A new phenomenon has appeared on the streets of Taipei. Advertisers wearing surgical masks and holding signs reading, "No-interest lines of credit for business and industry" and "Borrow money without having to beg" have, like ghostly apparitions, silently stationed themselves at busy intersections. In some ways, this new "profession" is indicative of the recession afflicting Taiwan.

Economically speaking, 2001 was Taiwan's worst year in half a century. Gross domestic product actually shrank by 1.9%; the unemployment rate rose to over 5%; and in the fourth quarter, the banking industry's non-performing loans reached a high of more than 8% of all loans. The only positive figure was a ten-year-high trade surplus of more than US$15 billion. Even that figure was problematic-it was the result not of export growth, but of weaker imports. Those weaker imports indicated that domestic manufacturers had cut back on investments in new equipment, giving rise to more concerns about the long-term economic outlook.

The last ten years have been a golden age for Taiwan's IT industry. Now many firms are seeking to build on this foundation by setting up bases in mainland China.

According to Lee Kao-chao, a senior member of the Council for Economic Planning and Development, "Taiwan's economy encounters major obstacles every few years, but after making adjustments, it always finds its way out of the woods." Lee has observed these upheavals at first hand, and though the problems have never been quite so severe, he remains confident that Taiwan will get back on track.

Taiwan went through a serious crisis just 15 years ago. The currency had appreciated rapidly; the public was speculating wildly in stocks and property; people were demanding democracy; and traditional manufacturers were moving production offshore. Lee recalls that people were no less pessimistic about the outlook for the economy then than they are now. Then, in the early 1990s, high-tech industries such as electronics, information technology and semiconductors began to flourish, not only pulling Taiwan out of its crisis, but earning the island global recognition and burnishing its reputation for creating economic miracles.

The high-tech boom has now been driving Taiwan's economy for a full decade. But as times have changed, the high-tech industry has begun to follow in the footsteps of traditional manufacturing, quietly moving production to mainland China. Taiwan's notebook computer industry, for example, which last year manufactured 60% of the world's notebook PCs, has begun to set up production in China. In fact, Taiwan's eight major notebook manufacturers have all now established facilities in the Shanghai area. Even manufacturers of cellphones, motherboards, passive components and monitors, whose Taiwan operations remain competitive, are rapidly ramping up their Chinese production. Economists estimate that Taiwanese firms accounted for more than 70% of mainland China's US$35 billion in IT exports in 2001.

Now even the semiconductor manufacturing industry that has been so critical to Taiwan's economy in recent years has begun clamoring for the government to ease restrictions on its investment in China, giving rise once again to fears of a "hollowing out" of Taiwan's industrial base. And the steep drop in GDP growth from 5.9% in 2000 to -1.9% in 2001, a difference of nearly eight percentage points, has dealt a further blow to Taiwan's confidence.

Are traditional industries in decline? San Sun Hat and Cap, which is based in Tachia in Taichung County, generates healthy profits selling its products all over the world. When Polo, one of the company's clients, slaps its logo on these San Sun's caps, they sell for more than NT$1,000.

According to Huang Ho-ming, chairman of the Institute for Information Industry, "The current recession resulted from rather unique circumstances; a number of factors came together at the same time, complicating the problem."

Domestically, IT manufacturers, who tend to excel at seizing the initiative, were making plans to invest in China and market their goods there even before 1999's Chichi earthquake. When the earthquake rocked Taiwan, it reminded both Taiwanese businesspeople and their foreign clients of the wisdom of not having all their eggs in one basket, and accelerated the move to the mainland.

By positioning themselves to compete in the global marketplace, local IT manufacturers expanded the scope of their businesses, but scaled back their Taiwan operations. At the same time, Taiwan underwent a political sea change as the DPP took over the reins of power for the first time. This set off political bickering between the DPP and the KMT, which had run the government for five decades. Moreover, the image of the DPP as leftist and anti-business still prevailed. The situation was extremely unsettling to local businesspeople and worsened Taiwan's economic situation.

Douglas Hsu, chairman of the Far Eastern Group, says that whether speaking about the Fourth Nuclear Power Plant, working hours, reducing the number of foreign workers allowed into the country, or the "national security tax," the new government frightened businesspeople with its every policy initiative. In 2001, private investment in Taiwan plummeted an unheard of 26%. It fell a further 17% in the first quarter of this year. Firms are voting with their feet, bringing yet another negative factor to bear on the economy.

