Year-end report card
While it may be true that the situation in the PRC will change dramatically, economists are mostly confident in the innate ability of Taiwan firms to adapt. It is disconcerting, however, that more and more large Taiwan corporations are applying to invest in the mainland. Not only are the amounts invested ever larger, the types of investments are shifting from traditional industries toward mid- and high-tech production, or to mid-stream processing of raw materials. These are precisely the types of industries that the government is working so hard to keep in Taiwan.
But does the slogan of "keeping your roots in Taiwan" have any appeal for Taiwan businessmen? Is Taiwan an asset or an albatross for these entrepreneurs as they strive to remain competitive internationally?
A study released by IMD International graded 42 countries on their competitiveness. Taiwan finished 18th, far below key rivals like Singapore (2nd) and Hong Kong (4th). Clearly Taiwan is no longer the dexterous "flying dragon" of yesteryear, but has become a sluggish dinosaur; indeed, the survey even listed it behind Malaysia (17th), a newly industrializing country. Many people are concerned that Taiwan may be left out of the global recovery and Asia-Pacific economic takeoff expected for the end of this century.
There are reasons for concern. In particular, domestic economic growth was very slow in the first three quarters of 1994. There were also many typhoons as well as shortages of water and electricity, causing industry to cry "uncle" repeatedly. But, perhaps feeling the effects of the global recovery and of the appreciation of the Japanese yen, in the fourth quarter the economy experienced explosive growth. In November, usually the slow period for overseas sales, exports totaled US$9.4 billion, an increase of 26% over the same period in 1993. Imports also were dazzling, increasing 35% over the same period. The two categories combined to record the highest growth rate in trade in seven years. A report released by the OECD in December indicated that Taiwan's overall economic growth for 1994 was 6.4%, seventh highest in the world. Taiwan still seems to be "at the head of the class."
"If all is going well with trade, then this will stimulate investment and production in the manufacturing sector, and will also stimulate consumption. So there isn't any worry about deindustrialization or recession," argues K.C. Lee. And when you look further at the data, at the end of 1994 not only did imports and exports rapidly increase, investment, consumption, and production all flourished. "Hot, hot, hot!" is how Lee sums up the economy. In fact, he even suggests that the government should prepare early to avoid "overheating"-- excessively fast growth which can bring inflation.
Long-term problems still need work
Wei Duan notes that at the end of 1993, different schools of thought were debating about whether the forecast for economic growth in 1994 should be above or below 6%. However, the sudden surge in trade at the end of 1994 has made everyone optimistic that 1995 "will be even better." The only difference among scholars is over just how much "better" 1995 will be, and over whether Taiwan can do better than the other Newly industrialized Economies.
Though the upbeat outlook for 1995 has temporarily overridden longer-term worries, it is undeniable that there are still a number of problems with the domestic investment and production environment. As K.C. Lee states, "the private sector has a very high willingness to invest, but for various reasons this is not being realized in practice." Faltering investment will reduce future returns, and the upgrading of Taiwan's industry--so critical to long--term economic development--will not move forward. It could become a fatal blow to Taiwan's economic development.
It is not hard to diagnose why Taiwan's investment environment is less than ideal, but it is hard to get to the root of the problem. Looking at input factors, there are a number of inadequacies which greatly add to the costs of production: a shortage of labor, difficulties in acquiring industrial land, uncertainties in the supply of water and electricity, and inadequate development of infrastructure (especially transportation and communications). Also, technology is proving hard to come by for industrial upgrading, while small and medium enterprises are short of capital and are unable to keep investing....
The curing of the investment environment will require long-term treatment. In fact, after much research by scholars and practitioners, the prescriptions have already been written up. But decisions must be made and then implemented. As for the new challenges of 1995, one will be that Taiwan needs to accede to GATT this year. Another is that it will be necessary to thoroughly implement the blueprint to make Taiwan into a "Regional Operations Center" for the Asia-Pacific area. Both of these would be major steps forward in Taiwan's efforts, which have been underway for several years, to "internationalize, liberalize, and systematize" the economy.
Pressure brings out potential!
In order to prepare for GATT accession, Taiwan must reach bilateral trade agreements with 23 nations. However, as of the end of November 1994, final agreements had been reached with only Malaysia, South Africa, and Turkey. Moreover, the PRC is insisting that it enter GATT before Taiwan does, creating many variables which affect when Taiwan will actually be able to join GATT. Further, many key trading partners like the US and Japan have failed to accept Taiwan's conditions for joining GATT. How many concessions will Taiwan have to make to secure its entry into GATT? Right now it's hard to be certain.
