At present, there is considerable industrial overlap between the two nations, which has retarded the ability of Taiwan’s domestic industry to renew itself, disrupting the normal operation of the cycle of economic creative destruction. This is why tying the economy to the trajectory of China’s economic development has caused it to descend into immiserizing growth and why Lin’s assessment is questionable.
The free market mechanism is a demanding mistress. It is the government’s responsibility to coax the market mechanism through a range of policy incentives, to bring about the best resource allocation for the long-term benefit of the whole populace.
In his paper “Dynamic Comparative Advantage and the Welfare Effects of Trade” published in the Oxford Economic Papers in 1999, Stephen Redding, a professor of economics at the London School of Economics, wrote that the optimal development strategy for a developing economy was to strike a balance between the current comparative advantage of its traditional industry and a new comparative advantage in developing future high-value-added industries. Otherwise, in free trade, there will be over-specialization of the current comparative advantage that will actually stifle economic development.
In 2010, I published an article titled “Technology diffusion and global welfare effects: Imitative R&D vs South-bound FDI” in the international academic journal Structural Change and Economic Dynamics, in which I demonstrated through a numerical simulation how a middle-income economy such as Taiwan’s should not invest excessively in exploiting China’s current comparative advantage and how the government should instead formulate policies promoting research and development to bring the economy closer to the technological level of advanced economies such as the US.
The free economic zones and the service trade agreement that the Ma administration are currently promoting will only align Taiwan closer to the trajectory of China’s economic development, and this will further extend and expand the industrial overlap between the two nations.
Will this be able to free Taiwan from the immiserizing growth that is currently plaguing it?
Hwan C. Lin is a research fellow at the Taiwan Public Policy Council and an associate professor of economics at the University of North Carolina.
Translated by Paul Cooper