On Tuesday, the Cabinet announced it was raising gasoline prices, effective from midnight that day. In an atmosphere where price hikes were expected and some had started to hoard gasoline, the announcement undoubtedly had a short-term deterrent effect, but in terms of fairness and transparency of the market, the adjustment was far from enough as a response to the surge in oil prices. After all, the market mechanism cannot cover up policy incompetence.
What drives economic growth is the determination to break through the status quo and to employ creativity in the pursuit of a better life. Economic policy should become a breeding ground for commercial ideas, providing incentives to encourage long-term thinking and directing the public’s capital toward effective investment in order to stop opportunist manipulation from destroying social goodwill and the foundation for mutual trust.
The essence of the market mechanism is respect for diversity and the encouragement of innovation and competition, while preventing speculative hoarding and unused production capacity.
The government should lower tax rates, streamline and avoid interfering with business decisions. It should also guarantee a business environment with fair competition.
Unfortunately, in the past dozen years, the rapid growth of technological production capabilities has caused advanced countries to gradually lose their vigilance against inflation and financial speculation and stop paying attention to financial management.
While monetary policies have been relaxed as an emergency measure to settle the current financial crisis, the whole world suffers from rising commodity prices. In an era when prices are expected to rise, commodity price adjustments and income redistribution will emerge in various forms.
Some rice exporting countries have recently talked about a cartel along the lines of OPEC. The consequences would be further joint restrictions on production and unwillingness to sell.
The only way to lessen the impact of an era of high oil prices is to diversify sources of supply, make purchases in installments and seek to increase the added value.
Regrettably, for the past week we have only seen how the government has decided to provide NT$12.5 billion (US$411 million) of taxpayer money in oil subsidies, thus raising household transfer expenditures by NT$15,000 per year.
The government has failed to propose any plans or projects to improve mass transportation or oversee the performance of the state-run CPC Corp, Taiwan and Taiwan Power Co, such as promoting car pools, speeding up traffic flow, allowing state-run firms to respond flexibly and cut expenditures or allowing foreign gasoline companies to enter the market.
If the government persists in believing in the multiplied effects of expanding public expenditures and fails to grasp that it is a priority for oil companies to make profits in order to maintain the market mechanism, it should take a look at Japan.
More than 10 years of expanding public financial expenditure has only brought Japan into the ranks of high-debt developed countries.
The government could also ponder the lessons of the US in the 1980s, when consumer confidence and purchasing power dropped sharply, leading to stagflation, high unemployment rates and high consumer prices.
In terms of justifying the oil price hike, we should be aware that Taiwan is the only country in East Asia that doesn’t allow foreign oil firms, proof that there’s not enough competition in the market. For the last half a year, the CPC has been able to provide most of the gasoline for the entire country. This indirectly proves that domestic petroleum refineries indeed have idle capacity.
CPC has budgeted nearly NT$20 billion for the exploration of oil sources this year and guaranteed returns of NT$2 per liter for new franchises, which shows that there is a lack of competition in the market, and that increased costs caused by inflated budgets will increase the burden on the public.
The government should rethink the goals and implementation of the fuel price mechanism. In pricing oil products, the costs of items that are not directly related to oil refining should be excluded, or cost capitalization accounting should be used to amortize expenditures. In the meantime, the government should instruct gasoline companies to raise the export competitiveness of their refineries with excess capacity in order to prevent the nation’s two major fuel companies from only playing in the domestic market and shift cost burdens.
To rejuvenate the economy, the government should increase the efficiency of equipment, boost the public’s expectations for a better life and ensure policies don’t just benefit certain interest groups. By instilling a desire for competition among CPC staff, changing the way costs and hidden profits are compiled, or delaying expenditures not related to oil refining, the oil price increases could be halved based on the company’s expansion of market shares.
In the long run, the government should open the CPC’s gasoline storage and transportation facilities to public rental and allow foreign oil companies to enter the local market.
Only more aggressive deregulation of the market and macro-perspective policies can upgrade Taiwan’s industry. We hope that the government will heed our words.
Chou Tein-chen is a finance professor at Nan Kai Institute of Technology. Chou Ji is an economics professor at Shi-shin University. Lu Hsin-chang is an international business professor at National Taiwan University.
Translated by Ted Yang
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