The Liberty Times Editorial: The dangerous illusion of growth

Fri, Dec 28, 2012 - Page 8

As the year draws to a close, this is a good time to take stock of political achievements over the past year and to plan new visions. The issue that has been of the greatest public concern this year is the nine downward revisions in the government’s GDP growth forecast. At the beginning of the year, it stood at 4.58 percent, but now the government is struggling to even keep it above 1 percent. Since a long period of sluggish growth sooner or later is to be followed by a rebound, both domestic and international institutions generally forecast GDP growth of between 3 and 4 percent next year. That would appear to be a reasonable performance, but it is an illusion that stems from a low base — ie, this year — of comparison. The economic rebound will undoubtedly be weak, and there is no need to waste any more time arguing about it.

The government has failed to come up with a solution to the nation’s economic problems and to propose a comprehensive, long-term vision for the future. Instead, it has been trying to claim the moral high ground, using slogans such as “fairness and justice,” relying on “market mechanisms” and “only users pay” to embellish such measures as the twin hikes in fuel and electricity prices, the capital gains tax on securities transactions and the supplemental premium in the second-generation national health insurance that is scheduled to take effect next month. It has been doing this in an attempt to shift responsibility for the negative consequences of its administrative incompetence, the inefficient state-owned enterprises and other malpractices onto the public. The result is that the public misery index has kept on rising. This has driven President Ma Ying-jeou’s (馬英九) support ratings to an unprecedented low of 13 percent — which means he has even less public support than former president Chen Shui-bian (陳水扁), who is in jail for corruption. Taiwan once created an economic miracle that placed it at the head of the four “Asian Tigers,” but it is now faltering. Unemployment remains stubbornly high and salaries are stuck at the same level they were 14 years ago, making dreams of past glories seem like an illusion, while the government brags about vague international rankings. To be led by such an incompetent government is a tragedy for Taiwan and its pitiable people.

As the government becomes increasingly dysfunctional, a strange phenomenon is taking place in the nation: Studying the GDP is becoming the latest fashion. Some even claim that the question of public happiness and government efficiency now hinges on the level of GDP growth. This is a dangerous illusion. Granted, the international community generally uses GDP growth to evaluate a nation’s economic development. However, Taiwan’s unique industrial structure and operating format create statistical blind spots that make it difficult to reflect the true economic situation. For example, almost all of Taiwan’s foreign investment goes to China and large numbers of Taiwanese businesses have relocated there. This means that more than half of all Taiwanese exports are manufactured overseas, reaching a new high of 51.7 percent last month. Simply put, exports make up 70 percent of Taiwan’s GDP, but half of those exports are manufactured by Taiwanese companies in China. In the electronics industry, 58 percent of all Taiwanese exports are produced overseas. The outflow is worst in the information and communications technology sector — smartphones, flat-screen monitors and so on — where 84.7 percent of all production this year between January and last month took place in another country. Average monthly orders in this sector stand at almost US$10 billion, but only US$2 billion of these orders are filled from Taiwan. This business model, where orders are received in Taiwan, but production takes place overseas, is not helpful to domestic employment and salary growth. The result is that the practical living conditions of the general public are decoupled from GDP growth, which does nothing to increase public happiness.

Academia Sinica economic research fellow Ray Chou (周雨田) worries that the current status of the nation’s economy is not a result of short-term cyclical changes, but rather of long-term structural adjustments. In other words, the economy is not suffering from an acute disease, but from a chronic ailment contracted over a long period of time.

First, there is the massive relocation of businesses to China and the increasing reliance on that country, which means that the prosperity of some Taiwanese companies no longer has anything to do with Taiwanese society and the welfare of the Taiwanese public. The result is that not only is Taiwan overdependent on China, but it has become increasingly vulnerable to changes in the international economic situation, and is losing both its ability and direction that will lead the way to autonomy.

Second, although Taiwan is experienced in both traditional and high-tech manufacturing, it has yet to make the transition from assembly and contract manufacturing. There is a lack of innovative research, and development and branding, and although manufacturing volumes are large, profits are minuscule. For example, Taiwanese manufacturers once manufactured 90 percent of the world’s notebook computers, but the millions of job opportunities thus created were mostly located in China. In addition, the barriers to entry are low and so the industry has descended into a cutthroat pricing war. Gross profit margins have dropped sharply and today hover at about 2 to 3 percent. After overhead is deducted, not much is left.

Taiwan’s technology industry should learn from Taiwan Semiconductor Manufacturing Co: It should own the core technology and it should base its production at home — here in Taiwan — to be able to produce high value-added products; otherwise it risks being rendered obsolete by globalization, and rapid advancements in science and technology. That is why an industrial transformation and minimizing trade dependence on any single country are two of the most pressing issues at hand.

However, the government lacks foresight, wisdom and ability, and it is incapable of solving problems and realizing visions. Instead, it excels at boasting about vague international rankings and inventing incessant obscurantist slogans that only serve to confuse the public.

Frankly speaking, given virtually stagnant economic growth this year, it will be fairly easy to attain 3 percent economic growth in the coming year. Indeed, since the onslaught of the international economic crisis, Taiwan even saw annual GDP growth of 10.76 percent once, because the economy contracted the year before. The public has yet to feel the effects of this much-vaunted economic growth. Failure to upgrade the nation’s industrial structure and diversify trade will made a GDP growth of 3 percent next year, or a so-called U-shaped rebound, an illusion devoid of any significance.

Translated by Perry Svensson