Monday, August 30, 2010

Income Inequality: CEPA vs ECFA

The DPP has put its finger on a very powerful point, income inequality, and is pushing hard.

Rising income inequality has been an issue in Taiwan since the 1990s. During the 2008 election campaign, the KMT pushed the idea that the economy had been stagnant under the Chen Administration -- an idea it refers to as the "Lost Decade", a piece of propaganda so obvious not even certain blatantly pro-KMT international media organs will touch it. This campaign was successful despite the fact that a simple Google search will show that the economy was growing at around 5% during 2006-7 and during the first six months of 2008, at 6%. The reason that KMT propaganda resonated with the public was the steady rise in income inequality, along with wages that have been basically stagnant for years.

I've discussed some of the causes of income inequality elsewhere. Many factors have been identified as possible culprits. It is also a regional and even global issue. As Craig Meer and Jon Adams observed several years ago in an article that discussed Taiwan's rising income inequality:
The International Monetary Fund’s September Regional Economic Outlook for Asia notes that income inequality increased “dramatically” across Asia in the last decade. In that time, 13 out of 18 Asian countries posted increases in income inequality, as measured by the Gini coefficient. Ten out of 15 have a widening richest-poorest income gap, with South Korea posting the sharpest divergence. And a majority of countries are seeing a shrinking middle class, especially China and Sri Lanka.
One DPP strategy is to use Hong Kong's CEPA agreement to see what will happen to Taiwan once ECFA comes into force. A recent commentary in the Taipei Times noted:
The Democratic Progressive Party (DPP) recently broadcast a TV commercial voicing doubts about the benefits of the Economic Cooperation Framework Agreement (ECFA). Its contention was that the agreement would strip Taiwan of its sovereignty and consign it to being another Hong Kong. It would also, according to the ad, contribute to an increase in the disparity between the rich and poor.

In response, Council for Economic Planning and Development (CEPD) Minister Christina Liu (劉憶如) retorted that Hong Kong’s poverty gap had been considerable long before the territory signed the Closer Economic Partnership Arrangement (CEPA) with China. Consequently, Liu asserted, the CEPA had nothing to do with the disparity in wealth. In fact, she added, signing the ECFA would actually reduce the poverty gap in Taiwan.

Such a statement from an official responsible for guiding the country’s economic development leaves one dumbfounded.

Hong Kong signed the CEPA with China in 2003. According to Hong Kong’s Census and Statistics Department, its Gini coefficient (a value between 0 and 1, where 0 corresponds with perfect equality and 1 corresponds with total inequality), determined by the distribution of incomes in Hong Kong, increased from 0.525 in 2001 to 0.533 in 2006, the highest since 1971.

Meanwhile, the differential in revenues between the top and bottom 10 percent of families in Hong Kong increased from 26.9 times in 2001 to 32.5 times in 2006. The concern is that the rich get richer and the poor get poorer, and there is no getting away from the fact that this phenomenon does really exist in Hong Kong and that it has worsened since the CEPA was signed.

The CEPA has also had a considerable impact on Hong Kong’s industries and labor market, gradually turning the majority of Hong Kong’s middle to lower-class workforce into marginal workers, those forced to “work more for less.” This is one of the main reasons for the increase in Hong Kong’s poverty gap.

A few examples might well shed a little light on these figures. The number of workers who earn less than HK$5,000 (US$640) a month has increased by more than 70 percent, from 307,000 in 1997 to 528,000 in 2006, and the number of workers who work 55 hours or more per week has increased by more than 80 percent, from 501,000 in 1997 to 934,000 in 2006.

Both the CEPA that China made Hong Kong sign and the ECFA in Taiwan’s case are part of the free-trade system. And in both cases the likely winners in this process of globalization and liberalization are the capitalists and multinationals. The losers, as usual, will be the workers who can’t afford to move away.
The commentary goes on to note a related yet separate issue: the Ma government's as-yet unkept promises to do something to alleviate the gap. In other words the DPP has two separate but related issues here to pound the government with: that ECFA will increase income inequality, and that the government will do nothing about it.

Taiwan News had another one of its hard-hitting editorials on the issue as well:
In 1993, labor earned 51 percent of Taiwan's gross domestic product, while capital received 29 percent, but in 2007, labor's share had dipped to 44 percent while the share going to capitalists climbed to 37 percent, according to DGBAS data.

The former Democratic Progressive Party administration's most effective initiatives was the construction of a broad social safety net which included legislation for unemployment insurance, pensions for farmers and senior citizens, laws to protect employees from sudden plant closings or layoffs and a national pension system, even though many associated measures and economic development programs were boycotted by the KMT's legislative majority, such as a statute to promote renewable energy industries and even the opening of a southern branch of the National Palace Museum.

During its first two years, the Ma government has embarked on a campaign to cut business and "rich" taxes, including inheritance and gift levies and the corporate income tax, as well as lowering barriers to free trade with the authoritarian People's Republic of China.

In the face of charges by labor movement and independent economists and DPP leaders that controversial "Cross-Strait Economic Cooperation Framework Agreement" could exacerbate Taiwan's income and wealth inequalities, KMT government officials have replied with denials.

Typical was a statement issued by State Minister and ex-economics minister Yiin Chi-ming, who last Wednesday lambasted an editorial in the vernacular Liberty Times which expressed concern that ECFA could spur a worsening of income and wealth inequity as had the "closer economic partnership arrangement" between the PRC and its Hong Kong Special Administrative Region in the past seven years by maintaining that Hong Kong was already a highly unequal society before CEPA and that Taiwan did not have a serious problem since was only a 6.05 times gap between the highest earning fifth of Taiwan households and the bottom earning 20 percent of households.

