The Social Foundation of Taiwan’s Future: Guns, Wheelchairs and Shark’s Fin Soup

Editors’s Note: In a speech presented at the Columbia University Symposium on Taiwan in the 21st Century, Richard Bush examines Taiwan’s society, economy and polity.  Bush discusses how Taiwan might look in the future if present challenges are not met, and offers recommendations to achieve a better future in the region.

The title of my talk is “Guns, Wheelchairs, and Shark’s Fin Soup.” I won’t explain my meaning now. It will become apparent soon enough. I wish to begin by examining some basic parameters of Taiwan’s society, economy, and polity. I will then speculate on what Taiwan might look like in around fifteen years if present trends continue. I will assume that this outcome may be unacceptable and so conclude by offering some recommendations of what might be done to achieve a better future.

I will not focus on Taiwan’s future political relationship with the mainland. Indeed, I assume for purposes of discussion that the two sides will not resolve the fundamental dispute dividing them in the next decade or so. There are challenges to be met even if the China problem did not exist – but which are made more daunting because China is there.

What Do We Know? What Are the Important Trends?

There are a couple of facts we know with high confidence:

• First of all, we know that Taiwan’s population will peak relatively soon. Past estimates indicated that would happen around 2030. I understand that new estimates will say the peak will occur within this decade.[1]
• By 2025, the working age population will have declined from 73 percent to around 64 percent. The dependency rate for the elderly will have increased from 14-plus percent to 31 percent.[2]

Other things are harder to predict, but a review of what we know or think we know about Taiwan today suggests trends toward the future. The following facts and predictions seem pertinent:

• The economy is increasingly post-industrial. Agriculture contributed 1.7 percent to GDP in 2008; goods producing industries accounted for 25.0 percent; and services 73.3 percent. 5.1 percent of the labor force was engaged in agriculture, 36.8 in goods producing, and 58.0 in services.[3]
• Income inequality is trending upward. In 1998, the highest quintile’s average disposable household income was 5.51 times that that of the lowest. In 2008, it was 6.05 times.[4]
• The unemployment rate was higher in this past decade (around 4-5 percent) than it was in the 1990s (1-3 percent).[5]
• Tertiary education is expanding even as the size of the total youth cohort declines, but whether quality has improved is another question.[6]
• The central government budget has been basically flat over the last few years.[7] Within that budget, almost 12.6 percent goes for economic affairs; 19.2 percent for education, science and culture; 19.3 percent for other social welfare categories, broadly defined; and 17.5 percent for defense.[8]
• The tax burden in Taiwan ranks 58^th among a group of 65 more advanced countries (South Korea is 45^th).[9]
• Regarding the defense budget, Taiwan has tried in recent years to spend about 3 percent of GDP.[10] Within that figure, around 40 percent went for personnel in 2009, 30 percent for operations and maintenance, and 28.4 percent for “military investment” (i.e. equipment, etc.).[11] But the personnel share will grow as the Ministry of National Defense implements the all-volunteer army.
• The government debt is growing. Central government debt as a percentage of GDP was 13.9 percent in 1999 and was 33.1 percent ten years later.

If Present Trends Continue

The picture that this data paints is consistent with our general impression of Taiwan: a prosperous, well-educated, middle-class, demographically mature society with small families. Some parts of the economy have moved pretty far up the economic and technology ladder, but the service sector’s large percentage share is somewhat misleading. One has the superficial impression that too many people are employed in small, inefficient, family operations. In GDP per capita, Taiwan approaches some of the countries of Western Europe. In some respects, it has a lot in common with South Korea.

Yet if Taiwan seems in some respects to be moving toward a West European, even Scandinavian, direction, the comparison does not work. Taiwan taxpayers are not now underwriting a Western European-style welfare state, but they may need to move in that direction. And Taiwan does not exist in a Scandinavian security environment.

Even if China, the source of insecurity, did not exist, Taiwan would face tough choices as a society if these trends continue. The most serious is the aging of the society. Fewer working people will be supporting a growing number of elderly, with all the costs that task entails. The options appear to be increasing immigration (including from the Mainland), increasing taxes on those who are working, or reducing social services.

Another choice has to do with preserving economic competitiveness. Taiwan has some outstanding companies, and the best of these have become solid links in the global supply chains that link China’s assembly and manufacturing operations with consumer markets in advanced countries. But we cannot assume that Chinese entrepreneurs and enterprises will remain content to play the role they have played for the last few decades. They will wish to move up the technology and value chain. What do Taiwan companies do then? Do they find new niches or get displaced? How can Taiwan ensure general prosperity, high-quality employment and reasonable inequality?

By the way, we have some idea of the impact of trade liberalization on Taiwan’s future growth. One study estimates that compared to a 2004 baseline, Taiwan’s GDP will be 3.7 percent larger by 2020 if ECFA is adopted and ASEAN + 3 occurs. But if ASEAN + 3 happens and ECFA does not, Taiwan’s GDP would decline by 0.73 percent.

