Friday, October 26, 2012

Stagnant Wages = Reviving Competitiveness

The twin volcanoes of Guishan Island, just offshore from the fourth nuclear plant. It took real genius to put a nuke plant there.

Ralph Jennings with a strong article in Forbes on how wage stagnation is actually making Taiwan more competitive: Taiwan quality at cut rate prices.
Since the 1990s manufacturing and other jobs have streamed out of Taiwan and into China. That’s depressed Taiwanese wages, leaving them unchanged in real terms for a decade. The stagnation has driven middle-class workers to live with their parents and spike plans to raise children. But now it’s spurring growth in both ambitious startups and established companies weary of the growing costs and headaches of doing business in China. In short, Taiwan is becoming more competitive.
Jennings details some of the fallout, including the squeeze felt by many families from rising mortgage costs, as well as Taiwan's ultra-low birthrate, in part because no one can afford children. One factor missing in the low-wage equation is the record number of foreign workers here, who also help keep wages down. In case you missed it, Commonwealth magazine had another one of its top-notch analytical pieces, this one on the Korea-Taiwan tussle (whole thing is excellent, do read). The rise of South Korea was driven by good government policy, according to the article:
Another key to South Korea's ascendance over the past 15 years has been the government's effective implementation of several policies, including the development of a "Korean cultural wave" in 2001, an FTA blueprint drafted in 2003, and support for the auto industry and the creative and cultural industries, all of which were competitive internationally. Taiwan's main economic initiatives over the same period, including the promotion of free trade ports and support for six emerging sectors, were not well executed and were not internationally competitive.
Taiwan's government has taken a different route:
South Korea harnessed the country's power to support big companies in creating value and developing brands. In Taiwan, on the other hand, emphasis was put on containing and lowering costs and subcontracting for international vendors.

Tsing Hua University professor Perng Ming-hwei observes that when Taiwan arrived at a crossroads, it faced the choice of either having its companies relocate overseas in pursuit of cheap labor or upgrading its industries. Most Taiwanese companies chose the former approach and headed across the strait to China in droves, taking advantage of China's cheap land, labor, utility and even environmental costs to support their continued growth.

Perng laments that these companies chose an "easy money" option that entailed buying foreign turnkey solutions and importing raw materials in the pursuit of higher production yields and lower manufacturing costs.

In contrast, South Korean companies decided to invest heavily in technology and R&D and in building global brands.

Over the past 10 years, South Korea's spending on R&D as a percentage of its GDP has consistently outpaced that of Taiwan, and it exceeded 3 percent in 2006 to overtake Japan's as the highest in Asia.
Taiwan's industry make up has changed substantially since the 1960s, but at heart its remains an economy driven by subcontracting and small firms, whereas South Korea is dominated by huge conglomerates that operate on a global scale. South Korea chose to build productivity, Taiwan chose to hold down costs, a hamster trying to spin the wheel ever faster and faster. The Ma government's "new" policy of permitting firms that return to Taiwan to hire more foreign labor, as I noted in earlier posts, is simply more of this same, well-trodden path of industrial districts and cheap labor, a policy right out of the late 1950s.

Of course, Korea has not sent its firms to China. I just want to take a moment to savor the silence: when was the last time you heard anyone argue that Taiwan would zoom like Korea if only it were more open to China (hilarious past moment). Hear that silence? Well, we've got our ECFA, which isn't helping much and only covers about 5% of exports anyway. Even the Ma Administration, with its policy of inviting Taiwan's makers home, is tacitly admitting that Taiwan has been made worse off by moving them all to China (why else would it be out there, hat in hand, begging them to come back)?

Daily Links:
Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums! Delenda est, baby.


yankdownunder said...

The rise of South Korea was driven by good government policy,

The rise was initiated by large war reparation paid by Japan in 1965.

More $ aid and technology transfer from Japan also contributed to the "rise".

Also simple theft(mainly from Japanese companies and USA) is a big contributor to the "rise".

Nippon Steel sues POSCO over technology

Nippon Steel, the world's No.4 steelmaker, said it was seeking $1.23 billion in damages from South Korea's POSCO, its Japan unit and a former Nippon Steel engineer, in a lawsuit charging them with improperly obtaining electrical steel sheet technology

Nippon Steel started investigating the case in 2008 after former POSCO employee Lee Seok Joo, who was sentenced to three years in jail on charges of selling POSCO's GOES technology to a Chinese steelmaker, told the court in his defence that the technology was originally Nippon Steel's, the Nippon Steel official said.

Thieves stealing from thieves!

Ben Goren said...

One thing strikes me about the regressive Taiwanese economic policy of 1950's Low Wage Special Industrial Zones + hope for foreign investment + Chinese Golden Egg Chimera is how much of it is seemingly based around the concept of 'convenience'. Too radical a change in the economy threatens too many high powered investor apple carts and that threatens the electoral base. It is not the low paid or SME's that can't pull Taiwan's economy out of the quagmire, it is the Government protecting the medium to large enterprises, the developers and the land owners that it stifling Taiwanese entrepreneurial agency. Meanwhile, the Government sits back and relies on the sheep like attitude of many Taiwanese businesses who only know how to follow and modify rather than innovate. Taiwan has MASSIVE all year round tourist potential if someone in power were willing to a) protect the environment b) prioritise tourist infrastructure c) stop pouring fucking concrete over everything and thinking that 100 tour coaches a day - good business.

As a businessman in Taiwan, I can attest that Taiwanese Governments (Chen and Ma) have been myopic, inactive, and retrogressive. It is their stubbornness , foolish pride and concern with being thought of as an 'Asian Tiger' better than Korea, Singapore, HK or Japan which is the reason for their progressive and ongoing failure to improve the economy or react to changes in the global economy.

StefanMuc said...

Well, South Korea is outsourcing too - e.g. Samsung contracts a lot of manufacturing to Foxconn.

As for South Korea stealing technologies from more advanced countries ... well all countries do that. Japan stole from the West, the US stole from Europe, Europe ... well at some point Indian and Arabian inventions were making their way there.

IP protection only matters once you have gained technological leadership - nobody sees any problem with it before this happens.