Article

Industrial Development and Changes in the Structure of Foreign Trade: The Experience of the Republic of China in Taiwan, 1946–66

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1968
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During the two decades since World War II, Taiwan has changed from a primary producing economy, exporting staple agricultural products and heavily dependent upon foreign aid, to a relatively industrialized economy, the rapid development of which has in recent years been stimulated by expanding exports of highly processed goods. Three factors of major importance undoubtedly contributed to this successful transformation of the economy. First, the continued heavy inflow for more than a decade of U.S. economic aid helped to stabilize the economy after the severe inflation of the early postwar years and, it has been estimated,1 largely offset the burden of high military expenditure and made possible a substantial addition to the stock of overhead capital and production facilities built up under the Japanese colonial regime. Second was the exceptional labor market situation, which resulted from a number of factors. The influx from the Chinese mainland in the late 1940’s of many skilled technicians, managers, and entrepreneurs served to fill the gap created by the evacuation of similar Japanese manpower. This influx, together with the ample supply of surplus labor from the rural sector, the retirement of considerable numbers of military personnel,2 and the large annual output of high school and college graduates, combined to keep the general level of wages and salaries low, while the unusually high degree of literacy rendered the labor force highly responsive to profitable economic opportunities. Third, and not least, the economic policies adopted, with few exceptions, made good use of existing institutions and production facilities, and have encouraged increasing urbanization and, in more recent years, the outward-looking development of the economy.

Though these factors must be taken into account in any assessment of the development of Taiwan, it is not the purpose of this paper to attempt to show how they contributed to the postwar development of the island. The intention here is to see what lessons can be drawn from Taiwan’s experience concerning a pattern of industrial development conducive to growth based upon the expansion of exports of manufactures.

The choice of an appropriate production pattern is particularly necessary for an economy like Taiwan, which has a limited endowment of natural resources, notably of arable land and minerals, and which is faced with severe population pressures despite a comparatively small total population. In these circumstances, the maintenance of traditional agricultural exports is hampered by the growing need to provide an expanding food supply, and there are only restricted opportunities for establishing industries based on the exploitation of locally available natural resources. In addition, the scope for advantageous import substitution for intermediate products, capital equipment, and consumer durables is restricted by the small scale of home demand, since modern techniques frequently require very large-scale production of such goods for efficiency.3 This situation points toward the development of a production pattern that can take advantage of the abundant and well-trained labor supply, rather than one based primarily on climatic factors favorable to the production of certain staple export crops for which world demand increases very little. The desired production pattern would comprise processing and manufacturing activities that use imported as well as locally produced raw materials, fuels, and intermediate products and the development of an agriculture specializing in labor-intensive crops for which there is a large and growing potential export market. Only through such growing dependence on foreign trade can smaller economies like Taiwan attain the rising productivity, and increasing per capita incomes, which result from the economies of large-scale production. Once attained in this way, rising per capita incomes and expanding economic activity are themselves conducive to further diversification of the structure of production and sustained growth.

With a population of eight million crowded on a mountainous island of less than 14,000 square miles, and with an average per capita income equivalent to only about US$100 in 1952, Taiwan typifies the problem situation described. The growth of the economy since 1952 provides a good illustration of the development process outlined above; the ratio of foreign trade to gross national product (GNP) has risen as industrial expansion accelerated and per capita incomes increased more rapidly. As will be seen later in the text, it is useful to distinguish two periods of development: the first (from 1952 to 1960) was the period during which import substitution provided the major stimulus for manufacturing production; the second (from 1961 onward)was a period of accelerated growth supported by an upsurge of exports of manufactures and new agricultural products. Average annual rates of increase, in percentages, during the two periods were as follows: 4

1952–601960–66
Gross national product56.29.3
Average per capita income 5,63.66.3
Manufacturing production 713.015.3
Exports, other than sugar and rice 716.631.5

By 1963–65, exports of goods and services amounted to 18½ per cent of GNP, compared with 7½ per cent in 1952–54, and imports had risen somewhat less, to 19½ per cent of GNP, against about 13½ per cent.

Industrial development does not take place in a vacuum but is strongly shaped by the facilities and skills inherited from the past. The next section of this study, therefore, provides a brief description of the industrial and institutional structure of the economy as it existed at the end of the Japanese occupation, as well as a discussion of the changes in the structure of production and foreign trade necessitated by changes in demand and supply consequent upon the restoration of Taiwan to the Republic of China in 1946. The great reduction in net exports of rice and sugar formerly sold principally to Japan and greatly increased import requirements owing to the rise in population and changed economic and social conditions are seen to have provided a wide range of import substitution opportunities in the early postwar period. However, as will be seen in Section II, the consequent impetus to industrialization had in the main been exhausted by the end of the 1950’s, and the resultant slackening of industrial activity led to a reappraisal of the island’s foreign exchange and protective policies. The new policies that were adopted provided a favorable context for the expansion of exports of manufactures and new agricultural products during the 1960’s; rising incomes from exports then stimulated further industrial expansion for the production of new consumer goods and increased import substitution, for instance, in intermediate goods. It will be seen that, because of the small size of the domestic market, high export ratios were common not only in consumer goods industries but also in intermediate goods sectors, where the economies of scale are more important.

In order to judge whether it will be possible for the development of Taiwan to continue along the same lines in future, the commodity structure and market orientation of its exports are examined in Section III. There, an attempt is made to see whether exports of particular goods have been directed mainly to developed or to less developed countries, and whether the technological requirements and requisite scale of production of goods sold in those two regions have differed. It is shown that Taiwan’s exports to developed countries have, on the whole, been labor intensive in character, and that its exports to less developed countries have been more capital intensive in character. During the period 1962–65, the only years for which the basic statistics of trade by commodity and market are available, exports to developed countries tended to grow faster than exports to less developed regions. It is suggested that this was so partly because, in the former instance, the existing relative factor endowments (on the one hand, the abundance of labor and the scarcity of capital in Taiwan and, on the other, the near full employment prevailing in several industrial countries and a rising cost of labor there) are complementary and tend to create increasing opportunities for trade. In trade with less developed countries, however, export openings created by Taiwan’s industrial lead tend to disappear as other economies catch up and establish domestic industries of their own. Most of these countries restrict imports of manufactures other than capital equipment and essential supplies for domestic manufacturing industries, and in these fields Taiwan is not well placed to compete with the developed countries. It is therefore concluded that, in order to attain continuing industrial growth through export expansion, Taiwan, and other economies in a similar situation, would be well advised to place greater emphasis on the production and export of those goods that are in demand in the developed countries.

