In considering economic development in the Republic of China, we may inquire into the meaning of "economic development." Is it aimed at creating wealth? Are the rich to be made happier than the poor? The real objective of economic development, I feel, is the conquest and harnessing of nature in the service of mankind as a whole. It is now widely held that successful economic development should be defined not only in terms of rapid growth but also of improving social welfare. This should continue to be so in the decade ahead.
Social welfare is based on such factors as economic growth, price stability, employment, income distribution, education, sanitation, transportation, housing, prevention of pollution and solutions for problems of the elderly, labor, poverty, leisure, recreation and so on. The goals of economic development may be complex, but we can rely on the improvement of social welfare to determine the direction of our efforts.
The economic development of the Republic of China over the last 20-odd years was highly satisfactory. Rapid growth was accompanied by stable prices, successful labor absorption and improved income distribution.
At the outset of the postwar period, Taiwan was still predominantly an agricultural economy with over half of the labor force employed in primary industry. As a result of industrialization, this share has dramatically declined to 23 percent. From 1951 to 1978, the real national product grew by 8.8 times at an average annual rate of 8.2 percent. Per capita GNP increased from US$140 to the present US$1,400. The major export items until the end of the 1950s were sugar and rice, comprising well over half the total. With the industrialization and export expansion of the 1960s, the export share of sugar and rice had dropped to 3 percent by 1970. The financial import-export gap as a percentage of imports dropped from 42 percent in 1952 to 3 percent in 1970. An export surplus was recorded for most years of the 1970s. In 1978, the surplus reached US$1.7 billion or 6.5 percent of the GNP.
The 1960s were marked by price stabilization. Inflation averaged only 2.8 percent annually. Although prices rose in 1974 as a result of the oil crisis, inflation was stemmed in 1975 and thereafter was held to around 3 percent.
During the 1950s, the unemployment rate hovered at around 6 percent. However, due to the rapid labor absorption of the 1960s, unemployment was virtually eliminated by the end of that decade. Rapid economic growth was accompanied by improved income distribution. A study by Dr. Chenery, et al., comparing 66 countries, shows that the income distribution in Taiwan was the most equitable among developing countries and areas studied. The incomes of the poor have risen much more rapidly than those of the wealthy in the last two decades.
Social welfare improvements in the Republic of China are measured by a number of indicators. A comparison of 1952 with 1977 shows the following: Decrease in the crude death rate from 14 per thousand to 5 per thousand. Increase in life expectancy from 58.6 years to 71 years. Increase in the daily protein intake from 49 grams to 77 grams.
Many hurdles had to be overcome in the achievement of this success. Immediately after World War II, we were in a difficult position. There was a state of war on the Chinese mainland in the late 1940s. Prices in Taiwan rose about fivefold annually. The increase was thirty fold in the first half of 1949. The government had a huge deficit. Defense expenditures were heavy. Many small enterprises were producing simple manufactures of poor quality at high cost. Competition with foreign commodities in the international market was impossible.
Successful development of the economy can be attributed to many factors, including political stability, a high-level of education, the intelligence and diligence of the Chinese people and correctly chosen, efficiently implemented economic policies.
Among the economic policies implemented by the government over the last two decades, two were especially important. One was the stabilization policy of the 1950s, the other the export expansion policy of the 1960s.
Essential measures of stabilization included the New Taiwan Dollar reform of 1949 and the "preferential interest savings deposits" introduced in 1950. The annual interest rate for a one-year time deposit had been 20 percent. The interest rate on the new deposits was 7 percent monthly, which, compounded, would amount to 125 percent annually. As a result of the prevailing hyper inflation, duration of the deposits was very short only one month at the outset. Long-term deposits were gradually added as price stability was achieved and the amount of deposits rose.
By 1961, the inflation rate was only 2 percent. Although the currency reform took 12 years, it was necessary for successful economic development.
The "labor-intensive, export expansion" strategy also should be emphasized. In the postwar period, the alternatives were import substitution or export expansion. The destinations of these two roads were unknown to economists at that time.
Our government correctly chose the road of export expansion. The same decision was made by South Korea, Hong Kong and Singapore. Countries choosing import substitution included India, the Philippines and Pakistan. The end of each road was coming into sight by the late 1960s. Growth of the Republic of China, South Korea, Hong Kong and Singapore was apparent. By the early 1970s, India, the Philippines and Pakistan had begun to change direction. Today we expect their light manufactures made by low-cost labor to enter competition in the world market.
The labor-intensive, outward-oriented strategy accorded well with comparative advantages enjoyed by the Taiwan economy. Labor intensiveness made optimum use of an abundant resource and helped solve the unemployment problem.
