Moon, Stars, Wage Growth Next?

We all know the cliched saying, "always aim for the moon, even if you miss, you will land amongst the stars." This saying usually applies to parents who are trying to motivate their children, but it is increasingly taking shape in the economic and finance world. I got the idea reading the diplomat's coverage of the World Bank President, Dr. Kim. Dr. Kim aimed for the moon with his "3-by-5 pledge." He states that he aims to treat 3 mn people in developing countries with an anti- HIV/AIDS drug by 2005 during his tenure at the UN. The pledge ended up being unfulfilled, but the 3 mn target is reached in 2007, earlier than previous expected. Kim says his policies worked because "you have to set a really difficult target and then have that really difficult target change the way you do your work.” He has employed the same philosophy at the World Bank, but tackling poverty's causes and effects simultaneously is a very difficult challenge. Needless to say, he has yet to "land amongst the stars" at the World Bank.


This idea has also played out in industrial policies. South Korea's Park Chung Hee implemented policies that led to Korea's future industrial dominance. South Korea is now market leaders in steel, shipbuilding, autos, chemicals, and electronics. By striving to reach difficult output or export targets, chaebols were pressured to make significant breakthroughs in short amounts of time. This achievement did not come easily since the foreigners, importers, consumers, and laborers' interests were sacrificed in the process, but they did it. Though they often missed out on short term targets, the difficult goal helped them move with more urgency in improving their operations, technology, and management. This all sounds well and good, but China under Mao was a different story. Ambitious targets to beat US and UK in steel output during the Great Leap Forward led to disastrous outcomes. Drunk with hopes of a new China, wishes for a egalitarian society, and spells of Mao's cult of personality, people dived into this project with fervor. Seemingly overnight, useful bicycles, cookware, and machinery were dumped into giant furnaces and turned into giant heaps of metal crap. Great Leap Forward's bold goals were equivalent to aiming for mars, but China did not land among the moon or the stars, it landed into an era of shortage, starvation, and social upheaval.

Increasingly, this idea has expanded to foreign currency and inflation. Taiwan, the lagger in the four Asian tigers, has failed to meaningfully upgrade its manufacturing industries. Sure TSMC is a big name, but Taiwan has performed below its potential and created fewer competitive firms than expected. One criticism is that the central banks' cheap currency policy has shielded exporters from competition and deprived them of the urgency to upgrade. Recently the central bank has even released a 33 page report responding to a magazine critical on the central bank and its foreign exchange policy. In Japan, academics like Paul Krugman are calling for a 4% inflation target in Japan; the higher inflation rate is expected to help reflation policies since a failure to hit the target will still result in inflation higher than that of today's 0.7%. This policy also gives the government cover for much bigger forms of monetary policies. These talks seem tantalizing, but foreign currency and inflation targets are complicated and policy makers will always err on the side of caution. Considering it is difficult enough to maintain the status quo rather than improve the current situation, do not expect much aiming for the moon.

One part where the cliched saying may evolve next to is in wage hikes. Seeds planted from the 2008 financial crisis has grown to many social movements. From the on start of the Occupy Wall Street movement to Bernie Sanders and Donald Trumps' rise, economic inequality has played a big role. At the moment, given US's high debt and overall political leaning, wage hikes rather than welfare is a more realistic situation. In a country built by self-sufficient and dreamer immigrants, working to help one escape poverty is an acceptable narrative. As the likes of Wal-Mart laud the positive business effects in paying their employees' above market wage and Dimon announces wage hikes at JP Morgan, more meaningful wage hikes has gradually turned into expectation. Furthermore, as cities around the country, from LA to SF to NYC aim to raise wages to $15 an hour, this movement just keeps on growing.


Despite this trend, there is no lack of opposition. Citing price and quantity crosses featured in economic 101 courses , economists believe that wage hikes will decrease overall employment. This economic law is sensible and logical, but the price and quantity cross is not everything. The supply and demand curves are dynamic and next to impossible to capture in frameworks that assumes "ceteris paribus," or everything else the same. However, the louder the critics sound off alarms on wage hikes' negative effect on employment, the less likely cities and corps will stand idly watching their jobs flow out or payroll bloats up. In anticipation of wages hikes' effect on lower employment, cities and companies may compensate for this by adjusting policies to create more opportunities or productivity. Local governments may remove previous red tabs; companies may use new methods to increase productivity. Overall, despite the set backs, perhaps the wage hikes will be a disruptive force that leads to positive shifts in the supply and demand curves rather than a mere change in the price and quantity cross points. I do not have a good way to validate this narrative one way or another, but I do wonder if wage policy will become the next hot bed for the "aim for the moon and land amongst stars" philosophy.