I. Industrial Structure and Pattern of Trade Under the Japanese Occupation, and Their Development in the Immediate Postwar Years

Under the colonial regime the economic development of Taiwan was aimed primarily at turning the subtropical island into a major source of supply of foodstuffs and certain raw materials, while providing additional markets for Japanese industry. To this end, a modernized agriculture patterned after the Japanese system was introduced into Taiwan and systematically developed; it was characterized by intensive research and the careful adaptation of modern techniques to local conditions, expansion of irrigation networks, and widespread use of fertilizers within a system of highly labor-intensive, small family holdings.8 This program was supported by the provision of good inland transportation, port, and communications facilities; by the creation of specialized banking and cooperative organizations; by successful efforts to eradicate epidemic diseases; by the institution of comprehensive compulsory primary education coupled with a widespread system of secondary vocational schools; and by the establishment of an authoritarian but nevertheless efficient system of public administration, including the township and village level. These efforts were highly rewarding, as is evident from the massive supply of staple agricultural products (mainly sugar, rice, bananas, tea, and pineapples) shipped to Japan by the 1920’s and the large trade surplus achieved by Taiwan, the major part of the proceeds of which accrued to the colonial government and its Japanese investors.9

During this period, modern industrial activities were kept to a minimum, apart from the processing of agricultural products and exploitation of mineral resources. Most consumer goods and intermediate products were imported from Japan in exchange for exports of primary products. As the Sino-Japanese war continued, however, the strategic importance of Taiwan as a base for advance into China and Southeast Asia became apparent, and efforts were made in the 1930’s to develop industries on the island to supplement the Japanese war potential. These were started too late to make a significant contribution to the war effort, but the foundations were laid for development of metallurgical-chemical industries (in particular, aluminum and copper refining, alkali chemicals, and nitrogeneous fertilizers), cement, and bagasse pulp industries, all utilizing low-cost hydroelectric power, and also petroleum refining.10

The postwar economic development of Taiwan by the Chinese authorities was both facilitated and conditioned by the existence of this war-damaged, yet quite modern, capital and institutional base left by the Japanese. On the one hand, the relatively well-developed socioeconomic facilities permitted the expansion of agricultural and industrial production without the need for extensive new infrastructure investment, such as is normally required in less developed countries at an early stage of economic development. The agricultural sector, which was already highly commercialized and responsive to export opportunities before World War II, was further developed by the Chinese Government on lines similar to the Japanese system, under the guidance of a Sino-U.S. joint organization. With some institutional changes (notably the land reform of 1949–53) and technological improvements, the sector was able to adjust successfully to the changes in socioeconomic conditions, especially the loss of a guaranteed export market for sugar in Japan and the increased demand for rice at home. Taiwan’s agriculture was thus able to sustain urban-centered industrial development by providing an adequate supply of foodstuffs and expanding foreign exchange receipts from new agricultural exports (notably a wide variety of fruits and vegetables), while at the same time furnishing the expanding domestic manufacturing industries with surplus labor, investment funds, and markets for their output.11 This positive role played by the agricultural sector in Taiwan stands in sharp contrast to the situation in a number of other equally overpopulated territories, where the growth of agricultural production has continuously lagged behind the increase in population, requiring massive food imports and adding to the balance of payments problem and inflationary pressures.

On the other hand, the metallurgical-chemical industries constituted a “heavy” industrial base proportionally larger than is usually found in less developed countries with a similarly low level of per capita income.12 These and other industries left by the Japanese are relatively capital intensive and, for some of them (e.g., aluminum, magnesium, and petroleum), their raw materials have to be imported. Furthermore, while domestic demand for certain of these products was not large enough for production at the optimum scale of the existing plants, the restoration of their war-damaged facilities required considerable inputs of the scarce capital funds and foreign exchange. Whether to abandon some of these existing productive facilities or to undertake not entirely evident economic investments to restore them was consequently one of the difficult decisions that faced policymakers of the Chinese Government in the early postwar years. Eventually most of the productive facilities left by the colonial regime were restored to production, with the exception of some of the sugar-refining facilities which were consolidated or dismantled for sale overseas to fit the changing agricultural production pattern mentioned above. Part of the metallurgical-chemical base was, however, turned over to the production of chemical fertilizers, which, together with textile products, formerly constituted some of Taiwan’s major imports.13 The existence of the heavy industrial base encouraged the development of a number of other secondary industries (such as polyvinyl chloride plastics, pulp for papermaking, and monosodium glutamate), which produced goods formerly imported and, in some cases, even developed sizable exports. On the other hand, the continuance of the policy of supplying cheap electric power (subsidized by low-cost aid loans for power projects) led to the overexpansion of some metal industries (e.g., the production of iron rods and bars in small electric furnaces), which are becoming increasingly uneconomic now that the low-cost hydroelectric power potential has been fully exploited and has to be supplemented by higher cost, thermal power stations that burn coal and imported fuel oil. These industries have run into difficulties because their raw materials (such as scrap iron and bauxite) have to be imported, while an increasing proportion of their finished product needs to be exported in competitive international markets because of limited home demand. This has been made possible only by subsidizing exports through the maintenance of high domestic selling prices, which have damaged the competitive position of other export industries and have prevented the allocation of resources to more advantageous uses.

While large-scale and relatively capital-intensive industrial facilities were maintained and expanded by the Chinese Government in the immediate postwar years, the discontinuance of imports from Japan created a large number of investment opportunities in the production of consumption goods and other, simpler manufactures. Though a conscious protective policy was pursued from the early 1950’s (particularly in the cotton and woolen textile industry),14 the stronger and more immediate stimulus to import substitution arose from the institution of strict foreign exchange and import controls after 1949, following the change of Taiwan’s foreign trade from a massive export surplus to an equally sizable import surplus.

This change in the trade balance was brought about partly by the loss of an assured market in Japan for exports of sugar and other staple agricultural products,15 and partly by the reduced availability of rice for export owing to the natural increase in population and the heavy immigration from the Mainland.16 In addition, the increase in population and the retention of export earnings in Taiwan (instead of their transfer to Japan) gave rise to greatly increased demands for imported consumption goods, while large imports of capital goods were needed for the rehabilitation of war-damaged facilities and the establishment of new industries. In the late 1930’s the value of exports had been nearly 50 per cent larger than that of imports, but in the early 1950’s exports covered little more than half the cost of imports (Tables 1 and 2). Taiwan was faced with the prospect of continuing sizable trade deficits, since large surpluses of staple agricultural commodities would not in future be available to finance the import of manufactures. It was therefore natural that import substitution over a broad field of manufacturing should have provided the major stimulus to Taiwan’s industrial development in the early postwar years. And since the industrial base for metallurgical-chemical industries had already been established, it was also natural that, apart from the rehabilitation and expansion of those facilities by the Chinese Government, the bulk of investment in manufactoring during the postwar period should have taken place in relatively small-scale light manufactures and secondary industries that do not require large investment in capital equipment or highly sophisticated technology and management skills. This fact in itself made the task easier for entrepreneurs, the majority of whom (except for those evacuated from Shanghai) had no extensive experience in the operation of modern corporations. The activities of these entrepreneurs were facilitated by the existence of a ready and heavily protected domestic market and various inducements offered by the Government.

Table 1.Republic of China: Commodity Composition of Exports and Imports, and Balance of Trade in Various Commodity Groups, 1939 and 19531(In millions of U.S. dollars)
ExportsImportsNet Exports or Imports
1939219531939 219531939 21953
Foodstuffs, beverages, and tobacco133116254610770
Cereals391163533—24
Other foodstuffs, beverages, and tobacco9410519117494
Fuels and raw materials20718452—38
Hides, textile fibers, etc.312221—21
Petroleum, nonmineral oils, tallow, wax2612—4—12
Ores and metals 31117(10)4—9
Other minerals453114
Mainly manufactures and semimanufactures16670100—53—94
Textiles and apparel211110—8—9
Wood and paper products4105—7—5
Chemicals and chemical products831934—10—31
Cement, glass, porcelain121—2
Metal manufactures 36(9)—6—9
Machinery, electric supplies, transport equipment, instruments11233—11—32
Miscellaneous12118—10—6
Total16913019153—61
Sources: Finance Bureau, Annual Returns of Taiwan’s Foreign Trade, 1938–39 (Taipei, 1941), in Japanese; Bank of Taiwan, Export & Import Exchange Settlements, 1964 (Taipei, 1965).
Table 2.Republic of China: Relative Importance of Trade with Japan, United States, and Other Countries, and Balance of Trade by Areas, 1939 and 1953
ExportsImportsTrade Balance
193919531939195319391953
(Percentage shares)(Millions of U.S. dollars)
Japan 183468128426
United States26512—91
Other countries15481921724
All countries10010010010053—61
Sources: See Table 1.

