Thursday, November 08, 2007

What Can Taiwan Really Learn from Korea.

It's fashionable to hold up South Korea as an example to Taiwan. The European Chamber of Commerce in Taipei, clearly living in an alternate reality, became the latest follower of that trend when it announced that the reason that Taiwan has not done as well as Korea has is because it isn't open to China like Korea is.

The European Chamber of Commerce in Taipei has held up Korea as a shining example against Taiwan’s failure to improve trade relations with China and, as a result, attract foreign investment. The ECCT said Korea overcame the 1997 financial crisis and soared ahead of Taiwan by taking advantage of China’s predicted economic boom and growth. The Korean government has removed obstacles to trade with China by operating direct flights between the two countries and lifting bans on imports and exports.

ECCT chairman Ralf Scheller criticized Taiwan for failing to improve the business environment, open up the market and ease regulations. As a result, he said, it became the worst performer among Asia’s four leading economies in terms of national income and the number of visiting tourists. “We are not surprised by the result as no progress was made on priority issues we've raised in the past,” he said. The occasion was the publication by the chamber of a blue book on investment in Taiwan and 10 recommendations to the next Taiwanese president that included the normalization of cross-strait trade and deregulation of the financial and service industries.

Well, let's see. Korean direct investment in China is less than half of Taiwan's, and that is only the reported cases for the latter. In terms of GDP Korea's investment in China is miniscule, like 3-4%; for Taiwan it falls somewhere between one-third and one-half of GDP. In 2004, when Taiwanese investment in China was measured in the tens of billions of US$, total Korean investment didn't even reach $10 billion. As of September 2006, Korea's awesome investment totals had skyrocketed all the way to $13.8 billion, or about what the average taishang spends on a year for all three of his wives in Shanghai. Taiwanese companies have flooded into China, but clearly Korea has kept its industries at home. The results are patently obvious.

The full oddity of this must be savored: Korea's policy is to export to China using Korea as a base but sending some production to China -- keeping the major firms at home. Korea has, by all accounts, prospered more than Taiwan in doing so -- by ECCT Chairman Scheller's own claim. This is precisely the strategy that the DPP wants to follow -- keep the jewels in Taiwan. Obviously Chairman Scheller is very confused about what the source of Korea's growth is, thinking it must lie in direct flights. Does anyone really think at this late date that if we have direct links to China, that Taiwan's economic growth will suddenly spike?

Chairman Scheller ought to pay attention to another fact: Korea, like Taiwan, limits the flow of Chinese goods into Korea. At present, the two nations are discussing an FTA, but many Korean makers fear the impact of China-based MNCs on their domestic businesses. Thus, for many years Korea has limited imports of things from China in various ways (outside of manufactured goods made by Korea firms there). The article I linked to above also notes that China has scared Korean makers by how fast its firms are climbing the technological curve.

In other words, Korea has prospered by following the very policy the DPP advocates -- limiting China's impact on the Korean economy, limiting imports from China, protecting national industries, and limiting investment in China. Nevertheless, both the US and European Chamber of Commerce claim that, when the DPP does this, it must be folly, but when Korea does this, it is an example for Taiwan to follow.

How's that again?

Never mind that Scheller never mentions that it is longstanding Chinese policy to hollow out Taiwan's economy as a prelude to annexing the island. Taiwan's security is simply not an issue for the Chambers of Commerce here, since they will continue to make money whether democracy activists in Taiwan own the presidency or are carted off to Chinese jails. By contrast, China, needless to say, has no current, open desire to annex Korea.

Over at Taiwan Matters! Feiren put all of this into perspective with a nice post on Ma Ying-jeou's 1970s economic thinking:

What's more interesting is the profound disjunction between this unrealistic objective and the proposed means of achieving it. Remember that Ma's main policy proposals are allowing direct transportation links with China and removing the 40% investment cap. Just how is that going to get us back to the golden era?

China is not going to agree to the non-existent 1992 Hong Kong consensus and Ma will not have the political capital to accept the One China Principle without putting it to a vote. Even if he can, direct links with China mean more globalization and therefore less control over the domestic economy than we have now.

In all likelihood, what we will get is a lifting of the 40% investment cap. And everyone can see I'm sure how allowing what remain of Taiwan's industrial base to relocate to China will get us back to the good old days when the omniscient great man could control prices.

The great experiment of creating investment worth 1/3 of Taiwan's GDP in China has now been conducted since at least the mid-1990s and despite all this openness, Taiwan's economy has not boomed. I have no idea why anyone would imagine that after sending $100 billion dollars worth of manufacturing to China with modest positive economic effect for Taiwan, sending Taiwan's remaining industry there will cause Taiwan's economy to grow robustly. That is like arguing that if a double amputee became a quadruple amputee, he'd be able to run again.....

UPDATE: in the comments below Patrick Cowsill asks why I didn't address Scheller's remarks on tourism, which he apparently felt were quite insightful.

On raw numbers China, South Korea, and Japan all beat Taiwan, of course. But it isn't difficult to shoot down Scheller, because absolute numbers rarely mean much. Consider: Japan, with a total population of 8 or 9 times Taiwan's attracts less than three times as many tourists, like 8 million to Taiwan's 3.75 million (Japan is currently pursuing a policy to push tourism from 6 million in '04 all the way to 10 million). China's 120 million tourist arrivals dwarf most nations -- we can't compete with that -- but it is still equivalent to less than 10% of the nation's population. As for South Korea, it is 6.35 million this year (here) , or twice that of Taiwan, though its population is much larger than Taiwan's. In other words, on a per capita basis, Taiwan is already the most successful foreign tourist attractor in the area. This is even more amazing when you consider that all three of those nations offer a far great array of cultural and natural attractions than Taiwan does. Really, we're not doing too badly here.



73 comments:

Raj said...

Michael, doesn't Taiwan restrict Chinese investment on the island? Making that easier would certainly boost the economy. And no I'm not saying China should have a right to "buy the island out". Equally direct flights would make it more attractive for people to operate in Taiwan - currently the inconvenience of having to fly via HK puts some people/companies off.

As to the rest it is true that Taiwan has been overtaken by South Korea in terms of competitiveness. That is not to say Taiwan must remove all trade barriers between itself and China but there are things it could do to make it easier to work and invest in Taiwan for Chinese and non-Chinese.

Michael Turton said...

Sure, having Chinese investment here might boost the economy -- but look at the scale of Chinese investment in Korea. Do you think it would be so much larger here?

I just think the sort of facile, shallow announcements that if we only had the three links it would be 8% growth again is totally unacceptable, not only is it a substantial mispresentation of reality, but it inherently favors the KMT over the DPP. Which I think is the real point of all this.

I also think that an accurate depiction of the Korea economy is like, basic, to comparing the two economies. The two situations are totally different.

I think it would have been better if Taiwan had invested all that money at home, converting unproductive agricultural land to industrial use, handing out tax holidays, helping makers upgrade, etc. Sort of like the Koreans did.

That said, Korea too is bumping up against the China problem too....

Michael

Michael Turton said...

Equally direct flights would make it more attractive for people to operate in Taiwan - currently the inconvenience of having to fly via HK puts some people/companies off.

I'm not against direct links. What I'm against is the mentality that imagines they will make some huge difference in Taiwan's economic trends.

Michael

Michael Turton said...

Alternatively, does anyone really believe that Korea's competitive is based on direct flights and a few billion in Chinese ($2 billion cumulative as of last year really make Korea competitive? Or is Korea's competitive based on its industrial structure and manufacturing abilities?

Michael

Patrick Cowsill said...

"As a result, he said, it became the worst performer among Asia’s four leading economies in terms of national income and the number of visiting tourists."

You seem to have side-stepped the issue of visiting tourists. What does Taiwan have to learn from other countries (Korea included) in this regard? Or, on how to treat to treat "foreign" guests? Taiwan's visa policies, guest worker policies and immigration ideas are satuated with xenophobia. When are yiou going to take this topic on with some sort of credibility?

Michael Turton said...

Patrick, one reason I don't deal with tourists is because I don't consider them to be a viable economic strategy for Taiwan.

But it isn't difficult to shoot down Scheller. Consider: Japan, with a total population of 8 or 9 times Taiwan's attracts less than three times as many tourists, like 8 million to Taiwan's 3.75 million. China's 120 million tourist arrivals dwarf most nations, we can't compete with that. As for South Korea, it is 6.35 million this year (here) , or twice that of Taiwan. On a per capital basis, Taiwan is the most successful foreign tourist attractor in the area.

As for the xenophobia, I don't much encounter it (consider the immigration issue in US where I am from, so I can't complain about other nations). I don't deal with immigration, and I expect the local Chambers of Commerce to work on those issues, instead of wasting everyone's time making pro-KMT criticisms of the DPP.

marc anthony said...

It should be of particular concern exactly which industrialists are relocating to the mainland and show little concern of draining the Twn economy. Diehard KMT cadres, longing for reunification with the homeland, are happy to buy their way back in to the motherland. Where did the KMT redistribute all their ill-gotten wealth? Perhaps in the very industries which may now no longer be part of Twn's "crown jewels."

raj said...

