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Taiwan: Development That Works

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1967
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Taiwan is a “developing country” not only by courtesy but in actuality. How has it achieved this distinction?

M. F. Perkins

THE VISITOR to the Republic of China cannot but be impressed by the sense of urgency of the Taiwan people as they go about their daily affairs, be it the street peddler hawking his wares, the taxi driver delivering his fare at breakneck speed through the crowded thoroughfares, or the construction gang working on the latest addition to a building or industrial complex. All these are both the product and the instrument of Taiwan’s current boom. This is a country in economic ferment, engaged in transforming itself from an essentially agricultural society into one in which industry is rapidly becoming the mainspring of its drive to expand.

With economic growth running at a steady annual rate of 8 per cent, capital is scarce, interest rates are high, and skilled labor is at a premium. Almost daily one hears accounts of old records broken or of the success of a new enterprise on which handsome profits have been made by the venturing innovators. Statistics back up the impressions; real per capita annual income increased from US$121 in 1952 to US$217 in 1965.

How is Taiwan able to achieve this at a time when the record, in most developing countries, makes rather gloomy reading? Is it the result of the groundwork laid in Japanese colonial times? Is it the consequence of massive foreign assistance, particularly under the U.S. aid program? Is it attributable to the well-known ability of the hardworking Chinese people to. prosper in trade that is now being transposed into industrial activity; if so, why did this not happen before?

A Quiet Backwater

Taiwan was a quiet backwater throughout most of its relatively short recorded history. It was populated largely by a rice-producing, self-sufficient peasantry who originally came from Fukien and Kwangtung Provinces on the Mainland. The Portuguese, who discovered the island and named it Formosa or “beautiful” in 1590, were unsuccessful in establishing them-selves there. The Dutch founded a settlement in the south in 1624, and the Spaniards in the north in 1626 at the present port of Keelung. But these were all small trading ventures that had little effect on the economy of the island as a whole. Formosa served as a stronghold for the last resistance to the Manchus, and one of the leaders, Koxinga, expelled the Dutch. Manchu forces, however, finally occupied the island in 1683 and incorporated it into Fukien Province. It thus became a part of the Chinese Empire until ceded to the Japanese along with the Pescadores Islands in 1895 under the Treaty of Shimonoseki. But at no time did it develop into more than a small trading community.

Early Development

It was under the Japanese that the first significant commercial development took place as the colony was transformed into a supplier of foodstuffs, particularly rice and sugar, for sale in Japan, in accordance with the normal views of that time of the role of a colonial dependency. To this end, the Japanese established an infrastructure in the form of power, communications, and water control systems. The last was an important contribution. Since Taiwan suffers from torrential rains and consequent heavy run-off, water control not only extends the area under paddy cultivation and provides irrigation but also restricts the dangers of flooding.

New varieties of rice acceptable to the Japanese taste were introduced. Public corporations, such as the sugar corporation, were established in order to administer and develop the basic agricultural processing industries. Beyond this, however, the Japanese did not go.

The result was that the local population did not develop much beyond farming and the petty trading and processing required to service the domestic market. Government was in the hands of the Japanese, who held all the important posts, including the administration of the main corporations, the infrastructure, and the export processing industries. Higher educational opportunities for the Chinese were practically nonexistent, except, to some extent, in the medical services. The local population was thus largely excluded from the Government, administration, and technical professions. Looking back from a postcolonial era, it is easy to see how much more could have been done to prepare the population for independent progress—and equally easy to underrate the Japanese contribution in other fields.

Return to China

Consequently, when the island was returned to China at the end of World War II it lacked the administrative and professional cadres necessary to re-establish public administrative, economic, and social services. After October 1945 this void was partially filled by emigrés from Mainland China. Yet the transition was a traumatic experience for Taiwan. Local opposition to the new regime, then headed by the notorious Ch’en Yi, a former warlord, expressed itself in an uprising, which was put down in 1947. Later, following the communist victories in 1949-50, the transfer of the Nationalist Government to Taiwan was accompanied by some 2 million refugees and the remnants of the military. A large military force of some 500,000 men had then to be supported by a population numbering some 7.5 million. A high rate of population growth (3.5 per cent per annum) was an additional problem.

Taiwan’s entry into the postwar era was thus hardly a promising one. Communist China’s potentially explosive hostility was focused on the offshore islands of Matsu and Quemoy. Apart from this perpetual threat was the problem of supporting two governments—the national and the provincial—plus a large standing army. The financial situation was acerbated by the prevailing poverty and the rather delicate relations between the Nationalist Government plus the emigrés and the local population, which precluded any sharp increase in taxation. The consequence was the emergence of substantial budget deficits and inflation, which had been a feature of the downfall of the Nationalist regime on the Mainland.