Sooner or later, we must bring China back in to the analysis and address the security issue. That is, how will the leaders and people of the island balance the desire for a good standard of living for all citizens and the need to ensure external security? What level of security is appropriate? One thing we can be sure of is that the build-up of PRC military forces will continue. Some of the PLA’s new capabilities will not have a Taiwan mission, directly or indirectly, but many will. Taiwan’s leaders may succeed for awhile with a policy of accommodation while maintaining basic principles, but they are likely to remain concerned that China’s leaders may feel driven at some point to pursue a policy of coercion. The constraints on Taiwan’s national defense are well known. A new one is the transition to an all-volunteer army, which will require transferring resources from military investment to personnel or increasing the defense budget.

So Taiwan faces some difficult choices: how to maintain competitiveness in a globalized economy, how to assure both growth and relative equality, how to balance the desire for prosperity and the need for high-quality social services, and how to guarantee both a good life and national security.

So we come back to my weird title. In America, we said during the Vietnam War that we faced a tradeoff between guns and butter. I would suggest that Taiwan will increasingly face the tradeoff between guns, wheelchairs, and, with apologies to any environmentalists in the audience, shark’s fin soup. That is, a tradeoff between security, welfare, and prosperity.

The danger, of course, is that Taiwan will seek to muddle through rather than face the choices that are looming. The priorities of the government are fairly will established and reflect more or less what people in Taiwan want. Many people lead fairly comfortable lives. There is no sense of crisis. The consequences of not acting are long-term, whereas public choice takes place in the short term.

Yet if Taiwan chooses to muddle through as present trends continue, three effects are not improbable. First, Taiwan’s economy will be less competitive globally (even if some companies hold their own), and the standard of living will decline. Second, there will be a suboptimal response to the challenge of educating the young and caring for the elderly, so that both the working population and the elderly are unhappy. Third, Taiwan’s military power will continue to decline relative to the PRC’s.

What is the effect of such an outcome on public consciousness, and on how Taiwan defines itself by 2025? That is obviously hard to say. I don’t have the impression that average residents of Taiwan spend their time agonizing over whether they are Chinese, Taiwanese, or a mix – despite the efforts of pollsters to get them to do so. I expect that the average Taiwanese think most about whether their standard of living is better than that of their parents, whether it is getting better or worse for them, and how they are going to assure that their children will have a better life. These are the concerns, probably, that most shape their social identity.

One likely result of the continuation of current trends, we may speculate, will be deeper doubt and disagreement about what Taiwan is and what it means. Another is a decline in the public’s sense of confidence – confidence about the future and about the competence of the island’s institutions to address the dilemmas at hand. Already, we know, a large majority of Taiwan citizens have seen “deterioration in the capacity of the political system to deliver economic growth, social equity, and law an order.”[12] Having a consensus on fundamental identity and a strong sense of confidence will be crucial to meeting the biggest challenge of all: Beijing’s expectation, currently deferred, that unification will occur. It is not in Taiwan’s long-term interests to negotiate on that issue from a position of perceived weakness.

Muddling through is a choice, but it doesn’t appear to be appropriate to the challenges Taiwan faces. Other countries face these dilemmas, to be sure. The United States faces some of them. But the stakes are probably highest for Taiwan.

I am aware of the impressive history that Taiwan is a highly resilient society. Even now, it has many strengths: a good legal environment, an agile, manufacturing ability; technological vitality; and a lot of other things. Because Taiwan has escaped from predicaments before, to the surprise of the whole world, it follows that it can do so. If it is to meet these challenges, however, it will probably be by proactively changing the current course and remedying the weaknesses that are already apparent. What do I have in mind in this program of self-strengthening?

Another Approach: Self-Strengthening

The first area is economic policy. A big challenge to maintaining Taiwan’s competitiveness is the economic regionalization occurring in East Asia. If Taiwan is kept outside the circle of regionalization and liberalization, its companies will be increasingly marginalized. Concluding ECFA is important because it holds promise for getting Taiwan inside the circle. Otherwise, Taiwan’s growth will decline.

But it is important to understand how ECFA will benefit Taiwan. It is not just because Taiwan exporters will benefit from reduced tariffs. More importantly, it will force a structural readjustment within Taiwan. Uncompetitive, previously protected firms will go out of business. Opportunities will blossom for the most advanced sectors.

Government has an important role to play in this creative destruction. On the one hand, it must create mechanisms to ensure that workers in sectors that are no longer competitive can transition to sectors that are. This is not easy; the United States has failed over half a century to take care of workers whose skills have been made irrelevant by technological change. On the other hand, government must facilitate the emergence of new competitors. Thus, the principal recommendation of the Taipei AmCham’s 2009 White Paper is that the government improve its efficiency for the facilitation of business. This requires both terminating or changing outdated regulations, and retraining civil servants so that they will properly implement the new approaches. Regulatory bodies need to improve transparency and consultation with industry. They should adopt international norms rather than adopting “Taiwan-only” regulations.[13]

Second, Taiwan must continue to enhance its military strength and capabilities. This concerns, first of all, the procurement of appropriate advanced equipment, which we all understand is a complex subject. Second, it requires a sensible defense strategy. This too is complicated because Taiwan cannot assume absolutely that the United States will come to its defense and plan accordingly. But military planners need to think of what Taiwan can do to maximize the effect of American intervention should it come. Third, training must be effective and realistic. Finally, the defense establishment needs resources, both budgetary and personnel, particularly with the shift to an all-volunteer army.

