Evaluating the Efficacy of Taiwan's COVID Relief Stimulus Program in

Mitigating Economic Turmoil

Extended Essay

Economics

Research question:

To what extent is the Taiwanese government's intervention in the form of the COVID Relief

Stimulus program effective in preventing economic turmoil?

Word Count:
TABLE OF CONTENTS

1.0 INTRODUCTION

2.0 METHODOLOGY

3.0 EFFECTS OF THE COVID-19 PANDEMIC ON THE ECONOMY OF TAIWAN

4.0 THE MECHANISM OF THE COVID RELIEF STIMULUS PROGRAM

5.0 COMPARISON IN A SIMULATED ECONOMY

6.0 CONCLUSION

7.0 BIBLIOGRAPHY
1.0 INTRODUCTION

COVID-19, commonly known as the coronavirus, unleashed a global pandemic from 2019 to

May 2023. Before the complete development and official release of the vaccine in December

2020, the virus wreaked havoc worldwide, causing significant socioeconomic impacts, and

pushing most countries’ economies into stagflation due to the lack of healthy workers and the

absence of effective preventive measures.

As a Taiwanese citizen residing on the island of Taiwan, I witnessed the country's relative

insulation from the devastating impacts of COVID-19 compared to numerous other countries.

Drawing from past experiences with the SARS pandemic, the Taiwanese government's swift and

decisive actions initially allowed for the containment of the virus's spread, offering temporary

immunity from COVID-19's detrimental effects. However, even when domestic outbreaks

became inevitable in the later stages of the pandemic, Taiwan’s government provided potent

solutions to the rising issue.

During the COVID era, the Taiwanese government not only intervened in the domestic market

with direct aid to the mask industry as a preventive measure to decrease COVID transmission

but also provided new economic policies such as the COVID Relief Stimulus program, which is

a series of government subsidies providing direct financial support to keep domestic companies

operating, while encouraging consumer spending. This essay will examine how well the policies

worked together and how they helped stabilize Taiwan's economy from the effects of the global

pandemic, thus answering the research question of To what extent is the Taiwanese

government's intervention in the form of the COVID Relief Stimulus program effective in

preventing economic turmoil?

2.0 METHODOLOGY

To provide an answer to the research question, most of the data used in this study would be

secondary sources since most of the effects could be measured and analyzed through the

numerical recordings of the country's economic data, where most of the sources would either be

from private financial institutions, or directly from government departments.

This research will be comprised of two main stages in terms of content and methodology. Firstly,

we will establish and make assumptions on the potential effects that might be caused by the

COVID-19 outbreak domestically in 2020 and set this assumption as the baseline for empirical

simulation under normal development.

In the second stage, by using data from a CGE simulation, compare the difference in Taiwan’s

overall economy and labor market with and without various relief and stimulus measures, along

with a simulated scenario where COVID, which would enable us to evaluate the policy

effectiveness of relief and stimulus measures during the pandemic.

3.0 EFFECTS OF THE COVID-19 PANDEMIC ON THE ECONOMY OF TAIWAN

A fiscal policy refers to government policies aimed at boosting economic activity, through the

increase of government spending or cuts in taxation. In this context, the COVID Relief Stimulus

program is a fiscal policy, as it provides a way for the government to increase spending through

the allocation of government funds to various programs and initiatives to help address the

economic challenges posed by the COVID-19 pandemic. This essay will explain how the fiscal

policy in the COVID Relief Stimulus program decreased the impact of the COVID-19 recession

on the economy of Taiwan.

