Download Taiwan`s Economic Problems

Taiwan’s Economic Problems
I.
Introduction:
Like most countries, Taiwan faces numerous economic problems and challenges.
Although some of these problems are different than those of other countries and
require different policies, the first step in solving them is to identify the problems and
attempt to understand the major factors involved. This small reading will survey the
challenges faced by Taiwan and will indicate the choices which Taiwanese have about
their future.
II.
Lowering Unemployment
Let’s begin with the unemployment rate. Unemployment is considered undesirable for
many reasons. First, it is a waste of labor and entails considerable lost output.
Generally speaking, a one percentage point increase in the unemployment rate, above
its average level, reduces economic growth by 2.5-3 percent. Taiwan’s average
unemployment rate, since the late 1970’s, has been about 2-2.5%. The
unemployment rate during the 4th quarter of 2003 stood at 4.73%. Taiwan’s
unemployment rate hit a high of 5.32% during the 3rd quarter of 2002. It was a low
of 1.28% during the 1st quarter of 1993.
Unemployment Rate in Taiwan 1964:1 ~ 2007:2
Greater unemployment also gives rise to greater crime, divorce, and suicide. The best
way to reduce unemployment is to get the economy moving again. An expanding
economy nearly always results in an increase in employment and a reduction in
unemployment. Sometimes, when the economy is undergoing structural change,
unemployment may rise because labor is adjusting to the new conditions of the labor
market. Old types of labor are not in demand while new types of labor are not being
sufficiently supplied. Taiwan’s attempt to encourage the development of a high
technology economy may have caused a rise in unemployment because of the
temporary lack of skills within the Taiwan labor force. Some people have complained
that business is investing too much in Mainland China and this is reducing
employment opportunities in Taiwan.
Other people point to the fact that Taiwan’s economy suffered from the dramatic
downturn in the US economy which began in 2001. Other commentators have
conjectured that the increasing use of computerization has made labor less important
to the production process. Finally, some have claimed that jobs are being taken by the
import of cheap labor from Southeast Asia. Clearly, Taiwan must choose efficacious
monetary and fiscal policies which will help to reduce the rate of unemployment.
Getting people back to work is a top priority for anyone elected in the coming
Presidential elections.
III.
Stable Inflation
The next economic challenge in Taiwan is to maintain a stable rate of inflation.
Taiwan has had a wonderful record on price stability. Inflation can become dangerous
to the economic health of the nation if it rises too high. It is difficult to say when
inflation is too high, but generally economists believe that double digit inflation is
something to be avoided. They typically feel that a 2-3% rate of price inflation is
acceptable, especially if it is stable and predictable. Higher inflation generally
causes the monetary authority to take steps to reduce the inflation before it increases
too much. These contractionary policies usually result in a recession with attendant
high unemployment. The cost of inflation is that it takes a recession to lower it to
manageable levels.
Taiwan has maintained a stable 2.5-3% rate of inflation since the late 1970’s. The
inflation rate hit a high of 16% in the 4th quarter of 1980. This was due to the
extraordinary rise in prices caused by the second oil crisis. Some economists feel that
these increases in the price level were too short to be classified as inflation. They
note that inflation is a situation of a steady increase in the general level of prices, not
an abrupt jump in the price level. A bigger danger is the deflation which Taiwan has
been experiencing. Taiwan has had negative inflation rates or falling prices beginning
in 1999. The worst deflation (in the GDP deflator) occurred in 2003 when the rate of
deflation hit -2.52% in the first quarter.
Deflation creates widespread business
pessimism which reduces the willingness of business to invest in new equipment. In
addition, deflation puts a greater burden on people who are in debt. Taiwan needs to
get the economy moving so that there can be a reasonable increase in the level of
prices. Taiwan needs to re-inflate. Monetary policy is one tool that can be used to do
this.
IV.
