Comment 39: Taipei has lost its magic "ring" (Feb. 14, 2007, revised on Feb.27, 2007, Corrections and Addendum on June 24, 2009)

Corrections and Addendum: (June 24, 2009)

Some historic description about "Yin Kung", called "The Magic Ring of Taipei" in the original writing, contains some error. The author, as a sporadic visitor to Taiwan, appologizes for those mistakes due to the insufficient study of the history of "Yin Kung". It was a round brownish wooden structure in the middle of a traffic circle, and had housed quite a few famed snack shops though some of well known snack shops were located in the nearby area. Many movable food vendors gathered around the traffic circle formed a nightly food bazar. After the last fire that destroyed the wooden structure, the bebris were piled up in the middle of the traffic circle that we had mistakened as the piling up of wooden tables and benches. The City Government of Taipei under the leadership of Mayor Ma at that time (the current President of Taiwan, The Republic of China) did not rebuild the wooden structure in the middle of the traffic circle, but has built a white round structure, dubbed as a "giant white tin can" in our original writing, at the edge of the traffic circle. As of January of 2008 when the author dropped by Taipei, the tin can was still empty and the nightly food bazar of Yin Kung seemed to have gone for good. The most famous nightly bazar of Taipei is now shifted to a northern suburb of Taipei called "Sze-lin" in Wade-Giles spelling and "Si-lin" in Chinese pin-yin. The Sze-lin bazar not only contains food vendors but all sorts of vendors of various other kinds of merchandises. There is some talk from the current City Government of Taipei to abolish the outdoor Sze-lin bazar, too, but seems to have encountered stiff resistence from ordinary folks of Taipei. As for the food stands of "Light Snacks of Yin Kung" in the second air terminal of Taipei International Air Port, it is still at the upper level near the entrance of C-concourse after the exit-check of the immigration office as January of 2008.

From now on, updates of the situation about Taiwan will be added to this comment in a manner of reversed time-line. It may looks like a blog, but is just an ordinary HTML web page.

Prologue: The ring of Taipei

In the Taiwanese dialect it is pronounced "Yin Kuang." In the standard Wade-Giles spelling used by the Republic of China (Taiwan), it is spelled "Yuan Hwan." In the standard pinyin spelling of the People's Republic of China (Communist China), which also seems to have become the favorite spelling method of the city government of Taipei, it is spelled "Yuan Huan". In English it simply means "circular ring." During the daytime, the ring was just a busy traffic circle with wooden tables and benches stacked in the middle like a giant fruitcake, but when the sun went down, the delicate fragrance of delicious Taiwanese snacks filled the air as the ring magically transformed into a bustling open-air food bazaar. Hundreds of small food vendors opened shop, selling a variety of Taiwanese snacks from wheeled food stands. Young couples, friends, families, and neighbors gathered under the moonlight and the illumination of the food stands. They sat around weathered wooden tables to enjoy the flavors of the light snacks of the ring. They met old acquaintances and made new friends. The phrase, "light snacks of the ring," was synonymous with "Taipei cuisine." The ring was and still is renowned among locals and savvy international tourists alike.

In a recent trip to Taipei we failed to find any trace of the food vendors of the ring. The wooden tables and benches that once formed a giant fruitcake in the middle of the ring were gone, too. At the edge of the traffic circle now stands a strange round building that is best described as a giant tin can of Danish butter cookies with the outside painted all white. At the entrance a sign says "Taipei delicatessen alley" on one side and "Light snacks of the ring" on the other side. On inquiry we learned that the city government of Taipei forced the food vendors to move into the basement of the round building. We do not know whether the city government charged the food vendors rent.

Some blame the shabby construction of the building, and some blame the stuffy air. For us it just seems to be the impossibility of stuffing the magic and romance of an open-air food bazaar into a giant tin can. Customers deserted the building, and the food vendors followed. Now the building is empty and sealed off. The ring of Taipei has been reduced to another traffic circle within a sprawling metropolis of steel and concrete.

