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Controlling capital flow is far from a cure-all

The government is expected to lift various restrictions on Taiwanese investments in China in the near future once the resolutions of the Economic Development Advisory Conference have been put into effect.

Morris Chang (張忠謀), chairman of Taiwan Semiconductor Manufacturing Co (台積電), the nation's largest contract chip foundry, announced after the conference that his company would hasten its plans to invest in China as the government has replaced its "no haste, be patient" (戒急用忍) policy with a policy of "proactive opening and effective management" (積極開放, 有效管理).

The public, as a result, is concerned about the possible impact it will have on cross-strait relations.

The direction of capital flows has been a key issue in debates over the new policy.

People who are opposed to the policy have cited statistics showing that most of the capital that flowed to China has never flowed back to Taiwan.

They fear that Taiwanese investments in China may empty the nation of capital and investments.

People who are in favor of the new policy, however, have cited Taiwan's massive trade surplus with China over past years, which even exceeds the total amount of the nation's capital invested in China.

In my opinion, whether or not the above perspectives tally with the truth, to judge the advantages and disadvantages of the policy simply by the direction of capital flows is biased.

In fact, it is not necessarily disadvantageous when capital flows out of Taiwan.

Nor is it necessarily advantageous when capital flows in if the flow is triggered by non-economic factors.

From the point of view of the economy as a whole, a vigorous domestic economy does not depend on massive amounts of capital but on a proper environment and good opportunities for investment.

China is a case in point. It has attracted capital from all over the world because of its fair investment environment and opportunities.

For the exactly the same reason, Taiwan's capital, as well as its other resources for that matter, will certainly flow to areas and industries that ensure optimum profit amid today's tide of globalization.

Let's set aside the question of whether the government is able to compel local companies to repatriate the profits of their foreign investments, in addition to taxes or stock dividends for their shareholders.

Even if the government is able to do so, what will happen to the capital after it flows back? How will local banks use the money?

Surely they will invest it in areas and industries that ensure optimum profit.

When Taiwan is easing its restrictions on cross-strait trade, what the government should do is to establish efficient and sound mechanisms for cross-strait capital flow instead of establishing mechanisms to draw back capital from China.

Only by allowing the capital to flow according to regular economic patterns and market trends can our nation "turn stagnant water into flowing water."

Taiwan's future development does not lie in massive capital but in an appropriate position within the structure of globalization which allows Taiwan to promote competitiveness and advantages of its own.

How could the government forget the "knowledge-based economy" it has been promoting so loudly over the past two years?

Paul Hsu is a chair professor of management at the Far Eastern Group.

Translated by Eddy Chang
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