Cover Story: State of the State
As Taiwan gears up to celebrate the Year of the Horse, many are hoping that the worst of the country's economic woes are behind us. But how bad was it really in 2001, and what is the outlook for 2002? We take a closer look at what makes the economy tick, what needs to be fixed, and what the government is doing about it.
By Anthony Lawrance
The year 2001 is gone, and not a moment too soon. It was an annus horribilus if ever there was one in Taiwan's modern economic history, marked by falling exports, rising unemployment, capital flight to China, and political gridlock.
But it's behind us. Taiwan is charging into 2002, and things can only get better. Economic growth is in the cards again, the stock market is raising spirits ahead of Chinese New Year, and the legislature looks headed for calmer waters. Could this turn out to be the Year of the Stallion?
Alas, probably not. Just as last year wasn't quite the nightmare everyone thinks it was, so the coming year is unlikely to meet expectations. Exports will rebound, but not to anywhere near the go-go levels of two years ago; China will continue to suck out jobs and capital; and lengthening unemployment lines will keep a lid on consumer spending. As for politics - well, anyone who thinks coalition rule is easy hasn't been to Japan or Italy.
Yet when the camera for 2001 and 2002 pans out a bit, both years are likely to be recorded as a time of big structural change. Through this lens, they will surely be remembered for landmark achievements. In 2001, it was WTO entry, which threw Taiwan's markets open to foreign competition; the EDAC conference, which led to a turnaround in Taiwan's cross-strait economic policy; and the passage of a raft of legislation aimed at reinvigorating the economy. In 2002, it will (hopefully) be the rapid implementation of action plans set in motion by these watershed events.
What better time than now, therefore, to size up the state of the state? In so doing, the following article will address five basic questions about Taiwan's economy:
1. How does it work?
2. What's wrong with it?
3. How can it be fixed?
4. What's being done to fix it?
5. Where to from here?
HOW does it work?
To make sense of what happened to Taiwan's economy in 2001, one has to understand what makes it tick.
The best place to start is with the numbers. Taiwan's numbers were terrible in 2001; no one is going to debate that. Growth fell so sharply that the economy contracted on an annual basis for the first time since 1951, when official records for GDP began to be kept. If anyone tries to argue this was all due to cyclical factors, it must have been the worst "downcycle" on record.
Taiwan's cyclical swings usually follow a pattern that begins with a drop in the value of trade. In 2001, this was inarguably the case, as exports fell through the floor, dragging imports with them. Considering that they each account for about half of GDP, there's obviously no way the economy could have been propped up once they collapsed under the weight of the global slowdown.
Even before trade numbers have time to reveal a trend, however, share prices usually start to tumble on the TAIEX, which is dominated by export-oriented IT firms. Strictly speaking, a decline in stocks is a relatively small contributor to GDP. But the TAIEX has a much bigger influence on sentiment, as one in three Taiwanese has accounts at a brokerage. When Taiwanese retail investors, who still account for about 80% of daily turnover on the Taiwan Stock Exchange, see the value of their equity fall, they immediately feel poorer, and so they save more.
Which means they spend less. Which means the biggest contributor to GDP - consumer spending - goes in the tank.
A drop in consumer spending begets poorer corporate earnings, especially at companies outside of the 60 percent of the TAIEX taken up by tech firms. This begets layoffs, which begets further consumer pessimism, and so on.
If consumers are not spending, it's not likely that companies will be either, which brings up the fourth most important contributor to GDP growth: domestic investment, which took a hammering in 2001. No one should be fooled by the relatively small contribution to GDP suggested by the chart: a dollar of input should be worth many times its value in output. Imagine if businesspeople had to invest any more to generate the same income: they might as well be communists, for all the good their capital is doing them.
Political strife chipped in to spur the downcycle along in 2001 by further depressing consumer spending, but this was nothing unusual. Political noise always rises in volume during an economic slowdown as voters remember the main reason they elect a government is to manage the economy. It was just amplified last year by the standoff in the legislature.
