Growth ‘cure’ worse than headache

By Hwan C. Lin 林環牆  / 

Sun, Mar 16, 2014 - Page 8

For a long time, Taiwan’s economy has been laboring under what is termed in international trade theory as “immiserizing growth.” Many economists believe this concept is little more than a theoretical abstraction based upon an economic model, with little possibility of existing in the real world. However, those familiar with economic dynamic equilibrium analysis would not feel overly optimistic about the current unbalanced trajectory of Taiwan’s economy.

First, the potential economic growth rate for the long term continues to fall, retarding its ability for wealth creation. Meanwhile, over the long term, workers’ wages have become decoupled from the overall economic growth rate, and salaried workers generally no longer benefit from the fruits of growth. Despite the economic growth, actual salary levels, deflated by price levels, continue to fall, and salaried workers are becoming increasingly poor. The biggest winners in this immiserizing growth are the owners of capital.

Second, the “Made in Taiwan” brand is demonstrating an ongoing reduction in market share in global trade over the long term, falling ever further behind South Korea. This phenomenon has been especially acute in the years since the Chinese Nationalist Party (KMT) returned to power in 2008 with President Ma Ying-jeou (馬英九).

Third, Taiwan’s external terms of trade are worsening, which is hitting “Made In Taiwan’s” brand value in the global market. The value creation from the fact that products are made in Taiwan, by Taiwanese workers and their capital and skills, is becoming increasingly irrelevant in the global economy. Taiwan Semiconductor Manufacturing Co (TSMC) remains a very potent force in terms of value-creation, but there are increasingly few companies emulating it.

These four phenomena — weakening economic growth, the creeping impoverization of the populace, the decreasing share in the export trade market and the worsening of external terms of trade — are symptomatic of immiserizing growth, and they can be supported with official figures. If things continue in this way, the nation will inevitably regress into a low-income, developing economy.

Chinese state councilor and former chief economist and senior vice president of the World Bank Justin Lin (林毅夫) recently gave a speech in Beijing in which he said: “In the early 1990s, the Taiwanese economy was ranked above that of South Korea, but it has slipped in recent years and has since been surpassed by that country, predominantly as a result of political interference such as the ‘no haste, be patient’ and the ‘go south’ policies. After President Ma Ying-jeou came to power, the signing of the Economic Cooperation Framework Agreement initially provided a platform for rapid growth, but as the service trade pact has still not been implemented, the opportunities and momentum available in the huge China market have yet to be brought to bear.”

Lin’s assessment is wide of the mark. At root, the main reason for the malaise and decline into which the economy has fallen is the thoroughly discredited policy that Taiwan is following — tying itself to China’s trajectory of economic development.

By taking this path, the nation has invested excessive amounts of capital and technology in China and tried to exploit that nation’s huge advantage, its supply of labor. As a result, industry has rapidly relocated to China, which has severely compromised the nation’s ability to cultivate industries.

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