Thursday, 3 September 2009

Price and earnings, Manila style

John Mangun
Outside the Box
Business Mirror
http://www.businessmirror.com.ph/home/opinion/15507-price-and-earnings-manila-style.html

Banking group UBS publishes its “Price and Earnings” report every three years.

What the “P&E” report gives is a comparison of the cost of living among 73 cities around the world.

The survey examines the cost of many items and services as a factor of how much a local worker must toil in order to afford those items. Not surprisingly, Oslo, Zurich, Copenhagen, Geneva and Tokyo are the most “expensive” cities on the planet. Mumbai, Delhi, Manila, Kuala Lumpur and Cairo are the world’s “cheapest.”

When the study began in 1971, the purpose was to bring some order and comparison in light of the collapse of the world’s currency-rate exchange. When currencies were backed by gold, there was little price differentiation, and you could anticipate exactly how much something would cost regardless of the city you were standing in. As the exchange rate of a dollar to an ounce of gold was fixed, the exchange rate between currencies, too, was fixed.

A hand-tailored suit in the 1900s cost about one ounce of gold, no matter where you bought it—in New York or London. An ounce of gold and one suit cost $20. Approximately, four British pounds Sterling bought that same gold ounce. So to a tailor in New York or London, it did not matter whether you paid in dollars or pounds; he could still exchange the paper money for a standard amount of gold.

By 1971, when the “P&E” report began, all that change. There was no single standard commodity like gold to measure costs between locations. Over time, they developed the “Big Mac Index.”

McDonald’s Big Mac sandwich was one of the few things that did not change from place to place. The size and ingredients were virtually the same everyplace, sort of like an ounce of gold.

Therefore, “cost” or “price” could be measured by how long a man in Manila or New York or Moscow had to labor to be able to purchase the almighty Big Mac as opposed to purchasing an ounce of gold.

In one sense, a Big Mac is “cheap” in Manila as it costs much less in dollar terms than in Zurich.

However, that bit of information is of little use, unless you are interested in traveling the world in search of the least-expensive fast-food item to pay for with your dollars. The more important fact is how long a local individual would have to work to purchase that Big Mac in his local currency.

If you are an average employee in Tokyo, you need to work only 12 minutes at your job to enjoy a Big Mac for lunch. In London only one minute more of labor gets you that same sandwich. Pity the poor Indonesian, though, who must clock in for 136 minutes, or the laborer in Mexico City, who has to stay on the job for two hours for his Big Mac. Here in Manila, it takes 88 minutes of work to buy a Big Mac.

Yet, it is not all that bad here in the Philippines. When comparing a basket of 122 goods and services, that “basket” costs $2,969 in New York, in Zurich $3,219 and $2,401 in Hong Kong, but only $1,166 in Manila. Of course in Mumbai, the basket costs only $916.

Food prices are less expensive in Manila. The same groceries that would cost you $526 in Los Angeles costs $251 here. And clothes prices in the Philippines are among the lowest in the world. A complete ladies’ outfit, consisting of suit, blazer/jacket, summer dress, pantyhose and a pair of shoes, goes for $120 here versus $250 even in Jakarta and a whopping $860 in Athens. That’s probably because we are closer to China than Greece is.

But we all know why prices are “cheap” in Manila; wages are so low in comparison. “Average gross hourly wages [before taxes and social-security contributions] can purchase the most in Copenhagen, Zurich and Geneva, followed by Los Angeles, Sydney and Miami. Bringing up the rear are Jakarta, Manila, Mumbai and Nairobi, where average gross hourly wages have been between 11 percent and 15 percent of the purchasing power of a salary in Zurich.” And the worst statistic is yet to come.

The Big Mac index is being over taken by the “iPod Index.” An iPod nano (with 8 GB of storage) costs only 10 hours of labor in Miami or Sydney. While in Manila you must work about 128 hours to buy it. Of course, that is better than in Mumbai, where 177 hours of work can buy the iPod.

While it might be fun, even intellectually stimulating to look at all this data, in truth, it is a bunch of nonsense. For the price of a Big Mac in Manila, you could feed yourself very well with healthy food for a whole day. Trading the price of a Big Mac in New York would not buy you a day’s worth of real food.

And that iPod? You and I both know where we can get an “iPod” for “one-five only” and we are assured that it has the same components inside as a “real” iPod. It probably does, too.



PSE stock-market information and technical analysis tools provided by CitisecOnline.com Inc. E-mail comments to mangun@email.com.

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