But is an understanding of Taiwan's traditional economic cycle enough to explain what went wrong in 2001?
WHAT'S wrong with it?
In theory, exports rule, OK? Push those down and the rest of Taiwan's numbers should follow in a vicious spiral. Pull them up again and all should rise in a virtuous cycle. But this is where the story gets interesting, because structural problems in the economy have clearly been magnified by the current downturn. Confidence that Taiwan can export its way out of the current doldrums has taken a battering, with good reason.
This time, the numbers behind the headlines are worth closer scrutiny. Take trade. When looked at over the past decade it becomes clear that the main reason 2001's numbers were so alarming is they were measured against 2000's - which just happened to be the most astounding period of year-on-year growth in the decade. The total value of 2001's exports - surprise, surprise - was still higher than 1999's. What is more relevant is that they appear to be in line with a gradual flattening-out trend over the past 10 years.
Why?
The real question is why not. Taiwan had a great run in the 1990s, especially for an economy of its size and maturity, outperforming most analysts' predictions. Yet as can be seen from the chart at right, the early drivers of Taiwan's "second economic miracle", PC-related products, have been reaching saturation point in world markets. This is hardly surprising. Having "commoditized" the PC, and everything inside or attached to it, by driving down global cost structures to levels where they maintain a competitive advantage, Taiwanese OEM-focused companies are running out of worlds to conquer. Not only are they finding it hard to expand their already-huge market shares, but per-unit values are dropping steadily, too, as PCs become more common in US households than toasters. Returns are diminishing, as orthodox economic theory says they should.
Exacerbating this natural slowdown in 2001 was the fact that once cyclical problems in the global PC industry kicked in - not to mention the bursting of the dotcom bubble - Taiwan had little else to take up the slack. Traditional industries had in the meantime stepped up their migration to China, and higher value-added industries (PDAs, cell phones, biotech, software, etc.) were still in very early stages of growth.
With earnings in freefall, even hi-tech behemoths such as United Microelectronics Corp. (UMC) were forced to reduce payrolls. This guaranteed that a much harsher spotlight was shone on the politically most sensitive structural change that had been under way for some time: unemployment, which jumped by more than two-thirds to a high of 5.3 percent.
If for nothing else, 2001 will be remembered for the "Oh my gosh, China is draining us!" story. Though Taiwan's media did its utmost to dramatize the situation, last year was nevertheless a period in which factory relocation across the Strait turned from a trend into a mainstream movement. When those factories moved, they threw a large number of people out of work: the manufacturing sector alone chopped 158,000 jobs in the first nine months - 61,000 in electronics.
Even though, as the chart suggests, bigger and more valuable Taiwanese companies are replacing traditional SMEs in the food chain, the newcomers are employing fewer people. Old factory hands lacking the skill sets needed in today's hi-tech economy are being left behind.
Such a dislocation between manpower needs of the hi-tech sector and supply from the workforce hasn't been helped by slow adjustments in the nation's education system. Built in the days of seemingly endless industrial growth and designed to channel talent where the results of uniform national examinations suggest it should go - rather than where demand is strongest - Taiwan's schools, colleges and universities have been falling behind the curve. They cannot produce enough engineering talent to keep the hi-tech sector happy, nor can they produce the kind of English-fluent, globally savvy management talent needed to help Taiwanese service companies compete internationally. As a result, they are ill-equipped for Taiwan's transition to a "knowledge economy." (For more on this subject, please see the November issue of TOPICS )
Alas, WTO accession couldn't have come at a worse time for either new job seekers or the recently unemployed. Job losses will continue to pile up in the coming years as workers in previously protected sectors, especially farmers, lose out to foreign competition: the Council of Labor Affairs has put out a conservative post-WTO estimate as high as 130,000.
It looks like developed-nation unemployment rates are something Taiwanese are going to have to get used to. Consensus estimates by several foreign securities houses in Taipei see unemployment surging this year to an average 6.5%. Nor does there seem much hope for an improvement in 2003, with several analysts predicting a rise to around 6.8%. This is certain to dampen hopes for a strong recovery in consumer spending, the biggest contributor to GDP.