In addition to the institution of import controls mentioned earlier, the Chinese Government encouraged the transfer of rural savings into industrial investments through the transfer to private ownership of four major public corporations as the means of remunerating landowners in the course of land reforms in the early 1950’s. The Goverment also followed a deliberate policy of reserving profitable openings in the manufacture of new products, such as polyvinyl chloride plastics, for private enterprises after the basic research was done by public enterprises. Furthermore, entrepreneurs were given access to foreign aid loans and public bank credits and to preferential allocations of scarce foreign exchange at much more favorable terms than going market rates. There was also a system of preferential allocation of electric power and raw material supplies.

To these inducements were added late in the 1950’s and in the 1960’s such powerful stimuli as corporate income tax holidays, rebates of customs duties and excise taxes, low-cost export loans, earmarking of export earnings for the purpose of importing raw materials and replacement equipment, and government assistance in the development and acquisition of urban plant sites and auxiliary facilities. The Government also assisted entrepreneurs by providing information on prospective investment and export opportunities through a series of public-sponsored investment feasibility studies, and it encouraged the propagation of improved technical and management know-how by specialized agencies.

II. Progress in Import Substitution and Export Expansion in Major Manufacturing Sectors

By 1954, when the first postwar manufacturing census was taken, the structure of manufacturing production had undergone a considerable change. Though still the largest manufacturing sector, food processing mainly for export had declined substantially in relative size and those industries catering to domestic demand had gained in importance (Table 3). The latter included cotton and woolen textile industries initiated with the skilled personnel and capital evacuated from the Mainland and industries producing iron and steel manufactures, simple rubber goods, electrical supplies, and bicycles, in addition to chemicals, petroleum products, cement, and paper, produced in plants that were restored after war damage.

Table 3.Republic of China: Composition of Manufacturing Production, 1939, 1954, and 1965, and Ranking of Capital Intensity, 1962
Gross Output 2Net Value AddedRanking of

Capital Intensity,

Year End,

1962 3
Industries 1193919541954 21965
In percentages
Food, beverages, and tobacco *67424025C–D
Chemicals and chemical products *109910B
Petroleum, coal, and other nonmetallic mineral products *35914A-C
Basic metals and metal products *5446C
Wood and paper products *3889C–E
Textiles and apparel224(20)18E
Leather and rubber products111E
Machinery, electric supplies, and transport equipment42612E
Miscellaneous manufacturing (including printing)(7)(1)(2)6E
Total manufacturing100100100100
In millions of U.S. dollars
Value 4150270176481
Sources: Gross output: Editorial Board, Annual Economic Report of Taiwan, 1942, published by the Foreign Affairs Association of Japan, Tokyo, 1942, in Japanese; Industry of Free China (Taipei), November 1966. Net value added: Directorate-General of Budgets, Accounts, and Statistics, National Income of the Republic of China (Taipei, 1965) and National Income of the Republic of China, 1958–66 (Taipei, 1967). Capital intensity: Council for International Economic Cooperation and Development, Report on Industrial Surveys in Taiwan, Series No. 3 (Taipei, 1963), in Chinese.

The available production indices show that all these sectors expanded very rapidly in the early 1950’s (Table 4). Growth rates ranging from 15 per cent to 45 per cent per annum were achieved in nearly all manufacturing sectors, owing to the existence of a ready market at home and the low level at which production started. During the later 1950’s rates of expansion were much lower. A number of new industries were begun during this period (such as the manufacture of monosodium glutamate, rayon fiber, polyvinyl chloride plastics, urea fertilizer, flat glass, fluorescent lamps, and the assembly of compact cars). However, the fact that domestic production had already replaced imports of a wide range of manufactures was naturally reflected in a lower rate of growth of the manufacturing sector than in the preceding period.

Table 4.Republic of China: Major Manufacturing Sectors—Average Annual Rates of Growth of Production, 1950–54, 1954–60, and 1960–65, and Import Ratios, Export Ratios, and Intermediate Demand Ratios, 1954, 1961, and 1964(In percentages)
Average Annual Growth of ProductionImport Ratio 1Export Ratio 2Intermediate Demand Ratio 3
1950–54 1954–601960–651954 4196119641954 4196119641954 419611964
All manufacturing211116182117111519444855
Food128103428333027
Beverages1667
3
22
Tobacco16431
Manufacturing other than processed food, beverages, and tobacco 5271317(20)2822(4)1114(46)5867
Textiles (including apparel) 64471241092018354960
Wood products (including furniture) 61393122398881
Paper products221912911655070
Leather products15965424729
Rubber products24842432517138183
Chemicals and chemical products181521(54)3522(—)108(88)6573
Petroleum and coal products36118(15)117(—)53(74)7077
Other nonmetal mineral products151512(4)29(3)919(74)8885
Basic metals43159(2)2738(6)1113(69)8894
Metal manufactures34151351365167980
Machinery other than electric13141073643141726
Electrical appliances and equipment76262460301082036
Transport equipment1052614322611244
Miscellaneous manufactures91326501154830
Sources: Growth rates are based on unpublished sectoral production indices prepared by the Ministry of Economic Affairs. Import ratios, export ratios, and intermediate demand ratios are calculated from Mu-huan Hsing, The Input-Output Relations of the Taiwan Economy (Council for International Economic Cooperation and Development, Taipei, 1961), in Chinese, and preliminary input-output tables for 1961 and 1964 compiled by the Council.

By 1961 imports accounted for as little as 5 per cent to 10 per cent of total domestic demand (i.e., domestic output plus imports minus exports) in those sectors where output consisted mainly of a relatively limited number of comparatively simple and undifferentiated goods, i.e., sectors such as cotton and woolen textiles, wood products, paper, cement, and simple iron and steel products. In other sectors, such as the basic metal, engineering, and chemical industries, where the need for large-scale production or the requirements of advanced technology are more stringent, import ratios remained comparatively high, ranging from 30 per cent to 70 per cent. However, even here a high rate of import substitution was attained for particular products, such as caustic soda and allied chemicals and aluminum and petroleum refining, which, as mentioned earlier, had been developed on a prewar base.

