The Economist recently published stories on Taiwan titled “The hidden risks in Taiwan’s boom” and “Taiwan’s amazing economic achievements are yielding alarming strains,” which said the New Taiwan dollar has long been undervalued.
According to the magazine, to avoid “Dutch disease” — where a single product or sector drives currency appreciation, squeezing other sectors — Taiwan has suppressed the value of its currency, which has driven purchasing power down, house prices up and accumulated financial risk in what it called the “Formosan flu.”
Dutch disease is driven by a boom in a pure-export industry typified by natural resources, for which Taiwan’s semiconductor and artificial intelligence industries have never fit the bill. In fact, the semiconductor industry functions as a highly import-reliant supply chain.
Taiwan Semiconductor Manufacturing Co (TSMC) depends on significant quantities of equipment and materials from the Netherlands, Japan and the US for its chips. Its growth does not directly drive up exchange rates nor create a one-way appreciation pressure the same way that natural gas exports do — like what happened in 1959 after the discovery of the Groningen gas field, which led to the coining of the term “Dutch disease.”
According to basic economic theory, Taiwan’s export strength and trade surplus should raise the value of the NT dollar, not lead to its chronic undervaluation. However, in practice the NT dollar’s fluctuations bear little relation to export performance, but are instead closely tied to the flows of foreign capital. Foreign investors hold more than US$720 billion of TSMC stocks, higher than Taiwan’s total foreign exchange reserves of US$600 billion. When the stock market is hot and foreign capital is flowing in, the NT dollar’s value rises; when tech stocks weaken or geopolitical tensions rise, foreign investors withdraw and the NT dollar suffers. These exchange rate mechanisms are not symptoms of Dutch disease, but are typical of capital markets highly dependent on foreign investment.
Chalking all of Taiwan’s economic woes up to exchange rates is too one-sided. Although exchange rates do impact the cost of living and could accentuate economic issues, they are more of a mirror than cause, reflecting the nature of an economy.
Taiwan’s real issue is with industrial imbalances and widening income inequality. Over the past 10 years, the tech industry’s success has pulled its wages far ahead of other industries. Meanwhile, the service sector and low-productivity domestic industries have struggled to keep up, and rising house prices have widened the generational wealth gap. The increase in house prices is driven not by exchange rates, but by wages failing to keep up with asset returns. Excessive industrial concentration is a result of overdependence on a few highly profitable sectors.
In this economic landscape, exchange rates reveal only the underlying problems. If we ignore what is going on beneath the surface, our understanding will always be distorted. What Taiwan needs is not intervention in exchange rates, but determination to address structural issues through industrial upgrading, investment in education, smarter resource allocation and regional development.
The Economist’s warning is useful, but Taiwan’s case is not an example of Dutch disease. What we are facing is the volatility of global markets and the structural risks of overconcentration in one sector. If we can maintain clarity in diagnosing the problem, policy can move in a pragmatic direction and avoid skating around our central economic challenges.
Dino Wei works in the information technology industry.
Translated by Gilda Knox Streader
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