Taiwan is suffering its worst ever economic recession in 26 years. Its economy shrank 4.21 percent in the third quarter of this year compared with last year. Unemployment swelled to 5.36 percent in October. While the November unemployment rate experienced its first drop in 13 months, easing down to 5.28 percent, it is only a seasonal change and short-lived.
Because of partisan bickering, economic reality got mired in political ideology, especially during the Dec. 1 election campaign. Pro-China opposition parties often blame Taiwan's economic malaise on the ruling DPP's lack of administrative experience and its failure to further Taiwan-China integration. Together with pro-China businesses and media, they successfully pressed the government to ease the "No Haste, Be Patient" (
Before the Dec. 1 elections, Mainland Affairs Council Chairwoman Tsai Ing-wen (
Can Taiwan's economic slump be turned around by the new cross-strait investment policy? The answer is no. Taiwan has become a highly open economy after launching a series of tariff reductions and trade liberalization measures beginning in the late 1980s. Taiwan is integrated into the global economy, forcing it to specialize in an ever-narrowing range of the world's industries. Today, the world's largest wafer foundry -- belonging to Taiwan Semiconductor Manufacturing (台積電) -- can even serve as a barometer of the global semiconductor industry. Industry specialization enhances economic efficiency, while exposing an open economy to global business cycles.
Taiwan will become a WTO member on Tuesday. This will hasten globalization and further deepen Taiwan's industrial specialization, not only making pronounced economic fluctuations unavoidable, but also increasingly limiting the government's short-term ability to fine-tune the nation's economy through traditional monetary and fiscal polices.
Taiwan's economic fluctuations are synchronized with world economies and, in particular, the US economy. After five years of technology-led expansion, US economic activity peaked in March of last year and has since slipped into recession. Simultaneously, its main trading partners were dragged into a severe economic downturn.
There is no panacea for a small open economy to fight worldwide recession. Macroeconomic fine-tuning policies, such as lower interest rates, currency devaluation and fiscal expansion, are needed to help mitigate economic recession, but they only have limited effects on a small, open and highly specialized economy, like Taiwan's.
In fact, the government should focus more attention on microeconomic policies designed to, among other things, solidify the economy's tax base, improve financial market efficiency, spur product and process innovation, strengthen intellectual property rights protection and make the education system more responsive to changing labor market demands.
What matters is whether Taiwan's economy is resilient enough to synchronize with the forthcoming global recovery in the short run and also viable enough to prosper in the long run. Easing China-bound investment to further integrate Taiwan into the hostile, developing Chinese economy is not only unnecessary but dangerous.
Hwan C. Lin is an associate professor of the Economics Department, University of North Carolina at Charlotte.
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