Taiwan As a Model for Economic Development Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.) Kwoh-Ting Li Professor of Economic Development Department of Economics Stanford University Stanford, CA 94305-6072, U.S.A. October 4, 2002 Phone: 1-650-723-3708; Fax: 1-650-723-7145 Email:
[email protected]; WebPages: WWW.STANFORD.EDU/~LJLAU
Reminiscences u u u u u
Professors Ta-Chung Liu and Sho-Chieh Tsiang Professor Mo-Huan Hsing Professor Tzong-Shian Yu Professor Paul K. C. Liu Prof. Yung-San Lee, Prof. Jia-Dong Shea, Prof. Sheng-Cheng Hu, Prof. Chung-Ming Kuan
Lawrence J. Lau, Stanford University
2
An Overview u u u u
Taiwan’s Economic Record Taiwan as a Pioneer of and “Laboratory” for Economic Policies Lessons from the Taiwan Experience for Developing Economies Lessons for Taiwan from the Rest of the World
Lawrence J. Lau, Stanford University
3
The Economic Record u u
u u
u u
Taiwan is one of the first “Newly Industrialized Economies” (NIEs) in East Asia. 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. Taiwan has done exceptionally well despite relatively unfavorable resource endowment and population density. 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$13,000 (2000 prices), achieving rates of growth of more than 8% and 6% per annum respectively. Taiwan survived the East Asian currency crisis relatively unscathed, thanks to its large foreign exchange reserves and low external debt. How has it been able to achieve this remarkable economic performance?
Lawrence J. Lau, Stanford University
4
Taiwan’s Economic Record: Real GNP per Capita GNP Per Capita of Taiwan
NT$ 1,000,000
GNP PER CAPITA in 1996 prices
100,000
10,000 1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
Lawrence J. Lau, Stanford University Year
1984
1987
1990
1993
1996
1999
5
Real GDP of Selected Countries and Regions, 1970 and 2001 Real GDP of Selected Countries and Regions, 1970 and 2001 (1995 US$) 10,000
9,000
1970
2001
8,000
Billion US$
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
United States
United Kingdom
Taiwan
Nigeria
Mexico
Korea, Rep.
Japan
Italy
Indonesia
India
France
China
Brazil
Lawrence J. Lau, Stanford University
6
Real GDP per Capita of Selected Countries and Regions, 1970 and 2001 Real GDP per Capita of Selected Countries and Regions, 1970 and 2000 (1995 US$) 50,000 45,000 1970
2000
40,000 35,000
US$
30,000 25,000 20,000 15,000 10,000 5,000 0
US
UK
Taiwan
Nigeria
Mexico
Korea
Japan
Italy
Indonesia
India
France
China
Brazil
Lawrence J. Lau, Stanford University
7
Exports and Imports (US$): Selected Countries and Regions, 2000 Exports and Imports of Selected Countries and Regions, 2000 (US$) 1,400
1,200
Exports
Imports
Billion US$
1,000
800
600
400
200
0
Zone Euro
US
UK
Taiwan
Nigeria
Mexico
Korea
Japan
Italy
Indonesia
India
France
China
Brazil
Lawrence J. Lau, Stanford University
8
Exports and Imports per Capita (US$): Selected Countries and Regions, 2000 Exports and Imports per Capita of Selected Countries and Regions (Year 2000) 7,000 Exports per Capita 6,000 Imports per Capita 5,000
US$
4,000
3,000
2,000
1,000
0
US
UK
Taiwan
Nigeria
Mexico
Korea
Japan
Italy
Indonesia
India
France
China
Brazil
Lawrence J. Lau, Stanford University
9
The Rate of Inflation Annual Rate of Inflation (Implicit GDP Deflator)
% 35.00
30.00
GDP Deflator 25.00
20.00
15.00
10.00
5.00
Year 0.00 1951
-5.00
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
Lawrence J. Lau, Stanford University
1987
1990
1993
1996
1999
10
Pioneering Economic Policies u Land Reform —the successful (and peaceful) land reform, one of the
u u u u u u
very few in the world, helped raise agricultural productivity, i mprove the income distribution, and release savings for investment in t he industrial sector. Promotion of Family Planning. Reliance on Private Rather Than Public Enterprise. Export- Oriented Industrialization (as opposed to import-substituting industrialization). Maintenance of Macroeconomic Stability. Maintaining Equity with Growth. Promoting the Transition from Tangible Capital -Based to Intangible Capital -Based Industrialization. Lawrence J. Lau, Stanford University
11
Land Reform u Raises agricultural productivity through the incentive effect u Releases both tangible capital and human capital from agriculture u Improves the distribution of income, providing the basis for an
increase in aggregate demand (both consumption and savings) u Enhances investment in human capital u 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.
