Luby Liao

This is a guest blog by Dr. Frank Hsiao, a renowned economist

Are Taiwanese worse-off now?

A.        Although this is a daily concern for many Taiwanese,it is a complicated question.  Howdo you measure welfare of people?  In the previous writing, we have used the population below poverty lineto discuss whether the Taiwanese are getting poorer.  We have shown that they are not only not becoming poorer, infact they are better off.  Here wewould like to discuss the welfare of a nation from national economic points ofview. 

B.        In general, economists useper capita GDP (that is, a nation’s GDP divided by population) to measurewhether the individual in a country is better off or worse off over time in acountry or among other countries.  Foreasy international comparison, it is usually expressed in terms of US dollar. TheWorld Band and the United Nations publish the data annually.  However, due to objection from China,Taiwan’s data are missing from their publications since the late 1980s.  Fortunately, the InternationalCentre for the Study of East Asian Development (ICSEAD) at Kitakyushu, Japan, collects and compilesdata from international organizations and institutes, and publishes Taiwan’sdata along with 10 other Asian countries for over the past decade in their Februaryissue of East Asian Economic Perspectives (EAEP) each year.  Thelatest and previous datasets are available at their website athttp://www.icsead.or.jp. 

C.        Figures1 to 3 shows per capita GDP in current US dollars, per capita GDP in PPPadjusted US dollars, and inflation, namely, percentage change of the consumerprice index, for ten Asian economies, including four Asian NICs shown in lines:

Taiwan (by a heavy blacksolid line T with triangle markers),

South Korea (by a heavierblue solid line K with circles),

Singapore (by a light solidline S with white diamonds markers),

Hong Kong (by a dotted lineH with filled black circle markers),

along with four ASEANcountries shown in columns:

Indonesia (by a rose columnIn),

Malaysia (by a deep yellowcolumn M),

Philippines (by a light yellowcolumn P)

Thailand (by a white columnL). 

            Wealso added lines for two large Asian countries:

Japan (by a red slashedheavy line J with circles)

China (by a redslashed-dotted middle heavy line C with circles).

             To avoid the cluttering, the range ofthe data is taken from 1999 to 2006. The data on 2006 are estimation, as denoted by 2006e.  Since the lines and columns in thechart are rather complicated and intertwined, I have reproduced the original numericaldata below the chart.

D.        Figure1 shows per capita GDP in current US dollars.  The Asian NICs along with Japan form a distinct group fromthe ASEAN and China.  Taiwan’s percapita GDP has increased from US$ 13,611 in 1999 to US$ 15,611 in 2006, thegrowth is rather slow, so slow that Korea caught up with Taiwan in 2004.  It appears that the two countriesdeviate further after 2004.  Ingeneral, the per capita GDP of Taiwan appears to be stagnating, and is a sourceof much criticism of the opposition parties in recent years.

            Notethat how small per capita GDP of the China and other ASEAN countries is.  You may wonder, from American point ofview, how can a Chinese can survive with mere US$ 1,700 a year in 2005.  It probably is not much better than adog in the United States.  However,we know one U.S. dollar in China can buy much more than it can in the UnitedStates.  This leads to the conceptof purchasing power parity (PPP) exchange rate.

E.        In general, per capita GDPin current US dollars does not accurately reflect the welfare of individuals ina country.  It may merely show the distortedchanges in nominal exchange rate of the US dollars with the currency of thecountry due to speculation or restrictive government exchange rate policies, ormay reflect mere changes of the domestic price level of the country.  Furthermore, a large part of the GDP ismade up of non-traded goods and services, and it does not make much sense toconvert their value by using exchange rates, which are the price of tradedgoods and services.  Thus, the WorldBank and United Nations have developed GDP (or GNP) measured at PPP (purchasingpower parity), which converts GDP (or GNP) to international dollars by the PPPexchange rate. At this rate, one international dollar has the equivalentpurchasing power over domestic basket of goods and services that the U.S.dollar has over the same basket. The PPP rate makes the purchasing power of different currencies thesame.  It is a price deflator aswell as a currency converter.

            Figure2 shows per capita GDP measured at PPP.  Note that per capita GDP for all countries, except that of Japan, hasincreased, reflecting lower cost of living in these countries, especially theASEANs and China.  Thus, measuredin PPP, per capita income of a Chinese is now $7,198.  It appears a Chinese can live a little bit like a humanbeing.  This appears to be muchmore reasonable from the American point of view.  Interestingly, Taiwan’s per capita GDP in PPP in 2005 is$27,865, much higher than that of Korea, $20,590, quite different from thoseobtained in Figure 1.  TheTaiwanese have been better off historically than the Koreans in terms ofinternational dollars since the end of WWII, although the situation wasreversed before the War.  Korea isabout 6 years behind Taiwan.  Furthermore,the rate of increase (the slope) of the T line after 2003 seems getting larger,meaning that the gap between Taiwan over Korea are increasing.  Thus, the Taiwanese are much morewell-off than Koreans in real terms since 1999.

F.        One of the reasons thatthe Taiwanese are better off than the Koreans is that the Taiwan’s inflation ismuch lower than that of Korea. This is shown in Figure 3. To avoid clustering, Figure 3 only presents the inflation rates between-5% to 5% for each country.  Anyinflation rate larger than 5% is cut off at the top, and have to see it fromthe table.  Note that there is ageneral consorted trend of the price changes among the ten countries: generallylow in 2002 and high in 2004, indicating a strong external (international) influenceon the domestic prices, possibly due to oil price change and change in theworld demand of high-tech products, as these countries are high-tech exportsoriented.  While there are largefluctuation of prices over time, Taiwan’s percentage change of the consumerprice index, except 2005, is one of the lowest among the ten economies. 

G.        In conclusion, comparing1999 and 2006, so far as we can see from per capita GDP measured at PPP orinflation rates, the Taiwanese has improved their welfare and are much betteroff now than before 1999.  Comparedwith other similar countries in Asia, the Taiwan Government are doing good jobin controlling inflation.  Whilethere is room for improvement, there is no reason to be pessimistic aboutTaiwan’s economic future.      

(Frank Hsiao)