Unfortunately, just as Taiwan was confronting these many domestic troubles, the US's Internet bubble burst, bringing the high-flying global high-tech industry crashing back down to earth. Taiwan was badly bruised by the fall. The island's economy is export-driven, and electronics and IT products account for 35% of those exports. Nearby Singapore, where IT products account for 50% of exports, was hit still harder and saw an even sharper decline in its GDP growth.

Now that the problems are clearer, the government has begun putting together plans to address them. These have included turning Taiwan into a "green silicon island," a "knowledge-based economy" and a "global logistics hub," fostering Taiwan's "two trillions and twin stars" and promoting a six-year national development plan. In its two years in office, the current administration has offered more visions, ideas and slogans on the economy than any previous administration.

But as Luo I-chiang, formerly a member of Philips Electronics' board of directors, bluntly puts it, "There is no lack of long views and blueprints to address Taiwan's economic ills. What is lacking is the courage and resolve to implement policy, and actual projects."

"What will the global economy look like in ten years? What role would Taiwan like to play in that economy?" Luo asks the hard questions: "Once Taiwan establishes its goals, it needs to break them down into concrete steps spread over ten years. What does it need to accomplish each year? Legislation, people, infrastructure. . . . How many related measure will have to be put into place?" If Taiwan does not take concrete action, then any plan, regardless of how good it looks, is just so many words on paper.

Taiwan's businesspeople are innovative, fast on their feet, and have created a complete production chain. Once the "wiring" of the island gets up to pace, they should be able to take advantage of the limitless opportunities that the digital age offers.

Looking to the future, there is not a government on Earth that is not doing its utmost to capitalize on the two major trends in the world economy-towards globalization and towards knowledge-based economies. Premier Yu's Cabinet, with its "Challenge 2008-The Six-Year National Development Plan," is no exception.

Owing to its small size, Taiwan has historically sought to attract foreign investment as a shortcut to growth. In order to maximize its "utility," Taiwan has consistently striven to offer its foreign clients ever cheaper, faster, higher-quality and more accommodating service. This approach began in 1966 with the construction of the world's first export processing zone, continued through the days of Taiwanese businessmen traveling the globe with samples in hand, and is still utilized by the technology companies in the Hsinchu Science-Based Industrial Park.

"When you are small, you have to throw open your doors to gain access to the much larger markets and more abundant resources of the outside world." Luo I-chiang, who worked in Philips' headquarters for four years, takes the Netherlands as an example. Though small, the Netherlands has established itself as the gateway to Europe, and does its utmost to make life as easy as possible for those traveling or shipping goods into or out of the country.

Taiwan's location is even more advantageous than that of the Netherlands. It is located at the heart of East Asia, at the center of a different sort of "golden triangle" demarcated by the intersections of lines drawn from Silicon Valley to the Yangtse River delta (which includes Shanghai), and from Korea and Japan to Southeast Asia.

In addition, Taiwan's background as a former Japanese colony and the many Taiwanese who have studied and worked in the US give the island a human network of international dimensions. Add in the fact that the island shares a common language and culture with China and with ethnic Chinese in Southeast Asia, and the tight ties between its own business, political and academic circles, and Taiwan looks to be very well positioned here at the beginning of the era of globalization.

The "Asia-Pacific Regional Operations Center" policy promulgated in 1995 was designed to capitalize on these strengths. Policymakers hoped to turn the island into a regional operations center through which goods, capital, information, technology exchanges and personnel could freely flow. Although the later "go slow, be patient" policy with regard to China led to the abandonment of the plan, there was always broad support for the operations-center concept and a widespread belief that it was uniquely appropriate to Taiwan's position.

When globalization was still in its earliest stages in the 1980s, Taiwanese businesspeople traveled the world, setting up production facilities in Southeast Asia, Central and South America, and Europe to take advantage of lower production costs and the business opportunities offered by emerging markets. When China began to emerge from the shadow of the Tiananmen Incident in the mid-1990s, the world's multinational corporations felt they had to be there, and Taiwanese businesspeople found themselves playing on a much larger stage.

The goal of creating a "humanistic technology island" is to use technology to retransmit cultural content and to enrich people's lives.

Viewed from another angle, the lure of the China market is "wreaking havoc on the industrial structure and economic progress of neighboring nations, including Taiwan," says Wu Ho-mou of the Chung-Hua Institution for Economic Research. He adds that fears of a "hollowing out of the industrial base" are not unique to Taiwan: Japan, Korea, Hong Kong and the nations of Southeast Asia are all terrified of the economic "black hole" that is China.

