Thursday, February 11, 2010

Taiwan seeks to address economic concentration

Several economic indicators have revealed an optimistic upswing in Taiwan’s export-oriented economy after being hit particularly hard by the global financial crisis. According to the November monitoring index released by the Council for Economic Planning and Development (CEPD) on December 28, seven of the index components – including customs-cleared exports, manufacturing sales and the industrial production index – indicated a vibrant economic situation for the first time in 25 months. However, the CEPD said the monitoring indicators do not suggest Taiwan’s economy is overheating because the situation in 2008-2009 was so extremely dire.

National Central University’s Research Center for Taiwan Economic Development has also released survey findings showing that the consumer confidence index rose to a 20-month high of 65.39 in December 2009, marking a return to the level seen before the recession. According to the Ministry of Economic Affairs (MOEA), Taiwan’s exports in December 2009 continued to improve, totaling US$31.73 billion, up almost 53 percent from a year ago. By region, orders from China showed the fastest recovery, with positive growth starting in July 2009, while those in Europe still lagged behind.

Taiwan’s product, market concentrations hampered growth

During the Southeast Asian financial storm of the late 1990s, Taiwan’s performance was the best among the four Asian Tigers. But in the latest global financial downturn, Taiwan has been slower to recover. The Commonwealth magazine attributed this weakness to Taiwan's concentration concentration on select sectors over the last decade.

Taiwan has depended too heavily on exports, which have contributed higher growth rates to the economy than has domestic consumption over the last four years. Export volumes have relied too heavily on two industries: semiconductors and flat liquid crystal display (LCD) panels. The biggest problem is that Taiwan has placed too much emphasis on expanding the scale of production in a bid to head off competition from overseas, but has failed to take control of technology and the market. This problem has been highlighted by the overproduction of computer memory chips.

Another problem is that over 40 percent of Taiwan’s exports are concentrated with China and Hong Kong. An over dependence on exports and a reliance on a few markets has also served to weaken Taiwan’s economy.

South Korea, on the other hand, which was hit the hardest in the late 1990s, has now become the strongest Asian Tiger. It has developed a rather balanced economy: strong in electronics, petrochemicals, metal manufacturing and transportation.

You Chi-chung, deputy director of the Industrial Economics and Knowledge Center of the Industrial Technology and Research Institute, said Taiwan’s value added ratio has dropped from 27.8 percent in 1999 to 18.46 percent in 2008. He noted that one of the problems in Taiwan’s industrial structure is that the capability of creating added value is pretty low, which has harmed household incomes and the quality of life.

The four problems of Taiwan’s economy

In a review of Taiwan’s export-heavy economy over the past decade and to cope with the sobering realities brought on by the global financial crisis, the Economic Daily News made the following editorial observations and comments about Taiwan’s unbalanced economic structure:

1) Taiwan should reduce its over dependence on exports. From 2000 to 2007, Taiwan’s average real fixed investments increased by only 0.6 percent annually, being basically stagnant. In order to maintain continuous growth in the economy and employment, Taiwan promoted export-led growth, which accounted for 70.2 percent of Gross Domestic Product (GDP) in 2007, a big jump from 49.2 percent in 1999. In the wake of the latest global recession, it should come as no surprise that Taiwan’s exports have been severely hit and overall economic growth has been dragged down to a record low of negative 2.53 percent.

2) Taiwan should diversify its exports instead of focusing on a few industries. During the last decade, Taiwan strongly supported the development of the semiconductor industry and the flat LCD industry, including electronic components, computers, electronic and optical products. Eighty percent of these products were destined for export. In recent years, these capital-intensive investments accounted for 70 percent of total investment across all manufacturing industries, but their added values only accounted for 28.8 percent of all manufacturing industries, while indirect taxes paid by these industries accounted for less than 5 percent of the total.

3) The export sectors should cut their reliance on imports. Although exports accounted for a high portion of Taiwan’s GDP, the raw materials, components, and part-manufactured products relied heavily on imports. Although Taiwanese firms have worked tirelessly to expand exports, more than half of their earnings were used to pay other countries for imports of raw materials and components.

4) Taiwan should expand its service sector. Over the past decade, Taiwan has hired more service industry employees, but their labor productivity increased by only 1.8 percent annually, less than half of the 3.9 percent in the manufacturing sector. The real value added by the service sector accounted for only 67.2 percent of total GDP in 2007, a drop from 68.9 percent in 1999. Apparently, the sluggishness in the service sector contributed in dragging down the growth of the economy as well.

Wide diversification not wise

However, in an interview with the Commomwealth magazine, Du Zi-chen, vice president of the Commerce Development Research Institute, disagreed with the Economic Daily News. With limited resources, Taiwan is not able to develop every industry. Based on its own competitive strengths, Taiwan must select some key areas to be its strategic focus, he said.

After the global financial downturn, Du noted, the world sees three new emerging trends: reshuffling within sectors, the emergence of developing markets, and the prevailing need to cut energy use and reduce carbon dioxide emissions. Taiwan should divide its resources in a ratio of 70:30, that is, to put 70 percent of its resources into continuing to develop its already strong foundations, while devoting 30 percent to developing emerging opportunities.

In regard to building on Taiwan’s solid foundations, Du said, Taiwan should continue promoting the semiconductor wafer foundry business, IC testing and the packaging industries. As for new opportunities, Du sees some quality markets emerging in the coming 20 years, that is, an estimate of 1.5 billion emerging consumers with per capita annual income growth ranging from US$1,000 to US$3,000 to US$10,000. Taiwan is certainly poised to take advantage of these new consumers with its close proximity to 70 percent of the markets and its track record of making a good competitive product, said Du.

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About Me

The Press Division of the Taipei Economic and Cultural Office (TECO) in San Francisco represents the Government Information Office (GIO), Executive Yuan, Republic of China (Taiwan). GIO maintains nine Press Divisions in the United States, including the San Francisco office. The Press Divisions are in charge of promoting Taiwan's public relations and cultural exchanges. This blog is updated by the Press Division, TECO in San Francisco.