Pessimistic sentiment among consumers might be tolerable if their comrades in the corporate sector felt differently. Unfortunately, the third most important structural change felt more keenly in 2001 was a plunge in "fixed capital formation," or, in language non-economists might understand, domestic investment. Again, looking back over the decade, even though Taiwan's exports and imports have increased steadily, capital expenditure has not kept up. This reflects the obvious fact that businesses have been raking in more revenues, but not putting much more back into the economy to drive future growth. At least, not in Taiwan they haven't.
Judging precisely why, however, is tricky, due to the impossibility of accurately monitoring the flows of "Taiwanese" money, either at home or abroad. Yet anecdotal evidence of anxiety caused by political gridlock, together with statistics showing an 18% percent plunge in domestic investment in 2001, is enough to suggest the private sector had its reasons either to keep more money than usual offshore, or invest it where everyone else was - across the Taiwan Strait.
Without the capital needed to create jobs, generate incomes and ignite consumer spending, it will be tough for Taiwan to resume strong and sustainable economic growth, even if exports do pick up.
It would help if foreign investment were filling the gap. But this has been a tiny contributor to Taiwan's economic growth of the past decade: in 2000, by far the best year on record, it was barely a tenth of the size of domestic investment (and much of it was probably Taiwanese money round-tripping through tax havens such as the Cayman Islands).
Some would say it is unfair to lay the blame for this reluctance to invest squarely at the feet of private enterprise, considering that the government accounts for a third of the domestic investment pie. They would not be wrong: despite all the talk of fiscal stimulus in recent years, both spending and investment by the government have fallen as a share of GDP. Yet this just goes to argue the point that everyone involved in Taiwan's economy is having to cope with structural difficulties. As Damian Gilhawley of KGI Securities points out, the government's domestic debt overhang (totaling more than 170% of GDP) and an antiquated tax collection system shackles its ability to expand the national budget. Even if the legislature were to remove the legal cap on the amount of new bonds the government can issue each year, the budget deficit is approaching 6% of GDP - well above the internationally accepted 3% level. Meanwhile, the government's drive to privatize bulky, loss-making state-owned enterprises is holding investment in check.
These are problems that have been developing for some time and have little to do with the current cyclical downturn. Add to them, says Gilhawley, the government's contingent liability in the banking system - i.e., the money that might have to be spent on bailouts - and it's easy to see why no one should be pinning their hopes on the government riding to the economy's rescue.
Even monetary policy seems to be having little effect beyond the stock market. Though deposit rates are at levels where money is virtually being begged to chase greater returns in stocks, lending rates among Taiwan's banks have generally not followed cuts by Taiwan's central bank.
Which brings up the most talked-about structural problem of them all: the financial sector. As TOPICS explains in greater detail in our survey, Taiwan's credit institutions are in a sorry state after having gotten much, much sorrier than most people thought possible in 2001. Saddled with large non-performing loans, banks have been averse to reducing their spreads on interest between loans and savings, despite cuts in the rate at which they borrow from Taiwan's central bank - thus keeping borrowing costs relatively high for Taiwanese. And, lacking branches on the mainland, they have been increasingly reluctant to back business plans with a Chinese component for fear of not being able to see where their money is going.
Without lenders to fuel corporate ambitions, it's hard to get an economy going. So until a much-needed cleanup takes place in the financial sector, cyclical upswings in external demand are probably going to be constrained by more prudent credit policies at home.
Those, in a nutshell, are the challenges. What can be done about them?
HOW can it be fixed?
Coming up with ideas on how to fix the economy is the easy part, judging by how much advice Taiwan's government has received in the past year from analysts, economists, academics, media workers and fortune-tellers.
