Taiwan’s Economy: GDP Growth is a Bright Spot for Now

Written by John F. Copper.

Image credit: taiwan by keso s/Flickr, license CC BY-NC-ND 2.0

The recent economic news emanating from Taiwan is the impressive growth in its gross domestic product (GDP)—one of the basic indicators of economic vitality. This is certainly good to hear.

After experiencing negative growth throughout most of 2020, conditions changed in the last quarter of the year. As a result, Taiwan even bested China’s GDP growth. Furthermore, the upward trend accelerated this year, with GDP expansion the highest in two decades. If this growth is sustained, 2021 will end with a welcomed 5 per cent or better rise.

This represents a break from a long period of low growth. Taiwan fell into recession in 2001 after a bitter dispute between then-President Chen and the Nationalist Party or Kuomintang (KMT) over building a nuclear power plant that the previous legislature had approved. Severe political polarization and low economic growth for two decades followed.

How then did Taiwan return to good economic growth in 2021? Or better ask, why? One of the reasons is sensible, even prescient, planning. Another is good fortune.

President Tsai paid more attention to economics after facing insufficient poll numbers for managing the economy after being elected in 2016 and a drubbing in the series of local elections in 2018, with blame for being cast on her. She relied on better economic advisors. She lowered taxes. She worked to attract external investment (that brought innovation). She cultivated better relations with the United States. As a result, commerce with China grew even while President Tsai and her party were outwardly unfriendly toward China.

Fortuitous factors were also in play. In 2021, the global economy, the environment in which Taiwan must function, turned around negative growth in 2020. According to the World Bank, the world economy is expected to expand by at least 3.6 per cent this year.

The second variable and also a big one was, and is, the Trump tariffs that were kept in place by President Biden on China’s exports. This affected Taiwan companies operating in China, as did a rise in wages there. In response, many Taiwan companies returned home, bringing investment capital with them. Again, this had a significant positive impact on Taiwan’s economy, including GDP growth.

Last, Taiwan’s computer chip industry has been doing exceptionally well in the context of a global shortage.

Economic forecasters, including the World Bank, the International Monetary Fund and a score of thinktanks, anticipate 2021 will end well for Taiwan’s economy. Further, 2022 will see moderately good growth.

But after that, Taiwan will see GDP growth in the meagre 2 per cent range!

The problems they identify to explain future below-average growth are these…

Taiwan has a two-tier economy: IT, or information technology, and the rest. Those in IT do very well in terms of salaries and more. The rest say their parents had a higher standard of living than they have. Taiwan’s youth, especially those with an education, seek jobs or a place to start a new business elsewhere. Many seek a location where they can connect with prominent global companies. Most go to China, where they speak the language. A million or more fit this category. A majority say they do not want to return to Taiwan soon.

Taiwan’s leaders seek to expanded economic ties with the U.S., Europe, and Japan. But all three are less than promising in terms of GDP growth and meaningful increases in trade. The U.S., because of enormous deficit spending and debt, will see higher taxes and inflation. As a result, there will be less money for research and development, business expansion, etc. Europe and Japan face similar problems.

Taiwan’s politics are very polarizing. The two major parties are solidly of one view, their own, on almost everything while they vie with the other over authority to govern. They do not care much to solve problems and nourish a civil society. Bipartisanship is missing. Witness the dysfunctional bickering over blame for the increases in the coronavirus.

The issue of whether Taiwan will unify with China or become an independent (legally speaking) nation-state is a dominating one. Yet, it is a faux one. Taiwan cannot decide this issue. The U.S. and China will; never mind that Taiwan is a democracy. Meanwhile, cross-Strait relations constitute a formidable contradiction. Economic relations with China are a must to ensure Taiwan’s economy is healthy and growing. Yet many, perhaps most, in Taiwan fear dependency on China. Here economics and politics have merged as if they are one.

To be sure, national identity, whether one is called Taiwanese or Chinese, or both, plague discussions about economic policymaking. Thus, it is a major distraction from focusing on real issues.

So is electricity, or how to make it. How much should be green? Going too fast in that direction engenders severe economic uncertainty.

Another matter is Taiwan’s very low birth-rate—almost the lowest in the world. Economists tell us an increasing population fuels economic growth; a falling population has the opposite effect.

Finally, the resurgence of the coronavirus has dented economic growth.

What can Taiwan’s leaders do to fix this situation? Dealing with the issues mentioned above will help immensely. Focus on growth, worry less about equity. Do not count on progressivism or democracy to be a solution. One needs to separate economics from politics in the case of China. Try to build a consensus in resolving problems. Promote optimism to increase natural population growth. Finally, stop the blame game. The virus will probably not hurt economic growth significantly.

John F. Copper is the Stanley J. Buckman Professor (emeritus) of International Studies at Rhodes College in Memphis, Tennessee. He is the author of more than thirty books on Taiwan and U.S. Asian policy.

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