1

1. Taiwan economy - an overview

Taiwan, officially called Republic of China, is one of the largest economies in Asia.
With a GDP of 47,900 USD per capita, Taiwan is considered one of the four Asian tigers,
due to rapid economic growth and development from the 1960s until today. Taiwan is one of
the global leaders within the information and communications industry, which makes up
one-third of Taiwans GDP. During the last five years, the annual average economic growth
has been 4.5%, although it is expected to drop to 1.56% in 2015 (DGBAS, 2015).
Trade is essential for Taiwans economy and lately the government has been enhancing
economic ties and agreements with other countries. Thus, Taiwan is not officially recognized
as a country, it only holds formal diplomatic ties with few other countries. China claims that
other nations cannot have official relations with China and Taiwan at the same time, which
makes the process complicated. However, Taiwan joined the WTO in 2002, and in 2013 it
successfully signed agreements with New Zealand and Singapore. Taiwan hopes that these
diplomatic improvements will improve its chances to join the Trans-Pacific Partnership in the
future (Ministry of Taiwan Foreign Affairs, 2015).
2. Taiwan macroeconomic outlook and medium-term prospect
In this section, different macroeconomic indicators will be presented in order to analyze how
they affect Taiwans economy in terms of consumption, investment, trade balance, and
government spending.
2.1. Inflation
The inflation rate in Taiwan has been between -1% to 3.5% during the last four years, and the
average inflation has been about 1.33%. During this period, consumption and private
investments in Taiwan have been increasing due to stable monetary policies and a constant
growth of wages and labor participation.
Though, as we can examine from graph 1, the inflation has recently turned into deflation and
reached its lowest edge in January 2015 (DGBAS, 2015). In August 2015, the inflation was
registered at 0.45%. This deflation is caused by falling fuel and oil prices, Chinese
economys slowdown and decreasing demand for electronic devices and other exports. The
consumer confidence has weakened and, therefore, the domestic consumption and private
investment has started stagnating.

Graph 1: Inflation rate (2011-2020)

%
2.5
2
1.5
1
0.5
0
-0.5
2011

2012

2013

2014

2015

Inflation rate

2016

2017

2018

2019

2020

Inflation projection

Sources: IMF (2015) & DGBAS (2015)

Nevertheless, wages and labor participation are still increasing and this alleviates private
consumptions slowdown. Furthermore, it has been registered that the core inflation rate,
which excludes the prices of vegetables, fruits and energy, was up to 0.82% year-on-year
during the January-August period (Central Bank of Republic of China, 2015). The core
inflation, together with a recent cut of the discount interest rate, makes Taiwanese Central
Bank confident about increasing consumption in the future. Indeed, DGBAS forecasts an
inflation rate of 0.74% for 2016 and IMF projects the inflation to reach 2% by 2020.
2.2. Exchange rate and trade
The exchange rate has a big impact on a
countrys net-export. Since Taiwan is a small
open economy with a floating exchange rate and
with exports representing over 76% of its GDP
(IMF, 2015), it is important to analyze the
relationship between New Taiwanese Dollar
(NTD) and foreign currencies. A big export
sector contributes to a higher dependency on
foreign demand and competition, which are both
closely related to exchange rates.
The currencies of Taiwans main competitors,
Japan and South Korea, which also export a
great deal of technological products, have
plunged in value against the USD during the last

%
0.25

Graph 2: Annual average change in

exchange rate against to the USD
2011-2015

0.2
0.15
0.1
0.05
0
-0.05
-0.1
-0.15
2011

2012

2013

2014

2015

Korean Won

Japanese Yen

Chinese Yuan

Taiwanese NTD

Sources: World Data Bank (2015) & IMF (2015)

