It is Christmas Eve 2011. The National Concert Hall in Taipei is packed with children ages 4-12 in the company of their parents. Cellist Chang Chen-chieh is giving a Christmas concert, telling stories with his cello. On the program are Schubert's Ave Maria, Tchaikovsky's Nutcracker, and Christmas compositions by Bach and Beethoven.

Surprisingly, not a single kid leaves his or her seat during the concert, and there are no disturbing noises. There is some excitement, some restlessness, but the children sit through the heart-warming concert that introduces them to profound pieces of classical music in a light manner.

For youngsters raised in typical Taiwanese middle-class families, music is a part of everyday life. For these kids, whose parents were born in the 1960s and 1970s when Taiwan experienced its much vaunted "economic miracle," musical performances and playing an instrument are not a far-fetched dream.

Outside the National Concert Hall, a very different kind of performance is unfolding on the Chiang Kai-shek Memorial Hall Plaza. The Greenray Theater Company is performing its long-running play "Human Condition" in a setting that resembles Taiwan's raucous temple fairs, with round dinner tables and red plastic stools set up around the stage. Under the resounding sound of gongs and drums and the crackling of firecrackers, more than 1,000 people watch the play.

Inside the National Concert Hall, classical music tells stories that attract young children. Right at its doorsteps creative forms of outdoor theater equally find an enthusiastic, appreciative audience.

That's Taiwan. Among the Four Little Dragons of East Asia, Taiwan is the most diverse, liberal, democratic and creative place.

Pluralism and Liberal Democracy Come at a Price

Taiwan was ranked 6th worldwide in the World Competitiveness Yearbook 2011 by the International Institute for Management Development (IMD) in Lausanne, Switzerland. It came in 13th in the Global Competitiveness Report 2011-2012 by the Geneva-based World Economic Forum. Taiwan counts among the world leaders with regard to number of patents granted, industry clusters, financing through the local equity market, enrollment in higher education, and quality of science education.

However, it seems that Taiwan has paid a price for being pluralistic, free and democratic.

Since the 1990s when Taiwan underwent its democratic transformation, the island's economic miracle began to lose steam. Taiwan used to sit at the front of the class in the global economy, but in the race among newly industrialized countries to achieve economic transformation, it lags behind in the rear of the pack. While the economy spins its wheels, deep rifts within society have also become apparent.

"Taiwan ranks first in the world in terms of rise in per capita purchasing power between 1950 and today," notes Chou Ji, economics professor at Shih Hsin University, pointing to statistics documenting Taiwan's "economic miracle."

Nobel Prize-winning Russian-American economist Simon Kuznets has praised Taiwan for its dramatic achievement in sustaining robust economic growth while narrowing the wealth gap prior to 1990.

But if we look at Taiwan's performance today, a number of figures show that it ranks last in the class among the four "Asian Newly Industrialized Economies" (NIE-4), which also include Hong Kong, South Korea and Singapore.

Losing the Will to Develop

During its transformation Taiwan faced three major challenges: It lacked the will to develop, didn't have many international brands, and lacked a strong labor consciousness.

In October this year Chu Wan-wen, research fellow at the Research Center for Humanities and Social Sciences of Academia Sinica, published a paper titled Democratization and Economic Development – The Unsuccessful Transformation of Taiwan's Developmental State. In her paper Chu argues that Taiwan's transformation failed because democratization undermined "the will to all-out development."

Chu attributes this to three factors: First, instead of furthering the overall interest, the new mode of political competition has led to a partisan distribution of resources. Second, the Neoliberalist democracy movement rejected "development first" as the guiding principle of economic policy. Third, due to opposition against integration with China, no feasible development plan was drawn up for the Taiwanese economy.

The last point in particular can be blamed for the bungled transformation. Due to the ideological differences between the two major political camps as to which stance and strategy Taiwan should adopt vis-a-vis China, Taiwan has remained in a hopeless stalemate.

In 1997 when the Asian financial crisis hit, Taiwan was in quite good shape, both in terms of its export structure (with Europe, North America, and Asia accounting for one third of Taiwanese exports each) and its industrial structure (with the high-tech and conventional industries having equal weight). Moreover the government reacted appropriately so that Taiwan smoothly emerged from the crisis. On the other hand, it missed a good opportunity to undergo thorough transformation.

When Taiwan faced its first recession after 2000, the Council for Economic Planning and Development, the ruling and the opposition parties, industry, the bureaucracy and academia all held up the banner of economic liberalization and urged Taiwanese companies to invest in China.

