Sometimes one may have to question the wisdom of the state’s financial support for distressed companies in a free-market system, regardless of the kind of support — be it bank loans or government subsidies. What will come next if these firms continue to perform poorly despite state support?
Take the government’s announcement last month of a NT$300 million (US$9.4 million) fund to subsidize the tourism sector as an example. The scheme aims to assist businesses that have been hurt by the rapid decline in recent months of the number of Chinese tour groups, with measures such as providing travel agencies with a maximum of NT$45,000 per local group, including NT$300 for food, NT$600 for accommodation and half the transportation costs per person per day.
The subsidy program is to begin this month and is expected to last for six months to help revitalize the tourism sector during this difficult, transitional period. The government expects firms in this sector can use the funds to gradually adapt to market changes without risking a shrinking market immediately and to develop innovative tour packages targeting domestic travelers.
It is hoped the benefits to travel agencies will trickle down to the rest of the sector to generate a NT$1.44 billion boost to domestic tourism, according to a government estimate.
However, domestic tourism is a free market, so it is inevitable that firms are fiercely competitive, as has been shown over the past few years among firms targeting the Chinese tourist market. The likely result of the government’s latest subsidy program is that competition will become even tougher because the market appears more crowded than before.
More importantly, given the size of the domestic tourism market and the sector’s tendency toward destructive competition, not even the cleverest travel service operator could make its business profitable.
Therefore, there will inevitably be cases such as Taipei-based Volvo Travel Service Co, which was found offering tour packages almost free of charge. Such deals are definitely not the advertising gimmick the firm claimed. Rather, it is a predictable result of competition in both pricing and quality triggered by the government’s subsidy program.
Though some tourists may welcome super-cheap packages, often they discover the tours offered are just a waste of time and the shopping experiences too poor to remember.
However, this at least shows that the government should not just pour money into the tourism sector, because the sector may not spend the money on products and services.
The subsidy program is a double-edged sword: It could enable firms with stronger marketing and innovative products to stand out from the crowd, but it also might result in a no-win situation for consumers and travel agencies. Providing direct aid to affected businesses is certainly a good thing, but allowing companies to decide for themselves why their businesses are suffering and moving to improve the supply-demand situation is even more important.
The government has vowed to punish travel agencies that simply try to pocket the subsidies. It should, but the government must take care that the subsidy program does not simply postpone the inevitable closures of some distressed firms.
This type of incentive scheme cannot and will not work in the long term, because the free-market system ensures its limited contribution and eventual failure. Only by upgrading the nation’s tourism infrastructure, increasing training for industry workers and targeting foreign tourists can this sector prosper. The fundamental interest of the government lies in not becoming a dispenser of favors, but directing the economy toward upgrades and innovation.
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