Competition Necessitates Structural Reform
China Times editorial (Taipei, Taiwan, ROC)
June 5, 2013
Summary: The Swiss School of Management in Lausanne has announced its 2013 global competitiveness rankings for 60 economies. Taiwan fell from 7th place last year to 11th place this year. Hong Kong fell to 3rd place and Singapore fell to 5th place. South Korea remained unchanged in 22nd place. But Taiwan's declining competitiveness has attracted the greatest attention and concern. What factors contributed to Taiwan's decline? What was the role of economic crisis?
Full Text below:
The Swiss School of Management in Lausanne has announced its 2013 global competitiveness rankings for 60 economies. Taiwan fell from 7th place last year to 11th place this year. Hong Kong fell to 3rd place and Singapore fell to 5th place. South Korea remained unchanged in 22nd place. But Taiwan's declining competitiveness has attracted the greatest attention and concern. What factors contributed to Taiwan's decline? What was the role of economic crisis? These are all questions that warrant our attention.
First consider the upside. Taiwan remains competitive in international investment, fiscal management, and international trade. This proves that the government succeed in attracting foreign investment over the past year. Taiwan businesses have also returned to Taiwan, This has improved the fiscal picture. The elimination of trade barriers and the signing of free trade agreements also contributed. This is all enormously gratifying.
But in overall economic performance, Taiwan fell to 16th place. The slow recovery of the international economy impacted exports. This was not under our control. The domestic economy and employment rate fell to 24th place. This was due mainly to insufficient domestic demand. This made businesses reluctant to hire new employees. Salary increases remained small. Overall government effectiveness fell from 5th place to 8th place. This was probably due to long term ruling vs. opposition party deadlocks, inadequate coordination between ministries, and legislative inefficiency. Infrastructure, health, and environmental rankings also fell. These reflect insufficient investment in scientific infrastructure, and insufficient cooperation with industry.
Taiwan has long been proud of its corporate performance. But this plummeted from 4th place to 10th place. Production capacity and efficiency also declined, to 20th place. This is a warning sign that warrants concern. It means Taiwan's industrial upgrading and transformation is too slow. We have failed to jettison the OEM manufacturing-based model. Profit margins have narrowed. We have failed to create added value. We have remained trapped in a vicious cycle of price competition. We lack brand names. We lack competitive human talent. The service sector now accounts for a larger percentage of the total, but has shrunk in absolute terms. Industry is developing unevenly. Monetary easing and low interest rates have attracted funds to real estate. But this is an isolated case, and overly dependent upon government tax breaks, financial deals, and gasoline, water, and electricity subsidies These all constitute structural problems.
In short, Taiwan's competitiveness has declined. Public sector performance has improved slightly. But private sector performance has remained poor. The next question we must ask is: How can the government help the private sector improve its competitiveness? The answer is: Improve enhanced national competitiveness.
The US has regained its supremacy, due mainly to improvements in the financial industry. Numerous technical innovations and successful enterprises have reduced unemployment and gradually stabilized the housing market. Progress on the Chinese mainland is the result of its policy of phasing out low margin manufacturing industries and replacing them with high-tech, high value industries. It has replaced export-oriented industries with re-export industries. It has increased domestic demand, promoted industrial restructuring and upgrading, thereby stabilizing its economy. Japan's "Abenomics" has begun to impact its economic vitality. In the Eurozone, 2nd ranked Switzerland, 4th ranked Sweden, and 9th ranked Germany have all retained their previous rankings. They rely on export-oriented manufacturing, diversification, and SMEs with strong fiscal discipline. No wonder the IMD World Competitiveness Center said, "Structural reform is unavoidable. Development is a prerequisite to competitiveness... competitiveness has a simple golden rule: emphasize production, diversification, exports, investment in infrastructure, education, support for the development of SMEs, increased fiscal discipline, and most importantly, maintaining social cohesion."
This shows us the steps necessary to maintain social cohesion. The executive branch must implement open door policies and make resolute reforms. The ruling and opposition parties in the Legislative Yuan must break the current deadlock and reach a consensus on economic priorities and the people's livelihood. They must overcome their dread of the downside that prevents them from profiting from the upside. They must accelerate the process of deregulation. They must restore public confidence in economic development.
Secondly, the private sector must increase productivity and create added value. It must accelerate industrial upgrading and restructuring. It must shift capital investment from the electronics and technology industries of the past, to real estate. Imbalances must be addressed. Balanced development of industry and diversification is the correct path. How will funds be directed to SMEs, manufacturing, research and development and infrastructure? How can the government encourage job creation, and better educate the technical personnel required by industry? All of these are prerequisites to enhancing industrial efficiency.
The business community must change its policy of cutting salaries whenever the economy is depressed. It must realize that low salaries will not attract talent and cannot retain talent. Conversely, increased wages will improve employee morale. Employees will be more willing to make an effort. This will enhance productivity, benefitting business owners. Financial incentives should be replaced by the allocation of resources in branding, marketing channels, manufacturing, and services. We should encourage industry-university cooperation. This will significantly improve corporate competitiveness.
In conclusion, we hope the government and the public will remain vigilant and work together. We hope that that next year Taiwan's competitiveness will increase, and its economy emerge from under its dark cloud.