ECONOMIC PROGRESS IN TAIWAN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500220045-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 16, 2016
• Document Release Date: December 27, 2004
• Sequence Number: 45
• Publication Date: April 1, 1968
• Content Type: IM

 ~/~1-/ ~ ~2 ~.~n'1 CAP ~~ ~ L ,`.
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Secret
25X1
.~ oC S~
DIRECTORATE OF
INTELLIGENCE
Intelli ence memorandum
g
Economic Progress in Taiwan
Secret
ER IM 68-43
April 1968
Copy No .
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WARNING
This document contains information affec?tinb the national
defcnsr of the United States, within the mcanins of Title
18, sections i93 and ii,,, of the US Code, as amended.
Its transmission or rc~?clation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
orsovr i
OICLUU[D -1101.1 Al1TOAlATIC
OUM N(IIIAUINO ANU
O[CLAAti1~ICATION
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25X1
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1968
INTELLIGENCE MEMORANDUM
Economic Pro ress in Taiwan
Summary
Taiwan's economic performance during the past
decade offers an impressive example of growth and
development for the less developed countries.
The 9-percent annual real growth rate for gross
national product (GNP) during 1959-67 is among
the most rapid in the world and is about double
the average growth for all less developed coun-
tries. Per capita real income has increased by
more than 50 percent since 1960. The average
annual increase of more than 20 percent in Taiwan's
exports since 1960, sparked by rapid export diver-
sification, has been a major stimulant to the
economy's recent accelerated growth. With industry
progressively emerging as the mainspring of eco-
nomic growth, a significantly increasing share of
Taiwan's exports consists of industrial goods.
More fundamental reasons for Taiwan's economic
progress since the arrival of the Chinese main-
landers include the environment of political and
monetary stability provided by the Government of
the Republic of China (GRC), the encouragement of
private investment, and assistance from abroad,
particularly the large-scale official aid from
the United States.
Note: T Zs memorandum ryas produced soZeZz~ bra C1A.
It was prepared bra the Office of Economic Research
and coordinated with the Office of Current
InteZZigence.
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The heavier strain: on Taiwan's consolidated
budgets that are likely to result from an expected
increase in GRC commitments to defense, education,
research and development, and public works may
have a moderately retarding effect on the rate of
economic growth. Prospects for commensurate
boasts in budget revenues are dim; and, in tTie
absence of major tax reforms, large deficits are
likely during the next f.ew years. Increased sales
of national bonds by the GRC to offset deficits
will be attended by a more stringent supply of
domestic funds for private investors; and, alter-
natively, increased reliance on bank loans and
overdrafts will raise tre risk of inflation.
Nevertheless, the prospects for rapid indus-
trial development appear favorable and are not
likely to be disrupted by Taiwan's budgetary
dilemma. Although continued rapid industrial
development will ~_equire proportions:lly greater
capital investment than in the past, Taiwan's
capacity for generating domestic savings and
acquiring foreign funds will probably be suffi-
cient to fill these requirements. Export pros-
pects in Japan and the United States are likely
to remain bright, and Taiwan will probably press
for wider oppori_unities in other markets. A
growing ~.abor shortage in Japan and the low costs
of labor on Taiwan will also favor stronger trade
ties and increased economic complementarity be-
tween the two countries .
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Introduction
1. The economy of Taiwan has recovered from
a difficult period of postwar reconstruction and
rampant inflation to become in recent years a
showcase of development for the less developed
countries. Taiwan inherited from its period as
a Japanese colony (1895-1945) some important
assets and also several problems. The Japanese
left a considerable infrastructure and a substan-
tial sugar industry, but ffw managers or skilled
workers remained. Moreover, the sugar industry,
which had sold nearly all of its produce to Japan
under preferential terms, was a high-cost opera-
tion. Sugar and rice were Taiwan's only signifi-
cant exports until the early 1950's. The arrival
of the mainland Chinese replaced the loss of
Japanese skills, but the additional burden of
2 million mainland evacuees on the economy and the
mounting budgetary deficits caused by massive
defense expenditures generated a galloping in-
flation.
