The ROC Directorate-General of Budget, Accounting and Statistics announced May 22 that Taiwan’s unemployment rate had fallen to a six-year low of 3.91 percent, which is also its lowest since President Ma Ying-jeou took office in May 2008. The next day, the DGBAS raised its projection for full-year gross domestic product growth to 2.98 percent, up 0.16 of a percentage point since its last estimate, released in February.
These figures show that the nation’s economy is back on track, but anemic growth of less than 3 percent shows that it is just keeping pace with the global upturn and not enough to break out of the doldrums. Moreover, such growth is insufficient to remedy the long-term decline in the nation’s competitiveness.
It should be emphasized that Taiwan’s recovery comes on the back of the global upturn. According to recent projections from economics organization Global Insight, the recoveries in Japan, the U.S., European and other industrialized nations mean that the world economy is expected to grow from 2.5 percent last year to 3 percent this year, with most developed countries expanding from 1.3 percent to 2 percent, and the growth rate in emerging economies falling from 4.8 percent last year to 4.6 percent this year.
The European and U.S. markets are the main final destinations of Taiwan’s exports, which is why exports have recently recovered. The local stock market has also broken the 9,000-point barrier. With the rally in global markets, the wealth effect has clearly boosted domestic consumption. Given the situation at home and abroad, GDP growth and employment figures are expected to continue to improve in the second half of the year.
As Taiwan’s recovery is related more to global conditions than to the government’s efforts to stimulate the economy, it is no time for the government to be resting on its laurels. Instead, it should be especially cautious about the situation going forward. Global risks remain high. Although the U.S.’s economic fundamentals should continue to improve, its reliance on loose monetary policy and low interest rates remains.
The Eurozone has emerged from the threat of recession, but unemployment is stuck at a high level, and the European Central Bank seems undecided about a further cut in interest rates. Japan’s so-called Abenomics—based on the three arrows of fiscal stimulus, monetary easing and structural reform—has already faltered. There have been no follow-up measures and the country’s revival appears unlikely to be long-lasting.
Most worrying is that emerging economies have been noticeably affected by the winding down of the U.S.’s quantitative easing policy, causing international institutions to repeatedly revise down their estimates for growth. Emerging markets could plumb new depths by year-end, when QE is finally fully wound up. In mainland China, a long-term slackening of GDP growth is also inevitable due to the effects of structural reform and the economic bubble. This will have an especially big impact on other Asian economies.
Taiwan’s GDP growth depends on exports, and its exports to mainland China and Association of Southeast Asian Nations members account for more than half the total. In a climate of uncertainty in the industrialized economies and with ongoing high risk in emerging economies, it is unlikely that exports will continue to grow as strongly.
Growth in domestic demand is also heavily dependent on the stock and property markets, but global stock markets have plateaued and turned volatile. The domestic property market will cool following attacks on speculation by the government and the effect of changes in the external environment. Considering all these factors, a cautious approach must be taken on the stability and revival of the nation’s economy going forward, and neither government nor business can be complacent.
Even more serious is that under the influence of successive waves of global economic adjustment, other countries have been busy re-structuring their economies and boosting competitiveness. By comparison, Taiwan’s efforts are clearly inadequate and not up to its rivals. Although the DGBAS has revised the nation’s GDP growth for this year up to 2.98 percent, this figure is still behind the other three Asian tigers, with South Korea at 3.7 percent, Hong Kong at 3.6 percent and Singapore at 3.4 percent. Taiwan fares even worse in a comparison of salaries, with real wages in May retreating to the level of 16 years ago and far behind the other Asian tigers.
In the succession of cycles in the global economy that have followed the global financial crisis, Taiwan’s exports have become steadily less competitive. The most important factor is that insufficient effort has been put into revising the obsolete growth model that has served for so long—the model of contractors taking orders in Taiwan and outsourcing production overseas. This has led to a slow pace of re-structuring, with Taiwan companies lagging behind leading firms in South Korea and the U.S., while businesses in mainland China and Southeast Asia rapidly catching up.
Most worrying is the rapidly narrowing cross-strait divide in industrial development, with mainland firms gaining a stronger hold on its domestic market with help from Beijing and putting ever increasing pressure on Taiwan’s competitiveness. If Taiwan’s manufacturers do not quicken their transformation, the next recessionary wave will be even more serious.
The government cannot continue to go with the flow as far as economic cycles are concerned and simply make appeals to the benefits of economic liberalization. It must take a concrete approach to rebuilding Taiwan’s industry and helping businesses upgrade. The government should draw on civic sector resources and talent from all sources to create strong groups to promote re-structuring. Industrial transformation cannot be delayed and is the only way to turn around the nation’s falling competitiveness. (SDH)
(This commentary first appeared in the Economic Daily News, May 26, 2014.)
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