Sunday, January 08, 2006

Heritage Foundation: Economic Freedom Declines under the DPP

A recent post at Asiapundit refers to another post from Sun Bin on a recent report from Heritage Foundation that Taiwan's economic freedoms have deteriorated under the Chen Shui-Bian administration:

According to the Heritage Foundation, the economic freedom of Taiwan drops from #26 last year to #37 this year. Meanwhile, HK stayed at #1, 8 years after reverted to PRC rule. China still ranked low, but its score has improved steadily (note high value in score means unfree).

Asiapundit wrote, in introducing this:

One of the reasons that AsiaPundit objects to calling the Kuomintang pro-communist is that they are far less interventionist economically that the governing DDP.

As we shall see below, this is nonsense of a most heroic nature. He adds:

The DDP's instincts, similar to their opponents across the Strait, have been to meddle rather than further free Taiwan's economy.

Asiapundit gives no concrete examples of increased meddling -- he can't, as none exist (feel free, Chris). Asiapundit then goes on to conclude:

The KMT, whatever questions there may be about their foreign cross-Strait policies, are economically further removed from their Beijing counterparts.

Actually, the KMT and the Communists were economically almost identical to each other: both emphasized tight government control of the economy. The main difference between the CCP and KMT governments was not economic policy, but the hard work of the US and of a small circle of technocrats within the KMT regime, who put pressure on the government to open up the economy, and of course, hard work and genius of the Taiwanese. Let's put some historical perspective on it:

Wade (1990) writes:

"In fact, public enterprises have had a major role in the economy all through the period of outward-looking growth, as chapter 4 shows. From the early 1950s onward Taiwan has had one of the biggest public enterprise sectors outside the communist bloc and Sub-Saharan Africa. Short (1983) compares the importance of public enterprises internationally in terms of the percentage share of public enterprise output in GDP at factor cost and the percentage share in gross fixed capital formation. Taiwan had 13 to 14 percent, and 30 to 35 percent, respectively, over the 1970s. By both measures the country is in the top decile of non-African developing countries. In Asia only India and Burma are of the same order of magnitude; in Latin America only Bolivia."(p176)

Wade also notes in a footnote on p176 and 177 that in 1983 public enterprises owned 35 percent of the nation's industrial assets. He also adds that the Taiwan figures may well be massaged to reduce them, as the government frequently circumvented its own reporting rules. Just as in Japan and Korea, he notes, the public/private distinction is often very unclear.

In 1980, as Wade notes, the Ministry of Economic Affairs owned 14 public enterprises in power, petroleum, mining, aluminum, phosphates, alkali, sugar, chemicals, fertilizer, petrochemicals, steel, shipbuilding, engineering, and machinery. The Ministry of Finance owned four banks and eight insurance companies. The provincial government owned six industrial enterprises in iron, fertilizer, pulp & paper, food processing, textiles, and wine and tobacco. It also owned five banks. Even the city of Taipei owned a bank.

If you strip away the differing ownerships, the government controlled the electricity, airlines, sugar, salt, iron, steel, oil production, fertilizer, and many other industries. If you bought gasoline, you got it at government prices from a government producer, China Petroleum. If you went from one city to another, you took the government intercity bus, and if you sold rice, it was to the government board, at government prices. These agricultural prices were designed to squeeze agricultural production of its revenues and transfer them to State- and KMT-owned industries. It was intervention, and it was ruthlessly so. Public enterprises also received preferential loans and exchange rates, got credit when it was tight. Although the government promised to sell off these industries, they in fact expanded over time as China Shipbuilding and China Steel were created in the 1970s, and various electronics firms were created in the 1980s. It is important to grasp that the only reason that the government share of the economy shrank was because the non-government portion expanded so rapidly.

In addition to the sheer breadth of government ownership, numerous authors have drawn attention to government intervention in the economy. I won't bother to even summarize their work; the list of references ought to be an indicator of the debate over how the KMT government of Taiwan attempted to intervene in the economy, and the extent of its success. The titles should be clear enough. Fittingly, I will start with Alice Amsden's ground-breaking article in 1979:

Amsden, Alice. 1979. "Taiwan's Economic History: A Case of Etatisme and a Challenge to Dependency Theory." Modern China. 5, 3: 341-380.

