Wednesday, January 22, 2014

Greater Economic Freedom: So Why No Foreign Investment?

Greater Economic Freedom: So Why No Foreign Investment?
China Times editorial (Taipei, Taiwan, Republic of China)
A Translation
January 23, 2014

Summary: We are glad the FSC and Ministry of Economic Affairs are taking action. But other ministries must make an effort as well. We live in the present. We cannot rest on our laurels. We cannot cling to outdated concepts of manangement. Taiwan's economy is suffocating. This did not happen overnight. What exactly is the problem? The answer is clear.

Full text below:

The Heritage Foundation has released its 2014 Index of Economic Freedom. Hong Kong and Singapore were ranked 1st and 2nd in economic freedom. Australia, Switzerland and New Zealand were ranked 3rd, 4th, and 5th. The Republic of China was ranked 17th this year, up three places from last year. Much excitement ensued. But besides these indices, is there anything else the government should be looking at?

This index has been around for years. It is an important reference point for foreign investors. The Heritage Foundation uses four criteria in its annual evaluations: Rule of Law,   Limited Government, Regulatory Efficiency, and Open Markets. It evaluates the degree of freedom in the global economy according to ten criteria: property rights, freedom from corruption, fiscal freedom, government spending, business freedom, labor freedom, monetary freedom, trade freedom, investment freedom, and financial freedom. Among the 185 economies evaluated, the US, which loudly champions liberalization, fell two ranks to 12th place. Britain ranked 14th. Germany ranked 18th. Japan ranked 25th. South Korea ranked 31st. The Chinese mainland ranked 137th. Taiwan's ranking rose to 17th, the best it has ever achieved. Since President Ma took office, Taiwan's ranking has risen 18 places. This shows that Taiwan's liberalization has had an effect.

Taiwan received a business freedom score of 93.9 points, and a trade freedom score of 85.8 points. But on labor freedom and freedom from corruption, it scored less than 60 points. A score of 80 points or more is classified as free, 70-80 points is classified as mostly free, 60-70 points is classified as mostly unfree, 60 points or less is classified as unfree. Our overall score of 73.9 points, and 17th place ranking, is 1.2 points higher than last year.

The Heritage Foundation report notes that Taiwan has an appropriate degree of economic freedom. Its overall score was among the highest in the world and other Asian-Pacific economies. Its overall freedom score was higher than last year. This was due mainly to significantly improved fiscal freedom and investment freedom. Fiscal freedom rose from 70th last year to 41st this year. Investment freedom rose from 56th last year to 46th this year. This was the fruit of the year long effort by the FSC and the Ministry of Economic Affairs to promote liberalization.

Taiwan has made substantial progress in its degree of freedom. So why are we still having trouble attracting foreign investments? In recent years, Taiwan has almost always ranked last among the Asian economies in foreign direct investment (FDI). As a result, people cannot feel the improvements. The overall economy continues to suffocate. Kuan Chung-min is the new chairman of the National Development Committee. He said that businesses feel the impact of economic freedom immediately, whereas the general public often do not, at least not in the short term. In the long term however, liberalization leads to increased employment and higher wages. Unfortunately, as John Maynard Keynes quipped, "In the long run we are all dead." We must consider the long-term lethal factors. We must make corrections. Only then can Taiwan's economy achieve a breakthrough.

Why are foreign investors not investing in Taiwan? Fiona Woolf, the Lord Mayor of London visited Taiwan on the 14th. She thinks Taiwan's financial regulations are too strict. Without good services and products, one cannot become an offshore RMB center. She recommended that the limitations be relaxed, especially for domestic, foreign, and international banks looking to provide investors with financial products and services. Therefore the first step must be liberalized financial services. These will eliminate the gap between domestic and foreign banking. They will enable domestic banking to achieve the same status as other financial centers. What was our government's response?  Officials said our government has made many efforts at financial liberalization. Many regulations have been relaxed. The professional edition of Taiwan's debt review process has been simplified. Cross-strait economic and trade exchanges between the two sids are close. This makes Taiwan suitable for the development of regional RMB business. The government's response was deeply disappointing.

The merger of Taishin and CHB remains stalled. Newbridge Capital became frustrated and went home. Carlyle's acquisition of ASE failed. Orion Investments' acquisition of Yageo was rejected. Private equity funds cannot receive fair and equitable treatment at home. If funds are suspected of having originated on the Mainland, the Investment Commission begins a witch hunt to track down the source. Entrepreneurs are required to show passports or ID cards. They find this intolerable. Foreign investors have concluded that we simply do not know the rules of the game. Too many agencies wield too much discretionary authority. A Wall Street Journal article last year said that investors have difficulty withdrawing their investments from Taiwan. This factor alone has prevented many new investments from coming in. In response to criticisms, Taiwan regulators sometimes impose unnecessarily stringent requirements. Management on Taiwan is opaque. The rules are uncertain.

Our financial sector regulations also need review. As we all know, the review of new financial products often takes over six months, after which they are often rejected. Penalties for financial institutions are often a way to force them to limit or cease operations. Entrepreneurs feel like the late lamented goose that laid the golden egg. Currently bank deposit spreads are narrow. Yields are flat, and remain in a prolonged slump. The capital market remains unsound. It remains unfavorable to interest rates, insurance products, and annuities. Many hoped the "free trade zone pilot program" would include financial sector liberalization. But the central bank has issued its "three noes." Financial services will not be liberalized. One. They may not offer NTD denominated commodities. Two. Their derivatives may not be linked to Taiwan interest rates and exchange rates. Three. Their portfolios may not include NTD denominated commodities. Given such rules, how can businesses grow? They may as well invest in Hong Kong or Singapore. Why bother coming to Taiwan?

All of the above are manifestation of an unfree economy. They hinder Taiwan's progress. They are responsible for Taiwan's lost opportunities. We are glad the FSC and Ministry of Economic Affairs are taking action. But other ministries must make an effort as well. We live in the present. We cannot rest on our laurels. We cannot cling to outdated concepts of manangement. Taiwan's economy is suffocating. This did not happen overnight. What exactly is the problem? The answer is clear. How can we remedy the situation? How can we provide domestic industry with greater opportunities for growth? How can we renrew international and foreign investors confidence? These are all questions worth pondering.

社論-經濟自由度進步 外資為何不來
中國時報 本報訊 2014年01月23日 04:09


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