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
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