The recent performance of the US, European and Japanese economies has been far from ideal. This has led to a weakening of the economies in other countries. The policy of lowering interest rates adopted by many central banks does not seem to have been effective, and calls to lower interest rates continue. The US-Iraq war is generally believed to be the main economic uncertainty factor.
Investors are adopting a wary attitude and refrain from stock market investments, instead turning to the bond market in an attempt to stabilize profits. It is also generally believed that a quick end to the war would eliminate the uncertainty and minimize regional conflict, which would be the only way to bring the prices of oil and other raw materials to stability, and give the global economy a chance to recover.
A comparison between US and Iraqi military capabilities leaves the US highly confident that it will be capable of quickly conquering Bagdad. But does this imply a swift global economic recovery?
Even if the US were able to quickly end the war, that would only take care of the information side of uncertainty. On the fundamental side, judging from official US statistics, US unemployment rates remain high with employment in non-agricultural industries at its lowest level in four years, and consumer confidence indices are plummeting. Nor have we seen a solution to the problem of industrial overcapacity that came with the new economy in the 1990s.
The public is pessimistic about the future and afraid to spend, and the ability of manufacturers to negotiate prices is declining due to overcapacity, putting further pressure on profits. The only way for manufacturers to rein in expenditures is therefore to cut down on staff. With the addition of concerns for potential terrorist attacks and other external factors, this leads to further public pessimism about the future, thereby creating a vicious circle.
Even if the US manages a quick victory over Iraq, these problems remain unresolved for corporate America, and the industry's outlook is still not bright. The godfather of investors, Warren Buffett, stressed that most manufacturer stocks still are overvalued and devoid of investment potential.
He prefers to invest in high-yielding bonds. Due to the low interest rate policy, there is no shortage of market capital, but structural problems remain unresolved. A revival of the economy cannot be accomplished by a war alone. This is the US situation.
Europe and Japan have similar fundamental issues. Europe still hasn't recovered from the burst of the new economy bubble. Japan's decade-long recession has left economic doctors helpless. Even if these three big economies recover from their new problems (the US-Iraqi war), full recovery still lies in a distant future if they cannot solve their old ones.
The war will certainly not solve existing problems, but it may bring with it a host of negative effects. The threat of terrorist attacks may further envelop the US, expanding the scope and extending the period of these effects. The lingering fears from the burst new economy bubble and the shadow of looming terrorist attacks will affect the willingness of capital to remain in the US.
The US account deficit has been growing after the Sept. 11 terror attacks. After the US-Iraq war, capital outflows may increase further.
In addition, the US will have to bear the brunt of war expenditures as well as various expenditures in a future rebuilding of Iraq (such as food, medicine, and military expenditures), which will lead to a further worsening of the financial deficit. Even if it can use oil revenues to make up for the deficit, it has to consider international public opinion and pressure from other nations, which still leaves great uncertainty.
Should there be no changes to US economic structural factors, and if US President George W. Bush continues the implementation of his tax-cut policy, the financial deficit may grow still further.
A double-digit deficit would put the prospect for an economic recovery in the US under duress.
The future of the US economy is full of variables, which leads to great uncertainty for Taiwan's economic growth. Since the drive to economic recovery appears to be weakening, US domestic demand will weaken.
Devaluation pressures on the US dollar will also affect Taiwanese exports to the US.
These factors will be yet another blow to the Taiwanese economy which is highly dependent on exports to the US. The same situation may occur in many other newly arising export-oriented economies.
Even if the manufacturing industry is recovering gradually, it may still be affected in the future. Due to the multitude of variables, however, it is difficult to evaluate the extent of their effects.
One thing that is certain, however, is that China stands to gain the most. The war between the US and Iraq has allowed China to use the anti-terrorism and North Korean issues to gain more leverage in political and diplomatic negotiations with the US.
From an economic perspective, it has also allowed China, which already enjoys a relatively stable outlook and high economic growth, to attract further foreign investment.
Taiwan will also become gradually more reliant on exports to China, and the ability of the government to properly handle the cross-strait issue will have an even greater effect on the economy than it already does.
The US-Iraq war (if it can be successfully brought to an end) will put an end to decade-long resentment between the White House and Iraqi President Saddam Hussein, but it also implies the beginning of an era when the global economy will be recharted.
Faced with this new turn of events we must pay constant attention to changes in the global situation and adopt appropriate countermeasures. We should not think that using the same measures we did during the previous Gulf War will be a sufficient response.
When considering what would be in Taiwan's best interests, the government should give particular consideration to the question of how to integrate resources effectively and gain a position beneficial to the nation in the global economic system. Taiwan's last wave of economic transition was only barely satisfactory. It relied on the electronics and information industry founded by the previous generation to maintain economic growth, but traditional industries are still faced with many problems.
Our generation seems to lack long term planning and development. Even if the US-Iraq war is brought to a swift end, it will only be a short-term stimulant, and not a cure-all leading to rapid economic revival.
In a situation where the global economic outlook remains hazy, the key issue will be whether the government will be able to find a long-term direction for Taiwan. It will also be a test of the government's wisdom.
Jason Ye is a financial research analyst with the Taiwan Economic Journal.
Translated by Perry Svensson
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