EDITORIAL: Stability of the domestic economy

Mon, Sep 09, 2019 - Page 6

As the global economy slows due to uncertainties arising from lingering trade disputes between the US and China and other major countries, private consumption and domestic investment have become the two major drivers of Taiwan’s export-reliant economy.

On Thursday, the Commerce Development Research Institute said that the nation’s economic growth is likely to decelerate through January next year, but at a slower pace, thanks to increasing business investment and capital repatriation from abroad because of policies the government has launched. The government has also introduced stimulus measures to boost private consumption, such as subsidies for domestic tourism and purchases of energy-saving home appliances.

Clearly, the government’s economic policy is to break the myth that the market for domestic demand is too small to develop. Instead, policymakers aim to attach importance to the domestic demand and hope to guide investment, business procurement and industry supply at home through various economic, trade and tax measures. They want to promote the idea that if domestic demand develops, it would reduce any negative effects brought on from the global economy.

The fall-winter program for domestic travel — including subsidies for high-speed rail transportation, hotel accommodation and night market shopping — that the government introduced last week, as well as other policies to provide special loans to the tourism sector and waive fuel taxes on tour bus operators for one year, are part of the efforts to support domestic consumption, especially following Beijing’s suspension of permits to individual Chinese travelers to Taiwan.

China has also sought to expand its domestic demand, believing that it can facilitate self-sustaining growth based on consumer spending instead of trade and investment as it responds to moderate growth and less favorable external conditions, especially its trade spat with the US.

The governments on either side of the Taiwan Strait are on the same page, believing that expanding domestic demand is an effective way to counter fluctuations in the global economy.

Policymakers in Taipei and Beijing also believe that to boost domestic demand, promoting household consumption is crucial (as it is stable), while business investment can be excessive or insufficient at times and government spending fluctuates with economic conditions. However, consumption is constrained by household income and determined by confidence in the national economy.

Taiwan’s political tensions with China and the US-China trade dispute will force Taiwan to shift focus to the domestic market. Although Taiwan has been deeply embedded in global technology supply chains for a long time, which will not easily change in the short term, contract manufacturing and exports are vulnerable to volatility stemming from trade tensions and a slowing global economy. Therefore, the nation needs sound domestic demand, which would strengthen social safety nets, improve quality of life, promote local industries and be a stable source of long-term economic growth.

The size of the local market depends on the policies the government puts into place to expand domestic demand and turn excess savings into investment or consumption. If Taiwan can tolerate moderate growth from a structural economic transformation and refrains from relying heavily on short-term stimuli such as consumption vouchers, then a policy focus on domestic demand should foster more high-quality and high-value-added services, while the increase in household income would drive the development of more locally oriented industries.