Taiwan economy

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TAIWAN ECONOMY 1

Taiwan Economy

Taiwan has been one of Asia’s most growing economies over the pastfew decades. The country has been making significant improvements interms of the economy and output. Despite operating under the shadowof the major economies in the world, the country is one of the 5Tigers of Asia, and has recorded significant improvements in itseconomy. At the same time, economists assert that the country isdoing relatively well when measured against the status of othercountries in the region. In studying about the economic growth anddevelopment of the county, researchers aim to answer the question aswhat motivates the growth, and how significant economic indicatorsare performing in the country. This paper examines Taiwan’seconomic growth by looking at the historical determinants, economicgrowth in terms of GDP, demographics, savings, investments and TotalProductivity Growth.

Economistsagree that Taiwan is a country of economic success (Berger * Lester,2015). Since the beginning of the last decade of the 21stcentury, the county’s government has dedicated to developing themajor economic sectors that determine its GDP growth. Today, thecountry is listed as the 28th wealthiest country overall.As well, the country has ben performing well in the Asian listings.In this paper, the author looks at the historical determinants of thecountry’s economy. This is because the country has one of therichest economic histories, dating back to the time when they weredealing with European countries in trade. The economic growth is thereviewed based on the records of the GDP over the past few decades.This information is obtained from relevant sources, and findingsdiscussed with the support of scholarly articles. There is also asection discussing important demographics that are associated withthe country’s economy. Additionally, the paper looks at thecountry’s savings and investments, which are key to a sustainableeconomy. Finally, the research paper looks at the country’sTotal-Factor Productivity (TFP), in an attempt to account for thecountry’s total output due to labor and capital.

Historicaldeterminants

Economically, Taiwan has been in different periods that shaped andgave direction for its present economic performance. The earliestrecorded economic history of the country dates back to the Dutchperiod in the 17th century, when the country’s economywas supported mainly by trade activities with the Dutch and theSpanish. The involvement with the Dutch opened up the country to theoutside world, which has over time proven to have been a keydeterminant of the country’s future growth. It is also due to thisassociation with the Dutch that Taiwan formed close ties with othercountries, notably China and Japan (Berger, 2015). However, at thatpoint in time, perhaps the most important economic tie that developedout of the interaction was with Persian. With the Persians, theTaiwanese traded in exports such as sugar and copper, which led tothe emergence of many wealthy Taiwanese tradesmen.

Theinvolvement with the Dutch was followed by that with the Chinese(Cowan, 2012). After driving away the Dutch, General Cheng Chengkunset up economic links with Taiwan. Nonetheless, some scholars contendthat this involvement was benefitting the general and his countrymenmore than the Taiwanese people. However, the Chinese helped Taiwan toincrease the level of trade with other South Asian countries. It wasduring this period that Taiwan developed the capitalist system, whichis in use up to today. Towards the end of the involvement with theChinese, the country had developed its own rich merchants, who helpedthe county to open up more trade routes with other prospective tradepartners. According to Cowan (2012), by the beginning of the 20thcentury, the number of Taiwanese millionaires had significantlyincreased, making the country home to some of the wealthiest familiesin South Asia. This is when there emerged the Taiwanesebourgeois-nationalist revolution, which changed the social andeconomic future of the country (Rosen &amp Wang, 2011).

Thethird key historical determinant of the Taiwanese economy was theinvolvement with the Japanese. Just like with Dutch and the Chinese,the Japanese dominance in the Taiwan trade at the beginning of the20th century was as a result of an armed conflict, whichled to the eviction of the Chinese. According to Rosen &amp Wang(2011), given that Japan was still in its infancy stage in terms ofusing the capitalist system, the authorities tolerated the existenceof the Taiwanese capitalists. This measure resulted in fewrestrictions over production and distribution, which helped thecountry’s economy to stabilize. However, by the time the Japanesecapitalism had strengthened in the 19200s, the Taiwanese economy cameunder the full-force influence of the Japanese system. Most of theeconomic activities came under the control of the Japanesecapitalists, who flooded the Taiwanese economy. The Japanesecolonialism forced the Taiwanese into farming and fabric industry.According to Perkins &amp Tang (2015), the positive impact of thisturn of events was that the country’s people begun investing inAgriculture, which has proven over time to be a key sector in theeconomy. For instance, the rate of utilizing arable land in Taiwanbecame the highest in the Asian region by the 1930s. Over 24% of theland was utilized well, more than the 21% in Korea and 18% in Japan(Perkins, 2015). It was after the second World War that the countrydiversified its economy into business, commerce and finance. Today,the major trading partners of Taiwan are the United States and Japan.

