taiwan as a model for economic development - stanford university

Taiwan As a Model forEconomic Development

Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)

Kwoh-Ting Li Professor of Economic DevelopmentDepartment of Economics

Stanford UniversityStanford, CA 94305-6072, U.S.A.

October 4, 2002

Phone: 1-650-723-3708; Fax: 1-650-723-7145Email: [email protected]; WebPages: WWW.STANFORD.EDU/~LJLAU

Lawrence J. Lau, Stanford University 2

Reminiscencesu Professors Ta-Chung Liu and Sho-Chieh Tsiangu Professor Mo-Huan Hsingu Professor Tzong-Shian Yuu Professor Paul K. C. Liuu Prof. Yung-San Lee, Prof. Jia-Dong Shea, Prof. Sheng-Cheng Hu,

Prof. Chung-Ming Kuan


An Overviewu Taiwan’s Economic Recordu Taiwan as a Pioneer of and “Laboratory” for Economic Policiesu Lessons from the Taiwan Experience for Developing Economiesu Lessons for Taiwan from the Rest of the World


The Economic Recordu Taiwan is one of the first “Newly Industrialized Economies” (NIEs) in East Asia.u Taiwan began its industrialization drive after Hong Kong and before South Korea

as a result of rising wage rates in Japan, and subsequently Hong Kong, and quota restrictions imposed by the U.S. and subsequently Europe on textile exports.

u Taiwan has done exceptionally well despite relatively unfavorable resource endowment and population density.

u Over the last half century, real GNP and real GNP per capita have grown from approximately US$6 billion to over US$300 billion and from slightly more than US$700 to almost US$13,000 (2000 prices), achieving rates of growth of more than 8% and 6% per annum respectively.

u Taiwan survived the East Asian currency crisis relatively unscathed, thanks to its large foreign exchange reserves and low external debt.

u How has it been able to achieve this remarkable economic performance?


Taiwan’s Economic Record:Real GNP per Capita

GNP Per Capita of Taiwan

10,000

100,000

1,000,000

1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999

Year

N T $

GNP PER CAPITA in 1996 pr ices


Real GDP of Selected Countries and Regions, 1970 and 2001

Real GDP of Selected Countries and Regions, 1970 and 2001

(1995 US$)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Bra

zil

Ch

ina

Fra

nc

e

Ind

ia

Ind

on

es

ia

Italy

Ja

pa

n

Ko

rea

, Re

p.

Me

xic

o

Nig

eria

Ta

iwa

n

Un

ited

Kin

gd

om

Un

ited

Sta

tes

Bil

lio

n U

S$

1970 2001


Real GDP per Capita of Selected Countries and Regions, 1970 and 2001

Real GDP per Capi ta of Selected Countr ies and Regions, 1970 and 2000

(1995 US$)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Bra

zil

Ch

ina

Fra

nc

e

Ind

ia

Ind

on

es

ia

Italy

Ja

pa

n

Ko

re

a

Me

xic

o

Nig

eria

Ta

iwa

n

UK

US

US

$

1970 2000


Exports and Imports (US$):Selected Countries and Regions, 2000

Exports and Imports of Selected Countr ies and Regions, 2000

(US$)

0

200

400

600

800

1,000

1,200

1,400

Bra

zil

Ch

ina

Fra

nc

e

Ind

ia

Ind

on

es

ia

Italy

Ja

pa

n

Ko

re

a

Me

xic

o

Nig

eria

Ta

iwa

n

UK

US

Zo

ne

Eu

ro

Bil

lio

n U

S$

Exports Imports


Exports and Imports per Capita (US$):Selected Countries and Regions, 2000

Exports and Imports per Capi ta of Selected Countr ies and Regions

(Year 2000)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Bra

zil

Ch

ina

Fra

nc

e

Ind

ia

Ind

on

es

ia

Italy

Ja

pa

n

Ko

re

a

Me

xic

o

Nig

eria

Ta

iwa

n

UK

US

US

$

Exports per Capita

Imports per Capita


The Rate of Inflation

Annual Rate of Inflation (Implicit GDP Deflator)

