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Taiwan’s January elections attracted global media attention for a different reason than in 2018, when the island’s democracy was the subject of controversy as China pressured global airlines not to code it as an independent country. The recent ballot was essentially a referendum on Hong Kong’s turbulent relationship with the People’s Republic of China (PRC).
President Tsai Ing-wen was duly re-elected with 57.1 per cent of the vote by an electorate apprehensive about the mainland regime’s growing influence in Hong Kong – and the economic impact of long-running pro-democracy protests. As one of the four ‘Asian Tiger’ countries of the late 20th century (together with Singapore, Hong Kong and Korea), Hong Kong’s long-running street protests and escalating police responses play into Taiwan’s deep-seated dread of Beijing’s intentions for its future.
Small businesses are big business
Historically, Taiwan has found ways of thriving despite its decades-long standoff with the PRC. Diplomatically barred from the IMF, World Bank and OECD, it has turned its multitude of SMEs into a unique economic proposition: the country’s 1.43 million small businesses make up 97 per cent of the private sector and provide 9 million jobs – 78 percent of the total workforce. But these are more than corner stores or back-street workshops: Taiwan has created super-SMEs with global client bases, supported by central government policies and stimulus programmes. Where Japan and Korea’s governments focused on promoting large conglomerates, Taiwan recognised the energy and innovation that comes in small packages.
Taiwan has found ways of thriving despite its decades-long standoff with the PRC.
Starting in the 1950s with high-volume manufacturing of cut-rate toys and appliances for export, Taiwan’s SMEs have transformed themselves into producers of value-added products and services, in particular sophisticated electronic devices and components. Operating in clusters, these companies capitalise on the advantages of smallness: agility, innovation and low production costs.
As a result, Taiwan is rated fourth in the World Economic Forum’s competitiveness rankings, including fourth for workforce diversity and third for patent submissions, as well as performing strongly in most innovation capability indicators. GDP per capita at $49,800 is third in Asia (behind Singapore and Hong Kong) and ahead of Japan and South Korea – and far outstrips the PRC ($16,600). Taiwan’s social progressiveness – last year it was the first Asian country to legalise same-sex marriage – and intensely competitive media, which ranks second in Asia, drive a positive image overseas.
With the US and China’s on-again, off-again trade war having a deadening effect on global trade, many Taiwanese businesses with production outsourced to the mainland are bringing their businesses home to avoid tariffs driving their products’ prices up. The government has encouraged them with tax breaks and $2.4bn in investment; manufacturers have taken the opportunity to spend on high-tech automated plant, offsetting higher Taiwanese labour costs.
According to Academia Sinica, private investment is expected to grow 3.67 per cent this year, with local companies more motivated to invest domestically, and capital formation will grow 4.11 per cent on continued government support for infrastructure projects. Improving tax revenues is a priority for the new government in order to stimulate domestic growth through investment. Its revenue collectors aren’t able to access overseas records and tax offshore revenues, so Taiwan’s shadow economy in 2019 was estimated at a crippling 25–30 per cent of GDP.
Diversification means prolonged autonomy.
In addition, the trade war may reinvigorate the country’s Southbound Policy, which aims to boost trade relationships with neighbours in South and Southeast Asia and reduce reliance on exports to the mainland, which stood at nearly 40 per cent last year, despite dropping 4.1 per cent from 2018. Such a degree of dependence could all too easily lead to absorption into the PRC – so diversification means prolonged autonomy.
This year, demand from increasing global 5G roll-outs is set to boost high-tech orders, while early signs of diversification into the tourism and media sectors promise a broadening source of domestic production. The Central Bank’s cautious GDP growth prediction for 2020 is 2.34 per cent, based on increased domestic demand, with private consumption up 2 per cent, from 1.96 percent last year.
The government is aware that the island’s small and ageing population, with the world’s lowest fertility rate at 1.218 children per woman, poses a challenge for growth and has initiated efforts to encourage immigration. This is surely a positive development for the continued health of that uniquely dynamic SME sector.