Economy: Taiwan vs. Korea 2000-2006
August 13th, 2007 by MarkAs a relatively long term resident of Taiwan, I have some interest in its economy. Especially now that I’m involved in business here, it isn’t wise to ignore what I read and hear. One thing I’ve heard again and again is anguish at how much we’re falling behind our closest rival, Korea.
I suppose comparisons between Taiwan and South Korea are inevitable. Both were colonized by the Japanese early last century, people of both were split from their families as a result of World War II, and both went on to become booming manufacturing centers in the 80’s and 90’s. Right now, Korea and Taiwan are each involved in electronics markets and both invest heavily in China. Korea is China’s #1 foreign investor, and the Taiwanese are putting even more money into the mainland than the Koreans are, via 3rd parties (since direct investment is restricted by the Taiwanese government). Comparisons are inevitable.
The most logical place to start is with GDP growth.
GDP Growth
| GDP per capita, in US dollars | |||||||
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |
| Taiwan | 14,426 | 13,028 | 13,093 | 13,254 | 14,205 | 15,203 | 15,472 |
| Korea | 10,890 | 10,178 | 11,482 | 12,710 | 14,142 | 16,308 | 18,015 |
All data from the IMF, 2006 data are estimates.
In terms of annualized nominal growth, that gives Taiwan slightly less than 1.2% per year, and Korea over 8.6% per year. However, the major factor for this difference has been the precipitous drop in the value of the Taiwan Dollar. Over the last several years, the US dollar has weakened abysmally, but the Taiwan dollar has been losing ground even against the US dollar. The following graph charts the strength of the Taiwanese and Korean currencies against the USD:
Currency
This is bad, but it isn’t all bad. A weaker currency means that people will be paying more for imports (as well as domestic products that compete with them), and that their savings are worth less. It is a boon for exporters, though, and exports make up a crucial portion of Taiwan’s economy. All things considered, I’d much prefer to have Korea’s economy, but they do have other problems, such as high housing and labor costs.
Unemployment
| Unemployment Rate | |||||||
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |
| Taiwan | 3.0 | 4.6 | 5.2 | 5.0 | 4.4 | 4.1 | 3.9 |
| Korea | 4.4 | 4.0 | 3.3 | 3.6 | 3.7 | 3.7 | 3.5 |
All data from the IMF, 2006 data are estimates.
Possible Explanations
The most common explanation I see in Taiwanese media is that Taiwan’s small business-based economy can’t keep up with Korea’s huge conglomerates. There are many reasonable arguments to make for economies of scale, but while Korea was suffering through the SE Asian economic crisis in 1998, their newspapers were full of stories about how much more flexible Taiwan’s small business-driven model was.
One other thing that comes up is the huge amount of turnover in Taiwanese government positions after the DPP took power in 2000. It definitely had some economic cost, and a similar though smaller phenomena may repeat itself if 馬英九 wins the 2008 elections. However, any sort of cost to that sort of turnover would has been minimal. In fact, South Korea’s political scene has been more volatile, particularly in regards to Roh’s impeachment.
One thing that really is costing Taiwan, is the regulations on investment in China. Since direct trade is illegal in many cases, companies work via shell companies in Hong Kong, Macau, Singapore, or other areas. Every time business is done in that way, the intermediary takes a cut. With the volume of business the Koreans and Taiwanese do in mainland China, Taiwan’s extra frictional costs add up. Not being able to make direct flights results in a cost, too, and it’s the Taiwanese business that has to bear the weight of it.
Other thoughts
The three-links problem will likely be dealt with soon, regardless of the result of next year’s elections, but barring any surprises, Korea’s economy will probably continue to pull ahead. Their free trade agreement with the US will only accelerate their already impressive growth.
Related Post: Salary stagnation: The reason Taiwan’s middle class suffers
Related Post: TSMC CEO Morris Chang on Taiwan
August 13th, 2007 at 10:21 am
[...] Doubting to Shuo compares the economies of Taiwan and Korea. [...]