One point is that it isn't just one thing foreign investors and businessmen complain about - it's several. So although direct links, allowing more Chinese investment, etc won't by themselves massively boost growth (though links could help) together they could.

By themselves they don't severely reduce Taiwan's potential but together they are a burden. No one is saying Taiwan will get 8% growth, but it should be able to get over 5% for at least one year.

On Taiwanese investment, sometimes you just have to accept where capital wants to go. Keeping it out of China won't mean it's used efficiently anywhere else. Besides in the long run it could buy more influence over Taiwan's future in China than arms sales and referendums ever could......

Thomas said...

Funny, Patrick. I don't have any facts and figures to back myself up on what I am about to say, but I will say it anyways.

The three years I spent in Taiwan were the most comfortable I have spent in Asia. I never once felt any xenophobia. I did in China quite often though. Plus, most of my friends who have visited Taiwan have glowing descriptions of the Taiwanese. Some might indeed say that Taiwan is not among the best at attracting tourists (which I personally see as the ineffectiveness of the government at promoting local sites -- it is hard to get used to promoting yourself when you have been longing to be back in the country across the straits for many years or aiming to fight those that do have that longing) however, I have almost never come across someone who told me that they thought the Taiwanese are xenophobic.

What are you basing this claim on? I am honestly curious because it surprises me. Most people I know who are critical of Taiwan cite politics as the reason. They don't cite the people.

Even if you say that this is about immigration only, then I really don't see how immigrating to Taiwan is any harder than immigrating to the US or Japan. Do you really think a Filipino moving to Taiwan will have a harder time than a Filipino moving to the US or France?

Patrick Cowsill said...

"As for the xenophobia, I don't much encounter it (consider the immigration issue in US where I am from, so I can't complain about other nations). I don't deal with immigration, and I expect the local Chambers of Commerce to work on those issues, instead of wasting everyone's time making pro-KMT criticisms of the DPP."

We've both got it pretty good - our wives are Taiwanese and so that helps a lot in procuring a visa. But it's ironic that you bring up the U.S. According to statistics, the U.S. nationalizes 10,000 Taiwanese every year. To this point, only eleven Amercians have ever been nationalized here in Taiwan.

I am over-joyed to see any article that brings up this topic- Taiwan clearly is not open by anyone's standards. The Taiwanese government cries about reciprocity. But clearly, it doesn't have clue what the word means. You talk about Japan, but right now 400,000 "foreigners" obtain citizenship in Japan evey year. They even have an MP, Tsurunen Marutei, who is obviously not Japanese by descent.

What has the DPP done to rectify this? I think they've done a good job of stirring the pot, pitting "Taiwanese" against what they imagine to be "non-Taiwanese" on a regular basis.

Stefan said...

I'm not sure whether Korea's or Japan's tourist trade is a good yardstick - why not look at Thailand instead?

I think Taiwan would have a potential to increase tourism significantly. This might not be the solution to all problems, but it probably wouldn't hurt either.

It would help to apply a bit more focus in that area: putting nuclear power stations and waste storage into your top recreational areas (Nanwan, Orchid Island) probably doesn't help. Likewise cleaning-up beaches would be beneficial, and of course giving a single hotel control of an entire beach (see Kending) is not a very sensible approach. A bit more concern for the environment might well pay off financially, and wouldn't hurt otherwise.

Arty said...

Instead of looking at all the numbers. Just remember one rule. Taiwan is over-restricting the free market between China and Taiwan. Therefore, it is bad for the economy. Very simple.

Anonymous said...

many global surveys i've seen has taiwan always surpassing south korea in competitiveness. and taiwan dominates in marketshare in various hi-tech products or is at least very competitive with south korea like in semiconductor and flat panel production. so i'm not sure why everyone is saying south korea has surpassed taiwan in competitiveness. taiwan's economy is in the top 20 in the world and growing around 4% or so a year. and in ppp valuation taiwan's income is much higher than south korea's as well. all not bad for a maturing economy.

also, not sure i agree with you about the lower population/incoming tourism proportion justifying taiwan's lag in tourism numbers. highly popular tourist destinations like hawaii and singapore have very tiny populations yet attract much higher numbers in tourism. taiwan certainly can do more to be competitive in tourism. i've always thought the taiwanese govt. and private institutions should hire more professional experts like from singapore or the u.s. to help the local people elevate their services up to international standards. singapore has done a great job attracting tourists and businessmen and taiwan can learn a great deal from her. taiwan's quality in architecture needs to significantly improve and cities and towns need to focus on beautification. again, taiwan should hire more foreign architects to design some world-class structures to put taiwan on the map the way china, malaysia and other countries have done with the jin mao tower, petronas towers, etc., all designed by world famous architects and all having garnered significant amount of international media. taipei 101 being the tallest in the world truly has been ignored by much of the world. if it had been designed by cesar pelli or antonio callatravas it would be receiving much more attention. it would also help if it was a better looking building. c.y. lee, the architect who designed it and the designer of many of taiwan's skyscrapers, really should just retire from his craft.

Mark said...

Just because the DPP says it doesn't make it right, especially when talking about economics. And as much as I like to root for the little guy, in this case the US and the EU are right and Chen is wrong.

The past six years have been disastrous for Taiwan's economy. Right now, not only do we have a nose-diving currency, higher unemployment and a growing wealth gap, but inflation is also at it's worst in decades.

The European Chamber of Commerce knows what they're talking about. The point you missed in your focus on the amount of Taiwanese investment on the mainland is that most of it is either indirect or illegal. Every time a Taiwanese business deals with China under these conditions, they have to work through an intermediary in Hong Kong, Macau or elsewhere. Needless to say, the intermediary takes a cut, and the increased costs due to not having direct links to the mainland put the Taiwanese at a competitive disadvantage. The total cost is incalculable. Korea, on the other hand, doesn't have to pay these costs as it does business with China.

Furthermore, the DPP's failed plan to turn Taiwan into an Asian business hub are a direct result of their short-sighted protectionist policies. What multinational company will put their main Asia office in a place where direct flights to Shanghai are prohibited?

channing said...

Rural China is still fairly behind in tourism infrastructure.

I personally don't think Taiwan has much to learn from Korea, a place where 4 or 5 corporate holdings groups and their interests control most of the legislature and economic output.

Patrick Cowsill said...

"Funny, Patrick. I don't have any facts and figures to back myself up on what I am about to say, but I will say it anyways. The three years I spent in Taiwan were the most comfortable I have spent in Asia. I never once felt any xenophobia."

Thomas, I think you're exaggerating. Anyway, I am directing my comments at the bureaucracy and politicians here, and their policies. I am saying that they are not helping to make Taiwan an open country.

ChristieRoad said...

It's party paranoia. Just because an editorial or some news piece contradicts DPP claims or doesn't match politically with the DPP, the obvious cop-out is to say it is 'Pro-KMT' or 'Anti-DPP'. Why does everything have to be party politics?

I'm standing on the outside looking in, and I couldn't give a shit what's green or blue. That being said, I think what Chen's administration has done to Taiwan (and what they're attempting to do) is absolutely insane. Six ways from Sunday insane.

No direct flights? Not a big deal? No way, Jose. Go tell that to the folks in the front offices of some of the biggest conglomerates in Taiwan, and they will set you strait. The HK stopover has sent MANY a company packing. Believe it or not. To put a dollar amount on this problem would be nothing less than a guess.

So, let's follow the leader and get this referendum done, right? We'll really stick it to the folks in Beijing when we take to the polls an prove 99.9% of Taiwan agrees that joining the UN is a super idea. Yes, and the UN, seeing the overabundance of enthusiasm bubbling over this little island, will welcome us in with open arms and a big sign that reads 'Taiwan'.

Michael Turton said...

also, not sure i agree with you about the lower population/incoming tourism proportion justifying taiwan's lag in tourism numbers. highly popular tourist destinations like hawaii and singapore have very tiny populations yet attract much higher numbers in tourism.

Yes, of course we could do more, as I have complained on many occasions. But it's not like we've failed. We attract plenty of visitors from Japan and South Korea. We'll never have the beach thing like Hawaii or Thailand, but we could reach the trekking numbers that Nepal does.

Michael

Michael Turton said...

Just because the DPP says it doesn't make it right, especially when talking about economics.

Mark, that's so asinine, I'm not even going to bother with the rest of your comment, which paid attention to nothing I actually said, and is totally clueless as to actual history (look up APROC origin, please).

I'm standing on the outside looking in, and I couldn't give a shit what's green or blue.

Sure, Christie. We all believe you when you say you're not Blue or Green.

No direct flights? Not a big deal?

I never said it wasn't a big deal. What I said was, it isn't a panacea for the island's economic problems. And once again can anyone concretely explain how moving Taiwan's industries to China benefits Taiwan's living standards?

