Thu, Oct 18, 2001 page19

• Economists urge Taiwan to gradually wean itself off of exports

  Analysts say there are no easy answers to the country's economic problems, but believe reduced dependence on the US would be a good place to start

  • By William Pesek Jr / BLOOMBERG
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  Anyone wondering how the local economy is doing could do worse than to consult with a man known as "Mr Taiwan." That's Peter Kurz's identity and he's got the Internet start-up -- mrtaiwan.com -- to prove it.

  The 43-year old American is a bit of a celebrity. His notoriety owes less to Kurz's impressive language skills -- he's fluent in Taiwanese and Mandarin Chinese -- as to his enviable track record at picking stocks and calling economic trends. Local television networks and magazines pick his brain on all things financial.

  It may come as a downer, then, that Mr Taiwan has doubts about the nation's outlook. Some big ones at that -- at least for the near term. "I think we're in a recession," says Kurz, chief executive officer of Insight Pacific. "Worse, there's no easy way out of it."

  Kurz is quick to point out he's not exactly a pessimist where Taiwan is concerned. A long-time Taiwan observer who's won a myriad of awards analyzing the country's economy, Kurz can't help but worry.

  Even the rosiest of rose-colored glasses can't obstruct one's view of the problems facing one of Asia's most dynamic economies. The biggest is Taiwan's over-reliance on other economies for growth.

  Borrowing a page from Japan's post-World War II playbook, Taiwan turned its economy into a state-of-the-art export machine.

  Its high-quality semiconductors, computers, mobile phones and other goods zoomed overseas, especially to the US, which became Taiwan's biggest market. Ironically, that's where's the nation's troubles begin.

  "Taiwan's economic miracle is also a monkey on its back," Kurz explains.

  When the US was booming -- or even just growing modestly -- Taiwan's goods flew off the shelves. Since the export model worked so well, there seemed little reason to change course. Boosting domestic demand should be a top goal of any economic policy. But when your economy is expanding rapidly, living standards are rising and others are buzzing about your economic miracle, it's easy to lose sight of the bigger picture.

  Even the 1997 to 1998 Asian financial crisis failed to trip up Taiwan. While the Indonesias, South Koreas and Thailands of Asia hit the wall, Taiwan continued to boom along thanks to US demand for its goods. The bursting of the US stock bubble last year changed things. It also had Taipei regretting its complacency. The fact that the US is now sliding into recession makes matters far worse for this nation of 22 million.

  All of this has left analysts like Kurz with an intellectual dilemma. On the one hand, you have Taiwan's highly educated workforce and innovative businesses. On the other, a one-trick economy that knows all there is about exporting its way to prosperity but little about doing so internally. What Taiwan really needs to do is learn how to stand on its own.

  "I think that Taiwan needs to wean itself off the US economy," Kurz says.

  If there were ever a lesson in the dangers of relying on a single customer -- or at least a small number of them -- Taiwan is learning it now. Its central bank has cut interest rates 10 times since December with little to show for the effort.

  Lower borrowing costs are easing some of the strain on a banking system exposed to growing numbers of bad loans. But there's been little of the multiplier effect that often makes monetary policy shifts so powerful. If banks already weighed down with non-performing loans are reluctant to lend and households and businesses aren't borrowing, lower rates aren't much help. "The deflationary spiral is picking up steam," says Mike Newton, an economist at HSBC Holdings Plc.

  Prices are weak in Taiwan because consumer demand is soft.

  The US technology stock crash had a direct and still-unfolding effect on the local economy. As the US buys fewer Taiwanese goods, employers here need fewer workers. They're also paying less, leaving consumers with smaller discretionary incomes. Even though Taiwan boasts high household savings rates, the changing economic climate has consumers spending less.

  That's led Taipei to employ some good old fashioned priming -- boosting government spending to support the economy. The spending is aimed at combating record unemployment and stabilizing the nation's key stock index, which is down 60 percent since the middle of last year. Bad weather isn't helping things. Typhoons have interrupted factory production, closed businesses, damaged property and crimped consumption.

  Yet fiscal spending and easier money are short-term solutions to Taiwan's problems. What is Taipei doing to wean its economy off exports? Not enough, say many local economists. "I don't see much work on this front," says Irmak Surenkok, an economist at Primasia Securities Co. "This latest crisis has highlighted the problem, but I can't see much going on to change things."

  Then again, major change often takes time, especially here in Asia. Just look at Japan, which is 11 years into a slump for which no end is in sight. The ongoing global malaise has given Taiwan the determination to revive its economy from within. Now it needs time to make the transition.

  "I think it's unrealistic for the manufacturer of last resort to the industrialized world to regear itself overnight," explains Spencer White, head of research at Merrill Lynch Taiwan Ltd.

  One route Taipei is pursuing is increased commercial ties with China, which still considers Taiwan a renegade province.

  Stung by the worst economic slump in 49 years and the US and Japanese slowdowns, businesses on this side of the Taiwan Strait want wider access to China. There's cheaper land and labor to be found there, as well as a 7 percent growth rate -- the fastest in the world -- that could mean a vibrant market for Taiwanese firms.

  Yet things are progressing very slowly and unevenly. This week's meeting of leaders of the 21 Asia-Pacific Economic Cooperation nations in Shanghai may bring China-Taiwan tensions to a head. Taiwan is already smarting from China's move to bar President Chen Shui-bian from the gathering. The snub underscores the fragile relations between the two countries following a civil war that ended in 1949.

  Thawing the chill between Beijing and Taipei will take time.

  In the meantime, Taiwan's dependence on exports is perhaps its biggest structural problem. That explains why Taiwan finds itself in the uncomfortable position of waiting for a global rebound. No one knows when the US economy will stop sliding, or if Japan's ever will. Yet Taiwan is hoping for the best. Trouble is, that's all it can do at the moment.
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