Yet to a renowned U.S. economist, Taiwan should feel confident about itself and the achievement it has made as it transitioned from a labor-intensive economy to a knowledge-based economy, not to mention the robust information technology industry that the island has developed and demonstrated to the world.

“Taiwan has already taken great steps to shift the orientation of its economy,” said R. Glenn Hubbard, dean of Columbia Graduate School of Business who also served as head of President George W. Bush’s Council of Economic Advisors from 2001 to 2003.

“The island has of course been a center for innovation,” he added. “I think Taiwan will remain a very successful economy.”

High-end services

In Hubbard’s words, deciding where to set up manufacturing facilities is part of a company’s overall strategy to lower costs and maximize profits in this market economy, and Taiwan should not be overtly pessimistic about the impact of migration of production and jobs to the other side of the strait. “Labor cost issues that had given China an advantage are becoming more modest. Even China itself has seen manufacturing jobs moving to Vietnam and other lower-cost countries,” he said.

In fact, Hubbard thinks Taiwan can contribute a lot to the Asia Pacific as it seeks to integrate itself more into the region, given the success it has achieved over the past decades in creating a prosperous society. “Taiwan is very much a player in the world economy. It has much to offer for the neighboring countries,” he said.

What Taiwan can do better, according to Hubbard, is to develop high-end services. “Financial services sector can develop more quickly and more thoroughly in Taiwan than in China,” he said. “Even though Taiwan is a small market, China’s lack of efficient capital markets makes it harder for major financial institutions to develop.”

Mainland China

Having written several books on China, Hubbard has developed an expertise in the Greater China region. He commented on some of the latest economic events on the other side of the strait, including mainland China’s implementation of the so-called “macro-adjustment” policy and a revaluation of the mainland currency, the renminbi, which saw a rise in value after the Beijing government announced a 2.1 percent increase of the currency against the U.S. dollar.

While Hubbard believes China would continue to grow at a “nine-ish percent” range for a while and would revalue its currency again in a range of four percent, he stressed some of the most pressing issues facing China should not be ignored amidst talks on renminbi revaluation and tightening of the Chinese economy. Those issues include moving from a centrally planned economy to a market economy, and the implementation of financial reform.

“There is no point to have a revaluation policy if China does not clean up its financial institutions,” he said. “Right now there is a lot of state-directed credit flows, which make it harder for promising entrepreneurs to raise funds.”

He said it was in China’s best interests to have a financial industry that is efficient and lets the private sector decide how banks should be run.

“I would rather see China focus its energy there,” he said. “Rather than recapitalizing its state banks, China should get them more into private hands so they could work as private financial institutions. China should also strengthen its financial securities law to help banks operate more effectively.”

He said Taiwan has something to offer in this regard. “Taiwan would be a great model for China, as the island has developed a vibrant entrepreneurial private sector,” he noted.

Avoid cross-strait tensions

As both sides of the strait have seen more bilateral economic and trade exchanges, Hubbard urged against political tensions between Taiwan and China, as regional peace and prosperity does good for everyone.

His remarks came at a time when cross-strait tensions were at a high of recent. President Chen Shui-bian on Lunar New Year’s Day made public his plan to “abolish” the so-called National Unification Council and the National Unification Guidelines and ended up announcing the two had “ceased to function” and “ceased to apply.” It was clear his choice of words came as a result of heavy pressure from the United States.

Hubbard, who had met Chen on earlier visits, said he would not give political advice to leaders or heads of state. But he made the U.S. interest clear — that is, a desire to see the cross-strait status quo maintained.

“American economic interest is to make sure the whole region is prosperous, as prosperity tends to breed stability and push towards more free and democratic institutions,” he said, adding the U.S.’s interest is shared by other countries as well, as the global economy depends very heavily on stable working economic relations between China and Taiwan.

He added strained cross-strait relations worked against the interest of both sides, considering Taiwan is a major source of foreign direct investment on the other side of the strait, not to mention the growing number of Taiwanese firms setting up operations there.

“Taiwan has an enormous stake in China’s success as an economy,” he said. “And China also benefits from learning the economic success that has already happened in Taiwan. Keeping political tensions at a minimal would be — from an economist’s perspective — a good idea.”