In July of this year, the United Daily News invited a blue-ribbon panel of economic experts to assess the past five decades of Taiwan's “economic miracle,” also called the “Taiwan experience,” and discuss its relevance for the future.
Chang Tso-ching (張作錦), president of the newspaper, moderated the discussion. In his opening remarks, Chang said: “People here are proud of the Taiwan experience. It enabled us to rise from the ruins of World War II to prosperity as one of Asia's 'four little dragons' [South Korea, Singapore, Hong Kong, and Taiwan]. Since the end of the Cold War, all nations have been able to concentrate more on their economic development. In Taiwan's case, it remains to be seen whether our experience during the past fifty years is still relevant in the new world economic order. Many prominent international research institutions have pointed out that Taiwan's competitiveness in world markets is declining. The United Daily News is sponsoring this seminar in order to help bring this issue into public focus so that Taiwan's growth and development can be rejuvenated.”
Translated with permission from the United Daily News (July 17. 1995).
The panel participants were (in alphabetical order): Chao Yao-tung (趙耀東), a national policy adviser to the ROC president and a former economics minister; Chen Ting-an (陳聽安), a professor of public finance at National Chengchi University; Jaw Shau-kong (趙少康), secretary general of the New Party and formerly head of the Environmental Protection Administration; Charles Kao (高希均), a professor of economics at the University of Wisconsin and president of Common Wealth magazine; Joseph S. Lee (李誠), vice president of the Chung-Hua Institution for Economic Research (CIER); Lin Chu-chia (林祖嘉), head of the Graduate School of Economics at National Chengchi University; Shih Tsuen-hua (施遵驊), assistant director general of the banking department, Central Bank of China, and a professor of economics at National Central University; Wang Chou-ming (王昭明), a minister of state; Yeh Wan-an (葉萬安), an adviser to the CIER; and Yu Tzong-shian (于宗先), president of the CIER. Excerpts follow:
Charles Kao: The key to Taiwan's future success lies not in politics but in economics. We must maintain the economic advantages we already possess. Before former President Chiang Ching-kuo died in January 1988, the Taiwan experience was characterized by long-standing social stability, high economic growth, and sustained expansion in foreign trade. The past six years can be called the era of the “post-Taiwan experience.” During this period, many unfortunate phenomena have emerged: People are rich, but the government is poor. Most families live and work in modern facilities, but public facilities fail to meet their needs. Democratization is proceeding rapidly, but the quality of life is deteriorating. And relations between Taiwan and Mainland China have grown closer, yet they have also become less stable.
Chao Yao-tung: The Taiwan experience can be divided into two stages. The first, from 1949 to 1987, was characterized by rapid economic development. The second, from 1988 to the present, has featured rapid political democratization. Although Taiwan economics ministers before 1987 found many effective ways to boost economic development, their policies were aimed primarily at increasing productivity and penetrating international markets. Eventually, we began encountering a deteriorating natural environment and an unsatisfactory quality of life.
Wang Chou-ming: The Taiwan experience should not be limited merely to the economic dimension, The significance of political reform and democratization in Taiwan's development process should also be duly recognized. Nowadays many people blame the government for having paid inadequate attention to other areas of national development during the early decades. But such criticisms are not fair. Given the circumstances of the times, there was no choice but to make economic development the first priority.
Yeh Wan-an: We should not consider the Taiwan experience a complete success. It seems to me that our failures were as valuable as our successes.
On the positive side, between 1961 and 1972, Taiwan enjoyed high economic growth and was able to keep commodity prices down. This was indeed remarkable. Before 1972 we had high consumption and low investment, but after 1972, investments increased substantially. At the same time, foreign trade boomed, exports increased, and the trade deficit became a surplus. Eventually, financial conditions stabilized, thereby laying a solid foundation for the economic growth that came in the following years.
Why was this experience so successful? First, the government closely followed trends in international trade and made the most of Taiwan's limited resources. Second, the government took a two-track policy of business intervention and encouragement. Although intervention somewhat distorted natural economic development, it nevertheless helped create an environment favorable for private sector growth.
Taiwan in the 1970s was among Asia's four little dragons, or newly industrialized economies (NIEs). In 1977, our foreign trade volume and export volume were both greater than those of Singapore, though still less than Hong Kong and South Korea. Taiwan had a higher per capita GNP than South Korea, but was lower than both Singapore and Hong Kong. By 1987, we ranked first among the four in economic development. But our economy started ebbing in 1988, and the negative side effects of the Taiwan experience became more evident. Since 1988, our growth rates for exports, per capita GNP, savings, and investment have ranked last among the four little dragons.
Why? Because the government rallied all its resources to boost economic development in the earlier period, but has focused on political issues since the death of Chiang Ching-kuo. In the past, economic problems were more easily handled than today because people now tend to link every economic issue to politics. This has chilled the investment climate and damaged economic development.
