Some introductory remarks:

What I have learned after living in Taiwan for 20 years.

Many people in Taiwan believe government is not only necessary, but essential. They are very paternalistic about government and its role in the economy.

The vast majority of voters are not really interested in policy, since such things are to be determined by technocrats alone.

They are not interested in questions of whether the size of government is too large or too small, since more government is obviously desirable, if (and this is the important thing) government is run by moral people.

Therefore, the most important issue for most Taiwanese is whether or not government officials are moral. And, there is always a fight about corruption, family matters, morality, fidelity, filial piety, etc. Policy fights do not figure prominently in Taiwan democracy.

The most important issue between the parties (KMT and DDP) is a fight by technocrats and leaders over efficiency versus equity. This includes the China issue. You will not be too wrong by associating equity with the DPP and efficiency with the KMT. However, you should not apply the usual liberal-conservative format to Taiwan politics. Taiwanese (both KMT and DPP) in general believe in a benign, equitable, and paternalistic government – a government of the people, by the people and for the people.

I remember when I first arrived in Taiwan in 1987 I was amazed to find a poll taken in which about 80% of households in Taiwan wished their children could become civil servants. This is very Confucian and is nearly impossible to understand using Western concepts.

However, it speaks volumes about people’s attitudes about the role of government in Taiwan. Every economic analysis of Taiwan must be seen through this prism if it is to be well understood

• Programs supported by the DPP include social welfare policies involving the rights of women, senior citizens, children, labour, indigenous peoples, farmers, and other disadvantaged sectors of the society. Furthermore its platform includes a legal and political order based on human rights and democracy; balanced economic and financial administration; fair and open social welfare; educational and cultural reform; independent defence and peaceful foreign policy -- Wikipedia

天下為公

指一切財富均歸集體所有， 人們實行的是各盡所能、

平均分配的制度。

The Economy and Trade of Taiwan

Professor David Kleykamp ( 柯大衛 ) Department of Economics Tamkang University

http://www.kleykampintaiwan.com

Some Preparatory Remarks and Tools

Growth Cycles and Demand – the Short Run

Growth Cycles and Supply –The Long Run

Conclusions and Discussion

Alfred Marshall on Methodology

“It is the business of economics, as of almost every other science, to collect facts, to arrange and interpret them, and to draw inferences from them”

“Induction and deduction are both needed for scientific thought as the right and left foot are both needed for walking”

“Facts are the bricks out of which reason builds the edifice of knowledge”

The economist needs the three great intellectual faculties, perception, imagination, and reason: and most of all he needs imagination.

The Amazing Logarithmic Function

To discuss growth we need to completely understand the natural logarithmic function ln(x) or loge(x) which we can write more conveniently as simply

log(x)

But, what is the log function and why is it so useful?

Some Basic Rules of Logarthims

• Δlog(X) ≈ ΔX/X = the growth rate of X

• Δlog(XY) = Δlog(X) + Δlog(Y)

• Δlog(X/Y) = Δlog(X) - Δlog(Y)

• log(X)Y = Ylog(X)

• log(1) = 0

• log(1+x) = x for |x| close to zero

Growth Cycles, Inflation, and Unemployment

Trend in Growth Issues

Why was Taiwan’s Growth

so High from the 60s and 70s ?

Why has Taiwan’s Growth

declined from 1990’s to 2000+ ?

Reasons for High Growth During 60s and 70s

(1) Adam Smith’s notion that “the division of labor is limited by the extent of the market”

(2) Strong incentives for saving and investment

(3) Expand exports and use these to import producer goods

(4) Large increase in available labor by reducing agriculture and expanding manufacturing

Reasons for Secularly Declining

Economic Growth Rate

(1) Diminishing Returns from Additional Capital to a Slowly Increasing Labor Force

(2) Diminishing Returns from Division of Labor and Specialization of Industry

(3) Decreased Value of Traditional Output and Difficulties Surrounding Necessary Structural Changes

Short Run Co-Movements of Variables with the Growth Cycles

How do unemployment and inflation move with respect to short run changes in growth cycles in Taiwan ?

