On the morning of September 20, President Ma Ying-jeou attended the latest edition of the United Daily News Group's International Economic and Financial Forum and, on behalf of the government and people of the ROC, welcomed keynote speaker Thomas J. Sargent, the winner of the 2011 Nobel Prize in Economics. The president reiterated Taiwan's determination to join the Trans-Pacific Partnership (TPP), and explained why the government recently decided to postpone a planned second electricity rate hike.
In remarks, the president stated that the eurozone debt crisis has been escalating since the second quarter of this year, causing a global economic slowdown. Many international economic forecasting organizations have lowered their economic growth projections, and the International Monetary Fund has warned that the eurozone debt crisis is going to be the principal risk to the global economy. For the European Union, the main tool for responding to the crisis continues to be bailouts accompanied by harsh austerity measures. These measures, however, could trigger further shrinkage of the global economy. At a time like this, said the president, we owe special thanks to the organizers of this event for inviting Dr. Sargent to share his penetrating insights on the impact of the eurozone debt crisis on the global economy, with a special focus on economic governance and to provide us with a broader macroeconomic frame of reference so that we can think deeply about the issue and propose solutions.
President Ma pointed out that Dr. Sargent is a pioneer of the rational expectations school of macroeconomics. He has helped to incorporate the concept of rational expectations into economic policy, put forward a lot of seminal research and ideas, and laid a new foundation for modern macroeconomic analysis. In a study entitled "The Ends of Four Big Inflations," he examined the causes of four major episodes of inflation since 1920 and concluded that "only a quite decisive policy 'regime-change' would bring stabilisation" to the economy.
The president stated that the government's recent decision to postpone a planned second electricity rate hike was consistent with Dr. Sargent's idea about the need for a "decisive policy regime-change." In particular, in response to the global inflationary pressure caused by eurozone debt crisis and rising commodity prices, the United States has rolled out a third round of quantitative easing (QE3), but this measure threatens to cause yet another inflation crisis. If the government were to raise electricity rates at this time, even if the increase did not exceed the price hike that is routinely instituted each summer, it would create inflationary expectations. That is why the Executive Yuan, after considering all the relevant factors, agreed to postpone the rate hike until the 1st of October next year (2013) and simultaneously proposed a reform to the system for setting electricity rates, with the current case-by-case rate hikes to be replaced by a systematic approach in which rates would be determined by the market, i.e. floating rates would reflect actual market conditions, with an adjustment made once every three months so that people wouldn't be hit all of a sudden by big adjustments.
The president also emphasized that the Taiwan Power Company (Taipower) has to take a critical look at how the company is run. They need to review their long-term power purchase contracts with independent power producers (IPPs) and cogeneration plants, think of ways to reduce the amount that Taipower is required to pay IPPs to cover the cost of loan interest (the amount is based on a fixed 6.6% rate, which is much higher than what the IPPs now pay to their lenders), make better use of assets, and cut costs. In addition, Taipower needs to rethink its role in our society. It was once expected to help the government achieve its policy goals by, for example, providing subsidized power for Taiwan's schools, streetlights, and offshore islands, but responsibility for these subsidies should gradually be shifted back to the appropriate government agencies so that Taipower can be run strictly as a business enterprise. This big, comprehensive, and long-term reform is part and parcel of our decision, said the president, to postpone the second rate hike. Some have criticized the government for not carrying through on its policy decisions, but future action can be expected to solve the problem of electricity rates once and for all.
The president also noted that the International Monetary Fund has estimated that despite the global impact of the eurozone debt crisis, developing Asian economies will still post a very good 7.1% rate of growth this year, far better than the 1.4% expected for developed economies, and a report issued last year by the Asian Development Bank indicated that the combined output of all Asian economies will exceed that of the world's developed economies by the year 2050. By that time, moreover, 3 billion people in Asia will have climbed into the ranks of the wealthy. Quite clearly, he said, Asia will someday be the main engine of global economic growth.
The president said that Taiwan has a "shallow-dish economy" in which exports account for 70% of the gross domestic product, which means the economy is easily affected by conditions in the global economy. Nevertheless, he continued, Taiwan has weathered two oil crises, the Asian Financial Crisis, and the financial tsunami in very good shape and plays a key role in the ICT (information and communications technology industry) value chain. In response to the eurozone debt crisis, the Executive Yuan has adopted an economic stimulus program and approved a "Taoyuan Aerotropolis" project. Numerous other major infrastructure projects will also be rolled out. All of these things are very positive developments.
Turning to the subject of international economic and trade ties, President Ma stressed that when he first took office in 2008, Taiwan had only concluded free trade agreements with five countries in Central America that together account for just 0.2% of Taiwan's total foreign trade. What the country needs, however, is to sign free trade agreements or economic cooperation agreements with its major trading partners, and progress has been made on this front. Two years ago Taiwan signed the Cross-Straits Economic Cooperation Framework Agreement (ECFA) with its number one trading partner, mainland China, and the two sides are now discussing an agreement on trade in goods and services, which will hopefully be completed by the end of next year. Then last year Taiwan entered into the Taiwan-Japan Bilateral Investment Arrangement with its second largest trading partner, and is now making good progress in talks with Singapore and New Zealand on economic cooperation agreements. And in the wake of Taiwan's resolution this past July of the issue of US beef imports, former ROC vice president Lien Chan (連戰) met early this month with US Secretary of State Hillary Clinton during the APEC Economic Leaders' Meeting and the two reached a consensus to restart bilateral talks under the Trade and Investment Framework Agreement (TIFA). This could lead to the elimination of barriers faced by Taiwan's export firms.
The president emphasized that signing economic cooperation agreements with other countries will be a big boost to Taiwan's participation in regional economic integration. In particular, both Singapore and New Zealand are members of the Trans-Pacific Partnership (TPP), so entering into economic cooperation agreements with these countries would help create the necessary conditions for Taiwan to join the TPP. The government has declared its intention to achieve TPP membership within eight years, but it might not take eight years if the government, companies, and private individuals would cast off their protectionist mentality. The fact is, said the president, that Taiwan cannot be saved by protectionism. Opening up to the outside world is the only hope; closing ourselves off only causes contraction. This has always been the case, and always will be. The president noted that we cannot continue to thrive just by relying on internal demand. This is a big challenge, and one that must be faced.
In addition to Dr. Sargent, included among those attending the event were Duncan Wang (王文彬) (Chairman, United Daily News Group), Ling-Long Shen (沈臨龍) (Chairman, Taiwan Cooperative Bank), and Wu Chung-Shu (吳中書) (President, Chung-Hua Institution for Economic Research).