Meeting the Problems

Taiwan’s problems, then, were even more formidable than those generally encountered by newly independent countries. But the authorities had plans for overcoming them. Successive four-year development programs were instituted in 1952; the fourth, covering 1965-68, is currently in operation. The success of the first three plans was underwritten by massive U.S. aid, which was initiated after the outbreak of the Korean war. The nonmilitary portion of this aid, which included grants, loans, and technical support, totaled US$1.37 billion at its termination on June 30, 1965—a sum that represents US$98 million a year, approximately US$134 per capita over the whole period. This aid permitted the Republic to maintain a consistently large excess of imports of goods and services up to 1962, which contributed greatly to the much needed capital investment and raw materials required for the initiation and continuation of a massive development program. This the country could not otherwise have afforded. Nor—in all probability—could it have borrowed such sums abroad on conventional terms at that time, not only in view of the external threat but because few favorable investment prospects were discernible at the time.

As experience with both the successful Marshall Plan and with much less successful aid efforts in many other parts of the world testifies, however, massive external aid is insufficient to ensure success in economic development, unless a country’s own institutions—and its system of values—are conducive to the appropriate use of such aid. This proved to be the situation in Taiwan. Engineers and businessmen from areas like Shanghai and Canton were anxious to re-establish themselves in Taiwan. A fortunate combination of Mainland business and technical expertise, and the hardworking and intelligent Chinese native labor, was able to take advantage of the opportunities afforded by U.S. aid. The result was the creation of a fairly complex commercial agriculture and light industry, which currently represent the economic bases upon which the country is developing.

Government Role

Government has also played its role. The rapid inflation of the 1950’s has now subsided and given place to a condition of relative price stability. The basic public services of transportation, communications, and power and water control have been rehabilitated and extended with U.S. aid, under the guidance of the Ministry of Economic Affairs and its planning and development divisions. Public health was improved to the point where most tropical and communicable diseases have largely been eliminated. Education has been advanced along a number of lines, particularly at the elementary level. In other social services, such as housing, urban development, and sanitation, however, progress occurred more slowly.

The Government has refrained from preempting the field of economic activity; it has chosen rather to rely quite largely on the initiative of the private sector. Consequently, the proportion of value added by public enterprises in industry, which represents largely the output of corporations inherited by the Government from the Japanese, declined from 57 per cent in 1952 to 39 per cent in 1965. Fiscal and other policies, such as, for instance, the relatively low taxation on corporations, have played their part in this process. Foreign firms with finance, management, and technical experience have been encouraged to locate in Taiwan by the passage of favorable legislation concerning the establishment of new industries, tax incentives, the repatriation of capital, limitations on nationalization, etc. Industrial estates and a foreign trade processing zone have been or are in the process of being established. Technical assistance has been acquired from U.S. aid, UN institutions, and private sources.

In agriculture, also, the Government has been responsible for important changes. Widespread, high-rent landlordism was a source of social friction that also deprived farmers of incentives and impeded initiative. A program of land reform was introduced in three stages in order to eliminate this obstacle. In 1949, rents were restricted to 38 per cent of the value of the main agricultural crop. In 1951 an area of public farm land, equal to one fifth of all Taiwan’s farm land, was sold to the cultivators. In 1953 the Government began the compulsory purchase of private farm land in excess of a prescribed limit and resold this to landless cultivators; compensation to landlords took the form of land bonds with installments spread over 10 years and stock shares in some government corporations. This avoided the use of cash in a period of inflation. Land repayment in equal installments, spread over 10 years, has now been completed.

As a result of the land reform program, full ownership was increased from 38 per cent of the farm population in 1952 to 67 per cent in 1965; part ownership was reduced from 26 to 20 per cent and tenancy from 36 to 13 per cent. The immediate effect was an increase in the income of the farmers; the long-term result, a considerable increase in productivity, as the benefits from improvements, owing to increased investment and better farming practices, now went largely to the tillers of the soil. In addition, industry benefited in that former large landowners were able to transfer a part of their capital to industrial enterprises.

These new incentives to farmers were further strengthened by other government agricultural measures promoted largely through the Joint Commission on Rural Reconstruction (JCRR), a Chinese-American institution. This Commission has a staff of technical and social scientists experienced in agricultural development work, and also financial resources that are in large part made available through the counterpart funds generated by U.S. aid programs. Research programs have been strengthened and expanded, new products introduced, and, in conjunction with the local farmers’ associations, extension, credit, and marketing programs have all been improved.

