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 (
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.
Some academics have suggested that the best way to shrink forex reserves is to sell US dollars at an opportune time, thus causing the NT dollar to appreciate. But this "opportune time," which would have to be determined by looking at the economic situation and international currency trends, is not something that we can control. Instead, the Cabinet should use forex reserves to finance the 10 new national construction projects.
These construction projects can make up for insufficient public investments, promote economic growth, develop private sector demand and expand employment opportunities.
If forex reserves were used as part of the financing of these construction projects, thus diminishing the capital to be raised by issuing debt, it would be the same as letting the government increase tax collection, but the target for this taxation would not be the common man, but the forex assets held by the central bank.
From the point of view of fairness, the current tax system places the main burden on the salaried middle classes. Using forex reserves to handle the 10 construction projects would be tantamount to a large reduction in government debt that would otherwise be borne by this wide social stratum.
Furthermore, the results of going forward with the 10 construction projects -- results such as museums, subways, freeways and sewers -- would be shared and would promote economic growth and benefit a greater part of the population.
From a tax collection point of view, these construction projects are projected to increase tax collection to NT$150 billion within a five-year period. Compared to subsidizing cutting-edge industries already enjoying preferential tax treatment, tax flexibility would increase, and the wealth to be redistributed by the government would also increase.
Finally, from the point of view of preventing corruption, the 10 construction projects at least have a transparent information flow. Questions such as "what kind of construction project is this," "where is it located," and "how efficient is the implementation plans" would all be monitored by the Legislative Yuan and the public.
Compared to the opaqueness of industries and manufacturers that might be financed by forex reserves, there would be many fewer opportunities for people with ulterior motives to take advantage of these projects, and it would also be a demonstration of responsibility to the people of Taiwan.
From the point of view of fairness, tax collection, information transparency, efficiency and distortion of market mechanisms, the use of forex reserves to subsidize specific industries is not an appropriate policy.
Using forex reserves to finance the 10 new construction projects would be returning to the people what is theirs, and would meet standards of social justice and efficiency.
Hong Chi-chang is a Democratic Progressive Party legislator.
Translated by Perry Svensson
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