Taiwan's Economy: What's Going On?

Last week blogger Bent pointed out that there is a problem with the KMT running on the economy: it's flying. Nevertheless, it promises to be a campaign issue anyway, as Bent points out:

Make no mistake, though, the KMT and their supporters will deny this upturn as long as they plausibly can. Among blue supporters is has long been an article of faith that the economy is terrible; my Chinese teacher mentioned it at least every other class, and my mother-in-law is always lecturing our friends about how difficult it is to find a job (which they always manage to find within days). Look for Ma et al to start making noise about the recent economic news only benefitting those at the top of the heap - they’re the party of the common man! Well, except that the common man has a Taiwanese identity, not a Chinese one.

The KMT is admitting reality to a certain extent, but claims it's all manipulation. A-gu spotted this gem from the mouth of KMT Veep Candidate Vincent Siew:

But to get a more fully accurate understanding, let's get the quote. In response to the great performance of the stock market recently, Vincient Siew said:

「政府在這個期間，他盡量在炒作，希望能將它(股市)拉開起來，因為拉高起來，對他們未來的選情也許也有幫助，但是我希望股票反應的是基本面。」
In this time period, the government has spent all its efforts doing things [literally, "stir-frying" a term that to manipulation stock markets or day-trader-like attempts to get rich quick with short term investments; here, I don't think he means the government's manipulating markets, but is sorta dropping a not so subtle hint]. This is because the government hopes that if it can pull the stock market higher, it might help them in an election, but what I hope for is a stock market that reflects the fundamentals."

Siew's point, in other words, is that, yes, the economy is booming, but it is all manipulation by the dastardly DPP. The KMT's weird world point of view is that the DPP is completely incompetent, except where it needs DPP competence to sustain a conspiracy theory view of reality -- in which case the DPP suddenly becomes omnicompetent. Sure.

Reality is a bit more complex, however. This week the Global Investor section of Newsweek puts things in perspective:

For one thing, the country has run into the law of diminishing returns. Taiwan's per capita GDP is now close to $20,000. Economic growth slows at the higher stages of development; the same process has occurred in South Korea and Japan. Most low-end manufacturing has migrated to China and Vietnam. And like Japan, Taiwan faces a demographic problem, with a slowing birthrate and little immigration.

Some of these factors are endemic to advanced economies. So should Taiwan accept relatively low growth as its fate? While the country won't be able to replicate the "miracle economy" pace of 8 percent growth it had in the 1970s and '80s; policymakers in Taipei can still aspire for higher than 4 percent by pushing the economy into higher value added sectors.

Still, many foreign portfolio investors find it hard to comprehend the reasons for Taiwan's slowdown and have thus poured more money into its stock market than into any other emerging market since the current global bull run began in March 2003. Investors are chasing the island's stocks in the hope that its economy will accelerate once more. Others think the market's slowly deflating equity valuations are inexpensive compared with their historical values. After all, Taiwan's market traded at a price-to-earnings ratio of 100 in 1989, when the country was one of the world's fastest-growing economies and strict capital controls kept money trapped at home. It now trades at a P/E ratio of 15, which is slightly above average for emerging markets. Foreign investors are confusing the more normal valuation levels with outright cheapness.

The writer adds:

Taiwan's policy of having the region's highest tax rates and an inefficient goods-distribution system has inflated the country's cost structure and accelerated the outward flow of investments, resulting in low job growth and virtually stagnant wages. As Hong Kong and Singapore have shown, the key to keeping employment humming at higher stages of development is to fill the vacuum created in the manufacturing sector by boosting the services sector. But in Taiwan, financial services remain hamstrung, thanks to the government's penchant for interfering with banks.

The analysis concludes:

Given its wealth, Taiwan may never match the growth rate of poorer, larger neighbors like China or India. It will be similarly difficult for the Taiwanese stock market to outperform its emerging-market peers, as its valuations are not yet deeply discounted. Continued policy paralysis and slow progress on the reform front, however, raise the risk of Taiwan's becoming a permanent regional also-ran. That would justify the country's confidence crisis—and once again dash foreign investors' hopes of another boom.

There's more at work than just the goods distribution system and government interference with the banks. Taiwan's "problems" are the problems of any advanced economy, complicated by the political threats from China, and perceived through the strong cultural belief here that life is a zero-sum game and if you're not at the top of the heap, you must be at the bottom. Most nations would take joy in Taiwan's 4% annual growth rate and strong electronics sector. Instead, we have angst. Some of it is justified, given the decline in purchasing power faced by the middle and working classes, but it is also true that the public in Taiwan could stand a little education in the problems of growth when your economy is already quite wealthy.

[Taiwan]