The whole point of my article is that Korea has prospered by NOT moving its industries to China and by reinvesting its capital at home to upgrade its living standards. Let me repeat that for those whose English is impaired:

KOREAN
FACTORIES
STILL
IN
KOREA

Clear now? To make noise about direct links or intermediaries (hey, you mean Koreans can set up big factories without paying a cut to local partners? Since when?) is to miss the whole point: Scheller mischaracterized the basis of Korea's success. Korea prospered by LIMITING the effect of China on its industries, not by "opening to China" -- having direct flights would not be relevant if Korea had not retained its factories at home and placed limits on the flow of goods into Korea. There are precisely the things Scheller is criticizing the DPP for attempting to do. As a result, Korean makers have less than one-fifth the investment in China that Taiwanese do (miniscule compared to overall GDP), and they are not making their competitors rich and powerful, and they run a huge trade surplus with China. By contrast, Taiwan did not reinvest its capital at home; instead it insanely sent its capital abroad to develop another country. Hence its living standards are falling while the place where it invested its seed corn is experiencing rising living standards. Hence our experiences of worsening inflation and slow economic growth. And your proposed solution is to send still more of our capital and technology to China. Brilliant! And when have no factories, we can all make money selling insurance to each other and running brothels.

Yes, Taiwan's economic policies have sucked for the last two decades, not because they protected the economy, but because they combined the worst effects of openness with the worst effects of protectionism, under both LTH and Chen Shui-bian. They represent unsound political compromise rather than sound developmental policy. That in turn is partly a consequence of Taiwan's economic structure, of SMEs that have no connections to the government, whereas Korean chaebols are intimately involved with it. To blame the DPP is to pretend that there are no interesting structural factors involved, which of course there certainly are.

Whether or not we have direct flights is absolutely irrelevant if we don't reinvest here. In. Taiwan. This is what geniuses like Scheller don't get. Of course, they don't really give a shit about Taiwan, so one can hardly expect otherwise.

Michael

Michael Turton said...

By themselves they don't severely reduce Taiwan's potential but together they are a burden. No one is saying Taiwan will get 8% growth, but it should be able to get over 5% for at least one year.

Sure. But we don't have direct links for clear reasons of security. Does the ECCT criticize China for threatening regional security? Consider that Taiwan is hardly the only nation to put limits on Chinese visits; until 2005 only Chinese from Beijing and some coastal areas could visit Japan. Korea also places limits on visits by PRC nationals -- in fact to get a tourist visa that is exempt from normal erquirements you have to be coming or going from some other nation than China -- but god forbid if Taiwan does! It must be crazed DPP policy!

What pisses me off, Raj, is that the policies that the DPP follows are policies that other nations consider reasonable and other nations are not criticized for following AND were all initiated under the KMT AND exist for complex reasons that simpleminded statements like Scheller's hardly begin to address. Not to mention that he totally misrepresented Korea's growth source in the first place.

We have 4% growth here because we've been offshoring our factories and because our educational system and government- business interface both suck, not because you can't get a flight to Shanghai from here.

Michael

Anonymous said...

What the hell are you guys debating? The DPP supports direct flights. They support it with the condition that China respects or otherwise does not disrespect Taiwan's sovereignty (such as pretend that they are just some province of China and have visas that are all stamped with something like "province of Taiwan").

The Chinese KMT also supports direct flights but does not have those preconditions, but would be committing political suicide if they didn't have the same preconditions that the DPP has.

Basically, in the end, the problem is Beijing, and has nothing to do with political will. Beijing is trying to use it as a carrot and doesn't want to do anything to help the DPP. But it will run into the same problem with the KMT if it tries to sneak in language that disrespects Taiwan's sovereignty.

Some TSU are against any expansion of trade and direct flights, but they (like the PFP will be be the KMT) are about to be obliterated or engulfed by the DPP in the coming Legislative elections.

Michael Turton said...

It's a two hour flight from Seoul to Shanghai. Has there been a massive influx of foreigners setting up HQs there?

Kaminoge said...

Interesting point about numbers of tourists on a per capita basis. But I would think Hong Kong or Macau would be the most attractive places in East Asia using that criteria. True, both are Special Administrative Regions of China, but seeing as they have different entry/visa requirements compared to China proper, they should probably be considered separately.

I wonder how many of those 3.75 million foreign visitors to Taiwan managed to get out of Taipei during their stays?

channing said...

I think by the time Chen won the election in 2000, Taiwan's economic growth was about to begin levelling off anyway. It's quite impossible (as history evidences) to maintain double-digit growth for over two decades especially when GDP is nudging US$15,000 per head--not exactly a disastrous economic situation.

That's not to say there aren't glaring problems that could be helped better than they have been in the past seven years. The truth always lies in the middle.

Karl said...

Mark say:

"Right now, not only do we have a nose-diving currency"

Are we talking about the same currency? The NT$ that I know was flirting with 35:1 with the US$ five years ago. It's at 32.2 today, which is almost the same as it was *ten years* ago.

NT is down against the Euro, sure. But if that qualifies as a 'nose-diving currency', then a whole bunch of countries are in the same boat.

Taiwan Echo said...

As I mentioned before, Taiwan's survival war is domestic. Taiwan has to fight off the inland pro-China power in order for Taiwan to have a secure future ON THE ROAD OF DEMOCRACY.

AND THAT IS MORE CRITICAL THAN ANYTHING ELSE.

I often heard people say DPP did nothing but stirring up political fight. How can a government do things properly, if the opposition party is aiming at paralyzing the government ? Putting yourself in that same situation, who wouldn't think of fighting for survival first?

Does anyone out there really think that those pro-china people really think that they prefer living in China or living under China's control? Does any of you have any solid evidence or static data to support that claim, that the main goal of those pro-china people in Taiwan is to live under Communist authority?

I'll bet what they really want is to "live in Taiwan, but under the name of a China government". Deep down, all the chaos in Taiwan stems from one source:

Pro-china people in Taiwan can't tolerate the idea that Taiwanese are running their government.

That's the source of conflict in Taiwan, and to Taiwanese it's a fight between democracy and communism.

Those who think that Taiwan can sail whatever direction they want or however fast they want without the political concerns are simply naive.

Anonymous said...

It is the direct links for goods that matter the most. And the DPP admin has repeatedly stated it is willing to talk about it as long as there is NO pre-conditions like One China and all that. But unfortunately it is the direct links for people that China wants. Becasue people talks and goods don't.

Michael Turton said...

I think by the time Chen won the election in 2000, Taiwan's economic growth was about to begin levelling off anyway. It's quite impossible (as history evidences) to maintain double-digit growth for over two decades especially when GDP is nudging US$15,000 per head--not exactly a disastrous economic situation

Yes, Chen's first year was a recession year, the rest have all been respectable 4% growth. The unemployment situation began to take a downturn in 1991-2 after the Bubble economy went kaboom and businesses started shifting to China. Taiwan's economic problems all have deep structural roots, and cannot be solved easily.

Michael

Mark said...

"Are we talking about the same currency? The NT$ that I know was flirting with 35:1 with the US$ five years ago. It's at 32.2 today, which is almost the same as it was *ten years* ago."

Yes, we are. The TWD has fallen, even against the dollar (which you can verify on the currency graph in the link on my earlier comment). Considering how terribly the dollar has fared, that's saying a lot.

Compared against the Euro, the English pound, the Australian dollar, the Canadian dollar, the Brazilian Real, the Korean won or just about any other major currency except the yen, the TWD has fallen off a cliff.

Thomas said...

The essential problem is that too few Taiwanese understand that the boom times of 20 years ago cannot be replicated no matter what they do because they now have, for all practical purposes, a developed economy. This SHOULD be the hole in Ma's campaign, but unfortunately, in Taiwan, everybody always sees this as a zero-sum-game. "We can either be rocketing ahead or collapsing."

Even on the hot-button subject of inflation, consumer prices are rising far higher across the strait and have the potential to do more damage there. But few people are going around making doomsday predictions about it.

In other words, the Taiwanese are simply very bad at looking at their economy, among other things, in perspective.

Paul said...

For a normal country, opening up links and connections with China is obviously the right thing to do. And all the arguments for opening it up makes sense, EXCEPT that China and Taiwan relations are different to China and any other country relations. Here we have a country who is openly aggressive towards us - Korea is obviously different because China hasn't made any threats about taking it over!

Also, Koreans love being Koreans... even without investment restrictions, they're not going to move to China and become Chinese (hence taking their businesses and factories with them). Which is why it remains at 3-4% GDP, without the government telling them to stop. Taiwan is at 40% *capped*.

The problem with Taiwan are the KMT-Taiwanese, who don't really like Taiwan and lacks Taiwanese nationalism - unlike the Koreans, given the chance and some quick cash, they'll relocate to China. Again, in normal situations, this is fine - but in this situation where China is threatening to take Taiwan over, it's a threat to national security.

Just think...if it's uncapped, how far do you think it'll go? Will the KMT-Taiwanese know when to stop? Will it be too late when it becomes 80% and China has control of the Taiwanese economy?

Anonymous said...

