Thursday, September 29, 2005

Taiwan Ranks High in Competitiveness. In Other News: GIGO

The World Economic Forum survey comes out every year, showing that Taiwan's economic places high in competitiveness. This year The Beautiful Isle rates fifth, behind Finland, USA, Denmark, and Sweden. I'm sure this will be ressuring to all the factory owners investing in China (#49, right behind Botswana) because Taiwan's costs are too high, or driving taxis in Taiwan because their business was wiped out by cut-throat competitors from across the water.

One thing one quickly learns if one is serious about being a scholar is to review, not facts, but methodologies. Facts do not exist by themselves; they are constructs of methods. So I stopped by for a moment to view how the World Economic Forum defines "economic competitiveness" and what factors go into its rankings, since I had intuitive objections to the idea that I am living in one of the top five competitive economies in the world (neither my experience of business practices here nor my living standards reflect this finding).

Want to know why Taiwan is so highly ranked? Consider these two measures from the growth definition they use:

Innovation hard data
3.17 US utility patents granted per million population
4.17 Gross tertiary enrollment rate

There is no way on earth, no matter how many patents it get, that China is ever going to do well on a hard measure of "patents per million population." This measure reflects absolutely nothing about the reality of technology research around the world. It heavily favors Taiwan, which has more US patents than most any nation in Asia except Japan, and a small population.

The importance of the patents per population measure cannot be overstated, because the Competitiveness Index bases its methodology on it. Here's the methodology:

Core innovators are countries with more than 15 US utility patents registered per million
population; non-core innovators are all other countries.

For the core innovators, we place extra emphasis on the role of innovation and technology.The weightings for the core innovators are as follows:

Growth Competitiveness
Index for core innovators = 1/2 technology index + 1/4 public institutions index + 1/4 macroeconomic environment index

For the non-core innovators, we calculate the Growth Competitiveness Index values as a simple average of the three component indexes:

Growth Competitiveness Index for non-core innovators = 1/3 technology index + 1/3 public institutions index + 1/3 macroeconomic environment index

At the same time, speaking as someone who has taught in universities around the island, the "gross tertiary enrollmate" rate again tells us nothing about competitiveness, because it tells us nothing about the quality of the university system. Taiwan has very mediocre universities, attended in great numbers. Thus we get an artificial competitiveness boost.

Taiwan's anomalous position is plain from the top 15:


Three Asian nations in the top 15, a list basically of Western industrial democracies with the exception of Japan. And there, on this list, are two small Asian states, Singapore and Taiwan. Why? As far as I can see, because they get lots of patents relative to their small population size, and then benefit from the way the study is weighted.

The problem of the study is that the externalities of innovation are high, especially technological innovation, and difficult to quantify. Let's imagine that a university in Shanghai makes a single patent for improved plastic bag making technology. It's just a single patent, but anyone in China that the university licenses it to can legally use it, along with all the ones who will steal it. The benefits of that single patent spread throughout the society, and they do not spread through it in a way that is proportional to the number of people in China. Every Chinese person can partake of the benefit of better plastic bags, and everyone who uses a plastic bag obtains the benefit of that technology more or less completely, and that is true whether the population is 1.3 million or 1.3 billion. Yet it is just a single patent. In other words, the effect of innovation is independent of the number of people in a society. Using a population ratio to measure technological innovation is much worse than wrong -- it is irrelevant.

I am also skeptical of how Taiwan could score well on the macro index.

Macroeconomic stability hard data
2.13 Government surplus/deficit
2.14 National savings rate
2.16 Inflation
2.15 Real effective exchange rate
2.17 Lending–borrowing interest rate spread
2.20 Government debt

Sure enough, for high innovators the effect of the macro index is reduced, another benefit to Taiwan -- for core innovators, the macro index counts 1/4, for non-core innovators, it weighs in at 1/3. Taiwan's debt can balloon all it wants, says the World Economic Forum, so long as it keeps churning out patents.

Note that this index does not consider such things as foreign direct investment, one very practical measure of competitivess -- are people willing to invest in your country? If that were the case, Europe would be severely punished, since FDI into the EU from outside of it fell by half last year. If Finland is so competitive, how come it attracts less FDI from outside the EU than Cyprus? I am not claiming that FDI is some definitive measure -- any measure of competitiveness is inherently arbritrary and value-laden. But it seems to me that investors make very different assessments of competitiveness than the World Economic Forum.

Consider also the way the government spending defines "waste."

6.06 Is the composition of public spending in your country wasteful, or does it provide necessary goods and services not provided by the market?

How did Taiwan score well on this question with its vast array of government-owned business, which, as Robert Wade noted 15 years ago, made it the number one country for government ownership of business outside the old Soviet bloc? Additionally, I have simply ignored the questions about the judiciary and about government corruption.

I don't think we are looking at a document that says anything very meaningful about Taiwan's economic competitiveness. Instead, what we are seeing is an artifact of the methodology. I think that the hundreds of thousands of Taiwanese businessman who choose to set up shop in China instead of Taiwan are saying something very different, and much more pessimistic, about Taiwan's competitiveness. I hope the government does not use such "studies" to re-assure itself that Taiwan is moving in the right direction economically, socially, and institutionally.

UPDATE: 10/4 ESWN looks at the same survey here.


Anonymous said...

I can give you even more background into the insanely high patent/per mil figure for Taiwan.
The Taiwan IP industry has perfected a system, unique in the world as far as I know, wherein, with the initial stages of patent application process performed by a vastly cheaper combination of engineers and technical/legal editors (as opposed to US Patent Attorneys and/or Agents), Taiwan firms are able to file patent applications at a fraction of the cost normally accrued.
Trust an insider, there's no way in the world Taiwan companies would be chalking up that number of patents if they had to pay the going rate.

Michael Turton said...

Thanks, man.