Lawrence J. Lau, Stanford University
12
Reliance on Private Enterprise u 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.
Lawrence J. Lau, Stanford University
13
Reliance on Private Enterprise 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 Lawrence J. Lau, Stanford University 14 justified. u
Export-Oriented Industrialization 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
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 enco urages the reliance on the domestic currency as a store of value.
Reduction or rebate of tariffs in support of exports. u Establishment of the first export-processing zone in the world in Kaohsiung. u
Lawrence J. Lau, Stanford University
15
The Exchange Rate SPOT EXCHANGE RATE - N.T.$ PER U.S.$ (MONTHLY AVERAGE) 45
NT$ per US$
40
35
30
25
Month 20 195908
196207
196506
196805
197104
197403
197702
198001
198212
198511
198810
Lawrence J. Lau, Stanford University
199109
199408
199707
200006
16
Transformation from a Closed to an Open Economy u 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.
Lawrence J. Lau, Stanford University
17
Exports as a Percent of GDP: Selected East Asian Economies and U.S. Exports as a Percent of GDP
%
HONG KONG
INDIA
INDONESIA
KOREA
MALAYSIA
PHILIPPINES
SINGAPORE
THAILAND
CHINA
Taiwan
Japan
U.S.
180
160
140
120
100
80
60
40
20
ear Lawrence J. Lau, YStanford University
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
0
18
Imports as a Percent of GDP: Selected East Asian Economies and U.S. Imports as a Percent of GDP
%
HONG KONG
INDIA
INDONESIA
KOREA
MALAYSIA
PHILIPPINES
SINGAPORE
THAILAND
CHINA, P.R.
TAIWAN
JAPAN
UNITED STATES
240 220 200 180 160 140 120 100 80 60 40
Lawrence J. Lau, Stanford University
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
Year
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0
1970
20
19
Maintenance of Macroeconomic Stability u u
u
u u u
A low rate of inflation and a positive real rate of interest were also considered unconventional economic policies in the 1950s. 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. 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). Maintenance of a low but positive real rate of interest (to control inflation and to promote savings and investment). Conservative fiscal policy, in part also necessitated by the inability to raise revenue through printing money or issuing bonds. 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). Lawrence J. Lau, Stanford University
20
Macroeconomic Stability: Coordination of the Three Rates u
u
u
u
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. 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. 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. 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 21 rate most of the time. Lawrence J. Lau, Stanford University
Transformation of the National Savings Rate u u u u
Ultimately, an economy has to rely on its own savings to finance its investment— foreign resources can only help in a transition. U. S. aid in the early years helped bridge the initial savings gap and the foreign exchange gap. A low rate of inflation and a positive real rate of interest promote savings. The true savings rate of Taiwan is higher than the measured savings rate u u
u u 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 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
Translating domestic savings into investments—financial intermediation and capital markets--the role of self-fulfilling expectations. Creating and maintaining an environment in which investments are productive In more recent years, however, the government has become a net dis-saver because of its deficits, both on and off-budget. Lawrence J. Lau, Stanford University
22
The Savings Rate and Real Output per Capita: Taiwan Savings Rate versus Real GNP per Capita 45
40
Savings Rate (Percent)
35
30
25
20
15
10
5
0 0
2000
4000
6000
8000
Lawrence J. Lau, Stanford University GNP per capita in 1999 US$
10000
12000
14000
23
The Savings Rate and Real Output per Capita: East Asian Economies National Savings Rate and Real GNP per Capita 55
50
45
China Indonesia Korea, Republic of Philippines Thailand
Hong Kong Japan Malaysia Singapore
Percent
40
35
30
25
20
15
10 100
1000
10000
100000
Real GDP per Capita, 1995 US$
Lawrence J. Lau, Stanford University
24
National Savings Rate as a Percent of GDP: Selected Countries and Regions %
National Savings Rates of Selected Countries and Regions
60
1982
50
1998
40
30
20
10
0 United States
Thailand
Taiwan
Singapore
Philippines
Nigeria
Mexico
South Korea
Japan
Italy
Indonesia
India
Hong Kong
France
China
Canada
Brazil
Lawrence J. Lau, Stanford University
25
The Savings Rate as a Percent of GDP: Selected East Asian Countries and Regions The Savings Rate as a Percent of GDP
50
40
20
10
China
Hong Kong
Indonesia
Korea, Republic of
Malaysia
Philippines
Singapore
Taiwan
Thailand
Mexico
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
India 0
1965
Percent
30
-10
Lawrence J. Lau, Stanford University
26
The Savings-Investment Gap Selected East Asian Economies The Savings-Investment Gap as a Percent of GDP 25.0000
20.0000
China
Hong Kong
Indonesia
Korea, Republic of
Malaysia Singapore
Philippines Taiwan
Thailand
Mexico
India 15.0000
Percent
10.0000
5.0000
0.0000 1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
-5.0000
-10.0000
-15.0000
-20.0000
Lawrence J. Lau, Stanford University
27
Growth with Equity u
u
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. The principal instruments used are the creation of employment in the nonagricultural sector and the investment in education. u u
u
u
u
The creation of employment was mostly through the private sector. Universalization of education, first nine years and then twelve years.
