Posts Tagged ‘Taiwan’

At the risk of stereotyping, the Chinese people are remarkably productive when given the chance. Hong Kong and Singapore are dominated by ethnic Chinese, and those jurisdictions routinely rank among the world’s top economies.

Taiwan is another high-performing economy with an ethnic Chinese population.

Ironically, the only place where Chinese people don’t enjoy high average incomes is China. And that’s because there’s too much statism. If you peruse the indispensable Economic Freedom of the World from Canada’s Fraser Institute, you’ll see that China is ranked #115 out of 152 jurisdictions, which is even below nations such as Greece, Haiti, and Vietnam.

As I explain in this interview, China’s politicians are undermining prosperity with a system based on cronyism rather than capitalism.

China’s in the news, of course, because of recent instability in its financial markets. And I’ve taken advantage of the opportunity to give my two cents on this issue (see here and here).

But I was making the same criticisms even when China’s economy was perceived as a big success. I wrote in 2010 that America didn’t need to fear the supposed Chinese economic tiger. I pointed out in 2011 that China was way behind the United States.

And I was at least somewhat prescient when I warned about a bubble in the Chinese economy in this 2011 debate.

Though plenty of folks on the left actually argued that China’s state-controlled economy was something to mimic. Writing for Reason, Ronald Bailey cites some of their silly statements.

As the world watches China’s Communist Party leaders try to order markets around, my mind turned to those pundits who earnestly recommended that the United States emulate the brilliant beneficient Chinese planners in running our economy. The most fulsome China booster was New York Times columnist Tom Friedman. …So enamored of China’s industrial policy was Friedman that in 2010 he likened Chinese economic planning boldness to making “moon-shots.” …And then there is the inevitable Robert Reich. Reich, who is a former Clinton Secretary of Labor, has never been right about anything when it comes to economic policy prescriptions. For example, Reich was convinced in the 1980s the Japan would bury the United States due to the planning acumen of that country’s savvy bureaucrats. …Just shy of 30 years later Reich sang the same stale tune in 2011, only instead of Japanese planners, he was praising the wonders of Chinese industrial planning… As late as 2012, Richard D’Aveni, a Professor of Strategy at Tuck School of Business at Dartmouth College, declared in The Atlantic that “The U.S. Must Learn From China’s State Capitalism to Beat It.”

Actually, Professor D’Aveni is right for the wrong reason. We can learn a lot from statist economies. But we should learn what to avoid, not what to copy.

To conclude, this post shouldn’t be perceived as being anti-China. I want there to be more prosperity in that country, which is why I defended China from an absurd attack by the IMF.

Moreover, I commend China for reforms that move policy in the right direction. And as I pointed out in the interview embedded above, China’s reforms in the 1980s and 1990s may have been limited, but they did help lift hundreds of millions of people out of abject poverty.

Since I mentioned the interview, one of the quirky parts of the discussion was whether politicians should be held criminally responsible for economic mismanagement. Here’s what I wrote a few years ago about an example of that happening in Iceland.

P.S. You probably didn’t realize that it was possible to see dark humor in communist oppression.

P.P.S. But at least some communists in China seem to understand that the welfare state is a very bad idea.

P.P.P.S. Some business leaders say China is now more business-friendly than the United States. That’s probably not good news for America, but my goal is to have a market-friendly nation, not a business-friendly nation.

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There’s a “convergence” theory in economics that suggests, over time, that “poor nations should catch up with rich nations.”

But in the real world, that seems to be the exception rather than the rule.

There’s an interesting and informative article at the St. Louis Federal Reserve Bank which explores this question. It asks why most low-income and middle-income nations are not “converging” with countries from the developed world.

…only a few countries have been able to catch up with the high per capita income levels of the developed world and stay there. By American living standards (as representative of the developed world), most developing countries since 1960 have remained or been “trapped” at a constant low-income level relative to the U.S. This “low- or middle-income trap” phenomenon raises concern about the validity of the neoclassical growth theory, which predicts global economic convergence. Specifically, the Solow growth model suggests that income levels in poor economies will grow relatively faster than developed nations and eventually converge or catch up to these economies through capital accumulation… But, with just a few exceptions, that is not happening.

Here’s a chart showing examples of nations that are – and aren’t – converging with the United States.

The authors analyze this data.

The figure above shows the rapid and persistent relative income growth (convergence) seen in Hong Kong, Singapore, Taiwan and Ireland beginning in the late 1960s all through the early 2000s to catch up or converge to the higher level of per capita income in the U.S. …In sharp contrast, per capita income relative to the U.S. remained constant and stagnant at 10 percent to 30 percent of U.S. income in the group of Latin American countries, which remained stuck in the middle-income trap and showed no sign of convergence to higher income levels… The lack of convergence is even more striking among low-income countries. Countries such as Bangladesh, El Salvador, Mozambique and Niger are stuck in a poverty trap, where their relative per capita income is constant and stagnant at or below 5 percent of the U.S. level.

The article concludes by asking why some nations converge and others don’t.

Why do some countries remain stagnant in relative income levels while some others are able to continue growing faster than the frontier nations to achieve convergence? Is it caused by institutions, geographic locations or smart industrial policies?

I’ll offer my answer to this question, though it doesn’t require any special insight.

Simply stated, Solow’s Growth Theory is correct, but needs to be augmented. Yes, nations should converge, but that won’t happen unless they have similar economic policies.

And if relatively poor nations want to converge in the right direction, that means they should liberalize their economies by shrinking government and reducing intervention.

Take a second look at the above chart above and ask whether there’s a commonality for the jurisdictions that are converging with the United States?

Why have Hong Kong, Singapore, Taiwan, and Ireland converged, while nations such as Mexico and Brazil remained flat?