Thus, toward the end of the 1950’s it was becoming apparent that import substitution alone could not sustain indefinitely a high rate of manufacturing growth in such a small economy because, while the domestic market for simple manufactures was easily saturated, effective domestic demand for more sophisticated durable consumer goods and certain intermediate products was not large enough to justify their local production. Prices of manufactures showed an unusual decline in 1958 (Table 5), and entrepreneurs, alarmed by increased business failures, were already talking of a recession at that time. Data on the utilization of capacity are not available for that year, but industrial surveys for 1959–60 indicate that many plants producing simple manufactures, such as woolen textiles, plywood, paper, rubber goods, soap, iron rods and bars, insulated wires, sewing machines, and electric fans, were operating at only 40 per cent to 70 per cent of capacity.17

Table 5.Republic of China: Average Annual Rate of Price Change, 1952–65(In percentages)
1952–571957–581958–601960–65
GNP deflator83122
Prices received by farmers5162
Prices of manufactured goods13—272
Of which
Textiles61144
Wood products24—11—36
Rubber products941
Nonmetallic mineral products20—1815
Basic metals1815
Sources: Directorate-General of Budgets, Accounts, and Statistics, National Income of the Republic of China (Taipei, 1965); Council for International Economic Cooperation and Development, Taiwan Statistical Data Book, 1967 (Taipei, 1967); Industry of Free China (Taipei), June 1967.

These changes in the economic outlook and the consequent realization of the need to develop exports of manufactures as a means of sustaining economic growth were among the basic factors which led the authorities to undertake a series of major foreign exchange reforms in 1958–60 to correct the grossly overvalued currency and to simplify the complicated rate structure. Some months after the first round of foreign exchange reforms was applied in April 1958, serious gun duels erupted between the offshore island of Quemoy and the Mainland and a major typhoon struck Taiwan in the autumn of 1959, causing severe flood damage and temporary shortages of foodstuffs and construction materials. Strong inflationary pressures emerged anew, tending to offset the effects of the exchange devaluation. At this juncture the authorities imposed a strict anti-inflationary policy, which sharply reduced inflation-inspired investment activities in the private sector. Once again the number of business failures mounted, but the period of inflation was brought to a close by the end of 1960. Since then the rate of price increase has been much lower than in the 1950’s (Table 5). In retrospect, the major devaluation in 1958 and the strong anti-inflationary policy in 1960, coupled with various export promotion schemes adopted during the 1960’s, seem to have served to reorient the economy toward an outward-directed development, resulting in the expansion of exports of manufactures and new agricultural products during the 1960’s.

Table 6.Republic of China: Composition of Imports and Exports by Broad Commodity Classification, 1956, 1960, and 1964
ImportsExports
195619601964195619601964
Percentage shares of total value
Raw materials202128675
Food, fresh or simply preserved111511151014
Food, processed223675441
Manufactured goods other than processed foods676258122940
Total100100100100100100
Indices of value (1956 = 100)
Total100115180100131356
Source: Derived from data given in Table 7.

By 1964 the value of manufactured exports other than foodstuffs was three and a half times as large as in 1960, and such exports accounted for 40 per cent of all exports, against 29 per cent in 1960 (Tables 6 and 7). The fact that manufactured products other than foodstuffs still accounted for less than half the total value of exports in 1964, while owing in part to the exceptionally high sugar prices then prevailing, was mainly a reflection of the pervasive force of export expansion that extended also to other sectors of the economy, notably agriculture. Exports of certain manufactures, including aluminum, cement, plywood, and cotton textiles, for which domestic demand was already satisfied, had commenced even before 1960; but the rapid growth of exports and their extension to a wide range of products began only after 1961 when, as has been said, the economic climate became more conducive to export activities. By 1964 export surpluses were attained by many sectors of manufacturing (notably textiles, wood and paper products, and nonmetallic mineral products); because of this development, and the existence of favorable sugar prices, Taiwan achieved a trade surplus for the first time since the immediate postwar years.

Table 7.Republic of China: Imports, Exports, and Net Exports (or Net Imports) of Raw Materials, Foods, and Manufactured Goods, 1956, 1960, and 1964 1(In millions of U.S. dollars)
ImportsExportsNet Exports or Net Imports (—)
195619601964195619601964195619601964
Raw materials4525211781224—37—40—93
Food, fresh or simply preserved26 23744191764—7—2020
Food, processed561487921918286177
Manufactured goods other than processed foodstuffs1521572361649184—136—108—52
Of which
Textiles and apparel24105246722057
Leather, rubber, and miscellaneous articles101214111—10—11—3
Wood and paper products2461636—1230
Petroleum and other nonmetallic mineral products412424—4322
Chemicals and chemical products4443637920—37—34—43
Basic metals and metal products2225433518—19—20—25
Machinery, electric supplies, transport equipment, and scientific instruments68689919—68—67—90
Total228252410130170463—98—8253
Sources: Bank of Taiwan, Export & Import Exchange Settlements (Taipei), 1956, 1960, and 1964. The original data for individual commodities have been regrouped according to the UN Standard International Trade Classification (SITC) at the three-digit level.

In 1964 exports accounted for as much as 40 per cent to 90 per cent of the total output of certain manufactures, such as monosodium gluta-mate, cotton yarn, cement, and plywood (Table 8). In general, there was a tendency for exports to increase after domestic demand was more or less satisfied.18 A course of events such as that experienced in Taiwan’s development—first, expanding imports providing the impetus for import substitution; second, declining imports associated with rising domestic production; and, third, increasing exports as domestic production becomes competitive—has been dubbed a “flying wild geese” pattern by K. Akamatsu of Japan, inasmuch as the sequential movements of imports, domestic production, and exports can be likened to the orderly pattern formed by wild geese in flight.19 Because of the small size of the domestic market, this pattern of development would seem to hold not only for consumption goods but also for intermediate goods.

Table 8.Republic of China: Export Ratios of Selected Manufactures, 1954, 1958, 1961, and 1964 1(Percentage shares of quantities produced)
1954195819611964
Monosodium glutamate1562
Cotton yarn 24758
Paper41313
Plywood18557891
Cement491938
Flat glass44243
Rods and bars123015
Fluorescent lamps2129
Sources: Council for International Economic Cooperation and Development, The Republic of China’s Fourth Four-Year Plan for Economic Development of the Province of Taiwan (Taipei, 1965); “Asian Regional Symposium on Industrialization, 1965: Country Case Study—The Republic of China” (mimeographed, Taipei, 1965); various articles on Taiwan’s industry published in Bank of Taiwan, Quarterly Review, September 1965, in Chinese.

It is not easy, however, to trace this pattern, which prevails with respect to particular industrial products, in the aggregate figures of the value of imports, output, and exports of whole industrial sectors. There the pattern tends to be obscured by the development, within each sector, of ancillary production in addition to the original principal products of the industry concerned. For this reason, though the export ratio for many products rose steeply after 1961, as Table 4 shows, the share of exports in the total value of manufacturing output (other than processed food, beverages, and tobacco) rose less strikingly—from 11 per cent in 1961 to 14 per cent in 1964.

The fact that the export ratio for the manufacturing sector as a whole rose comparatively little (despite the tripling of the value of manufactured exports from 1960 to 1964) illustrates the widespread stimulative effects of expanding exports of many products on domestic production. Rising incomes, resulting from the expansion of exports and domestic production, strengthened domestic demand for more sophisticated consumer goods (such as household durables and motorcycles) and also for intermediate and capital goods. Notable among the latter were increased demands for wood pulp, stemming from growing needs for paperboard for export packing; for petrochemical intermediates, resulting from domestic and export demands for synthetic yarns, resins and plastics, etc.; for steel plates and other fabricated metal products, owing to demands for export containers and increased domestic demand for household durables and transport equipment; and for cement and structural steel for larger buildings, such as tourist hotels and residential construction (Table 9).

