Why did Taiwan's economy stagnate over the past couple of years?
Why did Taiwan's economy stagnate over the past couple of years?
Taiwan can prosper like smaller Scandinavian economies
The biggest reason is that Taiwan is already a “high income” country and part of what comes with being a high-income country is slower growth that seems “stagnant” compared to the fast growth rates of the past.
So part of this is a perception thing. The archetypal person of my parents’ generation was born on a farm with at least four siblings, moved into the city for work and was the first in their family to ever attend college. Compare this to those in my generation, where changes were relatively minor things like upgrading from a Sony Walkman to an iPod.
But Taiwan has also had to deal with some challenges that are unique to its economy. Most significantly, China has been rapidly moving up the value chain. In 2000, China’s per capita GDP was only 12% that of Taiwan’s. In 2015, that number has increased to around 30%. In many industries, Chinese companies have caught up or even surpassed Taiwanese companies. This means that more and more jobs are being sucked away from the Taiwanese economy. A decade ago, these were still mainly blue-collar factory jobs but they are increasingly valuable front-office jobs as well.
Some Taiwanese have, of course, benefited from the rise of mainland China, especially the Taiwanese businessmen (台商). However, they are relatively small in number yet have accumulated most of the benefit. The majority of the population has either not benefited significantly or seen their situation get worse. Think about the example of the Taiwanese factory owner that moved operations to mainland China in the 1990s. By moving the factory to China, he significantly cut his labor cost, was able to scale rapidly by tapping into the seemingly limitless supply of migrant labor streaming off the farms and on top of that, probably took advantage of significant tax breaks meant to encourage foreign investment.
Meanwhile, his local Taiwanese factory workers are out of work and, with this situation being repeated at hundreds of other Taiwanese factories, probably end up with a much lower-paying service job. This is part of a general trend of what is happening in much of the developed world, just at hyper-speed given Taiwan’s proximity (both geographically as well as overlapping industry-wise) to China as well as the huge size differential between the two (think of a small star sitting in close proximity to a massive black hole).
Today, this story is repeating itself for educated college graduates. Mainland Chinese firms are actively recruiting the brightest and most ambitious Taiwanese students, especially for its technology and Internet sectors, where hundreds of billions of dollars of value have been created in recent years. When this happens, it means that economic value is being created primarily in China instead of Taiwan.
But all is not lost for Taiwan.
First, labor wages (particularly at the white-collar professional level) between Tier I Chinese cities have caught up, if not surpassed, Taiwanese equivalents. A friend of mine who ran a large outsourced software developer in China told me that as early as 2012, costs for quality developers in China had surpassed Taiwan once you factor in the higher social/welfare taxes, and he was starting to re-focus his hiring efforts in Taiwan. Wages are very competitive in Taiwan now.
Second, quality of life in Taiwan is very high and significantly better than almost anywhere in China. Quality of life is important, especially for technology and innovation-centric jobs; for example, many people have cited the high quality of life as an important factor for Silicon Valley developing into the innovation powerhouse it is today.
Taiwan is not without its challenges but I do not think competing with China is an impossible task. There are certainly many industries where China’s domestic scale is critically important (e.g. the Internet sector, telecom equipment) but there are many others where geography matters less than extremely focused specialization and execution (e.g. advanced semiconductor foundry services).
Small countries that sit in the shadow of economic giants can succeed — just look at the examples of Benelux and Scandinavian countries (each smaller than Taiwan, population-wise) compared to Germany, the United Kingdom and France. If it faces these challenges head on and is reasonably smart and pragmatic, Taiwan can be the Netherlands or Denmark of Asia.
This was originally published in Quora in November 2015.