The Cabinet’s announcement last week that it plans to set up “free economic pilot zones” presents a significant challenge to the nation. While the plan is aimed at stimulating economic growth and development, the enormous investment benefits and tax incentives budgeted for these economic zones will have a sizeable impact on the domestic economy, both positively and negatively.
According to the Cabinet’s blueprint, the pilot zones would be aimed at developing the high-end service sector in Taiwan, including international logistics centers, international medical services centers as well as production and marketing centers for value-added agricultural products. In addition, the government expects the zones to help local companies promote industrial innovation and integration.
It seems that the government has proposed the pilot zones to attract foreign investment because it is far easier to start its economic liberalization experiments in designated areas rather than in the nation as a whole. In addition, the government would be able to open Taiwan’s market in a measured way to avoid creating a sudden shock to the economy, while allowing policymakers to learn from the pilot areas before introducing nationwide changes.
In view of a lackluster track record in attracting foreign direct investment in recent years, along with slow progress in industrial transformation characterized by the “hollowing out” of the nation’s manufacturing sector and the underdeveloped service sector, the plan for pilot zones shows policymakers’ desire to open up and stimulate economic growth. However, the government has already provided investment benefits, tax breaks and other deregulation measures in its previous free-trade zones project, and in the Asia-Pacific regional operations center plan in the 1990s. What makes its latest scheme any different? If these measures did not work previously, how will they work this time?
Last week, government officials said the tax revenue generated from the pilot zones would grow quickly to offset the loss of tax revenue because of its tax breaks.
Perhaps, before pondering what measures should be offered to attract investors, policymakers should ask themselves this question: If the Asia-Pacific regional operations center plan, which was copied from Singapore, failed to become a reality, why would this plan for free economic pilot zones, based on South Korea’s Incheon free economic zone, have a chance of succeeding?
According to local media reports, policymakers seem more confident this time because of improved trade relations with China. However, one has to wonder whether the plan for pilot zones will become nothing more than an upgraded model under the Economic Cooperation Framework Agreement, rather than one that will help improve Taiwan’s infrastructure, business environment and living environment to embrace more multinational companies.
The government has said the establishment of these pilot zones will create conditions that will pave the way for participation in regional trade blocs, but for now that is just wishful thinking.
In the near term the government will have to face opposition from farmers, labor unions and civic organizations over concern about job losses and other possible negative side-effects caused by greater deregulation and liberalization in these pilot zones.
Surely, no one will oppose the government’s efforts to further the nation’s economic development. However, the success of its plan will depend on the government’s ability to learn from experience and draw up complementary measures for the plan.
The government will need to take bold steps in reforms, making the pilot zones an experimental field for a future opening-up drive. So before the policymakers can confidently indicate their optimism about the plan, they should make sure the government has done what is right and necessary.