According to statistics compiled by the Directorate General of Budget, Accounting and Statistics (DGBAS), as of the third quarter of this year the production value of the nation's service sector accounted for 73.2 percent of GDP. This high figure, which is on par with many advanced nations, should be gratifying. But in fact, it is probably due mainly to a decline in the manufacturing and agricultural sectors. The growth of the service sector may in fact suggest that the economy is going downhill.
According to the statistics compiled by the World Bank, in 2003, the service sector in low to mid-income nations accounted for 53 percent of industry while the service sector in high-income nations accounted for 71 percent. Taiwan now exceeds many rich countries.
In 2003, the production value of the service sector accounted for 62 percent of industry in South Korea, 68 percent in Japan, 65 percent in Singapore and 88 percent in Hong Kong. Apart from Hong Kong, which has seen manufacturing move to China's Guangdong Province, the other three competitors all have service sector production value under 70 percent. It is not a good sign that Taiwan has exceeded the 15 member states of the EU, whose service sector accounts for 70 percent of production value. Taiwan is approaching the US level of 75 percent.
In addition to Japan, South Korea and Singapore, nations that excel in manufacturing such as Germany, Finland and Sweden do not exceed 70 percent services.
Our doubts are further confirmed when we look at production value generated by the service industry between 1990 and 2003. While growth of 6.4 percent annually does not look too bad, it was only slightly higher than South Korean's 5.7 percent.
On the other hand, production value in the manufacturing sector grew by only 4.2 percent, just 0.2 percent ahead of the US and trailing behind South Korea's 5.9 percent.
People might differ on the advantages of phasing out manufacturing. But faced with both international and regional instability, this policy is certainly risky. Following the Asian financial crisis, both Hong Kong and Singapore, whose economies are driven by the service industry, paid a high price as demand for services dwindled.
If we develop an overreliance on the service sector too soon, this could create risks. Although manufacturing also faces risks, if this sector is suffering purely due to a regional slump, then other regions can be used as a buffer, so that the impact is not too severe.
Obviously there is no single reason for the slowdown in the growth of the manufacturing sector. But the fact that a more rational division of labor across the Taiwan Strait cannot yet be achieved is certainly one factor. South Korean investment in China has already exceeded that of Taiwan, and China is now its main export market. Although Singapore has also experience symptoms of "China fever," the situation has not degenerated to the same extent as in Taiwan. This is probably due to the fact that it rationalizes manufacturing work flow more effectively.
Taiwan still maintains a degree of restriction of imports from China, such as blocking the import of upstream components. This has forced some local manufacturers to relocate to China. As they are barred from investing more than 40 percent of the net value of operations there, this has greatly reduced their willingness to repatriate funds to Taiwan. In addition, the lack of direct links has increased costs.
While the nation's industrial structure might look all right on the surface, its roots are in danger of being undermined.
Tu Jenn-hwa is an associate professor of the Graduate Institute of National Development at National Taiwan University.
Translated by Daniel Cheng and Ian Bartholomew
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