If there is an economy that has emerged stronger than any other from the covid-19 crisis, it is without a doubt Taiwan. This island located 180 kilometers east of China achieved growth of more than 3% in 2020, when the rest of the world fell into the deepest recession in years. In 2021, despite having nothing to ‘recover’, GDP grew by a powerful 6.4%, nothing to envy the rebound of the economies that came out of the crisis. In 2022, Taiwan is expected to continue growing above 4%. The aggregate growth since 2020 of this island is unparalleled worldwide. However, Taiwan faces a threat that has caused significant disruption to other economies throughout history.
With these enviable data, it would be logical to think that Taiwan has a bright future ahead of it, but the truth is that this island to the east of China is at risk of suffering from the phenomenon known as bad dutchso fall into a kind of two-speed economy if the sectors that do not benefit directly from the winning industry maintain a certain secrecy as far as prices and costs are concerned. This time it is not natural gas (as happened to the Netherlands in the 60s), oil or diamonds (natural resources), the trigger is not a raw material, but the scarce and valuable semiconductor chips so necessary in a world increasingly digital.
all to the chips
Taiwan’s economy was already heavily dependent on semiconductor exports before the pandemic, but the Covid crisis has made these microchips much more valuable. These small integrated circuits have brought millions of dollars of benefit to the Taiwanese economy, strengthening its currency and raising wages, but also raising the possibility that non-semiconductor sectors will pay a high price or fall into a sort of economy of second or third class.
Exports of integrated circuits, which include semiconductor chips, have grown by 20.9% year-on-year in 2021 and already account for more than 36% of all the country’s exports, according to data published by ING. “Global demand for semiconductors is high and Taiwan is the world’s largest supplier. We believe this trend will not change until demand declines, which is unlikely to happen in 2022 as chips for automobiles are still in short supply,” they assure from the Dutch bank.
According to data from Atlas of Economics Complexity Harvard, in 1995 integrated circuits accounted for 5% of all Taiwan’s exports, about 6,000 million dollars. Chips now account for more than 30% of exports and total about $130 billion in exports. In dollars, the sale of chips abroad has multiplied by 20, generating an impact similar to that which a discovery of oil, gas or other raw material can have on a country’s trade balance.
This success is leading the Taiwanese electronics industry to desperately look for workers, offering wages that are unmatched in other sectors that have not fared well from the pandemic. This is the case with services and other branches of industry, which are now at risk of being hit by too strong a currency, uncompetitive wages and loss of competitiveness.
A recent editorial in one of Taiwan’s largest newspapers explained this dichotomy that the economy has suffered since the chip boom began: the electronics sector, mainly chip manufacturing, has become a heavyweight in the country’s economy, in terms of exports and production. It contributed about 80% of the nation’s total manufacturing output, while chemicals, base metals, auto parts, and machine tools made up the remaining 20%. A decade or two earlier, the contributions of the sectors were almost uniform.
Chips are taking over everything. A poorly diversified economy is always more vulnerable to a change of scenery. If a new technology appears or for whatever reason the chips cease to be relevant (and in demand), the Taiwanese economy will suffer the consequences just as the countries that concentrate their entire productive fabric on oil production suffer when the price of crude falls off.
Now a two-speed economy is being generated that can have dangerous consequences. During the first 11 months of last year, the monthly wages of employees in the electronic components sector increased by 11.66% year-on-year, outpacing the 6.22% overall growth of the manufacturing industry and the 0.97% increase of the service sector.
High and unequal wages
The wages of employees of electronic component manufacturers were also approximately 50% higher on average than those of the general manufacturing industry and 59% higher than those of the services sector. “Such changes in the nation’s economic structure and income distribution explain why many people don’t benefit from the microchip boom”.
In addition, the high demand for workers in this electronics industry forces the rest of the industries and sectors to improve their conditions in order to attract the personnel necessary to continue producing. This raises costs for companies whose demand has not benefited from the chip boom, reducing their global competitiveness.
dutch disease
To these higher costs must be added the impact of the chips on the Taiwanese dollar. The growth of exports and the entry of foreign investment to expand the capacity to produce microchips has led to Taiwan’s local currency appreciates around 13% from 2019 lows, making all the goods and services produced by Taiwan more expensive in relative terms. Chips can easily dodge currency appreciation given their growing demand and currency stickiness right now (there is no way to replace those chips any time soon). This situation is what generates the risk of suffering from Dutch disease.
The bad dutch It is usually associated mainly with the discovery or exploitation of a valuable natural resource (oil, gas, diamonds) that initially brings great benefits to the sector in question and to the economy in general, but in the medium term generates harmful consequences as a result of an excessive strengthening of the currency, a general boom in wages (loss of competitiveness in many sectors) and inflation.
From the French investment bank Natixis they have made an extensive report on the Taiwanese economy in which they highlight that Taiwan’s exports reached a record in 2021 with a growth rate of 29%. Corporate revenue grew 16% in 2021, supported not only by the burgeoning semiconductor industry, but also by transportation and other materials.
These experts point out that the buoyant situation of the economy, caused mainly by the chip sector, may pose a threat in the short and medium term: “Despite the good prospects for the economy, Taiwan at risk of Dutch disease or generate a two-speed economy”.
two-speed economy
This divergence in growth has begun to affect wages and inflation. Sectors related to world trade (semiconductors and maritime transport) have enjoyed high wage growth, while the service sector is in a parallel universe, they say from Natixis.
On the other hand, this phenomenon initially generates a boom in aggregate demand that pushes up food prices, also driving underlying inflation, which in turn has an impact on the purchasing power of workers who are in sectors that are not enjoying wage increases.
This phenomenon is also related to the price of other assets. For example, house prices have risen 15% in 2021 driven by an increase in mortgage lending, which has led regulators to take measures to reduce banks’ exposure to this sector. Housing rises for everyone, although wages only advance in one sector.
All the macroeconomic data leaves Taiwan as one of the big winners in economic terms worldwide, however the death of success is something common in all fields and in the economy it is no different. “Taiwan is well positioned to take advantage of opportunities not only in semiconductors, but also in electric vehicles and the metaverse. Still, the positive outlook belies the looming risk of Dutch disease or a two-speed economy.”
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