Considering its lack of natural resources and other difficulties, the Republic of China on Taiwan had nothing of which to be ashamed. The island province has virtually no oil. More than 80 per cent of its energy requirements must be imported. With a population of less than 18 million, there is no big home market to support business and industry. Prosperity is dependent on exports and these must compete with the developed countries as well as some of the developing countries that offer lower wage rates than Taiwan. Additionally, the Republic of China lacks the advantage of diplomatic representatives in most of the countries with which it has a large volume of trade.
After several years of relative stability, inflation hit the economy hard in 1980. Retail prices were up about 19 per cent and wholesale prices more than 20 per cent. The higher price of oil was the principal cause. Although 1980 growth was somewhat under target, the Council for Economic Planning and Development takes a mildly optimistic outlook on 1981. Growth is set at 7.5 per cent in real terms with inflation of about 9.5 per cent.
For 1980, trade still advanced briskly at a rate of about 20 per cent. CEPD forecasts a reduction in 1981 to 9 per cent growth for exports and 7 per cent for imports. This would mean two-way trade of more than US$53 billion with a deficit of a little more than US$1 billion.
Private fixed capital formation is expected to increase moderately at a rate of 7.4 per cent. Investment in inventories will make up nearly 4 per cent of the gross national product. Inflation will cut private consumption growth to under 7 per cent.
These are CEPD estimates of growth for various segments of the economy
—Agriculture, 3 per cent with a decline from 7.7 to 7.2 per cent of the gross national product.
—Mining, 4.5 per cent with an increase from 1.1 to 1.2 per cent of the GNP.
—Manufacturing, 8.3 per cent with an unchanged 8.3 per cent of the GNP.
—Construction, 8 per cent with an unchanged 6.4 per cent of the GNP.
—Electricity and other utilities, 7.8 per cent with a gain of from 2.8 to 2.9 per cent of the GNP.
—Transportation and communications, 10 per cent with a GNP advance from 6.4 to 6.6 per cent.
—Other services, 7.9 per cent with a GNP gain of from 33.9 to 34 per cent.
Some economists are of the view that inflation cannot be held to the projected figure of 9.5 per cent. Estimates range from 10 to 13 per cent—all of them well under the 1980 performance. There is unanimous agreement that the worst of the oil price shock was weathered last year and that indexing will temper the effect of expected 1981 increases. Far-reaching steps were taken in 1980 to economize on the use of energy by industry, business and household consumers. Manufacturing emphasis has been given industries which are energy-efficient — especially electronics and electrical appliances.
Construction is proceeding on the island's second and third nuclear plants. When both are in full production, the requirement for imported oil will be substantially decreased. Many of Taipower's thermal power plants are already burning coal or soon will be. Long-term contracts for coal imports have been signed with such countries as Australia, the United States and South Africa. Coal exploration and exploitation at home are being stepped up. Production has fallen from the more than 5 million metric tons of a few years ago to less than 3 million tons.
With unemployment standing at only a little over 1 per cent, the educational system is emphasizing vocational training to provide more workers for industry. Labor productivity is being encouraged to keep up with the higher wages required by inflation.
Per capita income reached US$2,100 last year at current prices, assuring a continuation of the good life for Taiwan's people despite the big bite of higher prices. Private cars and motorcycles are so numerous that Taipei streets have become a perpetual traffic jam from early morning to late at night. Apartment prices have doubled and redoubled in the last few years without loss of buyers.
Although private investment is down, the government has been able to take up the economic slack without incurring huge deficits. Several of the Ten Major Construction Projects to modernize the infrastructure are being continued. Port and railroad construction is included along with work on the second and third nuclear power plants. Twelve more construction projects will benefit less developed areas of the island and make important cultural contributions to the people. Improved transportation is opening lip the last frontier of the east coast, which has mineral and forestry reserves, tourism potential and a dearth of people. The around-the-island railway will be completed in the mid-1980s.
Economic planners are not concerned because Taiwan fell behind Hongkong, Singapore, Malaysia and Indonesia in economic growth for 1980. The Republic of China still forged far ahead of South Korea, its principal economic rival, which wound up in the minus column. Hongkong and Singapore are too small in area and population to be comparable. Malaysia and Indonesia are rich in natural resources. Both have rural populations to satisfy the requirements of new industry looking for low labor costs.