August 13th, 2007 at 2:39 pm
I noticed that you stop writing about learning Chinese. Give up learning already?:-))
August 13th, 2007 at 2:59 pm
Not at all! The school does take an awful lot of time, though. Both my Chinese study, and my exercise have suffered as a result. I’ve also been been putting a bit of time into learning some other things. My Chinese is still improving bit by bit, though. Just a couple of nights ago, I learned what a jellyfish is called in Chinese.
August 14th, 2007 at 2:06 am
Hey Mark,
So this is what you were referring to in Cit Cain on Tuesday. I don’t know a massive amount about economics but I think there’s a good case to be made for Taiwan doing better than Korea.
If you pull the GDP by PPP per capita figures off Wikipedia they seem to tell the opposite story. Taiwan’s estimate is 29500 while Korea scores just 24500. Since very few Taiwanese have any interest in what their NT will get them abroad, (how many Taiwanese middle incomers travel overseas?) I think this is a far more appropriate measure - although most Taiwanese would it seems be more inclined to believe your growth figures over mine.
There seem to be a number of reasons why the NT is so low - Taiwanese investment in China and the government’s ham fisted, counter productive attempts at limiting it, the immaturity of the island’s financial sector, political uncertainty - but if the country continues to create wealth for itself, it’ll be in a good position to move up the comparative ladders when there is sustained financial reform and government encouragement to invest in services instead of manufacturing. When this happens, significant amounts of the substantial returns on Taiwanese investments in China will be relocated - and new Chinese investment will arrive.
Taiwan also has huge foreign currency reserves - $266 billion for a population of 23 million. That’s more that Korea has for nearly double the head count.
Lastly, Koreans (or pretty much anyone else) just can’t compete with the Taiwanese on Chinese guanxi. God knows how important that is.
All things considered I’d much prefer to have Taiwan’s economy.
By the way I’ve lost your card. My phone number is ??? ??? ????. Give me a text and we’ll have food and beer on linkou st sometime.
Edit by admin: I’m not sure that you really wanted to put your phone number on the internet, so I removed it from your post.
August 14th, 2007 at 4:33 am
According to PPP adjusted figures, Taiwan is still ahead of Korea, but it isn’t really pulling ahead. Taiwan had been considerably ahead of Korea for quite a while.
The problem with the PPP adjusted figures is that they are distorted by the huge drop in the value of the Taiwan dollar. Despite the price baskets used, the weak currency does mean that locals have to pay higher prices (in local currency), not only for imports, but also for local products that compete with them. For those who eat nothing but what can be bought at local mom-and pop food stands, the cost is lower, but for those who shop at supermarkets, or eat at international restaurant chains, the cost of a weak currency is considerable.
In terms of foreign currency reserves, Korea’s have nearly overtaken Taiwan’s, with Korea now holding over 250 billion USD. I predict that they’ll surpass Taiwan in this area before the end of next year, but it’s not as important of an economic indicator as unemployment or
realnominal GDP growth. Just look at Japan’s anemic growth over the last 20 years, despite being the largest per-capita foreign reserve holder in the world.You are completely right about the guanxi factor, though. Taiwan could have been making a killing in mainland China over the last 10 years.
Obviously, since I’m invested in Taiwan, I want things to pick up. I’m trying to maintain a rational view, though.
August 16th, 2007 at 12:00 am
From a really interesting letter to the editor published in the Taipei Times:
I do believe this will very soon come to pass.
Having said that, I do believe the Chinese saying “風水輪流轉“ that is, “fortunes takes their turns in changing”, if that makes any sense at all. Back when the Japanese economy was looking invincible in the 80s, airport shelves are full of books about the way of the samurai in a suit. And now they are in the doldrums, all of a sudden we don’t hear so much about Kaizen anymore. Instead we are seeing books such as “The Impact of Rising Lower-Middle Class Population in Japan - What can we do about it? ” by Kenichi Ohmae which essentially say that the problem with Japan is that it cannot copy the United States quickly enough.
Korea took a big hit in during the Asian financial crisis. It is now doing very well. I don’t know if there are more lessons to take from this any more than we can take from the fact that the Thai economy is doing very well, for instance. I do agree with you that hobbling our investments in China is essentially cutting off our nose to spite our face. I’m not just particularly clear on why the fact that Korea’s doing pretty well does anything in particular to reinforce that (to me self-evident) point.
