My attention was drawn to this piece, detailing a new book – Unfinished Miracle: Taiwan’s Economy and Society in Transition – which feels like it could be quite important. Whilst I await the final version, I nonetheless would offer a few thoughts on Taiwan, and not least its asymmetric relationship with China.

Few states are as substantially bound to and distorted by a single other large, connected country as Taiwan is by China (for the record, I do not acknowledge Taiwan as a sovereign nation but will for the purposes of this blog post refer to it in the short hand). The only other examples which spring immediately to mind are the relationships between the US and Britain, and between Brazil and Portugal – and both of those are largely historical cases. In each instance, the existence of the larger and younger frontier came to capture the economic imagination of the wealthier, older land – such that in many cases there was a disproportionate focus on these opportunities at the expense of other potentially more profitable ones.

Taiwan’s love-hate relationship with the Mainland along these same lines appears to be the heart of the thesis offered in the new book. In particular, the writers detail the “three-way trade” in which Taiwanese companies operate an export model using Chinese assets rather than domestic Taiwanese ones, creating employment and generating returns in China rather than at “home”:

“One can see from employment figures that Taiwanese enterprises have created far more jobs overseas than in Taiwan. The top 500 companies employ about 2.5 million people abroad (mostly in China) but only 1.5 million people at home. According to estimates, for every 29 people these companies employ in China, they employ one less person in Taiwan.”

Not every point makes sense to me. For instance the authors start off with the matter of SMEs accounting for a declining proportion of direct exports – which may well be true but I will have to wait for the book to see why it is relevant. After all any economy, as it develops and consolidates along the value chain, should see local export champions aggregate value so that a few higher end entities become the point of export, rather than SMEs serving as offshore suppliers to a foreign aggregator.

But the issue of how and where Taiwanese companies are making money is of great consequence. If the article is correct, Taiwanese companies are struggling to improve their gross margins despite moving their workforce into the PRC. This is clearly an issue about where they sit on the value chain. But there is another, even more gigantic elephant looming in the room: Taiwan is becoming nothing more than a remittance economy barely differing from the Philippines.

Consider that an estimated two million Taiwanese live abroad – one million in China alone (and half a million just in the Shanghai area). And these are not the old and invalid – they are the young, the brightest, the entrepreneurial two million out of a total workforce of only 11.8m people. Those that can, leave; those that can’t, remain. The social and cultural disjuncture between the diaspora and those staying at home, where graduate salaries are now lower than comparable roles in Shanghai or Beijing, is increasingly stark.

Furthermore, whilst domestic salaries are stagnating, business engaged in the offshore model discussed in this paper (“SMEs that become big companies in China”) are making huge returns, and often repatriating large amounts as a consequence. The earnings made from Chinese exports is leading to a huge asset bubble, particularly in property prices. Those same left-behind graduates are therefore experiencing not only depressed wages, but increasingly unaffordable housing. Even Chinese tourism is driving up the cost of living. The ongoing polarization of Taiwanese politics has its roots in this dichotomy. It is a perfect storm into which the DPP and the Sunflower Movement have emerged, but without any noticeable plan and only trite promises.

Political unrest is an outcome of the country’s inevitable economic model – inevitable because of China’s clever strategy of stymying Taiwanese attempts to trade elsewhere; but giving privileged access to China itself. This integration by stealth has paid huge dividends in terms of making the Taiwanese understand which side their bread is buttered. And it has led to two tangential outcomes – but only one is positive.

First, Taiwan has become a major centre for RMB internationalization. Much of the corporate earnings on the Mainland end up flooding back into Taiwan in its original currency. The island province therefore already constitutes the world’s second largest offshore RMB pool after Hong Kong (which occupies its leadership position for other reasons). Ordinary people are already getting used to RMB banking and wealth products on a day-to-day level, whilst corporates are beginning to issue RMB Formosa bonds. Mainland China is a fact of life for many people, accounting for the relative prima facie ambivalence towards independence.

Secondly and more worryingly, left-behind Taiwan has become increasingly parochial, with a poverty of means being matched by a poverty of ambition. Indeed the Taiwanese even have a term for this, the monstrous concept of 小確幸 which tells them that “good enough is good enough”, the ultimate expression of a “small country” mentality. Fewer and fewer overseas voters – “those that can” – bother to return for elections, especially in midterms, leading to legislative gridlock. And the media, who are left to focus on “those that can’t”, enter a downward spiral of navel-gazing such that news is more akin to a parish newsletter than real journalism.*

All this makes it far more problematic either for the KMT or any “One China” platform to succeed; and easier for peddlers of cheap myths for independence. In this sense, the Chinese strategy of binding Taiwan close may have the unexpected effect of creating a more troublesome rump population who have so little that they also have nothing to lose.

Taiwan’s economic decline is something of a tragedy. Of the four Tigers, its comparative decline is the most visual: Taipei looks like a city that simply stopped developing in c. 1990. Yet for many of us, it is a hugely romantic – and romanticized – version of much that is good about China. Unless someone can come up with a plan of action that captures the essence of all this, the island will continue slipping into a sea of irrelevance, regardless of any formal takeover by the PRC. That will be a situation where everyone is a loser.

