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Short and Long Run Challenges to the Taiwan Economy Short Run Themes Long Run Themes Action is Urgent Policies Can Be Implemented Quickly Impact of Policies Are Felt Soon Relatively Easy to Coordinate Public Can Be Mobilized Highly Realistic and Practical Action Not Quite So Urgent Policies Can Be Implemented Slowly Impact of Policies Are Felt Later Relatively Difficult to Coordinate Hard to Maintain Public's Motivation Highly Philosophical and Abstract One difficulty is that the long run is made up of many short runs and therefore the policies must be consistent and compatible Short Run Challenges Long Run Challenges Implementing Appropriate Fiscal & Monetary Policies Normalizing Interest Rates Lowering the Risks of Business Reducing Regulatory Barriers to Business Expanding the Scope of TAITRA Trade Diversification, Joining FTAs and Enhancing Competition Falling Fertility Rate Political Relations with China Rising Debt, Deficit and Dependency Ratios Changes in the Structure of Industry Education, Innovation, New & Quality Products, and Governance Wealth and Income Distributions Incorporation of Robotics and High Tech into Production One difficulty is that the long run is made up of many short runs and therefore the policies must be consistent and compatible These challenges cover most of the lists discussed in 2014-2016 by the Wall Street Journal, The Economist, Channel NewsAsia, Bloomberg, The Brookings Institution, Fortune Magazine and other think tanks and interested media, scholars, etc. However, most do not divide these into long and short run by the nature of the goals sought and by the constraints on their means used and results obtained. The most important philosophical principle to maintain is that the government should be working to create a positive business environment. To produce this environment, government should be seeking to Taxes and Government Spending (1) lower taxes and make reporting and compliance easy and transparent (2) produce public goods and services that can aid and support the expansion of international trade and the diversification of markets (expand TAITRA and related organs) (3) shrink the corporate business tax on all income reported in Taiwan, but maintain tax on income reported abroad. (4) lower asset transactions tax during periods when asset markets are stressed and raise them during periods when there are apparent bubbles forming (Tobin Tax). (5) reduce the size (budgets and employment) of the general administration of government (6) provide less money for schools and more money (tax breaks) to support legitimate OJT including capital expenditures Regulatory Reform (1) Institute a J1 visa program for foreign students who wish to remain in Taiwan upon graduation so that they may work in expanding trade between Taiwan and their home countries. (This in conjunction with the granting of more financial aid to foreign students who seek to expand trade) (2) Allow qualified foreigners a chance to establish businesses that can easily trade both exports and imports between their home country and Taiwan. (3) Speed and simplify the authorization of all products (especially pharmaceuticals and other specialized goods) that can be sold in Taiwan on a reciprocal basis with foreign countries. (4) Expand trade opportunities for ROC government authorized Chinese medicine (5) Lower all environmental regulations on business except where there is a fully justified reason to maintain strict controls on externalities. The bias should be upon less rules rather than more rules. Each company should estimate the compliance costs of all environmental, safety, and health regulations and these statistics should be submitted when taxes are reported and later summarized and presented in aggregated form to the Legislative Yuan once a year for general review of their impact. Currently there is no reliable estimate of regulatory costs to business. Monetary Policy (1) Normalize interest rates in a planned and transparent way so that proper hedging can take place, with a stiff flexible transactions tax placed on any speculation that may occur in tandem with the normalization. (2) M2 growth should be consistent with a nominal GDP growth of 5-6% minus the (low ended) predicted seasonally adjusted six month ahead growth of monetary velocity, with little discretion above and below this amount. The target should be made public as well. This will accommodate well a 4% real growth and 1-2% inflation in the GDP deflator. The interest rate should be allowed to adjust to this growth, with revisions in monetary growth after six months. Monetary Policy (continued) (3) The exchange rate (price of the USD in terms of the NTD) should be left alone to find equilibrium with possible imposition of transactions taxes if speculative attacks on the NTD are attempted. (4) TAITRA should be expanded to provide hedge advising and educational services to smaller companies that may need to cost effectively reduce their risks in the presence of fully flexible exchange rates. (5) ECFA agreements proposed on financial services should be ratified implemented so that cross strait branch banking and trade facilitating financing can take place more easily. (6) Repeal of Mortgage Rules was undertaken 3/24 and is once more a major capitulation to construction companies and banks seeking to expand the housing market, providing the wrong incentives