However, the next afternoon, the DGBAS confirmed that Taiwan's income distribution gap had worsened from 7.52 times in 2007 to a record 8.22 times last year or from 5.98 to 6.04 in 2008 and 6.34 last year times if government transfer and welfare payments are considered.

While attention by the KMT government to the question of inequality is welcome, the response issued by KMT Premier Wu Den-yih's Cabinet has been limited to the classic bureaucratic ploys of forming a special task force to improve income distribution was limited to yet another exercise in "ruling by slogans."

Perhaps the most problematic of the seven slogans issued yesterday afternoon was that of "promote economic growth and boost employment" as one of Taiwan's most critical socio-economic problems is the fact that since nearly half of Taiwan's export orders are actually produced in the PRC even if the funds are received in Taiwan, nominal economic growth no longer necessarily leads to increases in either employment or wages.
Not mentioned in any of this is Taiwan's complete lack of tax on capital gains. Since the income of the wealthy goes untaxed (see this post), "Social welfare payments" consist of income transfers from the salaried middle and upper middle classes to the poor, or of increased public debt -- which, since it is borrowed from holders of capital, simply increases their incomes. Taiwan News notes that government borrowing is problematic -- can social welfare payments be sustained? The Ma Administration has vastly increased the public debt both because of the stimulus spending and because it has slashed taxes on the wealthy. However, Taiwan is fortunate in that it has little foreign debt and huge foreign exchange reserves (see here for longer discussion).

ECFA's effects on income inequality, if CEPA is any guide, are likely to exacerbate existing trends. Because the DPP has a better record than the KMT on the public welfare, this issue is likely to hurt the KMT during the run-up to the 2012 election as ECFA comes into force and its effects are felt throughout the economy, from falling wages and job opportunities, to the rising flow of legal and smuggled crap from China in the local markets and shops.
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Anonymous said...

The discussion about income inequality is so dishonest and stupid because it does not recognize what most economists know as the root cause--globalization and the entrance of China, India, Russia, and others into the global marketplace. Entrance into the global marketplace above all means the entrance of literally billions of new people into the worldwide labor market.

Come on guys, supply and demand? The balance has tipped heavily in favor of capital, but perhaps with China's population stable and much wealthier, we may see the balance swing back the other way in the next decade or so.

The DPP made a huge mistake in trying to argue that income inequality wasn't getting worse; it would have been better to point out that this was exactly what was happening in highly developed economies like the US, and come up with a plan to ameliorate its impact, but I suppose the KMT would have never allowed for proper dialogue on how Taiwanese workers can increase their global competitiveness.

As an aside, my two cents are basically island-wide English fluency + branding Taiwan as a design powerhouse from microchips to jewelry to print and high-quality production center (high-precision tools, bikes, fruits) are really the best ways for maintaining and increasing the premium for Taiwanese labor.

Carlos said...

I'm with you on capital gains taxes, but overall... I'm not sure the DPP can convince people that it has a better plan. Part of the DPP's platform is responsible economic ties with China, and that certainly didn't help income equality during Chen's presidency. I'm not sure anyone knows what to do about it, frankly.

mike said...

Income inequality has two chief causes that can only be disentangled by attending to differences in principle.

The first cause is simply that some people are more productive than others - i.e. they produce goods and services that other people attach sufficient value to for their producers to profit, whereas there are plenty of other people who, for whatever reasons, simply don't do this, or do this to a lesser degree. Result: income inequality. Disentangled on its own like that, there is no moral problem with this cause of income inequality (unless you're a communist).

The second cause is the distorting effect which the State exerts on more or less everything, but above all on prices via manipulation of currency but also via legislative and regulatory restriction and artificial extension of the market parameters within which people typically decide how to run their own lives. The moral problem with this is that it requires the unwarranted presumption that some people (government) have a right to dispense with the lives and values of other people (subjects) by claiming a territorial monopoly on violence.

That some people are richer than me or you is not a moral problem per se, but the violent manner in which it may be both brought about and sustained by government is.

The DPP may or may not achieve electoral successes with this tactic of stressing income inequalities, but in doing so they prove that their principles are not consistent with human freedom.

The fight for Taiwanese freedom must now be made in tandem with the fight for Chinese freedom because the de facto exercise of political power on this island is going to come increasingly from Beijing. The DPP were, and are, too stupid and socialist to know what to do about this.

Michael Turton said...

Disentangled on its own like that, there is no moral problem with this cause of income inequality (unless you're a communist).

Or, unless you continued your reading past the age of 13. There's a whole raft of structural/social features that shape income distribution: from things like gender and ethnicity to tax and redistribution to the way the corporate and financial structures in a given society are set up. To say "some are more productive" simply begs the question of why they are more productive, and hence, exploration of the complexities of income disparities.

Michael Turton said...

As an aside, my two cents are basically island-wide English fluency + branding Taiwan as a design powerhouse from microchips to jewelry to print and high-quality production center (high-precision tools, bikes, fruits) are really the best ways for maintaining and increasing the premium for Taiwanese labor.

Yes, sort of realizing a Singapore-based model but without the political horseshit. I often think this too.

mike said...

"Or, unless you continued your reading past the age of 13."

Yeah I bet "Chicken Little and other stories" was fun eh Turton?

"There's a whole raft of structural/social features that shape income distribution: from things like gender and ethnicity to tax and redistribution to the way the corporate and financial structures in a given society are set up."

Hence my third paragraph: squirm away.

"To say "some are more productive" simply begs the question of why they are more productive..."

Not at all - some people simply produce goods or services that are wanted more, or wanted in greater quantity than those produced by other people.

Note however, my caveat about entanglement. Check your dictionary...