"This sense of uncertainty leaves businessmen not knowing where to begin," said one public relations person in the local auto industry, which will be one of the first to feel competition from major international rivals after GATT accession. Because there is no clear indication of what the relative position of the local and foreign producers will be, all the former can do at present is to minimize costs and increase competitiveness, and to organize themselves to appeal to and communicate with the government.
It will be necessary to implement waves of tariff reductions on imported products after GATT entry, giving foreign firms a chance to compete on equal terms in the domestic market. The question is: Which product areas will take the brunt of the first wave of reductions? Which products will get a somewhat longer period to adjust? How far and how fast should tariffs fall? How can disputes over losses incurred be handled? GATT accession creates dilemmas everywhere. As the moment of accession approaches, the wrestling between government and industry will become ever more obvious.
In each industry perhaps some companies will do well while others fall by the wayside. But overall, GATT accession will have a positive impact on Taiwan's economic development. According to a GATT report of November 10, 1994, if Taiwan joins GATT, by 2005 the value of its exports will be between 4.5% and 14.4% higher than if it did not join. National income will be higher by between US$2.6 billion and US$10.2 billion. And these are conservative estimates.
Joseph S. Lee, vice-president of the Chung-Hua Institution for Economic Research, looking at the big picture, says that the world economy has been traveling along the two axes of "globalization" and "regionalization." If Taiwan does not join GATT, it will not be seen as having the qualifications to be a member of the world economic circle. Also, after the World Trade Organization (WTO)--which is charged with overseeing implementation of the GATT agreements--is formally established in 1995, it will begin to consider new topics such as international labor and environmental standards. In other words, the longer Taiwan delays in joining, the higher the barriers will be to entry, and the more serious the adjustments will have to be. Therefore, it is essential for Taiwan to gain entry to the WTO in 1995.
"The pain of getting into GATT may very well be an important variable for Taiwan's economy in 1995. Yet Taiwan has been implementing liberalization and internationalization for many years now, so everyone should be psychologically prepared and have the capability to survive this test," says Yeh Wan-an, who adds hopefully: "People will work harder under pressure, and this will stimulate the potential of Taiwan's economy."
Deciding your own fate
The effort to remain a key link in the world economic order is evident not only in the determination to enter the WTO. It also appears in the blueprint for the "Regional Operations Center." The broad idea for this was floated two years ago. The hope is that Taiwan can take advantage of its geographic location, orthodox Chinese culture, business connections with overseas Chinese, and solid industrial base to become the regional center for foreign firms coming to the Asian region (and especially for those firms investing in the PRC).
The idea for the regional center has been widely acknowledged to be a good one. However, because it involves questions of the degree of openness in the interactions between Taiwan and the mainland--such as direct air and sea links, or allowing mainland staff, capital, and goods into Taiwan--there has been a lot of controversy as well. Some staff members at the Mainland Affairs Council are very clearly opposed to ideas like "the shop up front (in Taiwan) and the factory out back (in the PRC)" or the "Hong Kong-ization of Taiwan." They argue that to make Taiwan into a launching pad for foreign firms to invest in mainland China is "reducing ourselves to a mere supporting role."
However, in the recent cabinet reshuffle, Vincent Siew, who as head of the Council for Economic Planning and Development first promoted the idea of the Regional Operations Center, entered the cabinet, and a preliminary draft of the long-delayed "Regional Operations Center Timetable" has been completed. This indicates that the government is determined to implement the plan as quickly as possible. This was another year-end bonus which pleased the business community.
Looking ahead to 1995, "each variable has its positive and its negative aspects; nothing is absolutely positive, nor is anything an absolute write-off. Everything depends on how government and the private sector respond!" Joseph Lee's comment is a fitting final note as we look forward to 1995.
[Picture Caption]
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Though weighed down by various burdens, Taiwan's economy is still trying to fly high. (drawing by Tsai Chih-pen)
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The success or failure of export industries can reflect Taiwan's relative competitiveness in the world economy. The photo is of the Kaohsiung Export Processing Zone. (photo by Wang Wei-chang)
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Peaceful relations across the Taiwan Strait are a major prerequisite to economic development in Taiwan. The photo was taken at the high-level cross-strait meeting held in Taipei in July 1994. (photo by Vincent Chang)
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When will Taiwan enter GATT? What conditions will be negotiated with its trading partners? This is one of the most important topics for business people in 1995. The auto industry will be one of those most seriously hit by GATT entry. (Sinorama file photo)
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Important Economic Indicators for Taiwan
Source: Council for Economic Planning and Development
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The burst in consumption at year end seems to reflect public confidence in the economy and in the future. (photo by Diago Chiu)