Tue, May 25, 2010 page8

• A more inclusive economy needed

  • By Hwang Jen-te 黃仁德
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  Vice Premier Sean Chen (陳冲) recently said that low interest rates pose the greatest market risk to Taiwan. A look at Japan’s monetary policy shows that since 1995, Tokyo has adopted a low interest rate policy with rates at almost zero percent. This resulted in economic stagnation and the Japanese insurance industry went bankrupt.

  From 2001 to 2004, the US also had a low interest rate policy, with rates at around 1 percent. This resulted in increased public borrowing and huge increases in the number of houses purchased. Financial institutions were too loose with mortgages, which gave birth to the subprime mortgage crisis that caused the global financial meltdown. The low-interest monetary policies of these two big economies have left the world with an important lesson that should serve as a warning to other countries.

  Low-interest monetary policies help businesses invest. This is why as soon as the financial crisis hit, monetary authorities around the world adopted looser monetary policies and lowered interest rates. In addition, governments adopted expansionary financial policies that involved increased government expenditure and tax cuts.

  However, these moves only distorted the distribution of economic resources. While consumers will spend less when interest rates on their savings are low and when they are pessimistic about the future economy, businesses may over expand when capital costs are low. These factors could set off a new credit crisis. Therefore, monetary policy must be relaxed in stages and care must be taken to protect against negative after-effects.

  When the estate and gift tax was reduced in 2008 from 50 percent to 10 percent and the global financial crisis meant that the credit ratings of international financial institutions dropped, many Taiwanese businesspeople overseas returned their funds to Taiwan. However, low interest rates here and overseas resulted in large amounts of hot money that could not be invested in suitable instruments and some issuers of structured notes breached their contracts. These factors resulted in a surge of funds into Taiwan’s domestic real estate market.

  The cost of new homes in Taipei and other places have almost doubled since 2008. Average income earners now have no hope of owning their own home. If prompt action is not taken to change things, a bubble could form in the real estate market and a credit crisis could hit local financial institutions. Low interest rate policies would be to blame for this.

  Ever since the financial crisis hit in 2008, consumer spending power and willingness to spend has decreased due to job uncertainty and concerns about disposable income. These factors have resulted in a shrinking economy characterized by low demand. Fortunately, low interest rates and a monetary policy aimed at keeping the NT dollar weak coupled with strong demand from China saw investment by businesses and exports bounce back in the fourth quarter of last year.

  An increase in exports to China is both positive and negative. On the positive side, Taiwan’s consumer electronics industries started to employ more people to meet demand, lowering unemployment levels that had reached 6 percent. However, the export increase also saw Taiwan’s dependence on trade with China reach almost 42 percent.

  Monetary and fiscal policy need to be used to increase domestic demand while also finding ways to lower Taiwan’s dependence on trade with China. In order to achieve these goals, an appropriate increase to interest rates should be considered and the NT-dollar needs to be allowed to appreciate. Taiwan must start looking at how much and when these changes should be made as these factors would offset an increase in disposable income and domestic spending power.

  The effect of these changes would be to transfer a portion of Taiwan’s economic impetus to the domestic demand side.

  Apart from becoming overly reliant on China and risking the security of the Taiwanese economy in the process, too much emphasis on exports will cause an accumulation of large trade surpluses which will cause the NT dollar to appreciate as well as an increase in the money supply.

  If this is combined with an injection of foreign funds, housing and stock market prices could increase even further. This would be beneficial to big corporations and capitalists, but it would cause Taiwan’s gap between the rich and poor to grow. Furthermore, if capital and wealth become increasingly concentrated in the hands of a few, many would start questioning Premier Wu Den-yih’s (吳敦義) talk of a “grassroots economy.”

  Ever since the financial crisis, the central bank has led efforts to lower interest rates and keep the NT dollar weak to encourage an economic recovery fueled by increased exports. While this was a good plan, these short-term goals have already been achieved. We cannot afford to ignore the inflationary pressures that the recent huge hikes in real estate prices could cause. A grassroots economy cannot only focus on looking after capitalists; it must also focus on looking after average Taiwanese and the economically disadvantaged.

  The central bank should now consider their next goals for monetary policy, make domestic demand account for a greater ratio of economic growth and allow all participants in the economy to have an equal opportunity to contribute to economic growth. They should also consider how to come up with ways to stop excessive economic and trade reliance on China, as this would help maximize Taiwan’s economic security.

  Hwang Jen-te is a professor in and chairman of the Department of Economics at National Chengchi University.

  TRANSLATED BY DREW CAMERON
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