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What’s Wrong with Taiwan’s Economy? Impact of Globalization 41
What will be the impact of globalization on Taiwan’s
economy? In economics, globalization engages
in various aspects of cross-border transactions, free
international capital flows, foreign direct investment,
portfolio investment, and rapid and widespread diffusion
of technology. Proponents of globalization argue
that it enhances economic prosperity and leads to more
efficient allocation of resources, which, in turn, will
result in higher output, more employment, a lower price
level and a higher standard of living. Critics worry
about the resulting outsourcing and offshoring production
may de-industrialize the economy, hollow out domestic
industry, and cause unemployment to rise.
China started rising as an economic power in the
1990s, while Asia’s regional economic integration got
under way towards the end of the last century. China
and the Association of Southeast Asian Nations
(ASEAN) have been the two largest destinations of
Taiwan’s outward foreign direct investment. In contrast,
the United States, Taiwan’s top customer until 2000,
saw that status being eroded. The restrictions the government
placed on Chinese trade in 1996 have slowed
down the division of labor across the Strait and opportunities
were lost for Taiwan to become a regional operation
center in East Asia. There lacked direct
cross-Strait links of flight and maritime shipping service.
If they were in place, the savings in cost would
total NT$ 52.5 billion per year.
Figure 6 shows the trend of labor productivity for
the manufacturing and service sectors since 2001. The
former is more productive than the latter. Moreover, the
ICT industry, which has made the largest foreign direct
investment in China, actually has the highest growth in
labor productivity. Chuang and Lin (2007) find that
Taiwan’s outward FDI in China has de-industrialized
but not hollowed out Taiwan’s economy. The slowdown
in Taiwan’s labor productivity can be attributed to the
lower productivity in the service sector, but not to the
outward FDI. Figure 7 shows the trend of total factor
productivity for the service sector. In general, the
growth of total factor productivity is relatively slow
except for real estate, rental and leasing, and trade services.
Four service industries – trade; real estate, rental
and leasing; accommodation and eating-drinking places;
and cultural, sporting, and recreational services – register
an upward trend, while the other four – professional,
scientific and technical services; transport, storage and
communication; finance and insurance; and health
care – stay stagnant or go downward.