The obvious answer is that the former group of jurisdictions have pursued, at least to some extent, pro-market policies.

Heck, they all rank among the world’s top-18 nations for economic freedom.

Hong Kong and Singapore have been role models for economic liberty for several decades, so it’s no surprise that their living standards have enjoyed the most impressive increase.

But if you dig into the data, you’ll also see that Taiwan’s jump began when it boosted economic freedom beginning in the late 1970s. And Ireland’s golden years began when it increased economic freedom beginning in the late 1980s.

The moral of the story is – or at least should be – very clear. Free markets and small government are the route to convergence.

Here’s a video tutorial.

And if you want some real-world examples of how nations with good policy “de-converge” from nations with bad policy, here’s a partial list.

* Chile vs. Argentina vs. Venezuela

* Hong Kong vs. Cuba

* North Korea vs. South Korea

* Cuba vs. Chile

* Ukraine vs. Poland

* Hong Kong vs. Argentina

* Singapore vs. Jamaica

* United States vs. Hong Kong and Singapore

* Botswana vs. other African nations

Gee, it’s almost enough to make you think there’s a relationship between good long-run growth and economic freedom!

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Which nation is richer, Belarus or Luxembourg?

If you look at total economic output, you might be tempted to say Belarus. The GDP of Belarus, after all, is almost $72 billion while Luxembourg’s GDP is less than $60 billion.

But that would be a preposterous answer since there are about 9.5 million people in Belarus compared to only about 540,000 folks in Luxembourg.

It should be obvious that what matters is per-capita GDP, and the residents of Luxembourg unambiguously enjoy far higher living standards than their cousins in Belarus.

This seems like an elementary point, but it has to be made because there have been a bunch of misleading stories about China “overtaking” the United States in economic output. Look, for instance, at these excerpts from a Bloomberg report.

China is poised to overtake the U.S. as the world’s biggest economy earlier than expected, possibly as soon as this year… The latest tally adds to the debate on how the world’s top two economic powers are progressing. Projecting growth rates from 2011 onwards suggests China’s size when measured in PPP may surpass the U.S. in 2014.

There are methodological issues with PPP data, some of which are acknowledged in the data, and there’s also the challenge of whether Chinese numbers can be trusted.

But let’s assume these are the right numbers. My response is “so what?”

I’ve previously written that the Chinese tiger is more akin to a paper tiger. But Mark Perry of the American Enterprise Institute put together a chart that is far more compelling than what I wrote. He looks at the per-capita numbers and shows that China is still way behind the United States.

To be blunt, Americans shouldn’t worry about the myth of Chinese economic supremacy.

But that’s not the main point of today’s column.

Instead, I want to call attention to Taiwan. That jurisdiction doesn’t get as much attention as Hong Kong and Singapore, but it’s one of the world’s success stories.

And if you compare Taiwan to China, as I’ve done in this chart, there’s no question which jurisdiction deserves praise.

China v Taiwan

Yes, China has made big strides in recent decades thanks to reforms to ease the burden of government. But Taiwan is far above the world average while China has only recently reached that level (and only if you believe official Chinese numbers).

So why is there a big difference between China and Taiwan? Well, if you look at Economic Freedom of the World, you’ll see that Taiwan ranks among the top-20 nations while China ranks only 123 out of 152 countries.

By the way, Taiwan has a relatively modest burden of government spending. The public sector only consumes about 21.5 percent of economic output. That’s very good compared to other advanced nations.

Moreover, Taiwan is one of the nations that enjoyed considerable progress by adhering to Mitchell’s Golden Rule. Between 2001 and 2006, total government spending didn’t grow at all.

Taiwan Spending Freeze

During this period of fiscal restraint, you won’t be surprised to learn that the burden of government spending fell as a share of GDP.

And it should go without saying (but I’ll say it anyhow) that because politicians addressed the underlying disease of government spending, that also enabled big progress is dealing with the symptom of government borrowing.

Look at what happened to spending and deficits between 2001 and 2006.

Taiwan Fiscal Restraint Benefits

P.S. You probably didn’t realize that it was possible to see dark humor in communist oppression.

P.P.S. But at least some communists in China seem to understand that the welfare state is a very bad idea.

P.P.P.S. Some business leaders say China is now more business-friendly than the United States. That’s probably not good news for America, but my goal is to have a market-friendly nation, not a business-friendly nation.

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The United States has the world’s worst corporate tax system, with a job-killing tax rate of about 40 percent. In the European Union, the average rate is about 25 percent, but that’s just one part of the world that is moving in the right direction. My Cato colleague recently did a blog post about Taiwan’s politicians lowering that nation’s corporate tax rate to 17 percent. Now Tax-news.com is reporting that Ukraine’s government is doing something similar, reducing the corporate tax rate from 25 percent to 17 percent.

Ukraine’s new Prime Minister, Mykola Azarov has announced his government’s intention, in a revised tax code, to slash the country’s corporate income tax rate starting 2011, and then further on a transitional basis through 2014 to enhance the nation’s economic performance and fiscal attractiveness. According to the Prime Minister, the corporate income tax will be cut from 25% to 20% in 2011, and cut 1% annually from then on, until 2014 when the rate will stand at 17%. The Value Added Tax is to also to be reduced on a progressive basis over a similar timescale. Explaining the government’s methodology, Azarov was quoted by the national radio station NCRU as saying: “This innovative document is a real tax reform that will improve the investment climate in Ukraine and will improve the nation’s attractiveness for conducting business.”

It’s worth noting that a low corporate tax rate is not a silver bullet for an economy with other bad policies. Ukraine has one of the world’s most repressive economies, so reducing the corporate tax rate is just one of many reforms that is needed. But, all other things being equal, lower tax rates always are a good idea.

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