I think it would do some of my classmates from China good if they can go visit Taiwan for tourist trips sometimes; they claim to know Taiwan better than we think they do since TV shows from Taiwan are readily available on internet; but I don't know how much they can grasp from 吳宗憲 or 星光大道... or how much about USA from Prison Break before they came here(USA).

On the other hand I am not familiar with the current tourist policy, and don't know what kind of restrictions they face. Also I think the infrastructure is not quite enough to handle the insurgent of Chinese tourists... not to mention the bandit spies(j/k).

Hans said...

I thought your analysis on Taiwan economy is quite well put. However, since over 80% of Taiwan foreign investment does go to China already, I really think opening 3 links and scrapping the 40% investment cap would not drag down Taiwan's economy much more than it is now. Also, I think companies probably have many ways to circumvent the 40% cap anyway, so its function is not useful at all.

I think the best economy strategy for DPP is to gradually open up Taiwan to China, but really need to focus on innovation and upgrading industrial base of Taiwan, like you said. Those are really the things that would jump-off Taiwan economy. DPP should really be the man to do the job to open up to China, don't know what'll happen to Taiwan if KMT does it.

So I say, let them have the 3 links and case-by-case investment cap, but focus on innovation and upgrading industrial capacity, and do communicate the results to the voters.

Hans said...

Oh yeah, I also read this depressing article.

http://www.thejakartapost.com/detailheadlines.asp?fileid=20071109.B10&irec=9#

The perennial danger of a general election in Taiwan

Jusuf Wanandi, The Jakarta Post, Jakarta

November 10, 2007

Can you write a reply to refute it? I would really appreciate it.

nostalgiphile said...

Another excellent post, Michael, and I have to say I'm still peeved at the ECCT. Last year when I blogged about them they were preaching more or less the same gospel: the DPP is just "playing the China card" by not de-regulating everything for China's investors and allowing 3000 Chinese tourists a day, etc. All this blatantly pro-China, pro-business talk makes me nauseous. As you point out (and they don't), there are more important considerations than money at stake here--namely how to keep Taiwan from being forcibly annexed by China. Whether they realize it or not (I think they do), this is what their "free trade" policies are really aimed at--Chinese hegemony over Taiwan.

Michael Turton said...


Compared against the Euro, the English pound, the Australian dollar, the Canadian dollar, the Brazilian Real, the Korean won or just about any other major currency except the yen, the TWD has fallen off a cliff.


Yes, it's plummeted from.....28 to the Aus$ all the way to....$30, and that only the other day. In August it hit 25. Clearly there is a great deal of variation. The Korean Won? Well, in May it was 27.7, and on Friday, it was 28.2. Where is the cliff?

Naturally you'd expect that with the US$ having no bottom, the TWD would also fall. This has dick-all to do with having direct flights.

The reasons that economic growth is slowing here is because we didn't keep the industries here. Unlike Korea.

And again, I really must ask: what concrete benefits would be obtained from permitting the rest of our industries to move? This would raise living standards in Taiwan how?

Michael

Michael Turton said...

Hans --

I replied to the Jakarta post article about two days ago, showing that it was just a farrago of pro-China propaganda, and pointing out that it serves the same expansionism that drove the Chinese to attempt to claim that Natunas islands in the 1990s.

Now the link goes to an article about safe sex.

Michael

Ben Findlay said...

I tried to post something a couple days ago on this but lost internet connection and my comment. I can’t really be bothered to go into it again but you persist in asking this moonstruck, depressing question and really seem to want an answer.

So here you go – a half arsed reply from someone who doesn’t know much about economics to someone who doesn’t understand much about economics.

And again, I really must ask: what concrete benefits would be obtained from permitting the rest of our industries to move? This would raise living standards in Taiwan how?

Taiwan seems to be a first world country hanging on to its third world past - not enough investment in value added services whilst still encouraging investment in low margin manufacturing. I seem to remember (but can’t be bothered to check) you sarcastically asked in an earlier comment if Taiwanese should sell insurance to each other whilst running brothels. Yes, Michael, that is – in the broader sense – exactly what Taiwanese should be doing.

If something can be done cheaper in China, that is where is should be done. How does it benefit Taiwan? The same way closing loss-making coal mines in Britain and letting uncompetitive steel makers in America go bankrupt benefits those countries. The investors – whoever they are - get better returns and create more wealth, the consumers – at whatever level – get cheaper goods and more purchasing power and the workforce made redundant is pushed up the value chain to being more economically productive – selling each other insurance and running brothels.


I also seem to remember you writing that Chinese venture capitalists would not be much interested in investing in Taiwan were they allowed to – after all, how much have they pumped into Korea? I beg to differ.

Why is there stupendous amounts of Taiwanese money in China? 10, 20, 30, 40 or whatever it is, times more per head than what Korea has put in? Well, erm, because Taiwanese speak the language, share or understand the culture and have immeasurably more guanxi than people from pretty much anywhere else. This means that they can make far more money than anyone else can by investing in China. So that is what they do – play to their strengths in order to create wealth.

Now that Chinese investors exist, am I supposed to believe that they would not see the same competitive advantage in Taiwan? Come on!

The NT is weak because there isn’t enough money being invested here. I think the problem is not that Taiwanese don’t invest enough in Taiwan (they, of course, pour in heaps into industrial parks all over the island) – and anyway they put their money where they think they can get the most return which of course includes – as I think you wrongheadedly put it – developing the enemy. The problem is that China cannot return the favour. Taiwan chooses to not let Chinese capitalists make the renegade province more wealthy and stronger.

And now, Michael, I really must ask: what concrete benefits are obtained from not permitting Chinese to develop Taiwan?

Mark said...

"Mark, that's so asinine, I'm not even going to bother with the rest of your comment, which paid attention to nothing I actually said, and is totally clueless as to actual history (look up APROC origin, please)."

Woah, there. The idea that the DPP isn't always right about everything is so asinine that it derails you? That sounds an awful lot like partisan blindness.

I didn't mention the APROC in my comment at all. I've got no idea what you're going on about with that. Is it their (accurate) claim that the real GDP here tripled from 1986-1996 that has you upset?

Mark said...

Michael, if you look at the currency charts, the trends are pretty clear. I'll put up a post about it on my site so you and Karl can see what I'm talking about.

"The reasons that economic growth is slowing here is because we didn't keep the industries here. Unlike Korea.
I have to disagree. The Korean economy isn't strong because it's protectionist. Likewise, Taiwan isn't weak because industries here have found ways around the protectionist policies of the government. Protectionism is nearly always a losing proposition in the long-run.

"And again, I really must ask: what concrete benefits would be obtained from permitting the rest of our industries to move? This would raise living standards in Taiwan how?"
The most obvious benefit is specialization. Making everything at home is pretty inefficient. Another obvious benefit is cost. Manufacturing moved out of the US and other advanced countries decades ago because it was just too expensive. While Taiwan does have much lower labor costs than the US, it's still pretty expensive compared to China. This is basic economics. If we kept all the manufacturing here, we'd soon have the most expensive goods in the world, the CPI would go way up, and then either high inflation or a continued fall of the TWD would be a given. All in all, it wouldn't be a very pretty picture.

I think the biggest thing missing from this post is an acknowledgment that the Taiwanese rules for FDI are more restrictive than Korea's. We all know that Taiwanese companies do it anyway. However, when they engage in this sort of trade and investment through 3rd parties such as Macao or Hong Kong, there are very significant frictional costs.

Michael Turton said...

Woah, there. The idea that the DPP isn't always right about everything is so asinine that it derails you? That sounds an awful lot like partisan blindness.

No Mark, the idea that I'm ruled by what the DPP says is absolutely asinine. Waaay out of line.

ould raise living standards in Taiwan how?"
The most obvious benefit is specialization. Making everything at home is pretty inefficient. Another obvious benefit is cost. Manufacturing moved out of the US and other advanced countries decades ago because it was just too expensive. While Taiwan does have much lower labor costs than the US, it's still pretty expensive compared to China. This is basic economics. If we kept all the manufacturing here, we'd soon have the most expensive goods in the world, the CPI would go way up, and then either high inflation or a continued fall of the TWD would be a given. All in all, it wouldn't be a very pretty picture.


Mark, this is static comparative advantage thinking. But comparative advantage is dynamic -- upgradeable. Our position vis-a-vis China is amenable to human action. The whole point of keeping industries here is to upgrade them to keep them competitive, which is what the Koreans did. Not "protectionism". The world doesn't fall into easy dichotomies like protectionist/open.

I think the biggest thing missing from this post is an acknowledgment that the Taiwanese rules for FDI are more restrictive than Korea's. We all know that Taiwanese companies do it anyway. However, when they engage in this sort of trade and investment through 3rd parties such as Macao or Hong Kong, there are very significant frictional costs.

