What you need to know
Taiwan’s manufacturing profits are growing disproportionately faster than non-manufacturing profits, which has resulted in a loss of innovation and diversity in the economy.
As a quick recap of the previous article, Taiwan’s non-manufacturing sector is being robbed of its profits due to wages being suppressed for the growth of the manufacturing sector.
Here I will first illustrate how Taiwan’s lopsided growth has actually been taken to the extreme, as shown in the below few charts. Furthermore, by comparing with other advanced countries, I will demonstrate how Taiwan’s low cost manufacturing has resulted in loss of innovation and diversity in its economy.
In most other advanced countries, the growth of their manufacturing profits tend to grow in tandem with non-manufacturing profits, as can be seen by the countries which fall along the trend line in the chart below.
Taiwan’s manufacturing profits, however, fall far away from the trend line of these countries, where its manufacturing profits are growing disproportionately faster than its non-manufacturing profits. Compared with most other advanced countries, Taiwan’s non-manufacturing profits are therefore growing too slowly as compared to its manufacturing profits.
This pattern can be seen among other major manufacturing countries like South Korea, Germany, the Netherlands and Sweden, where they have tended to similarly depress wages to support the manufacturing export sector, relative to countries of similar economic levels as them.
The major reason for Taiwan’s manufacturing profits growing so much more quickly is due to the suppression of wages.
As can be seen in the chart below, Taiwan’s annual manufacturing profits per manufacturing worker is 25 times higher than the monthly minimum wage, which is the second highest among the advanced countries after Ireland.
In other words, due to Taiwan’s wages being so severely depressed, this has allowed Taiwan’s manufacturing sector to earn one of the highest profits among the advanced countries relative to wages.
In fact, this chart indicates that Taiwan’s manufacturing sector is earning much more profits than it needs, when taking other countries into perspective. Even if Taiwan’s wages were to grow much faster, Taiwan’s manufacturing companies would still be earning very high profits, given how high they already are.
Taiwan’s wages are therefore overly depressed.
But when we look at the non-manufacturing sector, its profits per capita as compared to minimum wage is comparatively lower.
In the chart below, we can see that for other advanced countries, both their manufacturing and non-manufacturing profits relative to minimum wage tend to follow alongside the trend line.
However, Taiwan veers further away from the trend line than other countries – the number of times of its manufacturing profits relative to minimum wage is actually much higher as compared to that of non-manufacturing profits.
This means that while Taiwan’s manufacturing sector is reaping huge profits on the back of the depressed wages, the non-manufacturing sector however is losing profits from not having enough consumption spending.
Taiwan’s manufacturing profits are too high.
Like the previous chart, the major manufacturing countries also fall away from the trend line, but this time around, Taiwan falls further away from the trend line that they do, signifying that the problem is worse is in Taiwan.
Even when compared with other manufacturing countries, Taiwan is even more unequal.
But Taiwan’s situation is not normal – it is not normal for the manufacturing sector to cannibalize the non-manufacturing sector so much that it weakens economic growth so badly.
In the chart below, we can see that among the other advanced countries, countries with higher growths in their manufacturing profits also have higher economic growth.
However, Taiwan stands in stark anomaly, where even though its manufacturing profits per manufacturing worker are growing one of the fastest among the advanced countries (vertical axis), its GDP per capita growth is instead one of the slowest (horizontal axis).
Taiwan’s suppressed wages have allowed the manufacturing sector to be immensely enriched but this instead robbed the non-manufacturing sector of growth.
This time around, Taiwan stands isolated. Even as other manufacturing countries suppressed their wages, they have not done it to the extent that Taiwan has, which so severely disrupted Taiwan’s economic growth.
The chart below therefore shows how imbalanced Taiwan’s economic growth has become.
It explains why in the earlier part of this article that while Taiwan’s manufacturing profits are growing one of the fastest among the advanced countries, its non-manufacturing profits, wages, household consumption, and the economy as a whole are all growing one of the slowest.
