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2.97% Economic Contraction

China's Industrial Purge, Taiwan's Trauma


China's quest to move beyond export processing is wreaking disaster in Taiwan, where policymakers are being forced to confront the harsh consequences of Taiwan's economic over-reliance on China.



China's Industrial Purge, Taiwan's Trauma

By Monique Hou, Yi-Shan Chen
From CommonWealth Magazine (vol. 416 )

How bad will Taiwan's economy get this year? On February 18 the Directorate General for Budget, Accounting and Statistics (DGBAS) provided the answer: negative growth of 2.97-percent. This figure is not only the single worst contraction in Taiwan's history, it is also a 5.09-point downward revision of the forecast of 2.12-percent growth for 2009 made just three months ago.

The take on the release of the directorate's forecast was not interpreted the same in all quarters. Many have applauded the directorate for "facing reality" and "having the guts to tell it like it is." Perhaps the DGBAS forecast approaches reality, but the government's explanation for the nation's slide into its deepest recession in half a century is worthy of contention.

The directorate maintains that the economic contraction of 8.36 percent in the fourth quarter of last year relative to the same period the previous year, and further contraction this year, are largely due to the global recession, the speed and magnitude of which has exceeded forecasts, severely wounding the manufacturing and export sectors.

"This is the cheapest of explanations, glossing over government incompetence and abnormalities in Taiwan's economy," noted economic commentator Ma Kai says bluntly.

Ma notes an imbalance in Taiwan's economic fundamentals, with growth overly reliant on exports of manufactured goods to China, while other industrial sectors play a marginal role.

The government's current line explaining the economic contraction blames depressed global demand resulting from the global financial meltdown, causing a decline in China's exports to Europe and the U.S., and in turn causing a slide in Taiwan's exports to China, Ma says.

In fact, opines Ma, the decline in Taiwan's exports to China began well before the start of the global financial meltdown, and the magnitude of that decline was far, far greater than the drop-off in exports to other nations (Table 1).

According to Ministry of Finance statistics, last July growth in Taiwan's exports to China and Hong Kong slid 21.5 percentage points, from 25.5 percent to 4 percent, far exceeding the 13.3 percentage-point decline in overall export growth.

"The problem is that the financial meltdown didn't happen until September," Ma says.

In the wake of the September financial tsunami, the decline in exports did indeed accelerate. But the speed of the decline in exports to China and Hong Kong outpaced that of overall exports nearly ten-fold. As of January, exports to China/Hong Kong had declined 58.6 percent. In other words, Taiwan's exports to China/Hong Kong have been cut by more than half. Given Taiwan's economic over-reliance on exports to China, the potential for disaster is readily apparent.

The reason behind the breakneck decline in exports to China lies in a miscalculation on the part of Chinese authorities in seeking to shed their export processing sector too soon – a sector that accounts for more than 50 percent of that nation's exports, and also happens to be one in which Taiwanese companies are heavily concentrated, constituting the core of Taiwan's trade surplus with China.

Industrial transformation and upgrading, particularly moving export processing industries away from coastal areas to make way for high tech and more highly capital-intensive industries, is a major part of China's Eleventh Five-year Plan for National Economic & Social Development (2006-2010). Guangdong Province began implementing the plan at the beginning of last year, instituting the policy known as "Empty the Cage, Change the Birds," which enforces the use of labor contracts, ends the long-standing tax holiday on export goods, and introduces a series of minimum wage hikes. Consequently, within a short few months, more than 10,000 businesses in the Pearl River Delta region closed their doors, many of them Taiwanese businesses headed for home.

"Even if there were no financial meltdown, China's and Taiwan's exports still would have fallen," says former Control Yuan president Wang Tso-jung. Regardless of whether one believes Taiwan's economic structure should or should not have been so inclined toward export processing, it is now the reality, Wang avers.

"China's elimination of the export processing industry is tantamount to the elimination of Taiwanese businesses in China, and the elimination of Taiwan's economy; this relationship is quite clear," Ma Kai laments. "But to date no one in Taiwan's government has looked at this problem seriously. How can those who are being harmed not speak up?"

China Self-destructs

The export processing industry is one many poorer nations currently are shackled to for economic survival, China included. But China fell for the myth of industrial upgrading and, before its time had arrived, determined to shed those shackles, adding to its woes amid the global financial meltdown and resulting economic downturn.

As Ma Kai notes, Chinese officials are still projecting eight-percent growth for this year, but actual growth may be more like six percent.

"This is a dangerous number, because six percent is not enough to provide growth without turmoil," Ma says. "China's elimination of the export processing industry is tantamount to self-destruction."

Local governments in China's coastal provinces have already put the brakes on the "birdcage policy."

"The Ma Ying-jeou administration should accelerate negotiations with China and convince them of the folly of this policy, rein in that horse, and get those shackles back on," Ma Kai says.

Bailing out exports is but a stopgap emergency measure. A less immediately pressing but infinitely more important issue is finding Taiwan's path to long-term economic sustainability.

In interviews with CommonWealth Magazine, both the younger Ma Kai and the old hand Wang Tso-jung agreed that Taiwan should seize this opportunity to sit down and truly size up the fundamental nature of Taiwan's economic problems. Both recommend focusing public works funding on flood control in the south, drought relief measures in the north and general beautification islandwide to build Taiwan into a highly livable nation.

"Taiwan is too unsightly, a situation Taiwanese used to excuse by saying they were too busy, too busy exporting," Ma say. "Now there are idle people everywhere and the government should make good use of that manpower and get things done that have been neglected for so long."

"Even just doing this, how may years will that take? How much will that cost? How many jobs involved? Employ 80,000 or 100,000 people and people are going to sit up and notice," Wang adds.

Through a comprehensive national land development program, "pigsties would be turned into palaces," Wang jokingly states. If this can actually be accomplished, then we will see "country folk heading for the cities, urbanites heading for the country, and foreigners flocking to Taiwan." In itself it would form a massive and sustainable service industry.

Translated from the Chinese by Brian Kennedy