Three decades ago, Taiwan and South Korea were twin tiger economies, the forerunners of a new Asian economic miracle. Today, however, Taiwan is lagging well behind its northern neighbor and arch-rival in global indices.

Why?

It is tempting to attribute Taiwan's gradual loss of competitiveness against South Korea to the island's diplomatic isolation as a rogue Chinese province. After all, unlike the Koreans, who have signed free trade agreements with Chile, India, the Association of Southeast Asian Nations and the European Union plus a pending one with the US, the export-reliant Taiwanese, thwarted by Beijing's clout, can’t just go about signing free trade pacts with whomever they please.

But another part of the story is that the Taiwanese aren't as good at putting their own house in order. Recent international comparisons show that while Seoul has been improving in crucial fields, Taipei has stagnated at best.

Red Tape, Corruption

Red tape and corruption are major turn-offs to business and foreign investment in Taiwan according to two recent reports. According to both the latest World Bank's Doing Business 2012 report and Transparency International's 2011 Bribe Payers' Index (BPI), Taiwan has fallen behind Korea, with which the island competes head-to-head in electronics, steel, machinery, petrochemicals, plastics and textiles, as well as for foreign investment.

Although Taiwan has fallen a notch from the World Bank's 2010 results – and now ranks 25th among 183 global economies on ease of doing business – the score is telling when compared to its rival’s. After Seoul introduced measures such as an online process for starting a business, merged several taxes and allowed electronic filing of commercial litigation, the Koreans climbed seven notches to end up being ranked eighth in the world.

And, if worker employment data had been included as in past surveys, traditionally among Taiwan's weakest categories, the gap between the two would have been even larger.

Apart from these problems with red tape Taiwan fails to gain ground in stopping bribery and corruption. In its latest report, Transparency International, a Berlin-based NGO that monitors international corporate and political corruption, ranked Taiwan 19th among the world's 28 main economic entities in its Bribe Payers Index (BPI), on a par with India and Turkey. In an effort to explain Taiwan's five-place drop somewhat, the previous BPI took only 24 countries into account, but again there is the telling comparison with Korea: Whereas Taiwan has fallen from 14th to 19th, Korea has advanced from 14th to 13th.

Although the bribe-payer index deals only with bribes paid by the private sector when doing business abroad, TI emphasizes that the general perception on corruption in a given country and the scores correlate strongly with each other. Accordingly, when Taiwan performs worse than Korea in the index, it means that the majority of 3016 senior business executives in 30 countries surveyed perceive the island as more corrupt than its main competitor on the international stage.

That the respondents are located in the world's largest economies in terms of outward trade and investment which together represent as much as 78 percent of global foreign direct investment outflows and exports doesn't augur well for Taiwan's ambitions to become a major trade hub and destination for foreign investment.

Lowering their Sights

The Taiwanese already seem to be setting their sights lower and beginning to give up on seeing themselves in the league of Asian Tiger economies.

“Compared to Japan, Korea, Hong Kong or Singapore, Taiwan's score is unsatisfactory; but compared to China, it's still okay,” said Kuo Yu-Ying, executive director of Transparency International's Taiwan chapter. “The Ministry of Justice.and the Agency Against Corruption have been working together with us to create a code of ethics and also legal framework to prevent public officials from taking bribes, but obviously there's still a lot of room for improvement.”

President Ma Ying-jeou inaugurated the Agency Against Corruption, with its 180 judicial personnel, earlier this year. It is largely modeled after the Hong Kong Independent Commission Against Corruption. However, the agency equipped with fancy interrogation rooms built on Hong Kong's blueprints, with 007-style gadgetry such as micro-cameras hidden in neckties, umbrellas and soft drinks, hasn’t prevented the island from facing several developments that are likely to evolve into high-profile corruption cases.

These involve hundreds of principals allegedly taking bribes from producers of school lunchboxes, as well as suspicions that a two-night presentation of a rock musical sanctioned by the government, costing the taxpayer an astronomical US$7.15 million, evaded the Public Procurement Act to the advantage of a few Kuomintang cronies.

While having scored significantly better than Taiwan in terms of perceived corruption when doing business abroad, it's not Korea's government that deserves the praise but its citizenry, said TI's Korean chapter.

“Korea's rank and grade shows that also Korea is still a corruption-prone country by global standards,” said Kim Sung-soo, acting executive director of Transparency International Korea.

“Yet, Korea's civil society, including the abolished K-PACT Council, made effort to improve transparency in our society. During this process, the business sector voluntarily made changes as well. Perhaps these kinds of effort reflected in this year's BPI.”

The K-PACT Council (Korean Pact on Anti-Corruption and Transparency) that Kim referred to was an initiative that was signed between leaders from the public and private civil sector in 2005 but was closed in 2009 as the Lee Myung-Bak Administration cut its funding, he said.

Combating hollowing-out

There is also the perplexing issue of hollowing out for both countries. In a 37-page research paper, Hideo Kobayashi of the Graduate School of Asia-Pacific Studies, points out that South Korea has handled hollowing out – de-industrialization as companies move to countries with cheaper labor and other competitive advantages – better than Taiwan. To support that argument, he quotes figures showing Taiwan’s balance of direct investment has been in the red since 1993, unemployment has risen and the ratio of manufacturing output has declined.

In South Korea, by contrast, firms in key industries such as electric/electronic machinery manufacturing, shipbuilding, steelmaking and auto manufacturing “all maintain their principal production bases in South Korea, and deployment overseas does not represent an immediate problem. Thus, in terms of industrial hollowing, the South Korean companies that are expanding their overseas operations are mostly in the labor-intensive, low-value added sectors, and even their operations abroad are not yet stable.

Peripheralization

Taiwanese economists have long worried that the gradual loss of competitiveness against Korea leads to the speeding up of a process they call “peripheralization”. Whereas the Koreans have been quick to elevate their position in the global manufacturing chain, the Taiwanese increasingly depend on making easy money from Beijing through the Economic Cooperation Framework Agreement, they say. The economists warn that nestling on China's periphery not only reduces the desire to expend painful efforts on reform but also reduces Taiwanese manufacturers' will to upgrade, making them instead invest elsewhere and mainly in China.

This latter notion is supported by figures: In the first nine months of this year, Taiwanese investment in China was US$10.54 billion, 23.06 percent up year-on-year. October imports of capital goods declined 15.8 percent from a year ago to US$3 billion, their lowest level since March 2008, an indication that local display and semiconductor manufacturers are becoming more conservative about importing equipment.

Also Taiwan's jobless rate in September stood at 4.28 percent – the highest among the four Asian Tigers. The island's stock market has been accounting for the weakest performance in the Asia-Pacific region, which should to some extent be seen in this context.

“Korea's FTAs with the EU and US already bring Taiwan to a very disadvantaged position. The latest reports of World Bank and Transparency International are adding insult to injury,” said Hu Sheng-Cheng, an economist at Academia Sinica in Taipei, Taiwan's most prestigious research institution, in an interview with Asia Sentinel.

To compete with Korea, “cumbersome laws must urgently be simplified so as to make them catch up with rapid changes in the environment. Something has to be done about cronyism and the fact that different courts' judgments in the same corruption cases vary big time. Decision-making must be done transparently and standard operating procedures in bid invitations at long last must be adhered to rigorously.”