Rising Phoenix An Unfinished Story of Taiwan’s Economic Development

1. Rising PhoenixAn Unfinished Story of Taiwan’s Economic Development Chi Schive Chair Professor, Shih-Hsin University March 26, 2007, Taipei

2. Contents • A prelude, a short or long story for Taiwan’s success? • To make Taiwan economy grow again– U.S. Aids (1952-60) • The first turning point (1958-60), a vital reform • The second turning point (1986-90), the cure of Dutch disease • An rising Phoenix, the final test

3. Two Heroes, Taiwan and Korea • Taiwan and Korea took fifty years to reach the same development level as U.S. over two-hundred years since 1976, while Japan took one- hundred years. (Herman Kahn, The World Economic Development, 1979) • Taiwan has maintained an average growth rate of 8.8 percent over forty five year since 1952. • Taiwan barely over passed Philippines on GNP per capita only by 1970. • By the end of 1990s Taiwan was ranked the top 14th by trade, 17th or 18th by GDP, 24th by GDP per capita.

4. Comparison of US Aid and Growth of GNP in Five Small Economies in the 1950s and 1960s

5. 8-point Suggestions (1959) for Economic and Financial Reform by U.S. Aid Mission • Military budget control • Banking and loan policies for inflation control • Tax reform, removing obstacle to business development • Unitary and realistic foreign exchange rate • Relaxing foreign exchange control • Proper pricing for public utilities • Securities registration and setting up stock exchange • Privatization of public enterprises

6. 19-Point Reform (1959) - Highlights Pursuing Economic Growth with Stability • Fiscal balance • Tax reform • Relax restrictions on trade • Promote production and exports • Encourage savings • Simplify administrative procedures • Improve investment environment • Build capital market • Foster private enterprises

7. 19-Point Reform (1959) Economic Development • Encourage savings and restraint consumption via incentives • Establish capital market • Overhaul all emergent control measures • Privatization of public enterprises • Simplify tax, foreign exchange control, financing measures for business • Simplify procedures for business establishment and operation, including entry/exit • Mobilize idle capacity of public and military plants • Rationalize pricing for public utilities

8. 19-Point Reform (1959) Budget • Streamline military force and fix military expense at current level in real terms • Reform tax system and administration for encouraging capital formation • Improve the performance of budgetary execution • Remove subsidies that would mislead the assessment of military spending and revenue and the performance of public enterprises • Adjust salary for military and public employees, while canceling fringe benefits and implement retirement program • Strengthen the auditing of military expense

9. 19-Point Reform (1959) Financial Sector • Establish central banking system for interest rate and credit policy • Consolidate savings and loan institutions into banking system under the jurisdiction of the central bank through the agency of the Bank of Taiwan • Ensure that banks are carrying out their individual functions and avoid short-term use of long-term funds

10. 19-Point Reform (1959) Foreign exchange and trade • Establish unitary foreign exchange rate system and ease trade administration to enable free exchange of the New Taiwan dollars • Extend encouragement measures for exports, streamline export procedures, and expand links with foreign business

11. Major Reforms (1958-60) • Multiple foreign exchange rate  Unitary exchange rate • Devaluation of the New Taiwan dollar • Statute for the Encouragement of Investment

12. Multiple Exchange Rate System in Taiwan Source: W. A. Yeh, “Actual Exchange Rates Under the Measures for Promoting Export Sales of Products Processed with Imported Raw Materials.” (mimeo)

13. Exchange Settlement Certificate System Source: W. A. Yeh, “Actual Exchange Rates Under the Measures for Promoting Export Sales of Products Processed with Imported RawMaterials.” (mimeo)

15. External Imbalances As a percent of GNP Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 1999.

16. Foreign Exchange Rate Change NT$ per US$ Source: CEPD, Taiwan Statistical Data Book, 1999.

17. Tariff Reduction Source: Yearbook of Financial Statistics of the Republic of China, Ministry of Finance, various issues.

18. Export Composition (1981-1999) by World Bank Classification % Notes: 1. Agriculture, forestry, fishery, livestock, hunting, processed food, beverage, and tobacco. 2. Consumer durables and non-durables. 3. Energy, minerals, and construction materials. 4. Intermediates ready or unready to be used for consumer or producer goods.

19. The Rationale of the APROC Plan The Asia-Pacific Regional Operations Center (APROC) Plan seeks • To accommodate the trend of regionalism. • To take advantage of Taiwan’s strategic geographic position in the Asia-Pacific region. • Capacity building of Taiwan’s manufacturing sector by enhancing its supportive services -- transportation, telecommunications, and finance.

20. Objectives of the APROC Plan • To carry out full-range liberalization and globalization, i.e., to promote the free flows of 4 I’s -- individuals, investments, industries and information. • Liberalization means de-regulation. • Globalization means to create an internationally compatible regulatory scheme. • Center means an integrator

21. Flows of 4 I’s: • Industries • Individuals • Investment • Information

22. IT Industry’s Share of Stock MarketPercentage, Market Value Sources: IMF, World Economic Outlook, September 2000; Taiwan Stock Exchange.

23. Lessons from Taiwan • If you do not have a market, then build it. • In order to enlarge the market, you have to open it. • If you well respect the market, the market will reward you sweetly.

24. A Different Goose on The Rise Will the “flying geese” paradigm remain?

25. SCENARIOS for Taiwan Warm Cross-Strait Relation Cool Cross-Strait Relation Weak Reforms Active Reforms