Thu, Jan 03, 2013 - Page 8 News List

Challenges in changing dynamics

By Kung Ming-hsin and Eric Chiou 龔明鑫,邱奕宏

Last year was a gloomy and disappointing period for Taiwan’s economy due to various domestic and international factors. Many indicators and statistics reflected the dire economic reality the nation faces. For instance, an official estimate of GDP growth rate last year was scaled down from 4 percent to slightly above 1 percent. The export growth rate is estimated to be minus-2.16 percent, the worst since the 2008 global financial crisis. Furthermore, the unemployment rate is not only the worst among the Asian Tigers, but average real wages have also deteriorated to the level of 14 years ago. All these signs seem to provide little confidence for optimism about 2013.

Taiwan’s economic achievements over the past years have been built on its solid foundation and critical position as a reliable supplier of intermediate goods in the highly integrated global production chain. Nevertheless, given the changing dynamics of global production networks in recent years, not only have Taiwan’s advantages gradually lost their luster, but its strengths have also been eroded and faced severe challenges. These ingrained and long-term structural issues may be the fundamental reasons explaining Taiwan’s economic stagnation and setbacks in recent years.

For some time, production networks in East Asia have been explained as a “flying geese paradigm,” led by Japan, through transfers of technology and foreign direct investment to undertake industrial division of labor across different Asian countries. Japan plays the lead goose in a hierarchy of industrial division of labor, followed by a second tier of nations and territories, such as Taiwan, South Korea, Singapore and Hong Kong, to export intermediate goods, and the third tier of Southeast Asian nations like Thailand, the Philippines, Indonesia and Malaysia, as manufacturing and assembling centers. The last group of nations joining this paradigm includes China, Vietnam and other ASEAN nations who provide raw materials and cheap labor as final production bases. In this pattern of industrial division of labor, Taiwan has been able to fully maximize its comparative advantages as an indispensable supplier of intermediate goods.

Nevertheless, this paradigm has experienced significant changes since the early 2000s. It has also been shattered by the impacts of the recent global financial crisis and 2011’s earthquake and tsunami in Japan. As a result, a new wave of industrial relocation and realignment in the global production network has been quietly taking place, which inevitably brings critical challenges to Taiwan’s economy.

The first change comes from increased production capabilities in developing countries. With massive investment inflows flooding into China and ASEAN countries over the past two decades, the introduction of new technologies as well as high-performance production facilities have enhanced the manufacturing capabilities of these emerging economies. Many local firms in China and ASEAN nations have benefited enormously from original equipment manufacturer (OEM) opportunities provided by European and US multinationals in terms of improving their specialization techniques in mass and low-cost production. As a consequence, their industrial capacity to produce intermediate goods and to mutually supply industrial component parts for each other’s needs has been strengthened. Hence, a traditional one-way flow of intermediate goods from Japan and the Asian Tigers to China and ASEAN nations in the flying geese paradigm is no longer self-evident.

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