Taiwan Semiconductor Manu-facturing Co (TSMC, 台積電) chairman Morris Chang (張忠謀) recently pointed out that "the Tai-wanese economy has already developed as far as it can under the current system." This statement offers two topics for discussion. First, what is the purpose of economic growth, or what does economic growth mean, and second, are there any limitations to economic growth?
A nation's economic growth is normally measured by changes in its real GDP. "Real" GPD means that price changes are deducted. "Domestic" indicates the total sum of all products and services produced within the country. The "national" in GNP or national income, indicates the income created by a nation's citizens or residents.
For example, income pro-duced by Taiwanese citizens abroad is part of Taiwan's GNP and also part of the other coun-try's GDP. In the same way, profits created by US companies in Tai-wan are part of Taiwan's GDP and part of the US' GNP.
National income is the same as GNP, minus depreciation and indirect taxation. Depreciation means wear and depreciation of fixed assets caused by production activities. These fixed assets must be renewed and should therefore not be included in the national income, which is used to estimate the national living standard.
Indirect taxation reflects a part of government expenditure that is not part of the economic welfare, eg, expenditure on military equipment.
In the end, the most representative measure of a country's economic welfare or living standards is the average national income, even though the word "average" is often left out.
When making international comparisons based on national income data, we must convert figures into US dollars. If this conversion is not specified, the exchange rate for the given period (year) is often made the standard. This poses a thorny problem, since exchange rates are likely to fluctuate.
In reality, the average growth of Taiwan's economy from 1990 to 2000 was 6.37 percent, which compared to international standards is a medium to high rate of growth. Calculated in US dollars, Taiwan's average GDP in 1990 was US$8,111, US$11,806 in 1994 and US$14,188 in 2000. In the seven years from 1994 to 2000, individual income grew by 20.1 percent, and did not hover around US$13,000 through the last seven or eight years.
It is worth mentioning that while the Asian economy as a whole remained flat in the year following the Asian financial crisis, Taiwan's economy grew by 4.57 percent.
Since the New Tai-wan dollar depreciated sharply, however, the average GNP fell from US$13,592 the year before to US$12,360, a fall of 9.1 percentage points. This decrease, however, was largely made up for during the following year. If, however, we calculate last year's national income in US dollars, it suddenly falls to the 1995 level.
There are three reasons for this. The first reason is a negative 1.9 percent economic growth, the second is the depreciation of the New Taiwan dollar and the third is the increase in Taiwan's population. Due to these factors, Taiwan's economy is really in trouble and the public feels it has become poorer, not over the past six or seven years, but since last year.
There is a simple explanation to economic growth and there is a more complicated one. The simple one is that GDP expenditures only are used for consumption, investment, government expenditure and exports. Since these expenditures include imports, imports are also deducted. Without consumption and domestic investment, therefore, the economy will not improve. If there is a lack of private investment, then can't the government invest instead?
Long-term economic growth, however, relies on uninterrupted investment over the long term and an uninterrupted increase in production efficiency. Temporary public investment by the government may stimulate growth, but it is not certain that such investment will effectively stimulate private investment. It may even result in a lot of waste, and it does not consider the issue of long term government debt.
Look at the dozen or so attempts in Japan over the last decade to stimulate domestic demand. These attempts have only caused Japan's economic vitality to deteriorate further, not improve. Herein lies a great truth. Why is there no private investment? Why an economy's ability for innovation or technological development slowly deteriorates is a big question.
Chang grasps the core of this problem when he says that we must start with changes to the infrastructure, for example legislation and education.
In the past, we kept repeating that the biggest challenge to the economy was not that the decline in the international economic environment would affect Tai-wan's exports -- which in its turn would affect the economic growth rate -- but rather our own financial and labor markets and the government's administrative efficiency. This includes the government's unreasonable organization, excessive regulation and outdated legislation and, -- as Chang mentions -- even language education. These problems can be summarized in two words -- system reform.
Sir Arthur Lewis, winner of the Nobel Prize in Economics in 1979, quoted Adam Smith's statement that a nation's growth is ultimately restricted by the laws and systems of that nation. Shouldn't we be alarmed at hearing that statement today?
Two hundred years ago, Smith introduced a new way of looking at a nation's wealth. He believed that a nation's wealth consisted of the necessities and conveniences needed by the national population and that were produced by the nation's labor each year. Necessities consist of goods and conveniences consist of services. Adding the two together, we get GNP.
Smith's thinking broke new ground. A nation's wealth could be increased and a nation's wealth is the national income, the people's standard of living. National wealth is not the same as a nation's foreign exchange reserves.
The reasons for increasing national wealth are now abundantly clear. The way to increase national wealth is to increase labor productivity. Thinking about it, isn't that achieved through education, investment and technological innovation?
There are limitations to economic growth and these limitations are actually created by our fear of system reform.
Chi Schive is president of the Taiwan Academy of Banking and Finance.
Translated by Perry Svensson
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