Everyone has a local partner one way or another; it all washes, Mark. In fact, as observers are wont to point out, Taiwanese firms do better in China than other companies (they also have access to investment incentives other countries don't). I think the big thing missing here is that you haven't looked at the numbers in any serious way. Korea's investment in China is less than 1/5 that of Taiwan's. Korea in almost every way is less open to China than Taiwan and yet is doing better than Taiwan. Shouldn't it have been a marked failure over the last 10 years, if your ideas are correct?

If something can be done cheaper in China, that is where is should be done. How does it benefit Taiwan? The same way closing loss-making coal mines in Britain and letting uncompetitive steel makers in America go bankrupt benefits those countries. The investors – whoever they are - get better returns and create more wealth, the consumers – at whatever level – get cheaper goods and more purchasing power and the workforce made redundant is pushed up the value chain to being more economically productive – selling each other insurance and running brothels.

As I noted with Mark, this is static comparative advantage thinking. See discussion above. The incontrovertible real-world reality is that Korea has prospered doing exactly what you people have said it should not be doing, while Taiwan has slowed doing exactly the thing you said it should be doing.


So here you go – a half arsed reply from someone who doesn’t know much about economics to someone who doesn’t understand much about economics.


Whom are you addressing with that statement?

Yong Jon Kim has a neat little article this year in the China Economic Review. Here's the abstract:

A model of industrial hollowing-out of neighboring countries by the economic growth of China

"Our model is a multi-sectoral version of Romer's variety expansion model that reveals the presense of industrial hollowing-out. The basic idea of the model is similar to that of Lucas [Lucas, Robert E., Jr. 1993, “Making a Miracle.” Econometrica 61, p. 273–302.]. An increase in (external) social experience capital through learning by doing raises labor productivity. It also increases the social capacity to adopt more technology-intensive goods. The model provides the following implications: First, even though the economic growth of China raises the exports of low-level technology goods from neighboring countries to China in the short run, this can lower their future growth potential by lowering the accumulation of social experience capital. Second, without increasing social capacity to adopt more technology-intensive goods, those countries can experience industrial hollowing-out, lower equilibrium wage rates, and a higher unemployment rate. Third, as with conclusions garnered by standard geography models, both a huge market size and very low-level wages in China imply a continuation of discontinuous and lumpy loss of jobs and sectors. In this context, various policies to raise social capacity, besides retraining programs and unemployment safety nets, should be provided by the government to avoid industrial hollowing-out and to allocate labor efficiently."

That's pretty much what I'm talking about.

Michael

Ben Findlay said...

So here you go – a half arsed reply from someone who doesn’t know much about economics to someone who doesn’t understand much about economics.

Whom are you addressing with that statement?

Yes, Michael, you insinuated correctly – I was of course referring to you. And just in case you’re in any doubt, the other person referred to is me. I’m afraid your reply, with really the greatest of respect to you, Michael – you know and understand magnitudes more about Taiwan than I’m ever likely to and I’m really very grateful to you for sharing some of these insights through your blog – only confirms in my mind that you may have read lots of papers on economic theory but really just don’t get the big picture. This merely being my self-acknowledged low value opinion, I trust stating it causes you no offence.

Start with that abstract. Unsurprisingly, the teacher is as misguided as the disciple. His presumption that industrial hollowing is bad and that government should interfere to avoid it is, to use one of your favourite words, dreck. America is, bar a few small nations, the richest country in the world per head at ppp. It has, on this scale, knocked the shit out nearly all western European countries over the past 15 years. Britain has also done significantly better than its traditional continental rivals over the same period. Both have allowed significant hollowing despite the indignant shrieks of their countries’ breathless doomster lefties. Japan, France, Italy and Germany have either not bothered trying or capitulated to protest. Notice anything those countries have in common compared to the brutal Anglo-Saxons? Yep – sluggish growth and high (or rising) unemployment. Also notice anything about the sectors of the American economy doing worst? Well, my, what a surprise! It’s the old mollycoddled industrial sectors! Yep, government clearly knows how to make money better than businesses do!

…this is static comparative advantage thinking. But comparative advantage is dynamic -- upgradeable. Our position vis-a-vis China is amenable to human action. The whole point of keeping industries here is to upgrade them to keep them competitive, which is what the Koreans did. Not "protectionism". The world doesn't fall into easy dichotomies like protectionist/open.
…………….Korea in almost every way is less open to China than Taiwan and yet is doing better than Taiwan. Shouldn't it have been a marked failure over the last 10 years, if your ideas are correct?


You preach on the world not falling into easy dichotomies and then make your own specious generalisations. In reply, what hasn’t already been looked at in this comment was addressed in my previous one (see below for more on that).

……………. The incontrovertible real-world reality is that Korea has prospered doing exactly what you people have said it should not be doing, while Taiwan has slowed doing exactly the thing you said it should be doing.

You repeatedly asked for replies to your supposedly rhetorical, but actually just myopic, question and then when I give you one – half arsed though it may have been – you do not heed it. Why should I bother spending time responding to your invitation to engagement when you then do not give me the courtesy of attentive audience? I shall, on this occasion, try again.
Taiwan doing exactly the thing I/we said it should be doing? Go back and read the first paragraph after quoting you (apologies for not making your quotation clear – I thought I’d put it in bold but forgot I had to program it in) and the second half of my comment – the bits that you have churlishly ignored – and then dignify me with the debate you thrice invited.

The issue of Taiwan’s potential versus actual GDP growth, it hardly needs to be stated, has many more (and more important) factors than the ones I’ve discussed.

Michael Turton said...

No, Ben, you didn't answer me. That's the whole problem here. I asked for something concrete and you instead fed me a lot of thirty years out of date free market religion -- there's a codocil in Chapter one of the Econ text I use in class (Parkin) that discusses the whole issue of dynamic comparative advantage/learning by doing. It's, ummm, basic to any idea of public policy economics.

Taiwan cannot be compared to the US or Britain, for that matter. Its universities are backwaters, its currency is not a reserve currency, its universities are not well connected to industry, its industrial sector, while subsidized, cannot hope to match the massive subsidy regime of the US, it cannot use its political clout to open foreign markets and gain favorable trade terms... ....Taiwan can remain competitive only to the extent that it is able to retain and upgrade its industry. Once that cycle of upgrading ceases, so will living standard rises here. That is why it is absolutely vital to have reinvested that $100 in seed corn here in Taiwan, instead of in China. That error was not one the Koreans made.

I didn't churlishly ignore your answer -- your answer assumed I was ignorant and stupid and then proceeded to give me a lecture that I can recite unconscious on economic thinking that was long ago refuted by the rise of the Tigers here (you're living in one but its implications for the kind of comparative advantage thinking you advocate hasn't hit you yet). Taiwan was able to grow in the past because it forged links to the advanced market economies that in turn enabled it to constantly upgrade its production technologies as well as follow the latest technology and market trends...and of course, all this was driven by a state sector that was an important provider of key inputs to Taiwan's dynamic OEM sector.

I don't want to get into the debate over the Anglo-Saxon model vs the continental model as it is not relevant here and is generally conducted on the basis of ideological constructions of the US and European economies rather than any actual knowledge of their complex functioning. This debate is even more complex because as The Economist noted the other day, the Bush Administration has been cooking the books ferociously.

Until facts on the ground are acknowledged -- that Korean industries are still in Korea, and living standards have risen there, whereas moving $100 billion in factory investment to China has been accompanied by stagnant incomes and living standards here -- I don't see much point in your ideological posturing -- "Yep, government clearly knows how to make money better than businesses do" -- is the kind of retarded construction that might be suitable for debate in high school, but I had to give up when I did a public policy masters and had to really think about how inputs from the state sector shaped the economy -- not in simpleminded terms like "government bad, market good!" Taiwan is a good example of this -- Taiwan's small firms are heavily dependent on the state for inputs of raw materials, subsidized water and power, and R&D. By moving to China, they cut themselves off from much of that -- and as Taiwanese choose to educate themselves in China, the networks that have long been the economy's sensitive antennae to the world are thinned, even disrupted, and they cut themselves off from the cutting edge research which the US still does. The result has been, as Lee Teng-hui noted in a long speech last year, that Taiwanese firms are actually dumbing down their production in moving to China. I blogged on it last year....in the long run, unless China leapfrogs past the west in a generation and becomes the most technologically advanced, open, dynamic, and forward looking economy in the world, with the world's best educational system, etc, well, I think the results of our re-orientation on China will make themselves clear in the long run.

The correct public policy move for Taiwan would have been to retain its industries here, move to upgrade them, upgrade government-business-university relationships, and upgrade the educational system, free up more land, etc -- all the things that weren't done under LTH. Fortunately at least we've started to diversify away from China.

As for hollowing-out, I'll try not to cite any more of the extensive development, economic and business literature on growth models, technology, and economic development.

Michael

channing said...

Wait, I thought it was a popular position here that the economy ISN'T stagnant...

Ben Findlay said...

Yes, Michael, you most certainly did churlishly ignore my answer first time. And then did almost no better 2nd time around. Instead of engaging in my first response, you utterly disregarded most of it, made specious criticisms of things I never claimed and told me that Taiwan was doing exactly what I/we said it should be doing. How fucking dare you have the gall to twice claim to have dignified me with a proper response.

