At first glance, it might seem like a good idea that the new Cabinet is starting with a new industrial strategy. The government wants to boost the service sector and make it a new driving force for the economy, weaning the nation off its decades-long dependence on exports to fuel growth.
Within the export industry, Premier Sean Chen (陳冲) is pushing for food and medical services exports, among other items, in an effort to diversify from the reliance on consumer electronics.
However, the scheme comes hard on the heels of the government’s failed effort to make private consumption a second pillar of the economy. The reason that plan failed is the local market is way too small, compared with our much bigger competitors.
At the moment, exports still constitute the lion’s share of the country’s GDP, at more than 60 percent last year, and the manufacturing sector is still the biggest contributor to national output.
Taiwan needs to revamp its industrial landscape since an export-oriented economy is highly vulnerable to global economic conditions, as can be seen from the downward spiral of the nation’s GDP growth. This year, Taiwan’s economy is forecast to grow at 3.91 percent annually, down from an annual growth rate of 4.03 percent last year, according to government statistics agency data. The Directorate General of Budget, Accounting & Statistics blames a weaker-than-expected global economy and sluggish overseas demand for locally made products.
Suitable allocation of government resources is made even more crucial in light of the country’s deteriorating budget deficit: The national debt rose to NT$216,000 (US$7,300) per household last year, up from NT$212,000 the previous year.
As debt mounts and the government’s leeway to fund new policies tightens, there are growing signs that the government plans to change its tax policy to push for structural change in the nation’s industrial landscape. The government is considering a reduction in corporate tax incentives, Chen said in an interview with the Chinese-language Economic Daily News on Wednesday. Only companies that create jobs will be given tax breaks and the government is considering raising corporate tax from its current level of 17 percent — the lowest in the world.
Local manufacturers, especially electronics maker, will suffer the brunt of these new measures, as those companies have been the biggest beneficiaries of the government’s tax breaks in the past.
It looks like job creation will become the new yardstick with which to gauge the value of a company — not how much revenue or profit it generates.
Take Taiwan Semiconductor Manufacturing Co for example, the world’s biggest contract chipmaker with annual revenues of NT$427 billion last year. The company has said its NT$300 billion in investment in new plants in central Taiwan over the next few years will create 8,000 new jobs.
Compare that with local restaurant chain Wowprime Corp, which is planning to invest a pittance in comparison, yet will recruit 2,500 new staff this year alone in line with expansion at home and overseas.
Change is needed — but this does not mean that manufacturing should be replaced by the service or any other sector. The output of the service sector is expected to double to US$16 billion from its current US$8 billion over the next 10 years — providing the Ministry of Economic Affairs’ target is hit. That’s still a far cry from replacing the electronics sector — even if the sector failed to grow at all.