Per capita income of US$2,000 is often regarded as the take-off point for a developing economy. That means the Republic of China is prepared to move into advanced economic ranks during the decade of the 1980s. Agricultural dependence has been left far behind, although the people of farms still make up about a third of the population and are not being neglected by economists or the nation. Also being put aside is the manufacturing straitjacket of small and relatively unsophisticated industry producing cheap goods for the home market and for relatively unprofitable exports.
In the 1970s, the Republic of China showed the Chinese of the mainland how to modernize. Land reform, light industry, widespread education, and government and private investment have given rise to an economy that is already challenging those of comparable countries in the West. The Taiwan economic goal is not only the completion of the island's success story but the extension of this experiment in free enterprise and meaningful" hard work to the huge laboratory of the Chinese mainland. What has been done in the island province will also be successful in China's continental provinces once the Communist throttlehold on incentive, investment and education has been broken.
Having just closed out a US$40 billion trade year, the Republic of China is now acknowledged to be one of the world's biggest little economic powers. Things haven't been this way for long. Not until 1968 did Taiwan have its first US$1 billion trade year. The US$10 billion mark was passed as recently as 1978.
If any country has moved from the farm to the factory faster, the word hasn't yet reached Taipei. In Japanese occupation times only a generation ago, Taiwan had sugar mills and canneries but few factories and those miniscule. The Japanese wanted the island to be a rice, fruit and sugar bowl. Manufactured goods were to be supplied by the industries of Tokyo and Osaka.
For some years after the Japanese departure in 1945, concentration remained on agriculture. The big economic development of the late 1940s and early 1950s was land reform. Absentee landlords sold their holdings to tenants. Taiwan farmers became freeholders with a greatly increased incentive to produce. Some of the returns from farm sales were invested in infant industries to produce goods needed by farmers and city dwellers. The U.S. aid program gave industrialization a brisk push.
Seeking jobs to keep a rapidly increasing population busy, the government encouraged both domestic and foreign investment. While many other countries were discouraging free enterprise and opting for welfare states and socialization, the Republic of China gave entrepreneurs their heads. The man who put his money in a factory instead of conspicuous consumption waxed very rich. As long as he plowed profits back into business and industry, the government withheld confiscatory taxation.
Initially, Taiwan's big businesses were in the hands of the government. They had been taken over from the Japanese, who tended to monopolize anything that returned a fat profit. So the early factories were small and family owned. Many remain in that category. But a few textile moguls and plastics kings waxed big and expansive. Their industries outgrew the limited local market and reached out for customers overseas. These businesses and the many to follow were built on a foundation of reasonably priced, intelligent labor. Taiwan was not a super sweat shop, however. Workers were free to organize and did so. They were not unreasonable because employers were prepared to share economic gains with them and because the government tried hard to keep the lid on inflation and stretch the New Taiwan dollar further.
Those early days could be described as a bicycle society. Everyone could afford a bike and most people went to work on them. Transportation for hire was provided by the pedicab. The first graduation was to the motorcycle, which was cheap and used little fuel. Bicycles became far and few between. The pedicab was banished to the countryside. Now the auto era has dawned. People are either buying a car or saving for one. Export of trucks has begun. Major auto makers of the United States and Japan are interested in helping Taiwan build an automotive industry of major proportions.
U.S. aid administrators encouraged small textile mills to provide import substitutes. Today the United States and most other Western countries impose textile quotas on the Republic of China because that small industry has grown so fast and so well. Seemingly everybody in the Free World wears something from Taiwan. Sweaters, for example. The 1980 export sales level was about US$500 million for this one garment. Taiwan sold 10 million dozen of them overseas last year. The US$4 billion textile industry has been No. 1 on the Taiwan export list for many years. It won't be staying there much longer.
