Taiwan once enjoyed a growing and prosperous economy. Its GDP was US$314 billion in 2000, which ranked nineteenth globally. Per capita GDP was US$14,180 that year and the economy's annual growth rate was 5.9 percent. Its trade volume was US$288 billion, making the nation the world's fourteenth largest trading nation. By contrast, China's GDP is about US$1 trillion, or three times larger than that of Taiwan, while its population is 60 times larger. China's per capita GDP is about US$800.
Starting in the spring of 2001, however, Taiwan's economy fell into a state of acute distress. Almost all electronics exports suffered sharp falls. GDP in the second quarter of 2001 contracted by 2.35 percent, the first such contraction in 25 years. The unemployment rate rose to 4.92 percent in July 2001 and then to a record high of 5.31 percent by last October. By June 2001, the non-performing loan ratio of financial institutions reached 7.44 percent. Last year it rose to 8.85 percent. Stock prices have fallen by nearly two-thirds from the peak levels recorded in February 2000, one month before Chen Shui-bian (
Taiwan has become poorer virtually overnight. The onset of economic hardship has been caused in part by the downturn in the global economy. But by far the largest factor is the exodus of its manufacturing base to China and the accompanying massive outflow of capital, technology and management talent.
Since 1987, Taiwan's cumulative investment in China has grown to over US$140 billion. In 2000, government-approved investment in China soared by 108 percent over the preceding year. Japan and the US annually invest 0.04 percent and 0.05 percent, respectively, of their GDP in China. The corresponding figure for Taiwan is 4 percent. Less than 1 percent of this capital outflow has been repatriated to Taiwan in the form of profit.
After a quarter century of economic growth and prosperity, the nation's economy has reached a crossroads at which basic structural changes are needed to sustain continued development. Taiwan needs to shift from manufacturing to service industries, to raise the level of its manufacturing base to higher value-added products and to invest in research and development for knowledge-based industries.
To prevent a further exodus of businesses to China, the government needs to improve the invest-ment environment so as to retain domestic industries and entice foreign investments. The necessary measures include offering public land at a reasonable price, lowering business income taxes, improving the skills of the labor force through education and training and providing such necessary infrastructure as cheap water and power.
Also needed is more efficient government assistance to business in environmental assess-ment, automation to replace labor and the achievement of vertical economic integration with advanced countries in lieu of over-reliance on a developing country such as China.
The proper solutions will take time and hard work. In August 2001, the government convened the Economic Development Advisory Council (EDAC) to solicit recommendations for improving the economy. All political parties were invited, as were government officials and representatives of business, labor and academia. The gathering was heavily weighted in favor of pro-unification business people and academics.
The EDAC's five panels reached consensus on 322 proposals. Three of these have most preoccupied both the media and the government. The first was a call to discard the "go slow, be patient" policy on investment in China -- initiated by former president Lee Teng-hui (李登輝) -- in favor of a new "active opening and effective management" policy. The second called for implementation of direct links with China as soon is feasible. The third sought to facilitate Chinese investment in Tai-wan's businesses and real estate.
Taiwanese businesspeople have been clamoring for the removal of the "go slow, be patient" policy on the grounds that they need China's cheap land and labor to remain globally competitive. So the US$50 million ceiling on single investment projects was lifted.
Removing the ban on investment in Chinese infrastructure, however, has had a negative impact on national security. After all, why should Taiwan help China build roads and air bases which could be used to attack it? Similarly, encouraging high-tech industries to move to China created a competitor and increased the number of jobless at home.
Some businesses may have benefited from the policy change, but the nation' economy as a whole was weakened and became increasingly dependent on the Chinese economy.
Establishing direct links will lower costs for Taiwan's busi-nesspeople. However, direct links can be implemented only through negotiation with Beijing, which has consistently refused dialog unless Taipei first accedes to Bei-jing's "one China" principle -- that is, agrees to surrender Taiwan's sovereignty. How far will the Chen administration bend in order to achieve direct links?
A US Sinologist has estimated that China has already smuggled 6,000 special-forces personnel into Taiwan. Once direct trade and transportation are in place and Taiwan's door is opened to tens of thousands of Chinese tourists each year, the number of such troops can be expected to grow by many times that number. Taiwan could then be brought to its knees by a combination of blitzkrieg and internal subversion.
As for encouraging Chinese investment in Taiwan, this is also a foolhardy idea. All Chinese capital is public capital. If the PRC is allowed to buy Taiwanese businesses, real estate and media at will, it will soon be able to control the the people's livelihood and to manipulate public opinion.
The three EDAC proposals together represent a giant step toward Taiwan's economic and political integration with China. These proposals also signify a drastic departure from the KMT's National Unification Guidelines.
The guidelines stipulate three stages in relations with China. First, China must become a democracy. Then it must achieve a standard of living comparable to that of Taiwan. Third, direct links could be considered.
The government, with the support of the EDAC, has apparently abandoned these preconditions. Does this mean the government has embarked on a policy of giving up Taiwan's democracy and free way of life in exchange for doubtful prospects of economic recovery and peace with the PRC? This is a question that merits serious scrutiny.
In retrospect, the adoption of the "active opening" policy and the discarding of the "go slow, be patient" policy can be seen as a devastating blunder on the part of the government. James Lilley, former US ambassador to China at the time of the Tiananmen Square massacre, once observed that "while the Taiwanese love freedom and democracy, they love money even more."
Businesspeople will always seek profit, regardless of any adverse impact that such actions might have on their country's overall economy or its political future. But the government is charged with the task of preserving the life, liberty and property of the 23 million Taiwanese. Opinion surveys have repeatedly shown that 75 percent of the Taiwanese prefer outright independence or the maintenance of the status quo. The government must therefore develop a viable economy while simultaneously safeguarding the nation's sovereignty and freedom.
If the ultimate aim of the Chen administration is perceived to be the sacrifice of Taiwan's democracy in return for peace with China and a promise of economic security, then voters have little reason to support the DPP. Under such conditions, the KMT-PFP opposition may be better equipped to negotiate a higher degree of autonomy for Taiwan.
Persisting in a suicidal policy of economic and political integration with China will doom not only the DPP, but also Taiwan's freedom. The Chen administration needs to implement effective measures to stem the "China fever." It must reverse the hollowing out of the economy and build up the people's confidence in the nation's future. This is the only way for Chen to hold on to the reins of power in next year's presidential election.
Li Thian-hok is a Taiwanese-American commentator based in Pennsylvania.This article appeared originally in the May 20 issue of the China Brief, a publication of the Jamestown Foundation in Washington.
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