TaiwanEconomy - Kleykamp in Taiwan

Some introductory remarks:
What I have learned after living in Taiwan for 20
Many people in Taiwan believe government is not
only necessary, but essential. They are very
paternalistic about government and its role in the
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
The Economy and Trade of
Professor David Kleykamp (柯大衛 )
Department of Economics
Tamkang University
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
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
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
(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
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%)
(3) US (16%)
(2) Hong Kong (17%)
(3) US (15%)
(2) Hong Kong (16%)
(3) US (14%)
Taiwan’s Top Three Sources for Imports
2001 – 2007
2004 – 2007
(1) Japan (24%)
(2) US (13%)
(3) China (10%)
Japan (24%)
US (12%)
China (11%)
2006 - 2007
(1) Japan (22%)
(2) China (12%)
(3) US (12%)
Why the enormous increase in exports to
(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
(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
(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.