In other words, the severity of Taiwan’s wage suppression has little justification – not only does it hurt the non-manufacturing sector, it hurts the workers earning suppressed wages, but it also hurts Taiwan’s overall economic growth.
In short, Taiwan’s government has taken things too far with suppressing the country’s wages.
Taiwan’s Low-Cost Manufacturing Has Resulted in Its Innovation Declining
But the loss of Taiwan’s economic growth isn’t the only problem with Taiwan’s stagnant wages. The other problem is the loss of innovation and diversity to Taiwan’s economy.
Economic complexity is a measure of a country’s ability to develop complex products, and to be diversified, innovative, and productive in doing so. In terms of economic complexity in trade, Taiwan’s ranks high by virtue of its large export sector.
However, when it comes to Taiwan’s complexity in technology and research, Taiwan pales by a large margin.
Based on data calculated by the Observatory of Economic Complexity (OEC), in terms of technology complexity, Taiwan ranks one of the lowest among the advanced countries – its ability to produce complex and diverse technological innovation is one of the poorest among the advanced countries.
Technology complexity is calculated using the number of patent applications by technology, and comparing the share of a country’s patent applications with that of the world’s output.
In terms of research complexity, Taiwan also performs one of the most poorly among the advanced countries, as can be seen in the chart below – its ability to produce innovative, complex, and diverse research is also one of the poorest. Research complexity is calculated based on the diversity of a country’s research publication in comparison with other countries.
Indeed, according to research published by the Organization for Economic Co-operation and Development (OECD), Taiwan was ranked one of the poorest among the advanced countries in terms of original, radical and breakthrough patents. Taiwan also has the lowest patent renewal among the countries compared, due to its patents generally having so little relative value that it is not worth paying to extend the patent.
Original patents are patents which rely on a large number of knowledge sources to produce original results. Radical patents are those which are cited by a larger number of technology classes than which the patent is classified. Breakthrough patents are the top 1% cited patents considered high-impact and are strongly associated with entrepreneurial strategies and further technological development.
Data from the Patent Asset Index also shows Taiwan’s to have one of the lowest patent quality among the advanced countries.
In general, we can see in the chart below that countries with higher technology complexity tend to see faster growth in their manufacturing profits.
However, while Taiwan’s technology complexity ranks poorly, the growth in its manufacturing profits per manufacturing worker are relatively high. Taiwan’s high manufacturing profits are derived from suppressing wages, and Taiwan’s wages being one of the lowest among the advanced countries.
On the other hand, for the other manufacturing countries earning high profits like the Nordic countries (Denmark, Finland, and Sweden), Belgium, Germany, and the Netherlands, their wages are also one of the highest in the world, which means that they are earning high manufacturing profits in spite of their high wages.
In fact, the technology complexity of the larger manufacturing countries like Sweden, Germany, Austria, and Finland rank even higher than the other countries (as can be seen by countries indicated using the green dots below).
Germany, Austria, Finland, and Sweden rank as some of the largest manufacturing advanced countries with their manufacturing value-add accounting for 19%, 17%, 15% and 13% of their GDP. This suggests that due to the size and diversity of their manufacturing sector, this has helped spur the development of their technological innovation across a wider spectrum, and boost their technology complexity.
On the other hand, Taiwan’s dominant focus in semiconductor manufacturing and its singular drive to depress costs and wages in order to produce low-cost products have instead occupied a majority of the resources in the economy. This has led to the other sectors being deprived of the funds and resources needed for innovation, which led to Taiwan having lower technology complexity.
This suggests that while the other high-ranking manufacturing countries achieved their high profits by virtue of innovating in larger and more diverse areas, Taiwan’s high profits are obtained by cutting costs in order to squeeze out more profits from the production of low-cost products in a concentrated semiconductor environment.
When comparing against research complexity, countries with higher complexity also have higher manufacturing profits.
Again, Taiwan’s manufacturing profits are high in spite of its low research complexity.
