The nation’s economy is facing tough challenges stemming from globalization, and the situation keeps getting worse. The state can try to restrict the international flow of resources, but unless it exercises the kind of centralized control that exists in North Korea, the outward flow of resources will increase, causing Taiwan’s competitiveness to drop. The planned free economic pilot zones might reverse this trend and bring some improvements, but some problems regarding their implementation will have to be overcome first.
During President Ma Ying-jeou’s (馬英九) six years in office, the economy’s average growth rate has been just 2.9 percent. This is part of a long-term trend. The problem did not start when Ma took office, although it is now worse than before. During the 1980s, Taiwan enjoyed an average annual growth rate of 7.7 percent. That figure fell to 6.4 percent during the 1990s and 4.4 percent during former president Chen Shui-bian’s (陳水扁) two terms.
A major reason for this slowdown has been declining investment in Taiwan. The average ratio of investment to GDP was 28 percent during the 1990s and 23.1 percent during Chen’s presidency. Since 2008, the investment rate has fallen further to an average of 16.9 percent.
The outflow of capital and talent is a more serious problem. In the past six years, there has been a net capital outflow of US$202.2 billion — an average of US$40.4 billion per year. The worst capital outflow so far was in 2012, at US$52.3 billion.
Taiwan’s net capital outflow for Chen’s terms was US$105.8 billion — an average of US$13.2 billion per year.
Over the past 10 years, between 7,000 and 26,000 people each year have moved abroad for investment or work, while hardly anyone has immigrated to this nation for similar reasons.
In recent years, National Taiwan University and National Chengchi University have found it very difficult to recruit talented staff. Talented Taiwanese often choose to work in Hong Kong, Singapore or China.
A recent report in the journal Oxford Economics predicts that by the year 2021, Taiwan will face the gravest talent deficit among 46 countries surveyed.
This is a shocking forecast. The outflow of personnel, capital, technology and consumption will fundamentally alter the nation’s dynamic comparative advantage, weakening its competitiveness at a structural level. It will be difficult to reverse such a trend in the short term.
Taiwan’s international isolation and its inability to participate in regional economic structures compel it to press forward with reforms and economic liberalization. Only by doing so can it become more competitive in the international arena and regain its economic growth.
In this regard, the free economic pilot zone policy is a step in the right direction.
The government says the zones will dispel the doubts that Taiwanese have about economic liberalization and internationalization, allowing ample time to make adjustments and choose responses before implementing such reforms nationwide.
However, promoting one-sided reforms and liberalization will not be an easy political process. It will require overcoming domestic protectionism, as well as stimulating local governments’ political motivation.
Only part of the government’s plan is to be implemented within the pilot zones. Some aspects, such as intelligent logistics, international health services and added-value agriculture, are to be implemented by “front shop, back factory” methods, while financial services and educational innovation are to be entirely outside the zones. So these will not really be “pilot” programs, but rather will be implemented nationwide.
As a result, they are sure to give rise to a great deal of suspicion, uncertainty and conflict. Factors such as the restricted flow of people, goods and money between the zones and outside areas are likely to complicate the promotion and management of the zones.
Furthermore, planning and implementation of the pilot zones are almost entirely the responsibility of central government departments, but the central government does not have enough human and material resources to do the job. More importantly, it lacks appropriate incentive mechanisms for promoting such a large plan.
The central government should act as arbiter of policy incentives and resource allocation. By delegating its powers over planning, personnel and financial policy, it can make local governments the main force for promoting the zones, arouse their enthusiasm and make them more competitive, thus setting many engines in motion in tandem to drive economic growth.
Taiwan has no time to waste. It needs to find effective ways to promote reforms and liberalization. The huge scale of the pilot zone plan in its present form may make it hard to implement.
If Kinmen residents agree, the government could consider designating the county a free economic zone in which various experiments such as cross-strait economic integration could be tried out within a short time frame. Measures that show good results could then be promoted nationwide, possibly more quickly than would otherwise be the case.
Tung Chen-yuan is a professor in National Chengchi University’s Graduate Institute of Development Studies.
Translated by Julian Clegg
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