Mon, Feb 27, 2012 - Page 12 News List

INTERVIEW: Taiwan has to develop a double-engine economy

Taiwan is seeking to build a services economy to diversify its risk exposure after slipping into a technical recession in the past two quarters as a result of global uncertainty. Leong Wai Ho, Singapore-based director and senior regional economist at Barclays Capital, suggests Taiwan could build a double-engine economy by deepening cross-strait trade links, whose benefits would more than offset heightened dependence on China. He set forth his views during an exclusive interview with ‘Taipei Times’ staff reporter Crystal Hsu on Friday

Taipei Times: Will Barclays Capital adjust its forecast of 3 percent GDP growth for Taiwan this year (projected in December) now that the presidential election is over and a new premier has been installed?

Leong Wai Ho (梁偉豪): The estimate remains unchanged. However, I do observe positive developments in the quality of growth. My favorite indicator is the drop in the number of workers on unpaid leave.

The supply disruption — caused by the flooding in Thailand — accounted for the drastic slowdown in exports in the fourth quarter of last year. The flooding destroyed lots of hard drive disk output, creating a global shortage.

Taiwan was most exposed, because it had the deepest concentration in the personal-computer value chain. The utilization rate of Asustek Computer Inc (華碩), the world’s No. 5 PC brand, declined 50 percent. If you are missing a hard disk drive, you can still produce every part of a PC, but you cannot ship it. It will just sit in your warehouse. That is why PC makers cut utilization and slowed down production.

In any case, it was critical component supply disruptions, not weakening external demand that is to blame for falling industrial production in the months of October, November and December.

Now there is nothing to worry about, as the situation has returned to normal. In fact, the coming months may be exciting for exports, pushing utilization up to 70 percent. The headcount recovery is solid, not merely a short-term phenomenon caused by rush orders.

TT: Nevertheless, GDP growth of 3 percent this year is slower than last year. What should the Taiwan government do to buffer the pain?

Leong: The projected slowdown has to do with a weaker export engine amid global economic uncertainty. That means Taiwan would be losing jobs in the export sector and those jobs are mostly in China. The job losses are compensated for by the services sector, which is doing very well, thanks to increasing cross-strait trade linkages.

We might see acceleration of cross-strait dialogue after the ruling party’s electoral victory on Jan. 14. Taiwan and China are likely to sign an investment protection agreement in the next round of trade talks later this year. That will unlock capital flows from China to Taiwan, which means greater foreign direct investment.

Currently, Chinese investors can only buy a 10 percent stake in a Taiwanese company, which is ridiculously low. The ceiling should be raised to 50 percent and investment might take place in the LCD, semiconductor and other technology intensive sectors. Only industries deemed sensitive to national security, such as telecommunications, should remain off-limits.

TT: Taiwan is trying to restructure its economy and put more emphasis on a domestically driven services sector. How will the effort do and could the services sector replace the manufacturing industry as a growth driver?

Leong: The services sector accounts for about 70 percent of the economy. The idea of building a services economy does not aim to subtract the importance of exports, but to supplement it, developing a so-called double-engine economy.

The government isn’t doing much in facilitating the transformation. The Economic Cooperation Framework Agreement [ECFA] is the primary driving force. The ECFA is not just about goods, but also about tourism. It will bring in throngs of people. Last year, Chinese made 1.8 million visits to Taiwan. That meant US$4 billion additional foreign exchange — a huge capital injection.

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