The global economy remains grim, prompting many major nations to unveil new economic stimulus packages. Taiwan should resist the temptation to follow suit.
“If the sky falls, some tall fellow will prop it up,” goes the saying. In rolling out additional stimulus measures, the world’s largest economies have in effect taken it upon themselves to fix the entire global economy. This being the case, all Taiwan needs to do is to consider its own strengths and weaknesses, and devise measures that will best promote its own economic interests.
Consider monetary policy first. The loose monetary policies being implemented in Europe, the U.K., mainland China and elsewhere will undoubtedly increase domestic demand. They will also result in more imports and cause capital to flow outward, so they will have the effect of raising global demand as well.
In some cases, these policies have been coupled with plans to purchase government bonds. Such purchases will give the governments involved more leeway to spend and could ultimately provide a further boost to the global economy.
But for many years now Taiwan has had an overabundance of capital, thanks to extremely low interest rates. If companies were unwilling to borrow and invest when the economy was still good and interest rates were already very low, it is highly unlikely they will be willing to do so now, when the economic situation is so dire. Miniscule differences in interest rates simply cannot create such profound changes in behavior.
In recent years, furthermore, the supply of bonds that the government is legally allowed to issue has exceeded demand. There is also no need for the government to repurchase these bonds from the public with some sort of quantitative easing. In sum, Taiwan has little room to loosen its monetary policy further, and even if it were to carry out such a policy, it is not clear what effect, if any, it would have on the economy.
What is clear is that increased liquidity would cause capital to flow to the real estate sector and other even more speculative and high-risk investments. Such an outcome would hurt not only the cause of financial stability, but also the future of national development.
Many nations have adopted a loose monetary policy partly to depreciate the value of their currencies and hence to boost exports. But the New Taiwan dollar is not an important international currency. This means that for Taiwan the amount of local currency in circulation and the effect of monetary policy on the exchange rate are both far less important than other factors such as the international economic situation and export orders. Thus it is not necessary to adopt a looser monetary policy in an attempt to cause the NT dollar to depreciate.
It would also be a mistake for the government to greatly increase expenditures, for that would further raise the national debt. The ROC government, which is already hugely indebted, should consider the sovereign debt crises in Europe as a warning against reckless spending.
It is common knowledge that many economic stimulus packages are simply ineffective. Since Taiwan’s economy is open to the outside world, many stimulus policies would only increase demand for foreign goods. In other words, the overall effect of any stimulus plan would not be as high as it would be for a nation with a closed economy.
Even if the government could increase demand for the goods produced by some types of businesses, for the most part these businesses are not those most strongly impacted by the international economic climate. Hence those industries and employees most in need of help might not benefit at all from another round of loose monetary policy.
The state can help out the unemployed by offering them jobs, but such a policy also has its pitfalls. The government now employs 100,000 more people than in did in 2007, thanks to a hiring policy instituted in 2008 in the wake of the global economic crisis. These additional employees have become a long-term burden on the government. A thorough analysis of the cost and benefits of hiring these additional workers should be conducted, so as to prevent the government from employing too many redundant workers.
As noted earlier, some nations cause their currencies to depreciate so as to boost exports. But if Taiwan were to follow a similar course of action, it would run the danger of being heavily criticized by other nations, on the grounds that it is already sitting on an enormous pile of foreign reserves.
Such a policy could also cause vast amounts of capital to flow outward, and could result in inflation. Thus depreciating the New Taiwan dollar is not called for at all.
From these various considerations, it can be seen that almost all across-the-board policies carried out by the government will have a very limited effect on Taiwan’s economic situation. Perhaps it would be better to accept the reality that the global economy is in a terrible slump, and, in the face of such a reality, to refrain from pursuing economic growth at whatever the cost.
What is most discouraging about the latest economic slump is not so much that economic growth has temporarily slowed down, but that some industries might lose their competitiveness for good. During difficult economic times, Taiwan’s exports shrink more than those of other nations; and later on when the economy bounces back, many local companies have a hard time rebounding along with the rest of the national economy.
Consider for instance the case of the “double D industries”—meaning Taiwan’s dynamic random access memory (DRAM) and its liquid crystal display (LCD) sectors. Prior to the 2008 financial tsunami, the local double D sector had about the same market share as did that of South Korea. Since then, however, its share of the global market has plummeted, and some double D businesses are unlikely to survive the current downturn. The loss of these businesses is the main reason Taiwan’s growth rate has been unable to pick up steam.
Thus during the current economic slump attention should be paid to the unfair economic trade practices of other countries. If any nation is found to be actively engaging in such practices, Taiwan should file charges against it with international organizations.
As to local industries that have been unduly harmed by unfair trade practices, the government should offer them all necessary support. In response to the economic downturn, the government’s general policy should be to help raise the local productivity level and the competitiveness of the nation’s workforce.
In addition, the government should pay attention to more than just short-term growth and unemployment rates. It should not exaggerate the beneficial effects that its policies might have, nor should it propagate falsehoods; otherwise it will only squander an opportunity to improve the competitiveness of local industries. (HZW)
(This article originally appeared in the Economic Daily News July 16, 2012.)
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