Reports that the government is considering using the nation’s foreign exchange reserves to revive the economy have recently become a topic of much discussion.
As of late last month, Taiwan’s foreign reserves amounted to US$294.1 billion. Reserves sufficient to cover imports for three to six months are usually thought to be quite enough for any country. However, considering Taiwan’s unique international position, our vulnerability to unexpected financial crises and our lack of access to assistance from the IMF, accumulating greater reserves is reasonable. Beyond that, however, although massive reserves may look good for national prestige, they do not have much substantial benefit. A country that accumulates excessive reserves is like a miser who is too stingy to shop, leaving his valuable assets idle.
Now that a global financial crisis has struck, the government’s proposal to use the country’s foreign reserves to boost the economy is both legitimate and timely. However, the special features of foreign currency reserves must be considered. Generally, these reserves should not be released within the domestic economy, as doing so may cause inflation. Also, since national reserves are the public’s shared wealth, the government should obtain the legislature’s endorsement before using them. How and where they should be spent is open to discussion, but the parameters should be clearly defined, so that those mandated with implementing policy can do so with a clear basis in law and will not be overcautious.
Foreign reserves can be spent abroad to the benefit of both sides. Many examples can be found in the practice of foreign aid. Simply put, a donor country can use its reserves through donations or loans to support specific construction projects in a recipient country, on condition that the recipient purchases items necessary for the projects from the donor. Thus, both sides can benefit.
Applied to Taiwan’s current situation, the Ministry of Foreign Affairs could, for example, inquire among our diplomatic allies and other friendly countries as to whether any of them needs loans to purchase computers. If, say, a particular country wants to purchase 1 million computers for its schoolchildren, we can provide it with a loan, either directly or indirectly through the Asian Development Bank or other international organizations, on condition that the recipient country buy the computers from Taiwan. The loan can be paid back in interest-free installments over a number of years. Such a measure would enable Taiwan’s ailing computer manufacturers to quickly re-employ their redundant workers and get their production lines moving again.
Another feasible plan would be for diplomats to survey how many people in neighboring countries are interested in visiting Taiwan. Let us say 1 million people want to visit Taiwan each year. After checking the potential visitors’ credit status, the government could turn part of its foreign reserves into travel loans through international banks. If each traveler is given a loan of US$2,000 and stays in Taiwan for one week, they could boost Taiwan’s domestic demand by NT$70 billion each year. Tourism-related businesses would reap the benefits directly, and the multiplier effect would be at least as great as that generated by the recent issue of consumer vouchers. As with foreign aid, the interest-free loans to visitors can be paid back when the global economy picks up.
If the government can apply our precious foreign reserves in effective ways, it can help bring about an early recovery from the recession and ensure its the public’s welfare.
Eric Wang is an economics professor at the Graduate Institute of International Economics at National Chung Cheng University.
TRANSLATED BY EDDY CHANG
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