The Taiwan Economy – Part I

Post - WWII Economic Reconstruction and

Reforms

Three Major Parts to Reconstruction

1. US Aid to Taiwan 1951 – 1965

2. Land Reform 1949 - 1953

3. Exchange Controls 1947 - 1970

Part 1US Economic Aid to Taiwan

--- US Marshall Plan proposed in 1947 and enacted in 1948 – $13 billion to Europe (US GDP was about $250 billion)... There was also aid to China sent before 1949.

--- US reluctant at first to send large scale aid to Taiwan but Korean War made this necessary...aid began as military aid....7th Fleet removed from the Taiwan Straits by Eisenhower to force China to end Korean War... policy called “neutralization” and it worked

--- Aid to Taiwan was for 15 years at $100 million average per year

Jacoby (1966) divides aid program into three five-year periods

--- In the first period, aid was centered on providing the basic necessities of life for large numbers of people in Taiwan and providing for security. This meant direct imports of food and clothing paid for by outright grants from the US to the government of Taiwan. Aid was allocated through two main channels – Defense Support and the Direct Forces Support. The former was designed to offset the burden placed on the ROC economy due to military expenditures, while the latter was used for military construction and other resources used directly by the military (both ROC and US).

--- In the second period, Taiwan regained its per capita income and was poised to undertake significant economic development. Taiwan saw a rise in surplus commodity imports made available through the famous Public Law 480 (PL 480) in which US surplus agricultural products bought up under US agricultural price support programs were made available to Taiwan at artificially low prices. Their sale in Taiwan created alternatively NT dollar or US dollar receipts for Taiwan’s government and the USAID Mission to China depending on the regulations in force. The second period was also the period when capital imports picked up and large scale public works and industrial projects were funded. Imports of capital and raw materials surged as a percentage of total imports, while the percentage of imports devoted to consumer goods fell off.

--- During the third five-year period of aid, corresponding to the interval 1961–1965, Taiwan began implementing a 19 point program of Economic and Financial Reforms. Taiwan’s growth experience was maturing. Internal sources of economic growth were coming into being. Loans made by the US to Taiwan went from concessional (low interest below 3.5%) to commercial terms. In addition, the ROC began developing broader external relations with political and economic organizations such as the UN and the World Bank. Most importantly, the private sector began to expand much faster and took the reins from the public sector in powering development. To quote Jacoby directly, “Effective encouragement of private enterprise was a key to the success of US aid in Taiwan”. (Jacoby, 1966, p. 92)

Industrial output in Taiwan rose 13% per year during the aid period. This rise was mainly concentrated in processed foods, nonmetallic minerals, chemicals, textiles, electric power, coal, electrical machinery, appliances, and transportation.

Taiwan was able to grow quickly due to the expansion of its markets. Both exports and imports were increased in a balanced fashion. This encouraged companies to reach larger scales of production, have good division of labor, and specialization of industry. The specialization of industry allowed labor to increase their productivity. Exports bolstered production of domestic industries and the foreign exchange earned was not wasted on consumer imports. Imports were shifted from consumer imports to producer imports. This was classic Adam Smith – from Wealth of Nations (1776).

But, the important fact to remember about Taiwan’s economy during the aid period was that it had very few natural resources and even less in the way of productive physical capital. Taiwan had enormous amounts of labor resources, especially as farm productivity rose and freed labor to move to the cities. Thus, the importation of raw materials and capital was absolutely essential to the growth record for Taiwan. To ignore this is to miss much of the growth story. Jacoby (1966) notes that 60% of imports to Taiwan during the aid period were raw materials, 25% were capital goods, and only 10% were consumer goods. The 2002 Taiwan Statistical Databook published by the CEPD has Taiwan with roughly 20% of imports being consumer imports in 1952, 9% in 1955, 8% in 1960, and 5% in 1965. By contrast, capital goods as a percentage of imports were 14% in 1952, 16.5% in 1955, 27.9% in 1960, and 29% in 1965. The reduction in consumer imports exactly mirrors the climb in producer imports during the 15 year period of aid.

This is import substitution...it is a change from foreign suppliers of consumer goods to domestic suppliers

Things start changing again...interesting...lots of imported cars

Prior to US Aid, it is hypothesized that Taiwan was at point C in the diagram to the left. This is a poverty trap. Under this condition the point C will begin to move to the left and per capita incomes will stagnate or even fall. This region is characterized by having an increasing marginal product of capital. We normally think that marginal products of factors are diminishing. The lack of significant infrastructure and human capital in Taiwan in the late 1940s made capital super-productive. However, without aid there would be no capital due to security concerns, as well as a lack foreign exchange or a suitable domestic industry.

US Aid shifted the point dramatically from point C to point D. It allowed security to be established and created the necessary infrastructure and agricultural gains to allow strong growth and positive returns on invested capital. With this small push Taiwan was able to move ahead on its own and escape grinding poverty.

1

(1 )

(1 ) (1 )

Y C I Y K K

Y K K

KK AK K AK

K

β is found to be greater than 1

β is found to be less than 1

Empirical Evidence for Taiwan’s Escape from a Poverty Trap

Data on output Y was taken from Jacoby (1966) while fixed investment data was taken from the same source and a capital stock was constructed using the perpetual inventory method. If an estimate for β is found to be greater than 1, then we have evidence for a poverty trap.