-----. ???? "The State and Taiwan's Economic Development" in Bringing the State Back In. ed. Cal Clark [date]

Arrigo, Linda G. 1985. "Economic and Political Control of Women Workers in Multinational Electronics Factories in Taiwan: Martial Law Coercion and World Market Uncertainty." Contemporary Marxism Vol. 11 pp. 77-95

Bishai, Martha F. 1991. "The Development of Industrial Land in Taiwan: a Legal Framework for State Control." In The Journal of Developing Areas. October, 1991. pp.53-64

Chan, Steve, Clark, Cal and Davis, David R. 1990. "State Entrepreneurship, Export Expansion, and Economic Growth: Granger Causality in Taiwan's Development." Journal of Conflict Resolution. 34, 1:102-129

Chen, Chung-min. 1981. "Government Enterprise and Village Politics." In Gates, Hill, and Ahern, Emily. eds. The Anthropology of Taiwanese Society. Palo Alto: Stanford U. Press, pp. 38-49.

Clark, Cal. 1989. Taiwan's Development: Implications for Contending Political Economy Paradigms. New York: Greenwood.

-----. "Dependency, Development and Constituency Appeals as Determinants of State Entepreneurship in Industrializing Nations: The Taiwan Case."

Cornell, David S. "Transferring the 'people's livelihood' to the people: an evaluation of Taiwan's privatization drive." Law and Policy in International Business, Vol. 24 ; No. 3

Crane, George T. 1982. "The Taiwanese Ascent: System, State, and Movement in the World-Economy." In Ascent and Decline in the World-System. ed. Friedman, Edward. Beverly Hills: Sage Publications. pp. 93-113

Douglass, M. 1994. "The 'Developmental State' and the Newly Industrialised Economies of Asia." In Environment and Planning A. 26:543-566.

Erber, George, Hagemann, Harold and Seiter, Stephen. 1997. "Global Competitiveness: Industrial Policy in the Performance of Asia and Europe." Journal of Contemporary Asia. Vol. 27, No. 3. pp. 338-355.

Gold, Thomas B. 1986. State and Society in the Taiwan Miracle. Armonk, N.Y.: M. E. Sharpe

-----. 1988b. "Entrepreneurs, Multinationals and the State." In Winckler, Edwin A., and Susan Greenhalgh. ed. 1988. Contending Approaches to the Political Economy of Taiwan. Armonk, NY: M.E. Sharpe, pp. 175-205..

Li, K.T. 1988. The Evolution of Policy Behind Taiwan's Development Success. New Haven: Yale U. Press.

Lin, Ching-yuan. 1973. Industrialization in Taiwan, 1946-72: Trade and Import- Substitution Policies for Developing Countries. New York: Praeger.

Noble, Gregory. 1987. "Contending Forces in Taiwan's Economic Policymaking: The Case of Hua Tung Heavy Trucks." Asian Survey 27, 6: 683-704.

Nordhaug, Kristen. 1997. "Institutional Change and Policy Reform in Taiwan: The Making of a Developmental State." Pacific Focus Vol. XII, No. 1. pp. 25-48.

Wade, Robert. 1985. "East Asian Financial Systems as a Challenge to Economics: Lessons from Taiwan." California Management Review. 27, 4:106-129.

-----. "What Can Economics Learn From East Asian Success?" The Annals of the American Academy of Political and Social Science v. 505 p. 68-79.

-----. ????. "East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence." World Politics

-----. 1988. "State Intervention in 'Outward-looking' Development: Neoclassical Theory and Taiwanese Practice." In White, Gordon. ed. Developmental States in East Asia New York: St. Martin's Press.

-----. 1990. Governing the Market. Princeton: Princeton University Press.

Wang, Wei-ming. 1981. The Establishment and Development of the Kaohsiung Export Processing Zone 1965-1975: A Study of Economic Decision-making in Taiwan, R.O.C. Taipei: Asia and World Institute.

Winckler, Edwin A. 1988b. "Globalist, Statist, and Network Paradigms in East Asia." In Winckler, Edwin A., and Susan Greenhalgh. ed. 1988. Contending Approaches to the Political Economy of Taiwan. Armonk, NY: M.E. Sharpe, pp. 270-282.

