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Flawed Economic Indicator?

GDP's Three Big Blind Spots


GDP's Three Big Blind Spots


Taiwan's work ethic has underpinned strong GDP growth, but life hasn't gotten much better for ordinary Taiwanese people in the past decade. What is it that this major economic indicator is not telling us?



GDP's Three Big Blind Spots

By Shiau-Jing Ding
From CommonWealth Magazine (vol. 432 )

Gross domestic product (GDP), the most commonly used and recognized economic indicator around the world, has come to be seen as the measuring stick for how well each country is doing, and the pace of a country's progress. But its usefulness is now being questioned.

Even before the global financial storm struck last September, French president Nicolas Sarkozy was dissatisfied with the tools being used to measure economic performance, and he set up the Commission on the Measurement of Economic Performance and Social Progress to search for new gauges that better reflect economic soundness and a society's overall well-being.

In reporting on the panel's findings in mid-September, Nobel Prize-winning economist Joseph Stiglitz agreed with Sarkozy that GDP was being used for something other than its intended purpose.

"We looked to GDP as a measure of how well we were doing, and that doesn't tell us whether it's sustainable," he said. "What began as a measure of market performance has increasingly become a measure of social performance, and that's wrong."

The GDP "fetish," as Stiglitz describes it, is as strong in Taiwan as anywhere else in the world. But as Taiwan awakens to the inadequacies of GDP in measuring society's well-being, economists are pointing to three crises reflecting imbalances in Taiwan's economy that have gone undetected by this major economic indicator.

"Taiwan's capital Taipei is a prime example of growth and development not moving in tandem," says Mon-Chi Lio, an associate professor in National Sun Yat-sen University's Department of Political Economy.

Lio found that the output generated by the city has risen consistently, but residents have used their feet to describe their plight by moving out of the city. Since 1991, Taipei's population has experienced a steady net emigration.

Crisis No. 1:

No Place to Live for Taipei's Worker Bees

"Each individual who commutes to Taipei to work is like a worker bee for the capital. Worker bees are only responsible for working for the queen bee, but they can't live in the center of her hive," Lio says.

Who truly qualifies as a Taipei person? The latest data on types of income from the Ministry of Finance portray different pictures of Taipei's households. Families living in the capital city do not have the highest wage and salary income in Taiwan, but they make up for it with the highest level of unearned income, such as rental income, royalties and dividends.

In 2007, Taipei's households derived 3.54 percent of their total income from rental income and royalties, earning an amount two to three times higher on average than that of families in Taiwan's other counties and cities. Another 20 percent of their income came from dividends, with each household raking in three to five times more in dividends than other households around the country.     

In his hit single of the early nineties, "Marching Forward," Lim Giong sang of young people from central and southern Taiwan heading north to Taipei for work, who "aren't afraid of anything." But in Taipei of the 21st century, mortgage burdens have struck fear in the hearts of many. According to Council for Economic Planning and Development statistics, mortgages have gone from accounting for 29 percent of Taipei residents' income in 2004 to 43 percent in 2008.

"This is simply a small group of people robbing a larger group of people. What is the government up to?" complains an agitated Lee Hsing-chang, who 20 years ago launched the movement "Snails without Shells," in which he led middle class residents to camp out overnight on Taipei's high-rent Zhongxiao East Road to protest skyrocketing housing prices.

When Lee was a construction site foreman, he saw a landlord and developer collaborate on one project where the landlord received more than 100 units of the new apartment complex in lieu of payment for the land. None of the landlord's three-generation family of 10 ever had to go to work, and they could all live a life of luxury simply off the rent they collected. Some landlords even hoarded property to be able to then sell or rent it at a high price. On the other hand, no matter how hard the people in the middle class work, their salaries cannot keep up with soaring housing prices.

Today, Lee is the chairman of the popular Overseas Dragon dumpling and pot sticker restaurant chain, but he still remains indignant when talk turns to housing prices. In his activist days, Lee recommended to the government and the legislature that a tax be imposed on vacant apartments and idle land to prevent speculators from driving up real estate prices.

Taipei's real estate market is increasingly a tool for people with money to make more money. One broker said that in the first eight months of 2009, 45 percent of prospective homebuyers were investors, a far higher ratio than the 20 percent estimated by the Ministry of the Interior's Construction and Planning Agency.

