Monday, March 24, 2008

The Political Economy of the Taiwan Special Administrative Region, 2008-2016

Old military works outside of the port of Keelung.

...excerpted with permission from Mai Che-en's The Political Economy of the Taiwan Special Administrative Region 2008-2016, published in June of 2017, Armonk: ME Sharpe.

....in the summer of 2008 controls on Chinese investment in Taiwan were lifted, and both Chinese capital and international capital flowed into Taiwan to drive up real estate prices in urban areas around the island, especially in the north. This writer recalls, nearly a decade ago now, speaking to an aide to a former US senator turned lobbyist, who remarked in anticipation of the triumph of Ma that came four days later: "We've been lining up clients for two years for a Ma victory."

The influx of international capital resulted in a real estate boom, and secondarily, a boom in services. Taiwan's underdeveloped leisure industry also received a jolt from Chinese tourists. Months prior to the 2008 election, foreign companies had been quietly revising Taiwan's infrastructure. While writing this book I had the pleasure of staying in the Far Eastern hotel complex right next to the Tainan Train station, whose renovations began in 2007, also in anticipation of Ma's victory. Nowadays Chinese tourists arrive regularly at the airport outside of Kaohsiung, and then are immediately whisked to the hotel where they go on tours of Tainan's historical sites. None of them know, of course, that the five star hotel they pay such extravagant prices for began life as an office building that had sat for years, unused....

...but it was obvious in hindsight what would happen. As Taiwan's industries offshored to China, with the last of the major semiconductor firms leaving in 2011, tourism and real estate boomed. Yet a growing uneasiness with the new, American style casino economy of rapidly rising income disparities, continuing income stagnation, and stagnant productivity could have led to the revival of a working class social justice movement. How was the threat of working class revolt averted?

The roots of the answer lie in the legislative election of 2008, the first of the many elections that have since given the KMT an unbreakable grip on the island's local electoral politics. That year a major electoral reform created winner-take-all districts, a move that many later came to see as a crucial setback for democracy. With its superiority in cash and unrivaled local networks, the KMT easily won a large majority, one that it has been able to preserve over time. While vote buying was a time-honored practice in Taiwan's elections, the 2008 Presidential election and subsequent legislative elections brought back the long unused practice of ballot box stuffing. Though few outside Taiwan realize it, the routine use of schools and other community centers as polling stations means that in practice the ballots are stored, counted, and processed by KMT supporters, since those institutions are heavily KMT controlled.

However, to win the 2008 elections, the KMT spent large sums of money. In order to recoup this expenditure, the KMT-controlled legislature then turned on the infrastructure faucets, creating flows of funds into their patronage networks which legislators then tapped. For eight years the KMT had starved the island's infrastructure spending in a bid to reduce incomes and discredit the DPP. This strategy was highly successful. The working class, which had suffered the most, experienced growth in household incomes as the flow of money out from the central government revived local construction and with it, local incomes. Essentially, the working class was bought off. KMT coffers were replenished as well. Out of the loop, the DPP, the TSU, and the Green Party remained impotent and impoverished, unable to gain any political traction.

The political effects of this were profound. KMT planners, adept at divide-and-rule strategies, also revived the party labor unions to divide the working class and prevent it from allying with the DPP. The DPP's own attempts to forge links with the working class suffered from its history of using the social justice movements to get in power, and then spurning them. With the KMT in sole control of government funding flows, local factions that had been allied to the DPP returned to the KMT, eliminating the DPP as a local political force throughout most of the island. Additionally, the flow of construction money, combined with the resurgent power of local clan and patron networks, kept workers in line. When those failed, there was always the threat of violence. The 2010 murders of four labor activists in Taoyuan by unidentified thugs still resonates among labor leaders seven years later.....