Employment has more than doubled in the last 25 years. Two-thirds of the increment was absorbed by manufacturing and related industries. Among 19 manufacturing industries, food processing, textiles and electronics accounted for half of the labor absorption by manufacturing. Food processing ceased to be a labor absorbing industry after 1966. Export expansion has been the essential factor contributing to rapid growth and labor absorption over the last 10 years or so.
Labor absorption first eliminated unemployment. New job seekers and the formerly unemployed were absorbed mainly by the non-agricultural sector and especially by the export leading light manufacturing industries. A characteristic of Taiwan's farm income is that it includes a large portion of non-agricultural income. The non-agricultural portion amounted to 34 percent in 1964 and 56 per cent in 1977.
Land reform and education policy had noteworthy roles in Taiwan's development.
One's income depends not only on the income of today but also on the income of yesterday from such assets as land, capital and intensive education. Land reform had been successfully implemented by 1953. It led to equalization of holdings and a smaller scale farming system. The smaller size of the farm system brought about more intensive use of labor. This together with changes in conditions of tenancy contributed greatly to the development of agricultural diversification and improvements in agricultural income.
Extensive education is another important means of creating higher incomes. Although there is no way of achieving complete equalization of education (because of differences in teachers, facilities, etc.) two important factors in the educational system of the Republic of China are related to equalization of income distribution.
One is the very low tuition rates set by the government. The average tuition charge is US$100 a year for enrollment in a public college and US$300 in a private college. The other is the unified entrance examination system under which each student has a fair competitive chance. With no discrimination between rich and poor, many students from low income families enter the best colleges.
The domestic economy has now reached a turning point. Unskilled labor is close to fully utilized. The wage rate has been rising. High school and college graduates are relatively abundant. The government's Ten Major Construction Projects have laid a foundation for heavy industrial development. Entrepreneurs have more advanced technology and more capital at their disposal than two decades ago. National defense has become stronger in terms of both finance and production. The international situation has changed, too. Oil has become a precious commodity. Its price will continue to rise and its supply may be subject to vicissitudes. Protectionism is gaining ground all over the world. Many newcomers in the world market are producing at lower wage rates. The international monetary system is far from stable. Without regard to U.S. "normalization of relations," Chinese Communist competition in the world market is keen.
Given these changes, the Republic of China must also change economic course. The old road led us to great successes. But to stay on the old road may no longer be fruitful. At this juncture, we face new alternatives.
The strategy of development has to be carefully planned. These points will need to be taken into consideration for the development of future industries:
- Low energy intensiveness.
- High technology intensiveness.
- High value added.
- High labor intensiveness.
- Good marketability.
- Strong defense foundation.
- High domestic linkage.
Among the manufacturing industries, machinery and electronics best fit all these conditions. Upgraded textiles is also an important industry for the future. In the service sector, banking and finance have been of increasing importance in recent years. Computers are climbing fast. Development of the service sector will not only generate value added, but also provide benefits for other industries, especially manufacturing. All these are strategic industries for future development.
The economic development of Asian countries in the late 1970s has been exceptional. The Republic of China achieved 12.7 percent growth in 1978. Growth rates for some other Asian countries in the same year were South Korea, 12.5 percent; Hong Kong, 10 percent; Thailand, 8.7 percent; Indonesia, 7.7 percent; and the Philippines, 7.5 percent. They expect to show growth of 7 to 10 percent this year.
This is a competitive world. We must switch to a new road and seem to have already chosen it. However, we have to ask ourselves if we are really determined to move along this new road. The going may not be as smooth as on the old road. Before we can make good progress, we shall have to smooth the way. Many difficulties must be overcome. Among these are the application of new machinery, adaptation of new methods, creation of new products, finding of new markets and emphasizing of new management. Much will depend on entrepreneurial initiative. Entrepreneurs can foresee what ordinary people cannot and move one step ahead. Entrepreneurs of the Re public of China have overcome many difficulties. They will not be satisfied with the present level of success. The newly industrialized countries are catching up. We must quicken our pace and keep that one step ahead.
Many things need to be done by government agencies. Revisions of inappropriate laws and regulations have to be carried out as quickly as possible. Institutional factors take time to change. The degree of success in the 1980s will depend heavily on the speed of these changes.
If the Republic of China puts all of its efforts into construction of the new road, we shall be able to look back 10 years from now and say, "We have chosen the correct road again and we built it quickly enough to serve our needs." This is the spirit pointing the way to the success of the 1980s.
Editor's note: The author is vice chairman of the Council for Economic Planning and Development and professor of economics at National Taiwan University.