Tuesday, November 3, 2009

Behind the GDP numbers, critical social problems are hidden

The gap between the rich and the poor has widened in Taiwan over the last decade according to the Finance Ministry. In studying 2007 income reports, the top 5 percent of tax payers earned NT$4.28 million (US$131,7000), while the bottom 5 percent earned NT$69,000 (US$2,123). The Taipei-based China Times reported the gap between the richest 5 percent and the poorest 5 percent as being 32 times in 1998 and has jumped to 62 times in 2007. This is the highest in Taiwan’s history.

Although income tax information is comparatively complete, it does not include capital gains and overseas income, which account for much of the income of the wealthy. Furthermore, the poorest households in Taiwan will usually not file an income tax return, thus making data collection incomplete.

Economic disparity grows under both parties

Generally speaking, two factors contribute to the deteriorating trend: 1) globalization and technology innovation, and 2) the wrong policies leading to an unfair tax system and thus enlarging the gap between rich and poor. Although the past ten years have seen both the Nationalist Kuomintang (KMT) and the Democratic Progressive Party (DPP) in power, neither party has paid attention to this burgeoning issue.

Professor Lin Wan-i of National Taiwan University said the previous DPP government had adopted several tax reduction policies favorable to the rich, allowing incomes for the wealthy to grow faster than incomes for the poor. The current government also pushed tax reduction policies to counter the global financial crisis that favored the rich, further widening the disparity between the rich and the poor.

Taiwanese work ethics have been an underpinning reason for the island’s strong gross domestic product (GDP), but life has not improved much for theTaiwanese people over the last decade, according to Commonwealth magazine. Much of the reason can be attributed to the limits of using the GDP as an economic indicator.

Nobel Prize-winning economist Joseph Stiglitz said, "We look to the GDP as a measure of how well we were doing, and that doesn't tell us whether it's sustainable… What began as a measure of market performance has increasingly become a measure of social performance, and that's wrong." As Taiwan awakens to the inadequacies of GDP in measuring society's well-being, the Commonwealth is pointing to three critical problems of Taiwan’s society that have gone undetected by this major economic indicator.

Problem No. 1: No place to live for Taipei worker bees

The output generated by the city has risen consistently, but residents have moved out of the city. Since 1991, Taipei's population has experienced a steady net emigration. “Taiwan's capital Taipei is a prime example of growth and development not moving in tandem," says Lio Mon-chi, an associate professor at National Sun Yat-sen University.

"Each individual who commutes to Taipei to work is like a worker bee for the capital. Worker bees are only responsible for working for the queen bee, but they can't live in the center of her hive," Lio says. Mortgage burdens have struck fear in the hearts of many. According to statistics released by the cabinet-level Council for Economic Planning and Development, mortgages have gone from accounting for 29 percent of Taipei residents' income in 2004 to 43 percent in 2008.

The latest data on types of income from the Ministry of Finance shows that families living in Taipei do not have the highest wages and salaries in Taiwan, but they make up for it with the highest level of unearned income, such as rental income, royalties and dividends. Landlords do not have to work since collecting rent can usually afford them a luxurous lifestyle.

On the other hand, no matter how hard the people in the middle class work, their salaries cannot keep up with soaring housing prices. Taipei's real estate market is increasingly a tool for people with money to make more money. One broker said that in the first eight months of 2009, 45 percent of prospective homebuyers were investors, a far higher ratio than the 20 percent estimated by the Ministry of the Interior.

Problem No. 2: World’s fifth longest working hours

Another GDP blind spot often challenged by economists is that it provides no way to measure the value of leisure. In Taiwan, long work hours and unlimited overtime have become another crisis. According to the 2008 World Competitiveness Yearbook published by the Lausanne-based business school IMD, Taiwan's working hours were ranked as the fifth longest in the world in 2007, behind Mexico, Hong Kong, South Korea and India. Each Taiwanese employee worked an average of 2,256 hours during the year.

The impact of long working hours on quality of the life can be seen most clearly in the reduced time people have to spend with their families. Along with the lack of time, workers are reluctant to take further professional training.

Problem No. 3: Growing proportion of low-income households

Aside from looking at economic growth, one also must consider income distribution. The proportion of poor people have become an important focal point in many countries. Minister without Portfolio James Hsueh says two indicators – the difference in income between the highest- and lowest-earning households and the number of low-income households as a percentage of the total – both provide a warning that poverty is worsening.

In 2007, the wealthiest 20 percent of Taiwan's households earned an average income 5.98 times that of the poorest 20 percent, but the disparity grew to 6.05 times in 2008. Nearly 30,000 more households have officially registered as low-income households since 2001, and their number as a proportion of Taiwan's total households has risen 0.3 percentage points.

"When the economy is growing, the wealth of low-income earners grows more slowly than that of high-income earners, but when the economy is weak, the wealth of low-income earners contracts the most," Hsueh explains. In other words, regardless of the state of the economy, the poor receive a relatively smaller share of the benefits of economic growth.

Directorate-General of Budget, Accounting and Statistics (DGBAS) believes, that using the income gap between the wealthiest and poorest households to measure the income disparity is not completely accurate since the survey only records regular income earned in a particular year, rather than a household's overall wealth. Many individuals in the bottom fifth income tier are actually retired people who do not have incomes, but "they are not necessarily poor," a DGBAS official says.

Still, at a time when the number of low-income households is clearly growing, the government has begun providing social subsidies and professional training to disadvantaged groups to help narrow the rich-poor divide. Another major element in addressing the problem should be to reform the tax system to help redistribute wealth, but one official revealed that with the current mindset geared to lowering taxes in order to drive GDP higher, pushing such tax reforms would be extremely difficult.

As has long been the case, many of society's problems are hidden behind the GDP numbers. As a single economic indicator, the GDP is inherently limited and cannot fully reflect society's many facets. The question many are pondering now is what blend of indicators should be used to replace the long-dominant GDP.

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About Me

The Press Division of the Taipei Economic and Cultural Office (TECO) in San Francisco represents the Government Information Office (GIO), Executive Yuan, Republic of China (Taiwan). GIO maintains nine Press Divisions in the United States, including the San Francisco office. The Press Divisions are in charge of promoting Taiwan's public relations and cultural exchanges. This blog is updated by the Press Division, TECO in San Francisco.