Recently we heard lots of different information about Taiwan, China, the Chinese invasion, the war in the Pacific Area, etc. Though, nobody probably thought, why Taiwan is so important to the world. First of all, we think about Taiwan as a giant factory of production microchips for the whale world. Microchips are making our devices work and making our world digitized. So that you can visit any place at home, or even participate in gambling with online casino games in Canada. Though there is something else that makes this country famous.
Singapore is commonly compared to Hong Kong, the US to Canada, China to India, and Taiwan, of course, to South Korea. The economies of the two countries are indeed very similar. In both, successful agrarian reforms served as a prerequisite for rapid growth. In both, the main driver of development was export promotion. Both countries occupy the top lines in the rankings of international testing of schoolchildren TIMSS and PISA. Both have similar demographics. The population is rapidly aging. Both have no significant natural resources. Both moved to democracy almost simultaneously. And both have shown fantastic growth since 1960. The GDP per capita has grown by about twenty-five times. For comparison, Singapore’s GDP per capita has grown nineteen times over this time, China’s fifteen times, Ireland’s nine, Spain’s six, and Japan’s six. And these economies are among the most successful in the world.
Historical GDP And Growth
Now let’s look at the ratio of per capita GDP of Korea and Taiwan themselves. In 1960, Taiwan was 40% richer. In 1970 and 1980, the ratio remained about the same. But already in 1990, it dropped to 14%, and in 2002 the gap became minimal at 8%.
But then the gap grows again. In 2016, it already reached 17%. Then the Maddison Project data ends, but the International Monetary Fund believes that Taiwan was 29% richer in 2021. It is unlikely that such slides can be explained by chance. So, we must try to look for their cause. Why has the gap narrowed for more than twenty years since 1980, and then began to grow again?
Everyone heard about the brands Hyundai and Samsung. These brands are known all over the world. But if you ask a random person on the street, how many Taiwanese brands will they name? The reader of these lines has probably heard about HTC, Acer, and Asus, who work with electronics will immediately remember TSMC, but it is foolish to argue that their recognition is incomparable with Samsung’s recognition. Maybe the fact is that the Taiwanese do not know how to make good electronics. Of course, they can. The point is different.
Both Taiwan and South Korea relied on exports in their development. Countries do not become rich through import substitution. There are simply no such examples in economic history. Countries become rich when their technically sophisticated products become competitive in world markets. And in order for it to become competitive, it is necessary to encourage in every possible way those companies that manage to take a share in the world market.
But Taiwan and Korea acted differently here. The Kuomintang in Taiwan stimulated exports in general by undervaluing the national currency, giving subsidies to all companies that managed to find export markets, but otherwise not interfering too much with the market element. Park Chung-hee in Korea “raised champions”. Companies were given strict planning requirements. Those who were successful were able to choose any amount of gold and subsidies, or loans at a negative real rate and other types of government support. Those companies that were not so successful were purposefully “choked” by the government. Everyone knows about Hyundai, but almost no one (even in Korea itself) knows the names of competing brands. There is no trace of those brands.
In Conclusion
At the same time, Taiwan has retained a huge number of small companies. They are flexible, able to quickly adapt to a rapidly changing environment, and accustomed to fierce competition. These companies are constantly disappearing, unable to withstand the competition. They are replaced by others. Meanwhile, the Korean economy is still dominated by a dozen giant companies. Without that iron hand that forced them to be constantly efficient, they had incentives not to increase labor productivity, but to achieve a monopoly position for themselves. They get preferences and government orders, corrupt politicians, and the like.
The Korean economy remains efficient, advanced, and dynamic. Samsung remains an outstanding company. Korean cars continue to conquer the world, and Finland and Norway prefer Korean armor to German armored vehicles. The problem is that the Korean economy is LESS efficient and dynamic than the Taiwanese economy.