Taiwan’s Lost Growth (Part 1): How Far Has Taiwan’s Economy Fallen Behind Other Countries Due To Stagnant Wages?

Taiwan’s Lost Growth (Part 1): How Far Has Taiwan’s Economy Fallen Behind Other Countries Due To Stagnant Wages?
Photo Credit: Reuters / TPG Images

What you need to know

When wages don’t grow, household expenditures and ultimately business profits stagnate as well. Here’s how this has played out in Taiwan.

Data shows that a rise in wages contributes to an increase in domestic consumption and business profits. Taiwan, with its wages stagnating over the past decades, has seen its economy and profits fall behind that of many other high income countries.

For Taiwan, an increase in the minimum wage, which leads to that of wages across the board, will break the vicious cycle and allow the economy to recover. 

When the minimum wage doesn’t grow, business profits don’t either

The more a household earns, the more they are able to spend and boost the economy. The chart below shows that in the last two decades, the growth in household income and expenditure has been slowing down in a similar pattern.

A higher household expenditure also contributes to a stronger growth in business profits. But Taiwan’s profits have been slowing down because household expenditure has been slowing down.

The key driver of household income is worker wages, which are directly associated with the minimum wage. During the last two decades, when the minimum wage growth was contained or kept at a low level, household income stagnated. This is shown in the chart below.

The slow growth in minimum wage is correlated with slow growth in household expenditure, as the chart below shows.   

By contrast, when the minimum wage grew by 10% to 20% annually during the mid-1980s to mid-1990s, household income and expenditure also grew at a similar rate. Business profits also grew by 10% to 20% during the same period.

Profit growth in Taiwan has slowed down in recent decades as the minimum wage barely grows. This creates a vicious cycle of low income, spending, and profits.

The chart below shows that prior to the late 1990s, the minimum wage, household expenditure, and business profits were all growing in tandem with the economy. 

But when the minimum wage stopped growing after the 1997 economic crisis (blue line), household expenditure started to flatten (brown line). Profits seemed to be growing, but not as fast as in the period prior to the crisis.

Economic growth (beige line) slowed down as wages, household expenditure, and business profits stagnated.

South Korea, whose economy is the most similar to Taiwan’s in terms of stage of development, has seen different trends. Since 1988 (when the country started implementing a minimum wage), its minimum wage, household expenditure, profits, and the economy have been growing in tandem with one another, and this trend continued after the 1997 crisis.

So, what is the significance of the decoupling of the drivers of Taiwan’s economic growth? Let’s take a look. 

The chart below shows that prior to the 1997 crisis, Taiwan’s GDP per capita (red line) was growing at the same pace as South Korea (blue line).

But after the 1997 crisis, Taiwan’s economy saw a significant slowdown. It slowed down to even greater extent after the 2008 crisis (see the two dips in the red line). 

Meanwhile, South Korea’s economy continued to grow steadily. 

After the second slowdown in 2008, Taiwan’s GDP per capita fell below that of South Korea. Because Taiwan’s economy never recovered to pre-1997 levels, this allowed South Korea to overtake it.

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If Taiwan’s economy had continued to grow at the same pace as South Korea, and at a constant level above South Korea, the dotted line in the chart below shows how Taiwan could have grown.

By 2018, instead of Taiwan’s GDP per capita growing to only NT$779,260, it could have grown to over NT$1,000,000. 

In other words, Taiwan’s GDP per capita could have been about 35% higher than it is today — as high as Japan’s.

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When comparing the profits per capita of Taiwan’s businesses, we can see a similar situation. Both 1997 and 2008 saw drops in profits without recoveries.

If Taiwan’s profits had remained at a constant pace above South Korea, the profits of businesses in Taiwan would be over 20% higher than where they are today.

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What explains the dramatic slowdown in Taiwan’s economy and profits? In short, wages stopped growing, which consequently slowed down the growth in household expenditure, profits, and economic growth. 

The profits of businesses in Taiwan are largely determined by the household expenditure of workers in Taiwan. The chart below shows how household expenditure in Taiwan slowed down after the 1997 and 2008 economic crises and never recovered, allowing South Korea to surpass Taiwan. 

If household expenditure in Taiwan had continued to grow at a constant rate above that of South Korea, Taiwan’s household expenditure would be about 25% higher than it is today.

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The chart below shows that prior to the 1997 economic crisis, Taiwan’s minimum wage was higher and growing at a pace similar to South Korea’s minimum wage. 

But after the crisis, Taiwan decided to suppress the growth of the minimum wage. For nine years, the minimum wage did not grow at all. 

