Thursday, July 17, 2008

Perspectives on the Current Economic Difficulties

Perspectives on the Current Economic Difficulties
China Times Editorial (Taipei, Taiwan, ROC)
A Translation
July 17, 2008

The Ma Ying-jeou administration has been in office less than two months, but it has run smack dab into the worst international recession in 20 years. The timing couldn't be worse.

The public on Taiwan may have been carried away by campaign ads promising that "everything will be better as soon as Ma takes over." This caused the TAIEX to rise disproportionately relative to international indices on March 22. But because international oil prices remained high and the DPP caretaker government deliberately froze gasoline prices, the Ma administration faced sharp pressure to increase gasoline prices the moment it came into office. Even though the Liu cabinet had two months to plan for the announced price hike, it waited too long to implement it. People began hoarding. When the Liu cabinet suddenly moved up the date of the price hike, it shook people's confidence. This was followed controversies over the Minister of Foreign Affairs and other officials' Green Cards. The Tax Reform Commission was suspected of being a rubber stamp. The Su Hua Highway Alternate Plan came under fire. The Premier was booed when he visited the countryside. The Liu cabinet began to look like a beating victim. In addition, the Legislative Yuan's failure to confirm Shen Fu-hsiung, and the dispute over Chang Chun-yen exposed the disunity within the KMT. Finally, the "Housebound President" stepped up to the firing line, and lifted controls on mainland investments. Only to run head on into the Freddie Mac and Fannie Mae debt crisis, which abruptly knocked Ma's countermeasures for a loop. By this time, the public on Taiwan's confidence in the new government was in tatters. This is something the Ma administration must face up to.

Faced with this grim international situation, the President and the Premier will have to rethink their overall strategy. The source of the international economic downturn is continued high oil prices that may reach new highs. Under pressure from increasing oil prices, both the European and US economies are in a downturn. These in turn ensure that the shadow of the subprime mortgage crisis will linger. Some suspect that crude oil prices have been subject to manipulation, and that the bubble will soon collapse. But until oil prices stabilize, the global economy will remain under a dark cloud. Landmines such as the Freddie Mac and Fannie Mae crises will continue to explode. The President and the Premier will have to remain calm. They must not attempt to offer the public unrealistic expectations that "the economy will improve immediately." Only by frankly and honestly laying out the facts of the international situation to the public can they get out from under the populist obligation to "save the stock market and win the confidence of the people." Officials need not go on television to tell people to "buy the dips" or feed them propaganda. They need not hastily introduce one half-baked panacea after another.

During such a downturn, what can the government do? It can seek truth from facts, practice its basic skills, and improve the health of the economy. The "supply side" impact of rising oil prices on the economy will make the total supply curve contract leftward. The Liu cabinet's only response currently is to expand domestic demand. It is attempting to increase aggregate demand. But those who understand the principles of economics know that although expanding domestic demand will help increase income, it will inevitably push up prices. Therefore, the Liu cabinet faces a dilemma. To avoid recession it will have to put up with price increases. To stabilize prices it will have to endure doldrums. The Liu cabinet finds itself on the horns of a dilemma. The increase in domestic demand is the reason it faces a conflict between prosperity and inflation.

If the new government expands domestic demand by repairing funeral parlours and paving roadways, such a policy will merely increase aggregate demand and raise prices. But if the government increases domestic demand at all levels of government, converts to solar panels and replaces energy-consuming equipment, constructs and maintains bicycle paths, speeds up completion of the Fourth Nuclear Power Plant safety check process, or even increases subsidies for those who use public transportation, it will increase domestic demand and aggregate demand at the same time. This will ease the community's reliance on energy. It is tantamount to reducing the impact of oil price hikes and weakening the impact of crude oil supply shortages. Therefore, as long as the government adjusts its pattern of expenditures, it need not remain fixated on its original plan. During the election campaign oil prices had yet to skyrocket. Various carbon reduction and energy-saving equipment expenditures will reduce the conflict between increased prosperity and lower prices.

When we look at other Asian countries under pressure from international crude oil prices, we find that Japan's inflation rate is the lowest. Over the past five months it has remained below 1%. This is because Japan invested a great deal of effort in carbon reduction, energy savings, and the development of alternative energy sources. Japan's efforts in energy conservation and carbon reduction have finally paid off in the era of high oil prices. Japan has to a considerable extent, defused the impact of high oil prices. Taiwan has a small scale free market economy. It will inevitably face wave upon wave of international raw material price increases. If it can calmly face recalcitrant international economic disadvantages, and concentrate on reducing carbon and saving energy, its current difficulties will become an opportunity for economic reconstruction. We cannot revive our economy immediately. But we can reduce carbon and save energy immediately, and thereby reconstitute our economy.

中國時報  2008.07.17







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