2. The GRC took appropriate steps in the
early 1950's to stabilize the economy and to
undertake sweeping land reforms. The failure
of the Chinese Nationalists to lay these economic
cornerstones had contributed to the regime's
down,~all on the mainland, and the GRC was deter-
mined not to repeat this error. The well-
conceived domestic reforms contained in the first
fr~~ar-year development plan, which was launched in
152, checked the inflation; and with the help of
large-scale US aid, introduced a period of rela-
tive economic stability and growth.
3. The GRC gave priority in the first stage
of economic development on Taiwan to reforming
and modernizing agriculture. The island had been
developed during the first half of the century
as a colonial supplier of foodstuffs for Japan,
but agricultural productivity remained low until
after the land reforms and technological improve-
ments that were accomplished after 1949. Agricul-
tural production since completion of the reforms
in 1953 has increased at an average annual rate
of 6 percent, considerably outpacing a population
growth rate of 3.3 percent in the same period.
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Economic Growth Since 1958
4. During 1959-67 Taiwan sustained an annual
real growth rate in GIJP of more than 9 percent
despite a deficiency in natural resources, a high
population density and growth rate, and dispro-
portionately high defense expenditures. This
high rate of growth is about double the comparable
growth rate for all less developed countries and
places Taiwan in the company of Japan and Israel
among the fastest growing economies in the world.
Per capita income on Taiwan was about US $210 in
1967, more than 50 percent greater in real terms
than in 1960. Exports grew even more rapidly than
GNP -- at an average annual rate of 17 percent
during 1959-66 and of 22 percent during 1961-66 --
as was the case in other countries with a high
growth rate in output (see Table 1). This rapid
increase in exports helped ~i'aiwan to obtain the
Growth of Gross IJational Product and ~;xports
of Selected Countries
1959-66
a. Rate of growth for 1961-66.
b. Rate of gror~th for 1960-66.
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necessary foreign exchange to finance the rising
imports of capital goods and raw materials essen-
tial for industrial development and made it possible
for the United States to terminate its economic
aid program by mid-1965, except for PL 480 assist-
ance. Much of Taiwan's success in exports can be
attributed to unusual ingenuity in developing new
lines of exports, which in turn provided a major
stimulant to industry and corimercial agriculture.
5. Since 1960, Taiwan has stressed the de-
velopment of its industrial sector, which is
rapidly becoming the mainspring of economic growth.
By 1966, Taiwan was the first less developed country
in Free Asia (except for the unique entrepot ports)
to have its industrial sector contribute a larger
portion of the net national product than the agri-
cultural sector. Taiwan's principal advantage in
industrial development is its low-priced, hardworking
labor force. Although it has concentrated on labor-
intensive light manufacturing, there are plans to
shift emphasis from light to heavy industry in the
next few years.
Factors Contributing to Past Growth
Political and Monetary Stability
6. The political stability brought by the
strong central government under Chiang Kai-shek has
been one of the most important conditions under-
lying Taiwan's economic progress. Taiwan has
avoided the political vicissitudes and insurgen-
cies that have characterized the transition from
colonialism to independence in such countries as
Burma, Inc:onesia, Malaysia, the Philippines, and
the countries of Indochina. Another significant
factor ~?~as the encouragement to the private
sector to take t:ze lead in economic activity.
Government policies on Taiwan, such as low taxation
for corForations, tariff protection, and generous
depreciation allowances, were designed to create
~.ncentives for private investment. The private
sector in recent years has provided more than two-
thirds of the total domestic investment in Taiwan,
compared with less than one-third in countries
like Burma, Ceylon, India, and Pakistan. Capital
appropriations from the government's consolidated
budget in Taiwan are limited primarily to infra-
structure and social capital.
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7. The financial policies instituted by the
government, after subduing the runaway inflation
in the early 1950's, laid a firm foundation of
monetary stability, which has fostered a steady
rise in domestic savings over the past ten years.
Gross saving as a percentage of GNP increased
from 9.2 percent in 1958 to 19.8 percent in 1965.
