Rong-I Wu
Barry Naughton
Shorenstein Reports on Contemporary East Asia
Number 6
October 1995
The 1995-96 JEAS Shorenstein symposia focus on relations across the Taiwan Straits. Dr. Rong-I Wu, the first guest in this series, spoke to Bay Area business and academic leaders at the Asia Foundation in San Francisco on the future of economic development in Taiwan.
Dr. Rong-I Wu is a leading expert on the Taiwanese economy and international relations. He is president of the Taiwan Institute of Economic Research; professor at the National Chung Hsing University in Taipei; an international trade commissioner and secretary-general of the Industrial Development Advisory Council for the Republic of China's Ministry of Economic Affairs; and member of the Eminent Persons Group of APEC (Asia-Pacific Economic Cooperation).
Chairing this session was Professor Frederic Wakeman, Director of the Institute of East Asian Studies. Professor Barry Naughton, Visiting Professor at Haas School of Business, University of California, Berkeley, and Associate Professor at the Graduate School of International Relations and Pacific Studies, University of California, San Diego, commented on the talk.
Professor Rong-I Wu's paper, "The Economic Development and Future Prospects of Taiwan," addresses two important questions First, what were the causes behind Taiwan's rapid economic development? and second, what policies should the government adopt in order to ensure Taiwan's future economic prosperity?
According to Professor Wu, Taiwan's rapid development from the early 1950s until the mid-1980s followed in the footpaths blazed by developed countries in the West and by Japan. In the early stages of development, agricultural economies gave way to manufacturing, but as economies matured, manufacturing ceded some of its primacy to the service sector. What set Taiwan apart, he suggests, was not so much the sequencing of development, but its pace. For instance, it took approximately 80 years for Germany to increase manufacturing's share of the gross domestic product from 18.5% in 1850-59 to 39.9% in 1935-38. In Taiwan, by contrast, the shift from agriculture to manufacturing was far more rapid, taking only 35 years. Since 1986, Taiwan's economy has shifted yet again, as the service industry mushroomed at the expense of manufacturing. In 1986, manufacturing was at its peak at 39.4% of the gross domestic product; by 1994, its share decreased to 29%.
How was such growth accomplished? To answer this important question, Professor Wu focuses on the success of Taiwan's industries in smoothing over the often rocky transition between these stages of growth. For instance, workers who might have been adversely affected by the shift from labor-intensive manufacturing to the less labor intensive service sector were successfully absorbed by the expanding service sector. As a result, unemployment remained very low during the transitional year of 1986.
Even though unemployment rates remained low, the transition from a manufacturing-based to a service-oriented economy was not without challenges. The appreciation of the New Taiwan dollar against the U.S. dollar and the increase of domestic labor costs and land prices have increased the price of Taiwan's exports, thus reducing the competitiveness of Taiwan's exports in the international market. As a result, in recent years Taiwan's export industry has been gradually shifting labor-intensive manufacturing industries to low-wage ASEAN countries and to the PRC. This strategy has both benefits and potential pitfalls. Without direct investment abroad, Professor Wu suggests, labor-intensive industries would be unable to survive in the international economy. On the other hand, economists in Taiwan have warned that the export of manufacturing abroad might also result in a "hollowing out" of Taiwan industry.
In addition to meeting challenges posed by the transition from a manufacturing to a service-based economy, Taiwan must also devise new strategies to deal with changes in the international economic and political environment. The success of the Uruguay Round of negotiations of GATT and the formation of the World Trade Organization, Professor Wu points out, will spearhead the global trend toward economic liberalization. Even as tariffs are reduced globally, however, it is likely that certain regions of the world will become hubs of global trading activity. The Asia-Pacific region, he suggests, will likely become a "new center" of international trade. As more enterprises invest in the region, Taiwan's industries will face increasingly strong competition. Finally, interdependence between Taiwan and the PRC has grown in tandem with expanding economic and trade relations across the Taiwan Strait. Political and economic developments in the PRC will undoubtedly affect Taiwan's future economic development.
How should Taiwan respond to these new challenges? Professor Wu suggests that the best way for Taiwan to smooth the transition to a service-based economy and prosper in a very competitive economic environment is to transform Taiwan into an "Asia-Pacific regional operations center." For the business community, the Asia-Pacific operations center would serve as an operational base for investment and business activity; from the macroeconomic perspective, the center would become a base for developing comprehensive economic and trade relations with members of the Asia-Pacific region. Such a center, Professor Wu proposes, would create a highly liberalized and internationalized environment to facilitate the free movement of goods, services, people, and funds. This, in turn, would attract investments from multinational enterprises and encourage local businesses to establish Taiwan as their base for investments and other operations in East Asia.
To develop such an operations center, the government of Taiwan would first have to make several key macroeconomic adjustments. These would include the reduction of tariffs, removing non-tariff trade barriers, and opening up the service industry. Restrictions on the movement of capital would also be eased, as would entry and exit restrictions on professional and specialist personnel engaged in short-term work in Taiwan. The government should also take steps to establish a modern legal environment to protect intellectual property rights and prevent computer crimes.
