Last Wednesday, the government was forced to implement a massive raise in fuel prices. Although this is not the fault of Premier Liu Chao-shiuan’s (劉兆玄) Cabinet, whether it was a reasonable measure is worthy of discussion.
The Cabinet’s claim that a one-time price hike was sufficient was obviously just a cover-up, because the government and the state-run CPC Corp, Taiwan have already absorbed 40 percent of the cost. Unless this is a long-term policy, another massive raise in fuel prices will occur when the government and the CPC stop absorbing these costs.
If one price hike is sufficient, expectations for another hike will disappear. But in Taiwan’s economy — where we are used to government intervention in energy prices — it is questionable whether a market equilibrium can be quickly achieved in response to the price hikes. And since it obviously isn’t a one-time price hike, why go through the trouble of saying that it was?
Another problem was that the complementary measures are disappointing. In addition to subsidies to the agricultural and fishery industries, we seem to be left with adjustments to the commodity tax and public transportation subsidies. But the original purpose of the hike was to control demand through high prices in the hope that oil prices in the long run would come to reflect actual cost, so that consumers would think twice when choosing their transportation. If the government reduces the commodity tax on fuel products, it would lose the capacity to control demand through high prices. Although the results of such a measure would not be apparent in the short run, it is necessary to start now.
Short-term subsidies should be given to public transportation because the government controls the prices of these businesses and therefore cannot ignore their constantly rising costs. Such subsidies should be cancelled once prices reflect the increased cost of oil. Otherwise, the incentive to replace high fuel consumption vehicles or save energy may weaken.
The belief that offering subsidies to public transportation systems can change people’s transportation habits in the short term is a myth. Public transportation systems are economies of scale. If more people choose to take public transportation because of the fuel price hikes, the shared cost for each passenger will drop. This means that they will be less sensitive to rising fuel prices than private means of transportation, which is enough of an advantage by itself.
In addition, public transportation networks are not fully developed in certain areas, so people in those areas would not equally benefit from such subsidies.
The hikes were implemented five days earlier than planned to limit illegal hoarding. But the suddenness of the announcement also damaged the government’s credibility — particularly because the raise was not really a one-time hike. Won’t operators and the public hoard oil illegally again if the prices are raised again next month as expected?
Illegal hoarding needs to be resolved by specific inspection and punishment. The government is barking up the wrong tree by changing the timing of implementation to resolve the matter — especially when a one-time hike is impossible.
Reasonable complementary measures should be able to maintain not only the public’s standard of living but also national economic efficiency.
There are two effects of the hikes. First, the high prices will force the public to reduce consumption, although the concrete effect will depend on the flexibility of short and long-term prices. Also, real income will drop, decreasing out the consumption of other products.
Hence, complementary measures must promote the first effect and weaken the second. The most reasonable subsidies are overall subsidies not directly linked to gasoline consumption.
I suggest that the government lower or cancel automobile excise or fuel tax for non-commercial vehicles. However, there should be no overall subsidies for commercial vehicles because this kind of subsidy does not weaken the incentive for operators to pass on additional costs to consumers. Business owners, including transportation operators, will inevitably raise the prices of their products and services with the oil price hike. But if customers are able to bear the pressure from rising prices, naturally, so can businesses.
If President Ma Ying-jeou’s (馬英九) government can boost the economy, the public can certainly withstand the pressure of the hikes.
But what about the short-term predicament? Perhaps the government should consider temporarily implementing individual subsidies based on the number of people in a household. That would be one way of helping disadvantaged groups.
Wang Chun-chieh is an assistant professor of political economy at National Sun Yat-sen University.
Translated by Eddy Chang
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