A Reflection: MBA and the Sun Flower Movement (Part 2)

         First, finance taught me to evaluate a project’s pros and cons without bias. Defined by the Investopedia as the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities, finance provides me the tools and methods to appropriate a project’s value. The calculation of the project’s value generally follows three steps: list out the project’s revenues and cost, discount the net revenue to adjust for the time value of money, a concept based on the concept that a dollar today is worth more than a dollar a year from now, and sum up the discounted values to find the net present value. However, proponents and opponents of the agreement both presented the costs and benefits with much bias. For example, based on the protestor’s AMA, the costs heavily outweigh the benefits.

         These students cited the potential costs to the agreement as the collapse of small and medium enterprises, the brain drain of local talents, and loss of Taiwan’s freedom and future, among others. The provided cost and benefit analysis seems helpful, but it only painted only half the picture. By presenting a lop sided focus on the short, medium, and long term costs without the same attention to the benefits, these protestors shrouded people from being able to make a sound judgment, one based on facts, rather than fear. Business Week’s survey showing that 80.9% of surveyors say that they lack sufficient knowledge about the agreement further demonstrate the need for unbiased and complete analysis. Considering it is already difficult to evaluate the agreement’s costs and benefits when the information is complete, one should be even more careful and avoid making conclusive judgments based on inconclusive evidences.

         Second, economics allowed me to identify the reason behind Taiwan’s fragile economy. Just a few decades ago, Taiwan was one of the four Asian Tigers that shocked the world with their stellar economic performance throughout the 1960s and 1970s. However, compared to its Asian Tigers counter parts such as Hong Kong, Singapore, and South Korea, Taiwan has lost its momentum and confidence. Tormented by a decade long wage deflation, many frustrated Taiwanese are no longer dreaming of a bright economic future, rather they just wish to stop the bleeding. Worried that the increased competition brought by the agreement will lead to further declines, particularly in local printing, beauty salon, tourism, and transportation businesses, people forget the agreement also opens up further opportunities. Due to Taiwan’s shared cultural and language heritage with China, Taiwanese businessmen have long taken advantage of China’s labor and consumer market. Yet, as competition intensified, many Taiwanese businesses are no longer looking at China as the land of opportunity. Selling themselves short, they concede to defeat before the fight has even begun. It is important to realize however that Taiwan’s economic insecurity started long before the agreement. I attribute Taiwan’s economic woes largely to Taiwan’s declining domestic investments. While Taiwan invests actively abroad, particularly in China and Southeast Asia, local investments have slowed throughout the years. It dropped from 34% of GDP in the 1980s to 20% of GDP in the early 2000s. Some may point out Taiwan’s strong FDI to neighboring countries and the benefits they bring, however the payoff from these investments seemed to have only benefited those at the top, the investors and the entrepreneurs.

         As a result, these ventures abroad have not directly benefited Taiwan. As local companies fail to upgrade their businesses and grow their market shares, their employees suffer. Since salaries reflect the value of the work determined by supply and demand, it is no surprise that salaries in Taiwan have not grown when companies stagnate due to the lack the investments for transformations. By tracing Taiwan’s economic history, one realizes that the protests over the agreement are complicated not only by Taiwan’s concern for its self-determination, but also by the decade long sense of frustration and hopelessness.

         Third, organizational behavior helped explain Taiwan’s low investment. Despite Taiwan’s skilled labor pool, strong market, and business friendly government, Taiwan has suffered from a lack of domestic investments even as the Business Environment Risk Intelligence (BERI) recently ranked Taiwan's "Profit Opportunity Recommendation" as the third-best among the 50 major countries covered, after only Singapore and Switzerland. This phenomenon cannot be explained just through the lenses of finance and economics; to fill its gap, I looked to organizational behavior, the study of the way people interact within groups. So how can organizational behavior help? Its concept of organizational culture, the values and behaviors that contribute to the unique social and psychological environment of an organization, help explains factors of Taiwan’s economic insecurity.