Yu Tzong-shian: Taiwan's economy grew rather steadily prior to the 1980s thanks to the generally bullish international economic environment. And in Asia, from the 1950s to the 1970s, quite a few countries---including South Korea, Vietnam, Indonesia, and the Philippines---suffered from wars or coups d'etat, while Taiwan enjoyed peace and stability.
Also at that time, protectionism was yet to emerge in the United States and Europe, and we could export virtually everything we produced. It was the golden era for labor-intensive industries. High-tech expertise was less important. Small and medium-sized businesses simply bought machines from the United States and Japan, then started turning out products and making money. We had a very high export growth rate.
But we made mistakes as well. First, the land reform undertaken in the 1950s was incomplete. It focused on farmland and did not deal with urban areas. Even the farmland reform dealt simply with land ownership transfer and failed to address land utilization. At that time, we did not foresee the negative consequences of subdivided farmlands. For example, when an old farmer divided his land among his sons as they reached adulthood, each received an even smaller piece of land. As a result, farm mechanization and increased productivity became impossible. We know all too well that land issues are now linked closely to many of today's social problems, such as unequal distribution of wealth and collusion between government officials and construction companies. The land problems remain unresolved.
Our second mistake was that we were so busy creating more job opportunities that we gave inadequate attention to issues such as pollution. In the 1960s and the 1970s, many industries were set up that were by no means environment-friendly. Since environmental awareness got a late start here, we are now paying the price. Even though we are more aware of the problems, some bribed government officials have continued to allow construction companies to destroy slopelands, watersheds, and other valuable land.
Moreover, during the 1950s and 1960s, protectionism was a mainstream orientation here. The best example is Taiwan's car industry, which received government protection for decades. The result is that our automobiles are not competitive. The pace of liberalization picked up in the 1980s mainly because of pressure from the United States. To be frank, without such outside pressure we would still have a closed-door policy in many respects. Even today, many government officials still support protectionism.
Currently, the government is committed to establishing Taiwan as a regional operations center in the Asia-Pacific market. But if we can't speed up the liberalization process, we will achieve nothing. For example, more than 120 laws and regulations need to be revised. Otherwise, the plan will just be meaningless talk.
Jaw Shau-kong: In both political and economic terms, relations with Mainland China have a significant impact on our external relations, while provincialism and class issues are major domestic problems. Since political problems have direct influence on economic development, social harmony must be maintained; otherwise, conflicts will lead to social unrest and, eventually, emigration.
Economic growth requires a sense of security among the populace, but we now lack this. This problem deserves close scrutiny. People need to know what they can attain ten years from now if they work hard. But this is no longer the case here. People are afraid they could lose everything they have because of political chaos.
Currently, many local businesspeople, including owners of internationally known enterprises, acquire loans from local banks but then invest overseas. This way, if anything happens to Taiwan, they can still protect their earnings. Recently, relations between Taiwan and the mainland have become unstable, and the triangular relations among Taipei, Washington, and Beijing have become more intricate. These developments add more uncertainty to Taiwan's future.
Moreover, we lag far behind in environmental protection. Most people were pleased when the Cabinet-level Environmental Protection Administration (EPA) was established in 1987. But now, with economic growth slowing, many businesspeople are criticizing the EPA for emphasizing environmental protection at the expense of economic development. But more effort is needed on environmental issues. In the future, failure to conform with international standards regarding carbon dioxide emissions, ozone depletion, and acid rain may lead to sanctions. As a member of the global village, the ROC must comply with international protocols.
Joseph S. Lee: The Taiwan experience helped us go from poor to rich. It was hard-earned success. World Bank experts have attributed Taiwan's achievements to its free economy, and they have suggested that other developing nations emulate us by adopting a market economy. Now, during the post-Taiwan experience era, we should go beyond the pursuit of sustainable economic development and put equal emphasis on issues such as social justice, democracy, and achieving Taiwan's due international status. Especially now, as economic development slows down, we should take this opportunity to thoroughly re-examine our policies.
Shih Tsuen-hua: Domestic monetary policy from the 1960s to the 1980s helped Taiwan enjoy stable economic growth without inflation. This success should be attributed in part to the Central Bank, which took measures to sustain growth in line with the government policy to maintain stable commodity prices. In contrast, many developing nations used inflation to help speed economic growth, but the result was serious inflation, economic depression, and a huge foreign debt. Although Taiwan and Latin American nations started boosting economic development in the 1950s, we achieved very different results by the 1970s.
Since 1949, when the ROC government relocated to Taipei, one of the Central Bank's primary objectives in foreign exchange policy has been to encourage export expansion in the hope that the exchange rate of the NT dollar would sharpen the competitive edge of local businesses, expand exports, and earn more foreign exchange, thereby leading to continued prosperity.
In the 1960s and 1970s, Taiwan had very strict controls on foreign exchange.
