As 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
2000200120022003200420052006
Taiwan14,42613,02813,09313,25414,20515,20315,472
Korea10,89010,17811,48212,71014,14216,30818,015

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

currency graph

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
2000200120022003200420052006
Taiwan3.04.65.25.04.44.13.9
Korea4.44.03.33.63.73.73.5

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.

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