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. 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. 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 Lawrence J. Lau, Stanford University 28 versa.
The Distribution of Income The Distribution of Disposable Income in the Republic of China on Taiwan 45
7
40 6 35 5
Ratio
4
25 Income Share of Lowest Quntile. l. scale 20
Income Share of Highest Quintile, l. scale
15
Ratio of Income Shares of Highest to Lowest Quintiles, r. scale
3
2
10 1 5
0
0
Lawrence J. Lau, Stanford University
19 65 19 6 19 6 68 19 70 19 7 19 2 74 19 7 19 6 77 19 7 19 8 79 19 80 19 8 19 1 82 19 8 19 3 84 19 85 19 8 19 6 87 19 8 19 8 89 19 90 19 9 19 1 92 19 9 19 3 94 19 9 19 5 96 19 97 19 9 19 8 99 20 0 20 0 01
Percent
30
Year
29
Taiwan’s Transition from Tangible Capital to Intangible Capital-Based Economic Growth u u u u u u u
u u u u
From shoe-maker to global contractor Backward integration from assembly operation From OEM (original equipment manufacture) to ODM (original design and manufacture) From intellectual “pirate” to innovator The role of the public education system The role of public research and development (R&D) institutions such as Industrial Technology Research Institute (ITRI) Establishment of the Hsin-Chu Science-Based Industrial Park by the government, the world’s first, and one of the very few successful ones. The importance of private enterprise and free entry The role of venture capital (CDIB, formerly CDC) The role of returnees from the U.S. and elsewhere Networks of human capital Lawrence J. Lau, Stanford University
30
The Sources of Economic Growth: Findings of Kim & Lau As Reported by Krugman (1994) u u u
u
u
Using data from the early 1950s to the late 1980s, Kim and Lau (1992, 1994a, 1994b) find that: (1) No technical progress in the East Asian NIEs but significant technical progress in the industrialized economies (IEs) (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 smarter (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! (4) Technical progress is purely tangible capital-augmenting and hence complementary to tangible capital
Lawrence J. Lau, Stanford University
31
The Sources of Economic Growth-Developing Economies in East Asia u u u u
u
Different types of measured inputs play different roles at different stages of economic growth Tangible capital accumulation is the most important source of growth in the early stage of economic development But simply accumulating tangible capital is not enough--it must also be efficiently allocated Efficient tangible capital accumulation is the major accomplishment of the East Asian NIEs, including Taiwan, in the postwar period u Market-directed allocation of new investment, aided by export orientation, promotes efficiency u Private enterprises have the incentives for prompt self-correction 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
Lawrence J. Lau, Stanford University
32
Real Output per Labor Hour (1980 US$) Real Output per Labor Hour (1980 US$) 20 China Indonesia Malaysia Singapore Thailand Non-Asian G5
10
5
Lawrence J. Lau, Stanford University
19 95
19 93
19 91
19 89
19 87
19 85
19 83
19 81
19 79
19 77
19 75
19 73
19 71
19 69
19 67
19 65
19 63
19 59 19 61
19 57
19 55
0 19 53
1980 US$ per Labor Hour
15
Hong Kong S. Korea Philippines Taiwan Japan
33
Tangible Capital Stock per Labor Hour (1980 US$): Selected Economies Tangible Capital Stock per Labor Hour (1980 U.S.$) 60 China Indonesia Malaysia Singapore Thailand Non-Asian G5