- 5 . 0 0

0 . 0 0

5 . 0 0

1 0 . 0 0

1 5 . 0 0

2 0 . 0 0

2 5 . 0 0

3 0 . 0 0

3 5 . 0 0

1 9 5 1 1 9 5 4 1 9 5 7 1 9 6 0 1 9 6 3 1 9 6 6 1 9 6 9 1 9 7 2 1 9 7 5 1 9 7 8 1 9 8 1 1 9 8 4 1 9 8 7 1 9 9 0 1 9 9 3 1 9 9 6 1 9 9 9

Year

%

GDP Deflator


Pioneering Economic Policiesu Land Reform —the successful (and peaceful) land reform, one of the

very few in the world, helped raise agricultural productivity, i mprove the income distribution, and release savings for investment in the industrial sector.

u Promotion of Family Planning.u Reliance on Private Rather Than Public Enterprise.u Export-Oriented Industrialization (as opposed to import-substituting

industrialization).u Maintenance of Macroeconomic Stability. u Maintaining Equity with Growth.

u Promoting the Transition from Tangible Capital -Based to Intangible Capital -Based Industrialization.


Land Reformu Raises agricultural productivity through the incentive effect

u Releases both tangible capital and human capital from agricultureu Improves the distribution of income, providing the basis for an

increase in aggregate demand (both consumption and savings)

u Enhances investment in human capitalu It was successfully implemented because the reformers themselves

did not own any land and did not want any for themselves

u The Joint Commission for Rural Reconstruction (JCRR) played an important role in the land reform.


Reliance on Private Enterpriseu There were extensive debates in Taiwan in the mid-1950s as to

whether private or public enterprise should lead the drive for industrialization. It was finally decided at the highest level of government that private enterprise was consistent and compatible

with the Three People’s Principle and should be allowed to grow.u Similarly, in South Korea, President Park Chung-Hee, having

observed the degree of incompetence and corruption within the

government (army), also decided in the early 1960s that private enterprise would be allowed to lead the drive for industrialization in South Korea.


Reliance on Private Enterpriseu A private-enterprise economy can also be inefficient if the markets are not

competitive or if there are artificial barriers to entry and to movement of goods and factors. The resulting allocations can be very much worse. Simply changing the system of ownership of the means of production from public to private does not necessarily guarantee economic efficiency. In the cases of Hong Kong, Singapore, and Taiwan, the economy is forced to be efficient because of its participation in the competitive world markets. In other words, the world markets provide the discipline and replace the antitrust laws that are sometimes necessary in developed economies to keep the markets competitive. The world markets also make sure that special privileges are not sufficient, in the absence of efficiency, for profits or even survival. In the final analysis, it is competition, with free entry and exit and not just profit maximization, that guarantees efficiency.

u Private entrepreneurs are not necessarily smarter than public officials. Their advantage is that they do not have deep pockets and so have to cut their losses very quickly when a project turns out to be a mistake. Public enterprises, supported financially by the government, tend to hang on long after they can be commercially justified.


Export-Oriented Industrializationu Export-oriented industrialization was in the mid-1950s a bold and unconventional

economic policy, outside the mainstream of economic development at the time, but proved to be extremely successful.

u It was advocated by Prof. Ta-Chung Liu and Sho-Chieh Tsiang, among others. u Maintenance of a single, competitive but stable, equilibrium exchange rate that

facilitates exports and imports.u Exchange rate was unified and pegged to NT$40/US$ in 1960 and was held stable for

almost two decades.u Stability is just as important, perhaps even more important, than a low level from the

point of view of economic development—producers, exporters, importers and investors can make long-term plans.

u A stable exchange rate also promotes domestic savings as it encourages the reliance on the domestic currency as a store of value.

u Reduction or rebate of tariffs in support of exports.u Establishment of the first export-processing zone in the world in Kaohsiung.