....and so on (this is just a small selection from an old bibliography I have). Anyone familiar with the whole debate throughout the 1980s and 1990s on the "developmental state" in East Asia and Taiwan (cf. Aberbach et al The Role of the State in Taiwan's Development or Deyo, F. The Political Economy of the New East Asian Industrialism) knows perfectly well that the KMT was among the most relentlessly interventionist states on earth during the heyday of the Taiwan Miracle.

The DPP, Heritage, and Economic Freedom
I blogged a while back on World Economic Forum's rapturously stupid piece on Taiwan and international competitiveness. We're probably looking at much the same thing going on here.

Let's look at the Taiwan page of the Heritage rankings to see how the Taiwan score was compiled. The first thing to note is that the reader cannot tell how the index was compiled. For example, Heritage writes:

The Ministry of Finance reports that Taiwan's weighted average tariff rate in 2004 was 1.64 percent, down from the 3.3 percent for 2002 reported in the 2005 Index, based on World Bank data. According to the U.S. Trade Representative, Taiwan "maintains Special Safeguards (SSGs) for a number of agricultural products covered by [tariff rate quotas]...Currently, 24 product categories require import permits...Imports of 65 categories are restricted...and their importation is effectively banned." Based on the lower tariff rate, as well as a revision of the trade factor methodology, Taiwan's trade policy score is 0.5 point better this year.

Note how that "...." effectively eliminates any details. The original report from which this information is drawn is online, fortunately. It is from the US Trade Representative. It needs to be noted, and loudly, that the USTR is not what anyone would consider an unbiased source on Taiwan's trade policies. The dataset used by Heritage is thus contaminated at the start.

But what are the contents of those 65 restricted categories? Well, for starters, one is ammunition. Taiwan is a civilized country where locals are basically not permitted to own firearms. Another restriction is on motorcycle size and highway access -- essentially the USTR wants Taiwan to open its highways to large, fast motorcycles, an idea only a madman or corporate shill could embrace, since neither much cares how many die. It turns out that a number of these "interventions" exist for sound reasons and are "interventions" only in the most technical sense of the word. In other words, Heritage's ideas of what constitutes "intervention" are strongly value-laden.

The Heritage report is also interesting for the interventions it ignores. For example, nowhere does it address Taiwan's prevalent habit of developing industrial districts with tax breaks and other advantages for business (presumably similar arrangements in the US and elsewhere are ignored). The "Informal Market" is simply a score from Transparency International and does not reflect the pervasive and well-developed informal market in Taiwan. In short, the methodology is extremely uneven and selective, ignoring both important government interventions and free-wheeling sectors of the economy.

In addition to their warped values, yawning gaps, and American bias, the most serious problem with the Heritage's rankings is that they are arbitrary. Read carefully the finance "methodology":

As of 2004, Taiwan had 45 domestic banks, five medium-size business banks, 36 foreign banks, 35 credit cooperatives, 253 farmers' credit unions, and 25 fishermen's credit unions. "Since the mid-1980s," reports the U.S. Department of Commerce, "the financial sector as a whole has been steadily opening to private investment. Nevertheless, the market share held by foreign banks remains relatively small (below three percent). The establishment of new securities firms, banks, insurance companies, and holding companies, has underscored this liberalization trend and enhanced competition. Four large state-owned banks were privatized in early 1998, and another four sold to the private sector in 1999. The only reinsurance company was privatized in 2002. Privatization efforts have reduced the number of public banks to five and cut the share of assets controlled by public banks from 61 percent to 21 percent of total assets of all domestic and foreign banks." Based on evidence that, despite progress in privatization, the government still has a substantial role in the banking sector, Taiwan's banking and finance score is 1 point worse this year.

Take a close look at that last sentence:

Based on evidence that, despite progress in privatization, the government still has a substantial role in the banking sector, Taiwan's banking and finance score is 1 point worse this year.

Yes, that's right, you read that correctly. In the topsy-turvy world of Heritage ranking, you can go forward in openness but backward in scores. Apparently progress that is not fast enough does not result in a lower positive score, it results in a negative one. By any rational standard if Taipei scored X last year, it should score better than X this year, because progress has occurred. But Heritage simply decides arbitrarily to award a negative score. Why?