Figure 1 illustrates a representation of Taiwan's economic conditions before and after the onset

of the COVID-19 pandemic. Initially, at the intersection of SRAS1 and AD1 denoted by Y1 and

APL1, the economy operates with an optimal output level and average price level. However, as

the pandemic unfolds, the impact on the economy becomes evident. COVID-19 contributes to a

reduction in workers' productivity, primarily due to concerns and fears associated with the

disease. This phenomenon prompts a shift from SRAS1 to SRAS2. The shift reflects a decrease

in the short-run aggregate supply, symbolizing challenges such as disruptions in labor

productivity, interruptions in the supply chain, and health-related issues. This transformation is

mirrored in the decline of real output and the increase in the average price level, from Y1 to Y2

and APL1 to APL2, which reflects the decrease in real output along with an increase in average

price level due to the downturn of the level of production. Notably, this shows a form of
stagflation, specifically cost-push inflation, where concerns about COVID-19 impact labor

productivity, thus limiting the country’s economic growth.

4.0 THE MECHANISM OF THE COVID RELIEF STIMULUS PROGRAM

According to the Department of Information Services, a branch of the Executive Department of

Taiwan, the COVID-19 relief stimulus program conducted by the Taiwanese government could

be separated into two different functionalities. Program 1.0 to 3.0 initiated starting in March

2020, before the domestic outbreak of the virus, focused on fortifying the domestic economy by

increasing investment through relief fund loans, totaling 82.5 billion NTD, while simultaneously

addressing the immediate needs of the population by providing support for vulnerable groups,

emergency aid, and salary subsidies, amounting to 135 billion NTD under income

enhancements, with additional measures and 41.1 billion stimulus implemented in July 2020,

such as the Triple Stimulus Voucher and travel subsidies, were strategically designed to

revitalize industries heavily reliant on local consumer spendings, such as construction, food,

natural gas, heavy electrical, and other industries.

Similar to programs 1.0 to 3.0, program 4.0 also provides more funds to the general public, but

the policies itself is more focused on dealing with the effects of the intensifying domestic

pandemic, which still requires the government to increase funding given to the domestic

markets.
Figure 2 illustrates the effect after the deployment of the COVID Relief Stimulus program, where

a total of 1465.2 million NTD was allocated by the government to the general public and

domestic industries. The fiscal stimulus provided a crucial financial boost to domestic industries,

enabling them to cover external costs resulting from the pandemic. This support also played a

significant role in reducing the unemployment rate, as domestic companies could afford to pay

higher wages, thereby retaining their workforce during challenging times.

This positive impact is depicted on the diagram as a rightward shift from SRAS1 to SRAS2,

indicating an increase in short-run aggregate supply (SRAS). Simultaneously, the government

released subsidies in the form of vouchers, which were made available to general consumers

for spending on goods and services during the pandemic period. This voucher system acted as
a short-term strategy to boost the aggregate demand (AD) curve, encouraging consumer

spending within a specified timeframe. The result is illustrated by a rightward shift from AD1 to

AD2 on the diagram.

The combined effect of the increased SRAS and higher AD contributes to stabilizing the

economy during challenging times. This prompts economic recovery from the cost-push

inflation, as indicated by the increase in real output (shift from Y1 to Y2) and average price level

(shift from APL1 to APL2).

The government stimulus of the economy through the COVID-19 relief stimulus program offers

some advantages. For example, the fiscal injection from the government budget could be

multiplied by the multiplier effect, leading to a more significant impact on the overall economic

activity. The multiplier effect occurs when an initial injection of government spending results in

increased consumption, further stimulating production and income, which in turn leads to

additional rounds of spending. In the context of the COVID-19 relief stimulus program, the

multiplier effect is crucial in propelling economic recovery. As the government disburses funds

with vouchers to the general public, it triggers a chain reaction of increased spending as

individuals who receive financial support are likely to spend more on goods and services,

boosting economic demand. This, in turn, encourages businesses to ramp up production to

meet the rising demand, leading to increased employment opportunities. The newly employed

individuals, with additional income, contribute to further consumption, creating a positive

feedback loop. According to the Statistical yearbook of Taiwan, the marginal propensity to

consume in 2020 is 75.50, following the equation

1
1−0.755
= 4. 08
meaning that the multiplier effect would increase the government injection of 1465.2 million NTD

creating the effect similar to a 5978.016 million NTD injection. However, it is crucial to recognize

that economic policy considerations extend beyond the multiplier effect. A debate is raised here,

on whether stimulating economic activities through the issuance of consumption vouchers or

cash is the desired direction of economic recovery. In the given context, where the end of the

pandemic is not yet visible, the timing of stimulating the economy through vouchers or cash

injections is questionable, given the potential risks associated with prolonged pandemic effects

and the increased costs of prevention and relief measures.