"My feeling on the 20th anniversary of the ‘Snails without Shells' movement is ‘I detest the government,'" Lee says. Over the past two decades, the government has not enacted any legislation to address the problem, preferring, he says, to accommodate investors and conglomerates that hoard property and throw supply and demand out of kilter. The only mechanism able to boost the supply of affordable housing – public housing built directly by the government – was halted nine years ago.

Crisis No. 2:

Worlds' Fifth Longest Working Hours

Another GDP blind spot often challenged by economists is that it provides no way to measure the value of leisure. In Taiwan, long work hours and unlimited overtime have become another crisis.

According to the 2008 World Competitiveness Yearbook published by the Lausanne-based business school IMD, Taiwan's working hours were ranked as the fifth longest in the world in 2007, behind Mexico, Hong Kong, South Korea and India. Each Taiwanese employee worked an average of 2,256 hours during the year.

The impact of long working hours on quality of life can be seen most clearly in the reduced time people have to spend with their families. The biggest wish of one investment bank vice president who works nearly 100 hours a week is to get off work before 9 p.m. so he can make it home to see his three-year-old daughter before she goes to bed. The banker fears his daughter will grow up without knowing him.

 Or take the case of Mr. Lai, who has been working in a local bank's sales department for around three years and earns a salary of NT$40,000 a month. When things get busy, Lai works more than 12 hours a day and even has to put in overtime on weekends. The only time his family is together is at breakfast time. Even when he sleeps at night, he frequently dreams about his work and suddenly wakes up with a start.

"But when I don't have a lot of work, it's not necessarily good either, because it means I don't have any customers," says Lai, echoing the lament of many Taiwanese workers that no matter how long one's working hours are, they always feel a lot of pressure.

What's the downside of long working hours? Hsin Ping-Lung, an associate professor in National Taiwan University's Graduate Institute of National Development, says the working hour numbers may be distorted by the Council of Labor Affairs' inclusion of foreign laborers, who tend to put in a lot of overtime, in its working hour calculation. Hsin believes that the impact of working hours on an individual's well-being is not based on how long they are but rather whether they're done willingly. Taiwan's long working hours, however, do leave Taiwanese workers unwilling to receive further professional training, because they do not have the time.

Crisis No. 3:

Growing Proportion of Low-income Households

Aside from looking at economic growth, one also must consider income distribution. The proportion of poor people has become an important focal point in many countries.

Minister without Portfolio James Hsueh, who is also a professor in National Taiwan University's Department of Sociology, says two indicators – the difference in income between the highest- and lowest-earning households and the number of low-income households as a percentage of the total – both provide warnings that poverty is worsening.

In 2007, the wealthiest 20 percent of Taiwan's households earned an average income 5.98 times that of the poorest 20 percent, but the disparity grew to 6.05 times in 2008. Nearly 30,000 more households have officially registered as low-income households since 2001, and their number as a proportion of Taiwan's total households has risen 0.3 percentage points.

"When the economy is growing, the wealth of low-income earners grows more slowly than that of high-income earners, but when the economy is weak, the wealth of low-income earners contracts the most," Hsueh explains. In other words, regardless of the state of the economy, the poor receive a relatively smaller share of the benefits of economic growth.

Taiwan's Directorate-General of Budget, Accounting and Statistics (DGBAS) believes, however, that using the income disparity between the wealthiest and poorest households to measure the income divide between rich and poor is not completely accurate. That's because the survey only records regular income earned in a particular year, rather than a household's overall wealth. Many individuals in the bottom fifth income tier are actually retired people who do not have incomes, but "they are not necessarily poor," a DGBAS official says.

Still, at a time when the number of low-income households is clearly growing, the government has begun providing social subsidies and professional training to disadvantaged groups to help narrow the rich-poor divide. Another major element in addressing the problem should be to reform the tax system to help redistribute wealth, but one official revealed that with the current mindset geared to lowering taxes to drive GDP higher, pushing such tax reform may be extremely difficult.

As has long been the case, many of society's problems are hidden behind GDP numbers. As a single economic indicator, GDP is inherently limited and cannot fully reflect society's many facets. The question many are pondering now is what basket of indicators should be used to replace the long-dominant GDP gauge.

Translated from the Chinese by Luke Sabatier