Monday, February 18, 2013

New Cabinet's Economic Policy Must Clear Five Hurdles

New Cabinet's Economic Policy Must Clear Five Hurdles
United Daily News editorial
Taipei, Taiwan, ROC
A Translation
February 19, 2013

Summary: The new cabinet took office yesterday. Neither Premier Jiang Yi-huah nor Vice Premier Mao Chi-kuo have any fiscal policy experience. But everyone hopes this will not hamper their ability to lead the cabinet, reverse the Sean Chen Cabinet's image of impotence, and open new doors for Taiwan's economy.

Full Text below:

The new cabinet took office yesterday. Neither Premier Jiang Yi-huah nor Vice Premier Mao Chi-kuo have any fiscal policy experience. But everyone hopes this will not hamper their ability to lead the cabinet, reverse the Sean Chen Cabinet's image of impotence, and open new doors for Taiwan's economy.

We have been greeted by more and more positive economic news. This has raised public expectations for the new year. But the situation remains in flux, both domestically and abroad. The new cabinet hopes to open new doors for the economy. It hopes to gain public trust and support. But to do so it must first overcome five hurdles.

The first hurdle is international economic variables. The international economic and fiscal policy situation has recently improved. But numerous variables remain. Central banks the world over are engaging in quantitative easing. National economies are benefitting from rising stock indices, rising housing and other asset prices. Demand is increasing, and so is trade. But the Eurozone may undergo negative growth. The U.S. economy is still undergoing long-term correction. The effectiveness of quantitative easing is diminishing, and the attendant risks are increasing. Emerging markets, including Mainland China, are still unable to fulfill the role of economic locomotive. Last month the International Monetary Fund (IMF) cut global economic growth this year to 3.5%. This is only slightly higher than 2012, and shows that economic recovery is still a long way off.

Since Japanese Prime Minister Abe took office, he has been pushing for a devaluation of the yen. This has dramatically increased the risk of an international currency war. Recently the U.S. government endorsed Abe's economic policies. This means the pressure to revalue currencies is directed straight at the RMB, the number one target among emerging nation currencies. The NTD will probably be caught in the crossfire. Given these variables, the new cabinet must demonstrate resilience, in order to stabilize the economy and restore its vitality.

The second hurdle is the challenge of free trade. Nations the world over are attempting to accelerate their economic recovery. To this end, they are aggressively promoting free trade agreements (FTAs). In his first State of the Union Address since his reelection, U.S. President Barack Obama declared that he would sign an FTA with the EU, in June of this year. Negotiations should be complete two years from now. This will create the world's largest free trade zone. In other words, the United States led "Trans-Pacific Economic Partnership Agreement" (TPP) for  2015, the ASEAN and China led Regional Comprehensive Economic Partnership (RCEP), and the US-EU FTA, may soon take shape. Therefore the new cabinet must negotiate an FTA. One the one hand, it must wrap up negotiations as soon as possible on the ECFA agreement on trade in goods and services, on the ROC-Singapore FTA, and on the ROC-New Zealand FTA. On the other hand, it must promote, full force, the "Free Trade Zone Pilot Program," and enable the ROC to participate in the TPP and the RCEP. This is critical if we wish to avoid marginalization.

The third hurdle is economic restructuring. Taiwan's economy is in part the victim of short-term sentiment. But it is also the victim of structural problems, including over-reliance on export-led economic growth, on "orders from Taiwan, with production overseas," and on the low-cost, low-value-added OEM export model. We may benefit from the global economic recovery. The economic growth figures may look pretty. But the employment opportunities will remain limited. Salaries will remain frozen. Most people will experience no economic benefits. Taiwan's economic growth model has reached a stage where it must change. The Ma administration has been in office for over four years. It has promoted economic restructuring. But it has left the impression that it is all talk and no action, that it is all flash and no substance. The result has been a weakening of the government's role at the helm and economic drift. This has led to a loss of confidence in the government. The new cabinet must learn these lessons. It must revolutionize its thinking and practices. It must offer businesses and the public a clear direction for the future. It must build consensus, and thereby lead Taiwan's economic transformation.

The fourth hurdle is to promote the construction of infrastructure. The Ma administration has touted its "Twelve Love for Taiwan Infrastructure Projects." But over the past four years, government fiscal difficulties and poor execution have left the public with an ambiguous impression regarding these twelve infrastructure projects. Consider major projects such as the aviation city and digital convergence. They have gone nowhere. They have not merely failed to promote economic growth. They have been a drag on economic performance, due to the lack of public investment. The cabinet is dominated by people charged with transportation and communications policy. Can the cabinet members charged with fiscal policy overcome long-standing abuses, while promoting public infrastructure construction? Can they introduce private sector economic participation? Can they demonstrate administrative competence? These will be the key indicators when evaluating the performance of the new cabinet.

The fifth hurdle is how to implement reform. Last year the Sean Chen cabinet promoted U.S. beef imports, the capital gains tax, gasoline price and electricity rate hikes. But the timing was wrong, the details were never worked out, and a consensus was never consolidated. The result was a string of setbacks. Popular support for the cabinet hit rock bottom. The impending pension reform program affects far more people. Its impact is far greater. Yet many polls show that over 70% of the public disapproves of the government's proposals for pension reform. Pension reform may lead to consumer belt-tightening. This and follow-up fiscal reforms require comprehensive responses. The new cabinet must undergo a change in mindset. It must solicit opinions. It must think in terms of a bigger pie. It must formulate a program more in character with the national interest. Only then can it create a majority consensus, and successfully promote pension reform.

The above five hurdles will be difficult to overcome. The Jiang Cabinet must be willing to engage in creative destruction. It must have relentless determination. It must have a strategy to change its method of governance. It must bear the burden of revitalizing Taiwan's economy and creating new prosperity.

2013.02.19 03:18 am










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