But as National Taiwan University economics professor Tain-jy Chen observes, this only led to a division of labor across the Taiwan Strait. Taiwan essentially continued to use its time-honored contract manufacturing approach, only operating in a much bigger market. "All along Taiwan failed to find a new model, or new value," Chen asserts.

Therefore, South Korea began to overtake Taiwan with regard to its position in global industry rankings. Particularly in industries where South Korea and Taiwan were competing head to head, such as the LCD panel and DRAM industries, Taiwan gradually lost out.

Taiwan Refuses to Grow up

Taiwan resembles a child who refuses to grow up. After launching "reform and opening up" some 30 years ago, China evolved into the world's factory, thanks to its low production costs and cheap labor. For Taiwanese manufacturers this was a welcome development that allowed them to put off necessary upgrades and changes. Instead of moving up the value chain, they replicated the contract manufacturing model in China. However, now that Beijing has made economic transformation a priority in its 12th Five-Year Plan, Taiwanese businesses all of a sudden are under even higher pressure to carry out structural change.

One after another Taiwan's key industries have hit the wall. The petrochemical industry, for instance, kept pursuing plans for high-polluting mega plants until the government withdrew its support for Kuokuang Petrochemical Technology's planned naphtha cracker, realizing that social consensus called for the protection of the environment. Economics Minister Shih Yen-shiang resolutely set a new industry target, saying, "Taiwan's petrochemical industry should take the road toward high quality instead of competing on quantity."

Even the island's twin trillion-Taiwan-dollar industries – display panels and semiconductors – began to struggle with competitive pressure.

Lin Yu-chang looks back on a lifelong career in the memory chip industry, experiencing its stellar rise and rapid decline. During the first two decades on the job, Lin's salary, annual bonuses, and personal investments netted him an annual income of more than NT$2 million per year.

But three years ago Taiwan's memory chip makers racked up annual losses in excess of NT$100 billion. The fifty-year-old looked around for job opportunities in more promising areas, but eventually decided to take early retirement and open a small B&B instead.

Stubbornly stagnant wages have also taken a toll on domestic consumption.

The advertising industry is usually among the first industries to feel the pinch when consumers tighten their purse strings. Ying Su-fen, a single mom who raises her teenage daughter by herself, used to work at a printing company in New Taipei City's Yonghe District, which mainly printed advertisement flyers.

After the 2008 financial crisis, employees were shocked to see the company's turnover shrink by more than half of its original volume. As a counter measure Ying's boss first cut salaries, slashing Ying's monthly salary of NT$48,000 by NT$5,000, which was followed by a second NT$5,000 pay cut. In 2009 the company faltered and Ying was laid off. Presently she is forced to live on unemployment benefits.

After being admitted to the ranks of the so-called "newly industrialized economies," Taiwan, the former top student, suddenly forgot how to learn on its own initiative and to grow up.

BenQ Depends on China's Haier

Tain-jy Chen believes that manufacturers face great risks if they lack their own brands.

Demand for LCD panels, for instance, is relatively stable in the notebook industry, because Taiwan is the world's largest producer of notebook computers. However, when notebook sales shrank and display makers tried to find new customers in the LCD TV industry, they immediately ran into problems, since the industry is firmly in the hands of American, South Korean, and Chinese makers.

In a bid to develop new customers, K.Y. Lee, chairman of Taiwanese electronics firm BenQ Group, personally flew to Shandong in China to discuss a contract manufacturing deal for LCD television sets with Zhang Ruimin, CEO of Chinese consumer appliances giant Haier Group.

The more Taiwan's manufacturing sector grows, the harder economic transformation will get. As Taiwan does not have large brands, manufacturers are forced to choose whose side they are on among the big brands. Once a brand manufacturer fares badly in the market, the contract manufacturers who picked the wrong side are forced to lay off staff or require employees to take unpaid leave to cut losses.

Taiwanese notebook manufacturer Inventec Corporation used to make tablet PCs for Hewlett-Packard. When the IT giant suddenly decided to phase out its tablet computer line earlier this year, Inventec was hard hit and announced the lay-off of 400 workers this November. But even those who picked the right brand makers find it difficult to make long-term business plans, since contract manufacturers have no say in their customers' strategic decisions.

The contract manufacturer mentality is clearly reflected in business figures. Taiwanese invests less than 3 percent of its GDP in research and development per year, whereas its chief rival South Korea has been spending more than 3 percent of GDP since 2006. Moreover, Taiwan's R&D largely focuses on improvements of existing inventions and lacks originality. Its patent utilization is notoriously low.

In analyzing why South Korea is faring better than Taiwan, Lin Thung-hong, assistant research fellow at the Academia Sinica Institute of Sociology, points out that South Korean enterprises have used R&D to create higher value, whereas Taiwanese makers chose to cut costs by relocating their businesses to low-cost neighbor China.

