Taiwan needs a reboot

Taiwan President Ma Ying-jeou’s pro-China strategy took a harsh rap over the weekend. In island-wide local elections, young voters came out in force to reject Ma’s efforts to develop closer ties with the mainland. His ruling Kuomintang, or KMT party, lost nine of their 15 city mayor and county chief positions - and Ma himself lost much of his mandate to promote cross-strait ties in his last two years in office.

The most stinging defeat came in the Taipei mayoral race. Every president since 1996 has been a former Taipei leader. The victory by Ko Wen-je, backed by the opposition Democratic Progressive Party, was “like Republicans losing Texas,” Sean King of Park Strategies told Bloomberg News. The loss was damning enough to prompt Prime Minister Jiang Yi-huah to resign and pundits to label Ma a lame duck. “I have received the message sent by the people,” Ma said amid calls to step down from his party’s chairmanship. “Now my responsibility is to propose reforms as soon as possible to respond to the people’s demands.”

What should those changes be? First and most obviously, Ma must recalibrate his China policy. That much should have been clear back in March, when Taiwanese students occupied the legislature for 24 days to protest Ma’s attempt to enact a trade pact with China without public debate. Since then, Beijing’s callous handling of Hong Kong’s student protests has further soured Taiwanese on the idea of adopting their own “one country, two systems” framework for reunification.

KMT politicians went into the elections arguing that their stewardship of the economy - based in large part on greater trade and integration with the mainland - justified their re-election. Yet for all Ma’s efforts, Taiwan’s economy has grown an average 3.3 percent in the five years since the 2008 global crisis, compared with close to 5 percent growth in the previous five. At the same time, wages, adjusted for inflation, fell below 1998 levels in 2013. Home prices have surged 82 percent since Ma took office in 2008; so has Taiwan’s income gap.

Clearly, China’s boom has not benefited ordinary Taiwanese as much as Ma claims. They fear that even closer ties with the mainland will hollow out Taiwanese industry and increase the island’s dependence on Beijing. A trade deal with China isn’t comparable to the ones Ma negotiated with New Zealand and Singapore. Taiwan wouldn’t just be competing with mainland companies, but state-supported behemoths carrying out the Communist Party’s agenda, which includes reunification by force if necessary.

Ma needs to diversify Taiwan’s growth engines. Before the elections, he warned that the island risked being left behind as China signed its own free-trade agreements with countries such as South Korea. In fact, Ma would be wise to use the next two years emulating Korean President Park Geun-hye’s efforts to build a more creative economy. Given the wage disparities between Taiwan and China, there’s reason to fear closer ties will actually reduce wages on the island. As per capita income approaches $40,000, Taiwan must innovate its way to higher living standards. That means harnessing its financial resources, human capital and rule of law to move up the technology value chain. Taiwan simply cannot compete with China on price. Its only hope lies in creating the new products, ideas and disruptive business processes that generate new jobs and wealth.

The economy’s strength is a services sector that employs nearly 60 percent of Taiwanese and generates almost 70 percent of gross domestic product. Its backbone is a vibrant ecosystem of small- and medium-size companies both in the island’s biggest cities and rural areas. Nurturing their growth, inventiveness and productivity with greater investment, tax incentives and training would pay off more than helping companies like Foxconn open more plants on the mainland. Ma should create new safety nets to protect Taiwan’s citizens as China’s scale and low costs encroach on their livelihoods.

There’s a role for the West here, too. The United States should welcome Taiwaninto its Trans-Pacific Partnership. The 12 governments currently negotiating the trade pact - including Japan, Australia and Singapore - represent about 35 percent of Taiwan’s trade. If the Republicans now taking control of Congress really want to increase U.S. influence in Asia and temper China’s, they would give President Barack Obama the fast-track authority he needs to rejuvenate the talks and conclude them soon. Adding Taiwan to the mix would give Ma even less incentive to cozy up to Beijing. And it would give Taiwan’s economy what it really needs: options.

The author is a Bloomberg View columnist based in Tokyo.

by William Pesek