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Economist says China can't be blamed for woe

Taiwan should stop blaming China for its economic woes, a researcher at the Economist Intelligence Unit said yesterday. He was speaking at a seminar organized by National Taiwan University and The Economist magazine.

According to Paul Cavey, the unit's senior economist, while Taiwan suffers from economic forces beyond its control, it is still in a strong position.

"[Last year] was a difficult year domestically with Taiwan's GDP contracting by 2.2 percent and unemployment rising to record highs ... [at the same time] Taiwanese investment in China rose by 30 percent, according to [Beijing]," Cavey said.

"This is a situation of coincidence rather than cause and effect. Taiwan can't blame China. The hollowing out [of businesses] to China is not the problem. The 2001 slump was triggered by slow [global] growth," Cavey said.

There were signs that Taiwan's economy did not fare too poorly last year.

"Manufacturing as a percentage of GDP has held up. Investment has also held up. There is no sign of a hollowing out of the economy," Cavey said.

But, he warned, there is a need for a balance in the number of visitors and investments across the Taiwan Strait, with more money leaving Taiwan than coming back in. Cavey said restrictions on visitors and investment from China should be lowered. He also pointed out that the continuing ban on direct transport and trade links was discouraging foreign direct investments in Taiwan.

He said, however, that the core of Taiwan's problem is in fiscal policy. The government spends more than it receives in revenues. Last year the deficit was 6.7 percent of GDP. And government spending to stimulate the economy fell from 9.7 percent of GDP in the 1990s to 6.4 percent last year.

Non-performing loans in the state-dominated banking sector were 8 percent of GDP last year, putting the government in a weak position to support future domestic investment.

The government also needs to privatize state-run banks and write-off the bad loans, Cavey said.

"If the government reforms the banks, it will lay the groundwork for renewed domestic growth in Taiwan," Cavey said.

Private industry depends on banking flexibility in lending to make new investments and foster new growth.

Cavey urged Taiwanese investing in China to proceed with caution as China's domestic economy is quite weak, with up to 40 percent of its GDP growth funded by state-initiated investments. Private consumption, meanwhile, has dropped from 50 percent to 47 percent of GDP.

It is only foreign investment in China that is booming -- up more than 20 percent this year.

China has other risks, he said.

"Are there invisible risks? Yes, well, it is China," Cavey said.

He pointed to the increasing incidence of social unrest because of rising unemployment. He also warned of what some have called reunification by stealth. "Economic links are being used by China as an attempt to draw Taiwan in," he said.

Yesterday's event was held to publicize The Economist's monthly guide to doing business in China, China Hand (認識中國), which will now be published in Chinese.

As The Economist's first ever non-English publication, China Hand will not come cheap. An annual subscription will cost NT$79,000. But universities will offer the magazine at a 40 percent discount.
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