What you need to know
The 1997 Asian financial crisis is a distant memory to most countries. But Taiwan hasn’t fully recovered from it because wages have been kept low.
Taiwan’s economy is stagnating. In comparison with many at a similar stage of economic growth like South Korea, wages in Taiwan haven’t grown fast enough to significantly expand household income and consumption, which has stifled economic growth.
The story of stagnation could be traced back to 1997, when a financial crisis spread across East and Southeast Asia. But as we’ll see below, Taiwan’s economy wouldn’t have fallen behind other high-income countries if it had been growing at pre-1997 levels.
Taiwan’s GDP shrunk for the first time in at least a decade, in 2001, five years following the crisis and never recovered to pre-1997 levels. After the 2008 economic crisis, Taiwan’s economy shrunk for the second time, and again, never recovered to pre-1997 and pre-2008 levels.
By comparison, South Korea’s economy shrunk slightly in 1998, but it quickly picked back up and had been growing at pre-1997 levels by the time the 2008 economic crisis hit. By 2010, South Korea’s economy exceeded its pre-1997 crisis growth trend line.
Poland’s economy slowed down after both crises, but it has been on its way to pre-1997 levels since 2017.
The Czech Republic’s trend is similar to that of Poland. The economy slowed down after both crises, but since 2014 has been on its way back to its pre-1997 levels.
Taiwan’s economic growth has followed a similar pattern to that of Poland and the Czech Republic: the economy suffered a decline after both crises. But both the Polish and Czech economy managed to recover because of a higher growth in wages.
Slovenia was relatively unaffected by the 1997 crisis. The economy shrank after the 2008 crisis, but has recovered to pre-1997 levels since 2017, when its growth rate picked up.
Estonia’s economy shrank after the two crises. But prior to the 2008 crisis, the dramatic levels of growth softened the impact of its post-2008 slowdown. Its economy has been growing at pre-1997 levels since 2011, when the growth rate increased.
Taiwan’s slow wage growth hampered the expansion of household expenditures and profits.
The comparisons above help to explain why Taiwan's economy has fallen behind. It hasn’t recovered from both the 1997 and 2008 economic crises. But why is this the case?
In the first part of this article I argue that the household expenditure in Taiwan could not grow fast enough to help the economy and profits recover from the crisis in 1997 because of stagnant growth in wages. The drivers of economic growth have thereby decoupled from one another.
But in South Korea, as the minimum wage rose, household expenditure, profits, and the economy grew in tandem with one another.
It’s the same in most other emerging economies, where the increase in wages has led to the growth in household expenditure, profits, and the economy.
The chart below shows how closely minimum wage, household expenditure, profits and the economy in Poland grew in tandem.
A clearer pattern emerges when we look at the Czech Republic and Estonia.
In the Czech Republic, with the minimum wage constantly increasing from the early-1990s to the mid-2000s, household expenditure, profits, and the economy grew rapidly.
But following the 2008 crisis, the minimum wage wasn’t raised for six consecutive years from 2007 to 2012, resulting in a slower growth in household expenditure, profits, and the economy. This changed in 2013, when the minimum wage rose again.
In Estonia, the growth in the minimum wage prior to the 2008 economic crisis helped expand household expenditure, profits, and the economy.
Minimum wage did not grow for four consecutive years after the crisis, but when it picked up in 2013, so did household expenditure, profits, and the economy.
Taiwan’s economy didn’t recover because wage growth is too low to bring up household expenditure and profits.
Following the 1997 economic crisis, Taiwan’s minimum wage did not grow for nine years. In the Czech Republic and Estonia, the minimum wage did not grow for six and four years, respectively. But the wages in these countries have grown high enough after the stagnation to allow the economy to recover.
In the Czech Republic, the impact of high increases in the minimum wage on the economy is the most obvious.
The chart below shows a sudden upturn in the Czech economy in 2014, allowing it to recover to pre-1997 levels. The change coincides with the rapid increase in the minimum wage (as can be seen in the blue line in the chart below).
Taiwan has fallen far behind many high-income countries at a similar stage of economic growth in terms of growth in wages. The government has raised the minimum wage by just 1.9% every year on average since 1998. But Estonia, Poland, and the Czech Republic have lifted the minimum wage by 10.8%, 8.3%, and 8.0% annually since the same year. The chart below shows how low Taiwan’s minimum wage growth has been.
Since 1998, Latvia, Lithuania, South Korea, and Slovenia have seen an average minimum wage growth of 9.7%, 8.3%, 7.5% and 6.2% annually.
The bar chart below shows that among emerging economies at a similar stage of economic development, Taiwan’s minimum wage grows at the slowest rate.
From 1997 to 2008, Taiwan only lifted the minimum wage once, in 2007. In the other nine years, it wasn’t raised at all. After the 2008 crisis, it saw zero increases in four more years, in 2008, 2009, 2011 and 2016.
