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Taiwan vs. South Korea:

Why Is Taiwan Lagging Behind?


Why Is Taiwan Lagging Behind?

Source:Ming-Tang Huang

Over the last decade, South Korea has pulled ahead of its rival Taiwan. Why has South Korea been able to graduate from the "Four Little Dragons of Asia," achieving a per-capita GDP 20 percent higher than that of Taiwan?



Why Is Taiwan Lagging Behind?

By Jerry Lai
From CommonWealth Magazine (vol. 448 )

Taiwan and South Korea are highly competitive with each other, whether it be in sports, brand names or economic performance. But over the past 10 years, South Korea has gone from a per-capita gross domestic product (GDP) just 77 percent of Taiwan's to pull even and ultimately surpass Taiwan's per-capita GDP by 26 percent. How can this be?

South Korea is trumping Taiwan because of its relative stability, in particular its comparatively solid domestic demand market and a more diversified development of exports.

Looking strictly at GDP growth, the two countries split evenly, each besting the other exactly five years out of the last ten. But more detailed analysis by Shih Hsin University economics professor Dr. Chou Ji, going back 20 years to where the two countries' economic growth rates were on a par, shows Taiwan's year-on-year economic growth rate beginning to change at a rate just half that of South Korea. Over the most recent decade, Taiwan's average economic growth rate has lagged behind South Korea, with the fluctuations now giving South Korea a two-fold edge.

Dynamic Exports, Solid Domestic Demand

Foreign exchange rates have provided a big boost to South Korea. A report from Goldman Sachs Research found that of the increases in average per-capita income among South Koreans over the past decade, 80 percent could be attributed to the factor of rising foreign exchange rates, with real economic growth accounting for just 20 percent. Given the observable gap in relative "purchasing power parity" (PPP) figures that the two countries consistently maintain, it is clear that Taiwanese enjoys higher purchasing power.

In the foreign exchange market, Taiwan's central bank was more inclined to side with the nation's small- and medium-sized enterprises with more clear-cut intervention, fearing exchange rate fluctuations on the scale of South Korea's currency, the won, would doom those smaller businesses, which are a major pillar of Taiwan's economy.

Yet the volatility in South Korean exchange rates over the past decade has done little or no damage to South Korean export competitiveness. A decade ago, Taiwanese and South Korean exports remained extremely close in terms of value, but by last year the total value of South Korean exports had outstripped those of Taiwan by 80 percent, or NT$160 billion. 

Moreover, a higher ratio of R&D investment has proven beneficial for exports by improving South Korean product technology and brand image in world markets. 

Looking at export industries, electronics are the only export game in town for Taiwan, while South Korea has broadly diversified its development with vibrant shipbuilding, automobile manufacturing, semiconductors, wireless communications, machinery, LCD panels, steel and petrochemical sectors. Its relative risk diversification and market expansion capabilities are more robust than Taiwan's.

The stability of the domestic demand market has further been built atop an extremely stable domestic employment market. An International Institute for Management Development (IMD) report this year noted that keeping its unemployment rate under control had been South Korea's biggest competitive advantage. South Korea's overall unemployment rate of 3.65 percent last year ranked sixth in the world, while its long-term unemployment rate stood at an unbelievable zero percent, the world's best. 

What sort of unemployment rate could be this low? The key factor behind the ultra-low unemployment numbers is unconventional hiring practices, an increasingly serious problem in South Korea. In 2008, sub-contractors, temp agency workers, and temporary employees accounted for more than 44 percent of the workforce. Additionally, comparatively rigid relations between labor and management make it difficult for South Korean firms to lay off full-time staff, even during tough economic times. In the IMD report, South Korea ranks 56th of 58 nations in terms of labor relations.

But the labor organizations that so severely damaged the competitiveness of South Korean industry during the 1980s and 1990s had moderated their stance considerably by the turn of the century, even to the extent that at the height of the financial crisis they were willing to accept temporary wage cuts in lieu of layoffs.

Once businesses returned to profitability, wages were adjusted accordingly. Between 2000 and 2008 overall industrial and service industry wages in Taiwan rose an average of 0.1 percent annually, while in South Korea wages averaged a 4.5 percent increase annually. A decade ago, wages in Taiwan and South Korea were on a par; now Taiwanese workers earn just 60 percent of what their South Korean counterparts make.

Government has been South Korean industry's strongest pillar of support. South Korean government largesse in the form of subsidies ranked third in the world, the IMD reported. South Korean government assistance to domestic industry was the biggest factor in helping South Korean industry weather the financial crisis, according to an April report from McKinsey & Co.

The South Korean government's performance is reflected in companies' ability to secure financing, market responsiveness and globalized capabilities, areas in which South Korean industry ranks among the top three in the world.

South Korean president Lee Myung-bak began his own career at Hyundai. Just prior to last Christmas, Lee made six telephone calls to United Arab Emirates president Sheikh Khalifa bin Zayed al Nahyan, and personally flew to Abu Dhabi to lobby the city state, succeeding in wresting from competitors like France and Japan a US$40 billion international contract to construct the world's largest nuclear power generation facility.

In the area of domestic demand, the relative strength of Korea and Taiwan lies in the results of their efforts to stimulate consumer credit spending. While the South Korean government has been willing to take the extreme measure of offering tax deductions for consumer spending using credit cards, this has not resulted in a financial industry crisis, as did the overuse of credit cards in Taiwan. South Korea has averted a meltdown by relying on stable wage increases across the board and a solid labor market, observes Rick Lo, senior vice president for macroeconomic research at Fubon Financial.

But it isn't just the South Korean government that has taken the initiative in propping up the economy; the nation's people have also been vigilant in protecting their turf. Last year news surfaced of a nationwide short-term debt crisis in South Korea. But the true cause of this phenomenon, Lo explains, goes back to 2008, when foreign investors dumped South Korean shares in a wave of profit-taking. In response, ordinary South Koreans came out of the woodwork to borrow funds from Japanese lenders at extremely low interest rates which they then used to buy South Korean equities. South Korean financial institutions were then able to underwrite long-term loans to foreigners at relatively higher interest rates and pocket the spread.

It's hard not to admire that kind of patriotism and determined self-sacrifice.

"But it's not easy for a dinosaur to change directions," Lo avers. In his opinion, the game South Korea is playing can result in both huge booms and huge busts.

As the old adage has it: "In ten years' time, the world can turn upside down." Initially, Taiwan and South Korea took remarkably similar paths on their respective journeys toward economic development. A decade from now, which will emerge on top? It's just too early to tell.

Translated from the Chinese by Brian Kennedy