Why? Well, the KMT was a regular contributor to both Heritage and the American Enterprise Institute back in the bad old days. Perhaps someone is repaying a favor. Perhaps it is the flow of funds into Heritage from the international banking and finance industry, or the fact that one of the compilers of the report is a former employee in the international banking industry. Or perhaps it is simply the mad right-wing politics of Heritage, exemplified by their fawning worship of King George. Heritage describes the index on its home page:

......Once again, Hong Kong and Singapore lead the pack, followed by Ireland, which jumped several spots. The United States is back in the top 10, after its first year out, due to narrow cuts in government spending and lower tariffs.(emphasis mine)

"Narrow cuts in government spending?" On my planet the Bush Administration has rung up the biggest deficits in human history by going on the largest public spending spree of any Administration, and the government has been intervening in the economy relentlessly, to shovel bucks to Bush's cronies. But in the Heritage world, adding another $2 trillion to the US debt just to murder Iraqis wholesale and reward Halliburton and other Republican-supported firms can be ignored, but if Taiwan doesn't want to import ammunition in order to forego the carnage seen regularly on streets in the US, why, that is a horrible restraint of trade.

In sum, the report's methodology is highly slanted, selective, and obviously right-wing. Like the World Economic Forum's GIGO report on Taiwan's Competitiveness, this document should be held at arm's length and pinched between thumb and forefinger. It stinks.

UPDATE: the leaky pen also spanks Myrick.

UPDATE: Chris from Asiapundit sent me a very polite email in response:

My major argument, and SunBin's and the Heritage Institute's in this case, would be on the current climate and the shift in policies since CSFB took the reins. The DDP is more restrictive on mainland investment flows, internal environmental policies and a number of other matters. Restrictions of chip fabs and petrochemical plant investment in China - for instance - cannot be justfied under 'security' reasons if the Mainland already has such technologies from the ventures set up by Toshiba, BASF, BP etc...
If we are going to bring up the KMT's behavior in the 50s and 60s when discussing how they should be defined today, then I don't think Foreigner and I could be quibbling over whether 'pro-communist' is a
suitable term for the party. (For that matter, if we were to jump back as recently as the Lee Teng-hui years, pro-communist wouldn't be something you could tag on the KMT). And I am hardly a pro-KMT propagandist, but calling them 'pro-communist' does them a disservice. (Not that you have, I note you typically use the 'pro-China' label - I see nothing wrong with using Blue/Green). That said, calling the KMT crass opportunists and short-sighted on defense would in my estimation be pretty accurate.

Let me begin by first noting that these KMT interventionist policies that began in the 1950s extend down to the end of KMT rule in 2000 and beyond; in many ways the DPP is simply following and expanding on what the KMT already began -- the government service reforms as part of the Total Quality drive that began in the late 1990s, for example, or reform of the banking sector, also ongoing. It is important to keep in mind that KMT interventionism is not an affair of the 1950s and 1960s, but continues to the present day. Sugar, salt, and iron are more or less still state monopolies, just as they were 2,000 years ago in China when the Tye Yen Lun first recorded debates on what the State should own. "Intervention" is an ancient policy in China.

I think what we have here is a philosophical difference in what constitutes an economic "intervention." Taiwan has numerous policies that protect local manufacturers, but intervention in mainland investment is not one. The DPP's policy of slowing economic investment in China is not an "economic" policy in the same sense that, say, curbs on imports of wood for home construction are. In the latter, the government makes it difficult for a wooden house to be certified as fire safe, thus preventing owners of such houses from obtaining fire insurance. Since the investment cannot be insured, few people are willing to risk building a wooden home, preserving the home construction market for local cement firms, whose connections to the KMT are too well-known to enumerate here. I share Asiapundit's distaste for such inefficient and trade-restrictive policies.

But the "Go Slow" policy is a national security policy, a policy specifically exempted from Heritage in its consideration of economic intervention. It is also worth pointing out that the KMT initiated this policy in 1996 -- thus KMT criticism of DPP policy could be seen simply as the usual reflexive KMT attack on any policy the DPP supports, even where the KMT once called for it. One could list numerous examples of such tactics. Restricting Taiwan's chipmakers from investing in the mainland is not being done because the DPP wishes to preserve some market from foreign competition -- the DPP would welcome competing chip plant investment in Taiwan -- or to keep the technology out of Chinese hands. It is done to protect the island's industrial base from destruction at Chinese hands -- and destroying that base is certainly a Chinese goal. I am compelled to point out that legal investment is one-third actual investment in China -- essentially the DPP winks at violations of the "Go Slow" policy, which raises the important issue of what DPP policy really is. A few high-profile industries are being protected, but in truth there is little the DPP can do to prevent Taiwan from de-industrializing.

