Taiwan can still make a comeback
Just when it seemed Taiwan's economy could hardly get worse, it did. After five straight months of decline, exports tumbled yet again last month, defying predictions that the fall would bottom out.
According to Bloomberg, the consensus among economists was for a drop of around 2.7 per cent last month compared to the same time last year. The actual decline, however, was 4.2 per cent. Indeed, the performance underscored just how dismal the island's economic situation has really become. Gross domestic product contracted 0.16 per cent year-on-year in the second quarter, the first decline the island has experienced since 2009. Last month, the cabinet-level Directorate-General of Budget, Accounting and Statistics cut its growth forecast for 2012 to 1.66 per cent, down from a previous estimate of 2.08 per cent.
In July, unemployment rose to 4.31 per cent. Real wages, meanwhile, are falling. The consumer price index last month rose 3.43 per cent, the highest in four years. Electronics exports have been particularly hard hit. Much of this, of course, is due to global developments beyond the trade-dependent island's control. Taiwan's main trading partners - China, the US and Japan - have all been battling slower-than-expected growth.
But this is not the whole story. The comparison with South Korea is telling. While Taiwan's exports to China and Hong Kong from January to July fell by 9.1 per cent year-on-year, shipments of South Korean goods to China declined by a modest 2.1 per cent in the same period. Stagnant domestic consumption and investment have added to the problem.
Critics, however, have lambasted the plan as lacking any real substance. There were, for example, no tax cuts. The government, which has been running a fiscal deficit since 2009, had little room to manoeuvre on that score.
Instead, Taipei is apparently hoping that the recently announced measures will help attract fresh investments. Officials are also touting a recent report by the Geneva-based World Economic Forum, which ranked Taiwan the 13th most globally competitive economy. Whether the strategy will work or not is the subject of considerable debate. Some economists, such as National Central University's Chiou Jiunn-rong, blame the government's wrong-headed economic policy of viewing the Taiwan-China Economic Cooperation Framework Agreement as a "wonder drug". He points out that since the trade deal took effect in September 2010, more Taiwanese industries have relocated to China. Moreover, China has begun to develop its own manufacturing industries, effectively competing with Taiwan.
Not surprisingly, President Ma Ying-jeou has been placing emphasis on Taiwan's willingness to join the Trans-Pacific Strategic Economic Partnership Agreement. This multilateral free-trade agreement includes the US but not mainland China and South Korea.
Taipei's membership could be an important means of promoting the island's exports. Currently, only a very small proportion of Taiwanese products benefit from bilateral free-trade agreements. But concluding such agreements is complicated by the fact that none of its key export markets recognise the island as a fully sovereign nation. Taiwan is self-governing, but China claims it as a province.
Only one of the recently announced stimulus measures - that of expanding cross-strait tourism - seems likely to show results in the short term. About one million visitors from the mainland reportedly entered Taiwan so far this year, up 66.5 percentage points from the same period last year. They have also been spending over US$230 on average per day.
Meanwhile, Taiwan's corporations might like to copy the South Korean example and spend more on research and development. Observers say that Taipei may also need to loosen controls on mergers and acquisitions in order to give local corporations room to adjust to new competitive realities.
Taiwan's electronics exports may have lost their competitiveness, but the island's technological and management capabilities remain strong.
A comeback is still possible.