However, there are also limitations in the use of the COVID-19 relief stimulus program, with

most problems lying within the complexity of the program itself and the execution of the

program. At the start of the program, there were many issues with the distribution of the

government budget, where cases such as the Ministry of Labor issued a living subsidy ranging

from 10,000 to 30,000 NTD to self-employed operators without a fixed employer. However, it

was discovered that 3,321 individuals simultaneously received the subsidy for taxi drivers and

bus drivers issued by the Ministry of Transportation. Additionally, the Council of Agriculture

granted a 10,000 NTD living subsidy to farmers, and surprisingly, 4,330 individuals who had

already passed away received the money, essentially providing funds to deceased individuals.

These discrepancies raise concerns about the effectiveness of the relief program in reaching its

intended recipients and addressing the economic challenges brought about by the COVID-19

pandemic. The complexities in the administration and coordination of the program have led to

issues of double-dipping, where individuals benefit from multiple aspects of the relief measures.

Furthermore, the misallocation of funds to deceased individuals exposes the lack of proper

verification and oversight mechanisms in the implementation process.

In addition to distribution issues, the effectiveness of the relief program may also be impacted by

delays in disbursing funds. Delays can hinder the immediate impact of the fiscal injection, as the

intended beneficiaries might experience financial distress before receiving the aid. Therefore,

the limitations associated with the distribution process and execution highlight the need for a

more streamlined and transparent system to ensure that the relief measures effectively reach

those in need and contribute to the desired economic recovery.

5.0 COMPARISON IN A SIMULATED ECONOMY

According to the Scottish Government, “CGE models are large numerical models which

combine economic theories with real economic data in order to derive computationally the

impacts of policies or shocks in the economy”(“Computable General Equilibrium Modelling:

Introduction - Gov.scot”). In the context of the COVID pandemic, where a simulation of the

Taiwanese economy could be made for a comparison with and without the COVID relief

stimulus program to evaluate the effectiveness of the program, so for this essay, data from the

Chung-Hua Institution of Economic Research, where a CGE model was used to conduct the

research will be used for further analysis. The simulated data can be seen in the graph below.
Source: 張傳章. 臺灣防疫與紓困振興政策之經濟成效研析. 31 Dec. 2021.

Figure 3 shows the simulated number of employed workers during the COVID pandemic, where

the blue line represents a scenario where COVID didn't happen and is considered the baseline

for comparison. In this baseline scenario, the number of employed workers follows a relatively

stable trend and growth, reflecting the typical employment pattern without the disruptive impact

of the pandemic.

Conversely, the red line illustrates the simulated trajectory of employed workers during the

COVID-19 pandemic. As depicted in Figure 3, the downward trajectory represents the onset of

the pandemic that led to a noticeable decline in the number of employed workers. This decline

is attributed to various factors, including business closures, lockdown measures, and economic

uncertainties triggered by the global health crisis.

And finally, the yellow line represents a scenario where COVID did happen, but the COVID relief

and stimulus program was employed as a countermeasure to mitigate the effects of the

pandemic on employment. It can be seen that the yellow line diverges from the red line,

indicating a deviation from the actual trajectory of employment during the pandemic. This

deviation reflects the positive influence of the relief and stimulus program on employment

figures. The program's measures, such as financial support to businesses, subsidies, and other

economic stimuli, contribute to stabilizing the labor market and preventing a more severe

downturn in employment.
 Table 1: COVID’s impact on employment(By industry)

Source: 張傳章. 臺灣防疫與紓困振興政策之經濟成效研析. 31 Dec. 2021.