But, in spite of its fears, Taiwan is the most likely of these to benefit from this process.

According to Huang Ho-ming, firms the world over are drooling over the thought of China's cheap land and labor, and its enormous markets, but are hampered by their unfamiliarity with the language and culture. Even after making large investments of time and money in learning, they still don't understand how to liaise with Chinese officialdom or manage Chinese employees. As a result, many European firms are placing orders in Taiwan while demanding that their Taiwanese suppliers set up production in China. This allows them to reduce their own risks while enjoying the benefits of Chinese production. Over the last two years, even Japanese firms have begun seeking out Taiwanese partners for China ventures, demonstrating how useful Taiwanese expertise can be.

China offers another benefit to Taiwanese manufacturers-the opportunity to develop their own markets and brands.

Chou Chih-yuan, president of the Beijing subsidiary of Global View, a Taiwanese firm that makes China's number-one brand of electronic dictionary, says that without your own brand, you can't be truly global. According to Chou, every major brand of international standing has a strong base in its domestic market from which to expand. "There are only 23 million people on Taiwan, so the market is too small to function as such a base. But China can be a great place to build a brand for Taiwanese firms that do their homework."

Taiwan must exploit the strength of others, in this case China, if it is to realize the greatest possible economic gain for itself. A number of clear-sighted Taiwanese firms recognized this some time ago, and set up mainland operations well ahead of the pack. Such firms are the reason for China's and Taiwan's ever-increasing mutual reliance on cross-strait trade. China (via Hong Kong) accounts for more than 20% of Taiwan's exports, and is now Taiwan's largest export market, importing more Taiwanese goods than even the United States. As a result, Taiwan enjoys a trade surplus of more than US$20 billion per year with China, and China trade has become a major force driving the island's economic growth.

However, formal cross-strait relations remain at an impasse. Within Taiwan, opinion is polarized: one camp believes that Taiwan needs China to survive, the other avers that China will be the death of Taiwan.

S.T. De, chairman of National Association of Small and Medium Enterprises ROC and of San Sun Hat and Cap, points out that while Taiwan has continued to run a huge trade surplus in recent years, both incomes and foreign exchange reserves have stagnated. To De, this clearly indicates that Taiwanese capital is flowing overseas.

Wu Ho-mou, meanwhile, declares that the role of cross-strait trade is the most important variable in the development of Taiwan's economy over the next ten years. Should Taiwan aggressively promote stronger economic links under the supposition that what is good for either side is good for both? Or should it keep its distance, operating under the assumption that economic links with China are a zero-sum game?

In an effort to find the path that offers the greatest benefit to both sides, President Chen Shui-bian stated in his inaugural address that establishing the so-called "three links" with China would be a priority of his administration. Following last August's Economic Development Advisory Conference, the "go slow, be patient" policy that had been in effect since October of 1996 was officially dumped in favor of a new policy of "active opening, effective management."

Although the government has now decided to move in the direction of liberalization, the numerous "technical issues" that remain continue to make difficult any easing of the current political impasse. Proposals to allow "three links," to permit Taiwanese firms to invest in semiconductor or upstream petrochemicals production in China, to allow Chinese capital and workers into Taiwan, and even to establish a free port that would make it easier to bring semi-finished goods from China to Taiwan for processing, still remain just that: proposals.

"The lack of 'three links' is wasting the money of Taiwanese businesses; they are the ones hurt by not being able to establish bases in China." A person with ties to both government and business remarks that in many situations, people need to take the long view. Where would Taiwan's high-tech industries be without those "unpatriotic" Taiwanese, men such as Morris Chang (chairman of Taiwan Semiconductor) and Hu Ding-hua (chairman of Macronix International), who pursued careers in the US after completing graduate studies there?

Viewed from that perspective, are the Taiwanese firms that are investing big bucks in China "unpatriotic," or in ten years will they perhaps become a driving force in the Taiwanese economy?

The Taiwan government often has little control over the dimensions of cross-strait trade. It does, however, have somewhat more ability to facilitate the transformation of firms that choose to remain in Taiwan. But this, too, is a difficult task, and it represents the second great variable in plans for the future development of Taiwan's economy.

