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
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.
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).
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.
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.