Business today all revolves around money. On the surface it appears that prices in a free market with perfect competition should be arrived at by the free actions of willing buyers and sellers; any deliberate protectionism, monopoly, profit-eering or collusion will cause abnormal price fluctuations and are full of dangers. But more importantly, the economic environment given by the combination of the state of the economy, the money supply, financial policy and monetary policy provides the basic conditions which underlie price fluctuations.
"The economy is sluggish, most sectors are depressed, and prices are soft." This is how many economists describe the current price situation. Looking back at the Year of the Pig, ROC residents' propensity to consume declined in step with the slowing of the economy, and this is a major reason why consumer price inflation fell back below the 4% p.a. warning line.
Blue light shows as belts are tightened
Just how bad are Taiwan's economic prospects? According to the Council for Economic Planning and Development's business cycle indicators, the outlook really isn't optimistic. After the brief upturn in the first quarter of last year, the monitoring signal score slid from its peak level--the "yellow-red light," which indicates a booming economy--through the "green light" which indicates moderately strong economic activity, past the rather sluggish "yellow-blue light," and all the way to the worrisome "blue light"! And after several revisions downward, the year's economic growth rate was recorded at 6.06%, the second lowest level in 10 years.
With the economy in the doldrums, growth in real national income hit a record low, and the unemployment rate rose to the highest level in eight years. With their wallets shrinking, shoppers no longer spent as freely as before, and growth in private- sector consumption slid to 8.92%, the first time in a decade it has fallen below 10%.
There are many similar economic statistics we could cite. But one aspect is confusing: last year, Taiwan's foreign trade performance was outstanding, with both exports and imports breaking the US$100 bn barrier to set all-time records; also, the trade surplus rose for the first time after falling for four years running, and exceeded US$8 bn. So with foreign trade so buoyant, why was the domestic economy so sluggish?
Hard to track down the money
A number of reasons can be identified. Firstly, in the aftermath after the decline of the bubble economy of the previous few years, stock market trading was light and there were many bankruptcies in the construction sector. This also had repercussions for the financial institutions which lent money to construction companies. Construction and the property market have been the locomotive of Taiwan's domestic economy, and with the locomotive slowing down and its fire going out, it is no surprise that the economy also cooled.
Some economists also point out that with the upgrading of local industry, the wave of rich export earnings was created by high-tech industries such as electronics and information technology. High-tech industries differ from labor-intensive industries in that an enormous automated factory often only needs a handful of workers to run it, so the numbers employed in such industries are not large. Thus even though high-tech industries have earned a great deal of money, ordinary members of the public who are not lucky enough to be associated with those industries have not shared in their rich profits, so of course they do not have such great spending power.
A still more important factor is that the sabre- rattling and tension across the Taiwan Strait has led to idle capital in the ROC quickly flowing overseas out of harm's way. In June of last year Taiwan still had enormous foreign exchange reserves of more than US$100 bn, but after mainland China's missile tests began, these reserves fell by US$10 bn in three months. With businesses cautiously limiting their investments, the money supply also fell continuously. With less cash in the domestic economy, the high prices which had been built on high spending naturally could not be maintained. This is another reason why, despite the fact that every manufacturer was complaining of rising costs and falling profits, they still didn't dare to put up their prices, or if they did so they then embarked on all kinds of discount promotions.
However, money is not static. It ebbs and flows like water, and if for a while it is silent or flows out of the country this does not mean that its power has been lost, all the more so since exchange rates and tariffs have become more reasonable and are unlikely to once again become a major factor depressing prices. If prices are to be kept stable, this will depend entirely on controlling monetary deposits and the flow of funds.
Looking at prices from the perspective of the monetary environment, the potential for inflation should not be underestimated.
A close watch on prices
First there is the government's monetary policy. For a modern society, an inadequate amount of money in circulation will cause liquidity problems for business activities and generally depress the economy; too much money will also wreak havoc in the form of inflation. Monetary policy is the safety valve on the flow of money, and is always treading a fine line between stimulating the economy and keeping prices stable.
The recent sluggish performance of the domestic economy forced the government to take a series of unusual measures to try to create a prosperous economic climate with "plenty of money": to stimulate the property market, the government several times expanded its budget for low-interest loans to construction companies and to first-time house buyers, to a total of NT$100 bn; to shore up the stock market, the government proposed the idea of bringing together several sources of funds to create a NT$200 bn "market stabilization fund"; and after the Chinese New Year the banks may adjust their deposit interest rates downwards, which is hoped will encouraged the public to increase investment and consumption.
As long as cross-strait tension has not eased, how effective releasing these flows of money can be in revitalizing the economy is doubtful. But will such attempts to improve the current economic situation sow the seeds of future inflation? Many academics express such worries.
On the side of financial policy, economists generally acknowledge that "deficit financing" is a major factor for inflation. In recent years the government has increased its borrowing requirement rapidly, and to smooth the path for its bond issues it will have to continue a somewhat loose monetary regime. Moreover, part of the enormous budget deficit is being used to fund the social welfare measures which have expanded rapidly in recent years. Various benefits such as old age pensions, farmers' pensions, and make-up benefits for retired civil servants and teachers, are being dished out in sums totalling tens of billions of NT dollars. This not only increases the amount of money in circulation, but also encourages the beneficiaries of these programs to feel they have plenty of money in their pockets, so they can spend as they wish; this adds to upward pressure on prices.
The factors influencing prices are diverse and complex, and no economic theory, however detailed, can take them all into account and make accurate predictions. But there are plenty of negative examples which can serve as a warning: in the late 1970s under the Carter administration, the United States' budget deficit increased massively and inflation went into double figures for several years running. Unemployment rose sharply and economic growth stagnated, creating the dreadful problem of "stagflation." At present Taiwan may still be far from such a situation, but we cannot let up for a moment from an attitude of caution and preparing for a rainy day.
