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34 Taiwan Development Perspectives 2009
I. Introduction
Taiwan’s economy grew remarkably fast in the last
four decades of the twentieth century. The mean annual
growth rate was 8.47 percent between 1960 and 2000.
Unemployment averaged 2.28 percent, while inflation
was kept around 4.52 percent a year. The rapid growth
of the economy was reflected on the improvement of
the living standard of the people. Per capita income
increased from US$ 144 in 1960 to US$ 13,090 in
2000.
The economy slowed down after 2000. Unemployment
rose. Gross domestic product grew 4.07 percent
on average from 2000 to 2007, while unemployment
rate climbed up to 4.26 percent. In fact, the
economy shrank by 2.17 percent in 2001, the only negative
growth ever since 1960 and the unemployment
rate hit 5.17 percent in 2002. What is wrong with Taiwan’s
economy and what causes such a slowdown since
2000? Moreover, as the world was hit a global financial
crisis of 2008, a small open economy like Taiwan is
heading for a severe recession. Will Taiwan escape
from the current crisis as it did from the Asian financial
crisis in 1997? As Asia is moving toward economic
integration, will Taiwan be marginalized? What are the
relevant government policies that may be applied to
help restructure the economy to cope with new challenges?
This paper intends to analyze the causes of Taiwan’s
economic slowdown since 2000 and addresses
the current situation as well as the consequences of the
global financial crisis. Are exposure under rapid globalization
and outward foreign direct investment in
China the causes of Taiwan’s economic slump? What
can government do to prevent the economy from further
deterioration and successfully help regain Taiwan’s
past growth momentum and sustain its growth in the
future? This is the most important issue confronting
Taiwan today and requires a coherent investigation.
II. Forces of Taiwan’s Economic Development:
Past and Present
Taiwan’s fast economic growth in the past can be
attributed to rapid factor mobilization and accumulation
under an outward-oriented open-trade environment,
which enabled Taiwan to industrialize the economic
structure according to its comparative advantage. A
high saving rate sustained a high investment rate, augmenting
capital accumulation. Trade-induced learning
by doing with a better quality of human resources fostered
domestic technological upgrading and industrial
transformation. 1
In the 1960s, Taiwan’s economy grew fastest, by
9.17 percent per annum. (See Table 1.) Figure 1 depicts
the pattern of rapid industrial structure change in which
manufacturing industries rose from 18.63 percent in
1961 to 35.83 percent in 1973 before the first oil crisis.
High domestic savings (20.18%) in the 1960s sustained
a high investment rate of 21.22 percent a year on average
without massive borrowing from abroad. An outward-oriented
open trade policy made it possible for
Taiwan to increase exports by 33.83 percent a year in
the 1960s. As a result, Taiwan started accumulating a
trade surplus in 1976. In the two decades that followed,
Taiwan maintained a constant industry share of about
1 Using Taiwanese industrial data, Chuang (1996) confirms
the existence of strong external economies
among industries, and shows that these external
economies can be largely attributed to economic-wide
trade-induced learning from opening
trade with advanced countries. Chuang (1999) finds
that human capital accounts for 46% of output
growth in aggregate manufacturing industry and
from 23 to 84% in two-digit industries for the period
1978-1994. Tallman and Wang (1994) find that human
capital alone contributed 45% of Taiwan’s economic
growth for the period 1965–1989. Moreover,
they find that the total contribution of raw labor,
physical capital and human capital can account for
90% of Taiwan’s economic growth.