Mon, Jun 03, 2013 - Page 8 News List

Economic forecasts not infallible

By Sher Chien-Yuan, Liu Yu-hsi 佘健源,劉玉皙

The Directorate-General of Budget, Accounting and Statistics (DGBAS) on May 24 forecast that Taiwan’s GDP is set to grow by 2.4 percent this year, a drop of more than 1 percentage point adjustment from its February forecast. This was a major cut and it now seems that economic growth is unlikely to exceed 3 percent this year. Following the publication of the forecast, the government attracted widespread criticism, leading Premier Jiang Yi-huah (江宜樺) to announce a set of measures aimed at stimulating the lackluster economy.

The agency’s numerous forecast adjustments have made people question its abilities. However, adjustments to economic forecasts are standard practice. A comparison between the agency’s February forecast and its most recent one indicates that the driver for the downward adjustment was that export shipments for the first quarter of the year were lower than expected.

Taiwan’s economy is small and open, and fluctuations in the global economy can have a great impact on it. The global economy is affected by many factors and its performance is very difficult to forecast. Although the agency’s February forecast may have been slightly more optimistic than forecasts from other institutions, its recent downward adjustment was still reasonable.

Given current knowledge, economists still have a long way to go before they are able to deliver more precise forecasts. If those in charge of DGBAS were able to reliably forecast economic activity, they would have been picked up by overseas financial institutions long ago. Instead, the real problem is how economic forecasts should be considered, and whether they require direct responses.

Since economic forecasts are often not reliable, the government should not respond directly to them. According to media reports, the Cabinet immediately reacted to the DGBAS latest forecast by proposing measures to stimulate the economy. A closer look at these measures shows that most of them were already planned or in the process of being implemented, and their implementation was simply accelerated.

The announced NT$3.24 billion (US$108.2 million) investment is but a drop in the ocean in terms of the overall economy. Most of the announced measures are politically, not economically, motivated, and are largely symbolic.

Government policy should not be a direct response to such forecasts. If these hastily formulated measures were to have a substantive effect, the economy could perform even worse: Massive rushed investments would only lead to waste and misallocation of resources, and there is a risk that it could increase collusion between government and industry, benefiting the wealthy at the expense of the less well-off. This would do more harm than good to the nation.

After a prolonged slump, the economy is experiencing long-term structural problems that cannot be resolved by short-term stimulus measures. For ideological reasons and because of the composition of its supporter base, the Chinese Nationalist Party (KMT) is constantly advocating closer ties with China. It does little to promote other forms of foreign investment to diversify risk, and nor does it encourage effective measures to upgrade industry and keep businesses in Taiwan.

The long-term result of this approach has been a cross-strait factor price-equalization that has caused real wages in Taiwan to stagnate.

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