Taiwan's three leading economic think tanks provide professional support to the government by...
Taiwan's three leading economic think tanks provide professional support to the government by devising policy recommendations and taking on special projects.
By Brian Asmus
Through the decades of Taiwan's remarkable economic success and during the past few years of economic slowdown, several leading think tanks have played the role of providing the government with a source of professional economic advice. The most prominent of those organizations have been the Taiwan Institute of Economic Research (TIER) and the Chung-Hua Institution for Economic Research (CIER), as well as the Institute of Economics at Academia Sinica.
The three think tanks have contributed to Taiwan's development by providing roadmaps for privatization and liberalization schemes and by giving advice in such areas as trade policy and social welfare programs. Among current topics on which they are offering expertise are means of dealing with an aging society, environmental challenges, the formation of a knowledge-based economy, and the promotion of what the government is referring to as "cultural and creative industries." The organizations also regularly engage in economic forecasting as a public service, even though government agencies rely chiefly on the official forecasts provided by the Directorate-General of Accounting, Budget and Statistics.
The Taiwan Institute of Economic Research (TIER) was established in 1976 with support from C.F. Koo, head of one of the country's most prominent business families, as the first private research institute in Taiwan. In addition to its forecasts, TIER issues research reports, provides industrial consulting services, and produces publications ranging from a daily forecast of interest and exchange rates to annual studies of four major industries (chemicals, information electronics, machinery, and textiles). Financier Jeffrey L.S. Koo, C.F. Koo's nephew, serves as chairman of the institute, and Wu Rong-i, one of Taiwan's leading economists, is president. The TIER staff consists of some 100 full-time economists.
TIER is heavily involved in maintaining Taiwan's contacts with a number of major international economic organizations -- including the Asia-Pacific Economic Cooperation forum (APEC), Organization of Economic Cooperation and Development, Pacific Basin Economic Council, and Pacific Economic Cooperation Council -- where political constraints force the government to adopt a low profile. It is home to the APEC Study Center, which conducts research on a wide array of APEC-related matters, and Wu Rong-i is a member of the Eminent Persons' Group, an advisory body to APEC.
CIER was set up as a nonprofit, autonomous research organization in 1981 with NT$1 billion (US$27 million at the then exchange rate) in seed money donated by the government and leading business associations government. It undertakes advanced research to provide a reference for the government in determining national policy as well as offering support services to various government agencies. Former premier Vincent Siew, who is currently both Kuomintang (KMT) vice chairman and chief economic adviser to President Chen Shui-bian, serves as the institute's chairman. Economist Chen Tain-jy is the president. The institute has 32 support staff and 54 research personnel.
Academia Sinica was founded in 1928 in China and re-established in Taiwan following the withdrawal of the KMT government to the island in 1949. Lee Yuan-tseh, a Nobel Prize winner in chemistry, serves as Academia Sinica's president. The Institute of Economics, one of its 25 research institutes, was created in 1970. It conducts research on economic theory and applications, and studies economic development problems and related policy issues in Taiwan.
International Trade Initiatives
Trade is a key area in which Taiwan's think tanks supply recommendations. CIER was asked to set up a model prior to Taiwan's accession to the World Trade Organization. "We had to evaluate the benefits and disadvantages of joining to help the government formulate policies that would help those [who would be put] at a disadvantage," says Chou Ji, director of CIER's Center for Economic Forecasting. "We specialize in setting up such models and doing such evaluations. Perhaps three to four associates and a similar number of research assistants are working on such projects at any given time."
TIER is also deeply involved in support for trade-related policy-making. David Hong, the institute's vice president, notes that while it previously specialized mainly in industrial research, in the past few years TIER has diversified its activity. As Taiwan has shifted from being a primarily labor-intensive, industrial economy to a more high-tech, knowledge-based, services-oriented economy, TIER has restructured to devote more attention to policies relating to trade, investment, environmental issues, the infrastructure, water resources, and energy.