August 16th, 2007 at 1:32 pm
Let me see how Taiwan and Korea are going to handle the incoming wave of hits from US credit crash. I think this crisis will be a far better measurement for both countries. Every country can grow like crazy but only the one survives crisis prevail.
October 13th, 2007 at 10:06 am
It seems like stats can be made to look like what every you want them to look like.
Take this Chen speech for example, that includes a section comparing Korea and Taiwan. Chen makes a valid point that -
And I’ve seen other manipulations of stats doing this kind of comparison.
Anyways, good post. Thought provoking…
October 13th, 2007 at 10:26 am
That is true. There’s a lot of data out there and you can make it support just about whatever you want. Currency devaluation can definitely make PPP stats look better. That said, Taiwan has been ahead of Korea in PPP terms for a long, long time. They’ve been growing at similar rates in PPP terms, while Korea has dramatically pulled ahead of Taiwan in real terms.
Update by Admin: From 2000-2006, Korea’s PPP-GDP per capita grew by 49%, while Taiwan’s grew by 39%.
November 9th, 2007 at 12:58 pm
The problem with looking at unadjusted GDP growth is that you can always jack the shit out of inflation and have nice looking numbers while having little real growth. This is the situation in South Korea today. You have high inflation that is eating at a lot of the growth in Korea and there is huge differences between the conglomerates making large amounts of money and the average citizen.
By the way–while Taiwan’s international status means that it’s much harder for it to get a free trade agreement (actually there’s little in terms of trade barriers between Taiwan and the US but it has symbolic meaning and could lead to agreements between Taiwan and other countries),
South Korea’s agreement with the US looks like it isn’t going to pass Congress, especially with the issues of beef not being able to be exported to Korea and cars and trucks (can we say SENSITIVE) being imported into the US being real sticking points.
This isn’t to say that economic policy in Taiwan is where it should be ideally, but those numbers you provide are very deceiving.
November 9th, 2007 at 6:10 pm
Passing by, “these numbers I provide” are from the IMF. You have an interesting argument, but it doesn’t make much sense considering the fact that Taiwan’s inflation is currently higher than Korea’s.
November 10th, 2007 at 2:46 am
Well, it does because for the past six years that are in question, South Korea’s inflation has been way higher than Taiwan’s. What it is today right now isn’t important and has no effect on previous GDP growth numbers. The problem is simple subtraction. If S.Korea has 5% growth but 3% inflation, then it really only has 2% growth.
I haven’t seen numbers for 2007 that would suggest it being higher in Taiwan this year than in Korea (you are kidding if you are citing numbers for a single quarter), but the question is by how much. It could be Korea has finally gotten their inflation problem under some control, and the main factors right now are all external (growing Chinese/Indian demand, oil), which would be the same for both Taiwan and Korea, putting inflation at about the same place (and who is a little bit higher doesn’t really matter).
November 10th, 2007 at 4:43 am
I agree with you that citing numbers from a single quarter is ridiculous. I haven’t included any 2007 data in these charts because they would be estimates.
I’m talking about the period from 2000 to 2006. I think I understand where you’re coming from, but the confounding issue here is currency rates. Taiwan’s dollar has taken a nose-dive (see the chart above) against the Korean won, and the euro, and the Canadian dollar, and the British pound, and the Brazilian real, and the Australian dollar, etc…
If you adjust inflation rates for currency fluctuation, then Taiwan’s PPP adjusted GDP numbers look comparable to Korea’s, but Taiwan’s inflation is through the roof. If you don’t adjust for currency fluctuation, then Korea’s inflation is indeed about 3% per year, but their real economic growth is 8.6% per year, while Taiwan’s is just under 1.2%. Either way you cut it, the economy here hasn’t been doing so well since the year 2000. There are some signs of improvement over the next year or so, but the real-estate situation could be trouble.
Please don’t take this the wrong way. I want to see the economy here pick up and trounce Korea’s. The business I’ve put so much of my time and energy into is here in Taiwan and my fortunes are bound tightly to the economic pulse of this little “graying tiger“.