After passing through exit customs when we left Taipei via Terminal 2 of Tao Yuan Chiang Kai Shek International Airport, we found a flag in an inconspicuous corner one level up, announcing, "Light snacks of the ring." Riding an escalator up to the corner, we found five or six wheeled food stands surrounded by aged wooden tables and benches. Though we were under a high ceiling decorated with a mesh of steel pipes instead of moonlight and stars, at least the air was not stuffy. One is still able to taste the delicately delicious snacks of the ring, only now one gazes at the images of a smiling Nicole Kidman and Channel No.5.

Unlike the European nations whose brand-name luxury boutiques now line the airport ring, Taiwanese society is a "quick-rich" product of globalization. The loss of the ring is a notable but not atypical incident for such a society. The emergence of societies like Taiwan is rapidly changing the face of the globe and posing substantial challenges to the future of humanity, from the rapid depletion of natural resources to the massive destruction of the environment and cultural heritage, all dictated by globalization. It is not only instructive but essential for us to study the emergence and the evolution of such societies in order to understand the mechanics of globalization. Taiwan is the best cadidate for this case study because it is one of, and probably is, the longest running of such societies. In the remainder of this article we will look into the rise, stagnation, and future of Taiwan from many different angles.

The rise and the stagnation

Taiwan climbed from the ranks of developing countries to a newly industrialized modern country by exactly following the roadmap of globalization. We dub this development model the "Taiwan model" because Taiwan was the first to achieve a smashing success along this line. The Taiwan model is copied in various countries, especially in China. The rise, the stagnation and the uncertain future of Taiwan are an essential study for anyone who wants to understand what globalization has in store for his or her own country, including the current world superpower, the USA.

Globalization is in essence a series of tariff-reducing treaties among many countries. It has been ongoing since the end of World War II but has greatly accelerated since the early 1980's. The centerpiece of this movement is the drastic lowering or elimination of import tariffs on goods produced in other countries, especially developing countries, and imported into the US. The resulting increase in imports created a runaway US trade deficit that has boosted US consumer spending and enabled developing countries to mass produce goods for export to the US. This is the foundation of the Taiwan model.

For a country to adopt the Taiwan model, it must meet certain criteria:

  1. It must have a very low cost but diligent and efficient labor source.
  2. It should not have any environmental policy to prevent or reduce industrial pollution.
  3. It must keep a substantially undervalued currency against the US dollar, and the government must constantly intervene in the currency market to keep its currency undervalued.
  4. The government must be stable and effective in suppressing protests from the public against the exploitation and destruction of the environment by foreign businesses that are producing goods to be exported to the US.
  5. It must provide safe and hospitable living conditions for the foreign managers and technical staff who run the production lines in the host country.
When those conditions are met, foreign capital floods in, new factories spring up, underutilized labor resources are engaged, and goods pour out of the production lines and are shipped away to America. Although the lion's share of this newly generated wealth is exported back to the US to boost consumer spending, a meaningful portion of the newly generated wealth will be distributed to the society of the host country to jumpstart its economy.

The phenomena of the Taiwan model can also be studied from the angle of financial transactions. As exports to the US increase, the host country will start to run a substantial trade surplus. The sum of the trade surplus and the incoming foreign capital becomes the amount of dollars that need to be exchanged for the currency of the host country. In a totally free currency market this will push the currency of the host country sharply higher against the US dollar. Then production costs rise, and the Taiwan model comes to a grinding halt. That is why the government of the host country must enter the currency market to buy up the dollars flooding in. The government can only issue local currency to buy dollars, and as a result, the local market is flooded with liquidity. This liquidity glut induces rapid infrastructure construction. Old buildings are replaced by new high-rises, and new streets and new city blocks seem to appear from nowhere. Freeways spring up, and new ports and airports, mass transit, high speed trains and all other modern goodies follow. For the so-called experts who do not study the finer workings of the globalization, the whole rapid-fire development looks like magic, and the phrase "economic miracle" is often used to describe the situation.

