Taiwan's business environment is expected to improve over the next five years on the heels of better infrastructure, loosening restrictions on capital flows and closer economic ties and lower tariffs with China, according to the Economist Intelligence Unit, which is a sister company of the London-based Economist magazine.
But the slow pace of financial reform and market liberalization is causing Taiwan to fall one place in the global rankings to 20th out of 60 countries, the unit said.
In its latest quarterly Business Environment Rankings survey, the unit said that Taiwan's total score for the business environment in the 2002-2006 period increased by 8.6 percent compared to that for the 1997-2001 period.
Gross domestic product is expected to grow 2.5 percent this year while demand in the recovering semiconductor sector will accelerate to almost 5 percent, according to the survey conducted by the companies correspondents in 60 countries.
In individual sectors, liberalization of foreign trade and exchange controls won the highest marks, increasing by 34 percent over the previous period, which the unit accords to WTO entry. These factors resulted in expectations for the country's business environment to improve from "good" to "very good" over the next five years, it said.
This estimate is based partly on the unit's assumption that lifting of trade restrictions with China will spur even greater investment there while also allowing more Chinese investment in Taiwan.
"The removal of barriers to investment by Taiwanese firms [in China], as well as by Chinese companies in Taiwan, will not only enable Taiwanese producers to lower costs by relocating facilities to China, but will also stimulate domestic competition," it said.
"Official policy in recent years has focused on raising the efficiency of the economy. Entry into the WTO and increasing tolerance of closer economic ties to China will reinforce this trend," said Paul Cavey, the unit's economist for Greater China.
David Loomis, chief strategist for Primasia Securities Corp also said that better economic ties with China will prove vital.
"The government's proactrive approach, particularly toward cross-strait relations, will have a positive impact because of all the investment that's going over into China," Loomis said.
The effects of the improved business environment will boost stocks, he said.
"For the more traditional sectors in the stock market you'll see there's an expectation already being built into the market that transportation and some of the laggard sectors, like construction and building materials, will experience a fundamental transformation in the near future," he said.
The unit also had some harsh words for the pace of reform in the domestic financial sector, where "there has been insufficient progress on accelerating bank mergers and reducing non-performing loans."
The most significant drop by an indicator was in the country's political stability, which fell 6.2 percent over the previous period over disputes between the ruling and opposition parties which "make any government less effective at setting and implementing policy," the report said.
But Loomis disputed this point, saying that the domestic political scenario had stabilized considerably since the December legislative elections, when the ruling party emerged as the dominant party in the legislature.
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