Since the panel meetings of the Economic Development Advisory Conference began, members have had enthusiastic discussions about Taiwan's current economic problems, and have suggested remedies to the downturn.
Among all these suggestions, supporters of the direct links who oppose the government's "no haste, be patient" policy have claim "[Taiwan's] industries can't survive without relocating to China," or that Taiwanese companies have been hurt by the policy. Not only have they demanded that the government accept the "one China" principle to save the economy, they have also blamed the outflow of foreign capital on the current ban against direct links. They appear to believe that once the ban is lifted, Taiwan's economy will be saved.
The opening of direct links is not a cure-all for Taiwan's economic woes. In fact, it will seriously hurt the labor market. Trade liberalization, apart from increasing the transnational flow of goods, will more or less link labor markets worldwide through price mechanisms. This leads to some developed countries importing goods extensively from developing countries, reducing domestic work opportunities and stagnating the average wage scale in their manufacturing industries. The phenomenon also widens the income gap between high-and low-skilled workers in advanced countries.
Industry naturally undergoes structural changes as part of domestic economic development. The disappearance of existing job opportunities and the appearance of new ones won't necessarily trouble the labor market significantly, as long as workers face relatively few obstacles in shifting jobs and the employers do not incur excessive costs from business upgrades.
If developing economies grow at an excessive rate, not only will the industrial structures of the developed economies be affected, but their labor markets will also suffer if local workers are unable to adjust in a timely manner. This has contributed to the deepening of income gaps between high-and low-skilled workers in the US, and the rapidly increasingly unemployment rate of low-skilled workers in the EU.
According to a study conducted by US economist Paul Krugman of Princeton University, the slowdown in wage increases in the US labor market has its roots in the the slow growth of labor productivity in the US service sector. The strong productivity increase in US manufacturing and service industries in the 1990s, however, reflected US companies' response to the challenge posed by their foreign competitors.
Thus, just like the US, what Taiwan must do at this moment is aggressively reform its domestic investment environment and help local enterprises improve their competitiveness. Only if it does this can the government successfully bring surging unemployment under control.
Another study conducted by Jeffrey Sachs of Harvard University also reveals that imports from developing countries have reduced job opportunities for low-skilled workers in the US manufacturing sector by 6 percent. In addition, maintaining close trade relations with developing countries has also deepened the income gap between the high-and low-skill workers in the US. If the government continues to allow local companies to shut down local factories and invest in China, Taiwan will pay an increasingly heavy price for problems such as domestic unemployment and distorted income distribution.
Against a backdrop of globalization, the global business environment has changed as liberalization has accelerated transnational capital flows and technology transfers.
As the restrictions on capital and technology transfers are lifted, companies in advanced economies invariably have an increasingly strong incentive to move production lines to developing economies where they can enjoy higher profitability through a cheap labor force. If only a few companies migrate, major problems will not be created in the home employment market. Once more local companies begin to relocate overseas, however, the capital market at home, as well as the productivity of the domestic labor force, decline drastically. In turn, the wage scale for domestic workers decreases.
Although Taiwanese businessmen investing overseas will not be affected as they enjoy the benefits of higher profitability, workers at home will be thrown into unemployment after factories are closed. Even for those who are able to keep their jobs, their wages will not continue to increase as they did in the past.
In order to cope with these changes, Taiwan must adopt a variety of global strategies for upgrading its economy. If Taiwan becomes dependant on cross-strait business, its labor market will suffer tremendously. Since most Taiwanese companies are small and medium-sized enterprises, the outflow of capital and equipment is relatively easy. If companies continue to leave en masse for China, the unemployment rate will continue to increase rapidly while income distribution of income will become all the more unequal.
For the above reasons, it is absolutely necessary for the government to restrict Taiwanese investment in China. Otherwise, social problems resulting from unemployment and a wider income gap will threaten social and political stability. In such circumstances the incentive for local companies to invest in Taiwan will be diminished, jeopardizing the nation's econo-mic development.
Besides the cheap cost of labor in developing countries, a production line's quality and reliability should also be carefully considered. In the production pro-cess, excessive bottlenecks in software and hardware infrastructure will create problems. Some of the advisory council's members have suggested the establishment of a "special economic zone" and bringing in Chinese labor to keep companies in Taiwan. That idea is no different from lowering the production costs of Taiwan's manufacturing industry to the level of China's and won't help to create more work opportunities. Although these moves may help to keep companies in Taiwan, they will not solve unemployment problems.
In fact, there are still many companies in advanced countries willing to pay higher wages just to stay in their own countries. An important reason is that the workers at home have higher marginal productivity. There are several ways to improve the marginal productivity of labor. Apart from maintaining a higher educational level and quality of local workers, better business management and advanced software and hardware infrastructure are also key. It would be impossible to completely replace industries in Taiwan with those of developing countries if Taiwan's marginal productivity could be improved.
The advisory council should focus on rapid reforms to upgrade government efficiency, as well as improvement of the quality and quantity of Taiwan's software and hardware infrastructure. It should not place excessive focus on cross-strait business relations, which are issues not entirely within Taiwan's control.
Kenneth Lin is director of the Bureau of Finance of the Kaohsiung City Government.
Translated by Eddy Chang
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