Thu, Aug 17, 2000 page8

• One Taiwan but two economies

  • By Hwan C. Lin 林環牆
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  The new government recently unveiled a NT$330 billion policy package aimed at stimulating Taiwan's sagging real estate market. The hope is that a reviving construction industry can serve as a locomotive to pull traditional and basic industries out of their long-term doldrums,thereby gearing up the bearish stock market.

  The policy package is larger in dollar amount than a similar, unsuccessful one launched by the KMT government. Some analysts have criticized the package as a recycled idea, saying it will only have short-lived effects. In fact, an in-depth look into the recent evolution of the world economy would highlight a far more fundamental problem facing Taiwan.

  The problem lies in the emergence of "dual economies," in which a flourishing new economy co-exists with an ever-weakening old economy. The new economy builds on knowledge-based high-tech industries, whereas the old one is based on traditional and basic industries. This problem -- "one Taiwan, two economies" -- is more complicated and far-reaching than a stimulus package can cope with.

  Macroeconomic strength is still impressive in Taiwan, thanks to explosive growth in its new economy, which consists mainly of semiconductors and other information-related products. Taiwan therefore has kept an annual economic growth rate of 6 percent or above in the wake of the Asian currency crisis of 1997.

  In recent years, a fundamentally structural change has been at work in the world, hastening Taiwan's evolution into a dual-economy nation. Beginning in the mid-1990s, the US pioneered a revolution in information technology, spawning a series of innovations in internet-related software and hardware. This revolution not only created new business opportunities, but also made communication, production and consumption much more efficient. All these have re-engineered the US economy, producing remarkable productivity gains, fast income growth and low inflation.

  A knowledge-based new economy has emerged in the US. This new economic paradigm is rapidly spreading to other countries, by varying degrees.

  The US is a global center of high-tech innovation. Its venture capital market is by far the largest in the world. More than 75 percent of its venture capital was distributed to information/communication technology and health/biotechnology in 1997. Meanwhile, Taiwan has emerged as a high-tech manufacturing center and has been vertically integrated into the US economy.

  The information revolution is still in its early stages. It continues to create strong OEM (Original Equipment Manufacturing) demands for Taiwan's semiconductors and other information-related products.

  The information revolution hastens globalization and further deepens Taiwan's industry specialization in its high-tech niche. It is splitting Taiwan into a dual economy. In the new economy, the high-tech industry is flourishing and commanding much higher P/E (price/earning) ratios in the stock market. In the old economy, the traditional and basic industries are largely faltering and receiving much lower P/E ratios. Most old-economy companies have found it increasingly difficult to compete with new-economy companies for financial capital and other resources.

  Tense Taiwan-China relations have been a drag on Taiwan's stock market performance. Nevertheless, the emergence of a dual economy will play a more complicated role in aggravating the overall market weakness.

  According to official data, the high-tech industry made up 39.1 percent of Taiwan's total output of manufactured goods (as of 1998), compared to the basic industry's 36.6 percent and the traditional industry's 24.3 percent. The size of the new economy relative to the old one is about 2:3 in terms of manufactured goods. The old economy remains dominant, in terms of size.

  These figures seem to imply ample room for the smaller, but dynamic, new economy to expand further. But it depends on whether resources can be smoothly redirected away from the old economy. Such resource reallocation conforms to free-market forces and Taiwan's long-term economic interest. It will continue year by year as guided by Taiwan's emerging high-tech comparative advantage. Its transitional process, however, will be prolonged and painful, since there are hurdles defying Taiwan's move toward a full-fledged knowledge-based economy.

  As analyzed in my earlier article ("Development needs action, not talk," Feb. 17, Page 8), Taiwan has long been short of R&D investment and, in particular, research talent. This is a well-known hurdle to industrial upgrades and innovation.

  The government must see that knowledge-based industries have been outpacing GDP growth for many years in virtually all Organization of Economic Cooperation and Development (OECD) countries. These economies spend more resources on the production of knowledge. Investment in knowledge (referred to as R&D, software and public spending on education) now represents 8 percent of OECD-wide GDP, a figure similar to investment in physical equipment.

  By OECD standards, Taiwan has under-invested in knowledge. This inference is based on these figures: R&D outlay made up about 1.9 percent of GDP and its public spending in education was no more than 3 percent of GDP, though software investment was unknown. An accurate measure of investment in knowledge should be adjusted downwards, because the R&D components of higher education and software investment should be subtracted from the R&D expenditures. Taiwan's actual investment in knowledge should be only somewhere between 5 percent and 6 percent.

  From a political-economic stance, business firms and labor in the old economy would also resist the transition to the flourishing new economy. In fact, this is what has been happening. Both the traditional and basic industries have successfully pushed the government for financial aid. The housing-stimulus package is just one example. As the next legislative elections draw near, political pressure from the old economy will loom larger and larger, as long as business and labor cannot adapt to the new economy paradigm.

  The dual-economy problems are brand-new experiences and present an unprecedented challenge to the new government. For Taiwan, a transition to a knowledge-based economy is the inevitable direction. The nation is in need of policies that can facilitate such transition. In the Internet era, the new government really has no time to stay on probation and get mired in partisan politics.

  Hwan C. Lin is an associate professor in the economics department of the University of North Carolina at Charlotte.
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