Thursday, April 13, 2006

Income Inequality and the Political Economy of Taiwan

Taiwan News reports on an important roundtable that explains why Taiwanese are so dissatisfied with Taiwan's economy despite steady economic growth.

The "Taiwan Miracle" was marked by two unusual phenomena. One was the high growth rates, and the other, high income equality. These were driven by Taiwan's powerhouse small- and medium-sized enterprises (SMEs). Ignored by the government and supported by an elaborate underground financial system, they turned Taiwan into a byword in political economy circles.

However, as the economy formalized and large companies began to dominate during the late 1980s and 1990s, the miracle, like so many of Taiwan's businesses, moved to China, and income inequality began to rise as the service economy grew. Former President Lee Teng-hui's speech, read out at the roundtable, identified this problem (translation from Taiwan News):

To be frank, the performance of Taiwan’s economy in recent years really makes people worry. The economy posted some growth, but the people usually don’t perceive any gains from this growth. The pace of growth lags far behind that of South Korea, which is in the same stage of development, and other neighboring Southeast Asian countries. Looking at per capita gross domestic product for instance, Taiwan had per capita GDP of US$10,200 in 1992, while South Korea’s stood at US$7,195. But by 2004, South Korea had overtaken Taiwan with per capita GDP of US$14,098, compared to Taiwan’s US$13,260. Why would things turn out that way? This is the key topic that we need to discuss at today’s All People’s Economic Development Conference.

Lee goes on to say:

We must further point out that over the past few years, Taiwan’s economic development has not only been far from ideal, but even worse, the average citizen has not gotten the impression that our income has increased. Their impression is borne out in reality. According to figures issued by the Directorate-General of Budget, Accounting and Statistics in February, Taiwan’s actual normal salaries saw 1.28 percent negative growth last year. This was not only the second consecutive year of negative growth, but also the sharpest decline ever. According to figures released by the government, Taiwan’s GDP grew at a rate of 5.7 percent in 2004, and 3.7 percent last year. With such growth, how can it be that salaries fell for two consecutive years? It is very obvious that the purchasing power of Taiwan’s average citizen is also on a steady decline.

Is this phenomenon unique to Taiwan? If we compare wages in 2000 and 2004, actual wages in South Korea’s manufacturing industry rose 27.64 percent (during that period), while Taiwan’s rose only 2.7 percent. This means that South Korea had wage hikes that were ten-times higher than in Taiwan. When we look at these figures, we can say very bluntly that economic growth over the past few years has essentially been shared by only a minority of people rather than by everyone.

Taiwan is actually suffering from the US problem -- the rich get richer at the expense of the middle and working classes. In the US that is partly the result of structural changes in the economy, and partly the result of two decades of class warfare on behalf of the wealthy, but in Taiwan it appears to be a structural feature of the national economy:

The results of Taiwan’s “go west” experience cannot compare with the results of South Korea’s strategy of investing at home. South Korea’s accumulated investment in China reached only US$20 billion by the end of 2004, accounting for just one-tenth of Taiwan’s China investment. South Korean investment in China has, however, slightly increased over the past two years. And aside from the past two years when South Korea invested somewhat more in China, South Korea’s economy performed better than ours every year with its average per capita GDP also exceeding ours. Just because South Korea’s enterprises are using China’s resources, they are not stuck in China for the rest of their days. Also, the technological level and international competitiveness of South Korean enterprises is better than ours.

Even more frightening is that South Korea last year exported goods worth US$76 billion to China, exceeding Taiwan’s US$74.1 billion in exports to China. In the past, many scholars swore by the idea of “generating exports through investment,” which meant “generating Taiwanese exports through investment in China.” This policy clearly loses out against the South Korean experience of “investing at home, growing roots at home, and promoting exports.”

Using China’s cheap resources to raise international competitiveness, this blind “go west” strategy has only encouraged our manufacturers to pursue a competitive strategy of cost reduction and going for quantity to prevail in the market. More so it has triggered vicious price-cutting competition among fellow manufacturers so that profits shrink by the day. Therefore an active opening policy is not only unable to raise enterprises’ business performance. Giving free reins to the “go west” trend will make manufacturers aim solely for low costs, while neglecting the upgrading of basic technology and quality. That way they will naturally not be able to build their own brands and gradually lose competitiveness internationally.

Lee, whose doctoral thesis on Taiwan is about capital flows, does not mention it in his speech, but an important structural difference between S. Korea and Taiwan is the existence of chaebol, or business conglomerates. The economy of S. Korea is structured around large agglomerations of business whose activities are coordinated with the government and who receive its protection and support. In Taiwan, export growth has been driven by the activities of SMEs, who have weak links to the government, who are not supported or guided by it, and who do not listen to it (as the vast quantities of illegal investment in China show). Taiwan's government has had policies to encourage the growth of certain industries since the 1980s, but these have had mixed results. The result of the two different economic structures is that S. Korean firms invested at home, whereas Taiwan shifted its seed corn to China, damaging its future and slowing its economic growth:

Capital outflow will eat into domestic investment, causing a slump in domestic industries and an outflow of capital that used to be abundant in the past. In 2003, Taiwan’s domestic investment accounted for just 16.3 percent of GDP, failing to reach 20 percent for the third year in a row. In contrast, South Korea always kept a domestic investment level of 25-26 precent (of GDP), and in Japan that figure stood at 23-25 percent. As a result of insufficient domestic investment, domestic economic activity has weakened, factory closures are increasing, the unemployment rate is rising, and domestic consumption growth is on the decline so that the entire national income is of course unable to rise. On top of that manufacturers do not invest enough in R&D so that product competitiveness declines, which forms a vicious economic circle that is hard to break.

A research report on the link between “Taiwanese investment in China” and the “unemployment rate” found that the higher the proportion of Taiwanese investment in China, the higher the unemployment rate and the wider the family income gap. The fact that there is a direct relationship between the two proves that there is a link between the negative growth of substantive normal salaries last year and two years ago and Taiwanese manufacturers’ going west to China. This is also the major reason why the government is unable to gain the support of the people as nowadays the entire working population strongly feels stress and fear over the possible losing of their jobs.

These problems do not admit of an easy solution. It should also be obvious that the pan-Blue "It's all Chen's fault!" and the talk of the "recession" are all wrong. It is not Taiwan's economic growth that is the problem. It is rapidly rising income inequality and the hollowing out of the island's industrial base, along with the rise of the service economy, that has ordinary Taiwanese feeling like hamsters on an treadmill whose speed is constantly increasing. Neither party seems to have a firm grasp of the situation, nor a set of programs to address the issue.

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