I'm sorry to have distracted you in discussion you had no desire or patience for. I wouldn't have started if I hadn't been confident that the exact reverse was true and that you had actually repeatedly invited debate. I'll be much more careful before bothering you next time.

My appetite (and no doubt yours too) for continuing this poisonous thread is almost non-existent but if you care to read my first reply, you know where to find it.

Yes, China will (almost) certainly not leapfrog the west in all those things you mentioned. But it will find its cutting edge niches where it comes to dominate (or do you not think so?). And Taiwanese businesses, being the colossal investors they are there, with all the advantages they have, will be at the forefront. But will Taiwan take part in this? No, because Chinese investment isn’t allowed in. You don’t seem to think this is important. I think it’s very significant indeed. I’d like to re-phrase that regrettably mimicked last question. The concrete benefits are, I suppose, obvious. But are they really at all significant in comparison to what is lost? I don't know for certain but I really don’t think so.

You say that Taiwan cannot be compared to the west and then sight education and connections between industry and university. But these are not relevant to manufacturing moving to China. At least they are not in Britain. You also seem to think that the badly performing, subsidized American industrial sector is where Taiwan should take its cue from.

And anyway, Taiwanese industry isn't closing the door on America it's just only opening it one way with China. You tell off Mark for using generalisations that the world doesn't easily fall into and then make a full case with your own.

Got to go - late for work.

Feiren said...

Why is there stupendous amounts of Taiwanese money in China? 10, 20, 30, 40 or whatever it is, times more per head than what Korea has put in? Well, erm, because Taiwanese speak the language, share or understand the culture and have immeasurably more guanxi than people from pretty much anywhere else. This means that they can make far more money than anyone else can by investing in China. So that is what they do – play to their strengths in order to create wealth.

This is a hoary myth that most people who have spent significant time in China can answer. The Taiwanese don't speak the same language as true locals in most parts of China. They are outsiders who constantly get fleeced by the 'we are all Chinese' nonsense. And as many savvy Taiwanese investors in China will be the first to tell you, they don't know the culture or the society. China is a very different place than Taiwan, and many of the things Taiwanese think they know are actually very different. Taiwanese investors have just about as much guanxi as a Taipei office worker has in rural Yunlin County, which is about zero. Cases like the Shinkong Group's disastrous joint venture in Beijing demonstrate this all the time.

The Taiwanese do have an advantage (as do the Koreans no doubt) is that they have a great deal of experience in doing business in a fast-developing economy based on low cost manufacturing. Taiwanese entrepreneurs recognize the environment in China as being similar to the one they grew up with in Taiwan during the boom years. The problem for Taiwan though is that they are seeking to repeat Taiwan past in China instead of creating Taiwan's future here in Taiwan.

Ben Findlay said...

Well Feiren, Taiwanese businesses apparently do better than any other nationalities' do in China. And there are plenty of them.

Mark said...

Feiren said
"This is a hoary myth that most people who have spent significant time in China can answer. The Taiwanese don't speak the same language as true locals in most parts of China. They are outsiders who constantly get fleeced by the 'we are all Chinese' nonsense."

If you think that the Taiwanese in Shanghai, Beijing, or other large cities face anything remotely like the language difficulties that Koreans do, you're deluding yourself.

Taiwan Echo said...

Hi ben,

You said:

If something can be done cheaper in China, that is where is should be done.
...
This means that they (Taiwanese) can make far more money than anyone else can by investing in China.

and argued that's why Taiwanese don't want to invest their money in Taiwan.

But at the same time you also argue that Chinese would see Taiwan as a place worth investing:

Now that Chinese investors exist, am I supposed to believe that they would not see the same competitive advantage in Taiwan?

Can you explain to me why Chinese businessmen would see Taiwan as a place where they would pour money in, when most Taiwanese businessmen think their only survival chance is to invest in China ???? To me who know nothing about the economic, this seems to be a bizzard twist of logic.


The concrete benefits are, I suppose, obvious. But are they really at all significant in comparison to what is lost? I don't know for certain but I really don’t think so.

...
Taiwanese businesses apparently do better than any other nationalities' do in China.

If Taiwanese already are doing better than any other nationalities, including Korean, it would mean that Korean can achieve competitity without investing as heavily in China as Taiwan did.

As such, your above statements sounds like a support to the idea that Taiwan's over investment in China causes Taiwan to fall behind, which, based on what I understand from your comments here, doesn't seem to be your position.

Am I reading something wrong here?

Feiren said...

Ben, there are no figures to back up your claim that Taiwanese businessmen are doing better than other nationalities. Anecdotal evidence shows that many have lost money and that others, after years of being in China, are doing well. My point is that years of experience in doing business in China are beginning to pay off, not language or cultural factors.

Mark, Taiwanese businesspeople do of course speak Mandarin. But the idea that the Taiwanese have some special insight into how China works is very deceptive. My main point here is that they probably do not speak Shanghainese. The same pattern repeats itself across China. The Taiwanese are outsiders who do not speak the insiders language. It's a bit like being European but being from Portugal and trying to do business in France. Or being Chinese and trying to do business in Taiwan.

Mark said...

As in Taiwan, business on the mainland is already dominated by mandarin and it's only strengthening its position. Taiwanese people have the advantage of literacy in Chinese, too. Finally, consider the issue of family ties. Not every one has them of course, but quite a few Taiwanese people still have mainland relatives.

Considering all the Taiwanese regulations they've been crippled by, I think the taishang have been doing reasonably well in China.

Michael, I've assembled some currency charts showing the long-term fall of the Taiwan Dollar since 2000.

Ben Findlay said...

Damn it, I dislike re-reading acid language of my own conception. It distracts from the message, blunts the purpose and lingers. The unpleasant, lamentable low road.

Ben Findlay said...

I’ve read the claim of Taiwanese businesses performing better before and was reminded of it by what Michael wrote in an earlier comment: “In fact, as observers are wont to point out, Taiwanese firms do better in China than other companies (they also have access to investment incentives other countries don't)”

Nearly all Taiwanese companies substantially invested in China are not wholesale moving there for the same reason Chinese companies would find Taiwan a very attractive place to invest. Much more secure patent protection, a more educated and productive work force that is more western oriented, better general infrastructure, less endemic corruption, etc. These are also true of Korea but, feiren, whether it is genuinely more profitable for Taiwanese than other nationalities to be in China – as previous things I’ve read and Michael suggest – or indeed, if it is just time and effort as you say, the fact is that Taiwanese put in the time, effort and money in huge amounts. And Chinese would, I think, do the same here - but not in Korea on anything like the same scale. What follow are all flawed, qualitative analogies: Compare American investment in Britain and (especially) Ireland with that in France. Or American investment in Canada and Mexico. Or French investment in the French and Dutch speaking parts of Belgium. Or German investment in Austria and Italy. Or recent Spanish and British investment in South America. And vice versa to all. How much foreign investment is there in Japan?

I’m readily agreeing with Michael that one of the (many intertwining) reasons Taiwan falls (only slightly) behind is because of a lack of private investment (meaning amongst other things a lower value currency and a delayed shift upmarket).Where I think we disagree is in the solution. I think that it is more efficient for Taiwanese companies to search for growth by shifting various low value sectors to China and encourage foreign investors to benefit from what Taiwan can offer. Taiwan can offer all (not just the potentially very large number of Chinese) investors significantly more if it is more open to China. This is not true on the same scale for Korea because the two countries don’t have the same established interconnectedness.

Am I being naïve about the potential security threat of Chinese investment here? I really don’t think it’s a significant issue.

Ben Findlay said...

......as long as it is watched. Government controlled investment funds piling in billions would be a rather unsettling threat. But what about private companies with visible shareholders meeting western standards of governance?

vin said...

Sorry this is so long…
Thank you, Michael, for the great post and especially for your informative replies to comments here. Arguably, even economists aren’t experts in their field; what you’ve contributed here sure goes beyond what I knew and I bet goes beyond what most other readers knew.

After reading all of these comments twice, it sure looks to me, Ben, like Michael did address your key point – and very persuasively, too. Taiwan Echo pointed out a key contradiction in your reasoning/analysis, as well. Korea seems to act more than most countries on the presumption that its economic circumstances are highly particular – and that it thus couldn’t possibly benefit from the use of a single doctrine such as yours -- and that no part of an overall, long-term economic policy can be usefully analyzed separate from other parts, (which, as Michael pointed out, should include education-system policy).

And both you and Mark consistently ignore that Korea is far more protectionist overall than Taiwan is. You’re trying to hammer Taiwan for being protectionist in the single overt way Korea is not, when the truth is Korea has no need to be overtly protectionist on this single aspect of policy given that the overall nature of its policy is so highly protectionist and incentive-laden that it will automatically constrain investment in China.