4 years as we can observe in graph 2. A strong NTD is a disadvantage for the Taiwanese
trade balance thus Japanese and Korean products appear to be cheaper on foreign markets.
The loss in competitiveness to neighbor competitors has contributed to a shrinking export
sector in 2015 for the first time since 2009 (Reuters, 2015). China is Taiwans biggest trading
partner, where 26% of its total exports go to, and has sometimes been accused for
manipulating its currency in order to boost its exports. An undervalued yuan is a
disadvantage for Taiwan hence the competition in the export market and because Taiwanese
goods become more expensive for Chinese to purchase.
2.3. Labor market
Taiwans unemployment level is today at its lowest level in 14 years, even though the
economic growth has been slackening. The unemployment rate has constantly been
decreasing in the last five years, from 5.2% in 2010 to 3.9% in 2015. A decreasing
unemployment contributes to higher wages, which has a positive impact on the domestic
consumption and stimulates economic growth. When unemployment is low, governmental
revenue increases because of employees paying taxes and less governmental spending is
needed on social benefits, unemployment insurance and decentralized working programs.
The minimum wage in Taiwan has been rising every year since 2011. Furthermore, in July
2015, the government raised the minimum wage by 3.81%, up to 120NTD per hour and
20,008NTD per month, in order to maintain the labor basic life (Council of Labor Affairs,
2015). The government also believes that increasing minimum wage in the recent situation
could favor internal consumption and diminish Taiwans reliance on exports (Taipei Times,
2015).
Graph 3: Unemployment rate (2010 - 2015)
%

5.5
5
4.5
4
3.5
2010

2011

2012

2013

2014

2015

Unemployment rate

Source: IMF (2015)

2.3. Monetary and fiscal policies

Even though the inflation has been negative the last eight months, Taiwans Central Bank has
maintained its benchmark discount rate at 1.875%, as it has been for the last four years. The
Central Bank argued that holding an accommodative monetary policy would have helped to
maintain price and financial stability and in that way encourage economic growth.
Notwithstanding, on the 24th of September 2015, Taiwans Central Bank decided to cut the
discount interest rate to 1.75%, due to sluggish external demand, slower Chinese recovery
than anticipated and weak domestic consumption. Hence, they now expect inflation to rise
mildly in the second half of the year. A lower interest rate would benefit domestic
consumption and private investments since it becomes cheaper to borrow money (Central
Bank of Republic of China, 2015).
Further, several domestic business heavyweights also urged to the Central Bank to devalue
the NTD or to peg it to a basket of different currencies (The China Post, 2013) in order to
boost the export. This was, however, rejected by the Central Bank governor who instead
argued that Taiwanese companies need to restructure and invest to move up the value-added
product ladder and it that way earn competitive advantages (The Diplomat, 2014). Besides, a
depreciation of the currency has an increasing impact on import prices of, e.g., oil and other
commodities, which will hurt the consumers. The application of easing monetary policies in
order to devalue the currency is usually not appreciated by other countries and it goes under
the name Beggar-thy-neighbor (Financial Times, 2013), since it gives trade advantages by
stealing export market shares from its competitors in an unfair way.
The Taiwanese government has recently increased the minimum wage. This fiscal policy can
be used to increase household consumption and also tax revenues without an unpleasant tax
raise. Yet, economists argue that a permanent minimum wage increase (if it is not eroded by
inflation) may have a reducing impact on the employment rate, especially for the low skilled
jobs.
During the last five years, the Taiwanese governments expenditure has been increased in
order to stimulate the economic growth, especially when exports have been stagnating.
Investments in infrastructure and education are important, particularly for Taiwan that wants
to climb the value-added product chain. In order to achieve this, a rise in productivity and
innovation is crucial (IMF, 2014). Nevertheless, projection of governmental spending seems
to drop from 18.4% of GDP today to 17.5% in 2020. It appears plausible that governmental

spending and the budget balance are correlated, thus the public debt is also projected to fall
(IMF, 2015).
3. Challenges
For the next five years, Taiwan will face three major challenges: the relationship with China,
engagement in different trade agreements and aging population.
As mentioned in previous part, Taiwan is highly dependent on trade and therefore will have
to face downturns when the total global demand decreases. Chinas significant slowdown
also has an important impact on the Taiwanese economy since China and Hong Kong
imports from Taiwan count almost 40% of Taiwans exports.
One of Taiwanese major challenges in the future is to transform to a higher value-added
economy, without completely losing the ability to produce a wide range of products for
global market. Nowadays, Taiwanese manufacturers consider moving high-ends production
to mainland China in the future, due to a rapidly aging population that leads to a decline in
working force population. Hence, a strong integration with China offers solutions but also
appears highly risky, because Taiwan is getting over-dependent on China.
A controversial trade agreement, the Cross-Strait Service Pact, was signed between Taiwan
and China in 2010 and is considered a major factor of the increased trade between the
countries. Yet, hundreds of thousands people rallied against the pact to assert Taiwans
independence, with the fear of getting swallowed up by China (The Economist, 2014).
Maintaining a good relationship with China without upsetting the Taiwanese population is
definitely a challenge for the government.
Moreover, engaging in different trade agreements is highly important. The trade with the
existing 12 members of the Trans Pacific Partnership amounted to 35% of Taiwans global
trade in 2014. This would enable Taiwan to expand its market access, safeguard their position
in the global supply chains and reduce the risk of shrinking exports caused by inequitable
competition and in that way improve its current account balance. However, the reduction of
tariffs would affect 90% of the Taiwanese goods, especially the currently protected
agricultural and manufacture sector. (Ministry of Economic Affairs, 2014).
Taiwan has a rapidly aging population, which will strongly affect the production and the
GDP growth as well as the public debt. Based on a deeper look at this situation, the IMA

