Mon, Sep 10, 2001 page18

• Schive Chi speaks his mind

  With the government seeking to adjust policy to get the economy back on track, staff reporter Stanley Chou sat down with veteren economist Schive Chi, president of the Taiwan Academy of Banking and Finance and former vice chairman of the council of Economic Planning and Development, to discuss the focus the government should take after the Economic Development Advisory Conference.

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  Taipei Times: What do you think of the 322-proposal conclusion of the Economic Development Advisory Conference?

  Schive Chi (薛琦): On the whole, the Economic Development Advisory Conference has improved Taiwan's [economic] atmosphere.

  

  Schive Chi, president of the Taiwan Academy of Banking and Finance and former vice chairman of the Council of Economic Planning and Development, makes a point during an interview last week.

  PHOTO: CHEN CHENG-CHANG

  However, when it comes to public policy, it's strange that a consensus was reached at all [in a 120 member conference].

  There is always a positive and negative side to any policy. For example, there is a proposal that we should set up an offshore capital market in Taiwan, like China's B share market. But we have to ask whether such a market would work and where the market participants would come from. Therefore, it's a question of whether we are making a significant improvement or not.

  As to the cross-strait relationship, the conference certainly creates a positive [goal for the economy], with the resolution to deregulate the "no haste, be patient" policy. However, whether it will be put into effect or not is another question. Many people are eager for concrete action following the conference.

  TT: Immediately after the conference, the Cabinet announced plans to cut the land value increment tax in half for two years. Do you think this is a useful move?

  Schive: I think there are a number of problems with this policy. Basically, the land value increment tax should be combined with the personal income tax. The reason is simple, it's not fair to levy the land value increment tax separately if we do not consider the income level of the person who sold the land. For example, a peasant could inherit a piece of land from his ancestors with dozens of other relatives. When he and his relatives sell the piece of land, he could share, say NT$500,000, but he has to pay a 60 percent tax, which is 20 percent higher than the 40 percent tax bracket for personal income taxes.

  Meanwhile, the peasant had almost no other income during the same year. If we combine the [land value increment] tax with the personal income tax, most of the unfairness could be justified.

  Another point is that cutting the tax rate in half would generate lots of loopholes. What will happen over the next two years is that lots of phony transactions will occur to evade the actual tax rates. The consequence after two years will be that almost no transactions will happen at all since almost all of them would have already been made in advance.

  TT: In light of the lack of solid fiscal or monetary policy proposals raised at the conference, what priority issues are left to be addressed?

  Schive: Balancing the government budget should be the direction taken by the administration. However, with a budget deficit [of NT$2.9 trillion], many are skeptical that the government will be able to balance the budget within the next business cycle, [through spending more now and spending less when the economy recovers]. In order to balance the budget, new taxation or the cutting of expenditures are the only alternatives. But both are difficult under present political circumstances. Many academics suggest that a more conservative approach to public finance should be taken.

  On the issue of financial reform, the administration has been doing a good job by passing a number of laws and regulations, including the [formation of] asset management companies, the financial reconstruction fund, the financial institution merger law and the expected financial supervisory board draft. Getting rid of the NT$1 trillion in non-performing loans in the banking sector is another serious problem the administration needs to tackle.

  TT: Will cutting the land value increment tax help the banking sector reduce their non-performing loans?

  Schive: Of course. It would be helpful for the banking sector to reduce their non-performing loans [through reducing the tax burden]. But it's unlikely that the banking sector could write off all of the underestimated non-performing loans in the next three to five years through tax reductions. Much more effort is needed in this area.

  TT: What kind of measures should be taken to revive Taiwan's economy?

  Schive: Actually, Taiwan's economy had been quite healthy before the Asian crisis in 1997, with a fairly sound financial system with limited foreign borrowing. It's why Taiwan was not struck by the crisis [like other Asian countries].

  However, labor markets, including both the civil and private sector, have been interfered with too much by the government, making the labor market too rigid. The consequence of this is that small and medium-sized businesses are reluctant to make new investments. Without the impetus of medium and small business, Taiwan's economic growth is starting to slow down and unemployment keeps rising. Some say the problem is Taiwan's investment in China, but Taiwan has been investing in China for the last 15 years. What needs to be done is training, training, training. The government should use all its means to upgrade the skills of labor -- that's the best labor policy. If the government wants to adjust the minimum wage, it should also subsidize the difference between the minimum wage and the actual wage that employers are willing to pay.

  Another important issue is revamping civil service compensation and retirement systems. We have been paying civil servants too well, and Taiwan simply cannot afford it. For example, civil servants can work for the government for 25 years and retire at around 50 years old. Then the government has to pay 80 percent of his monthly salary at the time of retirement for the rest of their lives. I think civil servant salaries should be cut and their pension plan should also be cut, say if someone retires at 50, his pension payments should not begin until they reach 60 years old.

  State-owned companies are another heavy burden for the government. We should privatize every state-owned company as soon as possible. Simply speaking, we should set up a system that balances compensation and work performance [within the civil service sector]. Without this, the budget deficit will continue to deteriorate further for the foreseeable future.

  TT: Other than those in the labor market, what other kinds of policies do you think the government should take?

  Schive: General speaking, the government should respect the [free] market mechanism. Economic issues should be solved through economic means instead of political means. The administration should stop using slogan [policies] and instead take action.

  TT: What kind of role should the government play in the future?

  Schive: The government should lead [Taiwan's economy] toward liberalization. In the education sector, the government should watch resource allocation between the public and private sectors, and make lifetime learning a primary goal of education. The government should liberalize labor market regulations, which would create new jobs. The government should continue the task of financial reform in order to prevent the trouble Japan has seen in recent years. The government should also reorganize its own structure, in order to cut down on expenditures and raise administrative efficiency. The government should seek to improve its relationship with China, which would help investor confidence.

  As to whether Taiwan should become an operation's center for the Asian-Pacific region, it should be left for the market to decide.

  The basic role of government today is to educate its citizens and improve the living infrastructure. In a more abstract sense, a government should provide a good business environment for the economy and a good living environment for its citizens. When the living standard has reached a certain level -- like Taiwan has currently -- the quality of life becomes a more important issue than ever.
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