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Taiwan’s economy stuck in limbo
By Shen Chung-hua 沈中華
Wednesday, Feb 10, 2010, Page 8
On Dec. 17, Vice President Vincent Siew’s (蕭萬長) financial advisory team said
Taiwan, with its high-technology edge, should set up a high-tech funding center.
On Dec. 22, President Ma Ying-jeou (馬英九) gave the plan his stamp of approval.
Central bank Governor Perng Fai-nan (彭淮南), however, has declared war on hot
money on the grounds that the speculative flow of investment capital from
country to country destabilizes exchange rates, which in turn causes problems
for exporters.
Perng recommends curbing the inflow of hot money through measures such as
levying a transaction tax, and has called for the financial center idea to be
put on hold.
The public may think these two aims could be pursued at the same time, but they
actually conflict. If Ma declares the establishment of a funding center a
government policy, we will have to learn to live with an influx of hot money. A
funding center is, after all, a platform for raising funds. Foreigners would be
able to issue shares in Taiwan and take the money away with them. Equally, they
could invest in Taiwan, bringing money into the country.
Obviously one would hope that the inflow and outflow of capital would follow the
proper procedure, but in reality investors around the world act according to
both rational and irrational expectations, often generating sudden massive
inflows and outflows of capital. This would certainly happen in Taiwan if a
financial center was established. If we tried to obstruct the process, this
inflow and outflow of money would go to other centers, and Taiwan would be left
out.
The world’s three biggest financial centers are New York, London and Hong Kong.
The authorities in those places do worry about the circulation of hot money, and
they caution people to beware of it. The purpose of these warnings is to remind
investors to beware of bubbles; they are not aimed at those who move funds in
and out. The authorities intervene in the fund-transfer process. Otherwise,
money would not be able to flow in or out. What kind of a financial center would
that be?
But how do these established centers handle the effects of the inflow and
outflow of hot money on currency exchange rates? Again taking the three biggest
financial hubs as examples, the US and the UK have floating exchange rates,
while Hong Kong has a linked exchange rate system that pegs the Hong Kong dollar
to the US dollar, but its central bank still does not interfere. In other words,
while the exchange rates of these financial centers are at opposite ends of the
spectrum — completely floating and completely fixed — in both cases there is no
intervention by the central bank. There is no room in these centers for a middle
way — managed floating exchange rates. Their central banks are concerned about
exchange rates, but they do not concern themselves on a daily basis with what
exporters want exchange rates to be.
On the other hand there are countries that have declared war on hot money, such
as Brazil, Chile and Malaysia. They have taken steps to impose tax on hot money
transactions. None of these countries can be considered to be financial hubs,
nor do they intend to become funding centers.
When Yale University economist James Tobin proposed levying a tax on hot money,
his advice was intended for the ears of developing countries, not for financial
hubs like New York, London and Hong Kong.
How to curb hot money and, at the same time, become a financial center is a
tough question, and one that nobody is talking about so far. So if you want to
be a financial center, then you are not in a position to exclude hot money. If
you want to run a casino, then you have to accept that gamblers sometimes take
home the winnings.
When the global financial crisis struck, many people asked why Taiwan was so
badly hit. One reason is that an export-based economy is too dependent on
overseas demand. When overseas demand fell, Taiwan’s exports were harder hit
than those of some other countries. This prompted heated discussion about
whether we should continue with such an economic strategy. Was it time for a
change in Taiwan’s economic structure? Should financial services be developed to
be a bigger part of the overall economy?
Many saw the crisis as an opportunity for change. Today, however, it appears
that the central bank has decided that it wants to be the central bank of a
manufacturing and exporting economy, not the central bank of a financial center.
That being the case, the financial center idea cannot go forward.
So the funding center we have in mind would in reality be just a capital market
that is a bit better than those of Thailand and Malaysia. We look at exports and
see plenty of benefits, but we don’t want to see their downside. In our hearts,
we deeply fear the free inflow and outflow of funds that a financial center
would entail.
If we cannot rid ourselves of this fear, Taiwan’s economy will never be
transformed.
Shen Chung-hua is a professor in the Graduate Institute of
Finance at National Taiwan University.
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