for building and more mal-investment. The CBC is completely involved in using its discretion to continue boosting this market. Taiwan’s External Negative Factors to be Addressed— (1) Mainland China slowdown and import substitution policies creating a Red Supply Line (2) Impact of Fed actions on demand, international financial markets, exchange rates, etc. (3) Possible debt fueled collapse in emerging markets due to Fed interest increases (4) Possible continued collapse in commodity prices in emerging markets (5) terrorism and refugee crisis in Euro Area Some Recent Policies to Achieve the Macro and Micro Goals ide@ Taiwan 2020 -- Five Digital Policy Aspects National Development Council (1) (2) (3) (4) (5) Infrastructural Environment – create better digital backbone Transparent Governance – use backbone to hear public demands Intelligent Lifestyle – cloud based learning museums, etc Internet Economy – e-business, cross border transactions, finance Smart Homeland – unite data across borders to help protect public Consumption Boosting Policies National Development Council Four major aspects — energy and water conservation, digital lifestyle, online purchases and domestic tourism Several concrete measures — (1) encompassing subsidies for purchasing energy- and water-saving products, (2) acquiring small-scale agricultural tools, (3) upgrading fixed broadband and cable broadband service (2G) to (4G) (4) upgrading mobile phones from 2G to 4G, (5) conducting joint promotional activities for online shopping (6) and promoting domestic travel and accommodation Retaining Talented Foreign Students in Taiwan Premier Jiang Yi-huah today approved an action plan to retain outstanding foreign students at Taiwanese universities to work in the ROC after graduation. Starting July 1, 2014, the government will adopt a points- and quotabased mechanism—similar to those adopted by many other countries around the world—to evaluate the work-permit applications of foreign graduates of Taiwan’s tertiary education institutions. HeadStart Taiwan Project Background In order to accelerate the development of innovation and entrepreneurship, the National Development Council (NDC) initiated the HeadStart Taiwan Project aiming to consolidate the power of the private sector and international startup community to create a positive and effective startup ecosystem in Taiwan, nurturing innovation and high added value startups here. Strategies Deregulation, global fund attraction and cluster building are the three major strategies of the project to assist young people in Taiwan in starting business and expanding into the international market. It also aims to make Taiwan a regional innovation and entrepreneurship center, adding new momentum to the growth of the economy. 1. Deregulation: To align Taiwan’s regulatory environment with international standard. 2. Global Fund Attraction: To attract global venture capitals (VCs) for international connections and early-stage investment. 3. Cluster Building: To build a physical cluster with co-working space and mentoring and professional services, accommodating incubators, accelerators and various startups for global networking. Industrial Development Bureau Policies Very Recent Monetary Policies by the Central Bank of China (CBC) 3/24/2016 The Board of the Central Bank of China decided unanimously on the following measures, effective March 25, 2016: 1. The discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral are cut by 12.5 basis points each to 1.5%, 1.875%, and 3.75%, respectively. The global economy is still faced with downside risks. The domestic economy is likely to show some signs of improvements but the pace of recovery remains sluggish. Moreover, interest rates across countries have largely trended down following further monetary easing by most of major economies (Appendix 2), inducing surges of capital inflows to the domestic market. To maintain financial stability while taking into consideration subdued inflation expectations and a widened negative output gap, the Board judged that reducing policy rates will help create a stable financial environment and in turn stimulate the economy. 2. The Regulations Governing Home Mortgage Loans and Land Loans Extended by Financial Institutions are amended (Appendix 3) to repeal most rules imposed on home mortgage loans and land loans, except for high-value housing loans. Environmental Policies – Intended to Raise the Viability of Green Energy Industries in Taiwan Taiwan recently enacted a greenhouse gas reduction and management act that ushered the nation into the era of carbon reduction and underscored its commitment to shouldering its share of the responsibility. The new law was ratified by the Legislature June 15 and promulgated by the president July 1 to provide the government with legal basis for taking action against climate change. In addition to specifying adjustment mechanisms and carbon reduction goals for 2050, the act calls for a gradual, phased process with control targets every five years. All measures— including inventory and registration, inspection and management, efficiency standards, and a cap-and-trade system—are aligned with current international practice. Combined with economic incentives, these policy tools are expected to create green jobs, raise Taiwan’s competitiveness, protect companies from the impact of international trade barriers, and ensure the nation’s sustainable development.