Taiwan’s Tsai Has to get the Economy Moving

Taiwan’s president-elect Tsai Ing-wen won a landslide partly thanks to reaction against cozying up to Xi Jinping’s China and partly to the state of the economy. Xi’s attitudes are unlikely to change and help the Kuomintang recover its fortunes thanks to the mainland becoming kinder and softer.

Doing much about the economy is however quite another issue. Not that it is in any kind of crisis. Innate caution stemming from its pariah status saw it weather the 1997/99 Asian crisis and the 2008 global financial crisis with equanimity. Even its self-induced 1989/90 stock and property market booms and busts left limited scars.

But the awkward fact for Tsai is that the economy contracted in the second half of last year and though modest recovery is probably underway, there are no quick or easy solutions to restoring sustained growth. At best it will struggle to get 2 percent growth this year despite a huge fall in import prices which should boost domestic demand.

Meanwhile expectations for a better division of the existing pie are running high. The swing voters who determined the election may be a cross-section of society but the DPP core vote is heavily weighted towards lower income and Taiwanese identity-conscious groups.

Taiwan has near zero inflation, a current account surplus running at 12 percent of GDP and a currency more resilient than most to the rise of the US dollar. But translating these positives into GDP growth is not easy.

A DPP government also does not generally appeal to much big business such as Hon Hai (aka Foxconn), the manufacturing giant famous for exploiting mainland workers in the interests of minimizing Apple, etc. product prices. There is a danger that the mainland will lean on Taiwan firms to transfer yet more of their manufacturing to the mainland.

On the other hand, overt efforts by the mainland to “punish” Taiwan for its rejection of “motherland” talk are unlikely as, like the military threats of the past, it would have a negative result. But one can expect efforts to make it difficult for Tsai to gain the international traction which Taiwan needs to broaden its economic base.

For a start there is unlikely to be further progress in opening Taiwan to mainland tourism. Profitable though this has been for Taiwan, it has not increased brotherly feelings on the part of Taiwanese while for mainlanders the order and politeness of its society is a poor reflection on the condition of the mainland after nearly seven decades of Communist rule. Developing Taiwan as a centre for top quality medicine appealing mainlanders requires ready access.

Taiwan does not even buy into Beijing’s attempts to make Japan into a unrepentant and everlasting bogeyman. Like other aspects of Taiwan’s history, its experience of Japan was very different.

Roadblocks to Raising International Profile

Beijing is also likely to put roadblocks in the way of Taiwan’s attempts to enlarge its international profile. Ma Ying-jeou had been allowed a little leeway in Beijing’s successful attempt to lure him into such gestures of One Country as the Xi-a meeting in Singapore – a meeting which backfired for the KMT as it seemed to show the true colours of mainland-origin Ma. Scant chance then for Taiwan to ride on the back of ASEAN free trade agreements and some who have signed up to the TPP may US may be wary of Taiwan for fear of alienating China.

But there is no question that Taiwan must make an effort to join and that means being prepared to break down barriers which include food imports, various forms of intellectual property. For a state so successful in many ways, Taiwan is peculiarly defensive at times. One result is that foreign direct investment is minimal put off as much by opaque rules as by Taiwan’s lack of membership of international agreements.

Restrictions on foreign skilled labour make a nonsense of Taiwan’s expressed desire for a higher international profile. Likewise petty restrictions deter the development of Taipei as an asset management and financial centre, notwithstanding its huge reserves and stable, if overly fragmented, banking system.

For much of Taiwan’s export business, lack of international agreements may not matter too much. Its star performer, electronics components, is vulnerable to competition including from the mainland as well as Korea and Japan – but not from others’ trade agreements. Yet Taiwan has yet to show that it can raise the level of its service industries both to improve local productivity and export more services.

Years of failure to remove restrictive practices, encourage foreign competition have had significant impact on growth. With a Legislative majority can Tsai break through decades when a combination of KMT domination and the interests of a KMT aligned bureaucracy stymied change?

Or is she going to focus on softer issues such as promising more for the disadvantaged, for sexual minorities? Or proceeding with the promise to rid Taiwan of nuclear power for reasons which have more to do with emotion than economic or technological reality. Three nuclear power plant licences expire in 2018. Can Taiwan afford to lose them when alternative power sources are not available?

Taiwan is also not so far off a Japan situation – its working population is already static and aging fast. Yet it lacks Japan’s size, independence and breadth of industries.

Can Taiwan use its financial strength to better show what it can do overseas? Any right-thinking person in charge of big city transport would surely take Taipei’s system over one from the mainland. But it seldom get the chance to shine.

This year Taiwan is continuing to benefit massively from the collapse of imported commodity prices. Its current account surplus, never small, is surging despite the continued outflow of private capital. The government’s fiscal position is not so strong given public sensitivity to deficits and the prospect of health and welfare payments increasing rapidly due to the aging population. Nonetheless the government could do more to use some resources to underwrite high profile projects in the region. Its neighbours are more than happy to see Taiwanese investment and should now be even happier that the DPP says on the subject of the South China Sea it will adhere to international laws and specifically the UN Convention on Law of the Sea (UNCLOS.). This implicit rejection of the nine-dash line, first drawn by the KMT in the 1930s and later taken up by the PRC as it allegedly historical claim. Will anger Beijing if publicly enunciated. But it is music to the ears of the other littoral states.

Better neighborly relations would help the economy too. Japan-style acceptance of population shrinkage rather than opening to immigration would make little sense given Taiwan’s political position but whether the DPP can embrace immigration or simply permitting foreign workers to remain indefinitely is another matter. Lower income groups represented by the DPP would likely oppose more liberal migration policies despite the evident benefits migration has delivered to other countries, such as Singapore and Canada, with similarly low fertility rates.