The Exchange Rate

SPOT EXCHANGE RATE - N.T.$ PER U.S.$ (MONTHLY AVERAGE)

2 0

2 5

3 0

3 5

4 0

4 5

1 9 5 9 0 8 1 9 6 2 0 7 1 9 6 5 0 6 1 9 6 8 0 5 1 9 7 1 0 4 1 9 7 4 0 3 1 9 7 7 0 2 1 9 8 0 0 1 1 9 8 2 1 2 1 9 8 5 1 1 1 9 8 8 1 0 1 9 9 1 0 9 1 9 9 4 0 8 1 9 9 7 0 7 2 0 0 0 0 6

Month

NT

$ p

er

US

$


Transformation from a Closed to an Open Economyu A small economy must be open in order to grow.

u Enterprises are free to export and import, exploiting their international comparative advantage and access to a much larger market. (There was protection in Taiwan, although over the years the degree of protection gradually declined.)

u The openness keeps the enterprises efficient by keeping the markets competitive. Inefficiencies cannot exist long in the face of international competition. This in turn puts pressure on the domestic factor markets, principally labor and land, to remain competitive.

u An open economy facilitates the transfer of technology in both production and management.

u An open economy solves the transfer problem for foreign capital in the forms of either loans or direct or portfolio investment.


Exports as a Percent of GDP:Selected East Asian Economies and U.S.

Exports as a Percent of GDP

0

2 0

4 0

6 0

8 0

1 0 0

1 2 0

1 4 0

1 6 0

1 8 0

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

Y e a r

%H O N G K O N G I N D I A I N D O N E S I A K O R E A

M A L A Y S I A P H I L I P P I N E S S I N G A P O R E T H A I L A N D

C H I N A T a i w a n J a p a n U . S .


Imports as a Percent of GDP:Selected East Asian Economies and U.S.

Imports as a Percent of GDP

0

20

40

60

80

100

120

140

160

180

200

220

240

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

Year

%HONG KONG INDIA INDONESIA KOREA

MALAYSIA PHILIPPINES SINGAPORE THAILAND

CHINA, P.R. TAIWAN JAPAN UNITED STATES


Maintenance of Macroeconomic Stabilityu A low rate of inflation and a positive real rate of interest were also

considered unconventional economic policies in the 1950s.u Prof. Sho-Chieh Tsiang was the major proponent of low inflation

and a positive real rate of interest; in particular, he emphasized that only the former could only be achieved with the latter.

u Maintenance of a low rate of inflation (an imperative because of past experience with inflation on both Mainland and Taiwan, and also necessary if the exchange rate is to remain stable).

u Maintenance of a low but positive real rate of interest (to control inflation and to promote savings and investment).

u Conservative fiscal policy, in part also necessitated by the inability to raise revenue through printing money or issuing bonds.

u Institution of a new system of taxation (since inflation tax through the issuance of money and borrowing at negative real rates of interest are no longer available).


Macroeconomic Stability: Coordination of the Three Ratesu A positive real rate of interest--maintenance of a positive real rate of

interest is one of the most effective way of preventing inflation from getting out of control.

u A low rate of inflation—a low relative rate of inflation is essential for a stable exchange rate to remain a long-term equilibrium exchange rate.

u A stable exchange rate is in turn consistent with long-term price stability—however, it must also be consistent with long-term equilibrium in the balance of payment accounts.

u Capital control was maintained in Taiwan until the 1980s, which permitted a degree of independence in the monetary policy prior to that time; however, from the early 1960s to the lifting of capital control, the gap between the official exchange rate and the black market exchange rate was never large, indicating that the official exchange rate was probably close to being an equilibrium exchange rate most of the time.


Transformation of the National Savings Rateu Ultimately, an economy has to rely on its own savings to finance its investment—

foreign resources can only help in a transition.u U. S. aid in the early years helped bridge the initial savings gap and the foreign

exchange gap. u A low rate of inflation and a positive real rate of interest promote savings.u The true savings rate of Taiwan is higher than the measured savings rate

u R&D expenditures are typically expensed rather than capitalized but they are in fact investments--yielding a stream of benefits beyond the current period

u If R&D expenditures and other investments in intangible capital, such as software, are included, the savings rate of Taiwan should be higher by at least 5 percentage points

u Translating domestic savings into investments—financial intermediation and capital markets--the role of self-fulfilling expectations.

u Creating and maintaining an environment in which investments are productiveu In more recent years, however, the government has become a net dis-saver because

of its deficits, both on and off-budget.