Different from the other larger manufacturing advanced countries, Taiwan’s method has been to severely suppress wages for the manufacturing sector, in order to earn high profits on the back of cheap labor. Besides, since most resources have been diverted to the semiconductor sector, this has reduced the amount of resources available for other sectors to conduct research and innovation. Coupled with the depressed wages, this further constrains the ability of researchers to develop new and more diverse innovations.
On the other hand, manufacturing powerhouses like the Nordic countries and the Netherlands instead focus on paying high wages to workers, so that they can produce new innovations and generate higher profits on the back of higher-value innovations.
In other words, Taiwan has been able to earn such high manufacturing profits by suppressing wages. Yet Taiwan has wasted the last two to three decades not ramping up investments in higher technological and research capabilities in other sectors, which means that Taiwan’s capabilities in these areas have fallen far behind.
Taiwan’s focus on semiconductor manufacturing means that the country’s production has moved further upstream than the other advanced countries.
Countries which rank higher in upstreamness are countries more involved at the start of the supply chain producing the raw materials and intermediary products for other manufacturers to develop final products. Countries which rank higher in downstream-ness are those more involved in the later part of the supply chain developing final products for sale to consumers.
Taiwan ranks high in upstreamness but ranks low in downstreamness – it is predominantly a producer of intermediary goods more so than being a producer of final goods. Taiwan’s manufacturers are better at being subcontractors than developing their own branded final product.
When comparing technology complexity with production upstreamness, we can see in the chart below that countries with lower economic complexity also rank higher in terms of upstreamness. As a result of Taiwan prioritizing its manufacturing sector in the outsized semiconductor sector which predominantly produces upstream, this has resulted in a loss of technological innovations in other areas, and a decline of Taiwan’s technology complexity.
Similarly, we can also see in the chart below that Taiwan has moved further upstream than other advanced countries since 2000 due to its heavy investment in the semiconductor manufacturing sector, and the lack of economic diversification has thus led to its research complexity being lower as well.
Being invested in the manufacturing sector isn’t so much a problem in itself, the problem is how it is done.
In the chart below, we can see that countries which are technologically more complex, diverse, and innovative also have higher total wages. Indeed, we saw how the Nordic countries like Denmark, Finland ,and Sweden pay one of the highest wages in the world, but yet also earn one of the highest manufacturing profits per manufacturing worker.
Not only that, the larger manufacturing countries like Germany, Austria, Sweden, and Finland are even able to make use of their involvement in downstream manufacturing and the production of final products, to become even more technologically complex than other countries (countries highlighted in green dots).
On the flipside, among manufacturing countries which are lower-wage and upstream-focused like Taiwan, their technology complexity is lower.
What this indicates is that investing in manufacturing can be beneficial to a country if it is able to tap on its manufacturing expertise to develop a wider range of innovations at the downstream end, in order to develop production for final goods which can yield higher prices. This allows the country to focus on higher-value manufacturing and in turn pay higher wages to workers.
If a country however gets stuck at the low-wage, low-value production stage, then its economy might languish to become less innovative and diverse, as has Taiwan.
Indeed, as can be seen in the chart below, not only does Taiwan have one of the lowest technology complexity, Taiwan’s technology complexity has also been declining for the past 15 years. Taiwan’s research complexity shows a similar decline.
Research published by the Information Technology and Innovation Foundation (ITIF) shows a similar situation. ITIF found that among major manufacturing countries, Taiwan’s production capabilities have become less diversified. While the share of semiconductor, computer and electronics production in Taiwan’s economy has grown, the share in the other industry sectors have shrunk.
ITIF reports that “Taiwan is weakest in pharmaceuticals, automobiles, and IT and other information services”. In fact, other than computer and electronics production, Taiwan’s global share of advanced production in other sectors has declined for the last 25 years, even as it has been increasing among Taiwan’s closest competitors, like South Korea, China, Index and other developing countries in Latin America and Asia.
