Taiwanese demonstrate paradox in investment

PUBLISHED : Friday, 25 September, 1998, 12:00am
UPDATED : Friday, 25 September, 1998, 12:00am

Taiwan is getting a good deal of praise in the investment press of late. While the rest of Asia crumbles, it has held relatively firm.

Its stock market has retreated but not crashed and the economy is holding up much better than its regional neighbours.

The quick retort to this from those that do not like the comparison is that Taiwan has always been relatively closed to foreigners and, thus, was not as exposed to the panic that gripped other markets.

There is some truth in this although not enough to diminish the credit the Taiwanese authorities must be given for their performance in achieving stability.

However, there are three areas in which Taiwan does not look so good and that are likely to slow its growth when the rest of Asia recovers.

The first is that Taiwanese are not big investors, at least not in Taiwan. As the first chart shows, Taiwan's ratio of gross fixed capital formation, or investment, to gross domestic product is less than 22 per cent, the lowest in Asia - lower even than the Philippines. The average for the rest of Asia - excluding Japan - is more than 35 per cent.

The response of the Taiwanese to this is that they invest heavily abroad; witness the coastline industries of the mainland.

This is undoubtedly true, if not measurable, but it introduces the second caveat about the Taiwan economy.

If they invest abroad, one would expect them to reap the harvest of these investments with dividends or other repayments and bring them back to Taiwan.

This, in economists' jargon, is called net factor income from abroad and the figures show that it has steadily declined since 1990 from 2.5 per cent of GDP to less than 0.5 per cent.

The simple fact is the Taiwanese don't show much inclination to invest in Taiwan or bring their money back home, which poses the obvious question of why foreigners should then want to do so.

There is only one entity that shows clear signs of investing more, and this is the Taiwanese Government, which several years ago embarked on a belated programme of modernising a dilapidated infrastructure.

The difficulty here, however, is that this government is much better at spending money than raising it, with the result that its expenditure is 20 per cent greater than revenue.

Since 1989, it has run an average annual deficit of 6 per cent of GDP.

During the same period, or at least to the middle of last year, the rest of Asia (ex-Japan) has shown consistent government surpluses.

These thrifty Taiwanese are a good deal less thrifty than the public image they like to convey.