SHORTCOMINGS OF MONETARY POLICY

When a monetary or financial problem or need emerges, monetary authorities

have to confirm it by gathering facts. These have to be presented and analyzed in
order to be able to formulate sound and appropriate monetary policies. The whole
process takes time, and even longer for the less developed countries with
inefficient public administration. Another delay is the impact lag which is the
time between the implementation of the monetary policy and the time the effects
of the policy becomes evident on the various sectors of the economy.
In view of the conflicting interests of the different groups in the economy, it is
not easy to evaluate the effects of monetary policies. A monetary policy is very
weak during deep depression.
Professor Michael Todaro criticized the ability of the third world countries to
regulate money supply and interest rates. He observed that the developed
countries like United States and those in Western Europe have well-organized
and efficient money and credit markets. It is therefore possible for such countries
to regulate their money supply and interest rate to suit the needs of their
economies. This is not the case in most less developed countries. Their money
markets and credit institutions are unorganized and fragmented. This makes the
administration of the monetary policies less effective.
The ability of the Third World governments is further limited by their
dependence on foreign exchange earnings like dollars. As a source of local
financial resources, such earnings are unpredictable and uncontrollable.
Moreover, Todaro gave his negative impressions on the dual monetary
system of most less developed countries. That is one for rich and another
for the poor.
UNIVERSAL BANKING
The Philippines has adopted the concept of extended commercial banking which
is a variation of the German model of universal banking. This allows the banks to
expand their functions so as to become superbanks with departmental store
capabilities. Under this scheme, commercial banks are allowed to engage in non-
banking activities, whether these are allied or not to banking. Expanded
commercial banking is expected to promote healthy competition, achieve greater
efficiency, and provide long-term lending.
The economy has experienced that despite the remarkable growth of the financial
system, accumulated earnings were not enough to supply the credit needs of the
economy. The financial system failed to provide adequate medium and long-term
finance created a climate of uncertainty for investors and reduced capital
formation.
The present financial system favored misallocation of existing financial
intermediation. Hence, the need for changing our financial system. It should be
responsive to the changing and growing needs of the economy.
• With the adoption of universal banking, the financial system will be in a better
position to help the growth of the economy. There will be an expansion in the
local and international banking operations. And this will create a more favorable
climate for both domestic and foreign investments. Likewise, an increase in the
flow of fund in the productive projects may be expected to support the
industrialization export promotion program of the country.
FISCAL POLICY
Fiscal policy is another major economic policy. It refers to the revenue and
expenditures measures of the public budget. Fiscal policy-making involves the
voters, the president, his cabinet, and the legislative body. In a democratic
society, the needs and wishes or the people are reflected in the budget.
These are prioritized based on available resources. For example, the felt need for
a public elementary school in a barrio in Palawan or and irrigation system in
Tayug, Pangasinan is included in the budget. This is not only social or economic
reason but also for political reason. In most cases, political interests appear more
dominant. Usually, such projects are given to the people when elections are near.
As stated earlier, the monetarists and the classical economists believe that the free
market system is the best way to allocate the resources of society. Such idea is
not completely correct. There are market imperfections such as the inadequate
market knowledge of both sellers and buyers, obstacles to free entry in the
market, and the unfair business practices.