Under pressure from street protests by members of farmers' and fishermen's associations, the government announced a week ago that it is suspending implementation of the three-tiered risk-control mechanism for the associations' credit units. This move is truly and deeply regrettable because it distorts many aspects of economic incentives and doesn't bode well for Taiwan's future economic development.
The problem has been blamed on the shortcomings of the three-tiered risk-control mechanism, such as sloppy decisions, bad communication and insufficient incentives. These shortcomings, however, are not sufficient reason for the policy change.
The credit units in many of the farmers' and fishermen's associations are sitting on a disproportionate amount of non-performing loans (NPLs) and would already have folded were it not for their dependence on the government's insurance and bail-out mechanisms. Although these mechanisms have the positive effect of preventing bank runs, they also amply reward pernicious behavior and work against incentives. The more problems an institution has, the more likely that institution will rely on these two mechanisms.
The Ministry of Finance is planning to restrict the operation of credit units with excessive amounts of NPLs. This would be the same as punishing harmful behavior and could offset the anti-incentive effects of the two mechanisms, which would be a step in the right direction.
I'm not clear on what the ideal reform would be in the minds of the critics, or what their superior strategy would be, but it cannot be claimed that the second-best option -- the three-tiered risk-control mechanism -- is inferior to the superior strategy and then use that as a reason for going with an inferior option, which would be to maintain the status quo. Deferring policies will cause existing distortions to gobble up economic resources, which in itself is a frightening result.
It is unavoidable that many commendable policies will affect income distribution. Even though the positive effects of a policy by far exceed the cost, these effects are difficult to assess because they are widely distributed among the public, while the cost is concentrated in a minority of victims. The voices of the victims will be louder than those of the beneficiaries and this is what distorts perception of the policies.
Income distribution resulting from these policies clearly diminishes the benefits to specific groups, which will be fuming with rage. Anything but the toughest policies will be insufficient to stop these groups. Blind belief in communication as the solution to all problems will be the same as underestimating their intelligence or overestimating their moral posture. That the government has abruptly applied the brakes under pressure by threats from special interest groups tells the demonstrators that their demonstrations are effective, and leaves the groups that do not demonstrate to continue to suffer in silence. This is a distortion of behavioral incentives and will obstruct the implementation of future reforms.
This unplanned halt to the government's financial reform policy will not only fail to amend existing distortions, but the pressure created by demands from vested interests will lead to new ones in other areas. In the eyes of those hopeful for reform, reforms have stopped progressing and even retreated. This is a heartless blow. Investors used to have a bullish faith in the economic situation. Vain attempts at using language and pretty words to cover up this mistake will be the same as shrinking the beef on the plate and replacing it with sculpted vegetables. It will only be met with scorn by the affected parties.
Lai Ping-yan is associate professor in the Department of Economics at Ming Chuan University.
Translated by Perry Svensson
China badly misread Japan. It sought to intimidate Tokyo into silence on Taiwan. Instead, it has achieved the opposite by hardening Japanese resolve. By trying to bludgeon a major power like Japan into accepting its “red lines” — above all on Taiwan — China laid bare the raw coercive logic of compellence now driving its foreign policy toward Asian states. From the Taiwan Strait and the East and South China Seas to the Himalayan frontier, Beijing has increasingly relied on economic warfare, diplomatic intimidation and military pressure to bend neighbors to its will. Confident in its growing power, China appeared to believe
After more than three weeks since the Honduran elections took place, its National Electoral Council finally certified the new president of Honduras. During the campaign, the two leading contenders, Nasry Asfura and Salvador Nasralla, who according to the council were separated by 27,026 votes in the final tally, promised to restore diplomatic ties with Taiwan if elected. Nasralla refused to accept the result and said that he would challenge all the irregularities in court. However, with formal recognition from the US and rapid acknowledgment from key regional governments, including Argentina and Panama, a reversal of the results appears institutionally and politically
In 2009, Taiwan Semiconductor Manufacturing Co (TSMC) made a welcome move to offer in-house contracts to all outsourced employees. It was a step forward for labor relations and the enterprise facing long-standing issues around outsourcing. TSMC founder Morris Chang (張忠謀) once said: “Anything that goes against basic values and principles must be reformed regardless of the cost — on this, there can be no compromise.” The quote is a testament to a core belief of the company’s culture: Injustices must be faced head-on and set right. If TSMC can be clear on its convictions, then should the Ministry of Education
The Chinese People’s Liberation Army (PLA) provided several reasons for military drills it conducted in five zones around Taiwan on Monday and yesterday. The first was as a warning to “Taiwanese independence forces” to cease and desist. This is a consistent line from the Chinese authorities. The second was that the drills were aimed at “deterrence” of outside military intervention. Monday’s announcement of the drills was the first time that Beijing has publicly used the second reason for conducting such drills. The Chinese Communist Party (CCP) leadership is clearly rattled by “external forces” apparently consolidating around an intention to intervene. The targets of
RSS