Chris' examples of environmental policies also leap to mind here. Again, protecting the environment is not "economic intervention" in the sense that it exists to restrict trade or favor one set of firms over another. Such policies theoretically apply equally to all firms in Taiwan (though in practice foreign firms are far more likely to be environmentally sound than local ones, and enforcement occurs more strongly on larger firms). No one could seriously regard the DPP push for renewable energy as a negative intervention in the economy. And no one who lives here would dispute the desperate need for serious and sound environmental policy. The environment is a good example of what happens when the DPP attempts to address the neglectful policies of the KMT: it is criticized for being "interventionist" when it is simply doing what any rational modern state would do -- preserve and re-establish the cleanliness of local water, soil, and air.

Another thing that should be highlighted is that the DPP and KMT are very close to each other economically. The DPP's foreign labor policies, as the Kaohsiung worker riot last year showed, are probably even more exploitative than the KMT's. There is no union movement in Taiwan at all. The environmental improvements instanced by Chris began under the KMT.Many other liberalization policies, on private electricity generation, and gasoline sales, are also continuation of KMT policies. The DPP is also continuing the KMT policy of opening industrial districts that give tax breaks, and also dedicated districts, for specific industries, to encourage their growth. This too Heritage ignores. In many cases the DPP does want to get rid of KMT interventions in the economy, but locals object. For example, the DPP has long talked about eliminating the widely-detested 18% interest rate on retirement accounts held by government workers, a long-time KMT "intervention" that favored mainlanders over Taiwanese (since they were more likely to get government jobs and more likely to rise in them). However, without a legislative majority, the DPP can do nothing.

This brings me to yet another point: there are numerous bills pending that could make great changes in Taiwan's economy, but the legislature is dominated by the pro-China parties and hence, the government cannot move forward. Who is the real intervener here? A the Taipei Times noted of the government's attempt to sell the Taiwan Business Bank, which triggered a strike by its employees:

Moreover, the Taiwan Business Bank incident has caught lawmakers' attention, and may prompt them to demand reviews of every government proposal on disposing of state bank shares. It will certainly increase uncertainty for investors and make it more difficult to reach Chen's target.

In many cases the DPP is taking the heat for policies that the pro-China parties actually foster. Because Taiwan's legislature is more powerful than the Presidency -- the government is designed to be run as a one-party state, not a democracy, in which lines of authority come down through the Chairman of the Ruling Party, not the President -- "DPP policies" are really legislative failures, not DPP problems.

Ultimately the clash between the KMT and the DPP is not a clash between competing economic ideologies, but between competing nationalisms, one Chinese, the other Taiwanese. On virtually all serious "intervention" policies, from national health care, to unions, to foreign labor, to education investments, and so on, the two parties are actually quite close, and struggle hard to differentiate themselves from one another. The exception is of course China policy, but then the DPP is following policies the KMT itself initiated, and which the KMT now objects to.

I'd just like to thank Chris for his polite email, and the stimulation to blog on this important topic.

UPDATE: Sun Bin comments below:

let me define intervention/meddling very simply, i think this is the same for all economist:
any government advice/restriction/diversion of private business' business decision is meddling in this case DPP's meddling with the busines decisions of TSMC, Formasa Plastic, UMC are interventions, and not 'free'.

This is of course bog-standard right-wing neo-classical policy thinking (a Marxist economist will give you a very different idea). I'd like to explore it for a second.

In neo-classical economics "meddling" is basically a political term, a value for which there is no objective justification. The political loading of this is nakedly pro-business.

In any analysis of the economic side of things, any economist will tell you that a given business will produce externalities, positive and negative. An externality is an effect of a business on others, essentially, which the others have no control over. The classic example is of course pollution generated by a factory, which poisons others far away. Externalities can be negative, like pollution, or positive, like the way painting my house raises property values for everyone around me by making the neighborhood look good.

