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Fast rising prices
set to slow growth
By Lee Wo-chiang §õ¨UÀð
The impact of rising fuel prices on overall economic growth should not be
underestimated. Following the recent fuel price hike, the price of electricity
is set to go up too. The combined effect of fuel and electricity price rises
will work through economic circulation to increase businesses¡¦ production costs,
so that companies¡¦ production output and profits are both liable to fall.
Needless to say, commodity prices will also rise. A 10 percent rise in the price
of oil is calculated to push consumer goods prices up by 0.37 percent, while a
10 percent rise in the price of electricity will bring about a 0.365 percent
rise. This effect is already making itself felt among ordinary salary earners as
it causes their real wages to fall. Once again, people are asking why everything
keeps going up, but wages never do. The government should take this situation
seriously and do its best to come up with a response.
Taiwan is an island economy, and our economic growth depends on foreign trade.
Exports account for more than 60 percent of Taiwan¡¦s GDP. According to figures
published by the Bureau of Foreign Trade, Taiwan¡¦s total exports contracted by
4.5 percent in January and February this year. This bigger-than-usual
contraction indicates that Taiwan¡¦s overall export growth is slowing down. At
the same time, the Council for Economic Planning and Development¡¦s indicators
for the nation¡¦s economic health have for four months in a row shown a ¡§blue
light,¡¨ signifying a recession.
Although Greece¡¦s crisis has been resolved for the time being, manufacturing in
the eurozone has been in recession for eight months in a row and unemployment
rates are high. Consequently, the eurozone¡¦s growth prospects are rather gloomy.
Although the US economy is becoming more stable, the pace of recovery is slow.
While the world has great hopes for the world¡¦s second-largest economy, China,
it has been growing less rapidly this year. China has cut its growth target for
this year from 8 percent to 7.5 percent. China is an important export market for
Taiwan, with the share of Taiwan¡¦s exports going to China exceeding 40 percent.
Exports to China account for 14 percent of Taiwan¡¦s GDP. Europe, the US and
China are Taiwan¡¦s main export markets, so their influence on our economy is
considerable.
Finding ways to stabilize commodity prices, stimulate the economy and create job
opportunities are all urgent tasks. The government should think about how to
increase effective demand and find additional sources of revenue. Rising prices
discourage consumption, so it is not easy to increase active consumption. That
being the case, the government can, if need be, consider stimulating the economy
through passive consumption by again issuing consumer vouchers, as it did in
2009. Another point is that in imposing capital gains tax, which is a tax on the
rich, the government should take action and implement clear complementary
measures. It should also think about imposing a hot-money tax on arbitrage
speculators.
With respect to foreign trade, the free-trade agreement (FTA) between the US and
South Korea that came into force on March 15 presents a threat to Taiwan. The
Ministry of Finance estimates that this FTA may cause a 0.05 percent reduction
in Taiwan¡¦s economic growth. Faced with competition from abroad, the government
should, in addition to completing follow-up agreements to the cross-strait
Economic Cooperation Framework Agreement, also seek to sign FTAs with various
other countries to avoid marginalization.
When market mechanisms are upset, markets stop working properly. Keynesian
economists say that when that happens the government must step in to fix the
problem. However, government interference can be excessive and it does not
always set things right. Freezing fuel prices is a good example of how things
can go wrong. It often happens that the measures taken to fix some problems only
generate new ones. Decisions made by the majority, such as in the way they vote,
are not necessarily consistent or rational. In other cases, the problem arises
from interest groups competing for profits. On the one hand there are
ineffective markets, while on the other hand governments may interfere in such a
way as to bring about undesirable side effects, or else they may just not be
able to achieve the desired results, and that is called ineffective government.
Specifically, if commodity prices keep rising at a certain rate and unemployment
also stays high, then stagflation becomes more likely. Happily, the Cabinet has
already implemented price-control mechanisms, and so far the annual rate of
increase in the consumer price index has been kept below 2 percent. As things
develop, the government must take a broad perspective and foresee what may
happen in the future. More important still, it must take note of public opinion
and show concern for the hardships people are experiencing. The only way to get
through rough times is for everyone to work together.
Lee Wo-chiang is a professor in the Department of Banking and Finance at
Tamkang University.
Translated by Julian Clegg
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