Land reform, technological improvement, extension, and marketing changes have been the programs sponsored by the Government as a means to increase agricultural output. In addition, more people are farming the land and doing so more intensively, owing to the growth of the rural population relative to land availability. This has happened because rapid population increase has resulted in additions to the labor force at a higher rate than could be absorbed in nonagricultural pursuits. Agricultural employment has increased from 1.8 million in 1952 to 2 million in 1965, or at an annual rate slightly under 1 per cent per annum. The cultivated area, however, has increased only from 876,100 hectares in 1952 to 889,577 in 1965, or by 1.5 per cent over the whole of this lengthy period. Land availability per worker has thus been reduced by 10 per cent from 1952 to 1965 and now amounts to only 1.1 acres per agricultural worker. Practically all the easily available usable land, constituting about 25 per cent of the total area, has long since been brought under cultivation. New land development involves heavy investment charges for reclamation. Thus, land from seashore or highland reclamation is likely to be brought into cultivation only in relatively small amounts. Moreover, industry and the cities are constantly edging into existing agricultural land.

Labor productivity in an already intensive agriculture would normally fall, owing to diminishing returns on labor as an increased amount of labor is employed on a (relatively) constant land area. In Taiwan, however, this tendency has been more than offset by increases in productivity brought about by improved technology in water control, fertilizer application, the use of pesticides and herbicides, and by an expansion in double cropping. As a result of these and other technical advances, agricultural incomes have risen, although not so fast as those in other sectors of the economy. The rural community, though becoming more prosperous, has not kept pace with the country as a whole.

Agricultural Exports Diversified

Crop production has increased by 91 per cent over the past 13 years. This has permitted Taiwan to continue to export agricultural products, such as rice and sugar, in spite of the growing demand of its rapidly urbanizing and increasing population for food and raw materials. The constitution of agricultural exports is changing, moreover, as the farmer attempts to switch to more profitable products. This has produced some spectacular results. Whereas exports of canned pineapple were valued at US$2 million in 1952, in 1965 they had risen to US$19 million. Exports of bananas increased from US$6.6 million to US$55 million over the same period and exports of canned mushrooms, which were not exported at all in 1957, have now reached a value of US$21 million. Similarly, exports of canned asparagus went from zero in 1962 to US$11 million in 1965. Taiwan is now the world’s largest exporter of canned pineapple and mushrooms and second largest in canned asparagus.

As long as domestic and export market opportunities continue to open up, Taiwan’s agricultural exports are likely to become even more varied than they are already. Even so, given the lack of available new land and the growing domestic population, it is unlikely that increases in production can be maintained at a rate that will preserve the present relative position of agriculture either in total output or in exports. This is already in evidence as the proportion of agricultural to total output has declined from 35 per cent in 1952 to 28 per cent in 1965 and the proportion to total exports from 95 per cent to 55 per cent, even though the total value of agricultural exports has risen by 135 per cent.

Taiwan’s Industries

The trend in resource allocation has been toward industry. The emphasis on light manufacturing, in contrast to heavy industry, has been determined largely by the relative lack of natural resources, both power and raw materials. Although the island has sizable deposits of coal, which are now being exploited, the narrowness and irregularity of the seams make mining difficult and increasingly expensive. Taiwan’s remaining unused hydroelectric power resources are difficult to exploit economically because of the irregular rainfall and lack of good reservoir sites to catch and store water. Recent new discoveries of natural gas are important, but limited compared with the island’s total power needs, and petroleum has been found only in very small quantities. In future, therefore, increasing amounts of petroleum or other sources of power will need to be imported. Mineral ores are not abundant and forestry resources are in need of rehabilitation.

Thus, Taiwan’s rather meager natural resources lead to the conclusion that its main industrial assets are its low-priced and hard working labor resources supplemented by energetic management and technical expertise. These have in fact been the main ingredients in light industrial development along with the capital and technical resources contributed by U.S. aid. Production in manufacturing had increased 166 per cent by 1960 over the 1952 base, with appropriate increases in power and ancillary facilities. Output increases were recorded in a wide variety of industries, such as food processing, cigarette manufacturing, cotton yarn and textiles, paper products, chemicals, fertilizers, cement, petroleum refining, glass, iron and steel products, electrical equipment, and shipbuilding.

