Sunday, May 23, 2010

Income Inequality in Taiwan

A commentator in the Taipei Times on ECFA and its probable effects on income inequality in Taiwan noted:
Despite Hong Kong’s per capita GDP exceeding US$30,000, an analysis by the Hong Kong Council of Social Service last year showed that the poverty rate was approximately 17.9 percent and that 1.236 million people in poor households with low incomes live below the poverty line.

The latest statistics show that Hong Kong’s Gini coefficient — a measure of wealth distribution where 0 describes perfect equality and 1 describes perfect inequality — has reached 0.533, the widest income gap among all developed economies.

Looking at Taiwan, Chiu Hei-yuan (瞿海源), an Academia Sinica research fellow, says that if Taiwan does not handle its cross-strait and industrial policies cautiously, the income gap is likely to be even worse than that in the next two or three years.

An ECFA is essentially the same as the Closer Economic Partnership Arrangement (CEPA) China signed with Hong Kong, as they are both free-trade agreements with “Chinese characteristics.”

That also means the approach to informing the WTO is handled with “Chinese characteristics” — that is, Taiwan’s leaders lean toward China. Putting aside any sovereignty concerns, an ECFA will mean increased social contradictions as the rich get richer the poor get poorer.
Taiwan's worsening income inequality has been the subject of much discussion in recent years. Though the Beautiful Island is nowhere near the stratospheric levels of the US or China, it is a key social issue with powerful political effects -- stagnant incomes were a major factor in public subscription to the KMT propaganda claim in the second term of Chen Shui-bian that the economy was getting worse when in fact growth was rising rapidly. Because the fruits of growth largely didn't reach the working and middle classes, they experienced stagnant incomes amid rising prices. Now that the KMT is power, Ma & Co. are the targets of middle and working class discontent over rising living costs and stagnant incomes. Another interesting effect of income inequality is women putting off marriage as male income inequality rises, a situation that has been a political football in recent years as well.
The Gini coefficient is a commonly used measure of inequality -- the higher the number, the worse the income inequality. As the table (source) above shows, the Gini coefficient (the table renders it as an index percent) in Taiwan has been worsening during the last two decades; in reality, since the 1980s when it was in the 20s. The bump in 2001 was due to the nasty recession that year. As the table shows, the Gini has risen despite increased social welfare spending.

There is much debate as to the exact cause of the widening income gap. Is it rising demand for skilled workers in the knowledge-intensive industries leaving out the working class? How could inequality be growing if more and more people are attending college? I suspect that one cause of inequality is the increasing financialization, corporatization, and formalization of the economy. These have shrunk the proportion of income that individuals are able to hide and that is off the books, meaning that informal economy is shrinking in proportion to the economy as a whole: alternative incomes are smaller, an effect felt in many families. Another effect, not often mentioned in studies of inequality, is the problem of the way income is redistributed from rest of Taiwan to keep Taipei living well. This means that the income boosts from public spending are lower in the central and southern areas because less public money is spent there.

The effects of ECFA on the distribution of income in Taiwan will likely be negative, as the author of the commentary observes. Traditional industries are likely to be hard hit, as they have been in places like Indonesia and Thailand, meaning that individuals already experiencing growing inequality will find things even harder, while rewards will go largely to giant firms, financial companies, and similar, who already have money. The inconsistent correlation between social spending and income inequality in Taiwan shown in that paper above suggests that Ma's program of compensating individuals in hard-hit industries, even if sincerely meant and competently executed, may not have much tangible effect.

ECFA effects, aging population, industries leaving for China... it's going to take a lot of imagination and foresight to steer the nation through the next couple of decades.
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Anonymous said...

Your link on marriage and income inequality actually fails to find a significant corrolation.

Kira said...

The link about the sinking of the Cheonan is completely ridiculous. There is no way a Los Angeles class SSN could be mistaken for a (much smaller) North Korean diesel sub. For one thing, the powerplant in a diesel-electric is much louder, and a completely different sound. Additionally, there is no way the commander of an SSN would fire on the Cheonan, given that North Korea operates hardly any ships of the same size, none of which are remotely similar.

channing said...

Income inequality tends to be much higher at a metropolitan level than at a national level. Plenty of articles about US urban areas being much less egalitarian than their Western European counterparts.

Ironically, a simple Google search shows studies indicating that Beijing is one of the most income-equal cities in the world.

Kerim Friedman said...

Anonymous already made this point, but to expand: You write "Another interesting effect of income inequality is women putting off marriage as male income inequality rises." Whereas the conclusion of that paper states: "we do not find evidence to support this hypothesis in recent decades."

Michael Turton said...

I've struck that out, but I think they have misinterpreted their results, because they do not factor unemployment "wages" (=0) as part of their calculation of wage rates/inequality but instead treat it as a different status. Note that they say local unemployment rates and educational attainment are heavier factors, but there is no way to disentangle them from wage inequality; they are part of it.

Martin Adams said...

Michael, have you considered that Taiwan's comparatively low income inequality (esp. in the eighties and before) might have to do with Taiwan's implementation of land taxes?

Michael Turton said...

I'll get back to that.