Tue, Oct 04, 2016 - Page 8 News List

Solving the conundrum of economic stimulus

By Lin Kien-tsu 林健次

Exports account for about 60 percent and imports, a negative item, account for about 50 percent of Taiwan’s GDP. While boosting exports would be the most effective way to stimulate the economy, the government must be careful planning stimulus measures. A high import rate means much of the benefits brought by economic stimulus could go to other countries, while Taiwan would still pay for its costs.

According to data from the Organisation for Economic Co-operation and Development (OECD) and the IMF, the multiplier effect of economic stimulus declines as the percentage of imports in GDP goes up. In a more isolated economy, the multiplier effect could be 1.6 times the average. Considering the level of Taiwan’s economic openness, the multiplier is expected to be about 0.6.

Take the typical Taiwanese breakfast for instance: Clay oven rolls, fried bread sticks and soybean milk are all made from imported ingredients. This means an increase in breakfast consumption would mostly benefit the nations that export the ingredients to Taiwan. For the same reason, public expenditure on infrastructure and purchases could have a limited effect on the economy.

Since the 1980s, due to a trend of deregulation in finances led by then-US president Ronald Reagan and then-British prime minister Margaret Thatcher, along with then-Chinese leader Deng Xiaoping’s (鄧小平) policy to open China’s economy to foreign trade, there was a significant increase in the percentage imports contributed to GDPs. Any kind of national economic impetus generally had a lower multiplier effect, as economic benefits were more likely to spill over to other countries. As a result, governments were less willing to provide economic stimuli.

However, the global economy has changed considerably. The financial crisis in 2008 was the first worldwide recession since the 1930s. After quantitative easing failed, it became clear that only large-scale economic stimulus would save the situation; piecemeal and inconsistent economic policies do not help. G20 leaders know this, but out of self-interest, they prefer to let others initiate it. Even if any national leader was willing to step up, their parliament would probably hold them back.

Therefore, Taiwan must rely on itself to improve its economy. If President Tsai Ing-wen’s (蔡英文) administration is planning to make domestic professional caregivers the main workforce for its new long-term care system, such a policy could have a large multiplier effect, as it would benefit domestic providers first and foremost. Additionally, it would allow families with senior members to have more resources at their disposal, which could contribute to the economy by increasing demand.

The same could apply to public childcare. By building a public childcare system with domestic providers, the income of childcare professionals could rise and the financial burden on families could fall.

Free university and preschool education could achieve the same result. If parents no longer needed to save money for university tuition, their purchasing power would increase significantly, and the economic effect would surprise many.

Does Taiwan have the resources to implement those policies? The answer is yes. Former president Ma Ying-jeou (馬英九) lowered the Profit-seeking Enterprise Income Tax from 25 percent to 17 percent, causing the treasury to lose about NT$193 billion (US$6.16 billion) per year. NT$193 billion would definitely be enough to pay for it all.

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