40
30
20
10
Lawrence J. Lau, Stanford University
19 95
19 93
19 91
19 89
19 87
19 85
19 83
19 81
19 79
19 77
19 75
19 73
19 71
19 69
19 67
19 65
19 63
19 59 19 61
19 57
19 55
0 19 53
1980 US$ per Labor Hour
50
Hong Kong S. Korea Philippines Taiwan Japan
34
Human Capital per Labor Hour (Years of Schooling): Selected Economies Human Capital per Labor Hour (Years of Schooling) 0.012 China Indonesia Malaysia Singapore Thailand Non-Asian G5
0.008
0.006
0.004
0.002
Lawrence J. Lau, Stanford University
19 95
19 91 19 93
19 89
19 87
19 85
19 81 19 83
19 79
19 75 19 77
19 73
19 71
19 69
19 65 19 67
19 63
19 59 19 61
19 57
19 55
0 19 53
Years per Labor Hour
0.01
Hong Kong S. Korea Philippines Taiwan Japan
35
Sources of East Asian Economic Growth with 3 Inputs and Technical Progress—No Breaks Hong Kong South Korea Singapore Taiwan Indonesia Malaysia Philippines Thailand China Japan Non-Asian G-5 Countries
Tangible Capital 69.37 75.44 59.36 80.83 77.49 59.48 54.60 73.91 83.75 50.44 37.79
Labor
Human Capital
Technical Progress
29.08 22.33 38.82 17.37 17.36 37.68 41.24 22.66 14.12 5.70 3.54
1.55 2.23 1.82 1.80 5.15 2.83 4.16 3.44 2.13 0.56 0.86
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 43.30 57.81
Lawrence J. Lau, Stanford University
36
Sources of East Asian Economic Growth with 3 Inputs and Technical Progress—With Breaks in 1985 Hong Kong South Korea Singapore Taiwan Indonesia Malaysia Philippines Thailand China
66-95 60-95 64-95 53-95 70-94 70-95 70-95 70-94 65-95
Tangible Capital 56.89 (8.79) 65.45 (12.28) 53.10 (10.23) 71.26 (11.76) 71.20 (10.88) 54.22 (9.65) 54.05 (5.40) 60.84 (9.68) 83.87 (11.63)
Japan Non-Asian G-5 Countries
57-94 57-94
49.04 (7.98) 37.44 (3.52)
Labor 23.65 (2.44) 18.62 (3.35) 33.94 (4.70) 15.61 (2.33) 14.59 (2.72) 32.47 (4.68) 37.81 (3.94) 18.06 (2.93) 11.92 (2.55) 5.23 (0.56) 3.36 (0.17)
Lawrence J. Lau, Stanford University
Human Capital Technical Progress 2.51 (4.80) 16.94 3.84 (6.31) 12.08 3.23 (5.92) 9.73 3.15 (5.40) 9.99 9.38 (10.34) 4.83 5.12 (8.02) 8.19 8.15 (7.41) -0.01 5.65 (8.00) 15.44 4.21 (5.99) 0.00 1.08 (2.15) 1.70 (1.68)
44.65 57.49 37
Sources of East Asian Economic Growth with 4 Inputs and Technical Progress—With Breaks in 1985
Sample Period Tangible Capital South Korea 65-95 63.35 Singapore 77-95 47.33 Taiwan 78-95 58.73 Japan 64-94 44.83 Non-Asian G-7 Countries 65-94 33.71
Labor Human Capital R&D Technical Capital Progress 13.61 2.10 20.94 0.00 21.55 1.37 29.75 0.00 11.42 1.32 28.54 0.00 5.20 0.82 14.63 34.52 3.71 1.32 12.53 48.72
Lawrence J. Lau, Stanford University
38
Average Human Capital: Selected Economies Average Human Capital (Years of Schooling per Working-Age Person) 14 China Indonesia Malaysia Singapore Thailand Non-Asian G5
10
8
6
4
2
Lawrence J. Lau, Stanford University
19 95
19 93
19 91
19 89
19 87
19 85
19 83
19 81
19 79
19 77
19 75
19 73
19 71
19 69
19 67
19 65
19 63
19 61
19 59
19 57
19 55
0 19 53
Years per Working-Age Person
12
Hong Kong S. Korea Philippines Taiwan Japan
39
R&D Expenditures: 3 East Asian Newly Industrialized Economies Real R&D Expenditures (3 NIEs) 10,000
8,000 7,000 Korea R&D Expenditure 6,000 Singapore R&D Expenditure 5,000
Taiwan R&D Expenditure
4,000 3,000 2,000 1,000
Lawrence J. Lau, Stanford University
19 94
19 92
19 90
19 88
19 86
19 84
19 82
19 80
19 78
19 76
19 74
19 72
19 70
19 68
0 19 66
Millions of 1980 Constant US Dollars
9,000
40
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
3.5 U.S.
Japan
W. Germany
U.K.