Economicgrowth

In the long term, Taiwan has one of the most remarkable economicgrowths. For the purpose of this paper, the research looked at thecountry’s economic growth in the long-term perspective, given thatthe country’s development process is equally long. The Japanesemajorly influenced the country’s present economic position.Historical statistics indicate that the Japanese authorities helpedthe country to stabilize its Gross National Expenditure and GDP,which are key determinants of economic growth. Given the 1990international currency rates, the country’s GDP was about 550dollars. According to statistics, the country’s GDP was worth over489 billion dollars by 2013. This was representative of 0.79 of theglobal amount (Trading Economics, 2015). The figure below shows thecountry’s GDP growth from 2006 to 2014.

Figure1: Taiwan GDP growth. Source (Trading Economics, 2015).

According to Berger &amp Lester (2015), the country’s growth rateduring the Japanese colonial period was due to the structural changesthat were implement. These changes, as identified in the country’shistorical determinants, included the change of the economic systemfrom a Taiwanese one to a dominantly Japanese system. According toresearch conducted by Godo (2012), the impact of the income change ofthe Taiwanese people during the Japanese colonial period was a growthof 1.97% between 1905 and 1940.

Interms of trade and development, the country has limited naturalresources. The main contributors to the country’s economic growthhave been agricultural products. The country has recorded a boom inthe agricultural sector, mainly dealing with sugar, rice and otheragricultural products with other countries in the Asian region. Othermajor contributors to the economy have been the service industry andthe manufacturing industry. The graph below presents the country’sFDP per sector.

Figure2: Taiwan`s GDP by sector 1955-2011. Source (Chiang &amp Gerbier,2013)

Taiwan’s economic growth is closely linked with closer economicties with leading Asian economies, such as China and the U.S. Forinstance, the country’s service industry has greatly benefited frominvestments from the Chinese government and private sector, as wellas business dealings with leading American investors. However,Salidjanova (2011) asserts that the country faces a risk ofoverdependence on China. Regardless, according to the CIA, by the endof the year 2014, the country recorded one of the strongest Asianeconomies. Its purchasing power parity had grown from $ 1.017trillion in 2012 to $ 1.079 trillion in 2014 (CIA, 2015). As well,the gross national savings had grown from 32,5% of the GDP in 2012 to34.7% of the GDP in 2014. The three strongest sectors over the pastdecade have remained to be agriculture (1.9%), industry (35.2%) andservice (62.9%) (CIA.gov, 2015). The unemployment rate in the countryis one of the lowest in the Asian region, standing at 4% in 2014. Interms of income, the country’s household income was 10%, which is afairly stable figure. As of 2014, the inflation rate stood at 1.2%,which however was an increase from the 0.8% recorded a year earlier.

Thegraph below is a generation of figures for the country’s GDP persector (considering the most significant sectors, service, industryand agriculture).

Figure3: Taiwan GDP from agriculture. Source (Trading Economics, 2015).

Figure4: Taiwan GDP from service. Source (Trading Economics, 2015).

Figure5: Taiwan GDP from manufacturing (industry) Source (TradingEconomics, 2015).

The above three sectors have been in instrumental in maintaining thecountry’s economic growth. Today, the county’s GDP is at analmost parallel growth rate as compared to that of the U.S, asrevealed in the graph below.

Figure6: Taiwan GDP growth rate comparison with the U.S. Source (TradingEconomics, 2015).

Taiwan has benefited from the free trade agreements that have thrivedin Asia over the past decade. For instance, in 2010, the countrysigned the economic Corporation Framework Agreement (ECFA) withChina, which opened up more trade links with the country(Salidjanova, 2011). This is one of the highlights of the country’sdynamic capitalist economy, which has helped the private sector togrow significantly, and contribute at almost equal measures to thegrowth of the economy. Similarly, exports have formed a major growthpoint for the country’s economy, with the leading goods beingelectronics, machinery and chemicals However, according toSakidjanova (2011), dependence on this has exposed the country riskdue to fluctuating global demand. The main challenges for thecountry’s economic growth remain being low birth rates, aging andother demographic relate factors.