Following the specifics of the data, the impact of the pandemic is higher in industries primarily

focused on manufacturing. When examining the 19 different industries, those most severely

affected include manufacturing, wholesale and retail trade, transportation and warehousing,

accommodation and food services, support services, educational services, and other services.

It is noteworthy to examine the manufacturing industry concerning the changes in monthly

employment figures. From February 2020, employment in the manufacturing industry saw a

rapid decline, particularly during the period from February to April when the monthly reduction in

employment approached thousands of people. However, starting from June 2020, the rate of

decline in manufacturing employment began to slow down due to the ripple effect generated by

the reorganization of the supply chain. In fact, from October 2020 onwards, there are indications

of an improvement in employment in the manufacturing industry.

In contrast, looking at the domestic service industry, especially those severely affected during

the pandemic such as wholesale and retail trade, transportation and warehousing, and

accommodation and food services, without any relief and stimulus measures and allowing the

pandemic to develop unrestricted, these industries would exhibit a monthly decline in

employment. Apart from a slight deceleration in the decline since October 2020 due to the

improvement in global and domestic pandemic conditions, the impact of the pandemic on these

three domestic service industries remained high.

Comparing the changes in employment numbers in the accommodation and food services

industry under three different policy scenarios, the baseline, COVID-19 pandemic, and relief and

stimulus measures. It can be observed that from February 2020, as the pandemic began to

emerge in Taiwan, the operational activities of the accommodation and food services industry

suffered significantly due to people's fear and panic. This resulted in a reduction in employment

numbers. From February 2020 onwards, the average monthly increase in affected employment

numbers due to the pandemic in this industry was around 7,000 people, as shown in Table 1.

However, as the pandemic gradually subsided after June 2020, the monthly increase in

employment numbers affected by the COVID-19 pandemic in the accommodation and food

services industry slightly decreased to over 5,000 people. Without implementing any relief and

stimulus measures, the employment situation in the accommodation and food services industry

would still face severe impacts due to the pandemic.

Apart from wholesale and retail trade, transportation and warehousing, and accommodation and

food services, other labor-intensive industries such as support services, educational services,

and other services also experienced higher vulnerability during the pandemic period.

Particularly, labor-intensive industries related to travel, like support services, suffered a

considerable impact. Looking at the total employment numbers in this industry, the increase in
employment numbers affected by the pandemic amounted to nearly 8.57% of the total

employment in this industry.

Other findings within the simulated economy, such as within the scenario without the

implementation of any relief and stimulus measures, the domestic total output is expected to

decrease from 42.8 million yuan to 41.9 million yuan, with an impact of approximately 900 billion

yuan, the employment in the affected labor market is estimated to be around 294,000 people,

causing the potential unemployment rate to rise to 6.44%, and with the initiation of government

relief and stimulus program, a total of 1.265 million job opportunities are expected to be assisted

throughout the year 2020, allowing the potential unemployment rate to be alleviated by

approximately 2.57%. While the impact on the domestic industries generally varied due to the

nature of different industries, it is observed that service industries which are closely related to

domestic demand are more severely affected compared to industries primarily focused on

manufacturing.

6.0 CONCLUSION

To conclude, from the analysis through the comparison of 3 simulated economies and

explanation of the general effect of the COVID pandemic on domestic industries, it is evident

that the COVID relief stimulus program has played a significant role in supporting Taiwan’s

domestic industries and economy as a whole from the economic turmoil that should’ve

happened without government preventive and precautionary measures. However, it is important

to note that the predictions made through the CGE models only estimate the forecasted

outcome through the use of domestic data, which ignores the capital movement across nations

and sometimes overestimates the trade effect. Nevertheless, the implementation of the

COVID-19 relief stimulus program is an effective economic policy that allowed the revitalization
of domestic industries, serving as the backbone of the economic growth of Taiwan during the

difficult times of the COVID-19 pandemic.

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