THE VALUE OF the New Taiwan (NT) dollar has fallen repeatedly in recent days. Coming at this particular time, can the NT dollar’s devaluation help boost Taiwan’s exports and remedy the country’s economic downturn? This is a pertinent question that merits discussion.
Domestic demand has been slack since 2000. Over the past five years, private consumption and investment have grown at an average of just 1.84 percent and 3.52 percent per year respectively. During the same period, however, overseas demand for Taiwan’s exports has performed better, growing by an annual average of 8.94 percent, thanks to which the economy has grown by an average of 4.5 percent each year over the past five years.
However, the financial tsunami of the third quarter of last year has spread around the globe and made its influence felt in the real economy. The squeeze on credit has cut effective demand below what is needed, with a strong negative effect on the global economy as demand from the US, Europe and other advanced economies for goods made in developing countries falls. Taiwan is a clear example, its exports having plunged 3.68 percent in the fourth quarter of last year.
Exports were the last remaining engine driving Taiwan’s economic growth, but now that engine has stalled. As calls for salvaging the economy get louder, some people hope that the devaluation of recent days will help by boosting exports.
Economic theory tells us that, under suitable conditions (the so-called Marshall-Lerner condition), devaluation can indeed boost exports and improve the balance of trade in the long term. In the short term, however, it will produce what is known as the J-curve effect, meaning that exports will dip before they rise. To begin with, the volume effect outweighs the price effect, actually causing a fall in net exports following devaluation.
In the short term, then, devaluation is not effective in boosting exports. In practice, whether devaluation will have the benefit of revitalizing Taiwan’s depressed economy needs to be further considered in terms of supply and demand.
Regarding the demand side, the current fall in exports is caused by the drop in demand abroad, which in turn is caused by the credit crunch, because when people and companies can’t get credit, their purchasing power falls. In such a situation, although devaluation produces a relative fall in export prices, this will not necessarily lure overseas buyers to purchase more goods exported from Taiwan. In other words, the effect of falling incomes may outweigh that of falling prices.
From the supply side point of view, currency devaluation will cause a relative rise in the prices of imported raw materials, and therefore in production costs. It will cause domestic prices to rise, which clearly will not encourage domestic consumption. Therefore, it can only cause Taiwan’s already flagging domestic consumption to go from bad to worse.
Furthermore, devaluation will cause a rise in the price of imported machinery, which is not good for domestic investment. Besides, as economies in East Asia are moving toward integration, intra-industry trade is increasing rapidly, and incoming materials processing and original equipment manufacturer (OEM) production are commonplace.
Under such conditions, as currency devaluation causes import costs to rise and export prices to fall, value added in these modes of production will be reduced, and so will manufacturers’ profit margins. This will make it hard for manufacturers to keep going, and will even cause some export-oriented manufacturers in Taiwan to go under, which will in turn cost more people their jobs.
More importantly, when the market anticipates currency devaluation, the result will be capital flight and reluctance of overseas capital to invest in Taiwan. It will have a negative impact on domestic investment and the stock market. When the market loses confidence in the NT dollar, demand for foreign currency will increase and the domestic money supply will plunge, causing credit to be tightened even further, with a negative impact on private consumption and investment. Worst of all, Taiwan’s foreign reserves will start to fall, even to the extent of causing a currency crisis. One need only look to the Asian financial crisis of 1997 to 1998 to see what might happen.
Devaluation does have some benefits. For example, it makes imported consumer products more expensive relative to those produced at home, which is good for Taiwanese manufacturers serving the domestic market. The problem is that such products are generally consumer durables or luxury goods, whose prices are relatively elastic. In times of economic depression, demand for such goods is usually low, so their influence is limited.
Currency devaluation can also attract overseas tourists to visit Taiwan and buy things here. Unfortunately, now that the whole world is sinking into recession, hopes that devaluation will attract more visitors, thereby boosting demand in the domestic tourism sector are probably misplaced.
Currency devaluation has the ability to stimulate exports and revive the economy. Its disadvantages outweigh its benefits. The idea that we can pin our hopes for recovery on devaluation is, to say the least, debatable.
Chuang Yih-chyi is a professor of economics at National Chengchi University.
TRANSLATED BY JULIAN CLEGG
As strategic tensions escalate across the vast Indo-Pacific region, Taiwan has emerged as more than a potential flashpoint. It is the fulcrum upon which the credibility of the evolving American-led strategy of integrated deterrence now rests. How the US and regional powers like Japan respond to Taiwan’s defense, and how credible the deterrent against Chinese aggression proves to be, will profoundly shape the Indo-Pacific security architecture for years to come. A successful defense of Taiwan through strengthened deterrence in the Indo-Pacific would enhance the credibility of the US-led alliance system and underpin America’s global preeminence, while a failure of integrated deterrence would
US President Donald Trump created some consternation in Taiwan last week when he told a news conference that a successful trade deal with China would help with “unification.” Although the People’s Republic of China has never ruled Taiwan, Trump’s language struck a raw nerve in Taiwan given his open siding with Russian President Vladimir Putin’s aggression seeking to “reunify” Ukraine and Russia. On earlier occasions, Trump has criticized Taiwan for “stealing” the US’ chip industry and for relying too much on the US for defense, ominously presaging a weakening of US support for Taiwan. However, further examination of Trump’s remarks in
It is being said every second day: The ongoing recall campaign in Taiwan — where citizens are trying to collect enough signatures to trigger re-elections for a number of Chinese Nationalist Party (KMT) legislators — is orchestrated by the Democratic Progressive Party (DPP), or even President William Lai (賴清德) himself. The KMT makes the claim, and foreign media and analysts repeat it. However, they never show any proof — because there is not any. It is alarming how easily academics, journalists and experts toss around claims that amount to accusing a democratic government of conspiracy — without a shred of evidence. These
China on May 23, 1951, imposed the so-called “17-Point Agreement” to formally annex Tibet. In March, China in its 18th White Paper misleadingly said it laid “firm foundations for the region’s human rights cause.” The agreement is invalid in international law, because it was signed under threat. Ngapo Ngawang Jigme, head of the Tibetan delegation sent to China for peace negotiations, was not authorized to sign the agreement on behalf of the Tibetan government and the delegation was made to sign it under duress. After seven decades, Tibet remains intact and there is global outpouring of sympathy for Tibetans. This realization
RSS