The most common line of thought seems the simplest: move to services. For sure, turning Taiwan into a "services-based economy" would cut across every one of its structural woes. It would boost exports by diversifying Taiwan's end-markets away from the hi-tech sector (especially in the US). It would reduce unemployment by soaking up workers from "sunset" industries. It would attract foreign and domestic investment to new areas of exponential growth. It would broaden the diversity of companies listed on the stock exchange, thereby reducing the volatility of the TAIEX. And it would give consumers wider choice on what to spend their money.
Easily said. But when it comes to action plans, such would-be advisers are a bit like respondents to cross-strait opinion polls who tick the box, "Maintain the status quo with China." In other words, "services" has many meanings.
The biggest sub-group seems to comprise those who believe the future lies in opening Taiwan's economy further to international capital and expertise. It was a hot topic at the last "Roundtable" conference held in Taipei by The Economist group.* A guest speaker, Jonathan Anderson of Goldman Sachs, probably summed up the situation best. Taiwan, he said, can decide to follow Hong Kong's model or Japan's in responding to the "hollowing out" of its manufacturing sector.
At the start of the 1990s, Hong Kong watched as its manufacturers took their money and skipped across the border to China. But Hong Kong also opened its economy wider, and the result was a surge of financial inflows. For all the cash that drained out, more than enough returned, boosting per capita incomes as the workforce moved quickly into services. Japan, by contrast, tried to have its cake and eat it too. It moved into higher value-added services, but also held on to its traditional manufacturing base by protecting it from competition. The result? It has one of the world's most inflexible economies and is struggling with recession and deflation.
Taiwan is stuck between the two at present. It went the Hong Kong way at first, but due to self-imposed restrictions on cross-strait capital flows, only a small fraction of outward investment has managed to find its way back. Manufacturing, meanwhile, still plays a relatively large role in Taiwan's GDP, suppressing the instinctual move into services usually seen in an economy that has lost its competitiveness in land and labor prices.
Peter Kurz, head of Insight Pacific and MrTaiwan.com, went a step further by asking the rhetorical question, What if all that Taiwanese money currently parked offshore was motivated to come back onshore? Regardless of whether Taiwan is capable of becoming another Hong Kong or Singapore, he believes it would behoove Taiwan's industrial giants on the mainland to have financial institutions they can rely on at home. Taiwan should therefore be positioning itself as a financial services center in greater China - for Taiwanese companies. Once it can successfully do this, it would in any case make itself more attractive as a lower-cost, lower-risk conduit for global investment into the mainland.
This might explain why another sub-group consisting of people like David Garrett of Airis Corp. believe in Taiwan as a logistics center. Airis is working on a "Global Air Logistics Park" in Kaohsiung. One reason it sees potential in the project is that currently more cargo is being trucked from Kaohsiung harbor up to Taoyuan's CKS airport than is being transshipped via Kaohsiung's own international airport. Most of those goods are either coming from, or going to, China. So developing Taiwan as a logistics center for its companies on the mainland would ensure it maintains a pivotal value-added "services" role in international trade.
Which brings up the issue of direct transportation links. Suffice to say that if they didn't believe in san tong before 2001, every last businessperson in Taiwan must now. Direct air links with big cities like Shanghai and Beijing would cut traveling time for executives, making Taiwan an attractive base for local and foreign companies operating on the mainland. This would help to lure new talent, or bring back talent that has fled in recent years. It would also cut the delivery time of critical components in global IT supply chains, again raising Taiwan's competitiveness. Even slower shipping links, especially if established with smaller ports such as Dalian and Qingdao, would improve the cost advantages of Taiwanese companies. Whether the links can be established soon, however, is not worth debating here, as the decision is stuck in a political black box that no one can see into.
What is worth discussing is the feasibility of plans to transform Taiwan quickly and effectively into a services center, period. For there is an alternative to the mainstream view, which holds that pinning one's hopes on Taiwan's ability to forsake manufacturing for services over the next few years is folly. It's simply not in the Taiwanese DNA, the naysayers say, nor is Taiwan equipped linguistically or educationally for such a dramatic transformation. Instead, this group prefers to focus on Taiwan's ability to do what it already does, only better, by moving further up the manufacturing value chain.