Meanwhile, after the economic crisis, South Korea spiked up its minimum wage. After 2000, South Korea’s minimum wage took a sharp turn and grew even faster than prior to 1997. As a result, South Korea’s minimum wage overtook Taiwan by 2007. 

If Taiwan’s minimum wage had continued to grow at a similar pace as South Korea, Taiwan’s minimum wage could have grown to about NT$60,000 a month today, or more than twice the minimum wage of NT$25,250 today.

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The above comparison uses per capita figures, but when we compare the total GDP of Taiwan with Poland, a country with a similar population and GDP, the same pattern can be seen. 

Prior to the 1997 economic crisis, Taiwan’s total GDP was growing at the same pace as Poland, and was growing at a consistent level above that of Poland, as the chart below shows. 

But after two slowdowns due to the 1997 and 2008 economic crises from which Taiwan never recovered, Taiwan’s economy lost its economic edge over Poland.

Between 1998 and 2019, Poland’s GDP grew from being 46.9% of Taiwan’s economy to 88.0%.

If Taiwan’s economy had continued to grow at its pre-1997 levels, Taiwan’s GDP could have grown to close to NT$25 trillion in 2019. In other words, Taiwan’s GDP could have been 35% higher.

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Similarly, Taiwan’s total profits were growing at a constant rate above Poland prior to the 1997 economic crisis. But after Taiwan’s economy slowed down after the 1997 and 2008 crises, the gap between Taiwan and Poland narrowed.

As a result, Poland’s profits grew from being only 47.4% of Taiwan’s profits in 1998 to 87.3% in 2019. 

If Taiwan’s profits had grown at pre-1997 levels, instead of the total profits of NT$9 trillion in 2019, Taiwan’s profits could have grown to about NT$11 trillion, or over 20% higher than they are today.

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As for household expenditure, Taiwan was growing at a pace constant with Poland until the 1997 economic crisis. But the slowdown after has resulted in Poland’s household expenditure catching up with Taiwan’s.

From being 53.8% that of Taiwan’s, Poland’s household expenditure has grown to being 96.4% of Taiwan’s in 2019. 

If Taiwan’s household expenditure had grown at the rate similar to pre-1997 levels, it could have grown to close to NT$12 trillion instead of its 2019 figure of NT$9.8 trillion. Taiwan’s household expenditure could have been a quarter times higher.

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Finally, up until the 1997 crisis, Taiwan’s minimum wage was not only keeping pace with Poland, it was also growing faster. But after Taiwan’s minimum wage stopped growing and stagnated since then, Poland has continued to grow and is catching up with Taiwan. From being only 0.2% of Taiwan’s minimum wage in 1989, Poland’s minimum wage has grown to being 86.3% of Taiwan’s today.

If Taiwan’s minimum wage had continued to keep pace with Poland, Taiwan’s minimum wage would be around NT$40,000 today.

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Taiwan’s slowdown is most obvious when we compare its total GDP with South Korea.

In the chart below, we can see that up until the late-1980s, Taiwan’s GDP was growing at the same pace as South Korea. But by the 1990s, South Korea’s economy expanded beyond Taiwan and never looked back.

Due to the difference in population sizes, Taiwan’s economy would not be able to grow to a similar level as South Korea. But if Taiwan’s economy had not stagnated and had recovered to pre-1997 levels, Taiwan’s GDP could have grown to about NT$25 trillion in 2018 (dotted red line). 

In other words, Taiwan’s economy could have been 35% larger today, and would have put it firmly among the 20 largest economies in the world, alongside the Netherlands, Indonesia and Australia. 

Taiwan’s total profits and household expenditure would also be 20% to 25% higher than it is today.

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As can be seen in the above comparison, Taiwan’s economy has severely lagged behind emerging economies due to its depressed minimum wage. This in turn has has prevented household expenditure from growing faster, suppressing profit growth, and Taiwan’s economy as well. Don’t take only from me  — the European Central Bank has described this process in greater detail.

There are certainly other determinants of economic growth. But wages and household incomes are a central driver of growth, and Taiwan’s stagnant wages have prevented its economy and profits from recovering from the crises of 1997 and 2008. 

In the next article, I’ll compare Taiwan with the other emerging economies at a similar stage of economic growth as Taiwan, to see exactly how far Taiwan has slowed down.


READ NEXT: Roy Ngerng on the Minimum Wage

TNL Editor: Bryan Chou, Nicholas Haggerty (@thenewslensintl)

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