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The Economic Transformation of the Republic of China on Taiwan

  • Ramon H. Myers

Just as the Greek hero Odysseus faced many misfortunes and great challenges and yet overcame them before returning to his beloved Ithaca, so, too, the Republic of China on Taiwan in 1949–50 faced insurmountable odds and difficulties and year-to-year crises thereafter, and yet also overcame them to achieve economic modernization and prosperity.

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1. The author fully recognizes that the legacy of Japanese colonialism and roughly US$1.5 billion aid support between 1950 and 1965 greatly assisted the Nationalist regime in their efforts to modernize the ROC economy on Taiwan, but he believes these were only necessary and not the sufficient conditions that explain the remarkable economic transformation that took place. This article tries to explain exactly what those sufficient conditions were.

2. For the best study of how the oil price increase influenced the industrial cost structure see Kuo, Shirley W. Y., The Taiwan Economy in Transition (Boulder, Colorado: Westview Press, 1983), Ch 10, p. 194;

3. Council for Economic Planning and Development, Executive Yuan, Taiwan Statistical Data Book 1983 (hereafter, TSD 1983) (Taiwan: Executive Yuan, 1983), p. 283;

4. Ibid. p. 22. Calculated from data presented. See Tables 1 and 2.

5. Zhongguo shibao, 10 May 1984, p. 1.

6. TSD 1983, p. 33. Calculated from data presented. I will refer to agriculture, industry and services as categories representing the primary, secondary and tertiary sectors. Industry includes mining, manufacturing, public utilities and construction, wheareas services denote transport, communications, commerce and other activities. See Table 2.

7. Ibid. p. 34.

8. Ibid. p. 16. See Figure.

9. Ibid. p. 15.

10. Ibid. p. 2. In 1974 consumer prices rose 47% and again rose 19 and 16%, respectively, in 1980 and 1981.

11. Ibid. p. 165.

12. Ibid. p. 4. Calculated from data presented. See Figure.

13. Council for Economic Planning and Mobilization, Taiwan Provincial Government, Taiwan Economy, No. 87 (25 03 1984), p. 119; See Figure.

14. Kuo, The Taiwan Economy in Transition, p. 95.

15. Ibid. pp. 96–97. Other economists have argued that the trend towards a more equal income distribution did not begin until the late 1960s. See Yan-yu, Chang, “Economic growth and income disparity in Taiwan, 1953–1975,” in Editing Committee of the Essays of DrHan-yu, Chang (ed.), Economic Development and Income Distribution in Taiwan (Taipei: Sun Ming Books Co., 1983), pp. 112–37;

16. Sheng-yi, Lee, “Income distribution, taxation and social benefits of Singapore,” The Journal of Developing Areas, No. 14 (10 1979), p. 78;

17. Ibid. p. 79.

18. Todaro, Michael P., Economic Development in the Third World, 2nd edit. (New York: Longman Inc., 1981), p. 135;

19. Shih, J. T., “Decentralized industrialization and rural nonfarm employment in Taiwan,” Industry of Free China (08 1983), pp. 120; Tsai, Hong-chin, “Rural industrialization in Taiwan: its structure and impact on the rural economy,” Industry of Free China, Vol. 56, No. 6 (25 12 1981), pp. 1732; Chinn, D. L., “Rural poverty and the structure of farm household income in developing countries: evidence from Taiwan,” Economic Development and Cultural Change, No. 27 (01 1979), pp. 283301; Low, A. R. C., “The effect of off-farm employment on farm incomes and production: Taiwan contrasted with Southern Africa,” Economic Development and Cultural Change, Vol. 29, No. 4 (07 1981), pp. 741–17;

20. See Chen, Edward K. Y., “Factor inputs, total factor productivity, and economic growth: the Asian case,” The Developing Economies, Vol. 15, No. 2 (06 1977), p. 126;

21. Mohuan, Xing, “Guanyou celiang (jixu biandong) di yixie jiben kaoliu” (“Some basic considerations of measuring ‘technical change,’” Jingji lunwen, Vol. 6. No. 1 (03 1978). pp. 110; In the 1950s it seems that as capital deepening occurred, technical change was labour-saving and labour became more efficient in manufacturing. See also Fu Yue, “Minguo sishinian zhi wushiwunian Taiwan zhizaoye bumen jixu jinbu zhi ceding” (“Estimating technical progress in Taiwan's manufacturing sector for the period 1951–66”), ibid. (October 1970), pp. 1–22.

