Over the past decade, Taiwan has undergone a drastic change in its industrial structure, with a fall in its labor-intensive production along side a rise of knowledge-
intensive, high-tech industry in the country. Two major forces engendered this change.
First, China's low-wage labor along with its open-door policy for international capital and trade has radically changed patterns in the region, giving it a comparative advantage leading to a re-allocation of resources in East Asia. Taiwan and other newly industrialized Asian economies (NIEs) have been losing their labor-intensive industry to China's labor-abundant, emerging economy.
Second, the information technology revolution which began in the mid-1990s was a golden opportunity for Asian NIEs. Taiwan capitalized on this boom and built a highly competitive original equipment manufacturing (OEM) position in the world's high-tech supply chain. These structural changes have posed great challenges to Taiwan.
First, the economic integration of Taiwan and China has increased in speed and scope. The shifting of production from Taiwan to China has even begun to spread to the high-tech industry. Taiwan Semiconductor Manufacturing Co for instance, plans to build an eight-inch wafer foundry in China. Such a production shift has caused painful displacement of workers in Taiwan.
Second, Taiwan's command of comparative advantage has increasingly been confined to the high-tech sector. This is an inevitable outcome of increased integration of regional economies. But specializing will also expose Taiwan's economy to the volatility of business cycles. This has aggravated the aforementioned adjustment problems since the global economy started a severe technology-led downturn in the first half of the last fiscal year.
True, it accords with the principles of optimizing profit to liquify capital and move it to a place that has the lowest-cost production site, but in some cases it is socially unjust. This contradiction has heightened and become a problem in Taiwan's economy, since its high-tech industry has failed to absorb jobless workers. These workers lack marketable skills for the high-tech industry.
The high-tech industry requires both sophisticated knowledge and ample capital. Expansion creates very few job opportunities for displaced workers who were formerly employed in Taiwan's traditional, labor-intensive industries. Most of these workers are incapable of being transferred between traditional and high-tech industries.
This problem has been reflected in the nation's stubborn unemployment rate, which stood at 5.31 percent in October. If hidden unemployment is factored in, the October unemployment rate rose to a record high of 7.45 percent. At the same time, income distribution has continued to deteriorate along with its sagging labor market.
The co-existence of high unem-ployment rates and a widened income gap is unprecedented in the nation's economic development. It appears to have weakened the public's confidence in the DPP and dimmed President Chen Shui-bian's (陳水扁) prospects for a second term.
Confronting difficult political and economic situations, Chen must have a sense that time is of the essence. At a Nov. 18 National Security Council meeting of high-ranking economic and financial officials, Chen asked the Executive Yuan to reduce the jobless rate from 5.32 percent to less than 4.5 percent before the end of next year.
Unfortunately, the sheer political divide over whether Taiwan is a sovereign state or as a part of China underlies most public-policy issues. As far as the nation's economic situation is concerned, partisan bickering always results in an over-simplified conclusion.
In contrast to the TSU, for instance, the KMT-PFP bloc always hastily concludes that implementing direct links is a quick fix for Taiwan's sagging economy.
Ironically, Taiwan is second only to Hong Kong in economic integration with China. But such integration has saved neither Hong Kong nor Taiwan from the dip in the international economic cycle. South Korea is much less economically integrated with China, but has recorded a relatively better macroeconomic performance in recent years.
Taiwan is in desperate need of an omnibus economic policy package to cope with the decade-long stagnancy of its per capita income; a rapid erosion of its tax base coupled with its undisciplined government spending; the boom in investment in China against the bust of its investment in itself and an alarmingly high non-performing-loan ratio.
But, the DPP government has tended to subordinate economic policy to political concerns, swaying back and forth between the pro-independence and pro-unification forces. As a result, the government's economic policy has become a reaction to political ideology rather than to economic reality.
The "go West" (to China) versus the "go South" (to ASEAN nations) policies can never be the core of an omnibus economic policy which serves the best interests of the nation and its people.
The government needs to stand firm against political ideology and act effectively to put forth a policy package that features a Taiwan-based global vision. Investing in Taiwan and its global networks should be the core of such a policy package.
Without sufficient investment in infrastructure, education (at all levels), research and development and the global networks that help foster multilateral cooperation and integration in marketing, production and technological innovation and spillovers, Taiwan would risk being hollowed out by its massive investment in China and would also risk suffering another decade of high unemployment and stagnancy in its per capita income.
Chen must hurry to put Taiwan on the right track with a determined Taiwan-based global vision. Failure to do so could cost him the 2004 presidential election and countless jobs.
Hwan C. Lin is an associate professor with the department of economics of the University of North Carolina at Charlotte.
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