On Thursday last week, central bank Governor Perng Fai-nan (彭淮南) said in a frank statement at a meeting of the legislature’s Finance Committee in Taipei that this would not be a good year, and that it would be difficult to reach the 1.47 percent economic growth target that the Directorate-General of Budget, Accounting and Statistics has forecast.
He also admitted that as there are few restraints on capital and interest rates are low, there is not much room to stimulate the economy using monetary policy.
In other words, unless the central bank copies the European Central Bank, casts all caution to the wind and moves to zero — or even negative — interest rates, Perng has no more tricks up his sleeve and the incoming government will have to save the economy on its own.
According to economics textbooks, the government has three policy tools at hand to stimulate the economy: monetary, fiscal and industrial policy.
Perng has said that monetary policy is unlikely to have any effect, which means that he is hoping that the incoming government can employ policies aimed at speeding up regional economic integration to save the economy.
Objectively speaking, the central bank has done well at the important job of helping to improve the economic situation during the past six months.
In May and June last year, the machine tool industry was stagnating due to the impact of the yen’s slide, with the result that many people in central Taiwan were forced to take unpaid leave. At the time, the yen had fallen to its lowest point in more than a decade, and the New Taiwan dollar was worth ￥4. As the central bank saw the industrial difficulties, the NT dollar slowly depreciated and from having fluctuated between NT$30 and NT$31 per US dollar, it fell to the current level at which it hovers at about NT$33 per US dollar.
Due to international pressures, domestic consumer price stability and other factors, the NT dollar might still depreciate greatly, which is why Perng suggested that exports cannot be improved simply by relying only on depreciation: The focus must be shifted to speeding up participation in regional economic integration.
Speeding up participation in regional economic integration could also help solve another economic crisis facing Taiwan — excessive savings, which currently are at unprecedented levels. Savings is what remains when gross domestic investment is deducted from gross domestic savings. Gross domestic savings have increased in recent years, while gross domestic investment has decreased, leaving mountains of idle money in the banks.
The best way to resolve the problem with excessive savings is to increase investment. However, if businesses feel that there are no opportunities, they will refrain from making investments. If Taiwan speeds up participation in regional economic integration and signs more unilateral or bilateral free-trade agreements, the increase in business opportunities that would follow a drop in customs taxes would help encourage business investment.
One key problem to speeding up Taiwan’s participation in regional economic integration is that there is a lack of talented trade negotiators. Both the China-led Regional Comprehensive Economic Partnership (RCEP), which is being promoted by China, and the multilateral US-led Trans-Pacific Partnership (TPP) are important to Taiwan’s economic development, so the problem is not which of the two trade blocs Taiwan should join, but whether it has enough talented trade negotiators that are capable of conducting several negotiations simultaneously.
When the draft of the TPP was announced, the Bureau of Foreign Trade put its whole staff on overtime to be able to provide a Chinese translation. If speeding up Taiwan’s participation in regional economic integration is dependent on the blood sacrifice of bureau staff while budget allocations are insufficient and there is no dedicated agency to work on it, it would be very difficult to achieve any results.
Perng offered another solution — government expenditure, which would have a strong multiplier effect. However, there is a risk that unplanned increases in public expenditure could lead to increased public debt and the construction of facilities that would remain unused — and that would not gain public support.
In the example of Japan, the second of Japanese Prime Minister Shinzo Abe’s three arrows was to increase government expenditure, but Abe managed to avoid public criticism by maintaining existing public facilities in order to increase public safety.
The ability to find ways of spending money that are acceptable to the public is to be a major challenge for the incoming government if it wants to use public expenditure to stimulate the economy.
Guo Yung-hsing is a professor in National Taichung University of Science and Technology’s Department of International Trade.
Translated by Perry Svensson
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