Demographics

As of July 2014, the total population stood at 23.4 million people(CIA.gov, 2015). A majority of the Taiwanese lie within the agebracket of 25-54 years. This population is also the most productiveeconomically. The number of people aged below 24 years comprises ofabout 27.5% of the entire population. Of this, the male outnumber thefemale by about 200,000 . This population, alongside with those above64 years, make up of the consumers with the least contribution toproduction and distribution. The median age of the county is 39.2years. As of 2014, the county was recording a 0,25% growth rate. Thesex ratio of the male to the female is about 1.07. This disparity isnot adequately significant in terms of gender influence to theeconomy, as both sexes contribute almost equally to the economy(CIA.gov, 2015). The major urban areas are Taipei with a populationof about 2.7 million people, followed by Kaohsiung with a populationof about 1.5 million people.

The human productivity index for the country was 1.11 children perwoman as of 2014. This is the reason the county’s major challengeto prospective growth is its population. The infant mortality rate asof 2015 was 4.44 deaths per 1000 births (CIA.gov, 2015. The countryhas been making steps towards decreasing this figure, because it isone of the threats to the country’s population growth. Thepopulation is made up of the Taianese, Chinese and indiginoys people.The Taiwanese make up of about 85% (CIA.gov, 2015). The mainlanguages are Mandarin Chinese. The literacy level in the countrystand at 96.1%. According to the CIA, children over 15 years can readand write.

Savingsand Direct Foreign Investment

The county’s household savings have growing over the past. Taiwanrecorded an increment between 2014 and 2013 of about 90400 millionTWD. On a personal level, the savings has averaged about 817000 from1964 up to 2013 (Trading Economics, 2015). The diagram below showsthe country’s household savings in 2014. According to the CIA, thehousehold consumption of the country was 53.2% as of 2015 (CIA,2015).

Figure7: Taiwan household savings. Source (Trading Economics, 2015).

In the country, the household savings correspond to the income duringa certain period. The table bellows is a summarization of thecountry’s household savings against the consumer statistics.

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Figure8: Taiwan savings. Source (Trading Economics, 2015).

Over time, the country’s investment regimes have been under theinfluence of external relations with major Asian economicpowerhouses. Primarily, mutual trade understandings between China andTaiwan’s have helped to boost its investment (Salidjanova, 2011).Since the end of the Cold War, the country has entered into a new eraof globalization and internationalization, which has had asignificant impact on its investment. The country has been performingwell in terms of Direct Foreign Investment (DFI). Some of the leadinginvestment partners are Japan and the United States, as well asChina. From the time the country gained independence up to thebeginning of the new millennium, the DFI was focused on electric andelectrical products (Berger &amp Lester, 2015). The service andforeign trade sectors closely followed this. As of the present, thecountry’s FDI draws heavily from the region’s sustainable growthand high purchasing power. Some of the key advantages of investmentin Taiwan are abundance of skilled labor, efficient logisticoperations, a strong industrial and logistical fabric and strategiclocation in the Asian region. The government, in effort to motivateand regulate FDI, has embarked on legislating preferential taxincentives to attract foreign investors. As a result, many investorshave enjoyed protection of foreign investment, as well as takenadvantage of the country’s International Conventions to conductbusiness. The graph below shows the country’s performance in termsof Direct Foreign Investment.

Figure9: Taiwan Foreign Direct Investment 2015. Source (Trading Economics,2015).

TotalFactor Productivity Growth

Taiwan has been one of the few countries that have increased theireconomies from relative poverty to the level of upper middle-incomecountries in about 30 years (Salidjanova, 2015). One of the reasonswhy economists apply TFP in studying countries such as Taiwan isbecause the role of accumulation of capital, both physical and Human,are key to their growth. Similarly, economists find it imperative todiscuss TFP in the context of the Asian countries because thesecountries have implemented successful economic models over the pastseveral decades. According to a suggestion by Bush (2013), the Asiancountries might be the role models for future economic models, whichmay as well be applied in the Western countries. Further, by studyingthe Asian countries TFP, economists find answers to questions aboutthe future of the region’s economy, and how the same influences theglobal economy.

