Taipei Times: What is wrong with the economy?
Kuan Chung-ming (管中閔): The nation’s economic structure has gone through significant changes since 2000, with exports gaining increasing importance to about 60 percent of GDP makeup today. The heavy dependence on exports makes Taiwan vulnerable to external shock, as seen during the global financial crisis in 2008, Europe’s debt problems in 2009 and the ongoing slowdown in China.
Between the 1980s and 1990s, international trade was fueled by private investment, which created job opportunities and boosted consumption. Since 2000, investment and consumption have grown at a pace slower than GDP growth, allowing external demand to swing the economy.
The long-standing overconcentration on a few “star” industries is not healthy either, and explains why industry and the economy stall when heavyweight companies fail to increase capital spending, as a whole. However, the market for domestic demand — much of it linked to exports — is too small to drive the economy and a structural reversal is not desirable or practical.
TT: What can the government to do to help?
Kuan: The fact that other export-oriented nations weathered the global slowdown better suggests room for improvement, but there is no quick fix. For years, many have advised local companies to turn away from competition for thin profit margins and to regenerate and upgrade. The suggestion remains merited, but with little success over the years.
Apple Inc takes away the lion’s share [in terms of profit] from sales of its consumer electronic devices, while Taiwanese companies, in Apple’s supply chain, share only 10 percent, although they are responsible for most production.
That is because Apple Inc possesses critical technologies that give it competitive edges unavailable to rivals. In my view, the government can lend a helping hand to companies with critical and irreplaceable technologies that bring high profit margins of between 30 percent and 40 percent from product sales.
There are quite a few of these companies in Taiwan, in the business of making machine tools for instance. They have no intention of moving their production line to China for fear of intellectual property theft.
The government can help raise their presence and brand awareness in overseas markets so they can grow stronger and bigger.
In my view, it is ill-advised for the government to seek to bail out companies whose business models are not competitive or viable to support themselves. It is tempting to do so, because their large scale might affect the nation’s GDP in the short term. The effort will prove futile at the end of the day.
TT: What can local companies do to deal with growing competition from Chinese exporters?
Kuan: The rise of the “red supply chain” is natural in the course of industrial development. It is to grow bigger and stronger whether we like it or not. Chinese companies are doing the same thing their Taiwanese peers have done; expanding their market share through mass production and cut-throat price competition. The strategy leads to surplus supply and price falls, hurting Chinese firms and rivals alike, as seen in the solar energy and steelmaking business. In my view, value carries matters more than volume and Taiwanese firms had better come out of the race for market share. Businesses reliant on government subsidies are just not sustainable.
TT: Can Taiwan develop a service-oriented economy?
Kuan: Taiwan should definitely assign more importance to the service sectors to cut dependence on exports and strengthen its economy. The UK serves as a good example in this regard. It was the first country to industrialize in the 18th century and maintains a significant role in the world economy today, particularly in financial services and the knowledge economy. The service sector dominates the UK economy, accounting for about 78 percent of GDP and London being the world’s largest financial center.
Taiwan can learn from the UK in developing a modern service industry instead of the traditional service industry, such as hotels and restaurants that generate low added value and constrain wage growth.
By modern service industry, I refer to companies involved in financial services, information technology and professional outsourcing. They provide knowledge-intensive and professional services that generate high added value.
As a major player in the world’s information and communications technology industry, Taiwan can definitely provide IT-related services. It is not necessary for all companies to keep an IT department, which entails lots of money. Rather, they can outsource the need for information security and related tasks to a specialist company. Taiwan can also export its experience developing and running science-based industrial parks like a turnkey system to other countries.
TT: What are the biggest problems constraining government efficiency?
Kuan: The nation’s flawed political mechanism slows the efficiency of policymaking. A lack of smooth cooperation between the executive and legislative branches exacerbates the situation, and outdated rules often tie the hands of those who want change.
It is common for different government agencies to approach things from their own perspective. It is up to the highest leaders to reconcile the differences and get work done. Unfortunately, I failed to see that kind of leadership exercised during my three-year service, relatively long given the frequent reshuffle of ministers during President Ma Ying-jeou’s (馬英九) second term. On average, one minister resigned per month over the past three years, not including disgraceful step downs. The frequent change of Cabinet ministers deepens bureaucratic inaction in an attempt to avoid making mistakes.
In addition, new ministers often refuse to honor legacy policies or adopt different readings, which is hurting the government’s credibility, accountability and consistency.
I quit in January because I do not think the incumbent government still has the legitimacy to run the nation given the ruling party’s landslide defeat in the elections of local administrators and council members in November last year. As a Cabinet official tasked with economic planning, I could not shake my share of the blame.
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