Asia predicts that economic growth will be limited. An elder population tends to have a
negative impact on the economy because of the dependency rate issue, a decline in working
labor force and the risk of fewer saving needed for investments. However, the public debt, as
a part of the GDP is projected to decline in the next 5 years and GDP is expected to grow at
an annual average of 3% until 2020 (Oxford Economies, 2015).

% of GDP

Graph 4: Current account, Governmental spending, public debt

2010-2020

50
40
30
20
10
0
2010

2011

2012

2013

Current Account balance

2014

2015

2016

2017

Governmental spending

2018

2019

2020

Public debt

Source: IMF (2015)

4. Conclusion
Taiwans development and leadership in information, technology and electronic industries
seem to give to the country reliability and stability for the upcoming years. These industries,
based on innovation, research and constant upgrade, have been growing for the last twenty
years and are now the biggest pieces of global demand and trade. There is no apparent sign
for this trend to change in the long period, but certainly, as it has been registered recently this
year, Taiwans biggest risk seems to be over dependency on these sectors, suffering more
than others countries these momentary slowdowns of global demand. Taiwan also needs to
put a lot of resources into research and development in order to compete with, in particular,
South Korea, Japan and China.

Reference
Brittan, S. (2013). The folly of beggar-my-neighbour policies. Available:
http://www.ft.com/intl/cms/s/0/6879ea32-6ad0-11e2-987100144feab49a.html#axzz3n32fGsH6. Last accessed 28th Sep 2015.
Central Bank of the Republic of China . (2015). Monetary Policy Decision of the Board
Meeting. Available: http://www.cbc.gov.tw/ct.asp?xItem=51132&ctNode=448&mp=2. Last
accessed 28th Sep 2015.
Department of Standards and Equal Employment. (2015). Adjustment of Basic Wage
(Minimum wage). Available: http://english.mol.gov.tw/6386/6394/6402/23308/. Last
accessed 28th Sep 2015.
Directorate-General of Budget. (2015). Accounting and Statistics.Available:
http://eng.dgbas.gov.tw/mp.asp?mp=2. Last accessed 28th Sep 2015.
IMF. (2015). Report for Selected Countries and Subjects. Last accessed 28th Sep 2015.
OECD. (2015). OECD Statistic: Real minimum wages. Available:
https://stats.oecd.org/Index.aspx?DataSetCode=RMW. Last accessed 27th Sep 2015.
Reuters. (2015). Taiwan says exports will decline in 2015, cuts GDP growth
forecast. Available: http://www.reuters.com/article/2015/05/22/taiwan-economy-gdpidUSL3N0YD3AW20150522. Last accessed 28th Sep 2015.
Taiwanese Ministry of Foreign Affairs. (2015). Economy. Available:
http://www.taiwan.gov.tw/ct.asp?xItem=140103&CtNode=3843&mp=1. Last accessed 28th
of Sep
The Economist. (2014). Sunflower sutra. Available:
http://www.economist.com/blogs/banyan/2014/04/politics-taiwan. Last accessed 28th Sep
2015.
The Oxford Economies. (2014). Taiwan Country Report. Oxford, Oxford Economics.
The Oxford Economies. (2015). Global Countries Report. Oxford, Oxford Economics.
World Data Bank. (2015). Official exchange rate. Available:
http://data.worldbank.org/indicator/PA.NUS.FCRF. Last accessed 29th Sep 2015.