When we used to talk about the Asian Tigers in the 1980s, Taiwan was the one that stood out. Our rates of economic growth, foreign trade and import growth were all superior to those of South Korea. The "Taiwan Experience" was recognized by everyone. But in the 1990s, each year was worse than the last and Taiwan's glow slowly faded along with this decline. Now, the Taiwan Experience has become synonymous with non-performing loans and low growth, and Taiwan's admirers are looking toward South Korea and its economic performance.
The performance of the South Korean team in the World Cup this summer is an apt symbol of the nation's high morale and considerable achievements. Leaving aside the 1997 Asian financial crisis, which caused its economy to contract 6.7 percent, South Korea generally enjoyed higher economic growth than Taiwan in the 1990s, with the last two or three years being particularly good. In 1999, the South Korean grew 10.9 percent, while Taiwan's economy grew 5.4 percent. In 2000, the respective figures are 8.8 percent and 6 percent.
Last year, as the dotcom bubble burst in the US, Taiwan's economy shrank 2.2 percent, while South Korea's continued to grow by 2.6 percent. This year promises to be even better for South Korea, with projected economic growth of 6.5 percent, while unemployment stands at a mere 2.8 percent. The real-estate market is thriving and has grown by more than it did last year and the stock market rose 24.02 percent in the first two-and-a-half months of the year, outperforming the rest of Asia.
Taiwan's stock market, by contrast, has grown only 7.21 percent, running out of steam after hitting 6,000 points. Things may have been looking up for financial markets recently, but looking to the long term, they are still not as strong as they used to be. How could this have happened to Taiwan? What is the secret of South Korea's success?
Western scholars say the change is due to South Korea's reorganization of its financial system following the 1997 crisis. But this is not the whole story. According to a research report from the world's second largest management consultancy, South Korea's bad debts are the third largest in Asia at US$100 billion, second only to Japan's and China's.
So does South Korea offer a better investment climate than Taiwan? No. We have all seen the passionate struggle of South Korea's labor movement. Year after year, international rankings of industrial and trade investment environments around the world place Taiwan ahead of South Korea. In fact, apart from a large and bold devaluation of the won during the crisis, the main reason South Korea was able to recover so quickly from the Asian financial crisis were policies of aggressive domestic public and business investments.
After 1997, South Korea changed its strategy and did its utmost to suppress expansion overseas, concentrating instead on upgrading domestic industries through large investments in areas such as the development and construction of a digital broadband infrastructure. This change in strategy caused South Korean investments in China in 1999 to shrink to extremely low levels, amounting to no more than US$200 million.
Proponents of Taiwan's westward expansion into China argue that by now this strategy should have caused South Korea to lose China's vast market. Experience, however, has totally disproved this reasoning. South Korean investments in manufacturing in China are not very large, and over the past decade to June this year, have amounted to only US$12 billion, compared to Taiwan's US$140 billion. This is a huge difference. South Korean investments do not even amount to 10 percent of Taiwanese invest-ments. South Korean exports to China are, however, still thriving. Last year exports reached US$23.3 billion, almost as much as Taiwanese exports to China at US$27.3 billion. This highlights the fact that investing is not the only choice, nor the best one, for entering China's markets.
The Taiwan Experience, on the other hand, has proved that "galloping into paradise" may satisfy grand business schemes for entering China. But for Taiwan as a whole, it only creates a "Taiwan Phenomenon" of large non-performing loans, low growth, high unemployment and low share prices. "Win-win" is an empty slogan and an illusion.
Taiwanese investments in China are the highest in the world. As a proportion of GDP, these investments, at 2.4 percent of GDP, are 80 times higher than those of the US and South Korea, both at 0.03 percent. This data clearly shows that Taiwan has not refrained from investing outside the country and that we have invested more and faster than most others.
There is also more economic freedom in Taiwan than in Japan or South Korea. In the "Index of Economic Freedom" survey, carried out this year by the Heritage Foundation in the US, Taiwan ranks 29th, ahead of Japan at 35th and South Korea at 38th. This shows that the problem is not that Taiwan's economy is closed, over-regulated or insufficiently liberalized, but rather that our overseas investments are concentrated in China and therefore unhelpful to the globalization of Taiwanese companies. The negative results of the excessive use of China's cheap labor have been that companies have not come under pressure to upgrade, technological know-how has stagnated and even been lost and domestic investments have been shrinking. In a few years, non-performing loans and unemployment have followed to create today's Taiwan Phenomenon.
The South Korean experience has already clearly shown us that investment is not the only means of entering China. Excessive investment in China will harm Taiwan. The best way to develop China's markets is not to establish factories there. Rather, the way to achieve business success is to create a stable foundation in Tai-wan and then improve quality.
Thirteen years of swarming like bees into China to set up factories have proven the fatal shortcomings of this approach, which we urgently need to address and correct. Do we have to lean toward China? When Taiwan's business-people shout "westward expansion," the people of Taiwan should take a good look at the South Korean experience and consider carefully why that country enjoys higher economic growth despite lower investments in China.
I was glad to hear that the government will establish an efficient management mechanism as a precondition to allowing eight-inch wafer manufacturers to set up foundries in China. But this promiseneeds to be backed up by action. I believe that as long as we comprehensively put into effect the consensus of the Economic Development Advisory Conference -- Taiwan first globalization risk management -- establish a firm foundation in Taiwan, rectify 13 years of one-sided policies totally geared toward China, work hard for globalization and rely on the talent and hard work of the people of Taiwan, it will be easy for Taiwan once again to step forward and take the lead.
Huang Tien-lin is a national policy adviser to the president.
Translated by Perry Svensson
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