Stagnant Wages = Reviving Competitiveness

The twin volcanoes of Guishan Island, just offshore from the fourth nuclear plant. It took real genius to put a nuke plant there.

Ralph Jennings with a strong article in Forbes on how wage stagnation is actually making Taiwan more competitive: Taiwan quality at cut rate prices.

Since the 1990s manufacturing and other jobs have streamed out of Taiwan and into China. That’s depressed Taiwanese wages, leaving them unchanged in real terms for a decade. The stagnation has driven middle-class workers to live with their parents and spike plans to raise children. But now it’s spurring growth in both ambitious startups and established companies weary of the growing costs and headaches of doing business in China. In short, Taiwan is becoming more competitive.

Jennings details some of the fallout, including the squeeze felt by many families from rising mortgage costs, as well as Taiwan's ultra-low birthrate, in part because no one can afford children. One factor missing in the low-wage equation is the record number of foreign workers here, who also help keep wages down. In case you missed it, Commonwealth magazine had another one of its top-notch analytical pieces, this one on the Korea-Taiwan tussle (whole thing is excellent, do read). The rise of South Korea was driven by good government policy, according to the article:

Another key to South Korea's ascendance over the past 15 years has been the government's effective implementation of several policies, including the development of a "Korean cultural wave" in 2001, an FTA blueprint drafted in 2003, and support for the auto industry and the creative and cultural industries, all of which were competitive internationally. Taiwan's main economic initiatives over the same period, including the promotion of free trade ports and support for six emerging sectors, were not well executed and were not internationally competitive.

Taiwan's government has taken a different route:

South Korea harnessed the country's power to support big companies in creating value and developing brands. In Taiwan, on the other hand, emphasis was put on containing and lowering costs and subcontracting for international vendors.

Tsing Hua University professor Perng Ming-hwei observes that when Taiwan arrived at a crossroads, it faced the choice of either having its companies relocate overseas in pursuit of cheap labor or upgrading its industries. Most Taiwanese companies chose the former approach and headed across the strait to China in droves, taking advantage of China's cheap land, labor, utility and even environmental costs to support their continued growth.

Perng laments that these companies chose an "easy money" option that entailed buying foreign turnkey solutions and importing raw materials in the pursuit of higher production yields and lower manufacturing costs.

In contrast, South Korean companies decided to invest heavily in technology and R&D and in building global brands.

Over the past 10 years, South Korea's spending on R&D as a percentage of its GDP has consistently outpaced that of Taiwan, and it exceeded 3 percent in 2006 to overtake Japan's as the highest in Asia.

Taiwan's industry make up has changed substantially since the 1960s, but at heart its remains an economy driven by subcontracting and small firms, whereas South Korea is dominated by huge conglomerates that operate on a global scale. South Korea chose to build productivity, Taiwan chose to hold down costs, a hamster trying to spin the wheel ever faster and faster. The Ma government's "new" policy of permitting firms that return to Taiwan to hire more foreign labor, as I noted in earlier posts, is simply more of this same, well-trodden path of industrial districts and cheap labor, a policy right out of the late 1950s.

Of course, Korea has not sent its firms to China. I just want to take a moment to savor the silence: when was the last time you heard anyone argue that Taiwan would zoom like Korea if only it were more open to China (hilarious past moment). Hear that silence? Well, we've got our ECFA, which isn't helping much and only covers about 5% of exports anyway. Even the Ma Administration, with its policy of inviting Taiwan's makers home, is tacitly admitting that Taiwan has been made worse off by moving them all to China (why else would it be out there, hat in hand, begging them to come back)?

D'oh!
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Daily Links:

• Huawei and the threat to China from pirated software
• Tony Lin on the large number of structural crises facing Taiwan. Scary. Think the Ma government is up to handling them? 
• Ex-cabinet Secretary Lin Yi-shih indicted
• This looks interesting: "The Civic World of International Communism: Taiwanese communists and the Comintern (1921-1931)" A Belagoruva. Modern Asian Studies, Volume 46, Issue 06, November 2012, pp 1602 - 1632 (abstract)

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