AmCham arrow Publications arrow Topics Archive arrow Topics Archive 2007 arrow Vol.37- No.12 arrow Analysis: What to do about the Widening Income Gap?
Analysis: What to do about the Widening Income Gap? PDF Print E-mail

Taiwan faces challenges in maintaining the equitable distribution of income for which it was previously known. Some new approaches may be needed.

BY TING-I TSAI

 

Taiwan long prided itself on the relatively narrow gap between the rich and poor in this society. But a severe challenge to that relatively equitable growth model now appears to be emerging, testing the government's ability to devise appropriate measures to deal with the consequences.

According to Council for Economic Planning and Development (CEPD) statistics, the average income of the country's top 20% richest households averaged 6.01 times that of the poorest households in 2006. That differential was down from a peak of 6.39 times in 2001, but still remains relatively high compared with past levels of four times in the 1960s, five times in the 1980s, and 5.55 times in 2000.

For the past four decades, international economists have generally considered Taiwan to be a society of income equality. Glenn Firebaugh, a professor at Pennsylvania State University and an expert on income distribution, notes that Taiwan is often cited as a country that has achieved "growth with equity," exhibiting less income inequality than most other countries. Taiwan's Gini coefficient (a measure of income equality that shows greater inequality as it moves up the scale) was 0.321 in 1964 and fell to 0.277 in 1980, indicating that the distribution of wealth became more equitable during that crucial period in Taiwan's economic development.

A series of land reforms carried out mainly in the 1950s, when Taiwan was still primarily an agricultural economy, are credited with establishing the foundation for that phenomenon. By turning tenant farmers into land owners, those reforms raised the income and living standards of the rural population. When the industrial era arrived starting in the 1960s, income equality tended to be maintained because most workers were employed in small and medium enterprises where pay levels were relatively even. From 1970 to 1987, Taiwan's Gini coefficient was under 0.3, but it started to increase gradually beginning in 1981 and by 2000 had reached 0.326.

Economists attribute the rise to three main factors: soaring real estate prices beginning in 1986 that created a new upper class overnight; the breakdown of larger households into groups of smaller households, skewing how income appears to be distributed; and the creation of a group of highly paid specialists in knowledge-intensive jobs who command incomes far beyond their peers in traditional industries.

Others have blamed the growing income inequality on the import of foreign laborers since 1992, and on the exodus of small and medium enterprises in the 1990s in search of cheaper labor overseas, particularly China. These two trends have led to higher unemployment and to salaries that fell below those earned by workers at similar levels in South Korea.

Starting in the late 1980s, Taiwan faced a growing shortage of workers for the so-called "3D" jobs: those that were dirty, dangerous, or difficult. Responding to appeals from industry, the government lifted what had been a longstanding ban on blue-collar labor from abroad, opening the market first for construction and factory workers and later for domestic help and care givers. As of the middle of this year, the number of foreign laborers in Taiwan had reached 350,684 - up from fewer than 5,000 in 1992 and 294,967 in 1999.

Now enterprises are urging the government to remove restrictions on the number of foreign workers they can import and to lower the minimum wage, which rose to NT$17,028 (about US$528) per month in July 2007 after having stayed at NT$15,840 (about US$487) for the previous decade.

Some labor experts have argued that the 350,000 low-paid foreign workers in Taiwan have diminished the willingness of local employers to raise the salaries of local workers, but others contend that employees should reflect on their failure to retrain themselves for higher-paying positions rather than fight for the labor-intensive jobs currently taken by foreign workers.

The exodus of small and medium enterprises to China and other countries with cheaper labor has also exacerbated unemployment. Although the official statistics of the Investment Commission of the Ministry of Economic Affairs are much lower, most economists estimate that Taiwan companies' cumulative investment in China alone exceeds US$150 billion. Taiwan has also been a major investor in Vietnam and other Southeast Asian countries.

That has caused numerous local factory closings. During most years in the 1990s, more than 5,000 plants were shut down annually, with a high of 6,988 closings registered in 1992. The trend continued during the current decade, with 6,752 factory closings in 2003 and 6,898 in 2006.

As a consequence, the number of unemployed is higher now than in the 1990s. The figure rose from 242,000 in 1996 to 450,000 in 2001 and a high of 503,000 in 2002, before receding to 411,000 in 2006, according to the Council of Labor Affairs. Lin Jih-wen, a professor of economics at Tamkang University, notes that decreasing the number of unemployed is crucial to narrowing the income gap. The problem, he says, lies in the lack of sufficient professional skills among the jobless or their dissatisfaction with available jobs.

"If local workers were interested in the jobs that foreign workers are taking, some 350,000 jobs would be available right now," says Max Fang, public relations manager of the 104 job bank, in explaining why Taiwan's unemployment is not the result of a shortage of available job slots per se.