From a social angle, the Taiwan model is not just compatible with social injustice; it actually derives nourishment from social injustice. In essence social injustice distorts the distribution of wealth towards the rich and powerful through unjust means. As social injustice cuts down the portion of newly created wealth received by average workers, average wage will not increase as rapidly as it should be. This will prolong the lifespan of the Taiwan model. Of course, if social injustice goes too far, it will induce discontent, rage, rebellion, social chaos and the collapse of the political regime itself. Then foreign managers and staffs will have to pack and run for their lives, and the Taiwan model will be destroyed. It becomes a delicate political balancing act to let social injustice flourish to a certain degree to prolong the life of the development model, but not so much as to incite social unrest.

Examples of social injustice are commonplace during the period of massive infrastructure construction funded by the liquidity glut from the government's dollar-buying operations. This period of rapid growth is a paradise for legitimate businessmen and con artists alike. Construction projects are often priced significantly above their fair market value so that corrupt businessmen and bureaucrats can pocket a portion of the excesssive loans meant for construction. These inflated projects usually collapse during economic slowdowns, incurring heavy costs for the entire society. Massive construction projects also accelerate the destruction of the environment and local cultural heritage that was already initiated by the building of factories by foreign capitals. The rapid economic growth affects the psychology of the governing elite, nurturing the notion that such destruction is permissible in the name of economic development.

The cycle of corruption continues unhindered until the arrival of the worst enemy of the Taiwan model, Western-style democracy. When democracy arrives, citizens begin to demand social justice and a cleaner environment. The conditions of the Taiwan model then erode quickly. Foreign capital stops flowing in, and foreign manufacturers pack and leave. The local capitalists who flourished through cooperation with foreign capitals in the era of the Taiwan model must evolve or also leave. Usually, the local capitalists will choose the easy way out and relocate to other places where the experiments of the Taiwan model are still in their infancy. Thus, the economy of the host country will stagnate.

Taiwan, under the authoritative regime of the Nationalist party headed by Chiang Kai Shek and then by his son Chiang Ching Kuo, had started down the road of the Taiwan model by the late 1960's. By that time it had become amply clear that Taiwan's survival would depend on local economic development, not on the idealistic notion of retaking the mainland, under the slogan of "counter attack the mainland". The road along the Taiwan model boosted Taiwan's economy at a measured pace through the 1970's and helped Taiwan weather two political firestorms from the US: the Nixon-Kissinger shock in the early 1970's and the Carter-Brzezinski shock in the late 1970's. However, the full bloom of the Taiwan model needed to wait until the 1980's, when the Reagan administration accelerated the pace of globalization and ushered in the era of the runaway US trade deficit. Taiwan assembled massive amounts of consumer goods and churned out the components for low-tech electronics. Made-in-Taiwan consumer goods dominated the US market by the end of the 1980's. During the same period Taipei underwent relentless rapid-fire changes. Western experts who are ignorant about the detailed working of the globalization process were awed by the speed with which Taipei erected its steel and concrete jungle. They dubbed the development of Taiwan an "economic miracle".

By the latter part of the 1980's, the rise in the average wage of workers in Taiwan was beginning to threaten the Taiwan model. First, foreign capital inflow had slowed down due to the shortage of low cost labor. The local capitalists that had grown in cooperation with foreign capital, however, were trapped within Taiwan. Under the authoritative regime of Chiang Ching Kuo a Taiwan merchant would have literally been risking his own life if he wanted to move his production line to Communist China. When Lee Deng Huei succeeded Chiang Ching Kuo as the President of Taiwan, democratization had started. Heeding the advice of so-called experts, Lee opened the floodgates for Taiwan merchants to move to mainland China under the "win-win" slogan. Lee's government quickly discovered that the first "win" in the slogan is for the rich owners of the business, since they ripped enormous profits by moving their production lines to mainland China. The second "win" is for Communist China because the massive immigration of Taiwan merchants with their manufacturing factories and know-how has transformed China into a hotspot of manufacturing and boosted China's military power so that it can retake Taiwan by force if necessary. As for Taiwan, without any doubt the win-win slogan has been a lose-lose proposition. When Lee's government discovered that it had been duped by so-called experts, it tried to slam the floodgates shut to slow down the further migration of Taiwan merchants into mainland China. However, it was like to closing the barn door after the horses had fled and only prevented the migration of then newly emerging high-tech industries.