Actually, it was only in 1979 that the foreign exchange market really came into being, and even now the Central Bank keeps a firm grip on it. In the I 960s, the exchange rate between the NT dollar and the U.S. dollar was 40 to 1, and it was kept at 38 to 1 from 1973 to 1979. Strict controls by the Central Bank aimed to delay and then gradually ease the appreciation of the NT dollar. It was feared that sharp appreciation would deal a heavy blow to exports. But this policy also stimulated speculation. That's why Taiwan's economic conditions became unstable in 1985, with the booming stock market and widespread real estate speculation. The Central Bank did not loosen its restrictions until 1989.
Taiwan's financial liberalization has had a major impact on monetary management. The Central Bank is now planning to use more indirect means. It will allow local financial institutions to manage themselves through market mechanisms and will not interfere with normal banking activities. With the increase in the number of financial institutions in Taiwan, competition will certainly intensify and great change can be expected. But laws and regulations governing these institutions are still incomplete.
The operations of financial institutions have a great impact on overall domestic finance, so we cannot simply let their success or failure be determined by market forces. In other words, the Central Bank should be ready to intervene whenever the market has serious problems. For example, earlier this year during the Mexican financial crisis, the U.S. government made great efforts to save its neighbor from financial collapse. From my point of view, this is a way of correcting the market, although some people may disagree.
Taiwan's M2 money supply [notes and coins in circulation plus checking account deposits] is equal to 180 percent of its GNP, compared with 60 percent in the United States. It is quite risky to allow such a large amount of currency to circulate in the market without restrictions. The government can play a positive role by maintaining market order and correcting market activities while still pursuing financial liberalization.
Yu Tzong-shian: In the future, the government won't be able to determine the direction of industrial development because the private sector will make its own decisions based on information from worldwide networking. Moreover, there won't be much difference between local and international markets because tariffs will be lowered and most non-tariff barriers will be cleared away. Given such circumstances, we hope that Taiwan's economy will still be able to grow, that income distribution will be reasonable, and that the quality of life will improve.
What role should the government play in achieving these ends? In the twenty-first century, the government will be neither the protector of weak businesses nor the rescuer of sunset industries. Instead, it needs to build a better investment environment by establishing appropriate laws and regulations, reliable public facilities, stable political surroundings, and efficient government. If this is achieved, investors will be confident and so will businesspeople. Convenient transportation and a safe and peaceful modern environment are all necessary for a comfortable life. Only when people are happy living here will they feel secure about working here.
Lin Chu-chia: Housing is a major component of a good quality of life. But since 1949, the government's land policies have focused on increasing productivity. Since the 1960s, income levels and wealth have accumulated rapidly, and the need for housing and land has grown at the same time. Especially in the late 1980s, high real-estate prices not only aggravated the distribution of income and wealth, but also scared people away from industrial investment and thus slowed economic growth.
The question is how best to maintain a stable real-estate market. Surely we need to review our land-use policies and designate some farmland for housing and industrial use. Yet it is even more important to discourage speculation by levying heavy taxes on anyone who profits from real-estate investments. The government should also raise the rate of the land-value increment tax and base it on real transaction prices.
The land used for housing and industry accounts only for 5 percent of the island's total area. Plenty of land is still available. But in the current real-estate market, speculators won't be satisfied no matter how much land the government releases. The only solution is to amend the taxation system. Only when speculators are restricted by heavy taxes can those really in need acquire land for housing and industrial use.
Chen Ting-an: Economic growth has become sluggish and income distribution patterns are worsening due in large part to a lack of equality and justice in the taxation system. Tax reductions for certain businesses and occupations are unfair. The government either reduces or gives up some taxes it should collect. As a result, taxation doesn't improve the distribution of wealth. Instead, it robs the poor to support the rich.
Legislators cater to their constituents by approving tax reductions and exemptions for specific businesses and groups. But at the same time, spending grows and grows because the government doesn't control itself. A healthy financial system is the best guarantee for economic development. To secure continuing, stable growth, government spending must be curtailed and equitable taxation policies must be established as soon as possible.
Yeh Wan-an: In recent years, the business sector has proven itself highly capable of making the necessary adjustments and taking creative initiatives in a highly competitive economic environment. It's no longer necessary for the government to protect it like a baby sitter. Liberalization must continue in order to promote fair competition and a free and open economy. That was why I suggested in 1993 that the Asia-Pacific Regional Operations Center Plan be included in the government's Economic Revitalization Program. The government has made this plan a top priority, and Taiwan can become a regional operations center if all the concerned agencies put aside their differences and work together.
Wang Chou-ming: It's true that the past emphasis on economic development needs to be readjusted. More attention must be paid to democratic development, social justice, and the environment. For the post-Taiwan experience, we must avoid antagonisms, such as those between factions, central and local governments, individuals and the state, and even the two sides of the Taiwan Straits. People must remember that the Taiwan experience from the 1960s to the 1990s was based on social stability. We need a society ruled by law---it's the major premise when trying to improve democracy and social justice. The rule of law is as important as stability.