An economist can tell you what such externalities should be for a given business, and tell you of the effects on others. When businesses produce, they incur costs. These costs exist in the real world and cannot be made to disappear by government. Further, the distribution of these costs is not something natural, but the result of values and choices made by businesses and policymakers. Hence the government attitude toward such externalities is not a matter of economic reality but of social and political values. If the government chooses not to force businesses to capture all the costs of their production, but instead, to pass those costs along to others, that is intervention, though many neo-classical economists do not define it as such. If I am allowed to dump my waste in a river, then not only are the people downstream poisoned, but further, their medical production is distorted because they must, thanks to the meddling of the government, put resources into production of anti-cancer medications, resulting in lower production than otherwise would have occurred of other types of medicines. The government's meddling has distorted the market.

Now, Sun Bin will argue that the government isn't meddling but refraining from meddling. But of course, this is absurd. If the government chooses that I will be poisoned rather than that a factory will clean up its waste, the government is meddling in my business (I can't do translation work if I am dying of bladder cancer!). The whole construct of "meddling" is simply a bit of pro-business cant dressed up in scholarly jargon. It is a classic case of disguising values as scholarship. Not meddling is a form of subsidy regime for businesses. There is no difference between not enforcing clean business, and the government paying businesses to clean up. The latter just distributes the costs differently, is all.

In sum, right up to the point an economist says "Your business will produce the externalities X, Y, and Z" that economist is engaging in scholarly analysis. But the moment she says "It is meddling to force businesses to recapture negative externalities X, Y. and Z" she is engaging in a discourse about values. That we create costs is a matter of economic reality. How we distribute those costs is a policy choice.

The idea that the government "meddles" when it forces businesses to recapture some of their externalities is simply abuse of scholarship to provide justification for values, much as social Darwinists abused the idea of natural selection to justify the power of elites over society (note that social Darwinists and neoclassical policymakers often overlap). It is high time the whole idea was recognized for what it is: a naked power play through rhetoric, and the disguising of values as scholarship. When we say that government meddles, we are converting an is into an ought, just as if we used evolution to justify exposing babies on hillsides.


Anonymous said...

Michael, illuminating analysis. Nick

Anonymous said...

Good work Micheal, you're on a roll lately.

Sun Bin said...

you said "I think what we have here is a philosophical difference in what constitutes an economic "intervention." Taiwan has numerous policies that protect local manufacturers, but intervention in mainland investment is not one. The DPP's policy of slowing economic investment in China is not an "economic" policy in the same sense that, say, curbs on imports of wood for home construction are. "

let me define intervention/meddling very simply, i think this is the same for all economist:
any government advice/restriction/diversion of private business' business decision is meddling
in this case DPP's meddling with the busines decisions of TSMC, Formasa Plastic, UMC are interventions, and not 'free'.

as chris pointed out, there are already factories in mainland China of similar technology, so the 'security' argument does not work. in fact, it hurts taiwan more than mainland.
e.g. if TSMC is more profitable, ROC govt will receive more tax. and the same 2.6% GDP spending on defense is a larger amount.
OTOH, SMIC (TSMC's competitor in mainland) will lure away Taiwanese engineers and TSMC customers anyway, it dose not repatriate profit to taiwan.

Sun Bin said...

The DPP is also continuing the KMT policy of opening industrial districts that give tax breaks, and also dedicated districts, for specific industries, to encourage their growth. This too Heritage ignores

no Heritage did not ignore that.
score changed from 2.03 to 2.48. it didn't shoot up to 5.00.

the difference in score measures the difference in policy. if heritage ignore the continuity, the score would be even worse.

Anonymous said...

Nice work.
I just read a piece about Jake van der Kamp's thoughts on Heritage Foundation's ranking on Hong Kong via Simon World. Same criticism as yours.

Anonymous said...

Ah, classic. Give a man a "university position" teaching his native language, a sweater two decades out of fashion, a hairy beard, sharp lookin' glasses, and Google... and he suddenly is reborne as a pseudo-intellectual.

Michael Turton said...

Naw. I was a pseudo-intellectual long before I got a job teaching at the U. But then an individual who posts anonymous insults on a personal blog really isn't in a position to discuss how pathetic someone else is, eh?