Taiwan’s Mounting Economic Challenges

Taiwan’s economy rebounded relatively quickly from the global financial crisis, posting an average 7.4% growth rate in 2010 and 2011, which followed a 1.8% contraction in 2009. This would appear to attest to the resilience of the island’s economy. However, Taiwan’s export-oriented economy has struggled to stay afloat this year, forcing the government to revise its growth projections down nine times. BMI forecasts Taiwan’s economic growth to be one of the slowest in Asia in 2012, at just 0.9%.

The present slowdown has brought to light as well as exacerbated a number of deficiencies within Taiwan’s economy, which, unless corrected, are likely to be detrimental towards its long-term growth prospects. In addition, because it is intricately tied to China’s economy, Taiwan will undoubtedly be affected by the mainland’s rebalancing efforts going forward.

Below, we list the main challenges facing Taiwan’s economy:

  • The banking sector is overcrowded and thus in need of consolidation. There is also excessive state involvement in the sector.
  • Taiwan’s tech sector is in structural decline, with research and development (R&D) and innovation failing to keep up with its competitors, namely Japan and South Korea.
  • Although Taiwan has deepened its economic ties with China, it has failed to attract significant Chinese investment. Foreign investors may meanwhile lose interest in Taiwan as a gateway to China.
  • Taiwan’s labour market is somewhat rigid, and the island has failed to attract skilled foreign professionals to make up for its domestic talent shortages.
  • Taiwan’s population will age rapidly this decade, and start shrinking from 2025. Demographic factors will strain the island’s fiscal position in the not too distant future.

As a result of the above factors, BMI recently revised down our average real GDP growth forecast for Taiwan in 2014-2022 to 3.9%, from our previous projection of 4.7%. Our full article on Taiwan is available to subscribers at Business Monitor Online and will appear in this week’s edition of Emerging Markets Monitor.