Taiwan--Asia’s Improbable New Strongman

Taiwan is the most dynamic and prosperous yet relatively unknown economy in the world.

It is a surprising economy. Taiwanese businesses have at least $37 billion and perhaps as much as $70 billion invested in the troubled countries of Southeast Asia, Thailand, Malaysia, the Philippines and Indonesia.

But Taiwan isn’t waiting for the International Monetary Fund to help those countries. Taiwan cannot belong to the IMF because mainland China objects to any suggestion of Taiwan’s being a sovereign nation. So Taiwanese banks, with the encouragement of their central bank, are supporting Taiwanese company affiliates in Southeast Asia with loans in this tense period. Thus they are helping start the recovery process by financing production for export.

Taiwan is an island country of 21.5 million descendants of Chinese immigrants who settled here over the last four centuries--including the Chinese Nationalist forces who retreated to Taiwan in 1949 after the Communists defeated them in a civil war.

The Beijing government from time to time has made the Taipei government public enemy No. 1. Yet Taiwan is one of mainland China’s chief benefactors, with direct investment in plants and equipment totaling at least $35 billion and probably more than $60 billion--the varying estimates being caused by unreported investments in factories and real estate projects on the mainland. Taiwan also buys more than $20 billion of China’s exports every year.

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Taiwan’s textile manufacturers have long used the mainland to produce garments and shoes. Now Taiwan’s high-tech industries are going to use China to manufacture computer circuit boards and other components. Taiwan’s big Acer Inc. computer company even plans to develop software in Shanghai.

Taiwan’s own economy of $284 billion in annual output of goods and services--about the size of the gross product of Los Angeles County, by the way--depends on foreign trade for more than 75% of its activity.

And the Asian crisis is hurting. Taiwan’s exports to South Korea are down 50%, exports to Japan down more than 40%. Yet Taiwan’s economy will grow 6% this year, slower than last year’s 8% but still quite healthy.

Why so robust? Because more than a third of Taiwan’s output these days is in high-tech goods that keep finding markets in North and South America, in China and Europe.

Taiwan’s high-tech industry is unparalleled in Asia, greater than that of any other country, including Japan. How it developed this modern industry without calling itself “Silicon Island” or any other hokey name is an object lesson for all of Asia and the rest of the world too.

Pursuing high-tech investment, Taiwan’s government started work 16 years ago on Hsinchu Science-Based Industrial Park, about 40 minutes from Taipei Airport, where semiconductor and computer component firms could operate at low costs.

The park now has almost 300 companies, many of them started by Taiwanese expatriates who returned from corporate jobs in the United States for the chance to run their own companies. The companies at Hsinchu represent more than $10 billion in aggregate investment, 90% of it Taiwanese and raised in the country’s stock exchange and unlisted markets, which have launched more than 1 million small to medium-size companies.

“We have 100 venture capital companies in Taiwan,” says Sing Chen Hong, head of Hotung Venture Capital Corp. “We have made 36 initial public offerings, and we’ll do 10 this year and 10 more next year.”

Perhaps the greatest factor in Taiwan’s development has been education.

“About 15 years ago, when our appliance and textile industries were moving production overseas, we saw that we would have to move to high-tech industry. And for that we needed to stress education,” says Finance Minister Paul Chiu.

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Taiwan spends 15% of its national budget on education at the university level, and county governments spend more than 50% on primary and secondary education. More than 250,000 Taiwanese graduate college every year, and tens of thousands go to the United States for graduate study.

As a result, Taiwan has the human resources to move from producing hardware to development of software. “We must produce intellectual property--computer software and management skills of all kinds, because hardware is subject to surplus production everywhere,” says Stan Shih, founder and chairman of Acer, which in 20 years has grown to a worldwide company with $6.5 billion in sales.

“Taiwan has the most advanced technical labor force in Asia,” says John Cheng, a Taiwanese entrepreneur with a doctorate in computer science from the University of Washington. Cheng, who owns companies in Palo Alto and Torrance, is starting another business in Taipei to develop software for Japanese companies.

It must be done here, Cheng explains, because Taiwan has more software engineers than Japan--that is, a country of 21 million has more advanced computer talent than a country of 120 million.

Yet even its high-tech industry is not Taiwan’s most important object lesson for Asia. That distinction goes to Taiwan’s evolving democracy.

Vigorous party politics have developed in Taiwan, challenging the long rule of the Kuomintang or Nationalist Party, political descendants of Chiang Kai-shek’s forces that have governed Taiwan since 1949.

Taiwan’s young, educated and relatively prosperous voters are questioning assumptions about the country’s governance, environmental policies and even its future relations with mainland China.

The Democratic Progressive Party has won repeated local elections and, in combination with other parties, threatens to unseat the Kuomintang in the presidential election of 2000.

The DPP advocates a future for Taiwan separate from mainland China, while the Nationalist Party’s goal is still reunification--although only in the long term and by peaceful means, Kuomintang officials stress.

No party advocates a declaration of independence for Taiwan, because to do so would invite military attack from the mainland, which considers Taiwan a province of China and nothing more.

“We want to live on our island, protect the environment and have good relations with the mainland,” says I-Hsiung Lin, a leader of the Democratic Progressives.

Lin, a Taiwanese lawyer and teacher, was imprisoned by the Kuomintang for 12 years and released in 1984 during a Taiwan government change of policy. He went to the U.S., studied at Harvard, taught at San Diego State and lived in Irvine for six years before returning to Taiwan in 1991 to help organize the DPP.

“We wish the mainland well in modernizing its economy, but they cannot modernize without democracy,” says Lin. “Democracy is the trend.”

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Until the present, Taiwan and perhaps the Philippines were the only countries in Asia where democratic politics were real. Now South Korea’s politics have changed, Southeast Asia’s must change and Japan’s could change. Even China’s politics may undergo a long transformation.

Which means that Taiwan’s example is more instructive than ever. Because the island nation’s greatest object lesson through the years has been adaptability.

Ejected from the United Nations in 1971 when Beijing took China’s seat in the Security Council, Taiwan has been on its own. Along with other Asian nations, Taiwan is protected militarily by the U.S. But it has had to spend 23% of its $40 billion national budget on defense and develop an industrial economy to pay its way.

So it has not been afraid to change. In 1987, Taiwan deregulated its banking system in order to expand financial resources for its small to medium-size companies. Then it had four government-owned banks; now it has 47 independent banks, all competing to offer loans and services.

One of them, Bank SinoPac, was founded in 1991 by Paul Lo, who served as head of Citibank’s Taiwan operation for 10 years. Lo wants to build “a regional bank for the Pacific Rim,” he says. Accordingly, SinoPac last year acquired Far East National Bank in Los Angeles and is expanding in Mexico and mainland China.

The pattern recalls Stan Shih’s Acer, which started out making components for others and is now the world’s eighth-largest computer maker, with operations on every continent.

In the U.S., Taiwanese entrepreneurs have founded companies as varied as Silicon Valley’s Solectron and Los Angeles’ General Bank.

And in the next few years, as Asia and its economies undergo historic change, Taiwan will be an improbable but influential force at the center of events. Maybe the ultimate object lesson is: If you’re small, think large.

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James Flanigan can be reached at jim.flanigan@latimes.com