Electrical machinery apparatus and electronic products are catching up fast and probably will move out in front this year. Japan has been surpassed in the export of black and white television sets and is being challenged in the realm of color. Exports of video tape recorders will begin soon. There's nothing much electrical or electronic that Taiwan doesn't make. Further impetus will be provided by the new science industrial park at Hsinchu an hour's drive southwest of Taipei. The eventual expectation is for another microchip valley 5,000 miles west of California's Santa Clara valley. Many electrical components are still imported from the United States and Japan. The total is declining, however. Not long ago Taiwan licked the integrated circuit problem. Electronics makers are beginning to show the same interest in research and development that raised Japan to a preeminent position in this energy-efficient industry.
Manufactured products now make up about 90 per cent of the Taiwan export list. Over the US$1 billion mark on an annual basis are (in addition to textiles and electrical and electronic products) shoes, wood products, and toys and sporting goods. Who would think of Christmas lights as an important export? Taiwan is the world's leader and in the US$100 million class. That's a lot of holiday lights and the living for a sizable number of people.
Climbing toward US$1 billion per annum are metal products, machinery and transportation equipment. The farmer profits from a food processing business earning close to US$1 billion a year. Mushrooms and asparagus have more than made up for the decline in tinned pineapple. Not very long ago every watch in Taiwan was imported. So was every camera. Today each is approaching the US$200 million export level.
As with every other non-oil producer, petroleum dominates the import list. The cost was about US$5 billion last year and is estimated at US$7 billion for 1981. The better part of a billion dollars goes for grains to feed nearly 18 million people. It takes US$500 million worth of cotton and wool to keep the spindles whirring.
Just as Taiwan exports manufactured goods, so does it import them for processing and similar uses. Machinery is the leader at more than US$2 billion followed by electrical and electronic products at a little less. Checking in at over the US$1 billion mark are chemicals, iron and steel and transportation equipment.
Although the Republic of China has diplomatic relations with just over a score of countries, it is trading with around 150. These now include the states of Eastern Europe. The United States is the biggest customer and Japan is the leading supplier. The American and Japanese roles are reversed on the import list. Other leading importers of Taiwan goods are Hongkong, West Germany, Saudi Arabia, Singapore, Australia, the United Kingdom, Indonesia, Holland and Canada. Kuwait and Saudi Arabia rank third and fourth among suppliers in consequence of the need for oil and its high price. Then come West Germany, Australia, Indonesia and Malaysia.
Many of the countries which eagerly leaped into Peiping's arms, hoping to sell something to a billion people, have come to realize that Taiwan is still a better customer in the short run and a more promising one in the long run. Lacking in diplomatic relations with the ROC, these countries have opened trade offices in Taiwan — offices which also perform consular functions and unofficially serve as embassies. Entering 1981, Taiwan has about the same trade problems as other countries: inflation, the high cost of energy and rising protectionism. Confidence continues that these will be solved or at least mitigated by the age-old device of building a better mousetrap and persuading the rest of the world to beat a path to your door.
The American Institute in Taiwan, successor to the U.S. Embassy, has reported that the Republic of China could become a tough competitor for the United States in technology-intensive industries. At the same time, AIT said, it is in the high technology field that the United States can find the biggest opportunity for increasing exports to Taiwan. AIT has taken note of the increasing competition of European goods, which also are bidding for a share of the lucrative advanced technology market in Taiwan. Aircraft purchases are being made in Europe and nuclear power plants may be bought there.
As AIT sees the future, "The most significant development in Taiwan's economic policy is its concerted efforts at diversification. It is diversifying in trade and energy usage. The diversification of trade, by increasing trade with partners other than the United States and Japan, will naturally mean that the importance of the United States as a trading partner will decrease. On the other hand, the U.S. will still be the largest single market for Taiwan's exports.
"American products with good prospects in Taiwan are agricultural goods; chemical raw materials; production equipment for electronics, metalworking, machinery and construction industries; process controls and test equipment; computers; health care equipment; and pollution control equipment.
"Taiwan's energy diversification policy includes the type of energy that it uses as well as the geographical areas from which it buys its energy. The diversifying of the types of energy from petroleum to coal and nuclear power has created a strong potential market for U.S. exports in both of these areas. The long-term coal contracts that Taiwan has already signed with firms from the United States and other countries are still short of projected demand. The United States currently is the only supplier of Taiwan's nuclear plants."