The trick, they say, is to stay several steps ahead of China and continue to feed subsidiaries or partners there Taiwan's lower value-added capacity. There will always be a newer and fancier technology for Taiwanese to work with. The best example is Taiwan's foundries, which have been building 12-inch fabs in Taiwan with 0.13-micron process technology, while Shanghainese pretenders to their throne are still struggling with 8-inch fabs. But it would be great if they didn't have to compete at all, as TSMC and UMC's 8-inch fabs are not nearly as profitable as their 12-inch ones. If they could sell their redundant capacity to the mainland, that would allow them to surge further ahead in the competitiveness sweepstakes.
The basic "captains of industry" thesis is that if the economy is to be transformed, those on the front lines of international competition are the best ones to do it. Therefore, it is essential that Taiwanese companies be able to respond to pressures in a global marketplace as fast and easily as their competitors do. Let businesspeople worry about whether they are going to switch from making laptops to 3G phones or LCD screens, they say, and let the government worry about things like improving education and living standards.
This need for a change in leadership mindset was probably best summed up by Y.C. Lo, a former Philips director who spoke at a conference held in Taipei by the Epoch Foundation and the Asia Foundation: "The government has to find a new role as a facilitator," he said. "...it must learn how to compete with other governments." The key to achieving this, Lo said, was to build a "trust" society, one in which there was no need for so many controls over the way companies go about their business.
If only. Clearing bureaucratic hurdles in the way of business would benefit everyone, as the American Chamber of Commerce in Taipei has repeatedly stressed in its annual White Paper. It would also make an immeasurable difference to the speed of Taiwan's economic transition. Foreign investors have the money and expertise to help Taiwan move up the value-added ladder far faster than it could through current efforts at self-sufficiency. Just look at what Starbucks has done to the coffee shop industry (not to mention interior design) in Taiwan. Imagine if that could happen in, say, pharmaceuticals or legal services.
Foreigners are not going to be stampeding into Taiwan, however, until some fundamental changes have been made to its regulatory environment. In the words of Richard Vuylsteke, executive director of Amcham Taipei, "Taiwan needs to go from a philosophy of 'illegal unless approved' to one of 'legal unless prohibited'."
Admittedly, opening up to foreigners is complicated by the risks of opening up to China. This is an incredibly tough step to take, considering the political enmity that exists across the Taiwan Strait. A growing number of people, however, believe it is vital. If mainland money were allowed into the stock and property markets, or if mainlanders themselves were allowed in as tourists, the upside would be substantial for the economy, they say.
Cliff Tan of Salomon Smith Barney, for instance, believes that allowing greater two-way capital flows between Taiwan and the mainland will help to reduce structural unemployment, as it will further spur the division of labor between the two and thus push Taiwanese companies faster into the service sector. Consider what it did for Hong Kong in the mid-1990s, he says.
The analogy is relevant in another way, as Chinese money could probably boost Taiwan's attraction as a regional financial center focused on the IT industry in China, as Peter Kurz and others have suggested. Just as Hong Kong is the place for Chinese capital to "round-trip" by participating in the growth of China's best-run companies, such as its telecoms giants, so Taiwan could position itself to Chinese investors as the best place to invest in their own country's rise as a global IT power.
As for tourism, mainlanders - real mainlanders, not the "overseas residents" variety cleared for entry by the government - are the only likely source of growth that Taiwan can expect at present, given the immaturity of the industry and lack of English language usage here. They are not to be sneered at as a potentially powerful spending force, however. Jeffrey Hanson, Head of Taiwan Research at CSFB, believes that when the infrastructure buildout is added to the spending power of tourists, a total contribution of three to four percentage points could be added to GDP over the infrastructure development phase, followed by a half point per annum contribution from additional tourist spending thereafter.
"Enough!" One can almost hear the government cry. These points are all understood, most cabinet officials (and even a majority of legislators) will agree. But although politics may be the art of the possible, it's not easy turning such fine words into deeds.
