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Can Taiwan survive a depression?
2009/07/18 15:50

Can Taiwan survive a depression?

The U.S. stock market crash triggered a financial meltdown, which started the silent tsunami engulfing the world, hitting Taiwan earlier than was expected. The export trade, Taiwan's economic mainstay, shrank in the last two quarters of this year; more companies and factories are going under; and unemployment rose, and is likely to hit an all-time high (it already has, if those forced to take long unpaid leave are included). Terry Guo, chairman of the Hong-hai group and Taiwan's one-time richest man, has predicted the depression we are facing will be three times as worse as most macroeconomists estimate.

Belatedly, President Ma Ying-jeou is coming out on the frontline — he promised to stay behind the front where his premier, Liu Chao-shiuan, is in charge — calling the shots to get Taiwan's Democratic Progressive Party-messed economic house in order. He ordered, in rapid fire, a tax cut, the issuance of consumers' vouchers, creation of at least 500,000 new jobs, the opening of all three direct links between Taiwan and China, massive public works construction and a series of cuts in Central Bank basic rates to stimulate the economy. Bailouts to ailing industries, such as automobile and DRAM (dynamic random access memory), are in the card. He still wants to keep his campaign promise of an annual economic growth of six percent for eight years. To put it simply, he is trying to act like President Franklin D. Roosevelt in his Hundred Days and shortly thereafter.

But Ma sounds more like Herbert Hoover. Right after the 1929 Wall Street crash, President Hoover became the exorciser with public statements such as “Any lack of confidence — in the basic strength of business — is foolish,” “business and industry have turned the corner” and “we have now passed the worst.” When the wheat prices dropped to a record low in 1930, he had Secretary of Labor James J. Davis drop this gem: “Courage and resources are already swinging us back on the road to recovery, and we are fortunate in having a president who sets a shining example of that courage and initiative.”

Actually, much more than talk was needed to swell the shrunken gourd and plump the shriveled shell. President Hoover did his best according to his lights, and he had a warm heart which responded to the suffering. But he was restrained from taking any bold imaginative steps by his wrong estimation of the situation. He meant very well, labored hard to find solutions and sought advice, but nothing seemed to work because being the prisoner of fixed ideas, and surrounded by like-minded men, he could not try anything new or bold. The Great Depression reached its nadir in 1932-33.

Unemployment hit 25 percent. Breadlines were in cities across the country. Although alleviated by the bold expedients of President Roosevelt's New Deal, it did not really end until 1939-40 when the United States began to re-arm in anticipation of its participation in the Second World War.

Roosevelt succeeded in saving twentieth century American capitalism by purging it of gross abuses and forcing an accommodation to the large public interest, because he reasserted the presidential leadership which had been forfeited by his three predecessors and promoted the growth of federal power which had halted since the First World War.

Can President Ma assert leadership like Roosevelt? The power of the central government seems to be challenged by those of cities and counties that doubt the executive capability of Liu Chao-shiuan's Cabinet and the small but vociferously hostile minority in the Legislative Yuan. The opposition Democratic Progressive Party exercises power disproportionately larger than its minority status.

Ma is following the worldwide Keynesian approach in an attempt to get Taiwan out of its economic woes. But the economy differs from country to country, and there's no guarantee that a strategy that works in one will work in another. The United Kingdom coped with the Great Depression differently, for instance. Its coalition National Government was forced to abandon the gold standard, which it said was indispensable for economic survival and to which the United States continued to adhere for two more years. Ironically, the failure to keep the gold standard helped the British economy. The value of the pound fell about a third in relation with other currencies which thus reduced the price of British exports and made it easier to find customers for them.

The National Government adopted no massive program of public works construction to create employment and stimulate demand as did most other industrial countries. John Maynard Keynes, the celebrated British economist, demanded the government to organize or plan economic development in vain. It belatedly provided, in 1934, token help for particularly distressed areas; it tried to persuade industrialists to locate factories in them and spent small amounts of money to subsidize training centers and other services. In addition, it encouraged private schemes of “rationalization” to reduce production in the most afflicted industries.

The Great Depression in Great Britain ended shortly before the German invasion of Poland in 1939 to begin World War II, and a basic shift took place in the British economy, away from the export-oriented heavy industries in the north to a variety of light manufacturing industries and service trades in metropolitan London and nearby counties. Unemployment in these sectors which served the domestic market was less. The middle class grew in numbers, while the cheapness of the industrial raw materials and food which Britain imported contributed to an economic revival in the mid-1930s. The prices for meat, grain, and cotton fell even more than did those for the industrial goods which Britain sold. A relatively small volume of exports would pay for a large quantity of imports.

Japan was among the first to recover thanks to its heavy investment in war industries, while unemployment was removed as a problem after the Mukden Incident of 1931, albeit it led the land of the rising sun to build an empire in Asia soon to be lost in the Second World War. So did Adolph Hitler's Nazi Germany. Moreover, the Keynesian strategy did not work all the wonders it promised in the United States.

Instead of blindly following the global trend, Taiwan should develop the way that besds fit it to survive its impending great depression.

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