Sat, Dec 20, 2003 - Page 8 News List

No subsidies from national wealth

By Hong Chi-chang 洪奇昌

A few days ago, the Cabinet proposed using foreign exchange reserves to encourage investment by selecting two or three key cutting-edge industries for interest or tax subsidies.

The Cabinet's wish to promote investment is to be commended, but using forex reserves to subsidize specific industries would not be in the best interest of economic development. Instead, it would do much to sacrifice economic efficiency and undermine social justice.

First, our forex reserves are an asset belonging to the people, the result of gradual accumulation over the past 50 years. If specific industries were given low-interest financing, then the full cost of interest and tax subsidies and investment risk would be borne by the public, but the public would not have a share in the profits.

Consider this scenario: as a result of successful investment, a company's profits increase, but if it is part of a certain industry, it might be exempt from business income taxes under the Statute for Upgrading Industries (促進產業升級條例). The company's profits cause share prices to rise, but with the suspension of the securities income tax, wealth remains with shareholders. Finally, profits may be transformed into staff bonuses in the form of shares, but even if share prices were to exceed NT$100, income tax would only be levied on the nominal share value, which might be only NT$10.

Clearly, specific manufacturers and their managers would enjoy most of the benefits resulting from the transformation of forex reserves into financing; that is, assets belonging to all citizens would be used to help a small number of people. Even if this created economic growth, the process would create significant inequalities.

Second, the importance of developing key cutting-edge industries and rewarding investment is not in doubt, but subsidies should not be unlimited. Current legally defined policies already provide preferences for businesses. These include the Statute for Upgrading Industries, the Cabinet's Development Fund, the NT$1 trillion preferential financing plan to promote new industrial investment, the NT$100 billion venture capital fund that is part of the "Challenge 2008" national development plan and the NT$50 billion research and development credit.

Also taking into account relaxed domestic policies on foreign investment and low interest rates -- and noting the example of a certain high-tech company that issued negative yield convertible bonds in Japan in the middle of this year -- we see that it is not difficult for well-performing manufacturers to find financing in the capital markets.

If low-interest financing from the forex reserves is also introduced, it will only distort resource allocation. The policy's benefits to high-performing manufacturers would be limited. The financing would instead be absorbed by certain high-risk manufacturers who have poor finances, or by manufacturers whose opaque flows of information have already been rejected by markets.

It could even lead to opaque credit allocation practices and connivance between business and political circles, bringing opportunities to the wrong people. Tady Products Development Co and Yamay International Development Corp are two bad examples of the Cabinet's Development Fund's investment ideas.

By end of last month, Taiwan's forex reserves had broken the US$200 billion mark. Not only does this mean that these funds are inefficiently used, but also that Taiwan is facing a huge exchange rate risk now that the US has once again formulated a strong-dollar policy.

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