Recent good news from the US offers a degree of hope for the economy. The US had its GDP adjusted upward to a 4.1 percent annualized rate for the third quarter of last year, which was its economy’s strongest performance in two years and assuaged global concern over a reduction in quantitative easing.
As the US economy is a global economic driver, this is evidence that the latter is on the path to recovery. This, coupled with the recent announcement that Taiwan’s export orders for November hit a new high, suggests that there is cause for optimism regarding the nation’s economic outlook. So why is the GDP growth forecast for next year stuck at the conservative figure of less than 3 percent? Does the government still lack confidence in the prospects for economic growth?
The problem is that the good news of increased export orders needs to be qualified with another fact, one that has been largely ignored, which people do at their own peril: As much as 53.7 percent of the export orders are actually manufactured overseas. This is a higher figure than at any time in the past.
Export orders for November represented an annual increase of 0.8 percent, but the percentage manufactured overseas increased by 2 percent over the same period. This means that the increase in orders translates into more jobs for our largest overseas manufacturing base, China, but is of precious little benefit to Taiwan. Therefore, the increase in export orders is not good news at all. It may be great for the major shareholders of the companies involved and for capitalists, but it is toxic for the workforce.
With increased globalization, corporations in advanced countries have needed to reduce manufacturing costs to strengthen their competitive edge. To do this, they have moved their production lines overseas to developing countries. In adopting this cost-reduction business model, these corporations have made it easier for themselves to adapt, but at a cost to their own home economy. Investment-led job creation and salary increases are now a thing of the past, as is manufacturing-driven domestic economic growth, and industrial development has ground to a halt.
This is especially true given the factor price equalization (FPE) effect. FPE is an economic theory that says the economic gap between a given factor, say wages or unemployment rates, of an advanced country — Country A — and the country to which it has outsourced its manufacturing — Country B — become aligned over the long term. The result of this is that Country A is forced to accept a reduction in salary levels and higher unemployment rates. The degree to which this occurs is relative to the size of the respective economies.
Taiwan has comparatively small economies of scale and it has aligned itself with the world’s most populous country. Given this, the hollowing out of Taiwanese industry has been inevitable.
More importantly, over time Country B learns how to emulate the manufacturing processes and gradually becomes strong within this area in its own right. After it has reached a critical scale, quantitative change leads to qualitative change, and that country then starts to possess its own economies of scale and make its own technological breakthroughs. Pretty soon, it has developed its own domestic industry and ends up competing with Country A.