Rising PhoenixAn Unfinished Story of Taiwan’s Economic Development

Chi SchivePresident, the Taiwan Academy of Banking and Finance

May 17, 2007

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

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.

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 2.9GNP 7.0 4.8 5.0 6.3 3.9Per capita GNP 3.8 1.9 1.7 3.4 1.0Percentages of GNP

Consumption 88.3 100.6 87.9 85.6 87.1Gross 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

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

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

19-Point Reform (1959)

Economic Development1. Encourage savings and restraint consumption via

incentives2. Establish capital market3. Overhaul all emergent control measures4. Privatization of public enterprises5. Simplify tax, foreign exchange control, financing

measures for business6. Simplify procedures for business establishment and

operation, including entry/exit7. Mobilize idle capacity of public and military plants8. Rationalize pricing for public utilities

19-Point Reform (1959)Budget9. Streamline military force and fix military

expense at current level in real terms10. Reform tax system and administration for

encouraging capital formation11. Improve the performance of budgetary

execution12. Remove subsidies that would mislead the

assessment of military spending and revenue and the performance of public enterprises

13. Adjust salary for military and public employees, while canceling fringe benefits and implement retirement program

14. Strengthen the auditing of military expense

19-Point Reform (1959)

Financial Sector15. Establish central banking system for interest

rate and credit policy

16. Consolidate savings and loan institutions into banking system under the jurisdiction of the central bank through the agency of the Bank of Taiwan

17. Ensure that banks are carrying out their individual functions and avoid short-term use of long-term funds

19-Point Reform (1959)

Foreign exchange and trade18. Establish unitary foreign exchange rate system

and ease trade administration to enable free exchange of the New Taiwan dollars

19. Extend encouragement measures for exports, streamline export procedures, and expand links with foreign business

Major Reforms (1958-60)

• Multiple foreign exchange rate

Unitary exchange rate

• Devaluation of the New Taiwan dollar

• Statute for the Encouragement of

Investment

Imports NT$/US$

1.General import by traders 32.28

2.Industrial materials, machines & equipmentby private & public enterprises and importsby non-traders

24.76

Exports 20.35

1.Exports by public enterprises 26.35

2.Exports by civilian enterprises

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)

Exchange Settlement Certificate System

Retained Portion of ExportExchange Earnings (%)

Actual ExchangeRate (NT$/US$)

10 26.5215 26.6320 26.7425 26.8730 27.0235 27.2040 27.4045 27.6450 27.9255 28.2760 28.7165 29.2770 30.0175 31.0680 32.63

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

External Imbalances

Exports Imports Exports - Imports

1980 52.6 53.8 -1.2

1982 50.2 45.0 5.2

1984 55.6 44.5 11.1

1986 56.7 37.4 19.3

1988 53.0 42.5 10.5

1990 45.6 40.8 4.8

1992 42.6 40.5 2.1

1994 43.6 41.7 1.9

1996 48.2 44.3 3.9

1998 48.8 46.8 2.0

As a percent of GNP

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 1999.

Foreign Exchange Rate Change

36.0

40.3

28.626.2 25.4

38.0

27.5

32.2235.5

40.0

20

25

30

35

40

45

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

NT$ per US$

Source: CEPD, Taiwan Statistical Data Book, 1999.

Tariff ReductionNumber of goods for which

tariffs wereAverage

Nominal TariffRate (%)

Tariff Revenueas % of Total

Imports lowered removed raised

1980 31.17 8.97 1604 23 10

1984 30.81 7.72 281 2 23

1985 25.46 7.89 1058 35 1

1986 22.83 7.67 777 28 11

1987 20.60 7.46 1699 15 6

1988 12.10 6.13 3313 154 0

1989 12.57 6.30 4545 155 0

1990 9.65 5.87 - - -

1991 9.65 4.97 1492 279 18

1993 8.89 5.15 - - -

1997 8.89 3.2 - - -

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

Export Composition (1981-1999) by World Bank Classification

Agri1 Consumer2 Materials3 Intermediates4 Machin’y+Transp’t

1981 7.7 47.2 0.5 36.5 8.11983 6.7 48.4 0.9 34.4 9.71985 6.1 45.9 0.6 35.4 12.01987 5.9 45.2 0.5 33.4 15.01989 4.6 37.7 0.4 40.0 17.41991 4.6 30.5 0.3 46.4 18.21993 4.0 24.8 0.2 51.2 19.71995 3.4 18.3 0.2 57.0 21.11997 2.0 14.9 0.4 58.7 24.11999 1.5 13.3 0.2 61.1 23.9

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.

%

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.

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

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

IT Industry’s Share of Stock MarketPercentage, Market Value

1990 1995 1999U.S. 18.3 21.8 33.3Canada 18.3 17.9 27.9France 10.7 8.8 19.8Germany 3.5 6.2 22.9U.K. 12.0 12.9 18.8Finland 8.7 40.2 71.3Japan 11.1 12.4 23.9S. Korea 0.4 5.1 18.2Hong Kong 16.0 10.9 18.0Singapore 3.9 28.9 27.0Taiwan 2.7 13.4 54.2Sources: IMF, World Economic Outlook, September 2000; Taiwan Stock Exchange.

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.

Will the “flying geese” paradigm remain?

A Different Goose on The Rise

SCENARIOS for Taiwan

Warm Cross-Strait

Relation

Cool Cross-Strait

Relation

Weak Reforms Active Reforms

Limited growth and gradually absorbed into China

Rising Phoenix, bringing regional prosperity

Cooked Goose Slow growth and becoming peripheral