However, going out to eat still costs far more than it did, relative to other stuff. So you’ll probably be inclined to go less often. But what do you do with the money you would’ve spent? Do you simply switch it to other things, leaving your aggregate consumption unchanged? Or do you reduce your total spending as well, and instead save a little more? At least for the idealised consumer of simple economic theory, two things turn out to matter for this decision. One is the extent to which there are other, close substitutes for the taxed activity. If you liked cooking at home, or indeed anything else, almost as much as going to a restaurant you’d be more inclined to switch your spending immediately to these other things. Your total consumption wouldn’t change much. In general, a hike in a particular sales tax will have smaller effects on aggregate spending, and result instead in more expenditure-switching, if it’s levied on something for which there are similar (and untaxed) alternatives. The other important factor is how long you expect the policy to last. If he thinks the tax hike is permanent, our idealised consumer of economic theory would substitute his spending straightaway towards other goods or services, regardless of whether they’re close substitutes. If not – if he expects the government to come to its senses at some point, and reverse the policy – he’ll be more inclined to wait until that happens.
This will, in turn, help raise the comfort level and can usefully avoid potential policy missteps and create policy synergies that eventually foster confidence of investors. This is the kind of trust that no amount of legal text, conditions precedent, or covenants can match, but is developed through the friendship and goodwill among friends within the region. Countries in the same region tend to possess better understanding and coordination, and therefore, policies and initiatives at the regional level can be more effective and timely. Second, while the Asian financial crisis was a wake up call for Asia on the need for regional liquidity facility, Asian countries need to consider making such facility sufficiently large and effective with timely disbursement in light of the current global crisis. During the Asian financial crisis, more than 75% of the IMF’s financial package for Thailand came from the funding within the region. The present global situation has also reconfirmed the vision set for the by the Chiang Mai Initiative (CMI) that Asia needs to have its own regional liquidity facility to protect itself from contagion, be it caused within the region or from outside. It is therefore timely that coordination and cooperation among countries be further strengthened to ensure that prompt remedial actions can be put in place in light of the ongoing global financial crisis.