Academia Sinica earlier this month presented a “Taiwan Industrial Reform and Competition Strategy Proposal” that pinpointed issues that are crucial if Taiwan wants to avoid a “middle-income trap,” considering its continuing economic restructuring and the government’s drive toward a new growth model.
A middle-income trap typically refers to when a nation’s growth slows after reaching middle-income levels, and the transition to a high-income level appears unattainable. According to World Bank estimates, only 13 of 101 middle-income economies in 1960 had reached high-income status by 2008.
Academia Sinica said that Taiwan would likely fall into such a limbo in the next decade if it cannot resolve three issues: the law, environmental impact assessments and cross-strait relations.
The proposal said the arrival of the new millennium has seen Taiwan’s GDP growth slow from 6.63 percent per year on average in the 1990s to 3.82 percent, with nominal national income lagging behind other Asian countries, especially major trading rivals South Korea and Singapore.
If development problems remain unsolved, Taiwan could be surpassed by between 15 and 30 countries in the next 10 years, it said.
Academia Sinica’s diagnosis and its suggestions have drawn a mixed reaction, with some saying its criticism of the environmental impact assessment system is unfair, while others called the focus on cross-strait relations out of date and insufficient.
There are people who agree that Taiwan faces the challenge of economic stagnancy, but others think it is actually China that will be trapped in the middle-income snare because it remains a low-income economy with per capita GDP of about US$8,580, according to IMF statistics.
Taiwan, whose per capita GDP rose above the middle-income-nation label of US$10,000 in 1992, has seen the figure reach US$24,230, but now faces a potential high-income trap, they said.
Nevertheless, there is a consensus that Taiwan needs to move from resource-driven growth to growth based on high productivity and innovation. The nation’s economy must also make room for the development of value-added industries, while businesses need to shed the mentality of relying on low personnel costs.
Therefore, one might be suspicious of the government’s ability to address employment and income inequality if the economy slows, but no one would be against innovation at all, as the success of Taiwan Semiconductor Manufacturing Co (TSMC), for instance, is built upon its manufacturing expertise plus constant innovation, increasing research and development spending, as well as high value-added services over the past 30 years.
TSMC is a rare example of a local company having developed admirably over the past 30 years and contributing greatly to the nation’s economy, so the government should be more ambitious and work harder to nurture a few more TSMCs in other segments of the economy — which, according to Academia Sinica, would require the government to implement favorable policies to encourage integration and strategic alliances, to ease bottlenecks in industrial upgrading and recruitment, and to help emerging industries gain access to capital and navigate the regulatory framework.
Admittedly, Taiwan will get stuck at some point and stop making progress toward a higher status. If there is anything in the institute’s report deserving our attention, it is that Taiwan is entering a phase in which businesses must have a new mentality of what sustainability and balanced growth looks like.
The strategies that raise a nation from low-income levels to middle-income status are different from the strategies that would allow it to take the next step to achieve high-income status. Following this line of thinking, it demands strong capability, vision and courage from policymakers to make such a transition possible.
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