Of Liberalization and Externalities

Another look at the political economy of the Cross-Strait Services and Trade Agreement

Much of the rhetoric in the current debate over the Cross-Strait Services and Trade Agreement centers on whether Taiwan seeks to be an open economy or a closed, autarkic country. This is the wrong argument to have. In a globalized world, Taiwan will find it difficult to avoid opening its economy further. That opening has to include China, since it is a major player in the world economy. This much was clear from the earlier discussion surrounding whether or not to conclude the Economic Cooperation Framework Agreement (ECFA); there was little disagreement that economic ties with China and other parts of the world are important to Taiwan. Taiwan is, after all, a trade-dependent economy and already tightly integrated into the world economic system. Where Taiwanese and their government have an important choice is over how to open their economy. This is not a strictly China-related issue.

Managing economic openness and its consequences is far more complex than aggregate figures on GDP numbers, growth rates, average incomes, employment rates, and even concerns about political influence from Beijing. Whichever administration in office in Taipei, along with Taiwan’s population, will have to consider the distributional implications of economic liberalization and its second-order effects. If higher economic growth rates, foreign investment, and export figures are the upsides from an open economy in today’s world, then rising income inequality, increasing prices, and stagnant median incomes are the downsides. There is also the uncertainty of commitments that come with cross-boundary bilateral agreements. Such matters directly affect ordinary people and the political choices they make, including at the ballot box and elsewhere. Yet, the current administration in Taipei seems to be paying less public attention to distributional issues even as it pushes for greater economic liberalization.

Here, Singapore’s experience may be somewhat instructive. Politicians and pundits in Taiwan, especially proponents of greater economic openness toward China, have made much of Singapore’s solid economic performance, notably its rising average income, over the past decade-and-a-half. In the aggregate, Singapore indeed benefits from the multiple free-trade agreements it concluded, including with Taiwan and China. Behind these gains are undoubtedly the Singaporean economy’s embrace of globalization, including the inflow of investment as well as the import of both high- and low-skilled labor. Yet, Singapore’s long-ruling People’s Action Party (PAP) witnessed a steady fall in electoral support since 2000 despite these advantages and mature party machinery, substantial resources, and close relationship with the civil service bureaucracy. This begs the question, why?

One reason lies with the challenges of addressing the distributional cost that come with economic openness, and which appear to accrue to ordinary Singaporeans. There is substantial income inequality. Singapore’s 2013 Gini coefficient according to its Department of Statistics in 2013 stood at 0.46, much higher than the 0.34 reported for Taiwan by Bloomberg in 2011.* Then there is the related issue of rapidly rising costs. Since 2000, Singapore witnessed a property boom and the corresponding increase in rental prices and inflation. Such conditions contributed to the Economist Intelligence Unit’sranking of Singapore as the world’s most expensive city in 2014. Consequently, Singapore’s official statistics indicate that real median income and the real incomes of most new graduates saw limited growth during the same period. Rising costs and inequality put substantial economic pressure on middle and lower income families. Studies from the National University of Singapore suggest that an effect of these forces is declining social mobility.

Liberal labor and investment immigration policies place further economic stress on middle and lower income Singaporeans. Ease of access to a large foreign labor pool that is less demanding of wages and benefits allows companies to put downward pressure on compensation for Singaporeans. Importing large amounts of foreign labor also raises demand for housing and public goods, compounding the rise in property prices while straining public infrastructure, particularly in transport, healthcare, and even public safety. Singapore’s population grew from 4 million in 2000 to 5.5 million today, out of which 3.2 million are Singapore citizens. These developments have little specifically to do with China, but help make Singapore’s population and workforce one of the world’s unhappiest, according to polls by Gallup and the Randstad Group. These are all issues that aggregate figures on average income, growth and employment rates are inadequate at capturing.

Conditions in Singapore parallel those in Hong Kong, another highly liberalized economy. Hong Kong witnessed high economic growth, average income, foreign investment levels, and a rapid rise in property prices, especially since the conclusion of the Closer Economic Partnership Agreement (CEPA) with Beijing. Accompanying these trends were high inflation that came with high property and rental prices, and significant income inequality as reflected in an official 2012 Gini coefficient of 0.54. Even with relatively decent prospects for employment, new Hong Kong graduates see low incomes, especially after adjusting for prices. These challenges add to overcrowding woes from large numbers of visitors and new residents, mostly from Mainland China, that adversely affect housing, public transport, healthcare, and education availability. Hong Kong’s workers display levels of unhappiness similar to their Singaporean counterparts, according to the Randstad poll cited earlier.

Moreover, without independent and binding third party arbitration and recourse, bilateral arrangements in world politics can be highly subject to commitment problems. Disputes will inevitably arise, and parties may seek to modify existing agreements. Then there is the possibility of reneging. Weaker partners are especially vulnerable in such circumstances, since they are less able to enforce their claims. These fears are particularly acute for Hong Kong and Taiwan when dealing with Beijing, given their proximity to and already high levels of economic integration with China, together with Beijing’s apparent efforts to influence politics on the ground. The question for Taiwan is how to maintain leverage and the possibility of recourse in its relationship with China should economic integration prove socially and politically costly, or if Beijing reneges on prior promises. The Ma Ying-jeou administration could be much clearer on how it intends to meet such challenges.

Economic liberalization inevitably creates winners and losers in a manner that involves complex political and social externalities. In today’s globalized world, the stakes of winning and losing are higher than ever. Yet, the costs and benefits of economic liberalization may not distribute equitably across a population. Aggregate economic gains mask the fact that middle class and lower income families increasingly populate the lower half of an expanding “M-shaped” wealth distribution curve. Those already with access to wealth and specialized skills become even more prominent in the upper half. This phenomenon may be especially apparent in open economies like Hong Kong and Singapore, and which Taiwan is only beginning to experience. Such pressures will likely intensify with further economic liberalization. As it seeks to open its economy further, Taiwan has to account for everything from distributional issues to uncertainty over agreements and worries about political pressure from Beijing. To the extent that such concerns are unmet, citizens may express frustrations at the ballot box when they can, and on the streets and inside legislative chambers when they cannot.

*The higher the Gini coefficient, the higher the level of inequality. OECD figures for 2011 list the relatively equal Nordic countries as having Gini coefficients of 0.25-0.26.

Ja Ian Chong is Assistant Professor of Political Science at the National University of Singapore.

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