Premier Jiang Yi-huah’s (江宜樺) recent comments about the “depressed” state of Taiwan’s economy and his hopes that a general mobilization for “transformation and innovation” will be able to break through this state of affairs have generated heated discussion across society.
After Jiang made these remarks, the Cabinet passed the Council for Economic Planning and Development’s plan to establish “free economic pilot zones.” According to the plan, the zones will give preference to the development of smart logistics, international healthcare, value-added agriculture and industrial cooperation, and they will leverage goods, personnel, the free flow of information and tax incentives to speed up the process of the structural transformation of Taiwanese industry.
The plan will be carried out in two stages. The first stage will be centered on free trade port areas using five ports and one airport — Keelung, Taipei, Greater Taichung, Greater Kaohsiung, Suao and the Taiwan Taoyuan International Airport. Using a “front shop, back factory” division of labor and integrating nearby science and technology parks, the zones will start simultaneously in all these areas. Once a special law on pilot zones is passed, the second stage will be initiated and this will involve local governments using their strong points to develop their economic hinterlands.
If the introduction of free economic pilot zones is successful, it will be the government’s biggest economic undertaking since Taiwan joined the WTO in 2002. It will bring about a lot of investment, and effectively combine production factors, such as capital, labor, land and the spirit of enterprise. This would allow Taiwan to rid itself of the perception that it is the worst performing economy out of the four Asian Tigers.
The key to the success of these zones lies in finding suitable markets. One example of the importance of markets is the Kaohsiung Export Processing Zone that started operations in 1966. The reason it was successful was the rapid growth in the US and European markets at the time, coupled with a lack of strong competitors. The government must therefore ensure that these zones are able to highlight Taiwan’s comparative advantage in the specialization and division of labor to gain an adequate share of the global market.
At present, of the four target industries for the zones, smart logistics and international healthcare are in fact supporting industries, and only value-added agriculture is a regular industry. Furthermore, “industrial cooperation” is not an industry per se, but rather a way of defining the establishment of industry as being a matter international cooperation.
It is thus evident that the bodies responsible for planning the zones are still trying to figure out what they will cover and that further interaction between domestic industry associations and foreign chambers of commerce is needed to increase productivity and commercial activity. Of course, there is no reason for a rigid and inflexible definition as this might hinder the establishment of more forward-looking industries.
The Economic Cooperation Framework Agreement (ECFA) between Taiwan and China still contains two follow-up agreements, on the trade in goods and in services, that have not been signed. Since these two agreements will influence the scope and depth of free trade that Taiwan will enjoy in China’s goods and services markets, these two agreements will to a certain degree affect the success of the economic pilot zones.
Before these two agreements are signed, the council must first closely examine the results of the talks between the two sides. It must prioritize the needs of the zones, and it must do so to ensure their success even if it makes large concessions.
Secondly, the council must focus on the details of the zones’ operation. For example, the “front shop, back factory” model is often used to describe the industrial relations between Hong Kong and the Pearl River Delta economic hinterland.
If this concept is applied to Taiwan’s pilot zones, the people who were involved in economic development in the past should be consulted to help answer the question of how to strike the optimal balance between efficiency and controls so that these zones do not deteriorate into “drug smuggling pilot zones.”
Lastly, the ability to follow through on policy is a must. Also, focusing on attracting companies with products that have just gone on sale in the US, Europe and Japan, but not other Asian markets, would probably produce the best results. Overseas offices of the Ministry of Economic Affairs must do everything in their power to show that investing in Taiwan is worthwhile as this would set off a virtuous cycle. Economic pilot zones are an important way to revitalize the stagnant, depressed Taiwanese economy, and we can only hope that they will be successful.
Tu Jenn-hwa is director of the Commerce Development Research Institute’s business development and policy research department.
Translated by Drew Cameron