Examination of Taiwan's GDP per Capita Ranking 12th in the World
China Times Editorial, November 6, 2023
There is a huge disparity between Taiwan's purchasing power parity (PPP) indices and exchange rates. Although the relatively cheaper cost of living pleases everyone, it's not considered normal in the long run.
Recently, numerous Taiwanese media outlets reported the "Global Top 20 Wealthiest Countries" survey, published by the American financial website, Insider Monkey. This report ranks Taiwan at 12th place, leading advanced countries such as the Netherlands, Germany, Sweden, and Belgium. How Taiwan managed to outperform so many economic powerhouses and the significance of this is in terms of macroeconomics are questions truly worth exploring.
In fact, the definition of wealth here refers to the forecasted 2023 gross domestic product (GDP) per capita based on purchasing power parity (PPP) by the International Monetary Fund (IMF). The PPP measures how much of a country's currency is needed to buy what one dollar would purchase in the United States. This data requires onsite surveys of various price indices in each country, which are then aggregated. Currently, it's calculated only every six years through the International Comparison Program (ICP) conducted by the World Bank. The IMF estimates and calculates these figures in the subsequent five years.
According to World Bank data from 2017, Taiwan's PPP index was 15.73, Japan's was 105.3, and South Korea's was 871. Using these indices, instead of the exchange rate, to calculate the GDP per capita based on PPP, the figures significantly differ from what we usually perceive. The reason lies in the considerable gap between PPP indices and exchange rates. In 2017, the exchange rate for the US Dollar to the New Taiwan Dollar was 30.44. It goes without saying that Taiwan's GDP per capita divided by the PPP figure would be larger than that divided by the exchange rate. In 2017, Taiwan’s GDP per capita was initially US$24,000, but when recalculated using PPP, it doubled to $47,000. According to this method of calculation, Taiwan leapfrogged Japan and South Korea, surpassing them from a position of lagging behind.
The substantial difference between PPP indices and exchange rates is the result of being determined by two different markets. Exchange rates are dictated by the foreign exchange market, while PPP indices are determined by the consumer market. However, the trends of these two may not necessarily align. In the case of Taiwan, since the PPP index is only half of the exchange rate, when Americans convert their U.S. dollars to New Taiwan Dollars, what they buy with that money in Taiwan is twice as much as what they could buy in the United States. Hence, Taiwan's GDP per capita based on PPP naturally makes a flamboyant international ranking.
Last year, Taiwan's Directorate General of Budget, Accounting, and Statistics (DGBAS), Executive Yuan, calculated the wealth of Taiwanese nationals based on PPP index. The result showed that the average wealth per household in Taiwan reached $798,000 at the end of 2020, ranking the third highest compared to Organization for Economic Cooperation and Development (OECD) countries, just behind Luxembourg and Switzerland. When this news spread, many were astonished. Is Taiwan really this affluent? In reality, the figure is merely a magical number derived from the conversion using PPP.
Taiwan's ranking as the 12th wealthiest country globally, ahead of advanced nations such as Germany, the Netherlands, Sweden, and Belgium, is in fact due to the application of PPP. The IMF estimates Taiwan's PPP index for 2023 to be 13.848, while the exchange rate from the U.S. Dollar to the New Taiwan Dollar in October 2023 was 32.302. Therefore, Taiwan's GDP per capita based on PPP will reach $72,000, surpassing that of many economic powerhouses.
There are two significant implications for Taiwan's high ranking. On the one hand, it reflects how Taiwan benefited from the remote and triangular trades during the pandemic. On the one hand, the government's policies on fuel and electricity prices and tax reductions on essential goods mitigated the anticipated inflation. The former boosted individual income, while the latter further reduced PPP indices. This interplay leads to Taiwan's GDP per capita based on PPP surpassing $70,000. In this regard, we should acknowledge the government's performance in stabilizing prices.
Some might argue that the domestic price index has risen significantly in the past two years, questioning the assertion of price stability. Last year, the inflation rates were 8.0 percent in the United States, 8.4 percent in the Eurozone countries, 5.1 percent in South Korea, and 6.1 percent in Singapore. While Taiwan also hit a 14-year high, it stood at only 2.95 percent. In comparison to these nations, Taiwan's inflation rates remained relatively stable. This indicates that prices in Taiwan are lower than in those countries. Lower prices enhance purchasing power, leading to a higher estimated GDP per capita based on PPP, which naturally positions Taiwan among the top performers.
It is certainly worth celebrating Taiwan's inclusion among the top 20 wealthiest nations. However, two emerging trends merit attention. Firstly, with the cooling of cross-strait trade, the trade volume in "Taiwan orders, Mainland produces" is rapidly declining. The annual approximately one trillion New Taiwan Dollars in triangular trade gross profit is inevitably dwindling year by year, which will curb the economic growth momentum. Variables exist in whether Taiwan’s GDP per capita based on PPP can maintain stable growth in the future. Moreover, the substantial difference between PPP indices and exchange rates, while favorable to consumers, might not be normal in the long term. This prompts a need to examine if there are shortcomings in Taiwan’s overall economic policies.
Based on 2017 data published by the World Bank, Taiwan’s relative price level index, with the PPP index divided by the exchange rate, stands at 77.49 (where the world average is 100.) This figure falls below Japan's 140.89, South Korea's 115.64, and China's 92.83, ranking 72nd globally. Almost all advanced countries register figures above 100. Although Taiwan's GDP figures after PPP adjustments advance due to relatively low price levels, does this also reflect a long-term income disparity and stagnant wages in the middle class? The Central Bank and the DGBAS should pay more attention to these peculiar phenomena in the overall economy.
From: https://www.chinatimes.com/opinion/20231106000115-262113