Taiwan started to nurture computer-related industries in the latter part of 1980's. For example, the high-tech industry leader, Taiwan Semiconductors, was founded in 1987. Taiwan's high-tech industries received a strong boost from the 1991-1992 recession in the USA. During the recession the US high-tech industry laid off experienced workers in the late 30's to 40's age bracket en masse in order to cut costs. Taiwan had been a substantial supplier of high-tech talent to the USA. Top college graduates from prestigious Taiwanese universities would migrate to the US to attend graduate schools and then work in US high tech industry for many years. Many of them were caught in the foolish lay-off frenzy of Silicon Valley, and some were disappointed by the cold and heartless face of US capitalism. Many have now returned to Taiwan to start new careers. The influx of top-notch talent with up-to-date know-how, combined with local capitalists still trapped within Taiwan, turned Taiwan into a new high-tech hub, later taking away many jobs from Silicon Valley.

Though the newly emerging high tech industry in Taiwan enjoys a different level of technological sophistication compared to the standard manufacturing industry that has been migrating en masse into mainland China, both industries share certain characteristics. That is, both are transplanted industries, and their products are earmarked to go into products that will be exported to the US to sustain the US trade deficit and US consumer spending. Thus, the high-tech industries in Taiwan have discovered that they too can rake in much higher profits by moving to mainland China to take advantage of lower labor costs and freedom to pollute. Those industries that want to move away from Taiwan into China are constantly squabbling with the Taiwanese government, which wants to slow down the movement. Currently, industries left in Taiwan mainly serve as parts suppliers to China. As Chinese exports to the US boom, so do exports from Taiwan to mainland China. For a society following the Taiwan model, like present day China and Taiwan in the 80's, more trade surplus means more rapid developement. For a matured manufacturing society, like Japan and Taiwan, where foreign capital is not flowing in, trade surplus means to lend domestic saving for other trade deficit countries to spend, and as the result its own consumer spending will wither away (see articles 1, 2, 2A, and 4 for detailed discussions). On the surface the GDP of Taiwan is still rising because of the increased exports to China, but consumer spending is rising only slowly. Even this slow rising is due to the statistical trick, borrowed from the US, to count the skyrocketing costs of the national healthcare system as a part of personal consumpton. The average salary of new graduates from colleges and universities has been stagnant for many years, and the real estate market has been underwater for nearly a decade. As a whole Taiwan's economy has stagnated for quite a while. This can be compared to the stagnation of Japan, but with more dire prospects for Taiwan than for Japan.

An uncertain future

The basic technology employed by Taiwan's high-tech industries more or less originated from the US and Japan. The US and Japan both strongly support the Taiwanese government's attempt to hinder the migration of its high-tech industries into mainland China because they fear that the migration will substantially enhance China's industrial base and military power. However, the top priority of the theory of globalization is to let businesses maximize profits, even at the expense of communist China replacing the US as the world's most powerful nation. As long as the globalization process is intact, the attraction of mainland China for Taiwan's high-tech industries remains the trend. Taiwan's government can only delay the inevitable but not reverse the tide. In fact, if the opposition party wins the next presidential election in 2008, we should expect the floodgates to open once again, and Taiwan's high-tech industries to migrate en mass to mainland China. Unless new ways are found to revitalize its industries, Taiwan will become an empty shell swiftly reabsorbed into China.