22. Yongsan, Li and Guoshu, Huan, “Taiwan zhizaoye shengchan hanshu zhi hengpomian fenxi” (“A cross-sectional analysis of manufacturing production functions in Taiwan in 1966), Jingji lunwen, Vol. 3, No. 2 (09 1975), p. 135; For fluctuations in technical change see Liang Qiyuan, “Nongyuan jiage zhengze you Taiwan zhizaoye zhi jixu biandong” (”Technical change in Taiwan's manufacturing industry and energy price policy”). Table 1, p. 132, col. 5, in Institute of Economic Research. Taiwan gongye fazhan huiyi (A Conference on the Development of Taiwan Industry), 18–20 03 1983; Nankang, Academia Sinica. Liang's methodology and findings show that technical change was non-existent during the two years of the oil crisis in the early 1970s. Whether his model can accurately measure technical change on a year-to-year basis is naturally open to debate.

23. This assertion is based upon a recent unpublished study by Yueh-eh Chen of the Council for Agricultural Planning and Development titled, “Agricultural productivity measurement and analysis of Taiwan, the Republic of China,” for the Asian Agricultural Productivity Conference, Tokyo, Japan (Sept. 1984). Miss Chen's findings show that total factor productivity accounted for 56% of agricultural production's growth between 1951 and 1966, then became negative for the years 1966–75, and then grew again to account for over 70% of output growth in the years 1975–81.

24. Huilin, Wu and Jiasheng, Wu, “Taiwan laodong shengchanli bianzhi zhi jiantao” (“An examination of labour productivity in Taiwan based on statistics published for manufacturing”), Economic Paper, No. 28, Chuang-hua Institute for Economic Research (07 1983), pp. 2021. Similar findings were reported by Chang, Pei-chi, “Productivity measurement and analysis in manufacturing industries in the Republic of China,” Industry of Free China, Vol. 51, No. 2 (02 1979), pp. 221;

25. Calculated from data of capital stock figures, Table 3 of an unpublished manuscript soon to be printed as a monograph by the Institute for Studies of the Three People's Principles (Nankang, Academia Sinica): H. J. Duller, Technique in Taiwan: The Role of Technology in Taiwans Past and Present Development. Also, See Figure.

26. TSD 1983, p. 186.

27. A friend of the author, a foreign service officer in Taiwan during the 1960s, wrote the following in a personal letter: “I was in Taiwan when the farmers paid off their ten-year loans (giving them almost instantly a 37½ per cent increase in income). U.S. aid stopped in that year, 1966, I believe and we were concerned that this would have a bad effect on local confidence. In fact no one seems to have missed it, and the transition went very smoothly.”

28. Between 1963 and 1972 the annual rate of gross capital formation increased at 14·6% compared to the annual growth of 7·3% for consumption spending. But between 1952 and 1962 the annual growth rate of gross capital formation was only 8·2% compared to that of 6·2% for consumption expenditures. Calculated from data in TSD 1983, p. 37.

29. In 1952 net savings as a fraction of national income at factor cost amounted to 5·2% whereas in 1970, 1971 and 1972 this had become 27·6, 31·6 and 35·0%, respectively. See TSD 1983, p. 49.

30. Jacoby, Neil H., U.S. Aid to Taiwan: A Study of Foreign Aid, Self-Help, and Development (New York: Frederick A. Praeger, Publishers, 1966), p. 153; Jacoby estimated that without U.S. economic and military aid Taiwan's GNP in 1964 would have been only about 58% of the actual amount. Yet economic aid only averaged about 34% of Taiwan's total gross investment, so why were the effects of that aid so powerful? Jacoby contends that U.S. aid broke the crucial bottleneck of scarce foreign exchange during the 1950s and enabled the island-economy to import critical items for economic growth.

31. Ian M. D. Little has insightfully pointed out that “Taiwan could have grown as fast and have consolidated her economic infrastructure for further growth as well as she did if she had had less aid but a smaller defense budget.” See Little, Ian M. D., “An economic reconnaissance” in Galenson, Walter (ed.), Economic Growth and Structural Change in Taiwan: The Postwar Experience of the Republic of China (Ithaca and London: Cornell University Press, 1979), p. 458; Little further points out that the real contribution of foreign economic aid to a country's economic development depends upon government policies and their implementation. Much of his essay focuses exactly upon what those policies were and why they did contribute so much to Taiwan's successful economic development and progress.

32. Jizeng, Shi, “Taiwan nonggongye fazhan zhi huhui guanxi” (“The interacting beneficial relationship between the development of agriculture and industry in Taiwan”), Economic Research Institute, Conference on Taiwan's Industrial Development, 18–20 03 1983; Nankang, Academia Sinica.

