"Brain damage from one way of loving Taiwan" - Tu Chenhua

The essay attached below is written by Tu Chen-hua, associate professor, Institute of National Development, Taiwan University.

The author examined the claim that investment in mainland China apparently leads to reduction in investment inside the island of Taiwan.

He took the investment data of all Taiwanese companies from 1991 to 2005 and calculated the correlation coefficient, x=investment in mainland, y=investment in Taiwan

  1. correlation coefficient = -0.83 for the period of 1991 to 2005. So apparently the data supports the claim, the 2 investment numbers are anti-correlated
  2. He then break the data series into 2 parts. Lee Tenghui era (1991-1999) and Chen Shui-Bain era (2000-2005). Then the correlation coefficient for 1st series is -0.02. 2nd series -0.71. i.e. no correlation during LTH era, but anti-correlation during CSB era.
  • Technical note: those who are not familiar with statistics may wonder how the "sum" of -.02 and -0.71 would produce an out-of-range -0.83, suffice it to say the difference in "end-data" (i.e. 1991 and 2005) plays a much larger role in linear correlation. i.e. -0.83 is mostly determined by comparing 1991-92 numbers with 2004-05 numbers. An extreme example: 1990:1; 1991:1.....2004,0.9; 2005; 0.95.
The conclusion: there is clearly a counter-example (1991-1999 series) for the zero-sum hypothesis . So the competition for investment capital is not the main factor for explaining the apparent anti-correlation from 2001-2005. Tu concluded that too much love could generate fever, and leads to "brain damage".

The authors proposed a few hypothesis for the decrease in investment inside Taiwan

  • Decrease in investment in Taiwan is mainly a result of deteriorating investment environment in Taiwan, due to factors such as erratic changes in economic policies and decisions (so that enterprises are wary about long term investments)
  • The growth in investment in mainland China is due to improving environment
To see if there is a constrain in overall sum available for investment, we can look at this chart.
While the % of investment in mainland increased steadily, the total amount of investement by Taiwanese companies (in Taiwan and in mainland) decreased significantly during the period. This would explain the slowing down of the economy in Taiwan. Taiwanese business have lost the entrepreneurship and willingness to invest for future. The result has already been observed in the past few years. The remedy is not to discourage investment in the mainland (the businessmen must believe they can make a lot money, and repatriate to Taiwan to spend, if they are willing to take the 6-10 hour flight ordeal), but to better the investment environment in Taiwan. And it is not neccessarily a zero sum game.

p.s. LTH is very outspoken about curbing investment in China these days. But I doubt if this is what he would do if he still is the decision maker. There is a difference between doing it yourself and pushing it to others in order to advance one's political objective. There is also the issue of the trade-off around sacrificing economic development for political/ideological objectives.










Michael Turton said...

ROFL. Thanks, Sun. That one really made my day. There is no way that he could get hold of the investment data of all Taiwanese companies -- since a significant portion of investment outflow is unregistered. The LTH era is not a counterexample for the Chen era as conditions on the mainland were completely different in the LTH period (duh). The article is clearly and deliberately slanted. Hilarious.

While the % of investment in mainland increased steadily, the total amount of investement by Taiwanese companies (in Taiwan and in mainland) decreased significantly during the period. This would explain the slowing down of the economy in Taiwan.

No shit. The total amount of capital available to Taiwanese firms is finite. Hence, investment in China or elsewhere means lower levels of investment in Taiwan. Further, FDI has made the same decision -- as flows have redirected themselves from Taiwan, Korea and Hong Kong to China. I guess Chen Shui-bian is secretly President of Hong Kong and Korea too.

This is just more of the "It's all Chen's fault!" garbage that reduces complex ideas to simpleminded nonsense.

BTW, which correlation coefficient was used? How was "investment" defined? is the study peer-reviewed?


Sun Bin said...

ROFL on everything that does not agree with your political view, that is pretty good attitude. :)

Anyway, the guy is probably partisan. But he made very solid points here. It is a very simple piece of analysis.

to your other questions:
1) The data he used are probably the official data. Of course there will be insible investment. One cannot hope to capture 100% data. But it should be good enough. After all, he was comparing trends, so it is a good approximation. Mind you, LTH and CSB used the same set of data. So it won't gain you any point by discounting his data source.
2) i drew the chart and made the comment on last paragraph (about 'total investment'), based on the data in his essay. i am not sure what exactly you are saying about 'finite' capital. we are looking at investment as % of GDP. what does finiteness have anythign to do with this? but you are probably right that FDI made the same decision, of avoiding long term investment in taiwan -- not because CSB controls korea or HK, but he made taiwan a less hospitable environment for FDI.
3) I do no think it was entirely CSB's fault. he was inexperience and made quite some mistakes. that is okay. his problem is, he yield his economic decision to political powers (deep green). the recent flip-flopping about mainland investment restriction is a classic example, that pragmatic Su Chenghcang was strong-armed into giving up his reform. So yes, CSB bears a lot of faults.
4) what do you mean by 'which correlation coefficient'? the x and y variables were clearly defined (and i translated) above. the coeff is that between the two variables.
5) I do not think he would submit it to academic journal with just this piece, because the myth he discounted is an assertion by the deep Green, and never been published. How do you publish some work which disproved some sloppy assertion?