For TIER -- and the other think tanks -- most of their projects are government-funded and are awarded through competitive bids. But TIER's understanding with the government to help represent Taiwan at international forums such as APEC and the OECD is an exception. Because of the institute's accumulated experience and experience in this field, the government prefers to assign this responsibility on a long-term basis. "TIER has built up a lot of trust," says David Hong. "It wouldn't make sense to put this out to bid and change every year."
Although a portion of its revenue comes from some private industry and business associations, TIER receives most of its income from the Ministry of Economic Affairs (MOEA) and other government agencies for carrying out specific research projects. Due to the complex nature of these studies, Taiwan's private research companies, which tend to be much smaller than the major think tanks, are usually excluded from the bidding. Some 20% of TIER's work is done under long-term contracts.
Among TIER's current assignments are studies of the potential impact for Taiwan of entering into FTAs with such other countries as Japan and New Zealand. Another project -- to be undertaken by four researchers over six months at a cost of NT$770,000 (about US$22,500) -- involves evaluating the possible effect of an FTA between China and the Association of Southeast Asian Nations (ASEAN).
Research done to help Taiwan prepare for negotiating FTAs looks at such aspects as market structures and trade flows and patterns. This research utilizes what is known as the Global Trade Analysis Project (GTAP), established by an international consortium in 1992 to lower the cost of entry for those conducting quantitative analysis of international economic issues. GTAP consists of two main parts: a fully documented global databank and a standard neoclassical modeling framework. In the case of FTA studies, the results are run numerous times using different scenarios to see how an FTA would affect economic growth for both parties. In the case of Taiwan and Japan, it was found that the most likely outcome would be for Japan's economic growth to increase by 0.05% per year while Taiwan's would rise by 0.95%, says Hong. (For Taiwan, the impact would be sharper because of its smaller economy).
Another part of the research is to identify particularly sensitive sectors that might need special attention in the preparation of the FTA, says Hong. For Japan, the most difficult sector is agriculture. While Taiwan and Japan have similar production agricultural structures, rural voters in Japan have much stronger political influence. With New Zealand, the most sensitive issue was determined to be milk and dairy products because of the clout of Taiwan's large food companies. There was also concern that any benefits given to New Zealand farmers would be demanded by American interests as well. "TIER presents the government with the research and offers policy recommendations based on those results," notes Hong.
TIER is also engaged in various projects connected with privatization issues, primarily for MOEA and Ministry of Finance. It has conducted many studies, for example, regarding the best means for privatizing the state-owned Taiwan Power Co. (Taipower), the monopoly utility company. Besides developing a mechanism to transfer government-held shares to the market, the plans had to consider the need for revision of the Energy and Electricity Laws to accommodate privatization of the power business, said Hong. In amendments to the Electricity Law that are still pending in the Legislative Yuan, the likely basic framework would retain Taipower's monopoly on transmission and distribution networks, while splitting the utility's power-generation assets among several companies that would be privatized.
Meanwhile, CIER is conducting research on how best to reorganize the post office. "The post office is a semi-governmental agency that monitors postal policy in addition to operating various postal businesses," says Chou Ji. "We need to look into whether and how to separate the two [functions]. Also, we recommended that the agency be changed into a public corporation, which has already been done."
The second step is privatization. In the United States, the post office is purely a mail-delivery operation. In Taiwan, which follows the Japanese model. But in Taiwan it has two additional businesses: savings deposits and life insurance. "We have to consider whether to split up these businesses or keep them together," says Chou. "This is no simple matter. Savings deposits at the post office involve huge amounts of money."
CIER is considering whether it would be most effective to set up a holding company, with operational units below to handle the three types of business. In that way, the profitable savings deposit and insurance units could help subsidize the money-losing mail-delivery service. The alternative is for the government to retain control of the mail service while selling off the other two businesses. "We also have to take into account logistical factors regarding mail delivery," says Chou. "With the advent of fax machines and email, there have been a lot fewer letters being posted. Yet can email and faxes replace the postal service entirely?"
