Friday, November 23, 2012

Economy and Economist

The Economist carried a letter from the diplomatic representative in the UK responding to its blundering Ma the Bumbler piece that stirred the nation last week. The letter actually put its finger on an excellent point:
It is not surprising that some of his initiatives have been unpopular during the downturn. The people of Taiwan have every right to use harsh words against their president, but when a foreign media organisation repeats the name calling it should at least use quotation marks.
Shen is right; The Economist article carries not a single quote of any speaker on the topic, from (wo)man on the street to expert in the office.

By contrast, the Intelligence Unit has a late but good review of the Administration's initiatives to increase foreign direct investment in Taiwan. It observed the same thing everyone else did a couple of months ago (like me), that there is a contradiction in the heart of the Ma Administration's plans to increase foreign direct investment (FDI) in Taiwan....
Such measures may help to lure some companies back to the island, and this would provide a boost to job creation and economic growth. However, they might not attract the kinds of firms that would be beneficial for Taiwan's longer-term development. Promises of low wages will appeal primarily to labour-intensive industries rather than innovative, capital-intensive manufacturers of high value added products. In its current formulation, the government's FDI strategy therefore appears to run contrary to its broader goal of modernising Taiwan's industrial structure and shifting away from the low-margin contract manufacturing in which the island has specialised. According to the MEA, the firms that have returned to Taiwan from mainland China in recent years operate primarily in sectors such as textiles and electronics, which is hardly an encouraging sign of restructuring.
It goes without saying that increased foreign direct investment was one of Ma's promises from ECFA. As the numbers in the figure in The Economist make clear, FDI is in the doldrums. Like everything else to with the world economy... as I noted in the post last month, the KMT's plan is simply a recapitulation of the 1950s and 1960s, using cheap labor and industrial districts.

...speaking of doldrums, former DPP Chair and presidential candidate Tsai Ing-wen came out and said that the government should delay implementation of the capital gains tax:
The stock market trading volume remains sluggish, causing concern over whether the capital gains tax on stock transactions should become effective as scheduled. Tsai Ing-wen stated that she thought it was not an appropriate time to impose the tax. Moreover, Tsai proposed that the government should either not implement the capital gains tax on stock transactions or implement the version of the tax proposed by former Finance Minister Lin Chuan's (林全), which was also the DPP's version.
The Finance Ministry, which apparently has more sense than most of the island's politicians, said bluntly that the tax would be implemented on schedule in Jan of 2013. Looks like the Mayans were off only by a month...

Finally, if you were wondering why Taiwanese are so angered with Ma, the US Bureau of Labor Statistics has an avalanche of stats and pretty graphs that show how the economy since 2007 has put thumbscrews on Taiwan workers....

Chart 3.4: Manufacturing compensation basically fell in the post-2007 period.

Chart 3.7: Manufacturing productivity, though not keeping pace with the pre-2007 period, still rose. This means that productivity gains are not going to workers in the form of increased wages, but to capital, which, as we know, pays relatively low taxes in Taiwan.

Chart 3.10: In local currency, manufacturing costs have fallen in Taiwan. More than anyone else on this list.

Chart 4.3: Note that gap between labor compensation and inflation. The BLS observes: "Compensation growth rates lagged inflation most notably in Hungary, Taiwan, and South Korea."

To sum up, workers are making less, far less, relative to productivity, than they did in the pre-2007 period. Inflation is running far ahead of labor compensation which is, as the last chart indicates, negative. Falling real compensation, rising inflation, and productivity gains going to ownership and labor robbed of its share. If the Ma Administration wanted to reduce wages to advance its plan to expand labor-intensive, low value manufacturing, things are certainly moving in the right direction.

Speaking of dirty ugly low value manufacturing, there is a petrochemical plant being mooted for Taichung harbor.
Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums! Delenda est, baby.


Julian said...

I'm not an economist, but the well-known principle of wage and price equalization as two economies integrate, especially with vast disparities in income levels and standard of living should account for the extremes show in these charts. This can't be blamed entirely on the Ma administration, as China and Taiwan were well on their way to a lopsided inter-dependence before 2008. But the Ma government is accelerating this process and making things worse. Much worse, as it turns out. It's more than laziness and incompetence in failing to come up with an economic strategy that hedges against these negative trends. It's the abandonment of what the KMT's proudest achievement, the so-called 'economic miracle.' Grr.

Anonymous said...

well said Julian..

more importantly.. lack of creative ideas, capital liquidity, direction vision its hampering Taiwan's future.

no body really knows what is next industry.