An article in Time from August highlighted the growing problem of the exodus from Taiwan of many of its best and brightest young talents, attracted by the lure of better prospects overseas, above all in China. It is not a new problem but one the article suggested is growing, not declining, driven not only by better opportunities in the Chinese economy but also, it would seem, by deliberate Chinese government policies aimed at drawing Taiwan ever more tightly into its sphere of economic dependence.
The challenge for Taiwanese policymakers is how to tackle it, not least because of the vicious cycle it risks creating. Taiwan already has one of the lowest birth rates of any developed country, an aging population and a near-bankrupt pension system. Without highly educated younger people contributing to the economy, the ability to provide for the elderly and educate the young people of tomorrow grows ever harder.
It is probably scant comfort to the government that Taiwan is not alone in this respect. The problem is similar to that faced in the past by Ireland, which for decades saw its brightest and most ambitious youngsters move to the UK and the United States in search of better opportunities there. But rather than simply blame China, Taiwan could do worse than study what Ireland has done to overcome the challenges it faced. For, as in Taiwan, Ireland’s brain drain was caused overwhelmingly by lack of opportunity at home where a slow-growing, largely agricultural economy offered few attractions for young people. This was reversed over several years, thanks to a consistent policy of attracting foreign investment, especially in high-tech industries, through a combination of low taxes and generous grants for research and development (R&D), all aimed at stimulating export-led growth.
Taiwan’s historic success was also built on export-led growth but ironically this has masked the problems that now contribute to the “brain drain.” Between 2005-14, Taiwan’s economy was growing at an annual average rate of almost 4 percent, healthy by global standards, especially given the global slowdown following the financial crisis of 2007-8. But, according to Taiwan’s national statistics, almost two-thirds of this growth came from trade, despite the economic slowdown, uncertainty, and rising protectionist sentiment worldwide. This was only achievable because of the sacrifices made by the Taiwanese workforce: in addition to the low and stagnant wages mentioned in the Time article, Taiwanese work the third-longest hours of any employees worldwide, exceeded only by those of Mexico and Costa Rica. Both the long hours and low wages are a reflection of the Taiwanese business model, in which mainly small companies (almost half of Taiwan’s companies employ fewer than 30 staff) win orders by cutting costs and profit margins to the bone. Unfortunately, it is no longer a sustainable, much less successful, model. In Taiwan’s biggest export market, China, its exports have been growing more slowly than have those of the rest of the world generally, notwithstanding the much-touted benefits of the ECFA.
One challenge, clearly, is to reform and rejuvenate Taiwan’s export sector and to lessen its dependence on China, an obvious aim of President Tsai’s “New Southbound Policy. But a deeper question is, why is Taiwan’s domestic sector growing so slowly? And would not faster domestic growth generate more opportunities for Taiwan’s young, reducing the incentive for them to seek fame and fortune across the Taiwan Straits?
Unfortunately, the success of Taiwan’s exporters has distracted attention from the stagnant domestic economy. Yet the difference between the two is striking, for whereas the export sector is dominated by private firms, state-owned or state-controlled enterprises (SOEs) dominate the domestic sector. They account for around 60 percent of the financial services industry, for example, and the government holds 40 percent of the shares in Chungwha Telecom (中華電信), even though it is listed on the New York Stock Exchange, giving the state effective control. Perhaps the most extreme case is that of Taisugar (台灣糖業公司), which runs hypermarkets, convenience stores, gas stations, pig breeding and much more. But nearly 90 percent of its profits come from its core business of producing and refining sugar and this production is, in turn, protected by Taiwan’s highest tariffs—nearly 50 percent, according to the WTO.
Many of the SOEs are operated more on civil service than enterprise lines, with promotion based on time served rather than merit-based and budgets centrally set, stifling initiative and enterprise. If Taisugar is in any way emblematic of the rest of Taiwan’s SOEs, they are less efficient than private sector companies would be and heavily reliant on regulations and controls to stay in business—regulations which also serve to stifle private enterprise and discourage foreign investment. Many of them owe their origins to the KMT’s authoritarian past and the ruling party’s desire to control the economy, ostensibly for its own benefit, but to date it appears to have suited both main political parties to leave them untouched. Academic research has also shown that overall output from Taiwan’s SOEs has been consistently lower than in the private sector.
Could privatization of some SOEs help stimulate domestic growth and improve job opportunities? A common assumption and fear about privatization is that it will lead to job losses, one reason why public-sector unions in Taiwan have fiercely opposed it until now. But research from the OECD shows that on the contrary, in the long run privatization creates new, additional employment opportunities because of the expansion in output that it generates. These new jobs more than offset any short-term losses; furthermore, the new jobs are usually more highly skilled, better paid and therefore more attractive to young, new entrants to the workforce. Nor is this confined to OECD countries. A study of Vietnam’s privatization of SOEs in the 1990s also found that both employment and employee income increased after privatization, albeit modestly. More and better domestic job opportunities mean less reason to emigrate. They also help stimulate domestic demand, boosting the economy further.
This is not to suggest that wholesale privatization of Taiwan’s SOEs is the only answer to the lack of domestic opportunities. Privatization alone will not put an end to Taiwan’s ‘brain drain.’ Younger or more ambitious people will always be tempted to seek opportunities overseas, even when times are good. That has been Ireland’s experience. Other factors, such as the high cost of housing, might also be reasons for people to move overseas. Sometimes it is simply the pull of a larger market. But Ireland’s experience has been that more domestic opportunities mean fewer members of the critical 15-24 age group emigrate and, just as importantly, more of those who do emigrate return home in later years, bringing with them additional skills and experience they have gained while overseas.
There are also sound reasons for some industries—those in national defense, for example, to be under the control of the state, nor is privatization an automatic panacea. UK evidence, for example, suggests that the benefits of electricity privatization have been modest, especially for consumers, something the Taiwan government might consider given its plans to privatize Taipower. In the case of Taipower, some if not all of the benefits of privatization might be achieved simply through regulatory changes, especially as Taiwan scored very highly in the 2016 World Bank Doing Business report for the provision of electric power to consumers. Given the success of privatization in many OECD countries, there is surely a debate to be had in Taiwan about the role of SOEs in the modern economy and whether privatization and deregulation would stimulate private enterprise and encourage foreign investment, in turn opening up more opportunities for young Taiwanese to seek their fortunes at home, instead of in China, to China’s benefit.
The main point: Taiwan’s past success as an export-driven economy masked the underlying problem of state-owned enterprises at home, which have led to stagnant growth in the domestic economy. Addressing the domestic economy is key to stopping the brain drain of Taiwan’s young talent.