* My own speculative thesis is that Taiwan, despite being very educated, has a lower per capita consumption of international quality media such as the Financial Times, the Economist or the Wall Street Journal than other equally non Anglophone societies such as Japan or Korea, or China.

With all the traction that crypto-currencies have been gaining in the media, it would be rude for me not to weigh in. One observation I would make is that since even my cousin has been invited to speak as an expert on the subject, we can probably safely assume that it is a bubble of the highest order – as alluded to by Charles Schwab in their recent analysis of similar phenomenon.

Source: Charles Schwab & Co.

On a more serious note however, I remain skeptical mainly because Bitcoin, Ethereum and the rest cannot fulfil one of the three primary functions of money. Yes, they can be used as a medium of exchange, and already are. Yes, I could see a point at which they could become a unit of account. But there is currently no pathway to being a store of value other than the value confidence ascribes to it. This is because it has no central bank or a state to back it up.

Proponents of “cryptos” like to mock conventional money by labelling them “fiat” currencies – in other words, money which has artificial value only on the orders of the government issuing them. “Look,” some gleefully point out, “most money today is not even backed by physical assets such as gold!” By doing so, they miss the point on two levels. First, the very purpose of money is to be an instrument of the state through its national treasury or central bank. In this resides the stability of the economy and society at all levels. Secondly, therefore, the official backing of recognisable assets such as gold is helpful but ultimately irrelevant. A functional government has the resources of an entire country at its disposal, which is why it has the power to issue, or at least back, legal tender in the first place.

At the heart of this lies a necessary understanding of the concept and role of “recourse”. In 2013 I wrote a paper on the why the dollar, despite pessimism from those seeing the end of American dominance, will likely remain the global reserve currency for a long time. Faith in a currency is more than just a confidence trick; it is more even than just the backing by specific collateral. What belief in a given currency rests on is belief in the power of a government to mobilise the totality of its resources in an extreme circumstance, for instance war. To wit:

“Eichengreen has nowhere identified a much more substantial reason as to why institutions across the world, from central banks to investors, choose a given reserve currency: namely, the ability of the issuing party to hold recourse over actual assets. Whether these assets are physical (in the form of industrial facilities or natural resources) or financial, it is a government’s ability to ultimately take control over them – to mobilise them in support of government policy and national necessity – that is the final arbiter of how safe that country’s currency is to you as a holder. This is particularly true of non-resident holders abroad, since they do not suffer downside from asset seizures but are instead a totally arms-length counterparty.”

I went on to explore the concept of Total Resource Mobilisation (TRM) capacity as a mainstay of how a country – and with it, its currency – is supported. I noted that one  the interesting historical example was the delayed decline of the Sterling Area well after Britain had ceased to be the primary global trader – because of a perception that Westminster still held recourse over an empire. For all the contemporary fears of American decline – in trade, hard and soft power and its institutions – the dollar has been unmoved as a reserve currency, as shown by the statistics.

Source: Bank of International Settlements

The same lessons are true of the new virtual currencies. A form of money without a form of state will render the inherent value of that money limited to only supply, demand and confidence –  all fine, but these do not offer a store of value. With no central bank, and no government to back it, there is no recourse for comfort – no “liquidation value” to act as the backstop as it currently does for all real currencies.

On a side note, I also wonder if those pushing the new currencies are being rather too geeky about the whole thing. I have no doubt that in many ways, the technology behind cryptocurrencies are superior to conventional ones. But being more perfect does not necessarily mean it will supersede the less perfect product – indeed history is littered with examples of technically superior inventions which did not end up “winning”, not least because its backers were too worried about theoretical perfection: Microsoft vs Unix, for instance; Betamax vs VHS; even arguably the internal combustion engine vs diesel. The dollar is easily forged, and stolen, and inflated; but it is good enough, and that is good enough.

This is not to say that I see no use for Bitcoin and its ilk. I accept that they can perform a useful function, particularly as a cross-border payment system – which, incidentally, is what many of those currently inside the industry currently see it as. These currencies have the benefits both of allowing anonymity and, potentially, offering greater security of online transfer. But then the real competitors for cryptocurrencies are not so much the Dollar, Euro or RMB, but rather the nexus of Visa / Mastercard, UnionPay and even Western Union. I can also accept that since we are only at the beginning of the cycle,  the ultimate level of valuation of these currencies may still grow. However, short of finally moving into a post-national world, I do not believe they will replace national currencies. The eschatological nature of these crypto-evangelists concerns me.

As ever, it is a lack of awareness about macro historical trends which concerns me – a deficiency which would always see good money thrown after bad. I am going to stick my neck out and short this – and if anyone has any clever ways of shorting the whole sector, let me know!

Far from being an act of vandalism, the Simplification process should be recognised as an intellectual achievement rivaling Johnson’s dictionary

The most extraordinary aspect of perusing the National Museum in Taipei is not just the artifacts on display, but the story it tells about Chinese history. Among the other unparalleled treasures, there is a room of printed texts from throughout the ages and it is almost incomprehensible to those of us schooled in the West that upon seeing some writings which look completely recognizable and fresh in terms of style and font, to look down at the label and discover it is in fact an original from the Song, the Tang or, in some cases, the late Han dynasty. In English, we could barely make out Chaucer in its original form, let alone Beowulf; yet an educated Chinese person could visually (if not intellectually) make out every word from these texts.

