How Taiwan Has Emerged from the Financial Tsunami
Vincent C. Siew
Vice President
Republic of China (Taiwan)
October 30, 2009
In 2007, a strong financial earthquake occurred, with its epicenter in Wall Street. It unleashed a massive tsunami that rolled across the Atlantic and Pacific Oceans, pounding the shores of every territory on the global economic map. Hardly a corner of the world was spared, and Taiwan also became one of the disaster areas.
Taiwan is a maritime nation with a mid-sized open economy. International trade has long been the main driving force of its economic growth. In 1999, exports accounted for 41.4% of Taiwan's GDP; in 2008, that figure had increased to 65%. During the five years from 2003 to 2007, Taiwan notched up an average economic growth rate of 4.88%, with exports contributing 90% of its GDP growth. The graph below shows the close correlation between Taiwan's export growth rate and its economic growth rate.
The last global recession was triggered by the bursting of the dot-com bubble in 2001. Although the global economy was not shaken as badly then as it has been by the latest recession, Taiwan was hit far harder than many other countries. In September 2001, Taiwan's exports shrank by 34.15%, one of the biggest contractions of any country in the world. And Taiwan's negative growth rate of 4.63% in the third quarter of that year was second worst only to Singapore's. When this latest global slump – the most severe since the 1930s – occurred, Taiwan again became a main disaster zone. In January this year, our exports plunged by 44.11%, the worst of any country in the world. And the drastic fall in exports caused our first-quarter GDP growth rate to drop to minus 10.13%.
Because Taiwan's financial internationalization is not at a similar level to that of Western developed nations, we still had not felt much direct impact from the financial storm up to June last year. But by the middle of last year, we foresaw that we were going to be severely affected by its spreading impact, and we accurately projected that the worst of the situation would occur in the first quarter of this year. At that time, we rightly grasped that, besides the direct impact of the sub-prime mortgage storm on our financial industry and investors, Taiwan would also face several major tests, including:
1. The constriction of enterprise funding channels.
2. The deterioration of business operation due to lack of enterprise funding.
3. Enterprises cutting costs by laying off workers, causing the employment market to deteriorate.
4. Enterprises' debt repayment ability diminishing, weakening the soundness of the financial industry.
5. Private wealth shrinking, and the people reducing spending due to lack of confidence in the future, causing domestic demand to contract.
To address these problems, we drew up a range of short-term and mid-term responsive measures that were focused mainly on four objectives: (1) To stabilize the financial system; (2) to keep corporate funding channels working smoothly; (3) to control unemployment; and (4) to expand domestic demand.
To achieve these policy objectives, we first introduced the "three-pillars-of-support" policy. The three pillars of this policy were:
Firstly, government support for banks: We started by providing a blanket guarantee of all bank deposits, to reduce the risk of bank runs. We were the first country in Asia to announce and implement such a guarantee, setting an example that Hong Kong, Singapore and others later followed. This measure served to steady depositor confidence, averted the occurrence of any large-scale bank run, and right away secured the stability of the financial system.
Secondly, bank support for business enterprises: This required that banks not tighten credit for corporate and housing loan customers, to ease pressure in the credit market. In order to avoid a credit crunch, the government worked in coordination with the Bankers Association to arrange for banks to extend loans to companies that were operating normally and had short-term capital needs, and at the same time to extend repayment deadlines or reduce interest rates for borrowers who were having difficulty meeting payments on housing loans.
Thirdly, government and enterprise support for workers: This involved making bank loans available at preferential rates for firms that desisted from laying off workers, while the government at the same time launched short-term and mid-term employment expansion programs. It is estimated that these measures could provide 341,000 job opportunities in 2009, roughly equating to jobs for 3% of the employed population.
Faced with the impact of the financial tsunami and the resulting sharp drop in exports, Taiwan needed to adopt a policy of expanding domestic demand in order to stabilize economic growth. With the private sector unable to increase its spending, the government had to take up this responsibility by turning to a policy of expansionary fiscal spending to expand domestic demand. Hence, last year, we started by mapping out a 58.3 billion NT dollar program for strengthening local construction to expand domestic demand, and launched various wage subsidy, employment promotion, and other related measures; then early this year, before the Chinese New Year, we issued consumption vouchers; and lastly, we launched a 500 billion NT dollar program to expand investment in public works and urban renewal over a four-year timeframe.
