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Key Economic Data 
  2003 2002 2001 Ranking(2002)
Millions of US $  406,000    
GNI per capita
 US $ 18,000
Ranking is given out of 208 nations - (data from the World Bank)

Books on Taiwan

Update No: 072 - (29/01/10)

A roadmap to recovery
The latest outlook from the International Monetary Fund, released on 26 January, is upbeat and suggests that global recovery may come faster than was predicted just three months ago. According to the IMF, global output is expected to expand by almost four per cent this year after contracting 0.8 per cent in 2009. The pace may quicken further in 2011. But the drivers of growth have shifted. Developing economies are expected to do much better than the developed ones.

The latest data suggests not only that recovery in the OECD area will be slower, but also that consumers in the West will be much more cautious in the future regarding debt spending and are returning to rates of savings closer to historic norms, instead of relying on binge credit, which was responsible ultimately for much of the trauma of the past two years. Those countries that will do best this year are those that can rely on domestic consumption to drive growth, especially where government stimulus packages have primed the pump. There are no surprises for guessing who will be leading the pack – China of course.

The stimulus programme introduced by the Chinese government last year appears to have paid off handsomely. Growth, which dipped in 2008 and in the early part of 2009, is now bouncing back giving a year-end result for GDP growth of 8.7 per cent (based on preliminary figures). For 2010, China is likely to see a return to double digit growth of at least 10 per cent. This is the present forecast of the IMF although China has a record of often outperforming even the upbeat forecasts.

All of this is both good or bad news for Taiwan, depending on your political viewpoint. As a country that has done well from the liberalised trading regime of recent years, Taiwan finds itself in a dilemma. Fully 70 per cent of Taiwan’s GDP is driven by exports, mostly in the area of high-tech – integrated circuits, flat panel screens and such like. And the United States has traditionally been both Taiwan’s largest export market as well as its staunchest ally as the island has progressively democratised over the past twenty years. It has now become – or was becoming, since we may have to now use the past tense – a model for democratisation in Chinese societies. But things have changed. Taiwan’s economy, is increasingly reliant on China. For the foreseeable future it will continue to be this way.

Because of its high level of integration into the global supply chain, Taiwan has reaped tremendous benefit from globalisation. At least it did so until that process went into reverse with the September 2008 collapse of Lehman Brothers. The global financial crisis sent Taiwan’s economy into a tailspin.

Taiwan’s real GNP contracted by 7.67 per cent in the final quarter of 2008, by 9.47 per cent in the first quarter of 2009 and by 5.46 per cent and 0.56 per cent in subsequent quarters. While results for the final quarter of last year are not yet out, the numbers above suggest an economy for which the worst is over. It needs to be. Tax revenues last year were at a 35-year low. Adding to the blow was Typhoon Morakot, the deadliest in Taiwan’s history which claimed more than 500 lives and more than US$3 billion in damages.

Now Taiwan’s economy is on the path to recovery. Exports appear to be rebounding and confidence is returning to the local bourse. After falling by 23 per cent in November 2008 (by volume) and by a massive 41 per cent the following month at the height of the meltdown, shipments rose by 46.9 per cent year-on-year in December 2009, the fastest rate of increase recorded since February 1995. Of course, this figure was attained against a low base and cannot disguise the fact that Taiwan’s trade performance last year was the worst in recent history. On a full-year basis, exports contracted by 20.3 per cent to US$203.7 billion while imports fell by 27.4 per cent to US$174.66 billion. The country’s trade surplus was the highest on record as companies drew down inventories and deferred new investment into capital equipment.

The more interesting feature is the change in the pattern of exports. Exports to China in December almost doubled from a year earlier – increasing by 96.7 per cent. By contrast, exports to the United States grew by only four per cent. In November 2009, China shipments grew by 56 per cent while shipments to the US actually fell by 5.8 per cent. With US recovery remaining sluggish, China is forging ahead (at least for now); the writing is on the wall.

The dilemma for Taiwan is that it needs to change its trading paradigm if it is regain and retain the prosperity that has become its hallmark over the past generation. This means that it can no longer rely on the United States in the areas where it has traditionally come to expect support. With the United States seeking to engage China across a broad front (with mixed success), Taiwan – in spite of its democratic credentials – gets in the way of the bigger picture.

This is where the significance of President Ma Ying-jeou’s Economic Cooperation Framework Agreement (ECFA) comes into play.

With the failure of the Doha Round of trade negotiations, the countries of Asia have increasingly resorted to bilateralism to preserve their trading advantages. Taiwan, because of its unique political circumstances, has been locked out from this process. It began negotiating with the United States on a Trade and Investment Framework Agreement (TIFA) back in 1994 but little progress has been made, largely due to US dissatisfaction with Taiwan’s commitment to intellectual property protection, and – more recently – over a host of sector-specific issues of which access of US beef to the Taiwan market has become the latest hindrance. While some of these issues are now close to resolution, a TIFA is still worth having but is of less importance to Taiwan than it once was.

In pushing for an ECFA with China, Mr. Ma may be backing realpolitik. An ECFA will be a bilateral trade agreement in all but name. The problem he has is that while recent reports suggest that around 70 per cent of the electorate support the idea of closer relations with China, many remain suspicious as to the real intentions of the KMT leadership, and the degree to which they are prepared to negotiate away Taiwan’s de facto sovereignty. A decided lack of transparency has so far marked the semi-official negotiation process with China which was resumed when the KMT returned to power last year after several years of tense political stand-off.

Three by-elections held earlier this month underscore the point. The KMT was routed in each one, even in a district that was previously solidly behind the ruling party. Instead it was the DPP that won all three. This was a salutary reminder that Taiwan is not yet China and that the electorate still has the last word through the ballot box. As is the case elsewhere, by-elections are traditionally used as a means of signalling voter dissatisfaction, but there are five more coming up shortly and the iron grip on power that the KMT has enjoyed in recent months appears likely to be eroded.

Significantly, with three extra seats already, the DPP now has sufficient numbers in the legislature to push a recall motion for the president or to summon him to the chamber. The DPP is likely to be cautious in using its new power but the fact that it can do so, signals the KMT that it needs to proceed with care.

Right now, Taiwan needs China and the people of Taiwan appear to know it. More to the point, the leaders in Beijing know it. The trouble is more in presentation than in actual engagement. Even so, although Taiwan is keen to pursue economic ties while leaving the thorny issue of political engagement to another time, the issue of reunification is right at the top of Beijing’s agenda. Can President Ma and his colleagues demonstrate the deft footwork necessary to dance around the thorny issues? Part of the problem he faces comes from within the pro-mainland old guard within his own party who still believe wholeheartedly that Taiwan is indeed a part of China. They may well prove to be Beijing’s fifth column and Mr. Ma will have to be both dancer and juggler if he is to stay on his chosen path to bring prosperity back to Taiwan and winning back those who have become disillusioned. Over coming months, we will be able to gauge just how well he is doing. At least, for now, he has an improving economy on his side and that should count for something. He needs to take care that he is not tripped by his own dancing team.

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