Country Report Taiwan
Economic growth in Taiwan is recovering somewhat this year thanks to rising exports and investment. Protests could slow the pace of further Cross-Strait cooperation, but policies towards mainland China are likely to remain pragmatic.
Strengths (+) and weaknesses (-)
(+) Highly competitive export sector
Taiwan’s has a good business environment, efficient markets, sound economic infrastructure and sophisticated education system, which benefit its export sector.
(+) Very strong external position
Taiwan’s has persistent current account surpluses, a vast amount of FX reserves (USD 421bn in September 2014) and an acceptable external debt burden.
(-) Vulnerability to external demand shocks
Taiwan’s economy is very open and driven by the export sector.
(-) Tense relationship with mainland China
Mainland China considers Taiwan as one of its provinces. The relation with China is tense and Taiwan has only limited access to multilateral institutions and international organisations as a result.
1. Growth is picking up thanks to export and investment growth, gradual fiscal consolidation is set to continue
After two years of relatively weak growth, the Taiwanese economy has been regaining some vigour in 2014. The economy grew by 0.5% q-o-q (3.1% y-o-y) in the first quarter and 1.5% q-o-q (3.8% y-o-y) in the second quarter. So far, the recovery has been primarily driven by exports, which is not surprising given that the Taiwanese economy is very open. Even as exports declined somewhat in month-on-month-terms in September, export growth has been strong in the first nine months of the year, especially exports of electronic goods. So far, Taiwan has been benefitting from the economic recovery of the advanced economies, in particular the recovery of the US economy. Exports will further be boosted by the launch of Apple's iPhone 6 and other new technology products. Meanwhile, a pick-up in investment has also supported economic growth. Investment fell in 2011 and 2012, but recovered in 2013 and was also relatively strong in the first 2 quarters of 2014. Investment growth is important, as gross fixed investment fell below 20% of GDP in 2012 and has thus been relatively low in recent years, which is likely to limit the growth potential of the economy.
Meanwhile, consumer confidence has increased after wages have started to rise again following a period of stagnation. As a result, overall economic growth is likely to be slightly above 3.5% this year.
Fiscal policy will, to a limited extent, act as a drag on growth. In 2013, the fiscal deficit fell to 1.4% of GDP, after having been above 2% of GDP in the four preceding years. In May 2014, a number of fiscal reforms, including a reduction of tax credits for dividend income and an increase of taxation of banks and insurance companies, were approved. These reforms are expected to result in a revenue increase of 0.4% of GDP. This should help to further reduce the fiscal deficit and slow the increase of public debt. Overall, sovereign risk will remain relatively low. At around 40% of GDP public debt is not overly high but we note that government revenue (about 17% of GDP) is relatively low. At the same time, the structure of government debt is sound, as the general government has no foreign currency debt and most debt is long-term. The government’s financing costs are thereby very low and foreign investors hardly own Taiwanese government debt, which means that there is hardly any vulnerability to a sudden stop in capital inflows.
2. Protests are likely to slow the pace of further Cross-Strait cooperation, but policies are likely to remain pragmatic
In March and April 2014, Taiwan experienced student-led protests against closer economic and political cooperation with (mainland) China. The protests were focused on the Cross-Strait Agreement on Trade in Services. This agreement was signed in 2013, but has so far stalled in Taiwan’s legislature, partially due to a three-week long occupation of the legislature by protesters. While there is widespread support in Taiwan for economic cooperation with mainland China, there are fears about the relocation of industries to mainland China and growing political control of China over Taiwan. The protests, which were also directed against nuclear energy and economic liberalisation, have weakened the government of President Ma Ying-jeou of the Kuomingtang (KMT) party. It has thus become more difficult for the government to achieve its agenda of increasing Cross-Strait cooperation.
Meanwhile, Tsai Ing-wen, the head of opposition Democratic Progressive Party (DPP), which was in power between 2000 and 2008 and at that time fuelled tensions with China by following a pro-independency course, has recently indicated that the party intends to follow a more pragmatic course. While the party may slow down the pace of talks with China over economic cooperation once in power, it seems to want to show the Taiwanese population that they can trust the party to manage the important relationship with China well. Despite the protests of early this year, there thus seems to be strong support among the most important political parties (and also among the Taiwanese population) for following a pragmatic China policy.
Taiwan, officially named the Republic of China, is a country comprising of several islands, located to the east of the People’s Republic of China. The largest island, the island of Taiwan, makes up 99% of Taiwan’s total land area and is the home of 99.6% of the population. The prosperity of this services-based, capitalist economy stems from its dynamic and entrepreneurial private sector, which employs over 90% of the working population. Taiwan’s business environment is good. The country scores very well on factors such as ease of doing business and is highly competitive internationally, particularly due to its efficient goods and labour markets and developed financial markets, as well as the country’s sophisticated education and healthcare systems and sound infrastructure. Taiwan is home to some of the world’s leading multinationals in the information technology (IT) sector and the country is an important supplier of intermediate IT goods worldwide. However, Taiwan’s high degree of openness, with total exports and imports of goods and services amounting to 136% of GDP (2013), is also the economy’s main weakness. It makes the economy overly dependent on external demand, especially from its main trading partners China, Japan and the US.
After the communist victory in mainland China in 1949, about 2 million Nationalists fled to Taiwan, established a government and incorporated the locals in the governing structure. Mainland China, however, still considers Taiwan part of its territory. Although tensions have eased in recent years, China will still consider any unilateral proclamation of independence by Taiwan an act of war.