33. For data on the relationship of export value to GNP see TSD 1983, p. 36.

34. For data on the economic characteristics of the services sector see TSD 1983, pp. 16 and 34.

35. Most astonishing about this transformation was the huge shift of labour from villages to cities. Between 1965 and 1973 the annual growth rate of labour flowing out of agriculture and never returning averaged around 4–5%. These years proved to be the most rapid phase of out-migration from the rural sector in Taiwan's entire economic history. For evidence of this see Table 3 in Jizeng, Shi, “Nonggong bumen gongzi chayi you laoli yidong: shuangxiang guangxi zhi chuli” (”Manpower mobility and the wage differential between the agricultural and industrial sectors: the adjustment mechanism”), presented at the Conference on Taiwan Manpower Resources, 21—23 12 1977, Institute of Economic Research, Academia Sinica, Nankang, Taiwan (p. 389).

36. Taiwan manufacturing firms are notorious for imitating foreign products and marketing them worldwide under different brand names. A most recent example was the Paimex E35 camera, an imitation of the Japanese produced Hanimex 35 camera. See “Japan: fighting a eopycat war,” Newsweek, 23 April 1984, p. 27.

37. This practice was widespread in 1981–83 in Taipei, even being followed by reputable companies. For a good account see Tanzer, Andrew, “The big bounce back,” Far Eastern Economic Review, 22 03 1984, p. 60;

38. Kiang, Wan-lin, “Technological change and industrial development: the plastic industry in Taiwan,” Industry of Free China, Vol. 54, No. 3 (25 09 1980), p. 19;

39. Council of Economic Planning and Development, “Woguo dianzi gongye xiankuang you pinggu” (“The current conditinos and an assessment of Taiwan's electronics industry”) Ziyou zhongguo zhi gongye, Vol. 54, No. 2 (25 08 1980), p. 17; For information on R & D spending in this industry see part 2 of same article, Vol. 55, No. 3 (25 September 1980), p. 15.

40. Ji Shiji, “Jixie gongye di jixu zhuanyi” (“The diffusion of technology in the machine-tool industry”), ibid. Vol. 54, No. 3 (25 September 1980). pp. 2–11. For another example of such technological diffusion in the enterprises producing ball-bearings and bolts see Twu Rongyi and Chuang Chunfa, “Taiwan jixu lingjianye zhi jixu yinjin buji you shenggen” (“The origins, diffusion and adoption of technology in the machine spare parts industry in Taiwan”). Taiwan yinhang likan, Vol. 36, No. 1 (03 1984), pp. 64107;

41. Cited from a draft copy of Gustav Ranis and Chi Schive, “Direct foreign investment in Taiwan's development,” to appear in L. Krause (ed.), Trade and Investment in Four Asian Countries (forthcoming), Table 2. I am grateful for Dr. Chi Schive for sharing this information with me.

42. Ibid. Table 6. On the suggestion of Dr. Chi Schive I have used the weighted figure of foreign firms by ownership to measure the contribution of direct foreign investment which meant revising slightly the figures on Table 6.

43. Tanzer, Andrew, “Asia plugs into the computer,” Far Eastern Economic Review, 21 07 1983, p. 60;

44. Schive, Chi and Yeh, Ryh-song, “Direct foreign investment and Taiwan's T.V. industry,” Economic Essays, Vol. 9, No. 2 (11 1980), p. 278;

45. Far Eastern Economic Review, “Taiwan” in Asia 1984 Yearbook (Hong Kong, 1984), p. 273;

46. Schive, Chi, “Technology transfer through direct foreign investment: a case study of Taiwan Singer,” Proceedings of the Academy of International Business Asia-Pacific Dimensions of International Business (Honolulu, Hawaii, 18–20 12 1979), p. 114;

47. This assertion is convincingly demonstrated and proven in Schive, Chi, “Direct foreign investment and technology: theories and Taiwan's evidence,” Proceedings of National Science Council, Republic of China, Vol. 3, No. 4 (1979), pp. 455–58; Even though foreign multinationals behave as oligopolistic firms, techonological transfer to local firms takes place and further diffusion then occurs to still other firms.

