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1. Introduction
“Why Is Taiwan Lagging Behind? Over the last decade, South Korea has pulled ahead of its rival Taiwan. Why has South Korea been able to graduate from the ‘Four Little Dragons of Asia,’ achieving a per-capita GDP 20 percent higher than that of Taiwan?”
(Lai (2010)), “ titles an article in the Taiwanese Common Wealth Magazine 5 years ago. Since then, not much has changed, similar questions are still asked by the media and are discussed in a variety of forums online. Though Taiwanese tend to have different opinions and hence sometimes disagreeing answers, the great majority is convinced this is a key question, not doubting the underlying assumption: Taiwan did fall behind. Complaints about Taiwan’s low and stagnating wage level take the same line. “Taiwan's low average wage level shows that the country's overall
competitiveness is not strong enough” said Quanta Chairman Barry Lam in 2014 (Focus Taiwan) and the Common Wealth Magazine (Lin and Teng (2014)) claims
“Taiwan's youth are leaving in droves to serve as low-wage workers in Singapore”
attributing it to the low pay in Taiwan, which also causes brain drain in higher skilled fields.
But is this notion true, did Taiwan fall behind? Is leaving Taiwan the right choice for young Taiwanese to increase their living standard? If not, how could this generally accepted view come up and remain over such a long period? I will come to the conclusion no, Taiwan did not fall behind, and hence leaving does not increase the living standard in most cases. The misperception came up due to a singularity in the exchange rate of the New Taiwan Dollar and consequentially an abnormally low price level in Taiwan.
Many Taiwanese today are dissatisfied with their country’s economic situation and development. From their perspective - after decades of fast pace growth - their
country has started to stagnate. While the East Asian miracle marked the beginning of the rise of four East Asian economies or ‘tigers’ - namely Singapore, Hong Kong, South Korea and Taiwan - only Taiwan’s momentum seems to have faded - or passed on to China. With high growth in the country that is at the same time a cultural
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relative - at least a cultural ancestor - and the most dangerous political and military threat, many young Taiwanese are in the ambivalent situation of fearing China and at the same time hoping to find their personal career opportunities associated with its rise. Both supports the impression of Taiwan’s economic inferiority and the notion of
‘falling behind’ relative to its geographic neighbours.
The economy of Taiwan is most often compared with South Korea’s. This is reasonable, as both took part in the East Asian Miracle and opposed to Hong Kong and Singapore, both are not city states. Both countries democratised at around the same time - and only after significant economic development has happened, setting them aside from many newly democratised countries, which face the task of economic modernisation only after giving voting rights to their people. Also their economic model was comparable, being inspired by the Flying Geese model (Kojima (2000)) and first functioning as an outsourcing location for manufacturing, later moving up the value chain towards the implementation of high tech industries. Today, in both countries semiconductors play an important role, and though both have a different approach and hence the industry is shaped in different ways, it is nevertheless an extraordinary similarity, as Chen and Sewell (1996) show, probably comparable to the differences and similarities that can be found when looking at the dominant industries of Japan and Germany.
Scitovsky (1985) identifies several key factors that are underlying both Taiwan’s and South Korea’s development:
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Common Chinese tradition and Confucian philosophy which is reflected in• placing high value on education resulting in high levels of human capital
• ability and willingness to work hard resulting in a high count of working hours
• wage flexibility and employment stability
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Japanese Rule that lead to• fast productivity growth in agriculture
• development of infrastructure
• reduction of inequality by repossessions of former Japanese assets
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Reduction of Inequality due to land reform/farm-prize support program-
Generous economic aid and heavy burdens of military expenditure‧
Therefore it is not surprising that Taiwan’s recent success - or lack thereof - is frequently derived from a direct comparison with South Korea’s performance.