Theneoclassical economic model holds that only physical capitalaccumulation is set to grow as it approaches a steady state (Stverenet al., 2012). The reason for this argument by the accumulationistsis that the growth rate of a country is a function of the rate ofproductivity in the long run. As such, in the case of the Taiwaneconomy, accumulationists hold that efficiency growth be realizedwithout addressing serious concerns about the country’s futuregrowth. In comparison to other countries, the low TFP growth inTaiwan, alongside the huge capital accumulation, can be interpretedas a natural pattern for economic growth. Theoretical results fromstudies indicate that from the accumulation point of view, rapidgrowth will be decreased if it is not accompanied with TFP (Singh andTrieu (1996). However, Taiwan, being one of the four Tigers of Asia,will most likely receive little contribution from the TFP.

Figure10: Estimates of TFP growth in Taiwan (Aggregate Capital and Labor).Source (Singh and Trieu (1996).

Figure11: Estimates of TFP growth in Taiwan (Differentiated Capital andLabor).

Whilemeasuring Taiwan’s TFP, the young (1992) model is applied. Thismodel uses aggregate production for the country’s economy. The twomajor factor inputs that are applied are the capital and labor, whichare further categorized into smaller units. Some of the categoriesare residential buildings, construction, machinery and demographics.According to the results of the calculation of the TFP, Singh andTrieu (1996) found that Taiwan has been consistently performinghighly over the past three decades. The TFP has contributed to theeconomy by a figure of about 45% of the general output. However, thefigures for the periods between 197301974 and 1981-1982 werenegative. Regardless, the average smooth effect was indicative of asubstantial fluctuation in the TFP over the period. Whenundifferentiated capital and labor are factored, the averagecontribution of the TFP to the growth was about 18%. This observationis made alongside an increase in the contribution from labor, whichincreased to 40% from 27% (Singh and Trieu, 1996). This is as aresult of factoring difference in demographics such as education andage. The interpretation of this observation is that the human capitaleffect in Taiwan significantly impacts the overall output growth.Moreover, fluctuations in the TFP Growth is not majorly affected byfactoring heterogeneity of the two-factor inputs. Singh and Trieu(1996) reduced the labor share by about 10%, and established thatthere was a resultant decrease of labor, by about 3.5%. These figuresput Taiwan’s TFP at the same level as Japan and Korea.

Fromthe above discussion, it is evident that the accumulationists debatedoes a good job in explaining the situation of Taiwan’s TFP. Whencompare against Japan, the results reveal that Taiwan is much moredeveloped in terms of TFP Growth. The discussion also indicates thatTaiwan has a high growth rate, more so when considered using laborand capital. This supports Young’s argument that the neoclassicalgrowth theory explains the difference in the performance of economiesafter the end of the cold war. In conclusion, the growth of output inTaiwan is the major factor for its economic growth over the past fewdecades. Another explanation for the country’s performance in termsof TFP is that its FDI has helped its major economic sectors to growsteadily.

References:

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Bush, R. C. (2013).&nbspUnchartedStrait: The Future of China-Taiwan Relations.Brookings Institution Press.

Chiang, M. &amp Gerbier, B.(2013). Cross-Strait economic relations: Recent development andimplication for Taiwan. EconomiePolitique de L’Asie (1): Retrieved9 December 2015 from https://regulation.revues.org/10177?lang=en

CIA. (2015). The World Fact Book: Taiwan. Retrieved on 9December 2015 from:https://www.cia.gov/library/publications/the-world-factbook/geos/tw.html

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Godo, Y. (2012).&nbspAnew database on education stock in Taiwan&nbsp(No.20). Institute of Economic Research, Hitotsubashi University.

Perkins, D. H., &amp Tang, J. P.(2015).&nbspEastAsian Industrial Pioneers: Japan, Korea and Taiwan&nbsp(No.041). Centre for Economic History, Research School of Economics,Australian National University.

Rosen, D. H., &amp Wang, Z.(2011).&nbspTheImplications of China-Taiwan Economic Liberalization&nbsp(Vol.93). Peterson Institute.

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Trading Economics. Taiwan. Retrieved on 9 December 2015 from:http://www.tradingeconomics.com/taiwan/gdp

Van Staveren, I., Elson, D., Grown,C., &amp Cagatay, N. (Eds.). (2012).&nbspThefeminist economics of trade.Routledge.

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