Liu Da-Nien, research fellow at the Chung-hua Institution for Economic Research (CIER), warns that Taiwan's share of Chinese imports is steadily declining. While some 40 percent of Taiwanese exports go to China, it has proven difficult to boost that number, since Taiwan lacks well-known brands. Taiwan also missed out on the opportunity to tap China's hunger for automobiles. Chinese consumers buy some 18 million cars per year. Only in 2010 did Taiwanese automaker Yulon Motor begin to set up production facilities in China, with mass production of the carmaker's Luxgen brand models kicking off in late July 2011.

Taiwanese businesses have treated China as merely a cheap manufacturing base rather than a growing consumer market. As a consequence, in 2009 Taiwanese exports to China shrank almost 16 percent, although the Chinese economy, stimulated by government measures to boost domestic consumption, still grew 8.7 percent.

43% Earn less than NT$30,000 per Month

As Taiwanese industry migrated abroad, the biggest problem that the island faced at home was sluggish demand that proved difficult to stimulate.

Taiwan saw its most severe economic recessions in 2001 and 2009. In both cases the economic bust was not due to foreign trade. In both years, net exports actually still posted growth. Real downturns were registered because of frail domestic demand.

More and more young people are entering university to escape joblessness, given the bleak outlook in the labor market. But college education is no longer a guarantor of higher salaries.

A total of 170 universities and colleges are competing for a steadily declining number of students islandwide, which has led to unprecedentedly high college enrollment rates and a devaluation of college degrees in the job market. At the same time, the technical and vocational education system has sized down considerably, causing a shortage of technically skilled employees needed for Taiwan's industrial transformation.

Between 2006 and 2010 the average salary earned by university graduates on their first job has continuously declined, according to statistics by the Council of Labor Affairs. College graduates made an average of NT$26,500 per month, while graduate degree holders earned an average of NT$31,000. The ratio of new college graduates with starting salaries less than NT$30,000 per month increased from 25 percent in 2004 to 37 percent in 2010.

A proper job no longer guarantees a future without poverty. For quite some time now, the number of people earning less than NT$20,000 per month has hovered around 1 million. As many as 3.5 million people, or 42.8 percent of the employed population, earn monthly salaries below NT$30,000.

Pan Yu-ping loves fashion, and even as a child she dreamt of becoming a fashion designer. She managed to get into university to study fashion design, graduating in 2006. Everything seemed to be going just as wished, when she discovered that salaries in the industry are so low that it is hardly possible to make a living.

Pan's first job was as fashion design assistant at a starting salary of a little over NT$20,000, about the same as what graduates earned ten years before. "This is the industry standard for the north. In central and southern Taiwan, salaries are even lower," Pan reveals.

After five years of hard work, Pan landed a job as a designer with a large apparel chainstore. Thanks to her diligence and enthusiasm, her salary has now risen to NT$40,000. But, as Pan concedes, she finds it hard to save any money, due to the high living costs in Taipei, in particular rent, so that she does not even dare to dream of buying her own flat.

Overdue structural change is to blame for the low pay in Taiwan's labor market. Taiwan failed to transform from an efficiency-driven economy to an innovation-driven economy that competes on quality rather than quantity.

In 2010 wages and salaries accounted for a record low of just 45 percent of Taiwan's GDP.

Research by the Academia Sinica's Lin Thung-hong reveals that South Korea is one of the few members of the Organization of Economic Cooperation and Development (OECD) that have not seen a decline in wage and salary income as a share of GDP, because the country has comparably strong labor unions.

New Scenarios

Researchers like Lin Thung-hong and Chang Feng-yi, executive director of the Taiwan Labor and Social Policy Research Association, call those born between the late 1960s and the 1980s Taiwan's "bust generation," because they bear the brunt of the economic fallout from Taiwan's failed transformation. They warn that worsening government finances, the trend toward fewer children, and spreading poverty might cause society to implode.

In the IMD rankings Taiwan performs best for corporate efficiency and worst for government efficiency.

The future brings new scenarios. In an age when countries use their national power in global negotiations to secure trade opportunities for national businesses, the strong will get stronger and the weak will get weaker. Since the government proved incompetent in the past, Taiwanese businesses were left to fend for themselves, a model that most likely will no longer be feasible.

Yet Taiwan remains embroiled in incessant bickering and divisive politics, and has yet to forge a consensus on a set of complementary measures to run its government, economy, society, education and environment. Like sand in an hourglass, time is slipping away.

Translated from the Chinese by Susanne Ganz