         Since Taiwan, formally known as the Republic of China, is isolated with only 22 countries in the world recognizing its statehood, its expression of nationhood is limited. Furthermore, compounded by the pressure given by the People’s Republic of China, Taiwanese people have long come to accept the status quo with China as the best way to preserving their democracy and society. As a result, Taiwan functions like a country, but does not think like a country. Since Taiwan cannot always fully embrace its nationhood, Taiwanese people have trouble forming a cohesive organizational culture. The fear for China as a threat to their life, liberty, and property, stemming from the unresolved cross straits issue, has taken root in the very fabric of the Taiwanese society and changed mindsets and behaviors. For instance, since it is difficult to guarantee Taiwan’s status decades from now, politicians and businessmen often act myopically in their self-interest. Politicians and businessmen aim for short term gains in an attempt to accumulate wealth as quickly as possible for their families. Rather than building the society or their companies, they look to minimize risk and maximize short term gains. Such behavior has led to political gridlocks in which the government has hindered the society; companies refuse to take risk and fail to develop their opportunities. The myopic mindset has been particularly hurtful in the cycle of poor wage growth. Just as Taiwanese businesses are reluctant to invest in new projects, they are equally unwilling to invest in human capital. Fixed on the high of instant gratification, companies prefer able bodies ready to contribute rather than talents who are diamonds in the rough. This culture has led to a brain drain; as the environment in effect forces Taiwanese talent to pursue opportunities elsewhere, Taiwan loses its elites that could have reversed such trends. In short, the lack of organizational culture has contributed much to Taiwan’s economic woes that fueled the strong reaction against the trade agreement.

         While I evaluated the protestor’s argument, related to their frustration, and zoomed out to see the bigger picture, I realized that I have taken elements from finance, economics, and organizational behavior. After four years studying at a business school, I have learned to be comfortable juggling concepts across these areas rather than merely looking at an issue through one specific angle without even referencing these subjects. After hours of following the news and researching the agreement, I believe the agreement is a necessary evil. Taiwan needs to open up itself, engage in market competition, and revive the competitive spirit. However, the government can play a more vital role in protecting the impacted industries and helping them transform their businesses. Yet, through the reflection on this issue, I learned that my education has broadened my approach and my view. In the end, though I also found my business school’s curriculum to be rigid at times and certain subjects to be taught too much on the surface, I also learned to appreciate everything my business school has given me. I cannot tell you whether it will bring you value, but after four years and some hours writing this reflection, I can proudly say, it certainly has for me. 

A Reflection: MBA and the Sun Flower Movement (Part 1)

          Does it provide value? That is the question many people are now asking about MBA degrees. In an ever changing world shaped by globalization, technology, political affairs, and climate changes, does MBA train students to become the versatile leaders that the world needs or rather mold students into factory made prototypes? While I am not in an MBA program, having gone to an undergraduate business school, I believe in the strength and effectiveness of the degree.

          To be honest, business schools are far from perfect; many criticized them for their rigid curriculums and generalist training. Many say that the academic focus discourages innovative thinking in favor of stock answers and fails to provide in depth specialization, but I see it differently. The balance of diverse subjects, theories, and applications gives students the tools to see the world in a variety of new lenses.

For example, finance and organizational behaviors, one highlighting a company’s financials and the other focusing on employee interactions, both helped evaluate the recent affairs in Taiwan called the Sun Flower Movement.

          On March 18^th, roughly 300 students stormed the Taiwanese Parliament, barricaded themselves in the building, and proclaimed their occupation to protest the Cross Strait Service Trade Agreement with China. Though the world has seen its fair share of political activities in the past few years ranging from coups to protests, the Parliament occupation is special. A harbinger for future clashes, the protest is a reaction to China’s rising power and it has the power to be the canary in the mines.The protest has been dubbed the “Sun Flower Movement” and it disagrees with a de facto free trade agreement that opens up the service sector between China and Taiwan for further investments. However, considering the scale of Chinese capital and the might of state companies, many feared that the agreement will hurt Taiwan’s economy and sovereignty. Furthermore, unhappy with the manner in which the ruling party, the Nationalist’s Party, has sought to pass the legislation, the protestors took the matter into their own hands.

          Starting out with just a couple of hundreds of students, the protestors grew exponentially over the next few weeks. They sent viral social media messages, started live streams, and even posted in Reddit’s AMA. Soon, their request grew from a clause-by-clause review of the agreement to its rejection and more monitoring in the future. Within a couple of weeks, protestors inundated the streets as well, growing to be an estimated 100,000 to 500,000 strong.

          

          Soon, articles for and against the protest started to flood the media. At first, it was difficult to evaluate all the news. Even for me, a Taiwanese American who spent my childhood growing up in Taipei, to separate facts from fictions and understand the issue. However, through the lenses of finance, economics, and organizational behavior, I identified a common bias in articles, realized the fundamental problem in Taiwan’s fragile economy, and arrived at my own conclusion.

*Sun Flower Movement Reddit AMA

http://www.reddit.com/r/IAmA/comments/21xsaz/we_are_students_that_have_taken_over_taiwans