These mid-term measures yielded significant effect, increasing GDP growth by as much as 2.82% according to our estimations. Statistical data from the Cabinet's Directorate-General of Budget, Accounting and Statistics show that our growth rate for this year has been raised from minus 6.86% to minus 4.04%, indicating that this spending package has played a major role in stabilizing Taiwan's economy. After hitting the bottom of the recession in the first quarter of this year, when GDP contracted by 10.13%, Taiwan's economy steadily picked up to negative growth rates of 7.54% in the second quarter and 3.52% in the third quarter, and is projected to rebound to a positive growth rate of 5.49% in the fourth quarter.
The efforts made by our administrative team in the last year and a half to contend with the effects of the financial tsunami have earned widespread approval. Thanks to the endeavor of all involved, we have managed to keep Taiwan from being swept to ruin by the tsunami. Nevertheless, there are still areas where we have not yet done enough, particularly in regard to mid- and long-term development, where there is still a need for further hard work.
The drastic slump in the world economy triggered by the global financial tsunami has resulted in big changes to the structure of industry and caused a seismic shift in the international politico-economic order. In addition to striving our best to cope with the shocks emanating from the financial tsunami and economic recession, we also need to consider what structural changes will have been wrought in global industry and politico-economic order in the aftermath of the tsunami. And we need to consider what kinds of macro-economic strategies we ought to adopt in response to these changes.
Our government has already mapped out some mid- and long-term plans for the next stage of Taiwan's economic development, though these plans still need further steps to be made for putting them into effect.
First of all, our government must develop emerging key industries and adjust Taiwan's industrial structure, to promote a comprehensive transformation of our economy. In the worldwide economic slump that resulted from the financial tsunami, Taiwan's economy was especially hard hit because of the high extent of its export orientation and the over-concentration of its exports in the electronics and semiconductor industries. This has clearly brought home the need for us to establish rising industries that cater equally to export markets and domestic demand and that match the trends of development in the international economy. Hence, our government has selected six key emerging industries that we will focus resources on promoting, namely: bio-technology, green energy, travel & tourism, cultural & creative enterprise, medical care, and high-end agriculture.
In the second place, our government must push forward with further economic reforms, and establish mechanisms to promote industrial R&D and marketing. Next year, when the Statute for Upgrading Industries is replaced by the Act for Industrial Innovation, we will start to employ functional incentives instead of the former industry-specific incentives. In addition, in this era of intense global competition and free movement of capital and talent, the government must create an attractive tax environment and provide the right conditions for drawing international talent to our shores. And needless to say, to cope with the effects of global warming, the government must formulate environmental, energy and other related policies conducive to sustainable development.
At the same time, our government must build a framework for stable, safe and normalized cross-strait economic and trade relations. With China poised to become the world's second-largest economy, how to maintain stable and normal trade relations across the Taiwan Strait is a crucial issue that we cannot possibly afford to turn away from. Since our government took office on May 20 last year, we have actively sought to improve cross-strait relations. At three rounds of Chiang-Chen talks, we have signed nine agreements as steps toward the normalization of cross-strait economic and trade relations. We are about to sign MOUs on financial supervision that will strengthen dealings and cooperation in the sphere of cross-strait banking and finance. And we are also working toward the negotiation of an economic cooperation framework agreement (ECFA) with the mainland, as an indispensable element of Taiwan's linkage across the Taiwan Strait and involvement in the world.
Finally, our plans for expanding investment in public works are not just aimed at giving a short-term boost to domestic demand. They have two even more important aims: to build the kind of first-class infrastructure that can raise our overall competitiveness; and to provide the people of Taiwan with high-grade public goods that can enhance their quality of life. Achieving these aims requires full and meticulous planning, and must be pursued as an ongoing endeavor. On July 15 of this year, Taiwan's admission to the WTO's Government Procurement Agreement (GPA) formally took effect. Membership of the GPA means that we will open all of our government contracts above a certain threshold to international bidding, which will enable us to tap into the best foreign technologies and experience in carrying out all kinds of public works. We earnestly welcome foreign contractors from worldwide to join in the bidding for such projects.
These four sets of tasks that I have outlined have a key bearing on whether Taiwan will be able to emerge completely from the shadow of the financial tsunami and retain competitive advantages in the post-tsunami global economic arena. Our challenges have not yet ended, and we still have a lot more work to do. If we are able to carry out these four main tasks smoothly and completely, Taiwan's economy will be well placed to ascend once again.
Now it just remains for me to wish this conference every success and wish everyone here the best of health. Thank you!