The future (and past) of the economy loomed large in the Chinese Nationalist Party’s (KMT) electoral campaign, and its victory in the presidential election had much to do with voters’ belief that the KMT under Ma Ying-jeou (馬英九) would do better than its predecessor in that regard.
The KMT’s platform was largely predicated on the belief that, since 2000, the Democratic Progressive Party (DPP) under President Chen Shui-bian (陳水扁) had “mismanaged” the economy, resulting in a loss of competitiveness. The argument was based on comparisons with Taiwan’s stratospheric rise in the late 1980s and throughout the 1990s, when GDP growth reached 11.64 percent and 12.74 percent in 1986 and 1987 respectively, and an average of 6.7 percent in the 1990s.
Ministry of Economic Affairs statistics show that while GDP growth in 2000 was 5.77 percent, it dropped to 2.77 in 2001 and, with the exception of 6.07 percent growth in 2004, never managed to surpass the 5 percent mark since. Nevertheless, GDP growth in Taiwan since 2000 outperformed most of the major economies and only lagged behind a handful of growing markets in Asia, such as China, Singapore, South Korea and India.
While the KMT’s accusations that the economy lost some steam under the DPP may appear rational, what it failed to take into account is the mini world recession that followed the Sept. 11, 2001 attacks, an event that even the most vitriolic of DPP detractors cannot blame on the party.
Those attacks and their subsequent impact on the world economy are often overlooked by the DPP’s critics, which exposes their failure to see Taiwan as part of the global trade system. The more an economy was tied to the US for its success, the more it suffered from the impact of Sept. 11. Trade data since 2001 shows us how connected world economies were to the US. In most instances, the more a country depended on the US for its growth, the weaker its growth was following the attacks.
For example, Canada, which depends on its southern neighbor for about 87 percent of its exports, saw its GDP growth drop from 5.26 percent in 2000 to 1.92 percent in 2001 and never managed to go beyond 3.28 percent (2002). Conversely, economies that had diversified their markets for exports were in a better position to weather the post-Sept. 11 economic downturn.
During its miraculous growth period, Taiwan depended to a large extent on the US economy for the export of its finished goods, such as electronics. In recent years, that sector has shifted to China, where manufacturing costs are substantially lower. Taiwanese companies have relocated much of their manufacturing to China. Taiwan, along with other countries such as Japan, made a tremendous, albeit unrecognized, contribution to China’s economic success. But one thing hasn’t changed: China’s success today is equally dependent on the US, whose consumers spend about US$9 trillion annually, or nine times the annual spending in China.
Which brings us back to the KMT’s promises to improve the economy through more trade with China. Prima facie, the strategy seems to be a sensible one, as it could promote trade in sectors that so far have been neglected. However, what the KMT and its supporters failed to take into consideration as they slammed the DPP over the economy is that China’s dependence on a healthy US economy is no less than Taiwan’s was in the 1980s and 1990s.
As Nouriel Roubini argued in his article “The coming financial pandemic” in Foreign Policy magazine, no country can claim to be immune to the US catching a cold. In other words, under the KMT strategy of tying the nation’s economy closer to China’s, growth in Taiwan will be largely contingent on growth in China, whose success is in turn dependent on the state of the US economy.
This means that a slowdown — and perhaps recession — in the US will have a direct impact on Taiwan’s success in China. The weaker the US economy becomes, the less Americans will buy the finished products that are manufactured in China, which in turn will have an impact on growth in China — and in Taiwan.
In all, the KMT’s strategy to encourage more intimate trade relations with China represents a failure to learn from history and creates more dependence, rather than less, on the US economy. Of course, we cannot blame the KMT for the current state of the US economy, nor should we have blamed (as the KMT did) the DPP for the impact of Sept. 11 on the global economy.
But one thing is certain: The KMT’s promise of a better economy ahead was either wishful thinking or a misreading of history. What is perhaps even more striking is that even as it made those promises, all the signs were there that the US economy was headed for a slowdown, if not recession.
Taiwanese who voted for the KMT in the hope that the economy would improve under Ma were either duped or equally missed the important lessons history can teach us.
A truly visionary economic policy would not place the nation’s future in the hands of China or the US alone. It would seek to diversify in the hope of mitigating the impact of a bad case of flu in the US.
J. Michael Cole is a writer based in Taipei.
Editor’s note: Johnny Neihu is on leave.
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