Table 9.Republic of China: Per Capita Consumption of Selected Manufactures, 1954, 1961, and 1964, and Its Rate of Increase, 1954–61 and 1961–64
Per Capita ConsumptionAverage Annual

Rate of Increase

of Per Capita Consumption1
1954196119641954–611961–64
In units specifiedIn percentages
Consumption goods
Monosodium glutamate (kg.)0.20.426
Cotton yarn (kg.)22.41.6—12
Fluorescent lamps (unit)0.090.1313
Household refrigerators (unit)10.002
3
Television sets (unit)10.002
Motorcycles (unit)10.003
Intermediate and producer goods
Paper board (kg.)0.71.52.71122
Cement for civilian use (kg.)4406894811
Petroleum refined (l.)1611252021118
Caustic soda (kg.)1.73.34.3109
Steel products (kg.)15.924.933.3710
Sources: See Table 8.

Advanced techniques and economies of scale are important in the production of some of these goods, and in certain cases Taiwan continues to depend on external sources of supply. As a consequence, there was a sizable increase in imports of chemicals, metals, machinery, and equipment, which accounted for about 90 per cent of the increase in imports of manufactures from 1960 to 1964 (Table 7). Despite the absolute increase in imports, the ratio of imports to domestic output for intermediate and capital goods generally was considerably reduced over this period (Table 4). Thus, in the 1960’s the industrial development of Taiwan was already at a stage where the greater part of the increasing demands occasioned by rising incomes could be absorbed by domestic sources of supply.

As a consequence of the pervasive forces of economic expansion, the growth of production in most industries was much higher between 1960 and 1965 than from 1954 to 1960. In both periods a significant feature of the expansion of manufacturing output was a marked rise in the proportion of sales to intermediate uses (which is indicated in the final columns of Table 4). Partly as a consequence of this trend, high rates of expansion characterized not only the industries with high export ratios but also those that export a comparatively small share of their output. By the mid-1960’s the pessimism of the late 1950’s had been replaced by prosperity and confidence.

During this period a trend in trade emerged that is likely to govern the course of the island’s industrial development for some time to come. As Table 7 shows, while exports of manufactures increased by over 270 per cent from 1960 to 1964, and imports of fuels and raw materials by 125 per cent, imports of manufactures increased by only 56 per cent; and in absolute value terms the increase in exports of manufactures was more than twice as large as that in imports of raw, materials. These figures bring out the natural sequence of manufacturing in Taiwan: import raw materials, create additional selling value by processing, and export finished products. Such a pattern of industrial growth is likely to be typical for smaller economies with limited natural resources, as distinct from larger ones which can depend mainly upon domestic sources of supply or demand.

III. Types of Manufactured Exports and Their Market Orientation

The importance of export demand as a stimulus to domestic expansion will usually tend to decline as an economy grows. Larger economies than Taiwan, such as Great Britain and Japan, at one time or another depended upon rising export incomes to provide an impetus for domestic growth, but the export ratio tended to decline after the initial stage of their development.20 However, with a much smaller hinterland and a much smaller population than that required to support efficient large-scale production of many intermediate products, it seems highly unlikely that Taiwan will be able to sustain a high rate of economic growth without a continued rapid expansion of exports.

In order to sustain a high rate of export growth for some considerable time to come, it will be essential for Taiwan to maintain a set of economic policies geared to an outward-directed development so as to ensure that export industries (and productive activities in general) can compete effectively in a dynamic world setting. It is outside the scope of this study to discuss the details of such policies. It should, however, be emphasized that the objective of outward-oriented development also implies a need for the island to produce and to export those commodities for which it is best fitted in terms of its production structure and for which there is a growing demand in the world markets.

In order to see whether Taiwan should seek to modify its pattern of exports and consequently its structure of production, it will be helpful to consider the recent development of its exports of various commodities to different markets, distinguishing in particular between commodities exported to developed and to less developed regions. For this purpose, in Table 10 exports of various commodities have been divided into three groups: commodities exported mainly to developed regions, mainly to less developed countries, and more or less equally to both areas. The results summarized below provided some pertinent indications regarding a desirable pattern of trade and production in the future.21

Table 10.Republic of China: Market Orientation of Exports and Differences in Factor Intensities, 1962–65(Value in millions of U.S. dollars)
19651962–65
Proportions Exported toProportion of Increase Taken by
Ranking of Capital Intensity, 1962 2Less developed areas 4Average Annual Rate of IncreaseLess developed areas 4
Commodity Groups 1Developed areas 3TotalOf which, Viet-NamValue of ExportsDeveloped areas 3TotalOf which, Viet-Nam
In percentagesIn percentages
Commodities exported mainly to
developed regions92826038982
Foodstuffs except wheat flour,
sugar, and teaE(N)95515750103—3
Raw materials in crude or simply
processed form… (N)90103013111—11
Manufactures85141733985152
Wood manufacturesE861429358218
Transistor radios, etc.E83176100 58317
Miscellaneous manufactured
articlesE84163383687134
ClothingE901020228911
Articles of plasticE752591007525
Commodities exported mainly to
less developed regions991449321128854
Wheat flour, pulp, fuel, etc.A-C10013810—5015050
Chemical products except essentialsB (N)1981381626257550
Rubber manufacturesE1001001
Paper and paper boardC100673
Textile yarnsD10045201010060
Nonmetallic mineral products except glassA1090501013336733
Metals and metal manufacturesB-D1090572138158562
Machinery and electrical materials except telecommunications equipmentE1377431452109040
Commodities exported more or less equally to both regions524829811158538
Sugar and teaB-E (N)53473701010059
Textile products except yarnE505026135050
Flat glassD(N)5050226100
Total exports6634104502773279
Sources: United Nations, Commodity Trade Statistics, Series D, Vols. XII and XV. For data on relative capital intensity, see footnotes to Table 3.

In the first place, there is an interesting contrast between the type of commodities exported mainly to developed regions and those shipped mainly to less developed regions. The goods exported predominantly to developed regions consist either of foodstuffs or raw materials—for the production of which Taiwan is naturally well endowed—or of manufactures of a labor-intensive nature (such as apparel, plywood, plastic articles, and transistor radios).22 On the other hand, the goods exported mainly to less developed countries are produced by capital-intensive industries, such as flour mills, petroleum refineries, and the manufacture of chemicals, pulp and paper, rubber goods, textile yarns, cement, metals and fabricated metal goods, and certain machines and electrical supplies. Comparatively few items are exported more or less equally to both developed and less developed countries; these include sugar and tea (in the production of which Taiwan possesses natural advantages), the relatively labor-intensive textile products other than yarn, and flat glass, which is relatively labor intensive but requires rather sophisticated technology.

Second, during the period covered in Table 10 (1962–65), exports (other than crude raw materials) oriented toward the developed countries grew much faster than those sold predominantly to less developed countries or than those directed to both groups of countries. (The annual percentage increases were 38, 21, and 11, respectively.) Furthermore, the growth of the exports sold mainly to less developed countries would have been much lower (i.e., about 16 per cent) had there not been a 29 per cent increase in exports to Viet-Nam as a consequence of the intensification of hostilities in Viet-Nam during this period.23

The preceding description of Taiwan’s trade indicates the intermediate position which the island occupies between the developed and less developed areas. While it lags well behind the industrial countries in its economic development, it has a clear lead over most of the less developed countries, as Section I has shown, both in its existing structure of production and in its “preparedness” for further industrial development. This intermediate position has enabled Taiwan to develop new exports to both groups. In trading with the developed countries it has been able to draw upon an abundant supply of well-trained and literate manpower in order to develop exports of relatively labor-intensive light manufactures and to turn to the production of new labor-intensive luxury crops,24 for which there is a growing foreign demand. On the other hand, in trading with less developed countries, Taiwan was enabled, by its lead in industrial development, to export certain types of manufactures of which those countries were still in short supply.