Growth in Productivity
The third challenge Taiwan faces is finding ways to maintain its high growth in labor
productivity. Productivity growth is perhaps the most important variable in
economics since it decides our standard of living and determines how quickly our real
wages can rise. Higher productivity means that we are producing more per labor hour
than before. A country which is accumulating more physical capital and is
experiencing improvements in its technology will naturally show higher productivity
growth. Taiwan has had significant increases in its productivity since 1980. On
average labor productivity in industry has grown at a 5-5.5% annual rate. When
coupled with a rise of 2-3% inflation, Taiwan’s nominal wages could reasonably grow
7-8.5% per year. Some people have claimed that rising productivity leads to greater
unemployment. They feel that labor has modern machinery which it can use today,
meaning that business can do more using less labor. Each labor hour can produce
more output. Other economists claim that higher productivity makes labor more
attractive as a factor of production and this raises its demand. What seems clear is
that education plays an important part in raising productivity and this education makes
labor much more attractive, raising its demand considerably. Education has become
more important in Taiwan and this is one of the reasons that expenditure on education
has risen in household budgets. The same is true in other countries, as well. An
important misconception in Taiwan is that some businesses complain that Taiwan
workers are too expensive, while other countries’ workers (e.g. mainland China) are
very cheap. The same businesses complain that the government must do something
to help increase the productivity of Taiwan’s workers. However, increased
productivity, coupled with competitive markets, nearly always leads to higher wages
being paid. You can’t have rising productivity without rising wages. This is true in
the US and is true in Taiwan. High wages simply reflect the high productivity of
Taiwan workers. If some companies wish to move to Mainland China they will find
that workers there are not as productive as Taiwan workers—even if they have the
same machinery! Perhaps this is one reason why that many firms have in fact lost
money on their Mainland investments. Finally, Taiwan must carefully consider the
effect its regulation of industry and energy policies have on labor productivity.
Efforts to improve the environment and reduce pollution may have the perverse effect
of lowering labor productivity, since money will be spent on equipment that does not
increase production and the most efficient methods of production may not be the
cleanest. A tradeoff exists between a cleaner environment and productivity. The
people of Taiwan deserve to be told clearly the nature of this tradeoff.
IV. Government Budget Deficits
The last big challenge which Taiwan faces is its large government budget deficits.
There is nothing wrong with a government which borrows part of its revenue to
finance its expenditure. Every government in the world engages in borrowing. Even
rich countries such as the US and Japan borrow large sums of money each year. This
borrowing can be divided into domestic borrowing and international borrowing.
Countries which borrow internationally must be prepared to pay out large sums of
foreign exchange (e.g. US dollars). If they cannot pay these dollars back they either
find alternative lenders, such as the IMF, to help them, or they face a depreciation in
their own currencies. Taiwan borrows almost all of its funds domestically—despite
the fact that it has massive amounts of foreign exchange reserves and could easily
accommodate a sudden outflow of foreign money from the island. Borrowing
domestically can become a problem if such borrowing raises interest rates so much
that it “crowds out” private investment and private consumption expenditure. The
government is borrowing a large part of domestic saving and private interests find it
prohibitively expensive to borrow. Another problem is that if government borrows
too much and interest rates rise too high, this can attract foreign capital flows and
raise the domestic currency. Such a fall in the foreign exchange rate (or rise in the
domestic currency) can reduce exports. This is sometimes called “international
crowding out”. The US has had considerable trouble with international crowding
out. Taiwan does not appear to be having trouble with this. It has been
aggressively pursuing expansionary fiscal policy, running big deficits and undertaking
large scale spending projects. However, there has not been a significant increase in
interest rates. Taiwan is using traditional Keynesian fiscal policy to fight its
economic doldrums. When investment and consumption are lackluster, it is best for
the government to borrow the saving of the public and spend it on important public
infrastructural works. Taiwan’s budget deficit hit a high in 2001 when it reached
over $635 trillion NT. It fell to $393 trillion NT in 2003 and will continue to fall as
the economy improves and tax revenues (from more workers being employed)
increase. Economists typically feel that the government budget deficit, as a
percentage of GDP, should not rise above 5% and is best kept below 3%.
In 2001,
Taiwan deficit-to-GDP ratio was about 7%, while in 2003 it was about 4%. This
indicates that Taiwan is still fiscally sound and is showing great improvement in its
budgetary matters. As we have noted, things will improve naturally as the economy
improves. Nevertheless, it is important for people in Taiwan to be careful how this
money is spent, so that wasteful and inequitable spending does not occur.
Discussion Questions:
#1. What are four major economic challenges which Taiwan faces?
#2. Why is high unemployment undesirable?
#3. What are some reasons Taiwan has been suffering higher unemployment?
#4. Why is high inflation undesirable?
#5. Has Taiwan had inflation recently? What has been happening?
#6. Why is productivity growth so important? Is Taiwan’s productivity growing?
#7. Are budget deficits undesirable? Why or why not?
#8. What has been Taiwan’s recent experience in government budget deficits?