The marginalisation of Taiwan

Taiwan's economy continues its rebound with a number of research agencies upgrading their economic forecasts. Trade has returned as the driver of growth. While the trade figures look particularly good thanks to the low base effect, the fact that exports have reached record high levels underscores the positive sentiment. Despite the good macroeconomic picture, unemployment continues to be a major problem with job vacancies, particularly unskilled jobs, in short supply. Government debt also appears to be a looming problem. President Ma Ying-jeou, continues to insist that Taiwan has to tie itself in with China to secure its future; many others remain unconvinced of the wisdom of this approach.

June 24 2010: Taiwan's exports in May rose to US$25.54 billion or by US$9.4 billion from the same time last year—a year-on-year increase of 58 percent. While the percentage growth was influenced by the low base effect, this amount represents a record high. Imports reached $22.3 billion, the highest amount since September 2008 when the global financial crisis first hit. Year-on-year the increase was 71.4 percent. Demand came from Asia; exports to China, Hong Kong, the ASEAN-six and the Republic of Korea were all at historic levels.

Exports to ASEAN showed the largest increase rising more than 67 percent from a year earlier, followed closely by China (including Hong Kong) which rose by nearly 66 percent. For the first five months of the year, Taiwan's exports totalled US$109.2 billion, an increase of 52.7 percent year-on-year, while in the same period imports rose 71.4 percent to US$98.55 billion. The trade surplus reached US$10.7 billion, down by 23.1 percent from the previous year.

The pleasing trade numbers plus suggestions of recovering domestic demand have enabled a number of Taiwan's economic research agencies to again revise upwards their growth forecasts for 2010. Polaris Research institute is now forecasting 6.82 percent GDP growth for this year—up from 4.65 percent in March. Cathay Financial Holdings is punting on seven percent growth which could increase to eight percent should Taiwan conclude an economic framework cooperation agreement with China. Provided global recovery continues and exports remain robust, Citibank Taiwan concurs that eight percent growth is achievable.

There are downside risks of course. Globally, the primary risk is that recovery will not be sustained and that export growth will falter should the present crisis in Europe worsen and flow on to other markets. The state of the US economy also gives cause for concern. While Taiwan's economy is recovering slowly, much uncertainty remains and latest data suggests that companies are remaining cautious about hiring new workers – preferring instead to extend the working hours of their existing workforce.

Unemployment fell by 0.25 percentage points in May to 5.14 percent of the workforce and the lowest level in 17 months. The ranks of the unemployed now numbers 567,000. Despite the improvement, Taiwan's unemployment rate is still the highest among comparable Asian economies, outstripping Japan at 5.1 percent, Hong Kong at 4.6 percent, the Republic of Korea at 3.2 percent and Singapore at 2.2 percent. The government's stated objective of lowering the unemployment rate this year to below three percent seems a forlorn hope. Most expect unemployment to remain above the five percent mark until next year.

The government is still banking on an economic cooperation framework agreement (ECFA) with China to boost growth and employment but many remain sceptical. A third round of talks on the ECFA was held in Beijing on 13 and 14 June and while progress appears to have been made, no consensus was reached on the so-called "early harvest list" or those items that would be marked for immediate tariff reduction or elimination. According to reports there are around 500 items from Taiwan including petrochemicals, machinery, auto parts and textile products. Tariff reductions will likely be around 60 percent for petrochemicals and 80 percent for textiles. China has around 250 products on its own list. However, neither list has yet been finalized.

President Ma claims that without a trade and investment agreement, Taiwan will be marginalized. He has sought to sell the ECFA on the basis that with China set to become the world's second largest economy, Taiwan can be transformed into a global innovation centre and regional trade hub as well as a global operation headquarter for Taiwanese businesspeople and a regional operation centre for foreign investors.

This concept was fashionable during the last KMT administration during the 1990s but time has moved on. It may be an overly optimistic ambition nowadays since Shanghai has already become the regional trade hub as well as the regional operational centre for many foreign investors—as the hollowing out of Taiwan's international business community over the past decade clearly attests.

Fearful that Ma may be a single-term president, China is placed in a dilemma. On the one hand it wishes to lock down its pre-eminence over Taiwan as early as possible so as to reduce any future government's freedom to manoeuvre while at the same time it wishes to avoid forcing Ma into accepting unpopular terms that move ahead of public opinion in Taiwan. The sticking point at the present time appears to be the issue of whether Taiwan, under an ECFA, will be allowed to enter into bilateral trade agreements with other countries which, in the absence of a successful Doha round of WTO negotiations, have now become fashionable.

