A Jerry-Rigged Economic Policy: No Direction, No Future
China Times News editorial (Taipei, Taiwan, ROC)
January 15, 2010
The financial news on the 12th of this month focused on two points. Both have considerable influence on our economic development. First, the Council of Labor Affairs adopted a draft amendment to the Labor Standards Law. It hopes to adopt German legal reasoning, which stipulates that "mergers and acquisitions may not result in employee changes." It wants to forbid un-incorporated companies and financial holding companies from dismissing employees following mergers and acquisitions. Secondly, it wants to replace regulations pertaining to the promotion of innovation in sunset industries. It wants grants to promote research and innovation, along with business tax cuts, in order to attract foreign capital.
These two bills are merely the beginning. Other bills have already entered their second or third reading in the Legislative Yuan. All are equally controversial. If the Labor Standards Act is amended in accordance with the Council of Labor's demands, financial holding companies will be petrified. It will also take Taiwan farther away from the free market. Businesses undergo mergers and acquisitions in order to achieve synergy. Changes in the work force are essential for improved company performance. If financial holding companies are not allowed to lay off personnel following mergers, it is certain to discourage companies attempting to expand their financial reach. What's worse, the new bill may even be retroactive. The stipulation that "mergers and acquisitions may not lead to employee changes" may express the spirit of German law. But German laborers enjoy close-knit legal protections based on a venerable philosophical foundation. Taiwan must not selectively imitiate Germany's labor laws. This haphazard transplanting of another nation's laws may not be appropriate for our society, and will inevitably inspire skepticism.
The new industrial innovation law is also controversial. This law can be boiled down to two words: "tax cut." It cuts the general business income tax to 20%. Even more controversial is Article 30. It cuts taxes for operational headquarters to 15%. The logic of the ruling party has always been to bring tax rates down to those of Singapore and Hong Kong. It has long applied this logic to both business regulations and the income tax. Early last year, a substantial cut in the inheritance tax rate reflected this very thinking. But Singapore and Hong Kong are small. Neither has a manufacturing base, and no broad based work force. Their economic and social structures are very different from Taiwan's. We are obviously different from Singapore and Hong Kong. Yet we insist on emulating their low tax regime to attract cross-border business. This is another example of our haphazard transplantation of other peoples' tax systems. This has long been a target of criticism by economic and financial experts.
In addition to the aforementioned two bills, we have the national health insurance system, labor pension system and social welfare system. All three were adopted in the past few years. These were inspired to a considerable extent by the Scandinavian countries. The Republic of China's health insurance program has been praised by Nobel Prize winning economist Paul Krugman. But Krugman failed to notice that our Director of Health has demanded a health insurance premium increase upon threat of resignation. The increase remains far off. On the one hand the public on Taiwan enjoys the level of health care and social welfare enjoyed in Scandinavia. On the other hand our tax burden is merely one-third that of the Northern European nations. We get more. We pay less. No one in the government cares that the health insurance program and pension program cannot possibly continue in this manner forever. Put simply, we want only to transplant the Scandinavian system of welfare benefits. The rest of the system we refuse to look at.
Politicians on Taiwan love jerry-rigging. Public infrastructure uses mass rapid transit systems and trains from Canada and France. It uses high-speed rail transport components from Japan and Europe. They are all cobbled together haphazardly, depending upon our politicians' whims. On the policy front, we imitate Germany's labor laws, Hong Kong and Singapore's tax cut regimes, the Scandinavian countries' social welfare system, America's university system, and the Communist Party's party organizational structure. Our constitution is a major work of jerry-rigging. It components can euphemistically be described as "the best of all worlds." But in fact it is rife with incompatibilities. Mutually-exclusive organs have been transplanted into a single body. The final outcome is certain disaster.
If a country wants to adopt the Scandinavian welfare system, it must impose high taxes to cover its expenses. It cannot possibly maintain a low tax rate. If it insists on a low-tax rates to attract cross-border business, it will not have enough funds to take cover social welfare. Also, since 2001 our government has been promoting a knowledge economy. But it fails to understand that rapid changes within a knowledge-based economy necessitate frequent labor force disruptions. Therefore promoting a knowledge-based economy will inevitably affect labor policy and social welfare policy. Unfortunately, Taiwan's populist political climate, short-sighted politicians, and the mindset of the man in the street have never fully meshed. A jerry-rigged machine is usually riddled with defects. It can seldom continue operating over time.
No one knows where our government is taking us with its public policy. Is it towards Scandinavia's Nanny State? Singapore and Hong Kong's low tax, small government regime? Germany's state capitalism? America's free market? The United Kingdom's privatization model? South Korea's consortium led government? Indonesia's crony capitalism? Where exactly is it taking us? The public on Taiwan no longer dares to hope for enlighted leaders with shining visions. All it wants is a clear direction. Nothing more.