48. Smith, Patrick, “The new world carmakers,” Far Eastern Economic Review, 5 04 1984, p. 66;

49. Ibid. p. 66.

50. Wang, Kwei-jeou, “Economic and social impact of export processing zones in the Republic of China,” Industry of Free China, Vol. 54, No. 6 (25 12 1980), pp. 728;

51. An unqualified success, yes, but some scholars point out that high labour-turnover has plagued firms in these zones. See Zhongji, Wu, “Gaoxiong jiagong chukouchu laogong lishilu zhizai yenjiu-minguo liushiyinian zhi minguo liushiqinian di shizheng fenxi” (“A further study of labour turnover in the Kaohsiung export processing zone”), Jingji lunwen zongkan, No. 11 (05 1983), pp. 3360;

52. Tanzer, Andrew, “Taipei's off-shore allure,” Far Eastern Economic Review, 10 03 1983, p. 38;

53. Ibid. p. 38.

54. Tanzer, Andrew, “New route into Taiwan,” Far Eastern Economic Review, 28 07 1983, pp. 7071; For a good commentary on the recent “boomlet” in the Taiwan Stock Exchange see Tanzer, Andrew, “A managed boom,” Far Eastern Economic Review, 22 03 1984, pp. 6364;

55. For data on number of farm families and the area of cultivated land see TSD 1983, p. 58 and for 1982 data on importance of agriculture in exports and net domestic product see Council for Agricultural Planning and Development, Executive Yuan, Basic Agricultural Statistics Republic of China (Taipei, 03 1983), pp. 12; For related comments on the differences between agriculture in the early 1980s and the early 1950s see Tanzer, Andrew, “Roots of trouble,” Far Eastern Economic Review, 19 11 1982, p. 74; See also Kuo, Yichung and Peng, Tso-kwei, “Land tenure systems and farm mechanization in Taiwan,” Industry of Free China, Vol. 59, No. 6 (25 06 1983), pp. 112 for a good review of the new farming conditions as of 1980 compared to the 1950s and early 1960s.

56. About two-fifths of the residents in both large and small cities in 1973 supposedly came from rural areas. See Chang, Ming-cheng, “The economic adjustment of migrants in Taiwan,” Industry of Free China, Vol. 51, No. 3 (25 03 1979), p. 29; In 1973 Taiwan's population was already 15·5 million. Assuming that the urban share of total population was around 55% or 8·5 million, that would imply that by 1973 nearly 3·8 million people had probably moved to the cities after the Second World War. There is a rich literature on Taiwan's demographic trends and conditions in recent decades, much of which can be found in the recently published work, Economic Development in Taiwan: A Selected Bibliography (Taipei: Center for Quality of Life Studies, 1984).

57. Ching-lung, Tsay, Employment and Earnings of City-Ward Migrants: A Study cm Individual Outcomes of Migration to Taipei (Nankang, Taipei: The Institute of Economics, Academia Sinica, 1981), No. 18 Monograph Series, p. 14;

58. Ibid. Ch. 5. Tsay also found for his Taipei study that an unusually high proportion of employed in Taipei service activities were migrants.

59. See Basic Agricultural Statistics Republic of China, 1983, p. 36 for sources of rural household income.

60. Ibid. p. 39. Miss Ch'en of the Council for Agricultural Planning and Development, Executive Yuan, informed me of the estimated annual 1·8 kg rice consumption decline for the 1980s.

61. These monetary estimates of rice-in-kind subsidies to rice growing farmers were provided to me by Miss Ch'en.

62. Announced in Zhpngguo shibao. 1 May 1984, p. 1.

63. Basic Agricultural Statistics Republic of China, 1983, p. 12.

64. Liu, Paul K. C., “Factors and policies contributing to urbanization and labor mobility in Taiwan,” Industry of Free China, Vol. 59, No. 5 (25 05 1983), pp. 4 and 18;

65. TSD 1983, pp. 15–16.

66. Kuo, Shirley W. Y., The Taiwan Economy in Transition, pp. 244–45;

67. Ibid. p. 261.

68. Nuo, Wei, “Minsheng zhuyi di jingji moshi” (“The economic model for people's livelihood”), Zhonghua xuebao, Vol. 8. No. 2 (07 1981), p. 134; There is an enormous literature in Chinese devoted to Sunist writings, much of it relevant to how government policy should relate to Sun's Principle of People's Livelihood. Few western scholars have really examined these writings.

69. Linhan, Pang, “Zong Sanminzhuyi di texing tan qi shidai yiyi” (“The modern significance of the special characteristics of Sunist thought”), Zhongguo wenxue yuekan, No. 52 (02 1984), pp. 86100; See also Li, K. T., “Implementation of the principle of livelihood in Taiwan,” Industry of Free China, Vol. 55, No. 6 (25 06 1981), pp. 216;

70. Leu, F. J., “The present and future of artificial fiber industry in Taiwan,” Industry of Free China, Vol. 12, No. 2 (25 08 1959), pp. 518;

71. K. Y. Yin, “A review of existing foreign exchange and trade central policy and technique,” ibid. Vol. 12, No. 5 (26 November 1959), pp. 2–21. Yin Chung-jung was probably the most brilliant technocrat-official of the 1950s. He was largely responsible for persuading key government officials to reform the foreign exchange system in order to orientate Taiwan's economy to the world market. Further, he was responsible for bringing other technocrats into government like K. T. Li who masterminded a number of brilliant government policies like the export zones and the high-technology park at Hsinchu.