...the first three years of the Ma Administration saw excellent economic figures driven by increased public debt fueling massive public construction and asset inflation, especially in the north. This was accomplished over the strident objections of the Central Bank, resulting in the replacement of two central bank governors by an impatient President Ma. Completion of the Suhua Highway in the first Ma administration was followed immediately by commencement of work on the widely-derided tunnel through the central mountain range, by far the longest in the world, to connect Hualien on the east coast with Taichung on the west, planned to cut travel times to under an hour. The tunnel is under construction as of this writing. Except in certain service industries, however, productivity growth was non-existent, and the Administration took a hit when it closed many universities in the early 2010s due to falling enrollment and the funding pinch. Incomes remained stagnant, undercut by rising inflation driven by rapidly increasing land prices and expanding public expenditures. There was even suspicion in certain quarters that the economic numbers were becoming unreliable. Nevertheless, entrenched and well supported by local networks, the KMT won another resounding victory over the increasingly irrelevant and poorly-funded DPP in the legislative election of 2011. In 2012 Ma, riding the excellent economic growth of 2008-11, was easily able to achieve re-election against DPP Chairman Su Tseng-cheng. The DPP then broke up into its constituent factions. Five years later it remains a spent force...

....The real estate boom in the north and rising public construction lead inevitably to upward pressure on local wages, and thence, in turn to the importation of Chinese labor. The first Chinese laborers actually began arriving in the summer of 2010, as an "emergency measure" for "temporary labor" during peak construction periods. As Heinlein once noted, there is no such thing as a temporary emergency, and sure enough, two years later permanent flows of Chinese labor were legalized, leading, among other things, to diplomatic protests from the government of the Philippines, which was dependent on Filipinos in Taiwan for a large portion of its foreign exchange. Local businesses eagerly welcomed cheaper Chinese workers, arguing that it would enable retention of industry on the island, though by then the island's industries had largely left. Hardest hit by job losses, the aboriginal community remains strangely loyal to the KMT. Perhaps that is a legacy of....

...in the second Ma Administration was a foregone conclusion. With the onset of a genuine recession in 2012, and over 400,000 Chinese laborers in Taiwan, clashes between local workers and Chinese workers became commonplace, especially in the south, where Chinese laborers moved about only in groups even in the day. Protests from Beijing rose concomitantly. In June of 2015 President Ma was summoned to Beijing for talks, accompanied by an ailing Lien Chan, confined to a wheelchair, but still honorary chairman of the KMT. The now famous 17 Point Treaty was finalized, and....

UPDATE: Hai Tien had a great response below. I've put it up here.
... however, the shift by the KMT to a more Taiwan-centric position proved to be permanent. Senior cadres amongst the CPC were sorely disappointed to find that the growing Taiwanese identity continued unabated under President Ma, despite what was ostensibly portrayed initially in the international media as a pro-China government.

Despite increased cross-strait economic exchanges, the rising cost of manufacturing in the PRC, as well as increasing political instability spreading from the west of that country, ensured that future Taiwanese investment remained more or less at prior levels. In pursuit of ever cheaper labor, low level manufacturing continued moving into underdeveloped countries in Southeast Asia, and later - Africa.

... internal reforms undertaken by the DPP included large-scale decentralization, and the dismantling of the former KMT-inspired Stalinist party structure in favor of delegating increased power to local party offices - a move that would later be emulated by most political parties by 2012. Galvanized by their 2008 electoral loss, the DPP sought to convey a more professional image, a newfound emphasis on recruiting capable administrators and policy experts, as well as cosponsoring bipartisan legislation on various levels. The presence for the first time in Taiwan, of a responsible opposition party, continued the consolidation of liberal democracy in Taiwan. Coupled with the implication of several prominent KMT members in the Casino-gate scandal of late 2009, the DPP staged a major comeback in the 2010 local elections, winning Taichung City for the first time since 1997...


Yep. The future could go many ways. But crucial to a positive outcome is the revitalization of the DPP in the directions you've named. It's practically been a religious invocation on my blog that they need a professional chairman. And they need to stop mimicking the KMT as well.

More later today.

17 comments:

Miguel said...

great stuff man, you got link it to the full version, it is worth a million....

Raj said...

A very negative view and, with all due respect, just far enough ahead in the future that it's likely the blog will close before then.