Under President Tsai Ing-wen, who took office in 2016, Taiwan’s minimum wage has been growing constantly and more rapidly than previous years. is the highest the country has seen in the last 14 years, but this is far from enough.
In other words, Taiwan’s economy has not been able to recover because wages have never grown fast enough to allow the economy to recover.
Taiwan’s minimum wage has fallen behind, or is falling behind soon, that of many other emerging economies.
In 1995, South Korea’s and Slovenia’s minimum wages were only 40% that of Taiwan. Today, their minimum wages have grown to being 85% and 40% higher than Taiwan’s today.
In the other Eastern European countries, their minimum wages were only 5% to 20% that of Taiwan’s in 1995. Today, their minimum wages have grown to being 80% to 95% that of Taiwan’s.
Based on the current rates of growth, Lithuania’s minimum wage will likely overtake Taiwan’s next year. Poland’s government has also to increase its minimum wage to 4,000 zlotys (NT$28,957) by 2024, which will possibly be higher than Taiwan’s in the same year (see dotted line in chart below).
The same trend emerges when it comes to household expenditure per capita. South Korea’s household expenditure grew from 65.4% of Taiwan’s in 1995 to being higher than Taiwan’s in 2019 (104.6%). Similarly, Slovenia’s household expenditure was 85.4% of Taiwan’s, but in 2019, it grew to 96.5%.
It is the same story for economic growth. South Korea’s economy has grown from being only 67.7% that of Taiwan to 114.4% of Taiwan’s. Slovenia grew from 78.0% to 96.0%, and Czech Republic grew from 42.2% to 79.1%. The growths were more dramatic in Estonia and Lithuania — Estonia’s economy grew from only 19.8% that of Taiwan to 86.2% in 2019, and Lithuania grew from being only 13.4% to 73.0% in the same year.
Evidently, Taiwan’s economy is falling behind because of its stagnant wages, which have prevented household expenditure and the economy from growing.
Increases in the minimum wage fuels faster wage growth. Taiwan needs to be more ambitious in growing the minimum wage, enabling the economy to recover.
If wages are low, households won’t increase spending. Businesses won’t profit as much as they can and the economy becomes stagnant.
Taiwan’s businesses have called for the government to increase domestic consumption in order to increase their profits, but it is clear that as long as wages don’t increase dramatically, both household expenditure and business profits won’t recover.
If Taiwan’s minimum wage had been growing at pre-1997 levels, the minimum wage could have been about NT$50,000, or double what it is today.
With the higher minimum wage, household expenditure could have been about NT$14 trillion instead of the NT$9.5 trillion in 2020, and profits about NT$12.5 trillion instead of the NT$10.0 trillion in 2020. In other words, Taiwan’s household expenditure and profits could have been 25% higher than it is today.
Taiwan’s economy could potentially have been a quarter larger than today’s size: about NT$24 to NT$25 trillion, instead of the NT$19.8 trillion in 2020.
Taiwan’s businesses are mistaken to think that keeping the minimum wage low leads to profit growth.
The truth is, if wages don’t increase by higher levels, business profits won’t grow as fast. By blocking wage increases, businesses are losing profits.
From a microeconomic perspective, we might be inclined to think that limiting wage growth and thereby costs help businesses accumulate higher profits.
But from a macroeconomic perspective, it is wage growth that allows household expenditure and the economy to expand. By helping to grow the economic pie, businesses derive higher profits.
With the economy shrinking over the past decades, Taiwan has not been able to achieve its true economic potential. Confused by why Taiwan has not been able to grow even faster, Taiwan’s policymakers have led themselves to believe that Taiwan is a “small country” not capable of higher growth.
But from the analysis in this article, we can see that Taiwan’s growth is being limited not because Taiwan is “small.” Rather, it is because Taiwan has limited its own potential by not allowing wages to grow at higher levels in order to allow household expenditure to grow faster, and to push up profits and economic growth.
Due to significant growth in wages, South Korea has today joined the leagues of other wealthy and countries. If Taiwan had not slowed its wage growth, today it would stand shoulder to shoulder with the richest and most powerful countries in the world.
What this analysis shows is that increasing the minimum wage is not just about protecting the worker. In fact, increasing wages are necessary to allow the economy to keep churning. By increasing wages, consumption can then grow to increase prices and profits. Once wages stop growing, a key driver of the economy collapses, which breaks the economic cycle and slows down the growth of the economy. In other words, we need to see wages, consumption, prices and profits as part of a whole cycle of input drivers to grow the economy.
As long as Taiwan’s wages do not recover, then Taiwan’s economy will not be able to recover.
TNL Editor: Bryan Chou, Nicholas Haggerty (@thenewslensintl)
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