Taiwan's Economy

On Taiwan's economy, i.e. is it good or bad and is it all the DPP's fault?

How is Taiwan's economy doing?

Subjectively of course, many Taiwanese will probably compare it to the glory days in the 70's and 80's just as American's sometimes look at the 50's that way. In which case, the answer will be that the economy is doing very bad indeed, and you will cluck you tongue in despair as you drive your Lexus SUV through massive traffic jams of other people in expensive vehicles all trying to get into Costco to buy European chocolates and American beef.

Objectively I guess we could to compare it to Korea or some other rising middle-income country. (Comparisons to China would not be smart as growth from a low base is easier to achieve and China is a bit of a special case where quantity has a quality all of its own.)

2007 GDP Growth
Taiwan: +4.3%
Korea +5.0%

2008 GDP Growth (forecast)
Taiwan: +4.4%
Korea +4.7%

Industrial Production (Sep.)
Taiwan: +8.0%
Korea: +0.3%

2007 Prices (forecast):
Taiwan: +1.1% (But a year ago Taiwan was -1.2%)
Korea: +2.5% (a year ago Korea was +2.2%

Unemployment:
Taiwan: 3.9%
South Korea: 3.2%

(all numbers from this week's Economist.)

I am pretty much underwhelmed by the differences in these numbers, but I guess Taiwan could buck up and try to add about 0.5% to some of these figures, but there might be some factors that affect Taiwan's numbers that we should be aware of:

Due to language and cultural ties, Taiwanese businesses have more opportunities to invest in China than Korean companies. This might lead to some investment that otherwise would be done in Taiwan to be done in China. An example would be a Taipei-based upscale coffee shop that chooses to expand in Shanghai and other Chinese cities rather than in southern Taiwan.

Taiwanese companies may tend to operate in more labor-intensive fields than Korea's large more capital intensive conglomerates, thus forcing them to go abroad at a faster rate.

Taiwanese individuals also have more opportunities to work in China, even at foreign firms that have nothing to do with Taiwan, thus affecting Taiwan's GDP numbers, which only counts Taiwan's domestic production. 300,000 Taiwanese professionals now work in China according to this article. That's 1.3% of Taiwan's population and an even bigger chunk of its labor force!

Is it the DPP's fault?

Politicians have much less control over the economy than people think. It is true that Taiwan's stock market (not to be confused with Taiwan's economy) is overly sensitive to political events, but people like my wife who blame Abian for the fall of the stock market in 2001 without noticing the coincidental bursting of the US dot.com bubble are fooling themselves as to the power of the president.

In fact, the DPP being a political worry to many people, might actually have kept the NT$ lower in value, thus giving Taiwan's export industries a decent boost.

Current Account Balance as a % of GDP (2007)
Taiwan: +6.4%
Korea: +0.4%

Of course, the DPP has been spending some money, too.

Budget Balance as a % of GDP (2007)
Taiwan -2.0%
Korea +0.4%

What could the government realistically do to help Taiwan's economy?

Direct links with China: This policy might have slowed down investment in China a few years ago, but the result now is a net loss to Taiwan. Taiwanese who live and work in China come back to Taiwan less and less as it is too much of a hassle. They end up living in China full time and spending their money there.

Taiwan should not only allow direct links with China, but drastically deregulate the airline industry to make a flight from Xiamen to Taichung cost about the same as flying Southwest from San Francisco to San Diego. That would give Taiwanese investors in China an incentive to fly home more, spending their money in Taiwan. You could literally work at the factory during the week and come home for the week-end to Taiwan. Quick and cheap direct flights would allow some Taiwanese based businesses to gain China business. And it would spur more Chinese tourism and investment in Taiwan, too.

Free up imports: I am not sure how closed Taiwan is to Chinese products, but I would suggest removing any barriers to Chinese goods, providing health and safety issues are met. It does no good to protect portions of the economy from foreign competition and in fact can hurt the overall economy. I personally know that some production of camera tripods ended up being switched from Taiwan to China simply because you could not easily import cheap camera bags from China to include with the tripod. So Taiwan protected its domestic bag industry but destroyed its camera tripod export industry.

Tax Reform: Tax localized businesses and reduce taxes on "movable" business by re-weighting the tax system towards a consumption based tax. The noodle vendor currently pays no taxes beyond the 5% VAT while the factory and its owners pays that as well as corporate tax and income tax. If the factory moves to China and uses an offshore shell company, they can pay far less in taxes than if they stay in Taiwan. The noodle vendor cannot move to China. With the move to a consumption based tax, you will increase tax revenues from the grey market while keeping some of the industrial base in Taiwan for as long as possible. Yes, it's not very progressive, but seeing as how my local breakfast truck owner drives a BMW, I have to wonder how progressive it is to let a large portion of Taiwan's economy pay less than their fair share in taxes. (Wait, maybe he scrupulously reports his income to the tax authorities?) Actually, the DPP have a plan to reduce taxes. I wonder if it actually got passed? Taiwan is also making moves to tax their citizens' global incomes and watch out for the use of offshore companies. Great. Maybe they could enforce the income tax on noodle vendors, too? Get their ID card. Check the tax records and see if they pay any. I am going to hazard a guess that they will under-report their income. I could be wrong. Let's find out.

Alternative choice would be to go to a flat income tax, like many Eastern European countries have adopted to good effect. These can be made more progressive than a consumption tax, but I have worries about enforcement.

Okay, that's enough for a blog post. My portion on the taxes is probably the least well-thought out portion, so go easy there tiger.

I did find an interesting report on Taiwan that might point to areas Taiwan could improve.