And yet, when the record for 2001 is examined, it will show that substantial ground was covered in both branches of government to improve Taiwan's economic framework. Though questions remain over the implementation of laws and regulations either revised or newly written to cope with the country's economic transformation, a start has at least been made in most of the areas covered by this article.
The question is, does Taiwan have the speed - and the stamina - to make a success of these changes?
WHAT is being done?
James Ho thinks Taiwan has the ability to fulfill its ambitions.
Then again, he heads the government agency responsible
for coordinating the Executive Yuan's progress in deregulation and innovation. His job, though he won't say as much, is to make sure economic reforms stay on track.
Ho's Center for Economic Deregulation and Innovation (CEDI), once ambitiously titled the Asia-Pacific Regional Operations Center (APROC) Window, has a clear new mission: to invert the bell-shaped curve depicted in the diagram below.
CEDI is somewhere between the "move to services" and "make better products" crowds. It concedes that Taiwan has relied too much on its strength in manufacturing. With China and other less-developed countries enticing Taiwanese mass production offshore, the bell-shaped curve is going to be flattened whether people living here like it or not. The way to respond, CEDI believes, is to build a knowledge-based economy and turn Taiwan into a global logistics center.
CEDI's parent, the cabinet-level Council for Economic Planning and Development, pushed hard to put these projects (and others) into motion in 2001. Its fellow cabinet members responded remarkably well and, despite political wrangling on the surface, so too did their colleagues in the legislature. The result was an unprecedented number of economy-related bills passed in the course of the year.
WTO-related laws took pole position, with no fewer than 14 amended to enable Taiwan's accession. EDAC was next up, with 15 bills passed by the time TOPICS went to press. Importantly, the Company Law was almost completely rewritten, allowing for improved flexibility in the establishment and financing of companies. The Mergers and Acquisitions Act, meanwhile, allows for much-needed consolidation to take place, especially among Taiwan's legendary small and medium enterprises (SMEs). Then there is the Statute for Industrial Upgrading, which was given a substantive makeover to provide more effective tax and other incentives to companies wishing to invest in new areas. Finally, the financial sector's wishes were realized in the Financial Holding Company Law and the Financial Mergers and Acquisitions Act. Taken together, this legislation provides the framework for far-reaching change in Taiwan's economy.
At least, it should provide such a framework. Unfortunately, there are already plenty of gripes with the fine print of the most recently passed WTO legislation. Non-tariff barriers to entry remain, to a point where U.S. trade officials could be forgiven for thinking that their Taiwanese counterparts just don't "get" WTO entry. Regrettably, regulatory opaqueness and legal ambiguity is common in Taiwan, thanks to decades of laws deliberately left vague in places so that the executive branch could interpret them by issuing administrative orders. So, for instance, the job market could be thrown open by law, but the relevant ministry could decide that foreigners had to pass examinations in Chinese, or had to have been resident in Taiwan before WTO entry, and so on.
Still, there is clay to work with, and much of the job of monitoring compliance with the new legislation remains to be done in the coming year. Even though tempers are being tested, the jury is probably going to be out for a bit longer.
The bigger question on the minds of many is who exactly will be implementing and regulating the new laws. President Chen Shui-bian has set ambitious targets for reducing the size of the civil service and boosting its efficiency through a series of "mergers and acquisitions" among the Executive Yuan's ministries and councils. In all, 14,000 jobs are to be trimmed, and a third of the Cabinet's divisions abolished - all before the 2004 presidential election.
Bold though these plans may be, they raise the obvious fear among the business community that the person in charge of overseeing a certain law's implementation today might not be around tomorrow. It is also contributing to the reluctance of companies and sectors affected by recent legislative changes to move very quickly. For instance, why start to consolidate all your back-office staff under a financial holding company structure when you don't know who at the Central Bank of China, Bureau of Monetary Affairs, or Securities and Futures Commission will be your new regulator once the Financial Supervisory Board is set up?
