Opinion

HK, Taiwan divergence result of economic policies

While the effect of the ongoing unrest on the Hong Kong economy is obvious, Taiwan was already doing better before the protests started.

By: and Date: November 5, 2019 Topic: Global economy and trade

Hong Kong and Taiwan published their third-quarter growth figures very close in time, but the results were far apart.

The two share the same global risks insofar as both are open economies affected by the US-China trade war and are heavily dependent on the mainland, whose economy is slowing down. And yet, while both economies grew at the same speed (2.9%), it was in opposite directions: Taiwan positively and Hong Kong negatively.

It goes without saying that the Hong Kong economy has been bogged down by social unrest since mid-June, which explains the fast deterioration, but it is also true that both economies were already diverging before the social unrest started. The question, thus, is how was the Taiwanese economy able to perform better not only than Hong Kong, but also than other similar economies such as Singapore or South Korea (the four economies used to be considered the “Asian Tigers” in the 1980s and 1990s)?

The first important difference is the absence of monetary and exchange-rate policies for Hong Kong compared with Taiwan. This is not only because of Hong Kong’s currency peg with the US dollar but also because the Taiwan dollar is not fully convertible while the Hong Kong dollar is. In other words, Taiwan has a tighter control of the flows of hot money and liquidity in the financial system.

The second difference lies in fiscal policy, and not so much because Hong Kong does not have room to move but rather because it does not use it. In fact, the Taiwanese government, in the light of a worsening global environment, has introduced an Infrastructure Development Program as well as an energy reform plan to introduce renewables, thereby stimulating investment. Hong Kong instead has announced two tiny – especially the second – fiscal stimulus packages (all in all 0.7% of gross domestic product) that aim at reducing the pain that businesses are going through but not so much to invest in the future.

Third, Taiwan has seen its foreign direct investment increase substantially this year in areas such as fifth-generation telecom (5G), semiconductors, data centers and new energy. In addition to foreign firms, Taiwanese companies have speeded up their repatriation of profits thanks to supportive government policies. The comeback of domestic investment means a displacement of outward FDI.

Last but not least, Taiwan has conducted a conscious policy of diversification of its export structure away from excessive dependence on mainland China, which has helped cushion the impact of economic deceleration on the mainland. The key areas of expansion are the economies of the Association of Southeast Asian Nations and, more recently, the US. In the same vein, although the tourism industry has been hit by restrictions imposed by China, the growth in inbound tourism from Japan, South Korea and ASEAN has remained high.

In a nutshell, social unrest is clearly harming the Hong Kong economy but policies exist to cushion the impact, especially fiscal policy. In addition, more structural policies can be used to increase Hong Kong’s attractiveness for foreign investors. The Hong Kong government might want to take note.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Past Event

Past Event

Advancing global value and supply chains to mitigate the challenges arising from the pandemic

Session at the 1st ASIA-EUROPE ECONOMIC AND BUSINESS FORUM: Transitioning to a New Normal: Leveraging Global Value Chains, Multilateralism and the 4IR

Speakers: Carmen Cano, Alicia García-Herrero, Jong Woo Kang, André Sapir, Luca Silipo and Tetsuya Watanabe Topic: Global economy and trade Location: Phnom Penh, Cambodia Date: November 24, 2021
Read article More on this topic
 

Blog Post

Goodbye Glasgow: what’s next for global climate action?

After COP26, and as the debate on whether Glasgow represents a success or a failure dies down, what next for global climate action?

By: Klaas Lenaerts and Simone Tagliapietra Topic: Green economy Date: November 18, 2021
Read article More on this topic More by this author
 

Opinion

Glasgow: a clearer sense of direction but with no hard numbers

Global climate action is visibly accelerating however the conference failed to deliver on the hard numbers.

By: Simone Tagliapietra Topic: Green economy Date: November 15, 2021
Read about event
 

Past Event

Past Event

How can we create more sustainable value chains?

There is an urgent need for GVCs to become more resilient and inclusive, and meet the net-zero challenge.

Speakers: Erik Berglöf and Alicia García-Herrero Topic: Global economy and trade, Green economy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 10, 2021
Read article More on this topic More by this author
 

Blog Post

What to make of the EU-US deal on steel and aluminium?

While deeply disappointing that the surprise deal maintains aluminium and steel tariffs against the EU beyond a modest quota, it alleviates a major irritant in transatlantic relations and contains interesting and innovative features relating to climate policy and to dispute settlement under WTO rules.

By: Uri Dadush Topic: Global economy and trade Date: November 4, 2021
Read article More on this topic
 

Blog Post

Strong, balanced, sustainable and inclusive growth? The G20 and the pandemic

The G20 is not doing enough to support strong, balanced, sustainable and inclusive growth in the wake of COVID-19, with the poorest countries left behind by the recovery.

By: Suman Bery and Pauline Weil Topic: Global economy and trade Date: October 29, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

Opinion

European governance

The inconsistency in global strategic relations

All of this talk on strategic retrenchment and autonomy is the language of escalation, not of appeasement and collaboration.

By: Maria Demertzis Topic: European governance, Global economy and trade Date: October 13, 2021
Read article More by this author
 

Blog Post

European governance

Pandemic prevention: avoiding another cycle of ‘panic and neglect’

Agreement is needed at international level on mechanisms to ensure better preparedness for the next pandemic.

By: Anne Bucher Topic: European governance, Global economy and trade Date: October 7, 2021
Read article More on this topic More by this author
 

Opinion

The geopolitical conquest of economics

Although economics and geopolitics have never been completely separate domains, international economic relations were shaped for 70 years by their own rules. But the rise of China and its growing rivalry with the United States have brought this era to an end.

By: Jean Pisani-Ferry Topic: Global economy and trade Date: October 4, 2021
Read article More on this topic
 

Blog Post

German elections: seizing the moral and economic opportunity of global health security

The new German government should play its part in global health security and preparedness.

By: Amanda Glassman and Guntram B. Wolff Topic: Global economy and trade Date: September 24, 2021
Read article More on this topic More by this author
 

Blog Post

Germany’s foreign economic policy: four essential steps

Germany and the EU need to develop a strong and proactive agenda to manage foreign economic relations, which are essential for German and European prosperity.

By: Guntram B. Wolff Topic: Macroeconomic policy Date: September 23, 2021
Load more posts