 2004, and we can see that industrial net exports were increasing in the period of real
exchange appreciation and decreasing in the more recent period of real depreciation of the currency.
In general, both the idea that domestic industrial demand was still growing fast but leaking out abroad,
and that these leakages are mainly a consequence of the overvalued real exchange rate-- popular as
they may be in Brazil-- find no support in the available data.
 56

Apparent Consumption Manufacturing Output

Turning from the manufacturing sector to the economy as a whole, we can calculate the import
content coefficient13 of Brazilian aggregate demand (Figure 4), which shows the share of total
(domestic and foreign) demand of the economy that is met by imports. We can see that this index has
been growing since 2009, but in 2011 it was lower than the average of 1999-2008 (11.3 percent). The
average of 2011-2014 (11.9 percent) is very close to the year 2008 (12.1 percent). And we should
remember that its value is affected directly by the real exchange rate (it increases with real
depreciation even if nothing else changes). The import content coefficient fluctuates a lot and does
tend to grow over time as imports grow faster than aggregate demand in the long run, but is still quite
small. We can see that imports are 12.5 percent of the total supply (in the year 2014) of the economy,
meaning that 87.5 percent of the supply is from domestically produced goods and
(mainly) services. This also makes it impossible to sustain the view that after 2011 the expansion of
aggregate demand suddenly stopped influencing GDP and mostly leaked out as imports.
 57

Finally, regarding the structural aspect of Brazilian imports and its relation to the real
exchange rate, Dos Santos, Cieplinski, Pimentel and Bhering (2015) found that the real exchange rate
elasticity of Brazilian imports is very low and that this reflects mainly the low elasticities of
intermediate goods, oil and fuel, and services such as transportation, royalties, and rents paid on
machinery and equipment which amount to about two-thirds of aggregate Brazilian imports.

BRAZIL
CHAPTER 6 – Household: Consumption and Labor Supply Decisions
Prior to Brazil’s current recession, private consumption was the largest contributor to growth
for more than a decade. During this period, Brazilian consumers benefited from sound policies, a
phase of relatively rapid economic development, and a supportive external environment (mainly low
global interest rates). But as the favorable factors that boosted consumption wane, it’s time for the
country to rethink its consumption-led growth model and look for alternative sources of growth.

Why was consumer spending so strong?

Strong consumption growth in the lead up to Brazil’s current recession was supported by a
range of favorable factors, including economic and social policies. Higher levels of schooling and
literacy in the 1990s began to pay dividends in the early 2000s as graduates entered the labor market,
increasing productivity and income levels. At the same time, social programs—most notably Bolsa
Família—and significant increases in the minimum wage provided a boost to incomes and increased
 58
financial inclusion for millions of Brazilians at the lowest income levels, increasing their spending
power and access to financial services. Widespread indexation to the minimum wage, including in
the social safety net, helped to support income levels and consumption. Between 2002 and 2014, both
nominal and real interest rates also fell dramatically, fueling a sharp increase in household credit,
almost doubling as a share of GDP (see Chart 1).

More recently, policies adopted in response to the global financial crisis focused on
stimulating household income and spending through various measures, including formal adoption of
a minimum wage rule that ensured minimum wage increases that outstripped productivity gains,
income tax relief, subsidized lending for automobiles and other durable goods, and a rapid expansion
of credit by public banks. These efforts ultimately proved to be counterproductive and contributed to
one of Brazil’s deepest recession in decades.

The decline in consumer spending

There are a number of reasons why private consumption has fallen sharply in the ongoing
recession and is likely to slow in the near term, including:
• Income and the labor market: The recession has caused employment to fall and average
wage growth to slow dramatically. Brazil’s strong social safety net has also been under stress as
public finances have deteriorated, most dramatically in some state governments which have struggled
to pay retirement pensions on time. If they continue to be guided by their current formula, minimum
wage increases may also hamper wage adjustment and employment growth.
• Real interest rates: Real interest rates are very high in Brazil now, likely reflecting large
risks that may be slow to decline. Pressures on funding markets from high government borrowing
needs will remain significant for a considerable time. Nearer term, unanticipated price and/or
exchange rate shocks, or price inertia, could have adverse impacts on the behavior of inflation and
expectations, affecting the path of policy rates going forward (markets currently price a significant
 59
easing). Central banks in advanced economies are also expected to increase rates, contributing to
higher global interest rates.
• Credit and debt: Credit growth has been slowing as the labor market has weakened and high
levels of debt and debt service have reduced consumers’ demand for credit. Weak domestic demand
and rising nonperforming loans have also led to a tightening of credit conditions on the supply side.
A prolonged period of labor market weakness and high interest rates could prompt a sustained period
of household deleveraging and contribute to weaker consumption growth.
• Confidence and uncertainty: Consumer confidence is expected to remain at low levels for
some time as the result of the weak labor market. At the same time, political uncertainty and
uncertainty related to the Petrobras corruption probe looks set to continue in the near term, making
households more cautious about their spending decisions and increasing saving.

Time to change the growth model

In a recent paper we have shown that consumption-led growth in Brazil has coincided with
widening infrastructure gaps and low investment. Low levels of investment are typically associated
with lower levels of capital per worker and lower levels of income per capita (see Chart 2; right
panel). There is also some evidence that higher levels of consumption are associated with lower levels
of income per capita (see Chart 2, left panel). This suggests that Brazil could achieve higher income
levels in the future by consuming less and investing more.

Alternative sources of growth

Private consumption growth should turn positive again as the economy recovers, which is
both normal and desirable. But consumption is unlikely to be again a leading driver of growth. To
make sure growth is vigorous and better balanced going forward, other forces will have to lead the
way.
 60
Key areas to address include:
• Infrastructure bottlenecks: Expanding the scope and size of the infrastructure concessions
program would not only boost investment growth in the near term, but also support it over the medium
term.
• Minimum wage and pension system: The minimum wage formula should better reflect
productivity gains to promote employment over the long term. Reforming the pension system by
reducing its financial imbalances and extending retirement ages should also create incentives for large
segments of the population to boost their savings, providing funding for higher levels of investment.
• Tax reform: Brazil’s tax system is notoriously complex, and represents a large cost of doing
business in Brazil. Simplification of the tax code would help to improve the overall business
environment and foster investment. Distortions in the system that promote consumption and
discourage investment (and exports) should be evaluated and addressed to improve efficiency and
more balanced growth in the medium term.

One of the many wonders of Brazil:

 61

Cachoeira da Fumaça (Smoke Falls)

This towering 340m tall cascading waterfall is truly one of Brazil’s best natural wonders. The
rainy season is the best time to see the water as it crashes over the ledge into the pool. The dry season
can offer only a trickle of water at times but the view is still awe-inspiring. There are two different
ways to approach this breathtaking natural wonder:
The first is from the top and a long 6 kilometer hike is required. The hike involves steep
natural stairs and offers views of colorful fauna and flora along the way. You will be awarded with
one of the most spectacular views in this country as you stand atop the plateau and look out over lush
hills and mountain tops. Looking at the actual waterfall from this vantage point takes guts as you
must get on your stomach and peer over the ledge. The second way to reach the falls is from the
bottom, after a three day trek. Here you can swim in the pool below and look up at one of Brazil’s
most amazing waterfalls.

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