November 18th, 2007 at 1:53 pm
Where is the adjusted growth figure to 1.2% in the IMF figures? It is neither on the web page you provide nor on IMF file to download. How did you calculate it?
November 18th, 2007 at 5:30 pm
Growth rate = [(final/initial)^(1/units of time)]-1
An easy way to check my calculation is to multiply Taiwan’s initial GDP by 1.012 (i.e. 101.2 percent) six times (since it’s six years). In 2000, Taiwan’s nominal GDP was 14,426, so if it grew by 1.2 percent a year, then the 2006 GDP would be:
14,426*1.012*1.012*1.012*1.012*1.012*1.012 = 15,496
Since the nominal 2006 GDP was only 15,472, it’s easy to see that the annualized growth rate was less than 1.2%.
November 19th, 2007 at 5:36 am
Michael has emailed me and corrected my use of the term “real GDP”. All figures I’ve used are nominal GDP. He has also suggested that IMF figures are not to be trusted. I’m more than willing to use data from more credible sources if readers can submit it. Constructive feedback is always welcome, but be nice.
Michael, the growth rate formula I used above is the general way to calculate the growth rate of anything from bacterial colonies to money in a savings account. What formula would you suggest for calculating long term GDP growth in current USD (as opposed to local currency)? Also, what do you consider to be a good source for international inflation data?
November 19th, 2007 at 5:13 pm
“Since direct trade is illegal in many cases, companies work via shell companies in Hong Kong, Macau, Singapore, or other areas. Every time business is done in that way, the intermediary takes a cut.”
The use of shell companies like this is mainly to avoid taxes by having profits stay in the country with the best tax regime. The shell companies are not actual intermediaries and just paper companies. It will add very little to the actual cost of products.
November 19th, 2007 at 6:18 pm
There are significant costs directly attributable to three links restrictions, and I’ve heard so first-hand from upper-level management at more than one large Taiwanese company.
November 19th, 2007 at 7:54 pm
Mark:
Real GDP is calculated by designating a particular year a base year, and then recalculating subsequent production using the base year dollars. It cannot be calculated using the formula you use because economic growth is different than money in savings account or bacterial growth, neither of which can be negative (hopefully!) or is affected by inflation of the unit of measurement (money) over time. I’m sure you remember the examples from your econ textbooks, but to put it simply, imagine Taiwan makes only bats and balls….
In 2000 Taiwan makes 50 balls worth $1 each, and 50 bats worth $3 each, for a total economy of $200. The next year Taiwan makes 60 balls worth $1.25 each, and 60 bats worth $4 each. Our nominal economy is $315 dollars, for a growth rate of over %50. However, to find the real growth rate, we use 2000 prices to calculate the economy as if the new production took place the previous year — 60 balls at $1, and 60 bats at $3. Our real GDP is actually only $240, and our growth rate is only 20%. Real economists calculate real GDP growth using a bundle of items. As you can imagine, arguments over weighting and representativeness are unending.
Because inflation varies from year to year nominal GDP is worthless in calculating GDP growth. Hence your claim that Taiwan has an annualized growth rate of 1.2% is not supported by any known facts or reliable methodology.
Hope this clarifies.
Michael
November 19th, 2007 at 11:35 pm
All are free to criticize my methodology, and to offer alternative sources of data to the IMF.
You are right that I calculated the growth of nominal GDP, rather than real GDP. You and “Passing by” are also right about inflation not being deducted from these growth estimates.
However, USD denominated nominal GDP calculations do still have their uses. One common one is calculating returns on investments. I also think that this is a reasonable way to measure relative changes in international buying power between Taiwan and Korea as long as their inflation rates don’t differ too much. I’m open to advice about how to improve this analysis, though.
November 20th, 2007 at 2:33 am
Real GDP is calculated by designating a particular year a base year, and then recalculating subsequent production using the base year dollars.
I have an economics degree and although we use a base year but more commonly we just have nominal - inflation just for short term. The problem today is that people are cheating on the inflation by altering basket of goods. Btw, why hate to tell you guys the reason that we are focusing on Korea is that the other two, HK and Singapore, have out performed far beyond Taiwan and Korea when Taiwan used to be the lead????