I would prefer to see your views on the first two years and then the first four years in more detail (and without an imagined narrative).

Tim Maddog said...

You wrote:
- - -
...excerpted with permission from Mai Che-en's...
- - -

I sense some kind of Castrovalvan loop at work and play here. ;-)

Tim Maddog

Anonymous said...

Scary read.. You need to publish this.

Thoth Harris said...

Brrrrrr... Chilling, because it is plausible and intimately foreseeable. I like the Heinlein reference...

What you write here, though, sounds like science fact, rather than science fiction. Unless, the unlikely occurrence of someone listening to you and others like you actually does take place.

This "rise in real estate prices" and "murder of labour activists by unknown assailants, "... s--t! It sounds like déja vu!

DPP and TSU, are you listening?

Michael Turton said...


I would prefer to see your views on the first two years and then the first four years in more detail (and without an imagined narrative).


Later today, I hope. But international capital backed Ma strongly and now they are going to want their reward. The question is, put crudely, whether we can transform into an economy dominated by real estate and services, or whether we're going to be scooped out and left with nothing, with international capital moving on to hollow out the next productive state. I can't tell -- I think there is a lot of positive possibility, actually. So many uncertainties.

But the combination of real estate flipping + massive infrastructure spending means that Ma has a demand "in" for the importation of Chinese labor. The only question is not whether he will do so, but how soon. Of all Ma's promises, that one was made to be broken.

Whatever way Taiwan's economy goes, the KMT will keep its grip on the legislature for many years to come, and Ma will win a second term, barring something bizarre and unforeseen. The next few years will see strong economic growth here, by all accounts.

Michael

Haitien said...

You really should consider taking up science fiction writing, Michael. There's a serious lack of speculative fiction concerning Taiwan in the local bookstores. For all our sakes (and mine especially), I hope that you're wrong on this one.

... however, the shift by the KMT to a more Taiwan-centric position proved to be permanent. Senior cadres amongst the CPC were sorely disappointed to find that the growing Taiwanese identity continued unabated under President Ma, despite what was ostensibly portrayed initially in the international media as a pro-China government.

Despite increased cross-strait economic exchanges, the rising cost of manufacturing in the PRC, as well as increasing political instability spreading from the west of that country, ensured that future Taiwanese investment remained more or less at prior levels. In pursuit of ever cheaper labor, low level manufacturing continued moving into underdeveloped countries in Southeast Asia, and later - Africa.

... internal reforms undertaken by the DPP included large-scale decentralization, and the dismantling of the former KMT-inspired Stalinist party structure in favor of delegating increased power to local party offices - a move that would later be emulated by most political parties by 2012. Galvanized by their 2008 electoral loss, the DPP sought to convey a more professional image, a newfound emphasis on recruiting capable administrators and policy experts, as well as cosponsoring bipartisan legislation on various levels. The presence for the first time in Taiwan, of a responsible opposition party, continued the consolidation of liberal democracy in Taiwan. Coupled with the implication of several prominent KMT members in the Casino-gate scandal of late 2009, the DPP staged a major comeback in the 2010 local elections, winning Taichung City for the first time since 1997...

David said...

There will certainly be a short term boost to the economy, but Taiwan has a number of challenges it is unprepared for. These are rising commodity prices, a coming recession in the US, sky-rocketing oil prices, dependence on imported energy, peak oil and climate change. The path of major infrastructure investment is just digging Taiwan into a deep hole as this infrastructure will not be appropriate to Taiwan's needs in 2020.

Taiwan's PV industry is a possible bright spot in light of this. However, one only needs to consider Taiwan's lack of a good energy policy to see this won't help the overall problem much.

Michael Turton said...

Dead right, David. Taiwan's choices during the last eight years have sucked, and we won't see any change under Ma.

Michael

Anonymous said...

Michael, your post reminds me of some of the doomsday scenarios proffered by diehard Blue-supporters back when President Chen was elected back in 2000.