The first phase of the transformation from agriculture to industry was directed toward the domestic market—i.e., to the substitution of home-produced goods for imports. By 1960, it was largely completed and attention turned to export markets. Here Taiwan had to compete with other exporting countries, particularly Japan. So far the island has been able to do this successfully. Exports of industrial products, excluding processed agricultural products, have risen in value from US$4 million in 1952 to US$34 million in 1959 and to US$202 million in 1965. They now represent 41 per cent of total exports, compared with 25 per cent for primary agricultural products and 30 per cent for processed agricultural products, including sugar. The big industrial exports are textiles, metals and machinery, chemical products, and plywood, which together account for 73 per cent of the value of industrial exports. Taiwan is now the world’s largest exporter of plywood, made mostly from imported raw materials.

The Future

Although Taiwan has had remarkable success in its development effort so far, it does not follow that the path in future will be smooth. The sharp rise in the value of exports in 1963-64 and 1964-65 was mainly the result of windfall profits from extremely high sugar prices, and current trade is bolstered by hostilities in Viet-Nam. These favorable influences are not permanent features of the island’s trade. And there are new problems. With the termination of nonmilitary U.S. aid on June 30, 1965, Taiwan’s easy access to external financial and technical help is now over. In future, loans will need to be obtained from conventional sources, and there will be close scrutiny of their purpose and prospects. Technical contributions and equity capital will need to come more from private sources; hence opportunities for investment and the establishment of new industries will have to remain attractive. This means not only that government policies will have to remain favorable but that Taiwan has to demonstrate that it continues to be a going concern in order to induce confidence.

Continued progress will require an expansion in exports. There are several reasons for this. First, the domestic market is small and is already well supplied with locally manufactured goods. Further opportunities will open up as population and incomes increase, but these will be insufficient to maintain the present rate of growth. Second, the lack of resources means that increasingly large imports of raw materials are required to produce Taiwan’s export goods. Finally, although further industrialization will result in backward linkages to intermediate products, it is unlikely that Taiwan will be able to produce a large proportion of its own capital goods in view of the nature and size of its basic economy; these too must be imported and paid for ultimately by exports.

Taiwan’s ability to expand further into international markets depends upon two basic factors. The first, which is partly beyond its control, is the willingness of importing countries to permit a growing volume of goods from the Republic which directly or indirectly compete with their own industries; some such difficulties have already been encountered in exporting textiles and canned mushrooms and asparagus. Success here most likely implies the export of a variety of products, none of which would have too great an impact on any one market.

A second problem concerns Taiwan’s ability to extend its successful competition with other exporting countries over a much wider range of commodities. Up to the present, one element in its success has been low labor costs, and presumably this factor will be able to continue along the same lines for some time to come. But opportunities based mainly on cheap labor will gradually be exhausted; moreover, the rapid decline in the birth rate, evident in the last few years, will, if it continues, result in a tightening of the labor supply. Also there will be competing exports from countries having equally cheap or even cheaper labor, for instance, Korea. Then Taiwan will need to remove some of the inefficiencies now present in organization and management which are currently being masked by low-wage labor. The need to achieve economies of scale will require a rationalization and integration of business organization and operation. The introduction of professional management, which was an essential ingredient in Japan’s own postwar development, will also be necessary. These features are not common in the family-dominated, generally small-scale, nonintegrated operations of today. Ancillary changes are also likely to prove necessary, such as the stepping-up of technical and general education on a considerable scale, the improvement of capital markets and credit facilities, and the establishment of direct marketing organizations abroad as soon as the volume of exports permit. Such transformations are not easy to bring about.

Will Taiwan be able to continue the favorable long-term rate of growth shown during the 1950’s and 1960’s? The answer to this question is largely dependent upon that raised earlier: what are the reasons for the successful effort to date? Many students of Taiwan’s economy see them as being internally motivated rather than externally induced. Japan’s contribution in colonial days suffered from the neglect of technical education, local public administration, and local business enterprise. U.S. aid was of tremendous importance, but it has now to be replaced with conventional forms of financing and external technical assistance, through foreign participation and other means. This should continue, provided that the investment climate remains favorable.

The best answer would appear to be that success has come to Taiwan largely through the energy and initiative in economic affairs exhibited by its labor and its management with appropriate government support. Given further close cooperation between the Government and business, and intelligent economic and financial policies, there is no reason to believe that future problems cannot be solved as past problems have been successfully overcome.

1966 Table of Contents

A Table of Contents for Volume III of Finance and Development, covering 1966, has been prepared and is available in English, French, or Spanish free on request to:

Finance and Development

International Monetary Fund Building

19th and H Streets, N.W.

Washington, D.C. 20431, U.S.A.

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