Purely as a numbers game, it seems inevitable that Simplified Chinese characters, as established by China in various rounds of reform from 1956 onwards, will win out in representing the Chinese language. By every measure, Simplified outstrips Traditional complex characters in usage and the education of new learners whether ethnically Chinese or foreign. Yet if one examines the rhetoric that still emanates from Greater China and in particular Taiwan, it becomes clear that although this is known, the declining world of Traditional Chinese still grips the moral high ground. But the common, non-academic proponents of Traditional labor under two common misconceptions.

The first and most obvious fallacy is that simplified writing reform was undertaken as random vandalism. It is frequently cited that learners of both languages often arrive at the conclusion that much of the shortening has been the work of Communist progressivism, purposefully disregarding the features of an ancient civilization. Yet this is far from the case. Only a small portion of the simplification process involved wholesale substitution of components or, in extreme cases, hatcheting of words. On the contrary, many of the new forms reached back into various strains of traditional Chinese including ancient alternative and vulgar forms, commonly used short hand and caoshu (cursive) print representations. The thousands of delegates meeting in 1956 searched far and wide for forms which could be best reconciled sympathetically with the language which already existed, and in many cases did so quite elegantly. The fact is that the simplification process, for all its imperfections, remains a monumental intellectual achievement which stands alongside Johnson’s first dictionary.

The second mistake is to ignore the fact that impetus for language reform has been long-standing, and natural. Simplification  had been discussed throughout the 19th century and a lesser version had even been implemented (albeit only for six months) in China under the Kuomintang in 1935. Lu Xun, China’s most prominent writer of the 20th century, had gone as far as to say that “if Chinese characters are not destroyed, then China will die”. Yet this is not the only evidence of natural evolution – Japan simplified its version of Chinese (kanji) in 1946 and the introduction of shinjitai was itself a form of linguistic reform. Likewise have the Koreans and Vietnamese slowly changed the usage of their hanzi (mostly for local terms) to the extent that both, like Japanese, have characters unique to their own language. And of course, controversial reordering of language is not just limited to logographic languages, as the much-debated 1996 German reform demonstrated. Of course, the timing and extent of the jiantizi was very much a choice of the Communist Party but they were only tapping into what was an ongoing debate about how the language should move forward. For sure, reform was not just a Communist conspiracy.

The question should therefore really center on whether the process has been executed well, and it is here that the communities in Taiwan and overseas have been particularly vocal. Without going into the details here, the reality is that there were good and poor simplifications in the process. Some of the less controversial changes might include the word meaning “to learn,” changing 學 [xué] to 学 for instance, since the original does rather evoke the over-burdening of a child’s head with the excesses of Traditional stroke counts. Likewise the adjustments of the word for “energy,” as 氣 [qì] to 气, or “to be” as 為 [wèi] becoming 为, which are both so “elemental” that not much is lost. Indeed the adoption of 台 [tái] (from 臺) even in Taiwan, is indicative of the necessity of some changes.

Against this are the changes whose aesthetics are so difficult to swallow, such as the change from 廣 [guǎng] to 广; the unsatisfactory merging of words based on phonetics such as both 髮 [fā] and 發 [fā] become 发; and those changes which are perceived as being purely political such as the conversion of 華 [huá] to 华, and the so-called “国-phenomenon” as identified by Zhao and Balduff in Planning Chinese Characters (2007). The most prominent rallying cry of all for the Traditional Chinese community is of course was the heartless [pun intended] extraction of 心 [xīn] out of 愛 to give us the word for love as 爱 [ài]. Without doubt, these could have been done more sensitively.

The balance sheet is mixed, and Simplified Chinese is not to be defended in and of itself per se. However (and leaving aside the arguments over literacy which – very broadly – support Simplified), the reforms have one important anthropological argument in their favor: they recognize constant evolutionary change. On the Mainland, there have been effectively five rounds of reform in 1956, 1964, 1977, 1986 and 2009; in Taiwan the written language has remained ossified, with a commensurate impact on its viability. The problem across the Strait and elsewhere in the Traditional Chinese world is that the social, intellectual and political opposition to Simplified script leads to the ultimate fallacy: that Traditional as we know it today is, effectively, “perfect.” It has been done, the process has finished and there is nothing left to fix. This can be neither logically or empirically true.

The truth is that, had the Communists never won the war, and had Mao and others not pushed the reform agenda strongly, Chinese written script would have changed at some point. Around the margins, evolutionary use would have materialized; and it is quite possible that a centralized standardization of some sort may have been instituted. Modern Chinese would therefore be something in between today’s Traditional and Simplified. It is probably time for the Traditional school to recognize that, even if they do not agree with everything that has been done, the cause was more natural and noble than has been given credit for.

This piece was originally published in Caixin Online in April 2015.