Tue, May 20, 2003 - Page 10 News List

... but economists see only a few remedies

By Joyce Huang  /  STAFF REPORTER

Economists yesterday agreed with an IMF prediction that the country could face serious deflationary problems in the near future.

The IMF report described Taiwan, Japan, Hong Kong and Germany as "high-risk" countries in terms of deflation.

"Taiwan may not come out of deflation in the near future, which is worse and harder to deal with than inflation," Yu Tzong-shian (于宗先), director of the Chinese Institute of Economics and Business, said yesterday.

While falling prices are good news for consumers, deflation could actually create long-term downward economic momentum, Yu said, and there appeared to be little the country could do to combat it.

"The lower the prices, the lower the profit margins for companies, which may end up going into bankruptcy and laying off staff," Yu said. "The declining spiral will lead to low demand, reduced incomes and high unemployment."

Although it is difficult to detect, deflation is loosely defined by economists as a "persistent decrease in the level of consumer prices" -- opposite to the textbook definition of inflation, which is a sustained rise in prices.

Yu said that Taiwan started experiencing deflation six years ago when wages and the prices of exports and imports began to fall. Signs of deflation turned clearer four years ago when the real-estate bubble burst, Schive Chi (薛琦), president of the Taiwan Academy of Banking and Finance (台灣金融研訓院), said last October.

Schive believed that if consumers are willing to spend lavishly to maintain demand, the negative effects of deflation could be reduced to a certain extent.

However, Andy Xie (謝國忠), a Hong Kong-based economist at Morgan Stanley & Co, yesterday said Taiwan's deflation has worsened since September 2001, when the consumer price index (CPI) fell for the first time.

The CPI fell 0.14 percent last month from a year ago, according to the Directorate General of Budget, Accounting and Statistics.

"Despite the short-term shock, the SARS outbreak in Taiwan is sure to contribute to more price cuts as a result of low demand and further exacerbate deflation," Xie said yesterday.

Xie added that Taiwan's deflation problem is an insolvable structural weakness of an economic cycle, which may not improve soon.

To bolster its economy, the nation can no longer depend on IT industries, which are facing fierce price competition and surviving on low profits after emigrating into China, Xie said.

Apart from government spending to prop up employment and investment, most economists said that there is little the government can do to tackle the issue.

"Not even relaxing monetary policies to weaken the NT dollar [against the greenback] will help," Xie said.

Government officials yesterday shrugged off the deflationary concerns, saying that the central bank was already dealing with the problem.

Minister of Finance Lin Chuan (林全) told lawmakers that deflation is not a problem yet as the nation has experienced only a slight drop in commodity prices.

Lin, however, added that if the SARS outbreak starts cutting into tax revenues, government spending may fall, indirectly adding to deflationary pressure.

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