Nineteen sixty-five is the pivotal year in the Republic of China's economic development. "Healthy economic growth" already has led the United States to announce the phaseout of economic assistance at the end of the current fiscal year next June 30. In the words of U.S. AID chief David Bell, "Taiwan, which ten years ago was as heavily dependent on U.S. aid to stay afloat as Vietnam is today, is now reaching a point of economic self-sufficiency."
Since 1949, the year the National Government moved its seat to the island province, the economy has grown annually at a rate of more than 6 per cent, sufficient to offset the 3 per cent increase in population and still provide a gain in the standard of living.
Last year the gross national product rose to NT$81,641 million (US$2,041 million), a fivefold increase in a dozen years. The national income was NT$66,512 million (US$1,661 million), and per capita income was NT$5,358 (US$134). The people have one of the highest standards of living in Asia.
This phenomenal economic growth is made all the more remarkable by the necessity of maintaining a high degree of military preparedness to combat Communist aggression. The war is not a cold one in the Taiwan Straits. Shells still scream through the skies over Kinmen and Matsu, and too often kill and maim in civilian habitations.
Massive American assistance has helped China achieve its outstanding military posture and civil well-being. Military aid since 1950 totals some US$2.2 billion and economic aid amounts to US$1,361 million. The economic aid total includes US$952 million in grants, US$181 million in development loans, and US$227 million in farm surpluses. The surpluses are partly gifts and partly loans under Public Law 480.
Announcing the economic phaseout last May, the U.S. State Department made clear that the United States would continue to provide military assistance and farm surpluses. Although they are agreed that the aid loss will be felt, economists of the Republic of China remain confident that Taiwan is ready to move ahead on its own momentum.
The history of post-World War II U.S. economic aid goes back to 1948, when a US$275 million agreement was signed to balance China's international payments and promote agricultural and industrial production. Except for a small amount, this money was not received because of Communist seizure of the Chinese mainland in 1949. Not until the next year did the United States decide to resume economic assistance.
Prior to 1957, aid averaging US$100 million a year was given, principally in the form of grants. Aid funds and goods shored up a shaky economy. Inflation was arrested and war damage repaired. Aid-financed imports of cotton, wheat, and soy beans prompted the establishment of agricultural processing industries.
Fiscal Reforms
Economic stabilization made it possible for the Chinese government to carry out fiscal reforms and the land reform program (successfully implemented between 1949 and 1963). By 1953, both agricultural and industrial production began to surpass prewar levels. The emphasis then was shifted from short-term stabilization to long-term development. Beginning that year, the first of a series of four-year economic plans was launched.
U.S. economic aid came to be programmed in close coordination with plans for economic development. From 1955, an increasing part of aid money was earmarked for use as loans to finance industrial projects.
Grants were tapered off from 1958 and virtually ended in 1961. In their place came interest-free development loans and the farm surplus loans. Both types of loans are repayable in New Taiwan Dollars. Repayment periods range from 20 to 40 years beginning from 3 to 10 years after the loan.
As the economy prospered, aid policy underwent another major shift in 1962. The amount of development loans was decreased and terms of repayment tightened. Loans were made repayable only in U.S. dollars and with interest. The annual total of economic aid dropped below the US$100 million mark.
Counterpart Funds
Aid has not merely been "used up," as the expression goes. Through April 30, 1963, grants and loans for development projects totaled US$398.3 million. This was broken down as follows: US$35 million for agriculture, US$102.9 million for mining and manufacturing, US$154.7 million for power generation, US$54 million for transportation and communications, US$8.4 million for public health and sanitation, US$9.2 million for education, US$3.5 million for public administration, and the rest for miscellaneous project-type activities.
To get two dollars' worth for every aid dollar, agreements often provided that China match U.S. funds in local currency to be spent for mutually agreed purposes. These "counterpart funds", as they are called, come from sale of aid commodities and loan repayments.
Up to the end of 1963, counterpart funds totaled about NT$22 billion (US$550 million), of which NT$8.3 billion (US$207.5 million) was spent for support of the armed forces and NT$13.9 billion (US$347.5 million) for social and economic development projects. After aid termination next year, counterpart funds will continue to grow for some time. Sources will be U.S. farm surpluses and loan repayments. Such local funds will serve as revolving capital to insure further economic development.