In order to strengthen Taiwan’s competitiveness and to regain Taiwan’s economic complexity, diversity, and productivity, Taiwan would need to increase wages.
In the chart below, we can see that among the advanced countries, the higher their minimum wages, the higher their technology complexity.
Since the 1997 economic crisis, Taiwan’s government has adopted a low-cost system and suppressed wages to grow the manufacturing sector.
After nearly three decades, there is enough data to show that such a strategy is misguided and has instead resulted in Taiwan’s economy stagnating and becoming less innovative.
There are great costs to Taiwan’s economy.
First, stagnant wages have led to Taiwan’s non-manufacturing sector losing the consumption needed to grow, resulting in Taiwan’s overall economy stagnating and growing slower than other advanced countries.
Second, due to the over-reliance on low costs and wage suppression, Taiwan has become stuck in lower-value manufacturing in the semiconductor and electronics sector, which has led to Taiwan’s economy becoming less diversified and innovative.
By taking wage suppression too far, Taiwan’s government has therefore not only hampered Taiwan’s economic potential, but also its innovative potential.
One wonders why Taiwan’s government is self-inflicting pain on Taiwan’s economy and sabotaging the country’s growth. Taiwan's domestic economy is being compromised due to an over-emphasis on a low-cost manufacturing sector.
In order to regain Taiwan’s economic and innovative potential, the government needs to abandon the current low-cost system and develop a new strategy aimed at restoring the growth of domestic consumption and businesses, so as to allow Taiwan to move into more diverse and higher-value manufacturing and bring about great economic dynamism for Taiwan.
This is only possible if Taiwan’s wages start increasing.
Taiwan’s government also needs to stop being led by the nose by Taiwan’s manufacturing-focused business groups which want to depress costs and hold Taiwan back, and start thinking about the best economic strategy that will allow Taiwan’s economy and people to grow together as a whole. Taiwan’s government also needs to wean the manufacturing sector off their addiction to low costs.
In fact, Taiwan’s politicians and policymakers need to reflect on their business interests and how these interests directly contradict with transforming Taiwan’s economy.
The examples of manufacturing powerhouses like the Nordic countries, Austria, Germany, the Netherlands, and Sweden show that it is possible to move into higher-value manufacturing by paying more to workers, and yet still earn high profits. Not only that, the economy can then benefit as a whole with the knowledge transfer that goes into other parts of the economy, resulting in the economy becoming more innovative and diversified.
As other countries start to localize production due to global uncertainties, this poses a threat to Taiwan’s long-term economic viability. What else can Taiwan’s economy turn to if the other sectors in its economy are too weak to pick up the slack? What back up plan can Taiwan fall back on, after a singular focus on the low-cost manufacturing export sector?
If Taiwan’s economy continues to stagnate, when the time comes in the next decade or so when Taiwan would be forced to diversify its economy, Taiwan will find itself with very little alternatives to turn to.
However, as it is, Taiwan is stuck but there is no end in sight because the government hasn’t seemed to realize that the low-cost system is hurting Taiwan.
The government needs to first recognize the folly of the ‘low-cost’ system. Other advanced countries like Germany, Ireland, the United Kingdom, and Singapore have all realized the mistake of suppressing wages and have implemented plans to increase their minimum wages to adequacy.
As a start, Taiwan’s government therefore needs to increase the minimum wage at a much faster rate, in order for wages at other wage levels to grow faster as well.
As we saw above, Taiwan’s businesses are earning more than enough profits, and there is enough money to move around wages and to rebalance the economy, and help it grow faster.
As Taiwan approaches the presidential and legislative elections next year, which political party in Taiwan has the same foresight and vision to uplift wages and transform Taiwan's economy? Or is this just wishful thinking?
Or will Taiwan’s economy continue to stagnate?
READ NEXT: Taiwan’s Slow Growth in Minimum Wage is Dragging its Economy Behind
TNL Editor: Kim Chan (@thenewslensintl)
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