The Savings Rate and Real Output per Capita: Taiwan

Savings Rate versus Real GNP per Capita

0

5

10

15

20

25

30

35

40

45

0 2000 4000 6000 8000 10000 12000 14000

GNP per capita in 1999 US$

Savin

gs

Rate

(P

erce

nt)


The Savings Rate and Real Output per Capita: East Asian Economies

National Savings Rate and Real GNP per Capita

10

15

20

25

30

35

40

45

50

55

100 1000 10000 100000

Real GDP per Capita, 1995 US$

Per

cen

t

China Hong KongIndonesia JapanKorea, Republic of MalaysiaPhilippines SingaporeThailand


National Savings Rate as a Percent of GDP: Selected Countries and Regions

National Savings Rates of Selected Countries and Regions

0

10

20

30

40

50

60

Bra

zil

Ca

na

da

Ch

ina

Fra

nc

e

Ho

ng

Ko

ng

Ind

ia

Ind

on

esia

Italy

Ja

pa

n

So

uth

Ko

rea

Me

xic

o

Nig

eria

Ph

ilipp

ine

s

Sin

ga

po

re

Ta

iwa

n

Th

aila

nd

Un

ited

Sta

tes

%

1982 1998


The Savings Rate as a Percent of GDP: Selected East Asian Countries and Regions

The Savings Rate as a Percent of GDP

-10

0

10

20

30

40

50

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Perc

en

t

China Hong Kong

Indonesia Korea, Republic of

Malaysia Philippines

Singapore Taiwan

Thailand Mexico

India


The Savings-Investment GapSelected East Asian Economies

The Savings-Investment Gap as a Percent of GDP

-20.0000

-15.0000

-10.0000

-5.0000

0.0000

5.0000

10.0000

15.0000

20.0000

25.0000

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Pe

rce

nt

China Hong Kong

Indonesia Korea, Republic of


Singapore Taiwan

Thailand Mexico

India


Growth with Equityu During the period of the most rapid economic growth, approximately from 1965 to

1985, the distribution of disposable income has become more equitable, contrary to the prediction and expectation of most development economists at the time.

u The principal instruments used are the creation of employment in the non-agricultural sector and the investment in education.

u The creation of employment was mostly through the private sector.u Universalization of education, first nine years and then twelve years.

u The distribution in income in Taiwan is improved by improving the distribution of tangible wealth, through land reform, and intangible wealth (human capital), through massive government investment in education. It was not done through the direct redistribution of income.

u Giving people human capital rather than income, so that they can seek employment rather than welfare, helps to encourage self-reliance and preserve individual dignity and reduces moral hazard.

u Complementarity between tangible capital and human capital--investment in one type of capital enhances the rate of return of the other type of capital, and vice versa.


The Distribution of IncomeThe Distribution of Disposable Income in the Republic of China on Taiwan

0

5

10

15

20

25

30

35

40

45

1965

1966

1968

1970

1972

1974

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Year

Per

cen

t

0

1

2

3

4

5

6

7

Rati

o

Income Share of Lowest Quntile. l. scale

Income Share of Highest Quintile, l. scale

Ratio of Income Shares of Highest to Lowest Quintiles, r.scale


Taiwan’s Transition from Tangible Capital to Intangible Capital-Based Economic Growthu From shoe-maker to global contractoru Backward integration from assembly operationu From OEM (original equipment manufacture) to ODM (original

design and manufacture)u From intellectual “pirate” to innovator u The role of the public education systemu The role of public research and development (R&D) institutions such

as Industrial Technology Research Institute (ITRI)u Establishment of the Hsin-Chu Science-Based Industrial Park by the

government, the world’s first, and one of the very few successful ones.

u The importance of private enterprise and free entryu The role of venture capital (CDIB, formerly CDC)u The role of returnees from the U.S. and elsewhereu Networks of human capital


