New Year's Economic Prospects Call for Cautious Optimism
United Daily News editorial (Taipei, Taiwan, ROC)
February 16, 2011
Tomorrow is the Lantern Festival. The New Year has begun, and is bringing people warmer weather and renewed hope.
Last year's economic growth was double-digit. The black clouds of the financial tsunami dissipated. ECFA, which dragged on forever, finally went from paper to reality. The early harvest list of 579 exports will gradually reduce tariffs, beginning this year. More long-awaited benefits are still to come. So much good news, all at the same time. We should be able to look forward to a good year.
But despite these positive omens, we must not take economic prosperity for granted. But must take things one step at a time. Long term indicators could turn negative. If that happens, not just Taiwan, but the entire world will feel the impact. When might it take effect? It could happen this year. It could happen in the first half.
In September 2008, the financial tsunami struck. With the US at the helm, governments the world over attempted to minimize its impact and to ensure an early recovery. They adopted all sorts of unorthodox monetary and fiscal policies. But they went too far. They severely distorted the global economy. For two years imbalances worsened. Bubbles appeared in developing countries. Their economies overheated. Developed countries experienced capital loss. They hoped to revive their economies, but lacked the ability. The result was one half of the world bloomed, while the other half withered. Fire and ice coexisted, side by side, in an abnormal structure. More and more urgent measures became necessary to turn things around, and set the global economy back on the road to normality.
Here lies one of the keys. the U.S. Federal Reserve was the first to suddenly drop interest rates to zero. This was a serious offense against the laws of the marketplace. When will the Fed stop engaging in such heavy-handed interventions, and allow interest rates to return to normal? The U.S. Government is selfish. It obstinately adheres to a ridiculous interest rate policy and refuses to make concessions. With quantitative easing in the second quarter, it added fuel to the fire. As a result, developing countries fear that interest rates rises will encourage carry trades. Hot money will become even more rampant. Bubbles will burst, currencies will be revalued, and export competitiveness will be lost, They have no choice but to follow suit, to sit back and watch as real interest rates plummet, or even turn negative. How long can such distortions be maintained?
In the second half of last year, the United States began bleeding capital. The economy is still recovering. Apart from unemployment, the indicators have significantly improved. If this trend continues, the Federal Reserve's zero interest rate policy will become less and less justifiable. The Fed is likely to suddenly declare an interest rate increase during the first half. Once the United States lets go, developing countries will be relieved. They will rally in response. Disaster looms. The global interest rate structure will return to normal. It may even increase due to inflationary pressure. By then, much of the hot money will rapidly return to the United States. Fire and ice will suddenly collide. Fueled by U.S. funds, they will be unleashed. Hot money in developing countries will unexpectedly depart. Interest rates will increase. This will lead to the bursting of one bubble after another. Taiwan has been the target of hot money over the past two years. The central bank has wracked its brains attempting to block hot money. But it has been powerless. When the hot money leaves and the bubble bursts, the negative impact will not be far behind. If the bubble bursts too hard and too fast, it will lead to the worrisome "double dip." That is not something to be taken lightly.
Another important factor is Mainland China. Mainland policy, combined with a sudden jump in salaries, could close the doors of the world's factory. In recent years, Taiwan's economic growth has been dependent upon the surplus from Mainland processing zones. If this situation changes, the impact on Taiwan's economy would be great indeed.
If the world's factory closes, the initial brunt would be borne by the Mainland economy. The impact would be massive. The outlook for the Mainland economy would not be optimistic. Not only would it lose exports. Imports would be unsustainable too. This year Taiwan anticipates a huge increase in the number of Mainland tourists. Strong domestic demand and expansion on the Mainland would lead to exports to Taiwan. If these expectations come up short, if they decrease instead of increase, they will deal a nasty blow to Taiwan. Unfulfilled expectations are particularly hard to bear.
Such developments are likely this year. We must face the facts. We must prepare for a rainy day. We must begin as soon as possible. These growth engines, these pillars of the economy, may be suddenly shaken. We must ensure that Taiwan's economy does not collapse. After all, if the world's factory closes its doors, Southeast Asia will surely replace it. The global economy will emerge from the twisted wreckage. Prosperity will return. ECFA, in particular, has thrown open the doors to freedom and liberalization. Taiwan now faces a new era, undreamed of in six decades. But only as long as we are not attached to appearances, only as long as we are willing to confront the future, The Republic of China Centennial will be an important beginning. It will be the starting point for a new era of prosperity.
2011.02.16 02:56 am