The Presidential Office’s economic advisory panel held an extraordinary meeting on Tuesday after US legislators dealt a blow to the planned bank bailout, sparking renewed jitters among investors worldwide. At the meeting, led by Vice President Vincent Siew (蕭萬長), it was suggested that the inheritance and gift taxes be lowered and a sovereign wealth fund established. These moves would not be very useful in dealing with the crisis, while the fund proposal in particular has set off heated debate.
Sovereign wealth funds are increasingly common. Singapore, China, South Korea, the Middle East and US states including Alaska are among those that have created such funds. Taiwan can learn from the experience of Singapore’s Temasek Holdings, which established such a fund to attract international investment to boost GDP. Now, with the difficulties faced by international investment companies and lenders, a sovereign wealth fund could be a way to secure valuable assets.
But establishing the fund is still in the brainstorming phase. Details such as the fund’s goals, capital sources, structure, operation and regulation have barely been mentioned. It is therefore no wonder that the Council for Economic Planning and Development made clear on Wednesday that it was still too early to establish a sovereign wealth fund, although it said it was an option to consider further down the road.
Taiwan has two national funds — a National Stabilization Fund aimed at stabilizing the stock market and a National Development Fund aimed at funding venture capital companies. Further discussion is required to decide how these two funds and a sovereign wealth fund would interact and what purpose each would serve.
A sovereign wealth fund is composed of assets such as foreign exchange reserves, stocks, bonds and other financial instruments. If the government diverts funds from its foreign reserves to establish the fund, there would be a conflict between the conservative management of foreign reserves and the fund’s goal of making a profit, making management quite difficult. Raising private capital would restrict the scope of the fund, as would the investment targets and potential profits.
The international community is wary of state-owned investment funds. Considering the unique diplomatic challenges the nation faces, it could very well encounter difficulties in buying strategic resources such as petroleum and minerals because of pressure from China. Taiwan could also face problems in large corporate mergers and business acquisitions. These potential obstacles deserve consideration.
A government-managed sovereign wealth fund, like a state-run business, would be unable to free itself from government conservativeness, legal restrictions and personnel issues. In addition, a set of detailed regulations must be crafted to ensure transparent management, prevent political intervention and insider trading, and build internal and external supervisory mechanisms. Otherwise, disputes could ensue over the fund when too many people want a piece of the action. This would greatly undermine the benefits of the process.
There are many problems associated with establishing the fund that have yet to be broached. The key to remember is that this issue has nothing to do with solving the financial crisis: There is no incentive to rush. Let’s first solve the problems at hand and give due consideration to Siew’s concepts for Taiwan’s future when the immediate crisis is behind us.