Hu Sheng-cheng’s Views on the Economy

During the two terms of the Democratic Progressive Party (DPP) administration, Hu Sheng-cheng was a leading economic policy-maker, first as a Minister Without Portfolio, then as Minister of the Council for Economic Planning and Development, and finally as Chairman of the Financial Supervisory Commission. The holder of a doctorate from the University of Rochester, Hu taught for many years at Purdue University before his return to Taiwan. He is an academician at Academia Sinica. Hu was interviewed by Taiwan Business TOPICS editor-in-chief Don Shapiro.

On the direction of future economic development:
The lesson from the global economic crisis is that we rely too much on our exports, and too much on exports of high-tech, advanced manufactured goods.

Now that the world economy is bottoming out, it’s time to think about the future. The crisis exposed some shortcomings in our economy. We rely too much on a few sectors, so we need to expand our industrial base. To diversify our economic structure, the current government has targeted the tourism industry, biotech, healthcare, green energy, creative industries, and high-level agriculture.   

All these will take time. In the meantime, based on our current strength in electronics and semiconductors, we should exploit that advantage by combining electronics with traditional industries. We are very strong in precision machine, for example. If we can combine our high-tech computer technology and precision machinery, we could have a good future in areas such as medical equipment – a vital field in economies facing population aging.

In addition, our experience with TFT-LCD technology opens opportunities in solar energy, and our strength in telecommunications equipment can be used in conjunction with the auto industry.

At the same time, we need to diversify our export markets. If we still rely too much on U.S. demand, then in a few years we will see another crisis. In the future, we should take advantage of our strong presence in China, using China as a jumping board to other markets around the region. I’m worried that if we rely too much on the Chinese market, we won’t work hard enough on other markets. This is not to say that we should forgo the Chinese market; the question is how we use it.

On comparing the DPP and KMT policy approaches:
Actually many of the policies that the KMT government is promoting are based on what we had done previously. And to some extent what the DPP government did showed continuity from the past. In economic policy, we both use the same technocrats, so there is policy continuity. But the difference is in emphasis and in execution. The DPP government got its power from the trust of ordinary people, so its policy tended to cater more toward ordinary people. Sometimes there were complaints that the DPP was anti-business. It’s not true. But it does have greater focus on the well-being of ordinary people, particularly those who are disadvantaged, such as those in rural and mountainous areas.

Second, the DPP is more cautious in dealing with China, though this doesn’t mean, as many people said, that we locked ourselves out of China. Under the DPP government, the share of trade with China jumped to 28% and the export share to 40%, so there was rapid expansion in our cross-Strait trade. But for the DPP government, this isn’t the only market we want to focus on. Also, many of the DPP government officers were formerly county magistrates, so they know the importance of implementation. In the first year of the DPP government, it learned a lesson from the tragedy of the Bachang Creek incident. Now the KMT government also had to learn a lesson from typhoon Marakot.

In its first year, the execution power of the KMT government has been inadequate. After all, they had been out of the office for eight years. With regard to the stimulus package, the budget implementation was not rapid enough. Also, there were contradictions between different policy objectives. Take the inheritance tax, for example, which the KMT government reduced to 10% to induce overseas Taiwanese to move their capital back to Taiwan. The problem for Taiwan, however, is not that we are short of capital, but that we are short of investment opportunities. So when this capital moved back, there was no outlet for it except to move into the stock market and the luxury home market. As a result, the housing market looks like it’s booming, but the boom is only in the high-end sector. In Taipei, the price/income ratio is now 10 times compared to 8 times in the past, so the average people actually suffered. I am for bringing capital back to Taiwan, but you must have accompanying measures so this capital can find an outlet.

On Taiwan’s aspiration of becoming a regional financial center:
Even though globally, there has been a lot of talk about strengthening financial supervision, in Taiwan our financial supervision has always been very stringent. We still have to further liberalize the market. Such liberalization would seem to be in contradiction with the trend of increased consumer protection, but the answer is that we need a clearer differentiation between the wholesale market, where you have sophisticated institutional investors, and the retail market.

On the retail side, we must work harder to protect individual investors. Only when there is better protection of their investment will they have trust in the financial market. But on the wholesale side, there is still considerable room for us to liberalize.

In terms of attracting some large institutions to set up their Asset Management operation centers here, we have good technicians, good analysts, and good computer facilities, and the operations would be lower cost than in Hong Kong. We also have good protection of privacy and good law enforcement. All these are our claims to be an operations hub. The problem is not just to move money here – we have to be able to design financial products and we have to attract top talents to come to Taiwan.  

On cross-Strait economic relations:
Regarding ECFA [the proposed Economic Cooperation Framework Agreement with China], if this is a pure economic agreement, no problem. But a lot of people here are worried that there is a hidden agenda. Is there any political cost that we have to pay? Where is the transparency?

And second, who are the winners and who are the losers? It turns out that the winners will be petrochemicals, the steel industry – the very industries we are trying to discourage with our energy tax. So there is a contradiction. On the one hand the government is telling us that need ECFA because without it the petrochemical industry will be dying. On the other hand, they are saying we don’t want to encourage petrochemicals – we want to tax it away. They ought to have a grand strategy under which all these policy matters would fit in.

There is also no clear-cut strategy for how to help workers displaced as a result of ECFA, particularly in traditional industries. The government only says that we will give three or six months more of unemployment benefits. How we help these potential losers is very important. That’s why WTO is so difficult to advance – every country wants to help its potential losers, particularly farmers, because they are the first to be affected. So in this negotiation, the government must first drive a good bargain and second it must have a strategy to help out these potential losers. 

On raising government efficiency:
We tend to make a big fuss about small things, so in order to protect themselves, public employees tend to over-regulate and set extremely high standards. Then because that turns out to be unenforceable, the enforcement is relaxed. A case in point was the fire 10 years ago in a long-term care institution. According to regulations on setting up nursing homes, they had to be five-star. How many people can afford to send their parents to a five-star institution? So instead, underground and unregulated nursing homes grew up and all sorts of problems took place. If I’m going to be in trouble even if I use four-star standards, I might as well go all the way down and compete on price. We need to set more reasonable standards but then enforce them strictly. That will reduce our administrative cost substantially and the government will be more efficient.