With the US subprime mortgage crisis, economic predictions for the world economy over the next year are pessimistic, both internationally and domestically. Furthermore, there have been significant hikes in the price of crude oil and raw materials, with increasing signs that stagflation could deliver yet another blow to the world economy.
Taiwan's economic growth has always relied on exports, while crude oil and raw materials make up a large portion of imports.
As the global economy struggles, we should give more thought to the government's response to the situation.
Faced with slipping foreign demand and inflated import prices, any single policy would lose sight of one to deal with the other. Hence, the situation calls for a package of policies.
The overall direction should include a contractionary monetary policy to increase the value of the NT dollar, as well as expansionary fiscal policies. Industrial policies should include lowering import taxes on raw materials, adjusting the industrial structure and improving the efficiency of crude oil and raw materials usage.
Tax reductions and investments in public facilities are frequently mentioned measures for carrying out an expansionary fiscal policy. But in a situation where the government is already heavily burdened with debt, tax revenues are less than ideal and tax rates are low, any lasting tax deductions must be considered carefully.
Better yet, they should be included in an overall tax reform plan and discussed thoroughly.
As for increasing public investment, as a result of the government's financial problems, one has to wonder where the money would come from.
Does the government have the money? In terms of the government's fiscal situation, whether in current savings or accumulated savings, the answer to this question is "no."
If the government does not have the money, are the funds available from another source domestically? Because investment has been low in recent years, gross national savings have been much larger than that required for domestic investment. These surplus savings have grown to more than US$10 billion over the last few years. That amount could easily finance public investment.
In terms of savings and accumulated savings that are available to fund public investment, domestic banks are burdened by excess funds, while the public is sitting on funds with no suitable outlet.
If the government is willing to borrow from banks or issue debt through bonds to raise funds necessary for public investment from the public, then not only is money not a problem, the surplus of domestic savings could also be digested and the banks' problems with excess funds resolved.
Of course, investment funds could also come from abroad. Are the necessary funds available abroad? The answer to this question is undoubtedly "yes."
Available foreign funds not only include an endless supply from foreigners, but also capital belonging to businesspeople and other Taiwanese nationals abroad. The capital of Taiwanese businesspeople abroad has been the focus of much discussion lately. Regardless of whether such funds are controlled by foreigners, the Taiwanese public or Taiwanese businesspeople abroad, they can be used for public investment. But the influx of these funds will unavoidably cause an increase in the supply of foreign exchange.
If, at that point, the Central Bank of Taiwan does not buy these funds, the value of the NT dollar could decrease.
If the Central Bank does buy, then monetary supplies will increase and the problem with excess domestic funds will worsen.
In a situation where domestic savings and funds are plentiful and adequate for public investment, the government should therefore borrow domestically rather than abroad to raise the necessary funds for public investment.
Though finding the necessary funds for public investment is not a problem, it requires incurring debt -- preferably from domestic lending. Since it involves incurring debt, the public will immediately ask whether this entails saddling future generations with debt.
However, since public investment seeks to improve the living standard, improve the investment environment and increase future production capabilities, the benefits are long term. Future generations will enjoy these benefits, so it is not wrong to expect them to share part of the burden by paying back interest.
The question that we should ask is therefore not whether future generations will be burdened with debt, but whether they can repay it.
In other words, will the benefits brought by investments in public infrastructure exceed the capital and interest the investments require?
If the benefits are high enough, current and future generations should be happy to foot the bill and are capable of doing so.
In light of the economic situation, protecting the domestic economy by increasing public investment is a must. However, this should be implemented in conjunction with other mechanisms in order to avoid exacerbating inflation.
The funds required for public investment can be raised domestically from the public. However, each public investment project must be subjected to rigorous cost and benefit evaluations. Only those that will produce adequate benefits should be implemented.
Shea Jia-dong is a professor at the Department of Economy at National Taiwan University and a research consultant at the Chung-Hua Institution for Economic Research.
Translated by Angela Hong
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