An Island of Stability in Rough Asian Seas

Taiwan is faring best of all the Asian countries in the current crisis.

There is no International Monetary Fund emergency loan program needed for Taiwan’s banks. Indeed, Taiwan’s government, with $83 billion in foreign currency reserves, could lend the IMF a buck or two.

The Taiwan dollar has fallen roughly 19% against the U.S. dollar, the lowest devaluation among convertible Asian currencies. Taiwan’s industry is confident. “We will get a short-term advantage against our competitors in Korea because we can invest and they are hurt by debt and will have trouble keeping up investment,” says Stan Shih, chairman of Acer Inc., the worldwide maker of computers, peripheral gear and semiconductors.

Shih’s confidence is based on the fact that Taiwan’s small to medium-sized companies, more than 1 million strong, are financed largely by equity investments of individual shareholders rather than bank loans. That gives them flexibility and staying power when business turns down.

Yet Taiwan’s companies do fail often. They are not kept alive by government aid. That’s one of the island nation’s strengths, says a study by economists at Penn State University and the World Bank.

“New companies displace others by innovating and improving productivity,” says Penn State economist Mark Roberts.

But a vibrant entrepreneurial economy is not Taiwan’s only strength. “The most important reason for Taiwan’s escaping the troubles of other economies is that it has little or no foreign debt,” says Stanford University professor Lawrence Lau, who has worked extensively with Taiwanese industry.

The Taiwan government has discouraged borrowing from abroad because of a deep aversion to inflation. When inflation took off in Taiwan in the late 1980s, the government killed land speculation and threw the economy into recession. At the time, Taiwan took the kind of lumps that other countries are suffering today. The main index of Taiwanese stocks fell from 12,000 to 2,000; that index is back over 8,000 today.

Taiwan took those lumps because of government policies that stem not from economic theory but from the country’s history--and that’s a key point. The government of Taiwan’s 21 million people descends from the Nationalist forces of Chiang Kai-shek, which fled mainland China in 1949 after defeat by Mao Tse-tung’s Communists.

Chiang’s Kuomintang party blamed hyperinflation in China in the late 1940s for turning the people against them. They vowed to keep inflation under control in their new territory. So the government has guided the Taiwanese economy over the decades, encouraging but controlling foreign investment. Taiwan flourished first with chemical industries and home-appliance manufacturing.

But the government, now led by President Lee Deng-hui--a Cornell University graduate--has been wise enough to hold the economic reins loosely, to allow entrepreneurial companies to multiply and newer high-tech industries to emerge. “The government has been seeking technology transfer from foreign computer and telecommunications companies,” explains professor Thomas Gold of UC Berkeley, an expert on Asia.

Taiwan has farmed out labor-intensive industries by investing in Southeast Asia and China itself.

Acer, founded in 1976 by electrical engineer Shih and a few associates, is a good example of evolving Taiwanese views on industry.

The company, which had $3.8 billion in sales last year, is one of the world’s largest suppliers of computer parts to other companies, as well as a manufacturer of desktop and laptop computers under its own name--which is derived from the Latin for “sharp” or “acute.”

Acer distributes via more than 30 locations worldwide, working through roughly 21 companies in which it has sold stock to local investors. It relies on joint ventures with other companies, such as an alliance with Texas Instruments in semiconductors. That way Acer has expanded without borrowing enormous amounts of capital.

Also, Acer pioneered stock ownership among its employees, an innovation for Chinese industry, which traditionally is closely owned by family members. “We rely on equity financing. The people put their savings into the company,” says Shih, who last week accepted an award from USC’s Marshall School of Business.

The result: Acer has more than $1 billion of shareholder equity and only $140 million in debt. Thus it has been able to endure occasionally heavy losses to establish its presence and the Acer name around the world.

To be sure, Taiwan’s is not a perfect system. Rule by a single party over 40 years has resulted in corruption scandals. And the country’s prosperity owes much to its $30 billion a year in exports to the U.S.--not to mention the protection of the U.S. military.

But the same could be said--from trade surplus to the U.S. military umbrella--for almost all Asian nations. Taiwan and Acer are significant because they set an example for developing countries and companies everywhere--particularly for China--on how a balance of government guidance and entrepreneurial initiative can build a modern economy and spread prosperity.

Taiwan has created a middle class of skilled workers with average per-capita income of more than $12,000 a year. That’s roughly half the average income in Japan and the U.S. but many times the $600 average for China, which is trying to shift from a state-owned system to one that encourages initiative and the development of advanced industries.

Right now China is facing a crisis. Its economy is slowing, even as the Beijing government tries to shift state employees to more productive industries. Unemployment is rising and there is pressure on Beijing to devalue its currency, the yuan, to make exports attractive and preserve jobs at state companies. If it devalues, bad times seem inevitable. China would take a step back, Hong Kong would be devastated, and Japan and the world economy would be pushed further toward recession.

However, reports are that China’s leaders don’t want to devalue, but to press on with a restructuring of industry. In that context, Taiwan offers support. In the late ‘80s, Taiwan could have kept its bubble economy inflated by devaluing to help outdated industries. But it didn’t do that. Instead it forced some companies to fail, encouraged new industry and came back strong. In Asia today, its example speaks volumes.

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Taiwan at a Glance

Population: 21.5 million

Average per-capita income: $12,285 per year

Household savings rate: 20%

Unemployment rate: 3%

Inflation rate: 3%

Motor vehicles in use: 4 million cars, 8.5 million motorcycles

Source: Taiwan Trade and Economic Office