The Sources of Economic Growth: Findings of Kim & Lau As Reported by Krugman (1994)u Using data from the early 1950s to the late 1980s, Kim and Lau (1992, 1994a,

1994b) find that:u (1) No technical progress in the East Asian NIEs but significant technical progress

in the industrialized economies (IEs) u (2) East Asian economic growth has been input-driven, with tangible capital

accumulation as the most important source of economic growth (the latter applying also to Japan)

u Working harder as opposed to working smarteru (3) Technical progress is the most important source of economic growth for the

IEs, followed by tangible capital, accounting for over 50% and 30% respectively, with the exception of Japan

u NOTE THE UNIQUE POSITION OF JAPAN!u (4) Technical progress is purely tangible capital-augmenting and hence

complementary to tangible capital


The Sources of Economic Growth--Developing Economies in East Asiau Different types of measured inputs play different roles at different stages of

economic growthu Tangible capital accumulation is the most important source of growth in the early

stage of economic developmentu But simply accumulating tangible capital is not enough--it must also be efficiently

allocatedu Efficient tangible capital accumulation is the major accomplishment of the East

Asian NIEs, including Taiwan, in the postwar periodu Market-directed allocation of new investment, aided by export orientation,

promotes efficiencyu Private enterprises have the incentives for prompt self-correction

u Intangible capital accumulation becomes important only after a certain level of tangible capital per worker is achieved but has begun to be important for some East Asian NIEs such as South Korea and Taiwan


Real Output per Labor Hour (1980 US$)Real Output per Labor Hour (1980 US$)

0

5

10

15

20

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1980 U

S$ p

er L

ab

or

Hou

r

China Hong Kong

Indonesia S. Korea


Singapore Taiwan

Thailand Japan

Non-Asian G5


Tangible Capital Stock per Labor Hour (1980 US$): Selected Economies

Tangible Capital Stock per Labor Hour (1980 U.S.$)

0

10

20

30

40

50

60

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1980 U

S$ p

er L

ab

or

Hou

r

China Hong Kong

Indonesia S. Korea


Singapore Taiwan

Thailand Japan

Non-Asian G5


Human Capital per Labor Hour (Years of Schooling): Selected Economies

Human Capital per Labor Hour (Years of Schooling)

0

0.002

0.004

0.006

0.008

0.01

0.012

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

Yea

rs p

er L

ab

or

Hou

r

China Hong Kong

Indonesia S. Korea


Singapore Taiwan

Thailand Japan

Non-Asian G5


Sources of East Asian Economic Growth with 3 Inputs and Technical Progress—No Breaks

Tangible Capital

Labor Human Capital Technical Progress

Hong Kong 69.37 29.08 1.55 0.00 South Korea 75.44 22.33 2.23 0.00 Singapore 59.36 38.82 1.82 0.00 Taiwan 80.83 17.37 1.80 0.00 Indonesia 77.49 17.36 5.15 0.00 Malaysia 59.48 37.68 2.83 0.00 Philippines 54.60 41.24 4.16 0.00 Thailand 73.91 22.66 3.44 0.00 China 83.75 14.12 2.13 0.00 Japan 50.44 5.70 0.56 43.30 Non-Asian G-5 Countries 37.79 3.54 0.86 57.81


Sources of East Asian Economic Growth with 3 Inputs and Technical Progress—With Breaks in 1985

Tangible Capital Labor Human Capital Technical Progress Hong Kong 66-95 56.89 (8.79) 23.65 (2.44) 2.51 (4.80) 16.94 South Korea 60-95 65.45 (12.28) 18.62 (3.35) 3.84 (6.31) 12.08 Singapore 64-95 53.10 (10.23) 33.94 (4.70) 3.23 (5.92) 9.73 Taiwan 53-95 71.26 (11.76) 15.61 (2.33) 3.15 (5.40) 9.99 Indonesia 70-94 71.20 (10.88) 14.59 (2.72) 9.38 (10.34) 4.83 Malaysia 70-95 54.22 (9.65) 32.47 (4.68) 5.12 (8.02) 8.19 Philippines 70-95 54.05 (5.40) 37.81 (3.94) 8.15 (7.41) -0.01 Thailand 70-94 60.84 (9.68) 18.06 (2.93) 5.65 (8.00) 15.44 China 65-95 83.87 (11.63) 11.92 (2.55) 4.21 (5.99) 0.00 Japan 57-94 49.04 (7.98) 5.23 (0.56) 1.08 (2.15) 44.65 Non-Asian G-5 Countries 57-94 37.44 (3.52) 3.36 (0.17) 1.70 (1.68) 57.49


