Now that some capital restrictions have been lifted, and growth has slowed, domestic investors have taken an opposite approach; they are moving their money to more attractively valued emerging markets from Brazil to India. Total outflows from local investors have averaged a staggering $3 billion a month over the past couple of years. The accelerating pace of outflows has so worried Taiwan’s central bank that it has increased interest rates this year to prevent the currency from depreciating. It must be the only emerging-market central bank currently worried about a weak exchange rate.

The unbalanced external accounts are a sign to Taiwan’s problems: the lack of local confidence in the country’s long-term prospects is rooted in the realisation that while a 4 per cent economic-growth rate may be respectable for an advanced economy in ordinary times, it’s not when global growth is greater than at any time in history. Domestic consumption remains moribund — a sign of anxiety about the future.

Politics is further dampening hopes, with elected officials trading blows in Parliament rather than fixing the economy. The two main national parties, the DPP and the KMT, have been at loggerheads over how to manage relations with China.

Taiwan’s policy of having the region’s highest tax rates and an inefficient goods distribution system has inflated the country’s cost structure and accelerated the outward flow of investments, resulting in low job growth and virtually stagnant wages. As Hong Kong and Singapore have shown, the key to keeping employment at higher stages of development is to fill the vacuum created in the manufacturing sector by boosting the services sector. But in Taiwan, financial services remain hamstrung, thanks to the government’s penchant for interfering with banks.

... contd.