As official agencies and renowned international economic think tanks release optimistic forecasts for 1995, an American economist, Ravi Batra, has struck an independent note. As the title of his book The World Great Depression suggests, he predicts there will be a global economic disaster in 1995. The book not only became a bestseller, it also inspired a Japanese economist to write a rebuttal.
In Batra's scenario, the New York stock market will collapse in 1995, leading to a series of bank failures. Thereafter, the Tokyo stock exchange will fall dramatically, which will trigger a global financial panic. Within a few years, capitalism will self-destruct! The collapse of the US stock market will not have been due to a downturn in manufacturing, but to continually rising interest rates, which lower the incentives to invest in the market and lead investors to rush to pull out....
Where it goes, nobody knows
Economic predictions are like the stock market, which includes such aspects as fundamental structural analysis, the technical issues of investment, and the flow of rumors. There are too many factors that are impossible to fully get a grip on. Li Chih-tsun, the vice-president of Formosa Plastics, who has been by the side of Wang Yung-ching for 30 years, has seen the petrochemicals industry pass through good times and bad, and he laughs at talk of forecasts for the industry: "Not only is it difficult to discuss this topic, it is even hard to speculate about it!"
Li recalls the past year: In the first quarter, Formosa Plastics' main products, such as PVC and HDPE, continued to be in the same slump they had been in for several years, with prices stagnant and supply higher than demand. Unexpectedly, beginning in the second quarter, rumors began to circulate of a shortage, and the international price began to rise. Overnight, downstream factories flooded Formosa Plastics with orders, making the "feeling" of a shortage even more intense. After rushing to meet demand in April and May, it was expected that the wave would level off. But once again the unexpected happened: A number of international petrochemical materials manufacturers were hit by disasters like explosions or floods, so the global price continued to climb--so high, in fact, that Formosa Plastics itself felt it was "ridiculous" and took the initiative to keep prices down.
"When the International Petrochemical Manufacturers Conference opened in Europe in October, those in the industry were all asking each other, 'How could we have done so well this year?! How much longer can we keep it up?'" Naturally, there were all manner of opinions. But because those in the field really couldn't explain where the strong wave of demand came from in the first place, they were hard-pressed to guess when it might come to an end.
If it is this hard to guess accurately about a single industry, then what about the overall direction of the economy? It is far more complex, far more chaotic; like a kaleidoscope, it changes completely when any outside force is brought to bear on it; and there are countless outside forces which might intrude. It is even harder to handle because the "outside forces" are often subtle changes in people's ideas and feelings, changes which defy rational analysis. One political economist, queried on the topic of "the impact of the death of Deng Xiaoping on the economic situation in mainland China and on relations between the two sides of the Taiwan Strait," responded frankly, "You'd be better off asking Buddhist master Lin Yun, not us scholars!"
What you can't quantify, ignore!
Getting to the root of the problem, the biggest weakness of modern economic forecasts is their preference for "quantifiable" variables, such as interest rates, exchange rates, investment, or consumption. Less attention is given to "unquantifiable" factors--for example, psychological uncertainties created by political developments (such as elections). Though it is clear to all that these have a great impact on people's economic behavior, it is nearly impossible to fit them neatly into a "model" and make a "purely scientific" analysis. So the only thing economists can do is to leave them out.
Another limit to economic prognostication is that we can only analyze data that is right in front of us. Yet many policies and trends can only be evaluated after three or five years, so it is not easy to weigh them into forecasts.
"Perhaps we will only be able to make a more comprehensive assessment after improvements in statistical analysis," admits Li Cheng, second in command at the Chung-Hua Institution for Economic Research. He offers the following advice: While scholars may spend a lot of time arguing about specific numbers, like whether economic growth next year will be 6.5% or 6.8%, ordinary readers needn't be so serious. "The figures simply indicate a general direction, whether the economy should be better or worse next year compared to this year, that's all."
Philosophical economics
Although there are many shortcomings in economic prognosis, even for the moment leaving aside the famous international economic think tanks, in Taiwan alone the Directorate-General of Budget, Accounting, and Statistics, the Council for Economic Planning and Development, the Chung-Hua Institution for Economic Research, the Taiwan Institute of Economic Research, and other agencies all invest large amounts of money and brain power into coming up with estimates for all types of economic indicators. Time magazine once compared economic forecasting to predicting the weather: On the one hand, you know full well that the rate of error will be high, and that sudden natural disasters can occur without any warning. Yet human beings cannot help but want to know what the future holds. Moreover, it is dangerous to start off without having some general idea of the future. Indeed, not only will these types of prediction not decline in importance, their shortcomings will only attract ever more people to devote themselves to the task of improving them.
In the end, whether the forecast is for rain or shine, there are always people who still adopt the attitude that "I'm not going to let the weather stop me." Most businessmen have the same positive attitude. As Chu Chih-yang, chairman of the Fair Friend Group, insists: "You invest where there are investments to be made, you grow where there's room to grow, and you do your best to earn the money that's out there to be earned. Anyway, you don't know about a lot of variables until you get to the end. Since they are beyond your control, why worry about them?"
It seems that even as we strive to make economic forecasts, it won't hurt to see things philosophically as well.
[Picture Caption]
"Economic forecasting" takes no less knowledge than weather forecasting, but you still have to weigh the evidence and make judgments yourself. (drawing by Tsai Chih-pen)