James Ho downplays such concerns, saying he believes the government re-engineering plan will be set in motion by April at the latest, and that deregulation in general has strong support from the very top of the government. Evidence of this is that Premier Chang Chun-hsiung has asked him to present updates at the weekly cabinet meetings. Previously, these came on a quarterly basis. The CEPD has also established a website so that leaders and laggards can be monitored and made more competitive. The best of the best qualify for the (jokes aside) "Golden Ax Awards."
Then there are the Education and Justice ministries, which rate consistently high in public opinion polls for the reforms they have undertaken since Chen came to power in May 2000. The education ministry, for instance, has gone light years toward breaking down the tradition-bound inflexibility of Taiwan's system by introducing an alternative to the Joint College Entrance Exam. Taiwanese high school graduates now no longer have to attend college wherever their grades suggest they should. The Justice Ministry, meanwhile, has cracked down hard on "black gold," resulting in the legislative elections being the cleanest in Taiwan's history. Creating a sounder legal environment for foreign companies to contract in will go a long way to improving Taiwan's advantages over the mainland, as will increasing the "creative gap" between Taiwanese and Chinese educational institutions.
Impressive as these achievements may sound, they pale in comparison with what's happening at the Mainland Affairs Council. Ever since EDAC knocked cross-strait policymaking into the court of business opinion, resulting in the dropping of the "go slow, be patient" mantra in favor of "active opening, effective management," Taiwan's traditional party-pooper on cross-strait economic relations has been energized. Though it's hard to tell whether the MAC really has its heart in the game, or is playing for time, the result has been a near-constant stream of announcements recently on who and what has been cleared to move to China, and who or what can come in.
According to Vice-Chairman Chen Ming-tong, the MAC sees its new role as being one of "macroeconomic management." It's a far cry, he admitted to reporters at a November briefing last year, from its traditional role of "assuming the risk for Taiwan's industries" on the mainland.
Chen's boss, Chairperson Tsai Ying-wen, is anything but traditional, as attendees at The Economist conference will testify. Fielding a question about balancing national security concerns with cross-strait economics, her reply was, "Some things are a problem of national security; others are a problem of national security advisers."
Such talk is refreshing, yet when the MAC's record is examined more closely, it's still too early to say just how much balance has been struck between "active opening" and "effective management." President Chen pledged to implement the EDAC proposals to the hilt, and WTO entry is supposed to open Taiwan's markets wider to Chinese goods and services. Yet on both fronts the MAC has not always eased up at a pace commensurate with commitments: witness the delay of approval for 8-inch fabs to move to China, and the construction of extra-WTO barriers to low-cost goods from China.
Admittedly, though, Taiwan has come a long way on the vision thing as far as China is concerned. Tom McGowan, an Amcham vice president and foreign legal consultant with Russin & Vecchi in Taipei, calls it a "mindset change." James Ho thinks it will be the distinguishing characteristic of the government's performance in 2002.
Great stuff, one might say, but what does all this goodwill actually mean for the economy in the near future?
WHERE to from here?
Don't hold your breath. That is the message from strategists at some of Taipei's top securities houses and fund management firms. Recovery will take place, but the Year of the Horse is not going to be anything like 2000 was.
It won't be as bad as 2001, either, thanks to a recovery apparently underway in the U.S. This is important, because about 40% of Taiwan's exports are ultimately destined for the U.S., even if they make a detour through China. The recent performance of the TAIEX reflects the nascent US rebound, and should generate the usual positive knock-on effects.
Indeed, coupled with an easing of political tensions at home and in the Taiwan Strait, it appears that 2002 will be the year when the economy's "fasten your seatbelt" sign is turned off. There is some variation in estimates for GDP growth, but 1.5%-2% seems to be the most realistic range.
This doesn't mean, however, that the economy's structural weaknesses are going to quietly slip away in 2002. The continuing drain of manufacturing capacity to China, for one, will ensure that economics stays on the political agenda. If anything, this drain is likely to be helped along by WTO and EDAC. WTO entry will strengthen the "pull" of access to China's markets, while the changes wrought by EDAC will boost the "push" from Taiwan. What will replace all this lost capacity, especially in the high-tech sector?
