Taiwan currently has the 11th most competitive economy in the world, holds the second largest foreign exchange reserves at $90 billion, and is the world's 14th largest trading economy. According to the US Department of Commerce Taiwan is the world's largest market for infrastructure projects, energy, environment, and telecommunications. The US based Environment Risk Intelligence Service ranks Taiwan as the worlds fourth best place for investments. The most influential development to take place in Taiwan is the 1996 presidential elections which culminated a ten year process to democratization. It was this first direct election that put Lee Ten-hui at the forefront of this economically dynamic country.
Already a strong political presence prior to the elections, Lee will take the country into a modern political era marked by two key issues affecting business and economic industries. The first is Taiwan's relationship with the People's Republic of China (PRC) and the recent economic distress which followed extreme tension in 1996. The second involves the task of transforming Taiwan into a Regional Operating Center (ROC), or a gateway to the rest of Asia characterized by an outstanding infrastructure, innovation in key industries, and a "hub" of corporate bases for international firms.
China's political relations with Taiwan played a significant part in straining Taiwan's economy in the first quarter of 1996. The heightening of Taiwan's economic reputation and significant growth in industries such as electronics and telecommunications resulted in tensions with mainland China. Taiwan's policies of expansion and opening new markets have made the country virtually impossible for foreign investors to ignore as a source of potential growth for multinationals. China claims that Taiwan's actions have politically and economically distanced the island from the mainland. Key Chinese officials in 1996 designated Taiwan as a "renegade province". Adding to the tension, the WTO, while not officially granting admission to Taiwan, has kept relations open, despite its refusal to acknowledge China. After a visit to the US by Lee, prior to him officially becoming president in June of 1995, China withdrew its ambassador and declared a halt to any future high-level talks with the island nation. One month later Chinese missiles were launched into the sea 85 miles north of Taiwan. Military activities continued into March of 1996, and have recently been discontinued.
While there was little fear of extreme military aggression, China's intentions were clear. These acts were designed to create uneasiness, destabilize the economy and drive the stock market down. China's threat may have succeeded. Confidence in the economy dropped, consumers held off on major purchases, and new business investment was put on hold as capital outflow increased dramatically. The Central Bank was forced to intervene in currency markets to stabilize the exchange rates. GDP growth declined to 6.06 percent in 1995 and the estimated 1996 GDP fell from 6.17 percent to 5.9 percent. The stock market lost nearly 30 percent of its value.
Despite the negative effects of China's intimidation tactics, the Taiwan government maintained their policy of continuing external economic relations. Right now the mainland is the most important market for Taiwan, containing $25 billion in investments and 25,000 Taiwan funded businesses. However Taipei has maintained a longtime ban on direct business with the mainland, and therefore these investments have transpired indirectly through Hong Kong. In 1996, the ROC Ministry of Economic Affairs approved 18 indirect investment projects in the Mainland by Taiwan companies. With Hong Kong acting as an intermediary, the trade relationship is made up mostly of Taiwan's exports to China (90 percent). The remaining 10 percent of the relationship is composed of China's exports to Taiwan. Thus, the mainland is a major market and this fact has led Taiwan to make a sharp distinction surrounding financial and political relations with China.
From an economic standpoint, Taiwan still supports opening the market to the mainland, but at a conservative pace. This position must be enforced carefully, as Beijing interprets direct links as a strong signal for support of reunification. For this reason, Taiwan has developed propositions for doing business without sacrificing its independence. The two prominent tactics are: 1) the creation of "economic zones"; and 2) developing an internationalized economy, which is considered the best insurance against relinquishing independence. President Kim will actively promote the latter of these two suggestions as Taiwan's economy expands into the 21st century.
Transforming Taiwan into a regional operation center (ROC) will enhance and promote Taiwan's Financial and commercial industries to the status of its industrial and trading strengths. The Council for Economic Development implemented the Asia Pacific Operation Center Act of 1995 (APROC Act) which defines the strategy to sharpen Taiwan's competitive edge in order to compete effectively in the realm of global business. The industries focused on include transportation, hi-tech manufacturing, telecommunications, media, operations, and finance.
