Council for Economic Planning and Development ( CEPD ) minister Ho Mei-yueh recently sat down with CommonWealth Magazine and shared her insights on a host of pressing topics for Taiwan : the widening divide between the affluent and the impoverished, rebounding domestic investment , the need to preserve incentives to work, and Taiwan 's programs to help the disadvantaged .

Following are excerpts from the interview:

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Q: Why haven't wages gone up much in Taiwan in the past few years?

A: Actually, commodity prices in recent years have been low, and working hours have been reduced to 84 hours every two weeks, making employers less inclined to increase wages. Also, because companies have been unsure whether or not they'll be profitable, they have held base salaries relatively steady, and then, in years when they make money, they pay a year-end bonus of a few months' salary.

Times are changing. The nature of knowledge-based economies is that money is used to make money. So having arrived at this point, it's only normal that the divide between rich and poor should widen. If you look at the income gap in Taiwan , it is actually doing reasonably well compared to other countries. In Japan , the household income for the top 20 percent of earners was 6.6 times the comparable figure for the bottom 20 percent, while in Taiwan the ratio is 6.01 times higher, and in Singapore it's 31 times higher.

Knowledge-based Economies Create Income Gaps

In this era of the knowledge-based economy, the more people are able to use their knowledge, the more they make, so the income gap grows wider. That sets off demands for social justice, and for a social welfare system that will at least help the poor and disadvantaged with their basic needs.

We have tried hard to reduce income inequality but without hindering fair competition, in other words preserving the power of social incentives. Otherwise, why did the Soviet Union break up? Why did China overhaul its economy to accept capitalism? Because everybody believes that different levels of effort merit different levels of income, giving you an incentive to work. Only then can productivity be improved. But this, of course, leaves a gap in incomes, which is why there is a tax system and a social welfare system.

Total tax receipts, including social security contributions, amount to 18.2 percent of GDP (gross domestic product) in Taiwan, 25.5 percent of GDP in the United States, 26.4 percent in Japan, 34.7 percent in Germany, 43.4 percent in France, 36 percent in Britain, and 25.6 percent in South Korea. It's even lower in Singapore , at just 13.7 percent. That shows that Singapore has embraced a more capitalistic system where it doesn't matter if the income gap expands.

Q: Many people seem to believe that domestic demand is weak right now. Do you agree?

A: This year, external demand is 55 percent of the economy, and domestic demand 45 percent. In the past, the ratio was 70 percent external demand to 30 percent domestic demand. There was a three-year period in the early part of the decade where private investment fell dramatically, from roughly NT$1.6 trillion to NT$1.2 trillion. It rebounded to more than NT$1.8 trillion in 2004 and is expected to surpass NT$2 trillion this year.

With a rebound in private investment, overall domestic demand will gain strength, as will private consumption. The nature of knowledge-based economies is that money is used to make money.

Social Welfare Is a Last Resort

Q: There are more disadvantaged groups in today's society. How are they being helped?

A: I think social welfare is a means of last resort. The optimal situation is to have enterprises increase job opportunities, and only if they fall short should social welfare be used to bridge the gap. 190,000 new job opportunities have been created, more than were created last year, so why hasn't the unemployment rate fallen? It's because the labor force participation rate has increased, meaning more people have entered the job market. That is actually something we also need.

One of the top priorities of our ?Mega Warmth, Mega Investment? policy (a NT$1.17 trillion integrated domestic stimulus and social reconstruction plan introduced in 2006) is to care for disadvantaged households. They need help urgently, which we are providing as part of our Assistance Plan for Disadvantaged Households. It began last year, and as of the end of September this year, we have handled around 7,200 cases and disbursed a total of more than NT$90 million.

The plan also helps students from poor families pay their school fees.

I also want to stress that when I say providing jobs, those jobs should be for special categories of disadvantaged people. The Council for Labor Affairs even has diversified employment plans, where we subsidize employers for a year to encourage them to employ the disadvantaged.

We also subsidize students who have just graduated from college under the Youth Workplace Experience Program. The government subsidizes companies to employ new graduates, and if the two sides find the situation is working, the young employee is then formally hired.

Q: What other projects have you launched since coming to the Council for Economic Planning and Development?

A: Since joining the CEPD, I've thought of promoting ?regional resource integration,? capitalizing, for example, on schools or industrial parks, and then on women as resources.

Many urban resources are currently going to waste, and local governments should make new use of them. Next to the Chiang Kai-shek Memorial Hall, for example, there are many low buildings that were once used by the Ministry of Justice as dormitories. They should be reclaimed and the land used for urban renewal. Another example is Keelung . It shouldn't just be a port ? it also has to serve a recreational function. Why doesn't Keelung do this? Because it's not making good use of the nearby land.

Q: Some believe that urban renewal is simply a way to help big conglomerates make easy money. How do you see it?

A: In undertaking urban renewal, if you don't provide any incentive packages, nobody will invest. If we offer developers incentives, for example by permitting a higher floor area ratio on a certain piece of land, we can have the developer pay back to the local government 40 percent of the value of the extra floor space minus costs. We still have to give companies room to make money, but we cannot allow unreasonable profit levels.

The Risk of Abolishing Preferential Tax Breaks

Q: What do you make of Taiwanese businesses going to China ?

A: Taiwan 's economic conditions should not be compared with China 's. We should be compared with South Korea , Singapore and Hong Kong , which are more similar to us.

If the same types of enterprises can withstand our wage levels, then our development environment will be competitive with theirs. But they have attracted investment through preferential tax schemes, which I don't think is fair to Taiwan .

Singapore is willing to up the ante every time. They don't offer a five-year tax holiday as we do ? they provide 10-year tax holidays, and they're willing to negotiate.

For many companies evaluating investment projects, the choice of location often comes down to either Taiwan or Singapore . They'll ask me what preferential terms we can offer. I have to tell them that I'm sorry, they can still get a five-year tax holiday if they invest before the end of 2009, but I can't guarantee it will be available after that. And even if there is a five-year tax holiday, they will still be taxed at a 10 percent rate, because Taiwan has an Alternative Minimum Tax.

Singapore , on the other hand, can offer a 10-year tax holiday. Under these circumstances, people will only find it profitable to set up here if we offer them something truly unique. We need to use our basic infrastructure, efficiency and industrial value chain when we negotiate. But abolishing preferential tax incentives does carry a certain risk.

Foreign direct investment in fact has exceeded US$10 billion this year. Prior to 2000, it averaged around US$3 billion, and between 2000 and 2006 it averaged around US$5.4 billion. Last year it hit a high of US$13.9 billion and has already reached US$10 billion this year.

I myself was curious to find out who was investing this US$10 billion. Many are European companies buying businesses engaged in Taiwan 's conventional industries. They believe many local enterprises in this sector ? such as makers of golf-club heads, curtains, window shades and blinds ? are outstanding at what they do, and foreign investors have ended up buying many of the top producers in the world.

This is a typical model of internationalization. Taiwan fosters excellent companies that gain recognition not only at home but around the world, and then they are bought by international concerns. The company and production facility remain in Taiwan , but after being merged they become part of an international supply chain.

Translated from the Chinese by Luke Sabatier

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Chinese Version: 台灣貧富差距還算好的