Sun, Apr 13, 2014 page8

• Time to re-evaluate the economy

  • By Norman Yin 殷乃平
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  After changing the way it calculates GDP, the Directorate-General of Budget, Accounting and Statistics in mid-February raised the nation’s GDP growth figure for last year to 2.11 percent, the second-highest among the four Asian Tigers. However, there have been media reports that according to WTO statistics, Taiwan’s volume of external trade over the past decade was the lowest of the four.

  Closer scrutiny shows that Taiwan’s average GDP rose an average of 6.4 percent in the 1990s, and that unemployment remained below 2.9 percent. Average GDP for the 2000s fell to 3.4 percent, with negative growth in 2001 and 2009, while the jobless rate rose to 4.4 percent. In 2010 GDP leapt 10.7 percent, because China made concessions to Taiwan for signing the Economic Cooperation Framework Agreement (ECFA), but average GDP growth from 2011 to last year was 2.4 percent, while the jobless rate rose slightly to 4.5 percent for the period from 2010 to last year.

  These figures show the economy is weakening and Taiwan’s competitiveness is declining. This did not happen overnight and it is a result of several problems. If the government does not deal with the problems immediately, the prospects for economic development are not bright.

  When the Asian financial crisis hit Taiwan in September 1998, exports drastically decreased, the stock market collapsed and traditional industry suffered badly. Due to a government bailout, the banking industry also suffered, losing an estimated NT$2 trillion (US$66.5 billion) in bad loans. Because of a strong credit squeeze, Taiwanese companies in traditional industries closed down one after another. The nation’s small and medium-sized enterprises had been in good shape, but they suffered most during the crisis, and the banking industry was in trouble for a long time.

  In 2001, the economy shrank for the first time in many years due to the burst of the dotcom bubble and a downturn in the electronics industry. After the transfer of governments the year before, there were complaints about tax reductions and exemptions for the high-profit high-tech industry. To aggravate the situation further, there was severe confrontation between the pan-blue and pan-green camps. As a result, business owners panicked and many up and downstream companies and firms in related sectors relocated to China setting off a “China fever.” Most of the nation’s top 500 companies have established factories or branches in China.

  This wave of business outflow undermined Taiwanese industry in the same manner previously experienced by Japan. After many Taiwanese factories relocated to China, unemployment rose because the service industry was unable to absorb all the jobs from factories that had closed down. Because supply exceeded demand for labor, wages remained stagnant and private consumption low. This decade-long economic downturn is somewhat similar to Japan’s “lost decades.” The government was not alarmed by these structural changes, and the central bank continued to maintain low interest rates.

  By doing so, the government was attempting to help the banking industry to save itself on the one hand, and to further stimulate domestic investment on the other. Unexpectedly, the low interest rate on capital has increased the speed of business outflow. It has been estimated that the outflow of investment is almost as high as Taiwan’s entire foreign reserves of US$419.2 billion.

  The government is also unable to lead the economy in the right direction. Taiwan’s past economic miracle was a result of perceptive policies. However, in 2002 the previous government initiated a NT$2 trillion investment scheme, investing NT$587.9 billion in two “star” industries — opto-electronics and semiconductors. Due to insufficient analysis of the future of these industries, the project failed miserably and several major manufacturers filed for bankruptcy. Taiwan Semiconductor Manufacturing Co chairman Morris Chang (張忠謀) once said that the government should not have intervened in a competitive market since it was unable to pick winners or save losers.

  As for the efforts of the Ma administration, including the “6-3-3” policy and the “i-Taiwan 12 projects,” some resemble political slogans and some are merely ad hoc responses to financial crises. They are not plans for long-term economic development and do not provide guidance or industrial restructuring.

  Taiwan’s entry into the WTO and the signing of free-trade agreements only serve to prevent external trade from declining. The ECFA and the service trade agreement are part of this process, but they are unable to resolve the fundamental structural flaws in the economy or the nation’s gradual disappearance of competitiveness.

  Perhaps it is necessary to hold a national conference on economic and trade affairs. It is time to examine the economic problems.

  Norman Yin is a professor in the Department of Money and Banking at National Chengchi University.

  Translated by Eddy Chang
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