As Paul Krugman, last year’s Nobel laureate in economics, pointed out: “The prospect for the economy isn’t V-shaped, it’s L-ish,” meaning that it will go through a prolonged period of flat or slowly improving performance instead of rebounding quickly. Fitch Ratings has also predicted that Taiwan’s economy will contract by 5.7 percent this year, which would be the worst in East Asia.
With the economy in such poor shape, what driving force for recovery can be found from past experience?
Taiwan’s economic spurt began in 1965. At the time, Taiwan found itself on the front line in the standoff between US capitalism and Soviet communism. The US had grown strong and wealthy in the period of recovery following World War II, and its massive aid was a boon for Taiwan’s economic transformation.
Along with access to the US market, US aid helped Taiwan progress from primary industry to become a manufacturing base. From 1975 on, building on its successful experience and powered by accumulated capital, Taiwan developed into a base for the consumer electronics industry, prospering up until the recent economic crisis.
In 1965 Taiwan was still under martial law. The strict management practices of the time fostered a highly disciplined production force in the manufacturing sector.
Primary industry was the driving force behind economic development. Taiwan’s cheap and disciplined workforce, plus massive US aid and access to the US and European markets, allowed it to enjoy 50 years of prosperity.
The period of prosperity since 1965 was a second boom — the first taking place between 1920 and 1940, when the foundations for agricultural technology and primary industry were laid. Taiwan was then a Japanese colony, and Japan’s investment in Taiwan was the driving force behind the first boom.
Today, where can Taiwan find a force for a third economic boom? It no longer receives US aid, and the US market is highly competitive and not as open as it once was. Under these circumstances, some people are placing their hopes in China.
But China’s per capita GNP today is not even one-twelfth that of Taiwan. How can China become a target market when its consumers have so little purchasing power?
With Chinese labor costs so low, Taiwanese products cannot compete there, not to mention that the Chinese government faces great challenges in high unemployment and large budget deficits.
How, then, could China serve as a market supporting Taiwan’s economic development?
With manufacturing moving abroad and a devalued New Taiwan dollar, Taiwan’s assets have rapidly dwindled. Will total assets return to the level of the 1960s? Will the prosperity Taiwan has enjoyed over the past half century become a mere memory?
Taiwan must now tackle the development of high-end products. New products can only emerge in a knowledge-based economy when there is considerable space for creativity.
However, the retributionist policies pursued by President Ma Ying-jeou’s (馬英九) government have had a chilling effect on creativity.
Capital outflow, currency devaluation, the possible return of authoritarian rule, reckless raising of public debt, excessive expectations of China and a dwindling international market — all these things make it difficult for Taiwan to find a driving force for its third boom.
As long as this state of affairs continues, there will be reason to fear that Taiwan’s future economic performance will be even worse than what Japan went through during its “lost decade.”