Sources of East Asian Economic Growth with 4 Inputs and Technical Progress—With Breaks in 1985

Sample Period Tangible Capital

Labor Human Capital R&D Capital

Technical Progress

South Korea 65-95 63.35 13.61 2.10 20.94 0.00 Singapore 77-95 47.33 21.55 1.37 29.75 0.00 Taiwan 78-95 58.73 11.42 1.32 28.54 0.00 Japan 64-94 44.83 5.20 0.82 14.63 34.52 Non-Asian G-7 Countries 65-94 33.71 3.71 1.32 12.53 48.72


Average Human Capital:Selected Economies

Average Human Capital (Years of Schooling per Working-Age Person)

0

2

4

6

8

10

12

14

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

Yea

rs p

er W

ork

ing-A

ge

Per

son

China Hong KongIndonesia S. KoreaMalaysia PhilippinesSingapore TaiwanThailand JapanNon-Asian G5


R&D Expenditures: 3 East Asian Newly Industrialized Economies

Real R&D Expenditures (3 NIEs)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

Mil

lion

s of

1980 C

on

stan

t U

S D

oll

ars

Korea R&D Expenditure

Singapore R&DExpenditure

Taiwan R&D Expenditure


R&D Expenditures as a Ratio of GDP: G-7 Countries and 3 East Asian NIES

Figure 8.1: R&D Expenditures as a Percentage of GDP: G-7 Countries and 3 East Asian NIEs

0

0.5

1

1.5

2

2.5

3

3.5

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Per

cen

t

U.S. Japan W. Germany U.K. France

Canada Italy South Korea Singapore Taiwan


Patents Granted in the United States: G-7 Countries and East Asian Developing Countries

Table 8.3: Patents Granted Annually in the United States: G7 Countries, 4 East Asian NIEs and China

1

10

100

1,000

10,000

100,000

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Nu

mb

er o

f P

ate

nts

U.S. JapanW. Germany U.K.France CanadaItaly Hong KongSouth Korea SingaporeTaiwan China


R&D Capital Stocks: G-7 Countries and 3 East Asian NIEs

Figure 8.2: R&D Capital Stocks in Billions of 1980 U.S. Dollars

0.01

0.1

1

10

100

1000

1948

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

U.S. Japan W. Germany U.K. FranceCanada Italy South Korea Singapore Taiwan


Patents Granted in the United States and R&D Capital Stock

Figure 8.4: The Number of U.S. Patents Granted Annually vs. R&D Capital Stocks

1

10

100

1,000

10,000

100,000

0.1 1 10 100 1000

R&D Capital Stock in Billions of 1980 Constant U.S. Dollars

Nu

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USJapanWest GermanyUKFranceCanadaItalySouth KoreaSingaporeTaiwan


Is East Asian Economic Growth Sustainable?u The attractiveness of investment in intangible capital depends on the protection of

intellectual property rights, which in turn depends on whether a country is a producer of intellectual property--some of the East Asian economies, e.g., Hong Kong, South Korea, Singapore and Taiwan are ahead of other East Asian economies with the possible exception of Japan on this score

u Intangible capital is different from tangible capital in three important aspects:u Intangible capital is freely mobile across countriesu Intangible capital is simultaneously deployable in different locations without

diminution of its effectiveness (increasing returns in the utilization of intangible capital)u Intangible capital enhances the productivity of existing tangible capital whereas

additional tangible capital diminishes the productivity of existing tangible capitalu Because of its complementarity with tangible capital, investment in intangible

capital can retard the decline in the marginal productivity of tangible capital and counteract the “Krugman effect”

u There is also evidence of positive technical progress in the more recent period in South Korea, Singapore and Taiwan, reflecting their increased investment in intangible capital

u The people of Taiwan (and East Asia in general) are entrepreneurial, hard-working, and thrifty--all they need is a good, market-friendly, predictable and stable environment


