Taiwan has a dynamic capitalist economy with gradually decreasing government guidance of investment and foreign trade. In keeping with this trend, some large, state-owned banks and industrial firms have been privatized. Exports, led by electronics and machinery, generate about 70% of Taiwan's GDP growth, and have provided the primary impetus for economic development. This heavy dependence on exports exposes the economy to upturns and downturns in world demand. In 2009, Taiwan's GDP contracted 1.9%, due primarily to a 20% year-on-year decline in exports. In 2010 GDP grew 10.5%, as exports returned to the level of previous years. Taiwan's diplomatic isolation, low birth rate, and rapidly aging population are major long-term challenges. Free trade agreements have proliferated in East Asia over the past several years, but so far Taiwan has been excluded from this greater economic integration, largely because of its diplomatic status. Taiwan's Total Fertility rate of just over one child per woman is among the lowest in the world, raising the prospect of future labor shortages, falling domestic demand, and declining tax revenues. Taiwan's population is aging quickly, with the number of people over 65 accounting for 10.9% of the island's total population as 2011. The island runs a large trade surplus, and its foreign reserves are the world's fourth largest, behind China, Japan, and Russia. Since President MA Ying-jeou took office in May 2008, cross-Strait economic ties have increased significantly. Since 2005 China has overtaken the US to become Taiwan's second-largest source of imports after Japan. China is also the island's number one destination for foreign direct investment. Taiwan has focused much of its efforts on improving the cross-Strait economic relationship. Three financial memorandums of understanding, covering banking, securities, and insurance, took effect in mid-January 2010, opening the island to greater investments from the mainland's financial firms and institutional investors, and providing new opportunities for Taiwan financial firms to operate in China. Taiwan and the mainland in June 2010 signed the landmark Economic Cooperation Framework Agreement (ECFA), an agreement that the Taiwan authorities hope will eventually lead to a free-trade arrangement that will increase cross-Strait economic ties by lowering tariffs on a number of goods and by reducing market access barriers for services. The Taiwan authorities have said that the ECFA will serve as a stepping stone toward trade pacts with other regional partners and they announced that formal negotiations towards an economic cooperation agreement with Singapore would begin in 2011. Closer economic links with the mainland brings greater opportunities for the Taiwan economy, but also poses new challenges. For example, FDI in China has resulted in Chinese import substitution away from Taiwan's exports and a restriction of potential job creation in Taiwan.

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