Negativity and gloominess aside, no good yarn about politics can leave out domestic political scandals. Haitien's post alludes to this wonderfully. On this island, scandals are what ultimately shapes the narrative of any presidential administration. Given how President-elect Ma's reputation so hinges on his squeaky clean record, factor in the KMT's rather ugly record on corruption at the local government level, you have the recipe for a rather hard downfall.

Anonymous said...

With MA, the next four years will most likely be marked as the begining of the end for Taiwan. Unless Ma could assemble a very capable team...which is very unlikely. More and more investment and saving will be pulling out of Taiwan.

Anonymous said...

Economies based on real estate like ours in the USA are doomed ultimately to fail because there is a finite amount of real estate (like oil).

Does Taiwan allow foreigners to own its real estate? Many countries do not such as the Philippines.

Interesting to contemplate though.

The scariest part of this scenario is the massive influx of Chinese labor. In Tibet it has destroyed the culture.

Anonymous said...

Why are you so skeptical about international capital moving in and hollowing Taiwan out??? Don't most countries WELCOME international capital (ie foreign investment)? Generally, a large influx of foregin capital is seen as a show of confidence in a nation's economy. Hence the huge amounts of FC in China, India, and Vietnam. Do you think that multinationals are hollowing these nations out? Are you advocating that Taiwan reject this capital and become an isolated "nation" state like North Korea? Some explanation here would be most appreciated. Thank you.

Michael Turton said...

Why are you so skeptical about international capital moving in and hollowing Taiwan out??? Don't most countries WELCOME international capital (ie foreign investment)? Generally, a large influx of foregin capital is seen as a show of confidence in a nation's economy. Hence the huge amounts of FC in China, India, and Vietnam. Do you think that multinationals are hollowing these nations out? Are you advocating that Taiwan reject this capital and become an isolated "nation" state like North Korea? Some explanation here would be most appreciated. Thank you.

I'm not skeptical about international capital when it invests in new productive capacity. I'd be delighted by investments in chip foundries, CNC machine tool firms, university branches, etc. Those increase the productive capacity of the nation and create wage advances linked to gains in human capital and technological ability.

But what's coming in here is not going to do even one whit for the productivity of the nation. There might be some service gains, but we all know what a service economy is going to mean for the vast majority of Taiwanese, the same thing it has meant for the vast majority of Americans: rising income inequality and falling purchasing power. When the real estate in Taipei is flipped several times, exactly what happens for the productive capacity of the nation? Nothing. There might be some nifty multiplier effects, of course, but they will be largely in services.

Instead, we're going to see higher debts and greater inflationary pressure on local incomes, relative falls in productivity over time, and so on. More industry will leave the island. It's going to be an economy in which a few people who do little that is productive make a lot of money.

I'm curious to see, since the US$ is headed into territory that makes the lira look like a reserve currency, whether the central bank here will decouple the NT from the $. I'm also curious to see how far the Ma administration goes in liberalizing land use laws. There's lots of value there that can't be captured because land use laws here are clinically insane.

So I am not skeptical about international capital, anon. I'd love to see FDI that raised the productive capacity of the nation here, as it is doing in the nations you named above.

From an academic perspective it will be interesting to watch Taiwan completely post-industrialize. Will we be left a dried-up husk with little productive capacity? Or will Taiwan be able to locate a future where it can preserve a viable economy in services and real estate, with a strong leisure component and high living standards? Too many unknowns... and our only model for this transition is Japan. Brrrr....

Michael

Anonymous said...

I posted a list of possible changes at the bottom of this page if anyone is interested. Its more humorous than academic.

Great stuff Michael, as usual. Thanks for keeping us informed.

Anonymous said...

China and India's stock markets are bubbles. Just to note.

Capital is good. It encourages investment (spending by companies) even if it's investment in the stock market and not FDI since you can raise more through IPOs or additional offerings.

Bubbles are bad because they encourage too much investment and spending. This could mean wasting a lot of money on things you shouldn't be investing in (like bridges to nowhere, inefficient companies that will continue to be inefficient, etc.)

Anonymous said...

Your "17-point treaty" is more likely to be an "agreement" (as with Tibet) since "treaties" can only be signed by sovereign states.