What Can Taiwan Really Learn from Korea.

It's fashionable to hold up South Korea as an example to Taiwan. The European Chamber of Commerce in Taipei, clearly living in an alternate reality, became the latest follower of that trend when it announced that the reason that Taiwan has not done as well as Korea has is because it isn't open to China like Korea is.

The European Chamber of Commerce in Taipei has held up Korea as a shining example against Taiwan’s failure to improve trade relations with China and, as a result, attract foreign investment. The ECCT said Korea overcame the 1997 financial crisis and soared ahead of Taiwan by taking advantage of China’s predicted economic boom and growth. The Korean government has removed obstacles to trade with China by operating direct flights between the two countries and lifting bans on imports and exports.

ECCT chairman Ralf Scheller criticized Taiwan for failing to improve the business environment, open up the market and ease regulations. As a result, he said, it became the worst performer among Asia’s four leading economies in terms of national income and the number of visiting tourists. “We are not surprised by the result as no progress was made on priority issues we've raised in the past,” he said. The occasion was the publication by the chamber of a blue book on investment in Taiwan and 10 recommendations to the next Taiwanese president that included the normalization of cross-strait trade and deregulation of the financial and service industries.

Well, let's see. Korean direct investment in China is less than half of Taiwan's, and that is only the reported cases for the latter. In terms of GDP Korea's investment in China is miniscule, like 3-4%; for Taiwan it falls somewhere between one-third and one-half of GDP. In 2004, when Taiwanese investment in China was measured in the tens of billions of US$, total Korean investment didn't even reach $10 billion. As of September 2006, Korea's awesome investment totals had skyrocketed all the way to $13.8 billion, or about what the average taishang spends on a year for all three of his wives in Shanghai. Taiwanese companies have flooded into China, but clearly Korea has kept its industries at home. The results are patently obvious.

The full oddity of this must be savored: Korea's policy is to export to China using Korea as a base but sending some production to China -- keeping the major firms at home. Korea has, by all accounts, prospered more than Taiwan in doing so -- by ECCT Chairman Scheller's own claim. This is precisely the strategy that the DPP wants to follow -- keep the jewels in Taiwan. Obviously Chairman Scheller is very confused about what the source of Korea's growth is, thinking it must lie in direct flights. Does anyone really think at this late date that if we have direct links to China, that Taiwan's economic growth will suddenly spike?

Chairman Scheller ought to pay attention to another fact: Korea, like Taiwan, limits the flow of Chinese goods into Korea. At present, the two nations are discussing an FTA, but many Korean makers fear the impact of China-based MNCs on their domestic businesses. Thus, for many years Korea has limited imports of things from China in various ways (outside of manufactured goods made by Korea firms there). The article I linked to above also notes that China has scared Korean makers by how fast its firms are climbing the technological curve.

In other words, Korea has prospered by following the very policy the DPP advocates -- limiting China's impact on the Korean economy, limiting imports from China, protecting national industries, and limiting investment in China. Nevertheless, both the US and European Chamber of Commerce claim that, when the DPP does this, it must be folly, but when Korea does this, it is an example for Taiwan to follow.

How's that again?

Never mind that Scheller never mentions that it is longstanding Chinese policy to hollow out Taiwan's economy as a prelude to annexing the island. Taiwan's security is simply not an issue for the Chambers of Commerce here, since they will continue to make money whether democracy activists in Taiwan own the presidency or are carted off to Chinese jails. By contrast, China, needless to say, has no current, open desire to annex Korea.

Over at Taiwan Matters! Feiren put all of this into perspective with a nice post on Ma Ying-jeou's 1970s economic thinking:

What's more interesting is the profound disjunction between this unrealistic objective and the proposed means of achieving it. Remember that Ma's main policy proposals are allowing direct transportation links with China and removing the 40% investment cap. Just how is that going to get us back to the golden era?

China is not going to agree to the non-existent 1992 Hong Kong consensus and Ma will not have the political capital to accept the One China Principle without putting it to a vote. Even if he can, direct links with China mean more globalization and therefore less control over the domestic economy than we have now.

In all likelihood, what we will get is a lifting of the 40% investment cap. And everyone can see I'm sure how allowing what remain of Taiwan's industrial base to relocate to China will get us back to the good old days when the omniscient great man could control prices.

The great experiment of creating investment worth 1/3 of Taiwan's GDP in China has now been conducted since at least the mid-1990s and despite all this openness, Taiwan's economy has not boomed. I have no idea why anyone would imagine that after sending $100 billion dollars worth of manufacturing to China with modest positive economic effect for Taiwan, sending Taiwan's remaining industry there will cause Taiwan's economy to grow robustly. That is like arguing that if a double amputee became a quadruple amputee, he'd be able to run again.....

UPDATE: in the comments below Patrick Cowsill asks why I didn't address Scheller's remarks on tourism, which he apparently felt were quite insightful.

On raw numbers China, South Korea, and Japan all beat Taiwan, of course. But it isn't difficult to shoot down Scheller, because absolute numbers rarely mean much. Consider: Japan, with a total population of 8 or 9 times Taiwan's attracts less than three times as many tourists, like 8 million to Taiwan's 3.75 million (Japan is currently pursuing a policy to push tourism from 6 million in '04 all the way to 10 million). China's 120 million tourist arrivals dwarf most nations -- we can't compete with that -- but it is still equivalent to less than 10% of the nation's population. As for South Korea, it is 6.35 million this year (here) , or twice that of Taiwan, though its population is much larger than Taiwan's. In other words, on a per capita basis, Taiwan is already the most successful foreign tourist attractor in the area. This is even more amazing when you consider that all three of those nations offer a far great array of cultural and natural attractions than Taiwan does. Really, we're not doing too badly here.

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