This dual orientation of Taiwan’s exports has been a positive factor encouraging the development of exports, over and above the export promotion policies implemented by the Government. In this respect it possesses an advantage over other less developed economies without important mineral resources whose exports are in most instances directed very largely to developed countries. Relatively few territories, among them the largest Latin American countries, India, Pakistan, Korea, Hong Kong, and Israel, have attained an export pattern comparable to that of Taiwan. It would appear desirable, if possible, to maintain the existing dual export relationship with developed and less developed countries in order to achieve a continuing high rate of export expansion over the present wide range of exports, thereby sustaining the broadly based industrial development of the economy. This goal may not be easy to attain, however.

On the one hand, most of the less developed countries are intent on developing industries of their own. To this end, many countries maintain a high degree of protection and permit imports only when domestically produced supplies are inadequate. The sorts of manufactures which such countries are prepared to import freely are therefore liable to change considerably year by year as their development proceeds. Taiwan has felt the consequences of this situation in abrupt changes in the composition of its trade during the past decade with such countries as Korea, Thailand, and the Philippines. Although it so far has been able to expand trade with these countries by adjusting the commodity composition of its exports to meet their changing demands, the kind of manufactures which less developed countries are willing to import is tending to narrow down to intermediate goods and capital equipment, the production of which is relatively capital intensive and technologically demanding.

To maintain a high rate of growth of exports to the less developed countries would therefore require rising exports of the capital-intensive goods which are in strongest demand in those countries. However, this would require developing new large-scale industries much sooner than would be justified by the growth of domestic demand. Such a course would seem inadvisable in view of the continuing stringency of the balance of payments constraint, since it would require heavier outlays of foreign exchange than would otherwise be needed over the next few years. Moreover, even if Taiwan were to produce and export such goods, it would do so at a disadvantage vis-à-vis developed countries. Except for those products for which the factor of location is important because of high transport costs, Taiwan would probably not be able, for many years to come, to compete successfully with the exports of developed countries in terms of technological refinements and export credits, since the manufacture of new types of plant equipment requires heavy investment in research and development, and exports of such goods are usually facilitated by long-term credits, often in the framework of intergovernmental aid. These are the factors behind the relative sluggishness of Taiwan’s export growth to the less developed countries other than Viet-Nam indicated in Table 10.

On the other hand, the expansion of trade with the developed countries appears more logical and promising, not only because per capita incomes in these countries are rising faster but also because labor costs there are rising, and these countries’ demand for imports of relatively labor-intensive manufactures may therefore be increasing. The fact that Japan is now approaching the end of the phase of “unlimited supply of labor” 25 is another factor of particular importance for Taiwan. As Japan, which previously had also occupied an intermediate position between the industrial countries and the primary producing countries, tends to produce and to export manufactures requiring more sophisticated technology and larger scale production, its exports of the relatively labor-intensive products (e.g., cotton textiles, plywood, canned mushrooms, and even the assembling of transistor radios) are gradually being taken over by Hong Kong, Taiwan, Korea, and other recently industrialized economies.26 This process has undoubtedly contributed quite significantly to the rapid growth of Taiwan’s relatively labor-intensive exports to the developed countries in recent years.

There is, moreover, an interesting contrast in the nature of Taiwan’s trade with Japan and with other industrial countries. While its exports to Japan are still based mainly on its comparative natural advantages, a new trade relationship based on differences in the level of technology and in the relative costs of labor and capital seems to have evolved between Taiwan and the United States and, to a lesser degree, between Taiwan and the members of the European Economic Community (EEC). Thus, as Table 11 shows, in 1965 its exports to Japan consisted almost entirely of foodstuffs and raw materials, only 2 per cent being manufactured goods,27 whereas manufactures accounted for 63 per cent and 12 per cent, respectively, of its exports to the United States and the EEC countries. Furthermore, exports of foodstuffs to Japan consisted predominantly of the traditional staples (sugar, rice, and bananas),28 whereas, largely because of the greater distance and higher shipping costs, exports of foodstuffs to the United States and the EEC countries comprised mainly canned goods—the output of highly labor-intensive agriculture and processing.29 There has also been a noticeable tendency for an increasing share of more manufactured exports to the United States to consist of products of industrial processes near the end of the chain of production, in which wage costs account for a large proportion of the selling price (i.e., goods such as ready-made clothing, plastic articles, canvas shoes, transistor radios). Much of the increase in Hong Kong’s exports to developed countries over the period 1962–65 also comprised such manufactures.

Table 11.Republic of China: Commodity Composition of Exports to Japan, European Economic Community (EEC), and United States, 1965
JapanEECUnited States
In percentages
Raw materials9128
Foodstuffs, fresh or processed897629
Manufactures21263
Total100100100
In millions of U.S. dollars
Value1384198
Sources: See Table 10.

A large proportion of the total value of industrial output in advanced countries is accounted for by highly fabricated products, and studies such as that by Shinohara 30 have demonstrated that the proportion of fabrication in certain manufacturing sectors is actually higher in the United States and the United Kingdom than in less fully industrialized countries such as Japan. Since fabricating processes are usually more labor intensive than basic production operations, the rising cost of labor in the United States and other major industrial countries may provide a favorable context in the coming years for the expansion of exports of labor-intensive fabricating industries to advanced countries from areas at a stage of development similar to that in Taiwan.

A gradual change in the pattern of trade relationships, involving a shift in the structure of production and exports of the advanced countries toward those products requiring the most sophisticated technology and a complementary process of the recently industrialized countries taking over the export of less complicated manufactures, would appear to be a logical and economically beneficial trend. However, at the present time the expansion of exports of simpler manufactures from the less developed countries is hindered by trade barriers that protect domestic industries in the developed countries, while the balance of payments difficulties of many less developed countries that are dependent on exports of primary products limit the market for manufactured imports in those countries. This situation has led to attempts by the less developed countries to foster, by regional trade arrangements, trade among themselves in the more essential but more technologically demanding products, such as capital equipment and intermediate goods). Although the evolution of a more logical and complementary system of trading relationships has so far been hampered by various sectional interests, it is to be hoped that in the longer run natural economic forces will be given freer play.

IV. Conclusions

The analysis in the previous sections has certain implications concerning the allocation of resources that is needed for the attainment of growth objectives in Taiwan and in economies in similar situations. It has been argued, in the first place, that a continued expansion of exports, particularly of manufactures, is a prerequisite for domestic expansion and further import substitution. Second, it has been suggested that this pattern of development may be best attained by producing and exporting those goods that command a ready market in the developed countries. These desiderata imply a need to define the criteria for allocation of resources more clearly than in the past.

As has been seen, owing to the earlier establishment of a sizable heavy industrial base, the majority of industries set up in Taiwan after World War II were not very capital intensive in nature. Even the project for establishing a modern integrated steel mill, although repeatedly written into the country’s plan documents since 1956, was never pushed through. However, this rather prudent attitude in the allocation of resources seems not to have been invariably maintained, as indicated by the existence of a number of manufacturing plants which continue to require high rates of protection years after their establishment.