It will be a tall order for Taiwan to replace its current high-tech industries if they migrate to mainland China. Taiwan does not have the tradition or the skill to serve as a regional money center like Hong Kong. Under the constraint of a stagnated personal spending, a significant expansion of service industry also cannot be counted on. It will be many decades before biotechnology can rival in size and scope of the computer-based high tech industries that currently serve as Taiwan's industrial base. The buzzwords of nanotechnology have failed to excite even the most venturesome speculators on Wall Street. If Taiwan is re-absorbed into China in the near future as the opposition party desires, its average wage will only fall, its pollution regulations will be reduced to the level of mainland China. Then foreign capitalists and Taiwan merchants already moved to mainland China will rejoice and rush back into Taiwan to create another so called economic miracle from ash.

Businesses in Taiwan that want to migrate to mainland China are not waiting for Taiwan's 2008 general election to open the floodgates of exit for them. They are taking all kinds of action to achieve their ultimate goal of moving into mainland China to gain more profits. The most blazing and fraudulent strategy is called "money advance into mainland with debt left in Taiwan." Under this strategy, a publicly traded company uses fraudulent means to borrow more from financial institutions. The major shareholders of the company then use various means of money laundering to shift the borrowed money out of Taiwan to invest in mainland China under their own names. Eventually, the major owners of the company will literally escape to mainland China and let the public company in Taiwan go into bankruptcy. The recent explosion of such financial crises in Taiwan involves billions of US dollars. No one knows how widespread such strategies are, and no one knows how many more underwater financial volcanoes are ready to explode. By considering the persistent rumors that many public companies in Taiwan have investments in mainland China but never appear on their official books in Taiwan, we may gauge the size of such activities. Taiwan's GDP per year is around 200 to 300 billion US dollars, and it has a foreign currency reserve short of 300 billion US dollars. Readers probably can guess what kind of impact this sort of activity is having on Taiwan's economy as a whole.

Another sophisticated but legal financial strategy, apparently borrowed from Wall Street, is emerging in Taiwan. Recently rumors have spread that a Taiwanese maker of high-tech precision measurement instruments has partnered with a large US based private equity fund. The scheme is for the private equity fund to buy out the Taiwan maker, transform it from a publicly traded company into a privately owned one, move the registration of the company out of Taiwan and into a neutral country like Singapore, and then move the whole company into mainland China. The rumor in Taiwan is that the Taiwan government panicked and tried to stop the deal. The rumor on Wall Street is that US government also panicked from fear that such a move will enhance China's military power and pressured the private equity fund to abandon the deal. As a result, no deal has materialized as of yet. However, astute observers have noticed that if the private equity fund involved had nothing to do with the US, then how much influence could the US government exert to stop such a deal? It is further rumored that many high-tech companies in Taiwan are interested in the same strategy. International hot money has also noticed this trend and seems to have been moving into the Taiwan stock markets since the eruption of the rumors, steadily pushing Taiwan stock prices higher. When a private equity fund buys up a publicly traded company, they are forced to pay a premium on the publicly traded stocks. Thus, an early buyer of those stocks will make a windfall profit. The Taiwan government has bowed to the pressure of the desire of businesses to migrate into mainland China under this new strategy and has recently relaxed the regulations preventing mass migration.

Time is rapidly running out for Taiwan to nurture unique industries that will not migrate en masse to mainland China. The road of discovery can only be achieved by combining Taiwan's unique cultural heritage with the freedom bestowed by hard-won democracy. Unfortunately, the hot-headed elite and many in the public of a society that follows the roadmap of the Taiwan model often consider imitation of superficial Western and American fads and fashions down to the dot as the overriding priority. They wantonly discard their own heritage and culture in the name of profit, free market capitalism, or misguided ideas of modernism equated to something like the giant tin can at the edge of the ring of Taipei. If only they opened their eyes and saw the painstaking efforts of civilized societies to preserve and enhance their own tangible and intangible cultural heritage, they would realize that they must preserve an intangible cultural treasure like the ring of Taipei at all costs. It will be important for the students of globalization to see whether the loss of the ring of Taipei is foretelling the loss of democratic Taiwan.

This article is edited by Shang-Lin E. Chen of Smiling Unicorn Technologies.