72. K. T. Li, “Up-grading of science and technology in Taiwan,” ibid. Vol. 54, No. 2 (25 August 1980), p. 3. The 1983 policy of launching a joint-venture with Toyota, predictably pushed by the Ministry of Economics, is still another example of exerting leverage in the economy to achieve a new integration and up-grading of technical and managerial skills amongst manufacturers.

73. See W. A. Yeh, “The ten major development projects and Taiwan's economic development,” ibid. Vol. 51, No. 4 (25 April 1979), pp. 8–23.

74. Government officials hope to have 30% of the cost funded by foreign loans with another 29% financed by domestic loans, and the remainder paid from the state budget. See Council for Economic Planning and Development, “Highlights of the 12 new development projects,” ibid. Vol. 53, No. 3 (25 March 1980), p. 35.

75. Chen Sen and Chi-yuan Liang, “Energy policies of the ROC, ROK and Japan-a comparison,” ibid. Vol. 54, No. 3 (25 September 1980), pp. 2–16.

76. For discussions of such plans see “Telecommunications development plan for the 80's in the ROC,” ibid. Vol. 50, No. 4 (25 April 1981); for petrochemical development in the 1980s, ibid. Vol. 55, No. 5 (25 May 1981), pp. 7–26 and Chen Sun, “The new four-year plan for Taiwan, Republic of China,” ibid. Vol. 58, No. 2 (25 August 1982), pp. 1–12. For the 1982–85 period this most recent four-year plan projects a real GNP growth of 8%, and that in 1985 the per capita GNP in current prices at an exchange rate of NT$38 to US$1 will stand at US$4,303. The sectoral targets and other components of GNP have been estimated by a 32 equation macroeconomic model presented in this same article.

77. This estimate is based on taking defence and foreign affairs spending of the government budget (the two items are quite inseparable) at roughly 40% of the budget which in turn amounts to 28% of GNP. Budget data for 1985 fiscal year were reported in the South China Morning Post, 3 April 1984, p. 8, as US$3.44 billion for defence and foreign affairs to account for 39·4% of the budget, an increase of 6·7% over the last fiscal year.

78. TSD 1983, p. 158.

79. Ibid. p. 151.

80. Ibid. p. 153.

81. This estimate was provided to me by an economist of the Institute for the Study of the Three People's Principles, Nankang, Academia Sinica. He has not yet published his results.

82. For a vigorous critique of the performance of public enterprises see Jiping, Shi “Jingzheng, yaoburan jiu heli guanzhi” (“Compete or manage rationally”), Zhongguo shibao, 20 04 1984, p. 2;

83. TSD 1983, p. 81.

84. Ibid. p. 134.

85. These complaints have produced successful political pressures to force the Department of Commerce (U.S. Government) to exempt Hong Kong, Singapore, South Korea and the Republic of China from having duty-free entry into the United States of numerous items as specified under the Generalized System of Preferences (GSP). As of 31 March 1984 exports from Taiwan to the United States, estimated at US$3·7 billion, will no longer enjoy GSP duty-free treatment. These include 117 items such as preserved papayas, farm and gardening tools, kitchen wares, radios and cameras. The U.S. Administration promises that, despite the exclusion, Taiwan's eligible trade in 1984 will be more than 20% greater than in 1983. See The Committee for a Free China, China Letter, Vol. 8, No. 3 (0304 1984), pp. 34;

86. Specter, Michael, “Some cosmetic reforms to ease trade friction,” Far Eastern Economic Review, 8 12 1983, pp. 6667; In the spring of 1984 the government finally gave Procter & Gamble permission to go ahead with their marketing project.

87. In April James Lilley, Taipei director of the American Institute in Taiwan, conferred with Henry Hsu, chairman of the private National Anti-Counterfeiting Committee of Industry and Commerce. Lilley pointed out that recent studies in the United States concluded that commercial counterfeiting had costed American industries 130,000 jobs at US$8 billion in lost sales. Lilley also stressed that Taiwan accounted for more than 60% of the counterfeit goods in international trade. Lilley warned that the duty-free tariff benefits under the U.S. Generalized System of Preference could be used to punish Taiwan if means to combat counterfeiting were not stringently taken soon. See China Post, 20 April 1984, p. 12.

88. “Director-General Vincent Siew analyzes current ROC foreign trade,” China Post, 19 April 1984, p. 7.

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