Since the efficient allocation of available resources is a prerequisite to the sustained growth of the economy through export expansion, it will be to the best interest of the economy to avoid such costly investments based on arguments for self-sufficiency. Naturally such consideration should govern not only the undertaking of conspicuous projects in general but also the implementation of large-scale industrial projects for import substitution. In this connection, it is encouraging that the Chinese Government has reached a preliminary agreement with the Republic of Korea on the possible division of labor in the production of certain petrochemical derivatives. Furthermore, the efficient functioning of an export economy requires the maintenance of a consistent set of public policies conducive to the growth of the economy. In particular, the continuous review of the country’s protective systems (such as import controls, tariffs, and monopolistic practices) in the light of changing situations is essential for ensuring industrial efficiency and for creating a manufacturing structure in line with the country’s long-term comparative advantage.

The expansion of exports to developed countries implies a need to meet stiff competition in a buyer’s rather than a seller’s market for many goods. To do so will require continuous improvements in manufacturing processes, in product design, and even in packaging and shipping. Such improvements, in turn, necessitate the building up of strong commercial organizations and the development of the skills needed to identify and to produce goods for which there is growing demand abroad, and to promote export sales. These goals can be fully realized only in the framework of an open society that is outward looking and that strongly encourages communication with the rest of the world.

Développement de l’industrie et modification de la structure du commerce extérieur : le cas de la République de Chine (Taïwan ou Formose), 1946–66

Résumé

L’auteur examine comment Formose, au lendemain de la guerre, a réussi à passer du stade d’exportateur de produits primaires à celui d’exportateur de produits manufacturés et finis, ce qui illustre les résultats qu’il est possible d’obtenir en adoptant un système de production répondant à la faible superficie du pays, à la médiocrité de ses ressources naturelles et à l’intensité des pressions démographiques qui s’y exercent. Tout d’abord, grâce à l’agriculture, à l’industrie, à l’infrastructure et au cadre institutionnel relativement bien développés hérités du régime colonial, l’économie, dans les années qui ont suivi la guerre, a pu progresser sur une base solide. Par ailleurs, le fait que l’énorme excédent d’exportation de la balance commerciale ait disparu pour faire place à un déficit important provoqué par la perte du marché japonais jusqu’alors assuré — facteur auquel il faut ajouter l’immigration massive en provenance de la Chine Continentale les premières années de l’après-guerre — imposa la nécessité de développer l’industrie pour remplacer les importations. Néanmoins, l’impulsion ainsi imprimée à la croissance industrielle s’était apparemment considérablement ralentie à la fin des années cinquante, ce qui a amené les autorités à réviser les politiques suivies en matière de change et de protection douanière. Les mesures qui furent alors prises ont créé un climat favorable à l’expansion des exportations de produits manufacturés et à une croissance industrielle rapide au cours des années soixante.

De l’avis de l’auteur, cette expansion des exportations a été facilitée par le fait que Formose avait déjà atteint un stade intermédiaire de développement, ce qui lui a permis d’entretenir un double courant d’exportations, exportant aux pays moins développés des marchandises dont la production exige un investissement relativement élevé en capital, et aux pays plus développés des articles dont la production nécessite comparativement beaucoup de main-d’œuvre. Il est devenu toutefois de plus en plus difficile d’accroître les exportations vers les pays moins développés, ceux-ci ayant eux-mêmes réussi à produire davantage et à importer moins; par ailleurs, les dimensions limitées de l’économie nationale permettent difficilement d’intensifier la production d’articles de base nécessitant des investissements élevés. Il est plus facile d’augmenter les exportations vers les pays développés car celles-ci s’inscrivent dans le cadre de relations commerciales d’un caractère plus complémentaire. Une des conclusions qui se dégagent de cette étude, c’est que les pays ayant des économies du même type que Taïwan ont intérêt comme lui à orienter leur production vers les articles les plus demandés dans les pays développés, de manière à poursuivre leur croissance économique en développant leurs exportations.

El desarrollo industrial y los cambios en la estructura del comercio exterior: la experiencia de la República de China en Taiwán, 1946–66

Resumen

La transformación experimentada por Taiwán—que, de exportador de productos primarios se convirtió en exportador de manufacturas y productos elaborados durante los decenios posteriores a la guerra—se analiza en este trabajo como un ejemplo de selección acertada del patrón de producción que correspondía adoptar en una región pequeña, dotada de recursos naturales limitados y que confronta severas presiones demográficas. En primer lugar, el hecho de que ya se contara con una agricultura relativamente avanzada y con una industria, una infraestructura y un sistema institucional, legados todos del régimen colonial, proporcionó bases firmes para el desarrollo económico de la posguerra. En segundo término, el hecho de que la balanza comercial de Taiwán pasara de un voluminoso superávit de exportación a un déficit considerable al perderse el mercado de exportación que se tenía asegurado en el Japón, así como la densa inmigración proveniente de la China Continental que ocurrió a principios del período posbélico, crearon una oportunidad para la expansión de las actividades fabriles con miras a producir bienes que sustituyesen a las importaciones. Sin embargo, parece que el impulso que adquirió el crecimiento industrial en virtud de este proceso se había perdido en gran parte ya para fines del decenio 1950, y la políticas proteccionistas y cambiarias del país fueron objeto de nuevos análisis. Las políticas que se pusieron en práctica entonces ofrecieron un marco favorable para el aumento de las exportaciones de manufacturas así como para un rápido crecimiento industrial durante el decenio 1960.

Se sugiere que la etapa intermedia de desarrollo en que se encontraba Taiwán facilitó la expansión de las exportaciones porque le permitió al país mantener la dualidad de la estructura de éstas, o sea, seguir exportando a los países menos desarrollados bienes cuya producción requiere un coeficiente de capital relativamente alto, y a los países desarrollados bienes que requieren un coeficiente relativamente alto de mano de obra. Sin embargo, se ha tornado cada vez más difícil conseguir que continúen aumentando las exportaciones a los países menos desarrollados, en razón de que dichos países van avanzando en la sustitución de importaciones y porque el desarrollo en Taiwàn de industrias de productos básicos que requieren un alto coeficiente de capital se halla obstaculizado por las reducidas dimensiones de la economía. Le expansión de las exportaciones a los países desarrollados, en cambio, resulta más fácil debido a que en las relaciones comerciales con esos países media un mayor grado de complementación recíproca. Esto sugiere, entre otras cosas, que convendría que Taiwán y las economías de índole similar optaran por darle a su producción la configuración que favorezca la elaboración de los productos que son objeto de mayor demanda en los países desarrollados, a fin de mantener el crecimiento económico mediante una expansión de las exportaciones.

Mr. Lin, economist in the Current Studies Division of the Research Department, is a graduate of National Taiwan University and Vanderbilt University. He was previously on the staff of the Council for International Economic Cooperation and Development in Taipei.

See Neil H. Jacoby, U.S. Aid to Taiwan: A Study of Foreign Aid, Self-Help, and Development (New York, 1966), Chapters 9 and 11.