Here much ambiguity abounds. Ma Ying-jeou appears to have changed positions several times claiming on different occasions that an ECFA must be a precondition to Taiwan being able to negotiate bilateral trade agreements with other countries; then the conditional tense was introduced with the statement that "an ECFA should lead to…" and then further doubt was introduced when he said that it "might lead to…".

China has been less equivocal. According to a Chinese spokesperson the idea that an ECFA would lead to other FTAs for Taiwan was not even on the table. A Chinese Foreign ministry spokesperson went further during a routine press briefing in saying that China "strongly opposes any official ties in any format that Taiwan might develop [with other countries] although it was not against any unofficial trade ties between Taiwan and China's diplomatic allies.

One newspaper editorial (admittedly pro-Taiwanese) has claimed that Taiwan's "worst nightmare" will be realized if China blocks Taiwan from concluding FTAs with other countries. The press has also pointed out that for many years, Taiwan's economy prospered without China. During the martial law years when Taiwan was run by former presidents Chiang Kai-shek and his son Chiang Ching-kuo Taiwan often posted double-digit economic growth. The mantra at that time was that Taiwan had to open up a wide range of markets in order to minimize the risk to its economy. Of course, that was in a different age and before China embarked on economic reform but the fact remains that it is only in recent years that Taiwan's investments into mainland China have skyrocketed and that investment, some of it quite high risk, correlates strongly with a drop in domestic investment. This goes some way to accounting for the historic high levels of unemployment now being experienced in Taiwan.

Given this constant increase in investment—more than $1 billion since Ma came to power in 2008, China accounts for an increasing share of Taiwan's GDP that may be difficult to reverse. According to this line of reasoning, this shows that Taiwan itself is embarked on a high risk gamble in getting too close to China instead of using the opportunities of globalization to adopt policies that would involve diversifying investments and risks around the globe. When it comes to the marginalisation of Taiwan, perhaps that has already happened; the only question is which is the best road back?

The long road back

22 June 2010: The Philippines stands on the cusp of a new administration, and one which (once again) has promised to bring transparency, accountability, reform and the rule of law to a country that (to paraphrase one Filipino commentator) has been hobbled by problems of political instability, bad governance and mass poverty throughout the nine-year term of President Macapagal-Arroyo. At this time it is worth remembering just how far the country has fallen behind the rest of the world.

In 1950, shortly after the end of the Second World War and at the infancy of the Philippines as an independent republic, it was regarded as the second most advanced country in Asia when measured in terms of per capita GDP. Back then, and with a per capita GDP of US$1293 the Philippines ranked 34^th in the world. In Asia, only Japan outranked the Philippines. Japan at that time stood in 29^th place with a GDP p.c. of $1873.

Fast forward to 2006 (latest comparable data available) and the Philippines had dropped to 111^th place (among 171 surveyed countries). Per capita GDP had barely grown to $1382. Looking at these same numbers another way, in 1950, the US was 740% ahead of the Philippines; by 2006 it was 3194% ahead. For South Korea the comparable numbers are 68% and 1327%; for Thailand, 66% and 118%; and even Indonesia is ahead (68% and 118%).

What went wrong? The glib excuse for the present state of affairs made by many Filipinos is that their country is paying the price of living for 400 years in a monastery and then 50 years in Hollywood. There is an element of truth to this. The Spanish ruled the Philippines (much of it anyway) through the Catholic Church and through bestowing patronage on prominent families. It was a European-style semi-feudal system of government imposed on an Asian people. The Americans did not change things much—perhaps there was not enough time and during the first half of the 20^th century American priorities lay elsewhere. Americans introduced a modern education system and an American style democratic system but made little change to the administrative structure of the country.

When independence finally came, in 1946, the result was probably inevitable. Despite ostensibly being a secular state, the Church has retained its pre-eminent position of influence and remains a part of the "establishment." Powerful families remain entrenched within the national and local political systems and despite pockets of modernism, continue to run many of the provinces along feudal lines. Many such families continue to regard themselves not only as being above the law—but as being the law. How else do you account for the alarming level of summary executions throughout the country? To cite one statistic, one hundred and thirty-nine media workers have been killed since 1986. Of this number, 106 have been murdered (summarily executed) under the watch of President Gloria Macapagal-Arroyo. Two broadcasters have been murdered in the past week.

