Beset by problems from within and without, Taiwan’s economy has begun to deteriorate. To address the situation, the Cabinet passed an economic stimulus package Sept. 4. In addition, ROC President Ma Ying-jeou met recently with Peter Diamond, winner of the Nobel Prize in economics, to ask the laureate for his views on the matter.
Diamond’s recommendation was that Taiwan should increase public expenditures and carry out tax reforms. This is good advice as far as it goes, but it is hard to see how it can be put into practice. As to the Cabinet’s economic stimulus package, it is also unlikely to make much of a difference.
The truth is that the first step in solving any question must be to identify the problem clearly, and to assess how it will change and develop over time. If this critical step is not carried out, the solution could turn out to be a waste of time and money. It could even make the situation worse, because the time to act might slip away as the wrong options are being taken.
From their public statements, it is clear that both Ma and the Cabinet believe the current situation to be the result of the European debt crisis and falling export orders from the U.S. and the EU. But if that is their understanding of the situation, they have not truly grasped the nature or extent of the problem. They are aiming at the wrong target and as a result they will be unable to provide a solution to the current crisis.
The situation in the EU and the U.S. will only have an indirect and limited effect on Taiwan’s economy. What will have a direct and profound impact on Taiwan, on the other hand, is the attempt by mainland China to shutter processing factories along its coastal provinces. This attempt is a grave threat to Taiwan, because for the last 20 years the factories in question have been the lifeblood of the nation’s economy and main source of its trade surplus.
Things are made worse by the fact that South Korea is raiding many of Taiwan’s main export markets, in effect sealing off any escape routes for Taiwanese manufacturers. The situation is as bad as it has been for the last two decades, and any response to the current economic situation should begin by taking these factors into account.
From such a perspective, it becomes clear that Diamond’s prescription fails to address the most fundamental issues facing Taiwan. By contrast, the solution put forth by the Council for Economic Planning and Development, though somewhat vague, addresses the core issues head on. The solution, according to CEPD Minister Christina Liu, is for Taiwan to adjust its export strategy, reorient itself to newly emerging markets, and develop consumer products.
During the last 20 years, the main focus of Taiwanese exports has been in supplying raw materials to export factories located in mainland China, and in assembling spare parts there. But now that the “factory to the world” is being dismantled, a replacement must emerge somewhere to fill the void and satisfy global demand. The international situation is such that this new factory is likely to appear either in Southeast Asia or in South America. Thus manufacturers in Taiwan should try to act as soon as possible in order to position themselves in these new manufacturing centers.
Aside from providing raw materials and assembling parts, there is another aspect to economic activity, which Taiwan has been negligent on for too long: selling consumer goods. This neglect has allowed South Korea to take the lead over Taiwan. Over the last 20 years, as Taiwan has put all its emphasis on the petrochemical and high-tech industries, it has forgotten the importance of consumer goods at the lower stream of the manufacturing process. As a result Taiwan’s production chain is now fragmentary and incomplete, unable to compete in the consumer goods market.
It cannot be emphasized enough that before things get worse across the strait and manufacturing costs there begin to rise, Taiwan should try to persuade the more than 100,000 high-quality Taiwanese businesses in mainland China’s coastal provinces to come home. They will be able to join forces with upper- and mid-stream companies to form complete and high-quality production chains, which can completely reorient Taiwan’s export emphasis.
Such a move would also give a tremendous boost to domestic investments and construction activity, and the economy will benefit in both the short and the long run. The CEPD must work hard to carry out Liu’s vision, so that the problems confronting Taiwan’s economy can be addressed at the root level. (HZW)
(This commentary originally appeared in the Economic Daily News Dec. 3.)
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