The Council stresses simplifying the procedures for foreign investment, the privatization of telecommunications, and the integration of Taiwan's financial system with international markets. More specifically, the scheme involves policies significantly reducing business related paperwork, and building major infrastructure projects. The Taiwan government has made plans to build new roads, subways, and rail systems. In addition, the groundwork for a new media center, a second science park for research and development, and 20 to 30 industrial parks has been established. The Chiang Kai-Shek International Airport will undergo a major overhaul to better serve the rapidly increasing number of passengers. The government has also offered incentives for international companies which move their regional headquarters to Taiwan. The new policies will grant investors a five year "tax holiday," loosen foreign exchange controls, intensify data protection regulations, and raise the cap on foreign investment in the stock market. Avid support and participation by government and private industry has so far enabled this transition to be relatively smooth.
Success in the electronic manufacturing industry has been a substantial contributor to the economic success of Taiwan. The ROC Industrial Development Bureau proclaimed Taiwan as the world's largest producer of scanners, keyboards, and local-area-network cards. Electronics attracts one-third of the country's foreign investment funds. Taiwan companies have been able to maintain a competitive advantage by adopting the strategy of being a low-cost, original equipment manufacturer (OEM) in the personal computer market to foreign countries. Taiwan companies are known for their speed and flexibility in this sector. Acer Group is Taiwan's first "global giant," ranking seventh worldwide in computers. Recently, more developing countries have made attempts to follow this successful lead and Taiwan's electronic manufacturers have responded by either expanding product lines or shifting their focus.
Electronics suppliers in Taiwan have branched out to other electronic and telecommunication equipment. These firms now manufacture more than one-half of the world's modems and circuit boards. Taiwan gained 64 percent of the $840 million market for scanners simply by making them more affordable. Umax Group is now the world's second largest optical scanner producer. Within the semiconductor industry, firms experienced a 43 percent increase in sales in 1995, totaling $4.4 billion. In addition to diversification, there has been a greater emphasis on innovation as a distinguishing edge for Taiwan's products. Approximately $21.3 billion has been invested in further developing Taiwan's information technology industry. Much of this development occurs in Hsinchu, Taiwan's version of Silicon Valley. Areas outlined for exploration and expansion include multimedia products, networking, imaging, and virtual reality. By maintaining a strong presence in the high-technology industry, Taiwan will better ensure the stability of other sectors, including the financial system.
The backbone of the current financial system is the Taiwan Central Bank, formerly controlled by the Central Bank of China, which is equivalent to the US Federal Reserve. Its three primary functions are to maintain national monetary stability, reform bank operations by providing guidance to the banking industry, and to regulate currency flow. The financial market is composed of domestic banks, local branches of foreign banks, medium-sized business banks, and the departments of farmer's and fishermen's association. Domestic banks hold 44 percent of the market for deposits and 63 percent of the market for loans.
In order to realize the objective of becoming a ROC, Taiwan will have to continue to liberalize its financial sector, a task which has proven to be a gradual one thus far. Taiwan, relative to other nations in the region remains conservative in its tactics to free the financial market from heavy government intervention. In 1990 officials permitted the establishment of new private, commercial banks. In 1991, they allowed investment and trust companies to apply for private bank conversion. By the end of 1995 however, state run institutions still claimed 54 percent of loans and 35 percent of deposits. Bank privatization has been stalled, as evidenced by setbacks in the three leading firms: First Commercial, Hua Nan, and Chang Hwa.
Taiwan has taken some measures to strengthen ties around the world and has steadily strengthened its relationship with the WTO. Currently the nation can claim observer status, however the Economic Affairs Ministry is hopeful that this will change by July of 1997. The delay of membership status is due in part to Taiwan's relationship with China. Taiwan's admission has also been delayed due to unresolved high-level talks between major members, including the US, the European Union, and Canada with regards to trade barriers on imports of cars, beef, and other agricultural products.
With this in mind, Taiwan now acknowledges the inherent value of reinvigorating its export industry. Recently, economists have noted that despite Taiwan's trade surplus, exports have been decreasing or at least falling at a slower rate than imports. Officials have agreed to spend $50.9 million in trade missions to promote exports which should, in turn, generate $194 million. This surge promotes not just the main industries mentioned previously, but also the production of machinery, textiles, and leather goods.
In conclusion, Taiwan faces challenges in the near future it must approach with caution if it is to remain on friendly terms with western nations. At the same time Taiwanese officials must look toward China to play a prominent role in its financial success. Taiwan must address all of these issues in the near future to escalate the economy to its optimal level.
Return to Table of Contents