November 20th, 2007 at 7:05 am
Arty, we’re focusing on Korea because that was recommended to Taiwan as an example. Singapore and Hong Kong are so completely different than Taiwan no real comparison is possible (no productivity killing agricultural sector, complete control over rural-urban migration, etc). Although the Korean economy is completely different than Taiwan’s, superficial resonances make comparisons interesting to some.
Mark’s claim is that economic growth is like bacterial growth and that Taiwan’s economy is growing at an annualized rate of 1.2%, based on that perception. Neither claim is supportable. The reality is that by any reasonable measure — commonly used by real economists — Taiwan’s economy is growing around 4-5% every year. Of course, the basket of goods issue is a problem, as is defining “inflation” — several measures are used.
I’m open to advice about how to improve this analysis, though.
There’s not much to be done, as long as you believe yeast and economies grow the same way, and as long as you rely on an IMF database whose data origins are a mystery. The reality, given by the Taiwan DGBAS, is that economic growth between 2002-2006 averaged 4.60%. The DGBAS revisions are here:
http://eng.stat.gov.tw/public/Attachment/76128542971.doc
This page will take you to their massive statistical databases:
http://eng.dgbas.gov.tw/mp.asp?mp=2
You might note the real vs nominal numbers in the revisions, in which nominal growth is frequently below real growth. In this case, nominal growth is below real growth every year. Your 1.2% calculation is complete nonsense, Mark. It may fit some ideological commitment you have, but it has nothing to do with reality. If you really want to claim that Taiwan grew 1.2% over the 2000-6 period, you need to supply some pretty heavy reasons why everyone should disregard the real GDP calculations made by the DGBAS.
Michael
November 20th, 2007 at 9:04 am
Michael, this is just ridiculous. I never made any claim that “economies grow like yeast” or anything remotely like it. What I did say is that the growth rate formula is a general one that can be used to calculate the average growth rate of anything over a span of time. And it’s true.
Your comment about the differences between nominal and real GDP is noted, and I am not claiming that these nominal GDP figures are the same as real GDP figures (which also give Korea a greater growth rate than Taiwan). As for the source of the data, I’m not really partial to any one source. Your link to the DGBAS only goes back to 2002 data, but what’s there is similar to the IMF data.
These personal insinuations don’t really do anything productive.
November 20th, 2007 at 9:32 am
Ok, I can see there isn’t much point in continuing this. Let me know when there is some reason I should disregard the DGBAS figures.
Michael
November 20th, 2007 at 6:33 pm
“There are significant costs directly attributable to three links restrictions, and I’ve heard so first-hand from upper-level management at more than one large Taiwanese company.”
Sure there are, but they don’t come from shell companies in the middle as you purported. The costs mainly come from extra logistics and wasted time.
Please check the bottle of the next bottle of Smirnoff alcopop you drink and you’ll notice the importer is a branch office of some company in the British Virgin Islands. Since the product is not made in China, why is Smirnoff using these shell companies? Google Transfer Pricing and all will be revealed.
December 19th, 2007 at 3:58 am
[...] im Kleinen wie im Großen. Beide Länder haben interessante Wirtschaftsdaten. Einen differenzierten Ländervergleich hat Mark von toshuo.com gezogen. Seine Herleitung sieht so aus: Both were colonized by the Japanese [...]
April 25th, 2008 at 2:42 am
Real GDP growth rate:
…..Taiwan…Korea
2003.3.6…….3.3
2004.6.2…….4.6
2005.4.1…….4.1
2006.4.9…….5.0
2007.5.7…….5.0
average4.9…..4.4
Taiwan real economy is better than korea
GDP PPP 2007
Taiwan 30128
korea 24587
nomial GDP is only exchange rate not real economy
korea unemploment rate lower because south korea near half work only part-time work
August 26th, 2008 at 7:08 am
take a look at this
.
List of countries by GDP (nominal)
.
.
13th South Korea 957,053(millions of USD)
.
.
.
.
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24th Republic of China (Taiwan) 383,307 (millions of USD)
Well, Taiwan is not even a country