Professor Wu also makes very specific proposals concerning the types of centers that would best serve Taiwan's economic interests and position in the international economy. The government of Taiwan should bolster its traditional strength as a manufacturing center by investing in research and development, promoting high-tech industries, and identifying those with high likelihood of success. In addition, the government should also build 20-30 "intelligent industrial parks" to turn Taiwan into a "science and technology island." The manufacturing center would be complemented by sea and air transportation facilities, to make Taiwan the hub of Asia-Pacific trade, regional financial, telecommunications, and media activities.
To compete in the 21st century, concludes Professor Wu, requires both a vision and a plan. The establishment of such centers may well provide an answer to both of these demands.
In his comments, Professor Naughton reemphasized several important issues discussed in Professor Wu's paper, in addition to raising several concerns about Taiwan's economic future and specific questions regarding the concept of an "Asia-Pacific regional operations center."
One of the most important points raised in Professor Wu's paper, Professor Naughton emphasized, was that, although many today speak of "the" Taiwan miracle, Taiwan has in fact undergone two economic miracles. The first and most frequently discussed miracle was the rapid growth of low capital intensive manufacturing from the early 1950s until 1986. The second but less discussed miracle occurred between 1986 and 1987, years which, according to Professor Wu, should be regarded as a critical juncture in Taiwan's economic history. Whereas in many countries the transition between economic stages has been accompanied by social dislocation, in Taiwan the critical juncture of 1986 and 1987 was breached smoothly.
Few experts, Professor Naughton recalled, anticipated that the Taiwanese economy would be able to adapt so rapidly. As early as the mid1960s, Taiwan economists worried about competition from low-wage economies in Southeast Asia. Some 10 years ago, a prominent U.S. economist argued that Taiwan was handicapped in the international market because it lacked large corporations, such as in Korea. Only large corporations, it was believed, could make the strategic investments necessary to generate structural transformation. Since then, Taiwan has confounded the skeptics. Taiwan's small-scale economy has proven very flexible in adapting to market changes. What the Taiwan experiences shows, Professor Naughton suggests, is that it often pays to worry about the future. Professor Wu's paper, which conceptualizes Taiwan's future economic trajectory, is helpful because it anticipates changes and makes specific policy recommendations for how to manage the post-1986 economic transformation.
The extent to which Professor Wu's proposal to establish an Asia-Pacific operations center, Professor Naughton continued, will depend on domestic and international developments. For instance, even though 1986 ushered in a service-based economy, there has been relatively little decline in the number of workers employed in the manufacturing sector. The service industry has expanded at the same time other sectors have also been growing rapidly. As a result, workers shed by manufacturing have been easily absorbed into other sectors of the economy. Most of the these workers, Professor Naughton pointed out, are young, and thus better able to withstand economic changes. Future changes might not be so easily accomplished, however. In recent years, the birth rate has been declining. In the not-so-distant future, Taiwan will have an older population. Older workers might not be able to adapt so readily to rapid structural change.
Professor Naughton's second query concerned the extent to which Professor Wu's vision of the Asia-Pacific regional operations center is contingent upon future good relations with the People's Republic. In 1986, just as Taiwan was undergoing rapid structural change, the PRC, under the leadership of Premier Zhao Ziyang, promoted the development of the country's coastal provinces. These policies made Taiwanese investment in the PRC extremely attractive. With lower labor costs, Taiwan manufacturing remained competitive as the economy overall was changing. The PRC's current policies, however, do not bode well for cooperative relations between the two countries. In addition to the recent flap over President Lee Teng-hui's visit to the United States, the PRC has also engaged in deliberately provocative military maneuvers along the coast of Fujian. An important question, therefore, is whether the establishment of an Asia-Pacific regional operations center "makes sense" only in the context of continued good relations with PRC. Should relations further deteriorate, what implications would there be for the operations center?
Finally, in terms of the sectors comprising the operations center, Professor Naughton wondered if it made economic sense to distribute government resources among so many different sectors. Taiwan's traditional strength, he noted, has been in manufacturing, and it has been in this sector where Taiwan has had a comparative advantage in East Asia. By contrast, finance and media are less developed in Taiwan, but well established in Hong Kong. For the regional operations center to play to Taiwan's strengths, Professor Naughton suggested that manufacturing remain at the core of the center, with finance and media playing a second-tier role to already established centers elsewhere in Asia.
Despite these questions, Professor Naughton remains optimistic about Taiwan's future prospects. Taiwan's postwar history shows a remarkable ability to adapt to change, and Taiwan's economists -- such as Professor Wu -- have already embarked upon the long-range planning necessary to ensure that future transitions will be handled as smoothly as past ones.
Summarized by Neil Diamant.
