Hope for Economic Stimulus Pinned on Consumer Vouchers

The problem for Taiwan's economy is confidence. Along with a NT$500 billion increase in public investment to deal with what has become the severest economic crisis since World War II, the Ma administration has proposed an economic rescue plan based on "three supports," and the Central Bank has offered up a "three reductions" plan. Furthermore, everyone, rich and poor alike, is enjoying wave after wave of tax cuts, with the most anticipated item coming in the form of consumer vouchers. The government is playing Santa Claus for the first time ever.

The "three supports" plan refers to government support of banks, banks' support of business and business support of labor. The hope is that, at this perilous juncture, we will all work with rather than against each other.

After banks saw their non-performing loans spike dramatically upward in November 2008, the government required publicly owned banks to continue providing needed capital to ensure normal operations among businesses needing loans. Banks must adhere to the quotas they have accepted to boost capital among small and medium-sized businesses. Although companies in Taiwan have not followed the example of their Hong Kong counterparts by entering into a formal agreement not to lay off workers without extremely good reason, Taiwanese firms have nevertheless pledged to exercise restraint in laying off workers, and will institute salary reductions or unpaid vacations, for example, so that fear of unemployment won't permeate society. Once the economy improves, businesses can avoid rehiring and training costs.

The"three reductions" policy (lower exchange rates, lower interest rates and a lower required deposit reserve ratio) is to be directed by Central Bank governor Perng Fai-nan, the only bank governor in the world to be awarded an A rating by Global Finance five times.

The first measure is devaluation of the NT dollar to lower the cost of exports. South Korea allowed its currency to slide 50% against the US dollar in 2008, seriously affecting Taiwan's export competitiveness. Thus, the Central Bank has decided to let the NT dollar depreciate slightly, and while the US Fed threw a curve ball in December by adopting a zero interest rate policy that sent the US dollar plummeting, Taiwan's Central Bank has nevertheless managed to maintain the exchange rate at 33 to the US dollar, down roughly 10% from the 30:1 rate prevailing in mid-2008.

The Central Bank has lowered interest rates five times in the last three months to boost market liquidity. On December 13, the discount rate was slashed from 2.75% to 2.00% in hopes of forcing some of Taiwan's high savings rate of 29.5% to be spent in consumption and investment. This echoes what President Ma Ying-jeou said: "In normal times we build the nation through thrift; in troubled times we save the nation through spending."

The most manifest measure in the effort to save the nation through consumption is none other than the government's imminent issue of the first "consumer vouchers" in Taiwan's history.

The Special Act Governing Distribution of Consumer Vouchers to Boost the Economy, which was passed in early December, provides that ROC citizens born and registered before the end of March 2009, as well as foreign and mainland Chinese spouses without ROC ID cards, are eligible to receive a NT$3,600 consumer voucher, regardless of age or wealth. Funding will come from a NT$85.7 billion bond issue.

The rush is on to distribute these "red envelopes" by Chinese New Year 2009. Inside are six vouchers worth NT$500 apiece and three each worth NT$200, which must be used by September 30, 2009. The aim is to increase economic growth by 0.64 percentage points.

To seize the opportunity, local governments and businesses are scrambling to draw the interest of consumers well before the issue of the vouchers. For example, the Taichung City Government has offered up an initial proposal: people spending their vouchers in Taichung and receiving stamps at any three tourist sites will qualify for a raffle with prizes including a 165-square-meter-luxury apartment and three cars a-fittingly bold move for the "consumer capital" of Taiwan.

Businesses are getting very creative, offering NT$8,000 worth of goods for NT$3,600 in vouchers, or accepting vouchers as payment for insurance and medical checkups. The Living Mall in Taipei is allowing consumers to buy goods now and trade in their vouchers for cash later when the vouchers come.

The "fireworks" effect of this spending incentive is nearing its height. But fireworks are transient; after the excitement dies down, the government needs to keep investing to shore up the economy, and we all must strive to create the greatest value for ourselves if we are to make it through these doldrums and see the sunshine once again.