There are three regressions shown on the left. The first shows the entire period 1952-1964. The other two show the sub-periods. Note how that the coefficient on ln(K) for 1952-1957 period is 1.091 greater than 1 and nearly 2-std. errors away from 1. This is evidence of a poverty trap. The other sub-period shows no poverty trap.

Part 2Taiwan’s Land Reform

Land Reform in Taiwan was Undertaken in Three Stages

Stage 1 -- 1949 rent reductionStage 2 -- 1951 sale of public land to farmersStage 3 -- 1953 land-to-the-tiller program

Before the land reform of 1949 only 36 per cent of the farming population were owner-farmers and 25 per cent owned part of their land. Rent took at least 50 per cent of the income from crop harvests. In addition, tenants had to furnish their own fertilizers, farm equipment and farm buildings. Leases were renewed each year. Landlords demanded a security deposit and assured rentals even during crop failures. Contracts were oral and revisable every year—with the tenant always unsure of how he stood.

Pre-Land Reform Situation

Stage 1 -- In this stage rents paid by tenants to the landlord were forcibly dropped from 50% of the crop to 37.5% of the crop. Also, in the 1949 reform the government encouraged planting of a second rice crop and additional crops of tobacco, vegetables, and other foods. Farmers now had an incentive to work hard and increase irrigation and fertilization.

From a land survey undertaken it was found a farmer should devote 25 per cent of his land in seed and fertilizer. The remainder should be divided equally between the landlord and tenant—and this was put into a written contract for at least six years. The tenant could renew the contract unless the landlord was forced to work on the land himself. The second term was for six years or more of continued tenancy. No more "key money" was paid to the landlord as a guarantee. Any crop failure was borne equally by the landlord, and tenant unless it was critical. Then the contract was abolished with no forced payment by the tenant.

A tenancy committee was established in each township to settle disputes. If there was no agreement, disputes could be brought to the county committee. Only when there was no conciliation at these levels could the case come to court. Out of 11 on the committee, the tenants had five representations.

These policies had the effect of reducing land prices in Taiwan

Stages of Land Reform

Stage 2 -- Sale of government owned land taken over from the Japanese and operated by tenants with the government collecting the rentals. During this stage the land was sold to the tenants. This is different from stage 3 which involved compulsory purchase of land from landlords for resale to operator-tenants. The sale of government lands provided a good test case of defects in the plan.

The government sold land with payments in 20 installments over ten years at four per cent per annum interest. The annual payment was only 25 per cent of the crop. This was lower than the 37.5 percent of the main crop formerly paid by a tenant as rent —but it did not include land tax and water fee which brought it up about even.

Since the farmer needs capital for improvements and farm machinery, fertilizer and insecticides, the government provided loans through farm associations.

Stage 3 -- In the "land to the tiller program", the 1953 to 1963, third and final stage, there was instituted compulsory purchase by the government of excessive land holdings of absentee land owners for resale to the operators. This program did not affect the land operator regardless of the size of the farm he owned. In Taiwan the average land holding is small and neighbors exchanged labor at planting and harvest time. Retention of three hectares of medium grade land of an irrigable nature was permitted.

In phases two and three payment was made in kind—in rice in the lowlands or sweet potatoes in the highlands. Many farmers paid off in three or four years, eager to get title to the lands. The government paid the landlords 30 per cent of the price in shares in government-owned enterprises, the other 70 per cent in land bonds or bonds in kind.

The government sold four big corporations and put the stock in the hands of the former land-owners. This stimulated industry while shifting the landlords to an industrial capital position at the same time the tenant got title to his land. There was little delinquency—only about one per cent—in payments for the land. Consequently the government had a large sum left from sale of government land. Part was used as loan capital for tenants on retention areas to buy land from landlords by private negotiation.

Reference : See http://taiwanauj.nat.gov.tw/ct.asp?xItem=153427&CtNode=103 Date de publication: 4/2/1968

Part 3Taiwan’s Exchange Controls

After WWII, Taiwan introduced a multiple exchange rate regime. It did so to control foreign exchange transactions and also control closely the types of goods that could be imported into Taiwan.

The Taiwan District Production Business Management Committee (TDPBMC) was created to plan, coordinate, and supervise Taiwan’s state run enterprises. 75% of manufacturing was SOE manufacturing. K.Y. Yin was an important person in the early transition of Taiwan’s economy.

美援會秘書長李國鼎先生（左）與副主任委員尹仲容先生（中）、美援公署署長白慎士先生（ Parsons，右）三人合影

Yin felt it was necessary to identify good state run enterprises and expand their output and employment. He believed in a “planned market economy”. The important state run enterprises would be subsidized, permitted to have easy terms of credit, and be subject to limited competition. Yin chose three important industries

--- electricity – necessary for industry --- fertilizers – used by all farmers --- cotton textiles – everyone needed to wear clothing

For the second and third of these, TDPBMC, created a special subcommittee to control foreign exchange. This committee began by controlling SOEs access and deposit of forex. Later it controlled all trade and other transactions in forex.

TDPBMC and Its Subcommittees Controlled Forex

At 26.52 the government would buy 90% of the forex of the exporter with 10% being exchanged for ESCs. At 32.63 The government would buy only 20% of the forex and 80% would be paid in ESCs to be traded on the open market or held.