The evacuation from the Mainland of a considerable number of middle-aged military personnel added to the severity of the unemployment problem as these persons retired from active service. The difficulty of providing sufficient employment opportunities for professional workers was evident in overstaffing at all levels of government service and in the public enterprises, and was recognized by the creation in 1955 of a subcabinet commission charged with the establishment of enterprises to employ retired servicemen.

For a general discussion of the economic effects of the size of economies, see The Economic Consequence of the Size of Nations, ed. by E. A. G. Robinson (London, 1960).

Throughout this paper, rates of changes, such as those given in Tables 4, 5, 9, and 10, are calculated as compound annual rates.

The growth of GNP and of per capita income from 1960 to 1966 are based on revised estimates published by the Directorate-General of Budgets, Accounts, and Statistics, National Income of the Republic of China, 1958–1966 (Taipei, 1967). The data for years prior to 1958 are soon to be revised.

The faster growth of per capita income in the later period was influenced by the steep rise in the price of sugar exports. However, even after correcting for the terms of trade effect, per capita income rose on average by 6.1 per cent per annum from 1960 to 1966.

Based on data from the Council for International Economic Cooperation and Development, Taiwan Statistical Data Book, 1967 (Taipei, 1967).

Apart from the large-scale sugar-cane plantations owned by Japanese corporations.

See Andrew J. Grajdanzev, The Economic Development of Formosa (Kelly and Walsh, Shanghai, 1941), pp. 145–65, and Jacoby, op. cit., p. 79 (Table VI. 2).

See Ryuzo Kusui, The Economy of Taiwan in War (Taipei, 1944), in Japanese.

For an analysis of the increase in agricultural productivity in Taiwan after the war, see S. C. Hsieh and T. H. Lee, Agricultural Development and Its Contribution to Economic Growth in Taiwan—Input-Output and Productivity Analysis of Taiwan Agricultural Development (Chinese-American Joint Commission on Rural Reconstruction, Economic Digest Series, No. 17, Taipei, 1966). For a parallel study emphasizing the role of new inputs, see Yhi-Min Ho, Agricultural Development of Taiwan, 1903–1960 (Vanderbilt University Press, Nashville, Tennessee, 1966).

See United Nations, Department of Economic and Social Affairs, Patterns of Industrial Growth, 1938–1958 (New York, 1960). One illustration which may be cited concerning Taiwan’s relatively advanced position with respect to metallurgical-chemical production is the fact that Taiwan and Japan were the only two areas in Asia in the early 1960’s where industrial chlorine was in stronger demand than its joint product, caustic soda. The relative size of demand for chlorine and caustic soda is usually taken to indicate the difference in the stage of chemical-based industrial development.

For a fuller discussion of postwar development problems in Taiwan, see K. Y. Yin, The Complete Collections of My Views on the Economy of Taiwan (published posthumously by the Council for International Economic Cooperation and Development in Taipei, 1963), in Chinese. Mr. Yin, in his various capacities, was the key architect of the island’s postwar trade and industrial development.

See Yin, op. cit.

The decline in Taiwan’s exports to Japan in the early postwar years was caused not only by the changes in the political relations between the two countries but also by Japan’s need to restrict nonessential imports.

According to the household registration, the population of Taiwan increased by two million, or roughly one third, between 1946 and 1952. Of these, some 600,000 were from the Mainland. Adding the troops (a large part of which did not have household registration) evacuated from the Mainland, the total number of new immigrants during this period may amount to about 800,000–1,000,000.

See Ministry of Economic Affairs, Report on Industrial Surveys in Taiwan, Series No. 1 and Series No. 2, 1961 and 1962, in Chinese. However, apart from the saturation of domestic demand, these ratios might have been influenced by the events which occurred in 1959–60 as described in the following paragraphs.

In this regard, it should be pointed out that while the local availability of raw materials may provide opportunities for manufacturing development based on processing activities, the lack of such resources need not seriously retard the development of end-using industries as long as there are complementary factors favoring the development of such industries. Among the industries which have attained a high export ratio in Taiwan, those producing cement, flat glass, monosodium glutamate, and polyvinyl chloride plastics use locally produced raw materials, while those producing cotton and woolen textiles, apparel, plywood, aluminum, simple iron and steel products, petroleum products, and transistor radios depend on imported raw materials and components. The relative size of domestic demand appears to have been the most important factor determining the initial development of a particular industry, while the strength of foreign demand was a major influence upon its later development.

See K. Akamatsu, “A Historical Pattern on Economic Growth in Developing Countries,” The Institute of Asian Economic Affairs, The Developing Economies (Tokyo), Preliminary Issue, May-August, 1962.

On the change in the export ratios of Great Britain and Japan, see Simon Kuznets, “Quantitative Aspects of the Economic Growth of Nations: X, Level and Structure of Foreign Trade: Long-Term Trends,” Economic Development and Cultural Change, Vol. XV, No. 2, Part II (January 1967), p. 19. On the changing sources of demand in Japan, see Hollis B. Chenery, Shuntaro Shishido, and Tsunehiko Watanabe, “The Pattern of Japanese Growth, 1914–1954,” Econo-metrica, Vol. 30 (1962), pp. 98–139. Similar evidence can be found for the United States, which depended on rising incomes from the exports of cotton and other staples to create an expanded home market for the domestic manufacturing industries based in New England. See Douglas C. North, The Economic Growth of the United States, 1790–1860 (New York, 1960).

Unfortunately, the detailed trade data necessary for this analysis were available only for the period 1962–65 when this paper was prepared.

See first column of Table 10.

In this connection it should be noted that, unlike Hong Kong, neither the Republic of China nor Korea was on the list of 19 financially strong countries that were barred from U.S. aid procurement after November 1960, and that the trade of both countries has been increased as a result of the war.

The cultivation of mushrooms and asparagus in small family holdings and the canning of these and other assorted vegetables and fruits constitute a much more labor-intensive process than the growing of staple crops on big plantations and their processing in large-scale factories.

A description of this phase of development in Japan and of the nature of its “dual” industrial structure is to be found in K. Ohkawa, An Analysis of the Japanese Economy, its Growth and Structure (Tokyo, 1962), in Japanese, and in writings by his former students.

On the changes in Japan’s trade structure since World War II, see Kiyoshi Kojima, “Japan’s Trade Policy,” The Economic Record, Vol. 41 (Melbourne), March 1965, pp. 54–77, and other studies by the same author.

As Japan’s industrial production and exports have come to consist increasingly of technologically more sophisticated products, and as its labor costs have risen in recent years, there has been an increase in Japanese investments in Taiwan, Korea, and Hong Kong aimed at profiting from the relatively low wage costs ruling there in the assembly of semifinished items and components imported from Japan into finished articles (such as electronic products and garments) for export. Direct exports of simpler manufactures from these territories to Japan, though apparently a logical development in the gradual evolution of trade, has so far been sporadic and insignificant, at least for Taiwan. In this connection, in 1966 a duty-free export processing zone was created there to accommodate foreign investments in industries that assemble products for re-export. Such investments would not have been made in Taiwan without the special arrangements concerning taxes and duties on imported machinery and components provided for in the free-trade zone.

The increase in exports of foodstuffs to Japan from 1962 to 1965 was largely the result of the liberalization of banana imports.

See page 311, footnote 24.

Miyohei Shinohara, “Changes of Industrial Structure and the Degree of Fabrication,” The Economic Review (Tokyo), Vol. 18, April 1967, p. 108 (Table 3), in Japanese.

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