EUR 564.18 For Business Accounts Only

Taiwan: Stuck In A Rut

State of mind is arguably the most important driver of economic policy making. We would all like to think that governments and central banks are rational when it comes to choosing the best policy framework for a country but that is rarely the case. They are either captured by vested interest groups or by, as Keynes would have it, the views of some defunct economist. Sometimes they are captured by both.

Taiwan is a good example of “both”. Semiconductors and electronics production more generally are the great success story of Taiwan. One company, TSMC, the largest and most successful semiconductor manufacturer in the world accounts for 20% of the Taiwan Stock Exchange Weighted Index. Entrepreneurial businesses which grew from nothing over the last 40 years are now giants in the economy, giants with influence. Taiwan’s large-scale export manufacturers use their influence to protect their business patches from competition internally. They also use their weight to influence economic policy by, for example, extolling the virtues of a cheap exchange rate. Neither the government nor the central bank is willing to challenge them.

Over the years the Central Bank of China has certainly accommodated their views, to the detriment of the development of the domestic economy. In our latest Asianomics Country Report, Taiwan: Stuck In A Rut, we show how manufacturing’s share of GDP in Taiwan has grown on the back of a cheap currency policy. Nothing much wrong with that except a) it hasn’t translated into a high earning, happy workforce and b) it is now hostage to the fortune of an increasingly protectionist-leaning global economy.

Polarisation and disaffection strut the stage in Taiwan as much as anywhere in the United States and Europe. And, like those areas, a strategic, visionary government is lacking to produce much-needed change. Maybe it is the heavy hand of China in the background but, more likely, it is just the populist disease from around the world that is forcing Taiwan’s politicians into short term, focus group policies that have no lasting benefit.

There are some great companies to have in an investment portfolio (as long as global growth is good) and there are no worries about sizable exchange rate depreciation but there is so much more that could be done. A frustrating example of limited economic and political vision.

Best for now
Jim