The United States is the biggest investor in the Taiwan economy. It has the largest number of banks operating in the Republic of China. Exhibitions of American products are almost continuously on display at a trade center in Taipei. The only organization of varied commercial interests is the American Chamber of Commerce in the Republic of China.
American businessmen and industrialists are big boosters for the Republic of China politically as well as economically. They have put their hearts where their money is, or quite probably it is the other way around. When the U.S. Congress was debating the Taiwan Relations Act, the president of the American Chamber of Commerce was on hand to express the views not only of U.S. businessmen in Taiwan but of the American colony in general. Many Americans doing business or residing in Taiwan protested strongly to President Carter or their Congressman when the United States recognized Red China and withdrew formal recognition from the Republic of China.
Twenty-five years ago Taiwan hadn't a single foreign bank. There wasn't any reason why it should have had. Foreign trade was miniscule. The Bank of Taiwan and its foreign correspondents was more than sufficient. As of the end of 1980, 21 foreign banks had branches open in Taipei and Lloyds Bank International Ltd. of London was on the way to raise the total to 22.
Foreign banks may be established in Taipei or Kaohsiung. First on the banking scene was the Dai-Ichi Kangyo Bank of Japan, which opened its Taipei branch in September of 1958. Although not so well known as the American banks, Dai-Ichi Kangyo is a powerful factor in Taiwan-Japanese trade.
The Americans arrived in February of 1965 with City Bank of New York just before the U.S. aid program ended. Bank of America followed the very next month, followed by the Bangkok Bank of Thailand and American Express International That was enough for more than four years. The next addition was the Metropolitan Bank and Trust Company of the Philippines in October of 1970.
Taiwan's surging trade and economic success triggered an influx of American banks throughout the rest of the 1970s. Chase Manhattan began the new trend in December, 1972. Then came Continental Bank and Irving Trust in 1973, United California in 1974, Chemical Bank and Toronto Dominion in 1975, International Bank of Singapore in 1978 and Seattle-First National, Rainier National and First National of Boston in 1979.
If the 1970s was the decade of the Americans, that of the 1980s may turn out to be that of the Europeans. Despite the Republic of China's withdrawal from the World Bank and International Monetary Fund, Grindlays Bank of Britain, the European Asian Bank of West Germany, Societe General and the Banque de Paris of France and the Hollandsche Bank-Unie of the Netherlands arrived in 1980.
Although they sometimes complain of restrictions, all of the foreign banks that have been present for some time are money makers. They have found the economy stable, experienced personnel readily available and foreign exchange regulations which are not too hard to live with. Foreign banks are not allowed to accept time and savings deposits. The ceiling on deposits is 12.5 per cent of capital or NT$1 billion, whichever is lower. In October of 1980, the Central Bank restricted pre-export loans to the level recorded as of the end of June or US$10 million for the new European banks. This move was made to help combat inflation. As of the end of October last year, outstanding loans of foreign banks totaled NT$74.9 billion (US$2.08 billion), about 8.5 per cent of the Taiwan total.
Each bank tends to do business with its own country and promote loans for those buying equipment there. Both Grindlays and the Banque de Paris have refinanced loans to provide industry and business with access to capital goods and know-how — from Britain and France, of course. The Export-Import Bank of the Republic of China is prepared to finance Taiwan exports through the foreign banks.
The foreign banking establishment is encouraging Taiwan trade relations with parts of the world where commercial interests are just developing. Societe Generale, for example, is active and knowledgeable in Africa, where Taiwan goods have a good prospect. The general manager of this French bank has suggested that trade with Ivory Coast and Nigeria can be substantially increased.
Although setting up a Republic of China branch bank doesn't come cheap, Western bankers consider that they are getting a bargain compared with costs at home and in such places as Japan and Hongkong. Expatriate employees need not be paid such a high housing allowance. Office space is plentiful at reasonable cost. Best of all is the pool of trained bank employees available in the domestic system. A team of continuous replacements comes from the business schools of Taiwan's leading universities.
Not so many years ago, the people of Taiwan distrusted all banks. Now they are beginning to trust and use their own as well as those that come to the island from abroad. Those involved in selling and buying goods involved in international trade have learned that a good bank is an absolute necessity and an important contributor to their margin of profit.