Establish Sovereign Funds: Promote Infrastructure Projects
China Times editorial (Taipei, Taiwan, Republic of China)
February 5, 2014
Summary: Taiwan's economy is suffocating. In order to find a breakthrough, the
Government must act. It must use its foreign exchange reserves to
establish sovereign wealth funds. Raise funds to promote public works,
and provide affordable housing for young people. This is a viable
strategy. All it takes is the will. As long as politicians are
determined and the legislature can be persuaded, they can be swiftly
implemented. Taiwan's economy can then be revived.
Full text below:
Taiwan's economy is suffocating. In order to find a breakthrough, the Government must act. It must use its foreign exchange reserves to establish sovereign wealth funds. Raise funds to promote public works, and provide affordable housing for young people. This is a viable strategy.
Economic growth can be promoted in four ways: consumption, investments, net exports, and government spending. Currently all four are in limbo. Salaries have not risen in over a decade. Private sector consumption is merely holding the line. It cannot increase growth. Recent investment remains bleak as a result of the world economic outlook. It has barely increased. It has occasionally experienced negative growth. Exports have been hurt following the 2008 financial crisis and the European debt crisis. Effective demand in Europe and America has been reduced. Economic growth has been unsatisfactory. Government spending has been affected by an emphasis on social welfare and a reluctance to increase the budget deficit. As a result, CEPD spending has been reduced. Investments in government and public utilities have barely increased.
Any economy that fails to grow becomes stagnant. New job opportunities are limited. One might have a job, but not a decent salary. Young people have no hope. They are forced to seek employment abroad. Older people tied to the land fear for their futures. The odds are against them. They are afraid to spend. This leads to a vicious downward economic spiral. Japan's "lost two decades" from 1990 onwards is the best example .
Reviving a stifled economy requires policies that restore a virtuous economic cycle. It requires using public works to stimulate economic growth, creating a multiplier effect. This is something the government can control.
What kind of public works best stimulate economic growth? The experience of nations around the world tells us that the most cost-effective means are the construction of infrastructure and transportation facilities. President Ma's "Golden Decade, National Vision" provided a comprehensive list. It included improvements to water works, electrical power, and industrial infrastructure. These can transform Taiwan into a convenient South East Asian sea and air transportation hub, and promote swifter transportation. They will create a comprehensive and convenient environment and digital convergence. These are public infrastructure works worth promoting. Several projects are top priority. They include the traffic bottleneck sections of the Huadong Line railway. These require tracks running in both directions, across the board rail electrification, South Link Line electrification, Suhua Highway No. 9 mountain road improvements, the West Coast Expressway road network. These form a third north south expressway. The Ten major infrasture projects include the New Taipei Twin Towers, the Songshan Airport Development Project, the Taipei Qui Yeh Yuan Building, the Taipei City Green Hill TWTC Exhibition Hall Development, the Kaohsiung City unified transportation system, the second Harbor Bridge and Harbor Tunnel, the New Taipei MRT third ring, third line MRT, the Tamkang Bridge, the Taichung Metropolitan Area MRT railway viaduct, the BRT public transport network, the Tainan City underground railway, and the Anping Harbor Bridge. These are also worthwhile projects that will generate benefits. If we have the financial resources, these projects stimulate economic growth on Taiwan immediately.
But even the cleverest housewife cannot prepare a meal without rice. Current annual revenue is limited. The budget is out of balance. Financial resources are worrisome. Different parties have different proposals to cut expenditures. But the government can set up sovereign wealth funds. This would help fill the nation's coffers.
Our government has yet to establish sovereign wealth funds. But in recent years, its foreign exchange reserves have reached 400 billion USD. The Central Bank has in fact conducted sovereign fund operations. As everyone knows, they have yielded a profit of 200 billion NTD. Most of this is the result of the leadership and hard work of the President of the Central Bank and his colleagues. The rest is the result of outsourcing operations.
Outsiders have little understanding of Central Bank operations. But in 2012 recognition was given to exemplary public servants. Forex Trade Chairman Chang Shou-fu received unprecedent public attention. He said CEO Peng authorized 500 million USD in capital to his operations team. In 2012 alone, they earned 28 million USD, about 800 million NTD. This amounted to a 5.6% interest rate. Observers consider annual earnings of over 200 billion NTD impressive. A total of 400 billion USD earned 12 trillion NTD, and a profit of 227.3 billion NTD in 2013, at a return rate of 1.894%.
The reason was, Central Bank operations ae conservative. Consider the Central Bank's income statement. Its main income is interest. These target U.S. Treasury AAA Grade fixed income assets. If sovereign funds are established, specialized investment operations begun, and certain risks assumed, one can expect a higher rate of return. The outsourcing of four major domestic fund operations in the wake of the financial tsunami should be able to beat market. Therefore sovereign funds can contribute to the nation's coffers.
CEO Peng has helped the government earn nearly 3 trillion NTD. This has reduced the shortfall in revenue. But more aggressive sovereign fund strategies and emulation of hedge funds may offer greater benefits. This is now the job of the Central Bank. It should help the government establish sovereign funds. The CEO has a wealth of experience. He can draw up plans for effective operations. He can consider how to revive a stifled financial industry, and give Taiwan's economy a shot in the arm.
The government should provide public works funding and establish sovereign funds. All it takes is the will. As long as politicians are determined and the legislature can be persuaded, they can be swiftly implemented. Taiwan's economy can then be revived.