Taiwan: growth slows to single digits; the economic scene may undergo some significant changes this year - Business Outlook Abroad

Business America, April 24, 1989

Growth Slows to Single Digits; the Economic Scene May Undergo Some Significant Changes This Year

Taiwan's economy slowed to 7.1 percent real GNP growth in 1988, after recording double-digit increases the two previous years. The growth target for 1989 is 7 percent. The country offers a wide variety of export opportunities to U.S. business, according to the American Institute in Taiwan. U.S. firms will find major opportitizities in pollution control, computer equipment, telecommunications, home furnishings and appliances, transportation, scientific instruments, power generation, and petrochemicals. After two years of double-digit growth, Taiwan's economy slowed to a 7.1 percent growth rate in 1988. Domestic demand replaced net exports as the driving force behind economic growth. The service sector emerged as the leading economic sector. Labor-intensive light industries declined while technology and capital-intensive heavy industries prospered. Per capita GNP broke the $6,000 mark. Wages continued to rise. Labor supply remained tight. Domestic prices rose slightly. The rate of growth for the money supply slowed but excess liquidity remained a problem and the Central Bank took a major step to redress it in December.

Inflation seems to have replaced growth as a priority concern of the authorities. Policies to discourage speculation in the stock and property markets were implemented. The NT$:US$ exchange rate stabilized in a range between a high of 28.94:1 in mid-year to 28:10 by year-end. As the higher New Taiwan (NT) dollar drove up Taiwan's investments overseas, foreign investment in Taiwan declined.

Imports continued to grow faster than exports, contributing to a reduced though still large global trade surplus of $13.4 billion excluding Central Bank gold imports (ex-gold), or $10.6 billion including it. The U.S. market share of Taiwan's exports dropped from 44.1 percent in 1987 to 38.7 percent in 1988, whereas the combined share of Japan and Western Europe rose from 27.5 percent to 30.6 percent. Based on U.S. estimates, Taiwan's ex-gold trade surplus with the United States fell 13 percent to $17 billion. Including Central Bank (CB) gold, the surplus fell 25.8 percent to $14.2 billion.

Although Taiwan has liberalized its economy and reduced its trade barriers, much remains to be done on exchange rate adjustment, service sector liberalization, intellectual property protection, and the reduction of high tariffs-particularly on agricultural products-and of nontariff barriers in general. Taiwan is preparing details on the four-year Trade Action Plan to reduce its trade surplus with the United States.

Labor has continued to be active in campaigning for its rights. In addition to illegal strikes called by transportation workers during the year, Taiwan saw its first legal strike in December. Conflicts over the interpretation of the 1984 Labor Standards Law foreshadow future disputes but the authorities are proposing revisions to the law which they hope will prove satisfactory to both management and Labor. Environmental protection is another area of growing concern.

Outlook for 1989 Taiwan has set a 7 percent real growth target for 1989. Tighter monetary policy in Taiwan is expected to dampen speculation in foreign exchange, securities, and real estate. It will also cut speculative non-operational gains of companies, gains which have helped companies to weather the slowdown in export demand. Fixed capital formation may be flat in 1989, but public and private spending, spurred by infrastructure construction, a land acquisition program, and rising personal income, is projected to grow at double-digit rates. This strength in consumption will permit overall domestic demand to continue to grow in 1989. Workers who dropped out of the Labor market to engage in speculation in stocks and real estate may return. The unemployment rate may rise slightly from under 2 percent in 1988 to the 2-3 percent range. Export demand will be sluggish. With lower tariff rates, imports will grow but at a rate lower than that in 1988. Taiwan's trade surplus will continue to decline.

This year may witness some significant changes in Taiwan's economic climate. The Legislative Yuan is expected to pass a bill revising Taiwan's banking law. The bill will provide for the privatization of Taiwan's state-owned banks (now accounting for 95 percent of the banking industry), creation of private banks, and the establishment of overseas branches by local banks (only two banks are allowed to do so currently). International credit cards are being introduced to replace the current debit card system. More foreign insurance companies will be allowed to open offices here and the scope of their operations will be expanded. Beginning in 1989, the authorities will no longer monopolize telecommunications and private companies will be permitted to participate in this industry. An extensive centrallycontrolled commissary system, reportedly accounting for about a third of retail sales in articles of daily necessity, will be phased out. Several state companies, such as China Steel Corporation and China Petrochemical Development Corporation, will offer a small portion of their shares to the general public and list on the Taiwan stock exchange. There are plans to carry out another round of tariff cuts in the spring of 1989.