But this is far from all: This thread contains SO MANY cases of what seems to be an almost-willful failure to process and understand key points. Ben’s and Mark’s comments in reply to Feiren’s post is another example. Maybe Feiren could have been clearer, but I certainly did not construe his (?) post to mean language similarity bestows zero advantage in China for Taiwanese vis-à-vis Koreans. The gist I got – without my brain being taxed whatsoever – is that this advantage is small compared to what uninitiated Taiwanese and the rest of us imagine it to be; that Taiwanese businesspeople face huge struggles in China, the same as investors of other nationalities do – which language similarity does little or nothing to ameliorate; and that Taiwanese’ REAL, very significant advantage is that they have “a great deal of experience in doing business in a fast-developing economy based on low cost manufacturing” – unlike business people of any other nationality. And Feiren’s other gist seems to be that all the talk about language similarity serves to obscure that “the problem for Taiwan though is that they are seeking to repeat Taiwan past in China instead of creating Taiwan's future here in Taiwan.”

This latter point hits on exactly what you don’t want Taiwanese to do in Taiwan, Ben. I agree with you there; I want Taiwanese to upgrade themselves in value-creation ability, too. But what about the thinning of social capital Michael referred to? I’m completely for removing the investment cap if you have a viable answer there. What coordinated policy approach do you advocate for building social capital and enhancing value-creation capacity here? Taiwan is not the US; this is not a post-Enlightenment society. Do you really think the implications of that difference aren’t huge? Maybe you do, and I’m open to persuasion on this point: maybe an economic policy that leaves Taiwanese workers free to sink or swim -- in other words, no coordinated overall policy – WOULD be good for Taiwan’s GDP in the long run. But as Michael said, you offer nothing concrete for addressing this issue.

What really, Ben and Mark, is the point of focusing so much on cross-strait economic policy in the first place? Sure, direct flights would help GNP (in the short run, anyway). But how would it help GDP? Chinese tourists, sure, but will that really be enough of a boost to substantially increase Taiwan’s GDP both short-term and later? You say you’re heavily invested in Taiwan, Mark, and that you care about its future. Then why not really focus on issues related to job-creation here and education system-change here – the things that could help and improve the workforce, and thus really boost GDP? Why focus on the side issue of boosting GNP by helping Taishang save transportation money? Yes, direct flights will help attract more Western investment – if the workforce is up to the mark. But with even Taiwanese bosses now saying the workforce here is no longer up to the mark, will that many Western investors really choose to put their money in Taiwan?

And for godsakes, why focus on currency arguments?

And why talk about Taiwan as if it alone features wage-stagnation and a growing income gap when most countries in the developed world have these problems? It comes off as benighted, exaggerated doom-saying. If the future brings economic doom, poor workforce capability will be the reason why, not these symptoms.

Most of all, why buy into comparisons between Korea’s and Taiwan’s economies in the first place? It’s the Singapore state-control model, not Korea’s, the blues love. Talking about THAT though would expose the blues anti-democratic nature. And, like the greens, the blues seem incapable of effective planning for a developed economy, so in trying to make hay by comparing Taiwan to Singapore, they would likely just embarrass themselves.

Mark said...

Vin, maybe you should be asking yourself why the US and EU chambers of commerce, scores of independent economists and ordinary Taiwanese residents, and politicians on both sides are talking about cross-straight barriers. I don't know if you keep up with the local news much, but Hsieh just ripped Chen a new one over this:

"How can you say you love Taiwan when you are stripping us of our competitiveness?” (Hsieh) said (to Chen) on Monday.

"Intel has gone to China already, and we're still here congratulating ourselves over how well we're keeping our tech secrets from China," he said, "saying that we'll only open up third or fourth line products to China because we don't want the Chinese to know about the rest."

謝長廷嗆扁:再管下去 台灣一無所有

vin said...

Tsk, tsk, Mark: An ad hominem insinuation about my reading habits; then an in-effect straw-man argument that connects my questioning your focus on direct links with the fact that a lot of people focus on direct links; and then the argumentum ad numerum to “beat” me on the straw-man position your distortion slotted me into. What good purpose does using fallacies serve?

I don’t wonder why any of the folks you listed focus on direct links; I asked why YOU focus on this GNP issue rather than on the GDP issues of local job creation and education-system reform – issues paramount to the workforce and to spending here. You have written several times that you’re heavily invested here; does that mean a business related to English education? If it does – and especially if your business is related to kids – how can focusing on GNP take precedence for you over focusing on GDP? I’m hearing more and more of my young adult students say that if they get married, they don’t plan to have kids, both because of their own limited career prospects and because of wage stagnation. Won’t that negatively impact your business in the not-very-distant future?

Maybe the impetus for my question is misguided; I seem to recall being told you have a school here; if that’s not so, then, yes, it’s a little odd that I singled you out for this question. And in that case, sorry for the singling-out.

Still, given that I already directly asked the question(s), and given that you do say repeatedly that you care about the economy, why didn’t you suggest how direct links will counter the above-listed problems? Would direct links attract enough direct foreign investment here to employ enough of Taiwan’s engineering talent locally -- plus employ enough local support staff -- so that the local economy would be revitalized? I tend to doubt it, but I’m very open to persuasion on this if you have good arguments to make.

The Hsieh-Chen stuff is interesting. Michael labeled it political theatre in a November 14th post. I added a comment about that – in the wrong place; instead of properly putting it under “Business Leader Calls for Peace Law,” I placed it under “Simon Tisdale Scores! And Me Too” (also November 14th). What I wrote is only conjecture, but I have a hard time taking this “rift” at face value. Maybe it’s real, maybe it’s DPP electioneering at its finest.

Anonymous said...

But I realize it was foolish of me, Mark, to question why you focus on exchange rates. It's always a reasonable focus.

Mark said...

I've mistakenly referred to my calculations as "real GDP" growth a couple of times, when I should have been saying "nominal GDP" growth.

I have invested in a school here, as well as a software company and a semiconductor company (which does its business in China). I also have personal acquaintances who are involved in relatively large international companies that do business in China and they have both put the costs of dealing with various restrictions imposed by Taiwan at over 5% of their top lines. Needless to say, in some industries with lower margins, that can mean the difference between success and losing to a Korean or local Chinese company. I can't really get into any details over the internet, but I believe the competitive disadvantage has had very real effects on very large portions of Taiwan's tech industry.

Beyond the pain in the tech industry, these regulations make it harder to attract foreign investment. When HK went back to China, there was a real opportunity for Taiwan to become HK's replacement as an Asia hub. I know more than one expat in Shanghai who would prefer the living conditions here, but with no direct flight or investment, Taiwan's out.

Finally, while Korea is also horribly protectionist about labor, they are at least taking advantage of some of the crop of extremely talented Chinese engineers who want to work in their tech industry. I think most Chinese could adapt to Taiwanese working conditions just as easily as Korean ones, and once again, the common language would be a big plus.

Finally, the reason so many people compare Taiwan with Korea is that they have similar histories and economies. Both are young democracies, both are filled with families broken by the after effects of WWII, both were Asian tigers in the 80's, and both have export-driven, technology-driven economies. They do have their differences, of course, but Korea's the fairest measuring stick Taiwan has.

All of what I've written here is based on my genuine beliefs about what would serve the utilitarian good of the middle class, not just foreigners such as myself. I'm also not exactly a lone voice in suggesting that we'd be better off with the three links.

Red A said...

Creating some kind of economic Fortress Formosa will end up hurting Taiwan, as the domestic industries protected from China will end up making Taiwan less competitive overall. Its also anti-consumer.

Michael Turton said...

Red A, we're advocating smart public policy, not "protectionism." Believe it or not, industrial policy exists in more categories than "open" or "protectionist." The real division is between "smart" and "stupid." Here we are on our eighth naptha cracker and more steel mills, which can only exist under massive subsidies, while we send our tech industries to China. Meanwhile Korea kept its tech at home. As Mark points out, it has those smart Chinese engineers working in Korea, where they build Korean industry.....

Why would smart Chinese researchers and engineers want to come here, Mark? This exact question was posed at a Shannon meet up to an expert who studies Taiwanese firms in China. What do you think the answer is?

Mark, I've already posted to your blog about why your GDP calculations are totally wrong. Nominal GDP cannot be used to calculate economic growth, and bacterial growth formulas cannot be used either, because economies do not grow like bacteria do, and because the unit of measurement of bacteria is not subject to inflation like money is. Hence your understanding of Taiwan's growth situation is totally wrong.

Michael

Feiren said...

Finally, while Korea is also horribly protectionist about labor, they are at least taking advantage of some of the crop of extremely talented Chinese engineers who want to work in their tech industry. I think most Chinese could adapt to Taiwanese working conditions just as easily as Korean ones, and once again, the common language would be a big plus.

You seem to be suggesting that Chinese tech talent can't come to Taiwan. That is incorrect. If you skip down to the Technology Professionals section of this article, you will find that not only can Chinese engineers come to Taiwan, they can come for up to six years!

And I happen to know, having been told so by officials at the Investment Commission (who are in charge of these matters), that they are eager for Chinese business and tech professionals to come to Taiwan. So far though, very few of the latter have been sponsored by Taiwanese companies to come here.

