Are You Ready for A Long Dark Night?
China Times editorial (Taipei, Taiwan, ROC)
February 20, 2009
We knew the numbers were not good. The economy experienced a significant 8.36% decline in the fourth quarter last year. This year's economic growth will be negative, and turn positive only in the fourth quarter. Growth for the year declined 2.97%. Nevertheless one cannot help being shocked at the seriousness of the crisis. Faced with this prolonged economic recession, the government must offer a more aggressive and comprehensive response.
The causes of the worst economic crisis in our history are obvious. The global economic crisis caused demand to disappear overnight. Taiwan's export-driven economy immediately dropped into an abyss. Exports have fallen dramatically. Profits and revenues have plummeted. Unemployment has risen. Unpaid leave is now common. This has led to the largest drop ever in private consumption and revenues. The future looks grim. Orders have evaporated. Private investment has been scaled back across the board.
Let's look at the numbers. January exports fell by 44.1%. Even discounting the effect of the Spring Festival, exports fell 34.9%. Exports are expected to fall by as much as 20% this year. Consumers may have 80 billion NT in consumer vouchers. But this year's growth rate is a mere 0.82%. Private investment is expected to fall 28%, having fallen over 40% in the first quarter.
Monetary policies such as interest rate cuts attempt to boost investment. Exchange rate policies such as currency devaluation attempt to promote exports. Consumer vouchers attempt to increase private consumption. But the impact of such policies is limited, because demand has evaporated. Currency devaluation cannot promote exports. The future looks grim. Zero interest rates cannot attract investments. Confidence has vanished. Once the consumer vouchers have been used up, private consumption will remain idle.
In other words, apart from the public sector, almost all economic growth has flamed out. How can one possibly be optimistic about the economy? Therefore, the government's responsibility is far greater than it was in the past. The effect of many policies may be just a drop in the bucket, but the government cannot refuse to act. Its actions must be more comprehensive and prudent. Only by doing the right thing when the economy has bottomed out, can it help the economy to rebound as soon as possible.
Interest rate cuts at a time like this cannot stimulate private investment. But at least they can give mortgage rates a breather. Allowing households to extend their mortgage policies will at least prevent the mortgage market from becoming another disaster area. Otherwise, mortgage defaults will surge. People will be left homeless, creating social problems. Large numbers of non-performing loans are another potentional landmine.
Currency devaluation cannot create foreign demand. But at least it can ensure that the most important engine of all, exports, will not simultaneous experience a sharp drop in demand. It will spare exports from a harsh exchange rate environment. According to domestic export forecasts for January, high tech products will decline. If the "Two Trillion, Twin Stars" industries, such as the LCD screen industry decline 70% or more, the entire DRAM industry will largely be done for.
The economic engine has flamed out. The most effective action the government can take is increase domestic demand, increase government procurement and public construction. It should do so promptly and aggressively. It should also vigorously promote economic openness and liberalization.
Faced with an unprecedented, protracted, and deep economic recession, the government must bolster the economy, creating a virtuous circle. Even more important, far more important than economic policy, is a comprehensive social safety net. Society must not be allowed to descend into chaos under the impact of this economic depression.
We have already seen a number of countries reel under the impact of the financial crisis. These include the comparatively backward economies of Latvia, Chile, Greece, and Iceland, where street protests have erupted. Waves of labor strikes have broken out in the Group of Seven, and even Britain and France. Dennis Blair, US Director of National Intelligence, warned that the economic turmoil triggered by the global economic crisis has become the United States' greatest security threat, more to be feared than terrorism.
People on Taiwan are good natured and rational. The rule of law is firmly established. The family structure remains strong. This enables family members to maintain a minimum standard of living during an economic downturn, when unemployment is on the rise. It can buffer some of the factors contributing to social unrest. The savings rate on Taiwan is high. This provides a certain amount of capital during a downturn. These are important assets during the global recession that will help maintain social order.
These are no guarantee that we will pass through the crisis without incident. If unemployment continues to surge, if people have no incomes, and even the basic cost of living increases, the result will be a decline in law and order. Even basic public safety will be difficult to maintain. The social structure is likely to collapse. Foreign investors will leave. Investments will vanish. The economy will be in serious trouble.
This chances of this worst case scenario happening on Taiwan is not high. But the government must take preventive measures. It must build a better social safety net, thereby stabilizing society and allowing everyone to safely pass through the storm. This is something the government must do. It may require substantial resources. But it is essential. Therefore the government must make prudent use of its resources, it must not throw money about, squandering precious resources.
DGBAS forecasts five consecutive quarters of negative growth. This will be the longest period of economic darkness in recorded history. Clearly we are in for a long, dark night. We can only bite the bullet and stay the course. Is the government ready? Can it lead? Can it help the people safely make it through this long dark night?