Rising Phoenix An Unfinished Story of Taiwan

1
Rising PhoenixAn Unfinished Story of Taiwans
Economic Development

• Chi Schive
• President, the Taiwan Academy of Banking and
  Finance
• May 17, 2007

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Contents

• A prelude, a short or long story for Taiwans
  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

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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.

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Comparison of US Aid and Growth of GNP in Five
Small Economies in the 1950s and 1960s
Growth rate Taiwan 1953-63 Korea 1953-63 Philippines 1960-63 Thailand 1956-63 Turkey 1958-63
Population 3.2 2.9 3.3 2.9 2.9
GNP 7.0 4.8 5.0 6.3 3.9
Per capita GNP 3.8 1.9 1.7 3.4 1.0
Percentages of GNP
Consumption 88.3 100.6 87.9 85.6 87.1
Gross domestic investment 19.0 14.0 13.9 16.5 15.5
Aid per capita per year (in dollars) 9.7 11.4 2.0 1.3 6.1
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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

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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

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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

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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

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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

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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

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Major Reforms (1958-60)

• Multiple foreign exchange rate ?
• Unitary exchange rate
• Devaluation of the New Taiwan dollar
• Statute for the Encouragement of Investment

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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)
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Exchange Settlement Certificate System
Source W. A. Yeh, Actual Exchange Rates Under
the Measures for Promoting Export Sales of
Products Processed with Imported Raw Materials.
(mimeo)
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External Imbalances
As a percent of GNP
Source Council for Economic Planning and
Development, Taiwan Statistical Data Book, 1999.
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Foreign Exchange Rate Change
NT per US
Source CEPD, Taiwan Statistical Data Book, 1999.
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Tariff Reduction
Source Yearbook of Financial Statistics of the
Republic of China, Ministry of Finance, various
issues.
17
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.
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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 Taiwans strategic
  geographic position in the Asia-Pacific region.
• Capacity building of Taiwans manufacturing
  sector by enhancing its supportive services --
  transportation, telecommunications, and finance.

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Objectives of the APROC Plan

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

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• Flows of 4 Is
• Industries
• Individuals
• Investment
• Information

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Anatomy of the APROC Plan
Manufacturing Center ? bones
Financial Center ? the blood
Sea and Air Transportation Centers ? arms and legs
Telecommunications Center ? the nerve system
Media Center ? eyes and ears
Six types of Centers reinforce the development of
each other and the whole Economy.
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IT Industrys Share of Stock MarketPercentage,
Market Value
Sources IMF, World Economic Outlook, September
2000 Taiwan Stock Exchange.
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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.

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A Different Goose on The Rise
Will the flying geese paradigm remain?
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SCENARIOS for Taiwan
Limited growth and gradually absorbed into China Rising Phoenix, bringing regional prosperity
Cooked Goose Slow growth and becoming peripheral
Warm Cross-Strait Relation
Cool Cross-Strait Relation
Weak Reforms
Active Reforms