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Morris Chang:

Deregulation, Tax Cuts Are History

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Morris Chang, founding chairman of the benchmark Taiwanese high-tech enterprise Taiwan Semiconductor Manufacturing Company (TSMC) considers the lessons to be learned from the global financial crisis.

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Deregulation, Tax Cuts Are History

By Fuyuan Hsiao, Yi-Shan Chen
From CommonWealth Magazine (vol. 409 )

How great will be the damage from this financial crisis? How long will it last? These are questions no one can answer. Economists all offer up their own varying opinions. Two or three months ago, few believed we were headed for a crisis in the manner of the Great Depression of the 1930s; more are now inclined to believe so. It is worth noting that Ben Bernanke, chairman of the U.S. Federal Reserve, now says the economic impact of the crisis will last at least several quarters, perhaps even several years.

Prior to the financial crisis, the economy was already headed into recession. Only after the financial crisis has passed will the economic crisis fully play out.

One needn't listen to what Bernanke actually says so much as behold the frantic, panicked actions of the Fed chairman and U.S. Treasury secretary Henry Paulson to get the full picture. That the two men responsible for U.S. economic and fiscal policy could be so wracked with anxiety, even with the massive resources of the U.S. government and Federal Reserve System behind them, fully illustrates the gravity of the current circumstances. Bernanke has only been partially forthcoming about his worries, leaving unspoken the most pessimistic of his concerns. Although Europeans appear calmer than the two Americans, the notion that the European financial crisis is second only to the one in the U.S. is evident in the considerable anxiety that exists there too.

Taiwan need not be overly concerned, because the U.S. economic downturn was sparked by the financial crisis. Taiwan's financial system is different from that in the U.S. Many of the island's banks are state-run and there is less transparency. We can't really know the degree of exposure to these toxic assets, but I suspect it is relatively less. Thus, there is likely no financial crisis in Taiwan, merely an economic downturn.

Our economic downturn is the result of the respective economic downturns in Europe and the U.S., particularly in our export markets there. At times like this the proper approach is to use domestic demand to bridge the gap. But that's easier said than done. Government investment in stimulating domestic demand must be executed deftly. The efficacy of government leaders calling on consumers to spend more is negligible, as under the present circumstances the consumer instinct is precisely the opposite: they want to quickly stockpile cash and avoid spending.

Invest in Education to Boost Domestic Demand

To expand domestic demand, the government must do a good job, and not do unnecessary things. There are actually quite a lot of things Taiwan needs to accomplish, like infrastructure projects such as roads, bridges and other public construction projects. But this must be done properly. During the 1990s Japan built a lot of bridges and roads that nobody uses.

More importantly, when expanding domestic demand, education is something the government can invest more in rather than flippantly cutting back. As for financing, in the short-term the government can issue short-term debt, but the window of opportunity here is growing smaller and smaller. In the long-term, government finances will not be what they once were, and new tax revenues must be considered.

Premier Liu Chao-shiuann was the first leader in the Far East to state his government's commitment to guarantee the full value of bank deposits. I believe this is the right course, although some economists doubt the government's ability to do so. But the point is that if you make the statement up front, perhaps in the future you won't need to, while if you leave it off the table, the necessity may indeed come to pass.

The government's primary mission right now is to avoid a financial crisis in Taiwan, because confidence is easier to maintain when banks are not failing. In the event a financial crisis materializes, the biggest damage done is the unseen damage that comes with the destruction of confidence, something that could take more than a decade to restore. There will be tough times ahead for exports, but it will not be as serious as in the U.S.

Looking at global trends, the role of the government will become more and more important. This is the prevailing wind of 2008. If Sen. Barack Obama wins the U.S. presidential election and the Democratic Party secures majority control of both houses of the U.S. Congress, this trend will continue.

The laissez-faire approach has gone on now for nearly 30 years, and the trend is about to change again. Even if Sen. Obama loses, it will only temporarily delay the shift. The pendulum has definitely swung in the direction of bigger government and more regulation.

Global Pendulum Swings Left

The difference is that while Taiwan has taken the American path, it is more than 20 years behind and currently going through a period of deregulation and tax cutting akin to the Ronald Reagan era, while the United States has turned in the opposite direction.

Capitalism changed many times during the course of the 20th century, but I don't believe it has changed so much as many people expect. Don't think that with just a little more regulation financial crises can be solved. If the pendulum swings too far, it will also have negative repercussions.

More regulation is not necessarily a good thing. For example, the nationalization of banks now looks like a good thing. But the U.S. financial sector has never had a particularly significant relationship with the government; they didn't rely on the government and had no need to give gifts to government officials. Once there is regulation there is reliance on the government, and bureaucrats can decide all sorts of things, and this can potentially lead to irregularities. It is for this reason that Paulson was reluctant to consider government involvement. Once the government becomes involved, things become more complicated.

I can't tell how deep or how long this recession will last, but economies always recover. Even if we can't deal with this in an ordinary fashion, at this time there is no need to be overly pessimistic, and I'm still optimistic for the long term.

The influence of the U.S. on the world was already in a state of steady decline. Its influence was at its peak in the wake of World War II, but began to wane in the 1960s. This decline is even more pronounced now. No one nation will supplant the U.S. in the future. The European Union remains very important, while Japan is not what it once was. I believe things are looking good for China. The same goes for India, and Russia is now doing much better than it was at its low point. The current crisis has definitely hurt the U.S.; it was like someone already growing old and frail, and then suddenly tripping and falling.

From now on, there will be no single global model, but several. That having been said, the free market will remain the economic linchpin. The only thing is that some countries will have a little more regulation, while others will have a little less.

'Innovation' Is Not Necessarily a Good Thing

From this financial crisis it is apparent that innovation is not necessarily a good thing. But without innovation there can be no competitiveness. Innovation does not necessarily mean a completely new thing. Webster's dictionary defines innovation as just a change. People have come to apply some kind of lofty interpretation of innovation, something set forth by extraordinary people, but this is not really the case.

Financial instruments are certainly a type of innovation; how to view that innovation requires judgment.

In business, the innovator's supervisors must evaluate the value of the innovation. Where the change is major, upper management must be made aware; where the change is relatively minor, the judgment of the immediate supervisors of those impacted by the change will suffice.

Whether innovation is good or bad is difficult to determine. An innovation could benefit the individual and benefit the company but, like the financial innovations that sparked the current crisis, still prove harmful to society – it's difficult to judge. But it's even worse to disallow all innovation. Even if scientific innovation nets you the Nobel Prize, the ultimate goal of that innovation is not necessarily to benefit the world or society.

The lesson of this financial crisis is that we cannot have complete deregulation. The intuitive solution now is regulation. I can think of no other solution.

Translated from the Chinese by Brian Kennedy


Chinese Version: 張忠謀 鬆綁、減稅已是過去式

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