Impact of Economic/Social Ties between Taiwan and Mainland China on Taiwan's Independence

The Impact of Economic and Social Ties between Taiwan and Mainland China on Taiwan’s Independence

  Shirley Hsieh and Robert P. Trost
  With China growing rapidly in political and economic power, debate as to whether Taiwan will remain independent is questioned. The legitimacy and sovereignty of the Taiwan state is threatened, and the international community is reluctant to dabble in this sensitive subject. With the two main political parties in Taiwan, Kuo Ming Tang (KMT) and Democratic Progressive Party supported respectively by Native Taiwanese and Mainland Chinese, oscillating for the Presidential seat, the future of Taiwan is unknown. There are four ethnic groups in Taiwan (Hakka, Hoklo, Mainlander, and Aborigines) and their history, culture, and future goals diverge.
  In this paper we examine the direction of causality between two largely unobservable variables: (1) sentiment among the Taiwanese people for a unified Taiwan and Mainland China, and (2) economic/social contact between the two countries. Although we do not observe one variable “sentiment” and another variable “economic/social contact”, we are able to observe several indicators of these two variables.
  We use Granger Causality[1] test for the direction of causality between these two indicators using a multiple indicator multiple cause (MIMIC) model[2].

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[1] Granger, C.W.J., 1969. "Investigating causal relations by econometric models and cross-spectral methods". Econometrica 37 (3), 424–438.

[2] See Joreskog, Karl G. and Arthur S. Goldberger (1975) JASA, Abraham and Ledolter (1979) Metrika, and Maddala and Trost (1981), Journal of Econometrics, for a discussion of MIMIC models.

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