Public Borrowing in the Philippines

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Public Borrowing

Public borrowing defined

Public borrowing is money government borrows to fund public spending, the total amount of money that a country's central government has borrowed to fund its spending on public services and benefits.[1] Public debt - the total of the nation's debts: debts of local, state, and national governments; an indicator of how much public spending is financed by borrowing instead of taxation. [2]

Origin of Public Borrowing [4]

Mercantilist Period (1500-1750)

European economists between 1500 and 1750 are considered mercantilists. This is the era of merchant capital, dependent on connections between social and productive systems. [4] Mercantilism started it all, during this era colonies were established and mercantilist trade was a great tool used for the control and accumulation of gold and silver bullions [5], the idea of financing was born for this purpose.

Adam Smith

Adam Smith is one of the greatest critics of mercantilism. He was strong in emphasizing the disadvantages of borrowing and expostulated on the advantages of the balanced budget during the years of capitalism.

Keynesian Theory of Deficit Financing (1880’s-1940’s)

It was during the time of John Maynard Keynes that the idea of public borrowing was introduced during the Great Depression, mainly as a compensatory tool in times of economic stability.

“In order to keep people fully employed, governments have to run deficits when the economy is slowing.” Borrowing for capital generation purposes is necessary like setting up public enterprises which will contribute to a productive output. This is not applicable for Least Developed Countries (LDC) because first instabilities of LDC’s are of external origin like oil crisis, inflation, and recession in the industrialized countries; and second Keynes’ theories are based on the assumption of fully developed economies undergoing cyclical difficulties (In LDC’s productive capacity is not yet fully developed).

Development Financing (1950’s)

It is predicated on Foreign Borrowing. The expenditure demands of development are expensive and urgent. The only immediate option recommended by experts is borrowing, specifically foreign borrowing.

This is based on the theories of Richard Musgrave. His book The Theory of Public Finance (1959) remains a leading theoretical work. [3]

Why Foreign Borrowing is Preferred

1. It results in inflow of additional resources.
2. It covers up foreign exchange deficiencies due to development spending. 3. It facilitates the inflow of technical and managerial expertise.

Significant events during the development decades:

1. The sharp rise in borrowing activities of the LDC’s.
2. The emergence of the World Bank and International Monetary Fund as the dominant figures in development.

The International Structuralist Models (1970’s)

Two Theories:

Theory of Imperialism/Neo-colonialism

Views the relationships among LDC’s, advanced countries, and the World Band/International Monetary Fund as that of imperialism. The colonial relationship is evident through political and economic dominance, or what is called “neo-colonial‟.

Dependency Theory/ Neo-Marxist Theory

Theotonio dos Santos (1970’s) defines dependence as a conditioning situation where the economies of one group of countries are conditioned by the development and expansion of others.

Conditions of dependency:

-common historical background;
-initial dependence on imports for manufacturing requirements; -heavy dependence on imports of foreign technology;
-deep penetration by foreign capital in the guise of transnational corporations; -condition of cultural, psychological, social, and political independence

Why government borrows? [3]
Public debt is one result of government financing expenditures. It is different from private debt, which consists of the...
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