Again, the reason they are in Korea is because the Koreans are investing in China and Korea. Taiwan meanwhile is investing only in China. That's the problem.

Michael Turton said...

Vin's comments were awesome -- many thanks.

Feiren asked me to provide this information on Chinese professionals ability to live in Taiwan.

Chinese Professionals, rules, demand

The gov't would love to have Chinese professionals come over. But few make the trek, and that is not due to gov't restrictions.

Michael

Mark said...

"Mark, I've already posted to your blog about why your GDP calculations are totally wrong. Nominal GDP cannot be used to calculate economic growth, and bacterial growth formulas cannot be used either, because economies do not grow like bacteria do, and because the unit of measurement of bacteria is not subject to inflation like money is. Hence your understanding of Taiwan's growth situation is totally wrong."

Michael it wasn't a "bacterial growth" formula. The mathematical formula to calculate the average percentage growth of anything over any unit of time is:

growth rate = [(final value/initial value)^(1/units of time passed)]-1

And that growth formula is indeed used for countless monetary calculations, including those made by fund managers (for whom inflation is a concern). If you want to argue that calculating nominal GDP growth is a bad idea because it doesn't take inflation into account and overstates real growth, I might agree. If you say that it's a bad idea because it doesn't keep track of currency fluctuations, that's debatable, but also fair.

Calculations of nominal GDP growth are done, though, and as far as I know, I calculated this one correctly.

Ben Findlay said...

Hello again,

Just thought this extract from a June WSJ (kindly brought to my attention by Michael at the time) makes apt re-reading.


"Now, at least, the central bank is inching closer to the true reason for the Taiwan dollar’s softness — investment outflows. Net outflows hit nearly $11 billion for the first quarter of this year. Taiwan’s net investment flows haven’t been in the black since the second quarter of 2005. Even in a region awash with liquidity and in the midst of a global bull market, investors just don’t want to put their money in Taiwan.

"Structural factors are to blame. One culprit, ironically enough, is the restriction on corporate investment in the mainland. Taiwanese companies are allowed to invest only an average of 40% of their value (the limit varies by industry) there. But because such investment is so lucrative, Taiwanese companies and entrepreneurs are increasingly opting to work around the law. They can do this by setting up shop in less restrictive countries, leaving Taiwanese investors with fewer companies at home in which to put their money.

"On a related note, Taiwanese economic policy hasn’t kept up with the times. There is still a strong regulatory and policy bias in favor of manufacturing over services, despite the fact that Taiwan is at the stage of development where it should be expanding its service sector. Spaghetti-like corporate structures and endemic insider trading also discourage investors from diving too deeply into Taiwanese equities. Bad policies and their outcomes — from a chaotic banking sector to hurdles for companies that want to on-shore research and development while offshoring manufacturing — leave many Taiwanese companies and their stocks underperforming.

"To top it all off, there’s political gridlock when it comes to addressing many of these problems. Fighting between the two main political parties has kept the focus off improving the economic climate. It’s hard to think of any major economic policy overhaul in the past seven years.

"In imposing limits on offshore investment, the central bank is asking Taiwanese investors to take one for the team by keeping more of their money at home despite the poor returns. But the bank is missing the point. The weak exchange rate is a symptom — not the disease — and capital controls will only make it worse.

Mark said...

Michael, this is from the page you linked to:

"Despite a lack of direct air and sea links between China and Taiwan, and significant restrictions on who can travel to Taiwan from China, the flow of human resources in the other direction is set to increase after a series of incremental liberalizations and policy shifts by the Taiwanese government."

Michael Turton said...

Mark, you're right, I misread what you said about bacteria and money.

Michael

Feiren said...

The European Chamber of Commerce knows what they're talking about.

Mark, the ECCT also knows where the priorities of its members lies. Morris Chang also knows a few things about Taiwan's economy and takes some very different views:

http://taiwanmatters.blogspot.com/2007/11/morris-chang-taiwanese-economy-in.html

The point you missed in your focus on the amount of Taiwanese investment on the mainland is that most of it is either indirect or illegal. Every time a Taiwanese business deals with China under these conditions, they have to work through an intermediary in Hong Kong, Macau or elsewhere

Usually that intermediary is in the Cayman Islands or BVI. Taiwanese investment consultants are experts at setting these vehicles up. The transaction costs aren't that high. Sure, direct links would cut many costs, but innovation, not cost cutting is how Taiwanese companies should be making their money.

Like Michael T., I'm also not opposed to opening up direct links with China per se. I just don't see how it addresses the real problems Taiwan's economy has, and I also fail to see how either party will achieve a breakthrough on this issue when China will not talk to anyone who does not recognize China's One China Principle:

As American poet Walt Whitman once wrote, "as soon as histories are properly told, there is no more need of romances." It is obvious that despite the vicissitudes in the history of Taiwan, the fact that Taiwan belongs to China has never changed. Likewise, no matter how the leaders and the ruling party in Taiwan change, it is only a transfer of power of a local authority in Chinese territory, representing no change at all to China's sovereignty over Taiwan. Although Taiwan has yet been reunified with the motherland, the sovereignty and territorial integrity of China have never been divided. Taiwan's status as part of China's territory has never been changed. It is widely-held in international community today that there is but one China in the world, the government of the People's Republic of China is the sole legal government of China representing the whole of China, with Taiwan being a part of it.

Spencer said...

Amazing banter on here. You guys are a lot smarter than me when it comes to the economic stuff.

I can add approx 2 cents from working inside a Taiwanese tech company here in Neihu.

The most intriguing questions are from those that suggest "adding value". As much as I hate such empty marketing terms, the concept is spot on.

The Taiwanese population is actually quite adept at adjusting to new concepts and adding value.

The shift away from the OEM model is exactly why Korea is doing well. (Samsung is kicking ass in consumer electronics.)

Taiwan faces different challenges because they have developed differently than Korea. The chaebols have had big money support for a lot longer; this translates into visible brands around the world.

I think we can all agree that Taiwan is still trying to emerge from family-owned business model.

Perhaps the best way to compete is with niche products? Do them well, brand them, and then ship them overseas.

It's not OEM because the creation happens over here.

Tainan Company in Businessweek.

Anonymous said...

http://www.taipeitimes.com/News/taiwan/archives/2007/11/24/2003389308

Professor of Economics at NTU supports your view as well.

ifan said...

Hi Machael,
Thanks for so supportive to Taiwanese.
I did not finish all your discussions in the comment part. But here is what I found:
http://www.euccc.com.cn/events/details.php?id=818&PHPSESSID=442de2b94b180e93418d7b6adf13feb9
2007/8, ECCT blamed the disconnection across the strait, and I suppose it is reasonable that if European companies have branches in China and Taiwan, they would like to see more connection across the strait--for their own development.
Their strategy is to threat Taiwan to open the market by their amount of investment. When the economic growth is slowing down these years and the bad political situation, they hope their voice can be very loud that we will listen to them without questioning.
I will not blame them because human beings are selfish animals, and the news on Taipei Times did not mention Korea (http://www.taipeitimes.com/News/biz/archives/2007/11/06/2003386527), so I will not try to argue with them.
Finding our own problems and solving them, this is what we are going to do. They can make their claims, and that's their freedom.

Anonymous said...

At Mark:

It's me again, yes, THAT anonymous.

You're making the same old mistake again, and again, and again.

I don't know if you expected anyone to click on those links you provided, but in any case I did. Nominal GDP, again, is important when considering foreign investment. If real GDP is equal (i.e. Taiwan and South Korea) but nominal GDP is higher in another country (i.e. inflation is higher--South Korea), then the country with higher inflation will be more attractive to foreign investment. The logic is simple--foreign investment doesn't plan to spend their money in country (i.e. will leave the country in a couple of years), so they don't need to worry about inflation. Your two links reflect that--nominal GDP is more important when you are trying to price investments.

Now since most citizens of Taiwan and South Korea do not act like transnational investment vehicles, they do not have an option of making their money in one country and spending it in another. Inflation is a problem for them!

My explanation for why Koreans are unhappy about their economy--while top level salaries have grown, many of those in the middle and lower classes are not in jobs whose salaries are keeping up with inflation. In other words, while in Taiwan you see certain segments whose salary has been stagnant, in Korea, you actually have people whose salary, because of 20% inflation over the last 4-5 years, has shrunk significantly!

taipei based said...

I have visited Korea many times although based in Taiwan and it's always been my impression Korea has raced ahead of Taiwan years ago.
The whole 'don't open up the rules to investment in China thoery' doesn't hold water. The money that was going out has already gone (200 billion by Mr.Turton's own figures). Anything that was going to go as pretty much moved over already, businessmen are much more efficient that governments you see in this regard. Now it's time to allow investments come back in from China and elsewhere and allow the flow both ways. It's simple really. Even if Taiwan opened all investment rules tomorrow in China I bet you would hardly see a factory closure here. The point is making it easier and move convenient and cheaper to do business in Taiwan, that is what you are missing.