Taiwan's president, Tsai Ing-wen, has had a tough first year in office.
Her popularity has plummeted as she has struggled to find a path through thorny policy debates. Hope that she might have a staunch ally in Donald Trump has receded. China has ratcheted up pressure, leaving Taiwan more isolated internationally.
Less noticed is that Tsai has, for now, won over one important group: investors. Cash inflows from abroad have made Taiwan's stock market and currency among Asia's best performers. Foreign direct investment in the electronics industry has also surged.
The government, to be sure, cannot take too much credit. A revival in global trade is the main reason for Taiwan's improved fortunes. Exports rose 15 percent in the first quarter, the fastest rate in six years. The big gains for Taiwan's stock market — up 40 percent in dollar terms since Tsai's inauguration — are about the same as those in South Korea, another economy whose growth is fueled by the global electronics sector.
Nevertheless, without a deft touch from Tsai, things could have been worse. It is easy to forget that, a year ago, the odds seemed stacked against Taiwan's economy. Falling exports had tipped it into a recession. Slowing smartphone sales pointed to little relief ahead. Most worrying was the political backdrop, with Tsai caught between her supporters, many of whom crave independence, and China, which demands that she acknowledge Taiwan to be part of "one China."
Tsai has, so far at least, steered a middle course, neither ceding ground to China nor taking actions that might provoke a harsh response. Investors, judging that cross-strait relations are frosty but generally stable, have felt confident enough to scoop up Taiwanese assets. The $8.3 billion in foreign direct investment in Taiwan last year was more than triple the 2015 amount and the highest on record. If exports remain strong, the economy has a good chance of beating the government's forecast of 2 percent growth this year.
A focus on commercial ties with Asian countries other than China has helped tourism. Tsai's election prompted China to push its travel agencies to send tour groups elsewhere in the region. In the first three months of this year Chinese arrivals in Taiwan were down by some 42 percent from the same period in 2016. Taiwan, however, has made up for much, if not all, of the loss by attracting visitors from Japan, South Korea and Southeast Asia.
The real test for Tsai's stewardship of the economy will be whether she can make progress on a series of deeper problems over the remaining three years of her first term. Taiwan's electronics businesses are under threat as China moves up the value chain. Productivity growth has slowed and wages have stagnated. Many of the most talented young Taiwanese are moving abroad, including to China, to work. And the rapid aging of the population is taking a toll: there is a heated debate about how to prevent pension liabilities from crushing the state budget.
Tsai's economic strategy has three main prongs. First is an NT $882.4 billion ($29.3 billion) infrastructure stimulus, covering projects from the railways to renewable energy. Second, she wants to lessen Taiwan's reliance on China with a "New Southbound Policy," of closer ties with countries in Southeast and South Asia. Finally, Tsai is crafting an industrial policy to promote innovation, talking, for instance, about creating an "Asian Silicon Valley."
All sensible enough, but each prong, on closer inspection, looks flimsy. The stimulus will be spread over eight years, providing a smaller boost than advertised. Variations of the southbound policy have been tried for decades: the smaller economies of Southeast Asia are no substitute for the Chinese giant next door. And just about every country aspires to foster innovation; few succeed.
Gordon Sun, director of the Taiwan Institute of Economic Research, said the main conclusion from Tsai's first year is that "our government is very good at making many noises." Investors like the story they have been told. But if Tsai's plan to revitalize the Taiwanese economy falls flat, it will soon start to ring hollow.