How does the stock market move with respect to short run changes in growth cycles in Taiwan ?

Let’s look at issues concerning aggregate expenditure for the Taiwan economy

In any economy there are two kinds of (newly produced) good or service being sold at any time – those domestically produced and those imported

Y + IMP = C + I + G + X

which implies

Y = C + I + G + Trade Balance

Demand Factors Affecting Growth

• Consumption

• Government Spending

• Fixed Investment

• Exports, Imports

How can we explain the drop in % of demand going to consumption and government spending ?

(1) Enormous growth in exports crowds out all else

(2) Population is growing older and saving is increasing due to life-cycle concern

(3) Greater emphasis on education, health, leisure

(4) Low price imports reduce the need for large outlays

Taiwan’s Top Three Export Destinations

2001 – 2007 2004 – 2007 2006 - 2007 (1) Hong Kong (19%) (1) China (23%) (1) China (24%)

(2) China (18%) (2) Hong Kong (17%) (2) Hong Kong (16%)

(3) US (16%) (3) US (15%) (3) US (14%)

Taiwan’s Top Three Sources for Imports

2001 – 2007 2004 – 2007 2006 - 2007

(1) Japan (24%) (1) Japan (24%) (1) Japan (22%)

(2) US (13%) (2) US (12%) (2) China (12%)

(3) China (10%) (3) China (11%) (3) US (12%)

Why the enormous increase in exports to China?

(1) Balance of payments considerations

(2) Products ready made for China

(3) Export demand from US channeled through China

(4) Large number of Taiwanese in China

How does Taiwan combat short run loss of jobs and economic activity ?

How does Taiwan combat long run decline in important industries ?

Standard Tools of Government

Economic Policy

Fiscal Policy – Spending and Taxing

Monetary Policy – Money Growth

Exchange Rate Policy – Free or Managed

Growth Accounting on the Supply Side

Factors Affecting Growth:

(1) Labor Supply Employed

(2) Capital Stock Employed

(3) All Other Factors (Multi-factor) – includes human

capital, oil shocks, structural changes, etc.

Y = real GDP

L = labor employed

K = capital employed

MFP = multifactor productivity (all other factors)

Taiwan has in the past depended heavily on investment to power the economy. The addition of machines and structures has had a remarkable effect on the economy. Of somewhat less importance has been the role of human capital, new organization, regulations, protection, etc. Finally, employment of (unadorned) labor has had the smallest effect over the past 40 years.

Recently Taiwan has been relying heavily on its growth of technology, human capital, and organization to generate growth. Investment in machines and structures has been less important. The contribution of labor growth has remained much the same. Part of this must be due to the significant use of hundreds of thousands of foreign laborers. However, the overall result has been a much lower growth potential.

Conclusions

(1) Taiwan’s economy performed extremely well until about 1990 when there was a significant change leading to a secular decline in growth.

(2) Taiwan’s economy displays more or less the textbook short run relations involving unemployment, inflation and stock market over the growth cycle.

(3) The secular declining trend in growth has both demand and supply components. The characteristic change in demand has been a peculiar fall in consumption and government spending. The fall in government spending has been dramatic, highly destabilizing, and incomprehensible.

(4) Taiwan is becoming more and more dependent on external demand and is vulnerable to a world recession that seems likely – despite China trade.

(5) Short run actions to moderate any downturn following world recession are limited. Fiscal policy is limited by a constant concern over corruption (a very real concern). Monetary policy is limited by concerns over the possible creation of a speculative asset bubble. Tax policies and laws are not helping matters.

(6) Long run supply is heavily dependent on non-traditional sources of growth.

(7) Taiwan needs to speed the opening of the three links and the design of an overall plan to expeditiously create a mutually beneficial economic union with China.