As this was being written, a fresh report from Human Rights Watch claims that an unidentified gunman shot and killed Suwaib Upham, a witness to the November Maguindanao massacre in which 57 people lost their lives. The witness was a member of the militia that had carried out the killings, allegedly under orders of the politically powerful Ampatuan clan, allies of President Arroyo. He had agreed to testify against the Ampatuans provided he was afforded witness protection. Three months before he was killed, Human Rights Watch had raised protection issues with Justice Department officials in Manila, yet the NGO claims that the department was still considering his request for protection at the time of his killing.

Under the Arroyo watch and more than ever before, the law is meant to serve the elite. Examples abound of courts being manipulated and made to serve the ends of prominent individuals. Foreigners are especially vulnerable. False testimony is often used to grab the assets of foreigners and force them out of the country under threat of incarceration or death.

A culture of impunity pervades the country. President Gloria Macapagal-Arroyo, did not create the present alarming situation; but she did very little during her nine years in office to reverse it. Indeed the slide has continued under her watch. I am indebted to one Filipino columnist for recently introducing me to a new word "kakistocracy" which he used to describe his country—a government run by the least qualified or most unprincipled.

In what may well be her final address to the nation, President Arroyo used Philippine Independence Day (June 12) to extol the achievements of her term in office. Although invited, President-elect Beningno Aquino snubbed the event. To have done otherwise would have been tantamount to a reconciliation. A "seamless transition" in present circumstances could be misinterpreted.

The incumbent President has made much of the "36 quarters of uninterrupted growth" achieved during her presidency. What is conveniently overlooked is the fact that the past decade—at least until the bubble burst in mid 2008—had seen the fastest expansion of the global economy in fifty years. A rising tide raises all boats and it would have been virtually impossible for the Philippines not to have done well. She has also been fulsome in her praise for the Armed Forces of the Philippines, crediting them with bringing peace to Mindanao even though a peace agreement appears to be as far away as ever. Lacking a popular mandate she has been beholden throughout her presidency to the armed forces, the Church and to the local political establishment and it is those groups that have prospered under her watch.

Independent commentators believe that perhaps her most significant achievement was reform of the value added tax system brought about in 2006. This has allowed the debt to GDP ratio to fall from a high of 82.3 percent in 1998 (following the Asian crisis) to a low of 38.9 percent in 2008 although things may once again be faltering with reports of a budget blowout this year. But with the GFC, natural disasters and election spending, perhaps that was inevitable. Aside from her record on VAT reform the list of achievements is dismal indeed. It is one thing to benchmark recent performance against that of her predecessors. It is quite another to benchmark against neighbouring countries. The competitive position of the Philippines in Asia has continued to slide.

According to a recent survey by the World Economic Forum, the Philippines continues to become less attractive as a business destination. The latest WEF Enabling Trade Index (ETI) has the Philippines in 92^nd position this year—down from 82^nd spot in 2009. Among the ASEAN group, even Viet Nam and Laos outranked the Philippines which bested only Cambodia at 102.

Domestically, most of the numbers paint the same dismal picture. From 2000 to 2006, the proportion of low-income families rose from 77 percent to 81 percent. Numerous surveys show that the number of people rating themselves as poor has been increasing as has the number of those who complain of hunger. According to data published by the World Bank, both infant mortality and malnutrition are higher in the Philippines than the average for East Asia and the Pacific.

Nor have the rich been spared. According to the National Statistical Coordination Board, in 2000 there were 51, 160 families classified as rich (0.3 percent of the total) with monthly incomes above PhP200,000 (or around US$4,300 a month). By 2006, this number had declined to 19,738 or around 0.1 percent of total families.

Unemployment and underemployment remain a problem at all levels of society; around 1.3 million people join the workforce every year. Official unemployment is high by East Asian standards and few people believe that the official figures tell the entire story. While unemployment hovers around 7.5 percent; more telling is the fact that underemployment is at about 20 percent. The labour market is characterised by low quality jobs with around 70 percent working in the informal sector. The situation has been aggravated by the GFC which has hastened the hollowing out of the manufacturing sector.

Over recent years, the Philippines has become primarily a service driven economy with domestic consumption accounting for around 70 percent of GDP. However, aside from jobs in business processing outsourcing and in telecommunications—both areas of rapid growth—much other service employment is at the low end, dominated by domestic household workers or self-employed street vendors.

The situation would be far worse were it not for the fact that around 10 percent of Filipinos have found work abroad. It is the overseas Filipino worker (OFW) that has kept the economy afloat. Filipinos have been going overseas to work since the 1970s but the efflux has grown in recent years influenced both by the buoyancy of the global economy (especially in the Middle East) and the dearth of opportunities at home. Indeed even throughout the recent GFC, remittance earnings continued to increase (albeit at a slower pace than previously) and this alone is what saved the economy from recession.

