Wed, Sep 15, 2010 - Page 8 News List

How to take ‘zombies’ off life support, narrow gap

By Lu Chun-wei 盧俊偉

The Directorate-General of Budget, Accounting and Statistics forecasts that Taiwan’s economic growth rate for this year will reach 8.14 percent — the highest in 21 years. However, the same institution’s survey of household incomes shows that the average income of the 20 percent of households with the highest incomes now stands at 8.22 times that of the lowest 20 percent.

This wealth gap is the widest on record. As economic growth hits a record high and the rich-poor gap stretches wider than ever, many people can’t help asking exactly who is benefiting from this economic growth.

Three main factors have contributed to driving Taiwan’s wage and salary earners into this poverty trap. First, distorted government distribution of resources; second, the movement of productive industry offshore; and third, inadequate development of emerging industries and those catering to the domestic market.

In Taiwan, developmental statism, in which industry is guided by government, is the norm. Under this setup, governments often employ such distorted means of allocating resources as tax concessions and financial rewards for specific industries to stimulate investment in and development of those sectors. However, decisions about how to allocate capital don’t always take proper account of international comparative advantage. Some decisions are even the result of lobbying by particular interest groups. This development model tends to foster so-called “vegetable industries” and “zombie companies” that lack the ability to develop their own technology, require ever greater inputs of capital, make less and less profit over time and can only survive if the government pours more and more resources into them.

Because of their inability to upgrade technologically, such companies compete instead by fierce cost cutting. This is often achieved by moving production offshore, which removes job opportunities from Taiwan and widens the gap between rich and poor.

Those manufacturers who choose to stay in Taiwan and upgrade and restructure, generally become more capital and technology intensive.

Indeed, becoming more capital intensive is a necessary and inevitable trend in industrial development, so one of the things government must do to tackle unemployment and narrow the wealth gap is provide an optimal environment for the development of emerging and domestic-­oriented businesses.

This includes fostering mechanisms that encourage people to set up new businesses, such as angel funds. What government must not do is repeat the mistakes of the past and allocate resources in a distorted way in order to prop up “vegetable industries” and “zombie companies.”

Unfortunately the government has so far failed to take any action to fundamentally correct the distortion of economic growth and resource distribution that leads to a widening gap between rich and poor. At the moment, all it is doing is copying the bad old ways of the past by designating six emerging industrial sectors and promoting investment in them through such means as tax concessions.

However, while existing industries follow a capital-intensive path and neither the environment for emerging and domestic-oriented businesses nor the existing political and economic system are improved, no matter how much capital is invested it will not result in more job opportunities or higher salaries, much less bring about a long-term narrowing of the gap between rich and poor.

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