According to Steven Chang, who got his start in the textiles industry before moving over into high-tech and is now the chairman and CEO of U-Tech Media, Taiwan has always been one of the world's key manufacturers. Whether in textiles, home appliances or IT and communications hardware, it has always imported hot technologies from more advanced countries and used them to manufacture a never-ending stream of products. Taiwanese firms have never had to make the mental effort required to conduct innovative research and development, set standards or design production equipment. Even Taiwan's much-admired semiconductor foundries rely on foreign technologies.

Chang says, "The technologies come from advanced countries to Taiwan, and are later passed along from Taiwan to China or Southeast Asia. The process has always worked very well." Today, developed countries are confronted by so many promising possibilities that nonetheless offer no guarantee of success, that even they are uncertain which direction to take, which has made them less willing to provide the less developed world with their "hand-me-down" technologies.

Take the personal computer, the cornerstone of the IT industry, as an example. Now that CPUs are reaching the limits of personal computer users' processing demands, what is next? There are almost as many views as there are people in the industry. The communications industry has also reached an impasse as the world struggles to agree upon a standard technology. Will it be GSP? CDMA? 3G? Something else? No one knows. Once that is decided, there are still technological bottlenecks to be overcome. The "digital home" is another fine idea that has been bandied about for years to remarkably little effect.

Steven Chang says, "In these days when the world's technologically advanced countries can't even help themselves, Taiwan can no longer expect to have orders come pouring in by sticking to its old, low-risk approach of manufacturing products that have already proven their viability in the marketplace." In recent years, the government has invested large amounts of capital to better meet the developmental demands of new technologies. It hopes to encourage an increase in overall research and development spending to 3% of GDP by 2005.

According to Lance Wu, president of Vista Incubation Technology Corporation, in the past Taiwanese industry simply followed the lead of others. The time has come for Taiwan to catch a new wave and ride it!

Wu notes that Taiwan ranks fourth among the 75 nations surveyed by the World Economic Forum for its Economic Creativity Index. If Taiwan can just implement measures that will take it in a more knowledge-based, technologically innovative direction, it should be able to realize this ambition.

Taking the number of patents granted in a given year as an indicator of technological innovation, Wu stresses that Taiwan filed more than 6,500 patents applications in the US last year, a figure which trailed only Japan and Germany.

Given this plethora of innovations, Wu says, "Taiwan should move its low-margin OEM manufacturing operations to China, and instead focus on further developing the two extremes of Stan Shih's 'smiling curve'-research and development, and logistics and marketing."

"Taiwan supports itself through manufacturing. But years of policies favoring manufacturing have given rise to a myth as to its importance." Wu asks which of the world's advanced economies doesn't now make its living off its brains.

"Look at the US. Does Dell Computers, the world's largest PC manufacturer, actually build its own computers? Where are IBM and Cisco's manufacturing bases?" Wu points out that these international business groups instead exploit their upstream R&D and their downstream distribution channels and brand names to rake in fat profits with little effort. He argues that these are the firms that should be Taiwan's model for upgrading its industries.

Huang Ho-ming agrees and says that Taiwanese should not let the success of the semiconductor industry cloud their vision: "Taiwan does not have the resources to support endless expansion of manufacturing. Power alone presents a major challenge to this model." Huang further comments that while you can make OEM sound good by calling it "professional manufacturing services," it does not readily generate technological advances, nor is it the best way to make money. Eventually, a new approach is required.

Recognizing this, Huang reminds companies that while they can, of course, continue to pull in orders from major international corporations by setting up production facilities in China, they should not forget to use the time and capital they save to invest in the R&D that will allow them to transform their businesses into knowledge-based enterprises.

What sort of knowledge-based industry would best suit Taiwan? Lance Wu thinks Taiwan should build out from its base in the semiconductor foundry business by going into IC and software design. Nanotechnology, a developing field that involves manufacturing on the molecular level, is another possibility. The field is expected to bring about a revolution in materials and manufacturing. The "twin stars" named by the Six-Year National Development Plan-biotechnology and digital content-are also very promising industries that are worthy of investment. (See "Two New Economic Stars Revealed.")

"Taiwan's industries could upgrade themselves in any number of ways." Luo I-chiang says that given the stability of Taiwan's high-tech industry and the island's abundance of venture capital (Taiwan ranks second in the world in terms of the availability of venture capital), the government need only build a good environment for investment and no one need worry about Taiwan's economic future; firms will naturally make choices based on their own needs and in their own interests.

