Central bank Governor Perng Fai-nan (彭淮南) last week engaged in yet another debate with Taiwan Semiconductor Manufacturing Co chairman Morris Chang (張忠謀) over the bank’s foreign exchange rate policy and the true value of the New Taiwan dollar. The men have been debating what level the NT dollar should be valued at for the past five years.
People have different views about whether the NT dollar should be allowed to depreciate to boost export growth or strengthened to make imports cheaper. No policy change can please both exporters and importers.
The currency policy is nearly as mysterious as the interest rate policy, yet its fundamental task is just as important to everyday life.
There is no doubt that the central bank under Perng’s leadership has for years used various monetary tools to fine tune currency and interest rates to maintain stability in consumer prices and financial markets. There are signs of increased global demand ahead given the recovering purchasing managers’ index and leading economic indicators in major economies, but why does growth momentum remain weak?
The nation witnessed a poor 1.58 percent annual GDP growth in the third quarter and a continued contraction in exports last month. Apparently, the currency policy is not sufficient to heal the nation’s economic wounds.
An important message behind the Perng-Chang debate is that there is real concern about declining competitiveness and the weakening economy. Even though the economy is likely to improve next year thanks to the continued global recovery, one has to be skeptical about the strength of near-term growth and the sustainability of long-term development considering the drop in foreign investment, declining government investment and still-weak consumer spending.
Regardless of whether Taiwan can attain 2 percent annual growth for this year, Taiwan Research Institute founder Liu Tai-ying (劉泰英) said last week that the weaker exports performance reflects not the central bank’s currency policy, but the lower added value that Taiwanese products generate. In other words, if there is no demand for Taiwanese goods in overseas markets because of poor added value, it does not matter how cheap they are.
Therefore, two things are important. First, why have Taiwanese manufacturers lagged behind their rivals in upgrading their technology and failed to develop high value-added products? Second, why has the government failed to attract and guide investment into production in the real economy instead of leaving money to flow into equities and real-estate markets?
Perng and Chang’s debate over the true value of the NT dollar is likely to continue in the foreseeable future, but people should not misunderstand the message behind their debate. The nation’s inability to deal with the slowness in the production of high value-added products and the government’s poor policymaking will likely push the economy into a vicious cycle and, as Liu suggested, Taiwan may begin to experience Japan’s “lost decade” very soon.