: Super User; Taiwan; 21 November 2012; Hits: 1447

Structural Changes Needed in Taiwan's Economy

“THE bottom is not falling out of Taiwan’s economy,” wrote HSBC economist Donna Kwok in a research note to clients late last month. In her view, Taiwan need not worry too much about weaker economic growth. After all, the economic downturn was essentially the result of the decline in global trade. In other words, as international trade revives, Taiwan’s economy will bounce back.

But is the downturn in global trade the only issue affecting Taiwan’s economic performance?

The stalled US economic recovery and the devastating debt crisis in Europe have certainly played an important role. As with Asia’s other export-reliant economies, economic growth in Taiwan has been lacklustre for more than a year. Reflecting a similarly heavy dependence on exports, Singapore’s economy shrank in the third quarter, while South Korea’s registered its weakest growth in three years.

After a disappointing third- quarter performance, Taipei says it expects exports, which make up about two-thirds of gross domestic product, to drop by 2.5 per cent this year, worse than an earlier forecast of a 1.7 per cent decline. Private consumption, another major economic driver, is projected to grow by a mere 0.88 per cent, significantly lower than an earlier forecast of 1.58 per cent.

As a result, the economy is officially projected to expand by just 1.05 per cent this year, down from a previous forecast of 1.6 per cent. Last year, the economy grew by 4 per cent.

As the economy slows, however, critics are beginning to suggest that structural changes may also be needed.
Earlier this month, Formosa Plastics Group chairman William Wong argued that one of the reasons Taiwan’s economy is suffering so badly is that it is over-reliant on electronics exports. “The stagnant economy is not just due to a global business down cycle,” he insisted at a sports event hosted by his company, one of the largest in the country.

What the island needs is “a balanced industrial structure”, with a more diversified economy similar to that of South Korea. Apart from electronics, the South Korean economy relies on industries such as petrochemicals, auto and shipbuilding.

Mr Wong, of course, is far from being a disinterested observer. Taipei has adopted strict standards for assessing the environmental impact of industrial ventures, and some of his company’s plastics projects have been halted as a result. One example concerns the difficulty Formosa Plastics has had gaining approval for the expansion of its naphtha cracker plant in Yunlin County.

Even so, Mr Wong has a point. Electronics makes up over 40 per cent of Taiwan’s total exports. Compare this to electronics rival South Korea, where the comparative figure is only 20 per cent. Although similarly battered by weak exports and sluggish domestic demand, the more diversified South Korean economy is expected to grow by 2.4 per cent this year.

Meanwhile, attempts to promote trade with mainland China may not be providing the expected returns. Last month, President Ma Ying-Jeou told a summit on the island’s competitiveness that stable cross-strait relations over the past four years has provided the island with a much-needed economic stimulus.

At first glance, this makes sense. Numerous business and trade agreements in recent years do appear to have paved the way for an increase in business activity. Taiwan’s officials are also looking forward to an increase in the number of mainland tourists.

However, official statistics also show that Taiwan’s exports to the mainland decreased by 6 per cent year-on-year between January and last month. The decline took place despite a huge rise in the number of products enjoying zero-tariff access under the Taiwan-China Economic Cooperation Framework Agreement (ECFA).

Having benefited from high levels of foreign investment in recent years, the mainland is apparently no longer as dependent as it once was on the flat panels, plastics and man-made fibre Taiwan supplies. China also has its own brands of computers, television sets and smartphones. Major players include multinationals such as Lenovo and a variety of lesser- known brands, including TCL and Haier.

South Korea is also a strong competitor. Its shipments to China rose 5.7 per cent last month from a year earlier. By contrast, Taiwan’s exports to China were flat, with only 0.3 per cent year-on-year growth. And with companies such as Intel and Samsung investing in poorer Asian states, even Vietnam has become a player.

Instead of focusing on the effect of the global economic downturn on trade, Taiwan needs to look for ways to maintain its lead in technology and innovation. A new industrial policy that encourages the development of a more diverse export base may also be required.

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Key Political Risks

Taiwan's main problem is its trade dependent economy. With an export to GDP ratio of 74 per cent, it is one of the most vulnerable in Asia to further downturn in global trade.

The government seems helpless in the face of continued economic decline.. An economic stimulus package has been heavily criticised, and a series of policy flip-flops over power and fuel prices has done nothing to improve its image.

In recent months the finance minister has resigned over a controversial capital gains tax, and the cabinet secretary-general was arrested over allegations of bribery.

WATCH OUT FOR:

Results of free trade talks with Singapore and New Zealand.
Outcome of Taiwan's efforts to join the Trans-Pacific Strategic Economic Partnership Agreement.
Evidence that Taiwan electronics firms are stepping up expenditure on research and development.
Moves to liberalise regulations on mergers and acquisitions in ways that may help Taiwanese firms adjust to new economic realities.
Continuing selling of Taiwan stocks by foreigners. Foreigners own a large proportion of local stocks, and a major selloff could put pressure on the island's foreign reserves at a time when exports are falling.