Reforms to Open Up Economy

Economic News

22 Jul 2010
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Amidst growing indications of a possible global recession, Taiwan's government is preparing a package of measures to strengthen the country's economy and insulate it against the effects of any broader downturn.



With the Taiwanese economy coming under pressure from rising energy and commodities prices, the government announced on July 23 it had revised its year-end projections for the Consumer Price Index (CPI) from the 3.29% figure it had set in May to 3.5% for 2008.



The adjustment came after the Directorate General of Budget, Accounting and Statistics released figures showing year-on-year inflation hit 4.19% at the end of the second quarter. The inflation rate reached 4.97% in June, the second highest increase in 12 years.



To help rein in inflation and boost spending, the cabinet ratified a proposal by the Ministry of Finance to lower taxes on a range of staple foods, including soy beans, sesame, butter and tomato paste. The 50% tariff cuts, due to come into force on August 6, will remain in place for six months.



President Ma Ying-jeou came to office in May having campaigned hard on a platform of liberalisation. On July 24, he confirmed the government's commitment to speed up its programme of reforms, saying that open and relaxed economic policies are the key strategies in making Taiwan an operations hub for local enterprises based in China and all other parts of the world.



"The current framework of economic regulations, tax system and tax rates must all be eased to a level at which local companies can become more competitive internationally," Ma told a meeting of the Asia Taiwanese Chambers of Commerce.



Economic reform was also the theme of an address by Premier Liu Chao-Shiuan in an address to the Chinese National Association of Industry and Commerce the same day, when he announced the cabinet was drafting a package of amendments to the country's tax laws. Under the proposals, the rates levied on business income, inheritance and gifts would all be lowered, he said.



Having eased the requirements of more than 30 policies covering the financial and banking sectors since coming to office in late May, Lui said the cabinet would relax a further 67 laws before the end of the year and an additional 142 rules and regulations governing business practices in 2009. "Such efforts are designed to sharpen Taiwan's competitive edge, he said.



One such measure was the decision taken by the government on July 17 to raise the limit on corporate investments on the mainland to up to 60% of a company's net worth. The new regulation, due to come into force on August 1, lifts the previous investment ceiling on Taiwanese firms valued at less than $164m from 40% of their net worth and from 30% for firms with a net worth of more than $164m.



According to Minister of Economic Affairs Yiin Chii-ming, the decision will serve to both strengthen the base of local companies and help attract more foreign investment to Taiwan.



"This Cabinet plan will not drive private investment out of the local market; instead it can help Taiwan to receive more capital from across the Strait as well as other parts of the world," Yiin told a press conference in Taipei to announce the decision.



While the government hopes a mix of free market reforms, tax cuts and higher expenditure can insulate the Taiwanese economy from the potentiall impact of any global recession, there is little it can do about high fuel prices or a drying up of the country's export markets. It will also take time for the effects of these measures to flow into the economy, meaning the short-term pain could be a fixture until the long- term gains kick in.

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