Competitiveness not the key indicator of Taiwan's growth

PHOTO: Competitiveness not the key indicator of Taiwan's growth

Laast month, when reports reached Taiwan that the island's ranking in the 2013 World Competitiveness Report prepared by the Swiss-based International Institute for Management Development (IMD) had fallen by four notches, the news touched a raw nerve.

Taipei's Directorate General of Budget, Accounting and Statistics had just lowered its prediction for Taiwan's 2013 economic growth to 2.4 per cent. This was down from a previous estimate of 3.59 per cent in the wake of worse than expected GDP growth for the first quarter.

With exports faltering, it was clear that the widely expected economic recovery was faltering. Could the island's declining competitiveness be the reason?

Quoting the IMD assessment, the American Chamber of Commerce (AmCham) in Taipei subsequently released a report pointing out that the economy was under-performing as a destination for foreign investment.

"The Ministry of Economic Affairs should thoroughly re-evaluate the foreign investment application approval process," AmCham chairman Alan Eusden told the media. Taiwan Vice-Minister of Economic Affairs quickly responded by promising to submit this and other AmCham suggestions to the legislature for review.

Lacklustre foreign investment is certainly an issue. Approved foreign direct investment in Taiwan totalled US$5.56 billion (S$7 billion) last year. This was higher than the US$3.81 billion in 2010 and US$4.96 billion in 2011, but still much lower than that of Thailand, Vietnam, Indonesia, Hong Kong and Singapore. Taiwan has also had difficulty attracting private equity funds.

But while AmCham saw Taiwan's fall in the IMD's competitiveness rankings as evidence of the need for reform in order to spur growth, the connection was far from obvious. Despite the downgrade, Taiwan was still ranked the 11th most competitive economy among the 60 the IMD studied. The island also remained the third most competitive economy in Asia after Hong Kong and Singapore.

A more convincing explanation for the low foreign investor interest - particularly in export-oriented industries - is political. China regards Taiwan as a renegade province. It has therefore actively opposed attempts by Taipei to conclude formal agreements with its major trading partners, since this would imply that other countries were recognising it as an independent state.

Tellingly, the island has not been invited to participate in the negotiations leading to the formation of the US-promoted Trans-Pacific Partnership (TPP). Apart from the United States, the TPP includes countries such as Australia, Malaysia, Singapore, Chile, Mexico and Vietnam, and may soon involve both China and Japan.

Compare Taiwan's situation with that of economic rival South Korea, which has signed free trade agreements (FTAs) with ASEAN, India, the European Union and the US. Not surprisingly, South Korea is doing much better than Taiwan in terms of both exports and its ability to attract foreign investment. The fact that South Korea ranks 13th in competitiveness, well below Taiwan in the IMD's assessment, hardly seems to matter.

Taiwanese exports compete directly with South Korea's in electronics, steel, machinery, petrochemicals, plastics and textiles. Since Taiwan's problem is political rather than economic, efforts to improve competitiveness further will probably result in only marginal improvements. Ditto for a recent suggestion by the influential China Times, a local newspaper, that Taipei should devalue the Taiwan dollar in order to offset the effect of the falling yen.

This is not to say, however, that the island is doomed to economic stagnation. The fact that Taiwan's free trade negotiations with Singapore and New Zealand have recently reached an advanced stage without any attempt by Beijing to scuttle them is significant. Beijing's new attitude is probably linked to the warming of cross-strait ties following Taiwan President Ma Ying-jeou's moves to foster closer trade and investment links with the mainland.

Singapore and New Zealand also appear to have found a formula that allows the two countries to avoid any suggestion that they are dealing with Taiwan as an independent state.

All this suggests that Taiwan's FTAs with Singapore and New Zealand could become models for similar agreements with more important trade partners in the future.

But before that can happen, President Ma will have to overcome domestic protectionist sentiment, particularly in agriculture.

Apart from China's acquiescence, negotiations with Singapore and New Zealand went smoothly mainly because Singapore does not have any agriculture, while New Zealand's farm products do not overlap with Taiwan's very much. In the past, there has also been strong opposition in Taiwan to the liberalisation of the telecommunications, pharmaceutical and transportation sectors.

International competitiveness rankings can be useful, particularly if they prod governments into implementing reforms. But, as the case of Taiwan illustrates, competitiveness is not always the most important determinant of economic growth.

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