As an example of successful TIER assistance to the government in formulating economic policy, Hong cited the institute's work in refining the concept of "cultural and creative industries," a key provision of the current Challenge 2008 National Development Plan. It carried out a survey that helped to define which kinds of activity should be included in this sector and to project the amount of growth and economic value it could be expected to attain. At the first stage, TIER cooperated closely with the government's Council for Cultural Affairs to assist in devising the parameters of the program. Afterwards, when the Legislative Yuan voted on the budget for the program, TIER's apolitical professional background was a factor in "convincing the legislators to give us most of what we had requested," says Hong.
Recently TIER has also been devoting attention to how to set up a sound mechanism for corporate governance -- an issue that has gained more urgency following the problems with Enron and some other companies in the United States. TIER's report "has had a big impact [in spurring] the promotion of corporate governance by the Ministry of Economic Affairs, Ministry of Finance, Legislature, and academics," says Hong. Based on TIER's recommendations, an association for corporate governance has now been established and Taiwan has stepped up its participation in relevant international activities.
Another TIER contribution was to set up a model for the Directorate-General of Accounting, Budget and Statistics (DGBAS) on how to calculate tourism-related statistics -- necessary because the Challenge 2008 plan puts unprecedented emphasis on promoting inbound tourism. That created a demand for more detailed figures than the government previously kept regarding foreign tourists, their activities, and spending habits. TIER set up a reference base for DGABS to determine the size of the market, amount of revenue, and growth.
Still other projects currently being conducted by TIER involve the development of incentive measures to encourage the private sector to invest in sewage treatment systems and nursing homes.
For its part, CIER was instrumental in preparing the groundwork for the Economic Development Advisory Conference (EDAC) convened by President Chen Shui-bian in August 2001. That role arose out of an earlier joint task force that CIER was asked to form with the Council for Economic Planning and Development (CEPD) at the time of the Asian financial crisis in the late 1990s. When Taiwan's economy began to suffer from a downturn several years later, CEPD again turned to CIER for collaboration.
The EDAC brought together government officials, scholars, and business people to come up with concrete recommendations on how to stimulate the economy. From a purely economic point of view, says Chou, it will take 10 years to put all the suggestions into place. "We had to develop and set up an econometric model to evaluate the parameters," he explains. "Factors change repeatedly, and so the parameters of the model need to be adjusted continuously."
The think tanks have inevitably had their share of policy failures as well as successes. Minister Without Portfolio Hu Sheng-cheng, former head of the Institute of Economics at Academia Sinica, cited the suggestions in favor of the establishment of the China Shipbuilding Corp. in 1973 as one of those mistakes. "This did not work out well," says Hu, citing the many years that the Kaohsiung-based company has operated in the red.
Another unsuccessful policy advocated by some think-tank economists in the early 1970s was an effort "to imitate the Japanese model by setting up large conglomerates like the zaibatsu in Japan and chaebol in South Korea," adds Hu. Advocates of that policy argued that Taiwan's small and medium-sized enterprises could never be sufficiently competitive in the international market. Hu contends that the lack of success of this move actually served to benefit Taiwan during the Asian Financial Crisis, since the large conglomerates in South Korea were responsible for much of the financial problems and mismanagement in that country.
There have also been examples of sound advice from the think tanks that was ignored by the decision-makers, to the government's later regret. Hu alludes to current problems in the financial sector resulting from "overbanking." "When the market was opened in the early 1990s, too many new banks were allowed to set up shop," says the minister. "Many policy-makers, after receiving input from the think tanks, had argued that three or four new banks were more than enough." But that view did not prevail, leading to today's difficulties with non-performing loans. "Now we have to clean it up," says Hu.
TIER's Hong is convinced that more communication between the think tank economists and key government officials would help to produce more effective policy, but those officials are often not easily accessible. "They have a lot of people trying to get their attention, plus there's a lot on their plates already," he notes.
In addition, a number of already-approved projects that were recommended by the think tanks have faced obstacles when it comes to implementation. Some observers blame these delays on the change in government in 2000, explaining that with the Democratic Progressive Party in charge, many in the opposition KMT and People First Party are less willing to play ball. Although Taiwan's newly democratic political environment may make policy-making a highly complicated process, politicians of all stripes are aware that -- if they choose to avail themselves of it -- professional economic advice and assistance can be provided by the country's major think thanks.