France
Canada
Italy
South Korea
Singapore
Taiwan
3
2
1.5
1
0.5
0
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
Percent
2.5
Lawrence J. Lau, Stanford University
41
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 100,000
1,000
100
Lawrence J. Lau, Stanford University
1998
1997
1996
Japan U.K. Canada Hong Kong Singapore China 1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1
U.S. W. Germany France Italy South Korea Taiwan
1995
10
1971
Number of Patents
10,000
42
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 1000
100
10
1
0.1
0.01
Japan Italy
W. Germany South Korea
U.K. Singapore
France Taiwan
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. Canada
Lawrence J. Lau, Stanford University
43
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 100,000 US Japan West Germany UK France Canada Italy South Korea Singapore Taiwan
Number of Patents
10,000
1,000
100
10
1 0.1
1
10
100
1000
R&D Capital Stock in Billions of 1980 Constant U.S. Dollars
Lawrence J. Lau, Stanford University
44
Is East Asian Economic Growth Sustainable? u
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 Intangible capital is different from tangible capital in three important aspects: u u u
u
u
u
Intangible capital is freely mobile across countries Intangible capital is simultaneously deployable in different locations without diminution of its effectiveness (increasing returns in the utilization of intangible capital) Intangible capital enhances the productivity of existing tangible capital whereas additional tangible capital diminishes the productivity of existing tangible capital
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” 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 The people of Taiwan (and East Asia in general) are entrepreneurial, hardworking, and thrifty--all they needJ.isLau, a good, predictable and 45 Lawrence Stanfordmarket-friendly, University stable environment
Lessons from the Taiwan Experience for Developing Economies u u u u
u u u u
The rate of growth of population must be brought down to manageable levels before sustained economic growth is possible. The transformation from agriculture to industry is inevitable. Private enterprise can play a major and critical role. 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. The transformation of the domestic savings rate is essential for sustained economic growth. Maintenance of macroeconomic stability is essential for achieving balance of payments equilibrium and promoting domestic savings. Investment in human capital can not only increase productivity but also improve the income distribution. 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. Lawrence J. Lau, Stanford University
46
The Economic Future of Taiwan: Transition to a Service Economy u u
u u
u
u
u
The transition to a service economy, with a focus on high value-added activities, is inevitable. 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. The Group-of-Seven (G-7) countries have shown the way, with significantly more than half of their GDPs originating from the service sector. 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. 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). As Taiwan moves up the supply chain, it too must out-source the lower-valueadded activities in order to survive the global competition and to enhance the value that Taiwan is able to capture. 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. Lawrence J. Lau, Stanford University
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The Risk of “Hollowing Out”-De-Industrialization u
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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). The distinction between GNP and GDP—it is much more important to increase GNP rather than GDP.
Lawrence J. Lau, Stanford University
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Models Not to Follow u
Silicon Valley u
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Japan (the Japanese disease) u u u u u u u
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More than a decade of stagnation Heavy hand of government Lack of a vision and a strategy Inhospitable to start-up entrepreneurs Asset price bubble High leverage Inefficient non-tradable sector
Hong Kong u
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High cost of housing
Asset price bubble
United States u u
The science base in Taiwan is too small to support a full emulation of the United States—Taiwan must be much more selective. 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 Lawrence J. Lau, Stanfordcreating Universitya land price bubble. 49
Models Not to Follow u
South Korea u u
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European Union (the Dutch disease) u
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It is too late for Taiwan to develop some of the traditional heavy industries, such as the automobile. The chaebols are not, in general, a good model for the promotion of innovation (there is the same problem with Japanese zaibatsus). 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. 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 doubledigit level. There is an attempt to circumvent the law through using temporary employment agencies like Manpower. Lawrence J. Lau, Stanford University 50
Does Taiwan need a floating exchange rate?