How Taiwan Weathers Storm
As East Asia's currencies plummeted and stock markets collapsed in the 1997 financial crisis, Tawiwan's currency fell only 15 percent and its stock market dropped by only 9 percent.
The majority of East Asian countries incurred more than just severe shocks to their financial sectors; they also encountered grave setbacks in production, consumption, and invetment. As a result, economic growth has been stunted and may even turn negative. In comparison, Taiwan's financial sector has only been mildly affected and is essentially performing well. Taiwan's economic growth in 1997 was 6.8 percent, consumer prices rose only 0.9 percent, and commodity prices fell 0.5 percent.
How was Taiwan able to weather the tempest?
* Gross national savings have exceeded gross domestic investment annually for many years. Investment in Taiwan is essentially funded from domestic savings rather than by incurring foreign debt.
* Taiwan has run a current account surplus for many years ($7.7 billion in 1997).
* Taiwan had ample foreign exchange reserves of $83.5 billion in 1997, enough to meet foreign exchange needs for eight months of imports.
* Taiwan has also adopted the right step-by-step process of financial liberalization. This involved first stabilizing commodity prices, liberalizing trade, and lifting restrictions on interest rates and foreign exchange rates. The next step was to open up the flow of capital. When the crisis occurred, Taiwan had a floating exchange rate, unlike the dollar-peg schemes of those countries affected by the financial crisis.
* The structure for financing Taiwan businesses is sound. Taiwan's businesses made use of the country's hot stock market in 1997 to get listed, get traded over the counter, and raise equity. Over $15.3 billion in equity was raised, increasing capitalization ratios.
* Taiwan's industrial structure consists mainly of small and medium-sized enterprises, which comprise nearly 98 percent of all enterprises in the country. These businesses are flexible in responding to external shock.
Taiwan's economy has been upgraded rapidly in the past decade. Today, more than 40 percent of Taiwan's total exports are capital and technology intensive products, while labor intensive products make up less than 20 percent of exports. The composition of exports more and more resembles that of developed nations. The primary reason for the financial crisis in Southeast Asian countries was a shakeout in the export-processing market caused by excessive demand. Thus, the countries truly affected were those located in the same region that was supplying cheap labor. More than a decade ago, Taiwan was forced to abandon traditional export-processing industries. It is now an upstream provider of raw materials, components, and equipment for export, so it avoided being squeezed out of the export market by these countries.
None of this provides an ironclad guarantee that Taiwan won't face economic difficulties. But its ability to weather the Asian financial crisis can be seen as an affirmation of the soundness of its economic policies.
Taipei remains keen to explore ways that Taiwan's relative financial strength and resources can be used to help the entire region get back on its feet, since a healthy regional economy is in every nation's interest. The IMF is being called upon to help those countries affected by the financial crisis - but its capital is limited. Taiwan is willing to shoulder some of this burden, but is unfortunately not an IMF member and can only provide limited funding through costly indirect channels. This is regrettable for those countries in need of such funding for financial recovery. To benefit such countries and the world in general, Taiwan should be granted admission to international economic organizations, such as the World Trade Organization and the IMF, at an early date.
* Chien-jen Chen is director-general of Taiwan's office of information.