Two-pronged approach

Because of that disconnect, the government is now planning both to bring in more foreign laborers for the traditional sector and to provide increased training to local workers to help them meet the demands of more lucrative emerging industries. The CEPD's plan is to train 26,300 local workers annually from 2007 to 2009 through government-sponsored programs; assist another 26,500 middle-aged, disabled, aboriginal, or female prospective workers to enter the labor force; and grant stipends to help tide over 9,700 job seekers. In addition, the government is seeking to create more jobs by promoting tourism as well as industries centered around the unique features of each of Taiwan's 319 townships.

These efforts, however, are expected to have only a marginal effect on the employment market, especially when Taiwan's economic growth and both domestic and foreign investment are lower than in neighboring countries. "Taiwan has failed to cultivate [enough] new industries that create jobs, and the problem will remain until it does so for the long term," says Tamkang University's Lin, adding that for the short term, lifting the ban on Chinese tourists' visiting Taiwan could certainly stimulate the job market. Sun Yo-lien, director of the Taiwan Labor Front, a Taipei-based labor activist organization, argues that the government should make the interests of local workers a primary consideration in reviewing inbound and outbound investments if it wants to make a difference in closing the income inequality gap.

Some researchers and economists have blamed Taiwan's existing economic structure, including its tax system and generally business-friendly polices, for its unevenly divided wealth. In its 2007 annual report, the Asian Development Bank said the benefits of Taiwan's economic growth recently have gone mainly to the top 20% of households by income. Explaining that finding, some local economists suggest that stock market gains are the main factor in widening the income gap, with the high salaries and bonuses given to high-tech employees also playing a role.

Starting in January 2008, high-tech firms will be required to list stock bonuses as expenses, which will likely mitigate companies' current practice of issuing stock as a bonus to boost morale and reduce turnover. The 104 job bank's Fang believes that the new bonus system could help significantly narrow Taiwan's income gap.

Social welfare is another way in which the government has tried to limit the income gap. Michael Hout, professor of sociology at the University of California, Berkeley, has found in his research that active government policies - whether they redistribute income directly through taxes or facilitate employer-union negotiations - can succeed in holding down inequality.

The concept of social welfare was not fully introduced to Taiwan until the beginning of this decade, when the unemployment rate jumped from 2.99% in 2000 to 4.57% in 2001. For decades before that, the rate had been under 2% until hitting 2.6% in 1996. But social security subsidies have become campaign fodder in Taiwan's intensely competitive political arena, and many observers consider that the policies have been ineffectively implemented because of inconsistencies stemming from the high turnover among premiers. The completion of a comprehensive social welfare net is still likely to be years away.

Over the past decade, Taiwan has spent about 5% of GDP on social welfare, which is close to Korea's level but lower than the 10-11% in the United States and Japan's 17-18%. For 2007, the government allocated NT$2.77 trillion (US$85 billion), to social welfare, a figure that will increase slightly in 2008 to NT$2.795 trillion. The budget is divided into low-interest loans for housing; pensions for the underprivileged, jobless, senior citizens, farmers, and fishermen; and educational subsidies for children from needy families. The pensions for senior citizens, farmers, and fishermen dominate the budget, which has been the subject of criticism from some social workers, sociologists, and economists on the grounds that it unfairly dilutes the social welfare benefits available for other groups.

Ministry of the Interior figures show that 86,959 low-income households were receiving subsidies from the government as of the end of June 2007. Eligible to receive the subsidies are each member of a household with income of less than NT$14,881 (US$458) in Taipei city, NT$10,708 in Kaohsiung city, and NT$9,509 elsewhere in Taiwan. At the upper end of the scale, there were 1,461,599 households with more than NT$1.82 million (US$56,000) in disposable income in 2006.

Lin Wan-I, a former Minister without Portfolio and now a professor in National Taiwan University's Department of Social Work, suggests that the inequities will be alleviated once Taiwan's national pension system - which will systematize the various existing pensions - is officially launched in October 2008. "At that point, the effectiveness of social welfare policy in decreasing income inequality will have reached its limit," he says. The CEPD describes the government's aim as bringing down the income gap to less than a factor of 6 by 2015. Lin Wan-I considers that if the incomes of the wealthiest 20% of households could be kept to 5.55 times that of the poorest 20%, it would be a tolerable standard for society. In his view, achieving that goal would require tax reform to place more of the burden on the wealthiest taxpayers. (and ending unfair practices such as exempting teachers, civil servants, and military personnel from personal income tax).

Confronting that challenge, so as to mitigate income disparities in a society that has long embraced relative equality, will be up to the next president and his administration taking office next year.
 
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