Favorable Balance
Public and private enterprises given aid financing have been required to raise their own funds for local expenses. Thus the aid program has functioned as a catalyst in promoting domestic capital formation.
Aid has contributed significantly to the balancing of free China's international payments. From 1950 to 1962, imports were worth US$2.9 billion, about US$1 billion in excess of exports. About 80 per cent of the deficit was made up by aid.
In 1963, China registered a favorable trade balance of more than US$20 million, even with aid goods counted in the import column. The trend continued throughout 1964. For the first seven months, the favorable balance was US$94 million.
At the end of last June, the foreign exchange reserve was about US$250 million. This turn of events has greatly lessened dependence on American economic assistance and made the 1965 termination possible.
For fiscal 1964, U.S. aid totals US$60 million, made up of US$2.3 million in technical aid grants, US$15 million in development loans, and US$42.7 million in farm surpluses.
Thus the actual cut in fiscal 1965 will be only the US$17.3 million in development loans and technical aid grants, because the farm surplus aid will continue. Surpluses will be sold for local currency, of which 50 per cent will be used for defense support and 25 per cent for loans to industry.
Additionally, the phaseout does not cancel outstanding commitments. Six aid loans totaling US$79.6 million are yet to be disbursed. These funds can be used through 1968.
Foreign Investment
In its aid phaseout announcement, the State Department declared: "The United States government notes the interest and willingness of industrial and financial institutions and private money marketers of foreign private investments to provide an increasing flow of development capital to Taiwan. The United States will continue to encourage this trend."
Through its own efforts, free China has obtained five loans totaling US$23.8 million from the World Bank and its subsidiary, the International Development Association, since 1961. Three other loans amounting to US$37.6 million are pending.
In September, U.S. Import and Export Bank General Manager Harold S. Linder visited Taiwan to explore the possibility of loans. His findings were affirmative. The Chinese government is now negotiating concrete loan programs.
For several years, there has been a steady influx of foreign and overseas Chinese investments. In 1963 alone, the government approved 129 investments totaling US$41,811,698. Eighty-three projects in the amount of US$26,169,299 were submitted by foreign investors, while overseas Chinese investments accounted for 46 projects worth US$15,642,469.
Availability of foreign capital has been enhanced by the record of free China in honoring its repayment obligations. AID Far East Administrator Rutherford M. Poats declared last May that the Republic of China had repaid US$16 million of aid loans due at that time.
Prospects Bright
Discontinuation of technical aid would have been a problem only a few years ago. But in the process of economic reconstruction, free China has trained technical personnel and accumulated technical know-how. China itself now provides technical assistance to countries in Asia, Africa, and Latin America.
Chinese technicians trained abroad from 1951 through 1963 totaled 2,565. More than 1,800 foreign technicians were trained in Taiwan under the third-country program between 1954 and 1963. In case of need, technical help can be obtained from such sources as the UN Technical Assistance Board and Special Fund and the World Bank.
U.S. economic aid to the Republic of China is not being cut off suddenly. It has been in the process of gradual reduction for several years. The process has been geared to Taiwan's economic growth. Even in the final chapter of the aid story, leftover loan funds and continued farm surplus sales will provide a cushion against any ill effects.
However, China has few reasons for economic alarm. Exports may reach a figure close to US$500 million this year and US$600 million next year. Imports are rising only slowly and mostly to provide materials for industrial expansion and export processing. The trade balance is healthy. Investment funds are available both internally and externally. Except for Japan, no country in the Far East is in a healthier, more promising economic condition.
Anticipating the aid cut-off, the Chinese government reorganized the Council for U.S. Aid into the Council for International Economic Cooperation and Development in September of 1963. The new organization is charged with the duty of coordinating government and private efforts for further economic development. CIECD now is formulating an outline of economic objectives for the next 10 years. The minimum goal is to maintain the present growth rate of 7 per cent a year in order to double the gross national product in a decade.
While striving for a greater degree of self-sufficiency, China does not interpret the term in its narrow, provincial sense. The aim is to establish economic relations with all free world nations for capital acquisition and technical cooperation. This has been true in the past but will be even more true in the future. Having been helped to stand on its own feet and to give its people material incentives to work harder, the Republic of China wants to carry the message to others through trade and by continued concrete example. China has learned that aside from the economic good involved in prosperity, there is no better defense against Communism.