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Chang-Tai Hsieh:

Taiwan Mired in 1980s Mentality


Taiwan Mired in 1980s Mentality


Professor Chang-Tai Hsieh, an expert on economic growth and development, discusses how Taiwan can break free from its current economic predicament.



Taiwan Mired in 1980s Mentality

By Yishan Chen
From CommonWealth Magazine (vol. 615 )

Running theoretical models and data in the economics field, where narrow specialization is the norm, Academia Sinica fellow and University of Chicago Booth School of Business professor of economics Chang-Tai Hsieh is an exception.

“He can use an elegant model to describe the real world, and engage in dialogue with data,” says Lin Ming-jen, chairman of the Department of Economics at National Taiwan University. “He also follows system design, which gives him a unique viewpoint on growth in China and across Asia.”

Hsieh, the youngest of Academia Sinica’s members, returned to the country of his birth recently to speak at the 2017 CommonWealth Economic Forum. 

Five years ago, when Hsieh was just 42, Academia Sinica members Cyrus C.Y. Chu and Ruey Tsay jointly nominated him to full academician, citing his “finely honed observation, and numerous novel views offered from a microcosmic perspective.” Reached in Geneva, Chu said, “A good economist has some tricks up his sleeve to use very simple ways to explain a highly complex world.” 

Hsieh’s most well-known academic treatise, issued in 2009, is entitled “Misallocation and Manufacturing TFP in China and India”. In the paper, he offers an approach for measuring the efficiency of resource allocation in developing countries. “This approach is widely applied and extended, pioneering a new field in developmental economics,” says Hsu Wen-tai, associate professor of economics at Singapore Management University.

A prominent academic figure in the U.S., Europe and China, Hsieh has published papers in the top five periodicals in the economics field. His work on economic development has earned him a position on the Nobel Economic Sciences Prize Committee, making him the youngest member and the only Asian among the panel of five. He has been an advisor to the Interamerican Development Bank, and also consulted for the World Bank and the government of Singapore.

Hsieh teaches a course at the University of Chicago entitled “The Wealth of Nations,” after the 1776 tome by Adam Smith, widely viewed as the father of modern economics. 
Given the expansive breadth of economics today, asked why he nevertheless titles his course after Smith’s classic work, he replies, “I think it's the most interesting question, and the most unresolved question.”

Proper Deployment of Resources

Hsieh was born in Taiwan during the Vietnam War, during which his father was a maintenance engineer working on American airplanes at a U.S. base in Tainan. After moving with his family to Singapore at the age of two, where they stayed for three and a half years, they moved to Iran. In 1979, they witnessed the Iranian Revolution first-hand as Ayatollah Khomeini overthrew the Shah, and the Middle East’s most Westernized nation rapidly became one of the region’s most conservative Islamic countries. 

Then a nine-year-old international school student, Hsieh saw the streets flood with protesters and one classmate after another leave as their parents lost their jobs. Four months later, his father lost his, the school closed, and the family moved on to Paraguay.

“I grew up in South America. All around you, it was clear to us, even as a kid [who] just looked out with your eyes that [economic development] just really was the most important thing that was affecting people's lives,” he says.

Surveying his papers, his chief area of focus is Total Factor Productivity, which, rather than looking at the portion of output created by the inputs used in production, is instead determined by how efficiently and intensely the inputs are utilized in production. In other words, rather than pure labor and capital, it measures productivity as driven by creative factors such as management and technology.

“When you look at detailed case studies, it's all about people and companies or organizations coming up with ideas and learning how to approach things differently. It is not about getting more access to resources,” Hsieh says.

Institutional Innovation Drives Development

When asked to offer his insights on the real reasons for the slowdown in the Taiwanese economy, Hsieh says that Taiwan needs institutional innovation more than anything. “The wave of the future is not so much in manufacturing but in other things like services. You know what other type of organizational forms are needed in order to get these other type of business,” he states frankly. For instance, to support K-Pop you cannot turn to the Industrial Technology Research Institute.

Hsieh says the establishment of the Industrial Technology Research Institute (ITRI) in 1973 was a brilliant act of institutional innovation and a world first. ITRI attracted people with the most outstanding entrepreneurial spirit, giving them the biggest incentives to set out on their own, start new companies, and potentially make a fortune if they succeeded. As a result, world-class corporations like Taiwan Semiconductor (TSMC) were formed.

However, 30 years down the road, ITRI has gotten bogged down by bureaucracy. “It has become the bureaucracy of the people. They're good people here, but it's not the same talented people that used to be there in the early days,” he says.

A more frequent returnee to Taiwan since being elected an Academia Sinica member, Hsieh believes that the problem with Taiwan’s industry leaders is that they remain mired in the outmoded mindset of science-driven progress, believing that simply by investing more in an area like biotechnology or high tech R&D, they can establish new industries. “The model we get from the 80s is not going to work because that was about industrial technology. So with services, it’s not about industrial technologies. We need a different institutional innovation.” Again turning to the example of K-Pop, he notes that Taiwan does not lack talent, or someone like (Taiwan-born K-Pop singer) Tzuyu would never have become popular in Korea. He asserts that it is the lack of institutional innovation that has held back service industry development.

Many critical voices claim that Taiwan succeeded in the era of state-driven development, but that the country has become weak and the economy slow since democratization. However, Hsieh completely disagrees with such criticism, noting the example of Taiwan’s national health insurance system. A product of the post-democratization period, Taiwan’s healthcare system is the best and most affordable in the world. As such, Hsieh believes that Taiwan’s problem is not so much its democracy as the lack of consensus. “It was the societal consensus that was important,” he concludes.

Translated from the Chinese by David Toman