Plenty, say optimists like David Loomis of Primasia. Taiwan has consistently shown a fast ability to adopt new technology, he said in a recent interview. "These people are go-getters who know what they want."
Others say reports of the death of markets for Taiwanese hardware products are premature. Besides, there are many areas of growth outside of the PC that Taiwanese companies are jumping into quickly, such as cell phones and wireless networking, where China presents a huge opportunity.
Jonathan Anderson reminds that the pressures of outsourcing to China were much bigger at the start of the 1990s than they are now, yet Taiwan managed to overcome them. And signs of response to the current challenge are evident, he says: "Taiwanese companies are already changing their profile from outsourcing producers to brand-oriented distributors who are themselves outsourcing."
At the most bullish end of the spectrum are those who point out, quite rightly, that Taiwanese companies are unique in owning both production facilities (in China) and sales channels (distributors to brand-name customers in the US). And no matter what you say about their lack of international sophistication when it comes to marketing and services, Taiwanese are better qualified than either foreigners or locals to exploit the massive mainland market.
The coin-toss is over just how quickly Taiwanese companies can seize the day in China, and how smoothly the economy can be reoriented to deal with that reality at home. Jeffrey Hanson of CSFB, for one, believes Taiwan is going to experience a medium-term "shock" as companies and capital drain to China faster than Taiwan can build new higher value-added replacements. Peter Kurz thinks a more potentially risky scenario is that Taiwanese companies in China get fed up with bureaucratic wrangling at home and decide to become Chinese companies in deed, if not name.
If the government is worried about any of this, it's not showing it. In fact, the DPP-led administration is probably about as confident as it should be after the December 1 legislative elections, with spokesmen saying this will be the year when their strategy of "Solidifying a base in Taiwan and going global" starts to have a stronger impact.
If so, that impact will probably be felt first in China, as it's clear that any Taiwanese company worth its international salt has set its eyes first on conquering the mainland, and then the world. Taiwan's natural spokesman on global branding, Acer CEO Stan Shih, believes this is the way he is going to take his group in 2002.
But can people like Shih pull it off without a strong financial sector to back them? Only if this is the year in which the issue of tackling the bad debt load is no longer simply talked about. Evidence is available that a cleanup is under way, as our survey details, but there is plenty to be done in 2002 to brighten the banks' balance sheets.
That said, as long as the financial sector is not a drag on growth, it could be enough to hope for. Stuart Davis, CEO of HSBC Taiwan, thinks it will play a "neutral role" in the economy this year, which, he says, "should be seen as positive." Steve Novak of ABN Amro Asset Management agrees, saying the best thing 2002 could bring is evidence of support for the "next wave" of change: making the asset management companies work.
Though it does not hold the same potential for drama as 2001 provided, 2002 will likely throw up more than enough "interesting times" of its own. For if Taiwan is to pitch itself wholeheartedly into the world arena as WTO entry would suggest, many Taiwanese are going to have to face up to the painful fact that they are living in an "emerged" economy. The newly unemployed will be among them. Previously protected businesspeople, especially in the services sector, will be another. Both are powerful lobby groups. And if government leaders think their work is done in opening up to foreign investors, they are bound to have a tough time sleeping at night once the details of WTO-related legislation start to be challenged by nit-picking lawyers.
But, in the words of Jedi master Yoda, face the dark side they must. There is no viable alternative destiny for Taiwan to pursue. Harry Harding, a renowned China affairs scholar from the U.S., framed it best during a recent visit to Taipei. Asia's "economic geese," he said, are changing their formation. No longer are the export-friendly, import-skeptical policies of Japan leading the way. China, with its apparent commitment to multilateralism, is out in front. What must be seen in the coming year is where Taiwan fits into the formation, and whether its wings are strong enough to fly straight and true.
* Note: The conference was held in association with Taiwan Asia Strategy Consulting. For more details, see the Economist Conferences website.