If Taiwan wishes to develop a knowledge-based economy, it must still address a number of weaknesses. The CEPD's Lee Kao-chao sees a global race to innovate getting underway among the world's developed nations, and sees human resources as the key to winning that race. Taiwan's relative lack of qualified personnel poses a serious challenge to the island.

San Sun Hat and Cap's S.T. De says that his company operates five factories in four countries. To facilitate the company's logistical operations, it needed an enterprise resource planning system that would collect and share information within the company. De complains that none of the local software companies he contacted were up to the task of designing appropriate software. In the end, San Sun had to rely on assistance from a client, the Polo Ralph Lauren Corporation, to get the system completed.

"Taiwan has only 45,000 software engineers, and even these don't have enough practical experience." De wonders how the government can talk about helping industry to "get wired," not to mention its much more grandiose objective of creating a "digital Taiwan," when something as essential as software engineers is lacking.

Huang Ho-ming, who is assisting the government in fostering the development of IT talent, says with some frustration that statistics show that Taiwan needs approximately 50,000 more software engineers than it has, forcing firms to continually steal staff from one another.

To meet this shortfall, Taiwanese IT firms are establishing R&D centers in the mainland even though Taiwan's government has yet to approve such ventures. In what is an open secret within the IT industry, firms have also been extending their feelers into universities all over the mainland, offering large scholarships and awards of all kinds to students there.

To cultivate home-grown talent, the Executive Yuan recently commissioned National Chiao Tung University to implement a "Silicon Island" plan. The government is expected to permit Taiwan's universities to hire 80 foreign IT faculty members, prompting university presidents to begin making recruiting trips overseas. Meanwhile, calls are growing for an easing of regulations governing hiring foreign professionals.

Huang Ho-ming says that there is also a pool of mainland-Chinese talent in the United States that Taiwan could tap into. If the government is concerned about bringing in mainland Chinese, technology professionals from Vietnam, Turkey or India offer a viable alternative. However, the government must also take Taiwan's current unemployment problem into consideration.

On this point, Huang raises an interesting question: "Why must good jobs be reserved for our own people? Why not encourage fair competition?" Huang notes that turning Taiwan's 500,000 unemployed into programmers is a truly difficult task. He notes that if Taiwan instead brought in foreign technicians, the sales they helped create would bring new prosperity, leading to further development of the services sector, and creating new jobs that would be of benefit to Taiwan's unemployed.

Of course, attracting professionals to Taiwan isn't simply a matter of high salaries; creating an environment in which technology professionals want to live is even more important.

According to Steven Chang, "Green spaces, books, cafes. . . regardless of where knowledge-workers are from, they all want a leisurely, comfortable, liberal environment in which they can explore the limits of their creativity." He says that the creation of an outstanding living environment is critical to Taiwan's future economic competitiveness.

Looking back at the last year, Taiwan's economic growth has recovered from its low of -4% in the third quarter of 2001 to 0.89% in the first quarter of 2002, and growth for all of 2002 is now forecast to reach 3%.

"Without doubt the worst is behind us," says Wu Chung-shu, a research fellow with the Academia Sinica's Institute of Economics. But people shouldn't get too excited just yet: "In the past, whenever the global economy has begun to recover, Taiwan's economy has immediately surged. This time, even with last year's extremely low basis of comparison, Taiwan is looking at only 3% growth. That's hardly remarkable performance."

Luo I-chiang also believes that we can't ease up just because the numbers show positive growth in the economy once again. He notes that Taiwan's growth still lags behind that of Korea, Hong Kong and even Malaysia, indicating that its competitiveness is still slipping. In today's hyper-competitive world, Taiwan certainly cannot be permitted to slide any further or waste opportunities.

Luo recalls that in the wake of 1997's Asian financial crisis, South Korea resolved to implement reforms and Singapore stuck to its economic principles-free and open markets and global service. In contrast to its fellow "Little Dragons," Taiwan's economic policy has been waffling since 1997. With so much still up in the air, foreign investors have been unwilling to put their money into Taiwan and local businesspeople have begun losing patience with the government's dithering. Perhaps the most worrisome aspect of Taiwan's economic outlook is that government and industry are headed in opposite directions and the distance between them is growing.

Wu Ho-mou feels that instead of merely worrying about the future, Taiwan should be taking control of its destiny by implementing plans to create the future that it wants. Taiwan must choose a direction and begin moving forward once again.