Lessons from the Taiwan Experience for Developing Economiesu The rate of growth of population must be brought down to manageable levels

before sustained economic growth is possible.u The transformation from agriculture to industry is inevitable.u Private enterprise can play a major and critical role.u A small economy with little or no natural resources must be open in order to

develop—the exchange rate must therefore be set to equilibrate the supply and demand for foreign exchange in the long term.

u The transformation of the domestic savings rate is essential for sustained economic growth.

u Maintenance of macroeconomic stability is essential for achieving balance of payments equilibrium and promoting domestic savings.

u Investment in human capital can not only increase productivity but also improve the income distribution.

u Investment in intangible capital (human capital and R&D capital) can help to maintain economic growth after sufficient tangible capital per worker has been accumulated.


The Economic Future of Taiwan:Transition to a Service Economyu The transition to a service economy, with a focus on high value-added activities, is

inevitable.u Just as it was discovered that Taiwan could not become rich by remaining in

agriculture half a century ago, Taiwan cannot become richer by remaining in manufacturing alone.

u The Group-of-Seven (G-7) countries have shown the way, with significantly more than half of their GDPs originating from the service sector.

u The Silicon Valley is the prime example of a successful transition—very little manufacturing is done in Silicon Valley today--it has indeed been “hollowed out”, but real wage and income per capita has continued to remain high.

u What made the success of Silicon Valley possible is the successful out-sourcing of production to elsewhere in the United States (Colorado, New Mexico, Oregon) and the rest of the World, including East Asia (and Taiwan in particular).

u As Taiwan moves up the supply chain, it too must out-source the lower-value-added activities in order to survive the global competition and to enhance the value that Taiwan is able to capture.

u Nike and Dell are the prime examples of a successful transition at the microeconomic level—neither of them do any manufacturing, but both have continued to prosper. They control intangible capital—brand name, management organization and methods, logistics, marketing, quality assurance, etc.


The Risk of “Hollowing Out”--De-Industrializationu If a good cannot be “made in Taiwan”, better that it is “made by

Taiwan” than by elsewhere (the value-added resides with the branding and the reputation of the firm, not in the physical place of manufacture).

u The distinction between GNP and GDP—it is much more important to increase GNP rather than GDP.


Models Not to Followu Silicon Valley

u High cost of housingu Japan (the Japanese disease)

u More than a decade of stagnationu Heavy hand of governmentu Lack of a vision and a strategyu Inhospitable to start-up entrepreneursu Asset price bubbleu High leverageu Inefficient non-tradable sector

u Hong Kongu Asset price bubble

u United Statesu The science base in Taiwan is too small to support a full emulation of the United

States—Taiwan must be much more selective.u Permanent agricultural price support is not a good idea—transitional aid should be

provided to individual farmers, not farms; with appropriate land use policy, farmers can benefit from land price appreciation without creating a land price bubble.


Models Not to Followu South Korea

u It is too late for Taiwan to develop some of the traditional heavy industries, such as the automobile.

u The chaebols are not, in general, a good model for the promotion of innovation (there is the same problem with Japanese zaibatsus).

u European Union (the Dutch disease)u The welfare state reduces the incentive to work and to save and imposes a huge

fiscal burden on the government. That is not to say there should be no social arrangements for unemployment, retirement and health care, but the arrangements should embody incentives for responsibility-sharing by individuals who are able to do so and preventing moral hazard. After all, the majority of the population has to bear the financial burden and responsibilities themselves one way or the other.

u Legislation supposedly designed to protect labor has made it almost impossible to dismiss any worker in France and Germany. As a result, no employer wants to hire anyone. Unemployment rates have therefore remained at the double-digit level. There is an attempt to circumvent the law through using temporary employment agencies like Manpower.

u Does Taiwan need a floating exchange rate?

taiwan as a model for economic development - stanford university

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