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THREE YEARS ago a prominent scholar declared that Taiwan’s economy was “on the brink of death”. The wording was extreme but the sentiment was widely shared. Taiwan faced a litany of seemingly intractable problems. Many of its best companies had moved to China; wages were stagnant; growth was grinding ever lower and the population was ageing rapidly. Its glory days as an Asian tiger—celebrated for its rapid development—seemed firmly in the past.
Yet in 2020 Taiwan has turned the clock back: it is, again, one of the world’s fastest-growing economies. Granted, its GDP is projected to expand by only about 2% this year. But it is in rare company, with fewer than a dozen economies expected to grow at all, thanks to the coronavirus. For the first time in decades, Taiwan’s economy is likely to grow faster than China’s. The question is whether Taiwan’s surprising strength marks a new departure, or whether it is simply a brief deviation from continued descent.
Two factors tied to the pandemic help account for Taiwan’s relative success this year. First, it was the only country to contain covid-19 without sweeping closures of schools, offices and shops. Its government, alert to new diseases in China, started screening visitors from Wuhan at the end of 2019, as soon as reports emerged of a mysterious pneumonia outbreak. Thanks to fine-grained contact-tracing and near-universal mask-wearing, life has carried on more or less as normal. Since July revenues for retailers and restaurants alike have increased compared with a year earlier.
Second, Taiwan’s manufacturers have been well-positioned to cater to global demand, such as it is. From tiny semiconductors to giant computer servers, electronics account for a third of Taiwan’s exports. With so many people suddenly forced to work from home, sales of products such as tablet computers and headphones have been strong. So while global trade this year will shrink by about 10%, Taiwan’s exports are up by nearly 5%.
Both these sources of out-performance will presumably fade when the pandemic ebbs. Taiwan has also, however, been a beneficiary of tensions between China and America. Taiwanese firms that had previously invested in China have shifted some of their operations back home, in order to avoid American tariffs. Those returning include Giant, a bicycle producer, Long Chen, a paper company, and Compal, a computer manufacturer. Investments in factories and other fixed assets in Taiwan reached an all-time high last year at NT$4.3trn ($150bn), and are on track for a new record this year (see chart).
The clanging reverberating through Hwa Ya Technology Park in Taoyuan, a big city in the north of the island, is evidence of the construction boom. Quanta Computer, one of the world’s biggest electronics manufacturers, is stepping up domestic production of sophisticated servers that it once made in China. And workers are tearing down blue plastic scaffolding covering an even larger server factory being built for NT$15bn ($525m). “It will be ready quickly,” a helmeted worker says cheerfully.
Some in Taiwan worry that this momentum, catalysed by Donald Trump’s trade policies, will fizzle out when Joe Biden enters the White House. Although Mr Biden has pledged to take a hard line on China, he may be willing to roll back tariffs. But Gordon Sun of the Taiwan Institute of Economic Research thinks Taiwanese companies will continue to diversify away from China. “They cannot afford to get caught in another trade war, even if the possibility is low,” he says.
The return to Taiwan, if sustained, would partly address one of the concerns hanging over its future: the relentless migration of good companies and good jobs to China. Some 400,000 Taiwanese, about 2% of its population, now live across the Taiwan Strait. Taiwanese businesses speak with trepidation about the emergence of a “red supply chain” in China that will soon challenge the likes of Foxconn, a Taiwanese contract manufacturer which makes most of Apple’s iPhones. Competition from China has also contributed to anemic wage-growth in Taiwan. Adjusted for inflation, salaries have been flat since 2000, averaging just under $20,000 a year.
Yet the surge in investment in Taiwan has clear limits. President Tsai Ing-wen often refers to the country’s “five shortages”, shorthand for its finite supply of land, water, power, workers and talent. Only so much can be done on a small island that is committed to phasing out nuclear power and that has one of the lowest birth rates in the world. Taiwan’s population officially started shrinking this year, and the government forecasts that it will drop from 24m today to 16m in 2070.
Added to these chronic woes are the hard realities of Taiwan’s reliance on China. Nearly 40% of Taiwan’s exports go to China and Hong Kong. “Taiwan can’t just get rid of China’s economy and search for other growth engines,” says Chen Chien-liang, an economist who served under Ms Tsai’s predecessor, who tried to draw closer to China.
The saving grace for Taiwan is that China needs Taiwanese products as much as Taiwanese firms need the Chinese market. Chinese firms are still far from matching the wizardry of TSMC, the Taiwanese company that churns out the world’s most advanced semiconductors. China has done nothing worse to the Taiwanese economy this year than limit the flow of tourists from the mainland (ironically, this may have helped insulate Taiwan from covid-19). America may in fact do more damage if it promulgates new rules that prevent tsmc from working with Chinese customers such as Huawei, a telecoms giant.
For Liang Kuo-yuan of the Yuanta-Polaris Research Institute the economic prescription for Taiwan is simple, if tough to pull off. The island must make itself as indispensable in industries such as medical devices and batteries, he says, as it has in semiconductors. Such high-value niches will help protect Taiwan from Chinese pressure, and will also fit with Taiwan’s limited resources and falling population.
A single year of impressive growth does not move Taiwan closer to that objective. Mr Liang, for one, frets that China is outdoing Taiwan in its long-term economic planning. But stellar performance in this most challenging year has at least given many in Taiwan a shot of confidence, after years of gloom. Across the road from the Hwa Ya Technology Park in Taoyuan, Chris Liang runs a small restaurant. Among his customers from tech firms, the change in sentiment has been almost palpable, he says. “Our epidemic control has changed people’s attitudes about the economy. People are more optimistic.”