Third, Taiwan must have a strong relationship with the United States. If only because the United States is a central element of Taiwan’s real defense strategy, it is important that Washington policy-makers remain confident that Taipei’s intentions are closely aligned with its own. But liberalization of economic relations with the United States will contribute to Taiwan’s competitiveness, along with liberalization with China and East Asia. And Washington can be helpful in other arenas.

Fourth, Taiwan must strengthen its sense of its core interests vis-à-vis China so that it can better defend them. Key among these is how the island’s leaders define Taiwan’s sovereignty and how negotiations with Beijing affect that definition. This is not so serious for talks on economic and functional issues, where both sides have agreed to set the sovereignty issue aside. But it will become increasingly relevant as the focus shifts to political and security issues, when the implications for later negotiations on the fundamental dispute between the two sides will grow. What would seem useful is a broad consensus, based on serious study and consultation, on what about Taiwan’s sovereignty should be defended at all costs and what is trivial. (And if Taipei can better articulate what is important about its sovereignty, its interactions with Washington will be more fruitful.)

I do not have to tell you that politics is at the heart of self-strengthening. Unless the political system is capable of making good choices on these issues, they will not be made. But the prognosis here is worrisome. The political spectrum is polarized when having a dominant, centrist consensus would be preferable. The norms and practices of the legislature do not foster good policy-making. The constitutional structure needs reforming. The media does not play a constructive role. I acknowledge that the United States has most of these same problems, but again, the stakes are higher for Taiwan.

In identifying these points of weakness, I do not mean to criticize the current administration. It understands the positive value and potential of ECFA. It appears to recognize the need for government assistance to help sectors that are endangered by increased competition[14]. The Ma administration has significantly improved the tone and content of relations with the United States, after fifteen years of problems (beef was a setback). Using the 1992 consensus while maintaining, when asked, Taiwan’s definition of that consensus, has proven to be an effective way of breaking the cross-Strait logjam. The government has taken measures that may be reversing the slide in international competitiveness.[15] The Minister of Health is seized with the issue of health-care financing. The Ministry of National Defense went through a QDR exercise that improved strategic thinking, including an identification of the need for “sustainment” in a conflict. And President Ma’s second-anniversary speech displays a grasp of the need to improve competitiveness in the context of an aging society.[16]

But all of that does not negate the need for serious self-strengthening. Improving Taiwan’s capacity in these various areas is important for its own sake. But it will also improve the public’s sense of self-confidence and ensure a position for the government in its future negotiations with Beijing. Avoiding having to choose between guns, wheel-chairs, and shark’s fin soup will not be easy, but it is certainly worth doing.

[1] http://eng.dgbas.gov.tw/public/data/dgbas03/bs2/yearbook_eng/y020.pdf

[2] http://eng.dgbas.gov.tw/public/data/dgbas03/bs2/yearbook_eng/y020.pdf

[3] http://www.gio.gov.tw/taiwan-website/5-gp/yearbook/ch09.html#KeyEconomicIndicators

[4] http://eng.dgbas.gov.tw/public/data/dgbas03/bs2/yearbook_eng/Y103I.pdf

[5] http://eng.dgbas.gov.tw/public/data/dgbas03/bs2/yearbook_eng/y022.pdf

[6] http://eng.dgbas.gov.tw/public/data/dgbas03/bs2/yearbook_eng/y040I.pdf

[7] http://eng.dgbas.gov.tw/public/data/dgbas03/bs2/yearbook_eng/y137I.pdf

[8] http://www.gio.gov.tw/taiwan-website/5-gp/yearbook/ch09.html#KeyEconomicIndicators

[9] http://www.photius.com/rankings/tax_burden_country_ranks_2009.html

[10] http://eng.dgbas.gov.tw/public/data/dgbas03/bs2/yearbook_eng/Y100I.pdf

[11] Ministry of National Defense, 2009 National Defense Report: Building an Elite Armed Forces (Taipei, MND, 2009), p. 156.

[12] Yu-tzung Chang and Yun-han Chu, “How Citizens View Taiwan’s New Democracy, in How Asians View Democracy, edited by Yun-han Chu, Larry Diamond, Andrew J. Nathan, and Doh Shull Shin (New York, Columbia University Press, 2008, pp. 110-111.

[13] Taipei American Chamber of Commerce, Taiwan White Paper, May 2009, pp. 5-6. There may be some progress on this front. The International Institute of Management Development ranked Taiwan as low as 23^rd in 2009 but raised it to 8^th in 2010.

[14] “President Ma makes case for ECFA, February 9, 2010 (http://www.president.gov.tw/en/prog/news_release/print.php?id=1105500127).

[15] The International Institute of Management Development ranked Taiwan as low as 23^rd in 2009 but raised it to 8^th in 2010.

[16] “President Ma and Vice President Siew hold press conference to mark second anniversary of inauguration,” May 19, 2010 (http://www.president.gov.tw/en/).