Recent actions by the world’s central banks have shown that the effectiveness of their monetary policies appears to have approached its limit, and Taiwan is no exception. Last week, the central bank decided to keep its policy rates unchanged after starting a monetary easing cycle in late September last year. Several market watchers expect the bank to hold its rediscount rate at 1.375 percent in the next few quarters before moving to adjust its available monetary tools and policy rates sometime next year.
The stabilization in the nation’s economy, as evidenced by growth in exports and manufacturing activity in the past few months, was the key reason for the central bank to hold the line.
However, central bank Governor Perng Fai-nan (彭淮南) told a news conference after the bank’s quarterly board meeting on Thursday that the economy could experience a prolonged L-shaped recovery — meaning a long period of flat or slowly improving performance instead of a quick rebound — if the government does not support the economy with fiscal policies and structural reforms.
Indeed, in an export-oriented economy like Taiwan’s, the pace of growth is likely to remain slow amid a continued retreat in global trade and a growing mood for protectionism around the world.
A report released on Tuesday by the Geneva-based WTO confirmed that global trade would increase by only 1.7 percent this year, down from the trade body’s April prediction of 2.8 percent, while the World Economic Forum last week said in its Global Competitiveness Report that growing anti-globalization sentiment and declining openness are threatening the global economy.
No matter what is causing a slowdown in global trade, the challenge for Taiwan is that it has been putting all of its eggs in one basket. The economy relies heavily on exports to a few markets, and the nation continues to concentrate on a few industries. Therefore, any serious setback in foreign demand and fluctuations in the global economic cycle would naturally haunt the nation again and again.
Another problem facing Taiwan is that top policymakers are usually slow to act and missed an opportunity to shift the nation’s growth drivers during the recession, while tending to fall back on their favorite export-oriented, electronics-focused policies when the economy regained its footing. In past decades, the nation’s heavy dependence on exporters and manufacturers in the course of its economic development has created an imbalance in its economic structure, with growing concern over why economic growth is not helping the working class and benefiting all sectors of the economy. That is not to say that the role being played by exporters and manufacturers is not important, but the important question is: Is this what Taiwan wants and needs in the long term? What should be done to balance the benefits of economic development?
The uncertainty in external demand has created knock-on effects in private investment as businesses continue to be cautious about expanding capacity, even though interest rates are low. The nation’s low level of private investment is also caused by a lack of confidence and a poor domestic investment environment, given that Taiwan’s private sector has a large amount of savings.
If exports and private investment are unable to support economic growth in a sustainable manner, would public investment and consumer spending come to the rescue in any meaningful way?
Facing a tough and bumpy road to revitalize the economy, President Tsai Ing-wen’s (蔡英文) government must act quickly and push through new solutions to diversify the composition of the economy, while making efforts to balance the nation’s development.
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