A recent estimate by the Commission on Filipinos Overseas (CFO) suggests that around 8.7 million are now working overseas. Most are employed in skilled or semi-skilled occupations. About 47.36 per cent or 4.13 million of these are temporary workers while permanent residents account for 42.31 per cent or 3.69 million. Irregular workers meanwhile comprise an estimated 10.32 per cent of the total or 0.9 million. These are workers without valid visas or those who entered host countries illegally, many on tourist visas. This problem is particularly worrisome in the Middle East and gives rise to human trafficking, especially of young women.

More than 1,000 now leave the Philippines every day of the year for overseas jobs. Whether or not this can be regarded as an accomplishment of the outgoing administration in finding these positions depends on your point of view. While, undoubtedly it is a safety valve for frustrated work-seekers, given the dearth of opportunity within the Philippines; it has led to a hollowing out of key professions such as teaching, nursing and engineering which adds to the long-term vulnerability of the country. Then there is the human factor to consider as families face long-term separation with many children now in single-parent families or bought up by relatives other than parents.

Lack of investment is the root cause of much of the problem. Gross Capital formation has declined from a high of 20.3% of GDP in 1998 to a low of 15.2 percent in 2008 (World Bank Data). Gross domestic savings as a percentage of GDP has been stagnant for much of the past decade going from 20.1% in 1988 to 13.7% in 1998 and down to 13.4% in 2008. Over the past decade exports of goods and services as a percentage of GDP has fallen from 52.2% in 1998 to 36.9% in 2008.

So much for the "glorious decade."

The mood in the Philippines right now is one of relief, tinged with a measure of optimism. People are relieved that the presidency of Gloria Macapagal-Arroyo will soon be over; and optimistic that the inauguration of a new president on 30 June will reinvigorate the country and bring respect back to governance. President-elect, Aquino, will have no easy task in turning the country around despite the overwhelming mandate he received from the electorate. Chosen precisely because he represents a break from the past, the "past" will inform his present for some time to come. Confirmed on 9 June as the winner of the presidential race he will have Makati Mayor Jejomar Binay for his vice-president. Binay wants to be an active "vice" and is rumoured to be wanting to be put in charge of local government. He would be well suited to the position.

Like Arroyo, Aquino is known as a hard worker. There the similarity may end. Unlike Arroyo, Aquino is known to be an advocate of clean and accountable governance and he has already promised to make his predecessor accountable for the systemic corruption that was endemic to her administration and its transactional style.

But we cannot expect miracles overnight. It will be a long and hard road to turn the Philippines around. Institutions of democratic government, never strong, from the Supreme Court down have been damaged over the past nine years.

The Philippines needs to attract new investment, domestic and foreign to soak up its educated workforce. To do so the incoming president will need first to address some domestic issues.

His promise to rein in corruption is a welcome signal and if he can ensure he surrounds himself with people of similar mindset he is off to a promising start. Corruption can be beaten but it has become so systemic that it will take time—and there appears to be plenty of people who believe that it will continue to be "business as usual."

The second domestic issue to tackle is that of population growth and to ensure that national policy is not dictated by any religious group, no matter how powerful that group may be. In 2000, there were 76.5 million Filipinos according to the national census. By the time of the 2007 census this had grown to 88.6 million and by 2010, the number is estimated at 94.01 million. There are now 17.5 million more Filipinos than there were at the turn of the millennium—or 23 % growth over the space of a decade. No wonder attempts at job creation are never sufficient.

What then would be a realistic goal for the Aquino presidency? Stemming corruption and simplifying business processes (an intrinsic part of the corruption equation) would lead to new foreign direct investment as well as plugging the leakage of revenues from government coffers. New FDI would create new jobs and greater resources available to government would allow greater social investment into education and health care. In time, greater and meaningful employment would allow domestic savings to bounce back. Labour productivity would improve. Once this happens a virtuous cycle would be created.

It is a herculean task but not an impossible one. Consider what has been achieved elsewhere in Asia over the past fifty years. There are plenty of examples from Korea to Thailand on which to draw (and leaving aside the city states of Hong Kong and Singapore which are special cases). There are plenty of hurdles ahead including the possibility of a hostile legislature. But against this must be balanced the overwhelming mandate he received—more than 40 percent of the popular vote in a field of nine candidates. He did not have to cheat in order to win an election; the country is on his side. Let us hope he can make a difference.