Economic Development is pursued to increase the quality of life for a
country’s citizens. Measuring life quality is a very arbitrary process though, especially when comparing countries with different cultural backgrounds, norms and value systems. Economists therefore defined “standard of living” as “the level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area. The standard of living includes factors such as income, quality and availability of employment, class disparity, poverty rate, quality and affordability of housing, hours of work required to purchase necessities, gross
domestic product, inflation rate, number of vacation days per year, affordable (or free) access to quality healthcare, quality and availability of education, life expectancy, incidence of disease, cost of goods and services, infrastructure, national economic growth, economic and political stability, political and religious freedom,
environmental quality, climate and safety.” This measure is very complex as it tries to 1 grasp all aspects of well-being, and as utility associated with each factor differs from 2 person to person, it can surely be assumed they differ between differently socialised groups. Citizens of very religious countries might have no need for religious freedom, the importance of housing space relative to for instance health care might be lower in less individualist socialised countries, wide-spread infrastructure might be less
important for highly urbanised countries etc. Also the discussion about “Asian values”
comes into play here and whether or not ‘Asian values’ exist, the academic discussion about them proofed that at least to a certain extent societies place different value on certain aspects of their life (Thompson (2001)). Reducing the measure of living
Investopedia
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Utility is a concept that tries to quantify wellbeing. Everything that improves an
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individuals ‘happiness’, be it monetary or non-monetary, can be added or compared this way. Its advantage over more the more common indicator welfare or income derives from the fact, that well-being is not a linear function of income and can differ from person to person. Some might for instance derive an increase in utility buying a more expensive good that was produced under conditions acceptable by the buyer (‘fair trade’).
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standard to one of its components, namely gross domestic product (per capita) therefore makes sense for economic considerations, especially due to many other factors being directly connected to GDP - a certain level of infrastructure,
employment, political stability etc. is implied in high GDP, while at the same time high GDP is a necessity for widespread access to quality health care and education.
According to International Monetary Fund data, in 1990 Taiwan’s GDP per capita was nearly 22 percent higher than South Korea’s, a head start, that it
maintained into the early 2000s. However, between 2000 and 2010 Taiwan’s GDP per capita fell relative to South Korea’s to only 83% thereof. By 2014, the most recent number, it diminished to three quarters, or 75% of its neighbours per capita GDP.
A relative decrease of 47% within only 14 years indicates a clear failure of economic development - or doesn’t it? Fact is, the move from 14,614$ to 21,573$
within 14 years means a compound growth of less than 3% per year. While this might be considered as decent for a fully developed country - it actually beats the US’s long-term growth average of just 2% between 1870 and 2005 (Barro (2007)) - for a country under Taiwan’s conditions in that time, it can be associated with stagnation.
The numbers shown before (Table 1 (a)) were derived under current prices.
Prices though do not necessarily develop in the same pace everywhere in the world.
The deflator that is used for the USD, not necessarily deflates the prices in Taiwan and South Korea correctly, however, by measuring GDP in terms of USD, we imply the US deflator. Inflation occurs differently in different regions, there might actually be differences in inflation between different districts of the same city. Using the same deflator for different countries that even have different currencies introduces a
Table 1 (a) Nominal GDP per capita Per capita GDP (current
prices USD) Taiwan Korea
1990 $8,086 $6,642
2000 $14,641 $11,948
2010 $18,488 $22,151
2014 $21,572 $28,739
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potentially large error into this comparison and its conclusions, which is the reason why PPP data is usually used to determine the standard of living.
Using numbers adjusted for purchasing power, Taiwan is de facto still in a better position today than South Korea is. But why is there such a difference in the nominal GDP and GDP (PPP) numbers? How did it happen and will the difference persist, misleading more people about Taiwan’s economic situation in the future?
The answer is tied to Taiwan’s political future. If Taiwan gains the ability to act as an independent economy and utilises this capability to catch up with the 3 process of international integration that Korea and other advanced and non-advanced economies have undergone during the early 21st century, then Taiwan’s nominal income is likely to increase and the relative income between Taiwan and Korea should be about equal in nominal and PPP terms. Otherwise, the difference appears to be stable, and in the long run Taiwan’s GDP (PPP) might even approach its nominal GDP due to a lack of growth potential.
Figure 1 provides a systematic overview on how to derive at this conclusion. I will show how Taiwan’s real/nominal GDP spread emerged after introducing some necessary theories in section 2. The emergence will be shown in section 3. Section 4 shows Taiwan’s absence from international integration, which explains why Taiwan’s nominal GDP and GDP (PPP) differ. The following three sections show why Taiwan’s GDP (PPP) is larger than nominal GDP and not vice versa: Section 5 describes
Taiwan’s monetary policy and its special relationship with China, section 6 looks into the balance of payments and section 7 will discuss China’s economic influence and
De jure political independence is not a necessary condition.
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Table 1 (b) GDP (PPP) per capita GDP (PPP) Per capita
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the local business environment. As can be seen, this is a three-step causal research, hence the counter-clockwise progression, starting with the phenomenon and moving backwards the causal chain.
Figure 1 Systematic Overview