Depreciation reserves, which had been an especially
important source of investment capital for govern-
mEnt enterprises, had generally accounted for more
than half of annual gross domestic saving until
1961. IIowever, in recent years net saving has
provided the lion's share of gross domestic saving,
mainly because of an increasing rate of saving in
the private sector.
8. The expanding domestic saving rate has
enabled Taiwan to support a high annual ratio of
gross investment to GNP in the face of greatly
diminished receipts of US economic aid since 1962.
Until the end of 1962, foreign capital usually
contributed one-tiZird to one-half of the annual
gross domestic investment, but by 1965, gross
domestic saving was providing about 85 percent of
gross investment. Gross fixed investment in the
1960's has generally fallen within the range of
15 to 20 percent of GNP, substantially exceeding
ratios attained in Burma, Ceylon, India, Pakistan,
the Philippines, and Gouth Korea.
Role ~f Export Gzuwtli
9. Since 1960, export demand Y',ds provided a
greater spur to Taiwan's development than domestic
demand. During the previous decade the Chinese
Nationalists had concentrated on the development
of import-substitution production behind extensive
government import barriers to satisfy an eager
domestic market. The US aid program, by financing
a large import surplus, had permitted the govern-
ment to temporarily relegate export-promotion to
a subordinate policy status. Little was accom-
plished in developing new exports, particularly
manufactured goods. As the limited domestic mar-
ket became satiated and plans for terminating US
economic aid were being formulated, Taiwan recog-
nized that continued high industrial growth would
depend heavily on export expansion.
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J
10. With substantial government assistance,
a number of manufacturing and processed food
industries have successfully expanded their sales
on the world market. Exports have risen at an
average annual rate of 22 percent from 1960 to
1966, and the 18.5 percent ratio of exports to
GNP in 1966 was about double the ratio of 1960.
Some of the most active industrial products that
have lec? the rapid increase in exports since 1960
are given in the following tabulation:
Value of
Goods Exported
1966
(Million US $)
Avera
Annua
Increa
1961-
(Perce
ge
l
se
66
nt)
Textiles 81.8
25
Metals and Light
machinery 61.3
Canned pineapples,
47
mushrooms, and
asparagus 58.7
38
Chemicals 39.8
34
Plywood 33.6
52
Cement 18.6
59
Special Relationshi s with the United States
and Japan
11. Although the policies adopted by the
Government of the Republic of China and the
industry exhibited by the people of T?iwan were
immensely important, the country is indebted to
the United States and to Japan tc~ a lesser extent
for the boosts given Taiwan's rapid economic
progress through economic cooperation. From 1951
to 1965 the United States supplied Taiwan with
about $1.5 billion of economic aid and technical
assistance. This aid averaged 6.5 percent of GNP
annually, filled one-third of Taiwan's import re-
quirements, and was equivalent to about 35 percent
of Taiwan`s annual gross investment.* Until the
* Some other countries have received reZativeZz~
as much aid. Foreign aid covered 40 percent of
Pakistan's imports and about one-third of its
investment during the 1950 's, a;ad in India foreign
aid has accounted for more than 40 percent of its
imports and 20 ~,orcent of its investment.
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late 1950's, annual disbursements of US economic
aid substantially exceeded in scale the GFcC defense
expenditures. Particularly in the 1960's, US aid
has been tailored to support and accelerate the
structural change from agriculture to industry. US
economic grants and development loans were termi-
nated in 1965, although PL 480 assistance has
increased. In addition to economic assistance,
the US has furnished more than $2.5 billion of
military grant aid since 1951 to cover the bulk
or `!'aiwan's defense needs other than personnel
costs, which make up nearly all of Taiwan's
domestic defense expenditures.
12. US trade with Taiwan has expanded sharply
during the past 15 years, in part because of
imports from the United States under official
aid programs. The United States accounted for
26 percent of total Taiwanese trade in 1966 and
has consistently ranked second only to Japan as
a trading partner for Taiwan. Reinforcing US aid
and trade ties with Taiwan is the important US
share in foreign private investment. By the end
of 1966, $42.7 million of US private capital had
been invested in Taiwan, representing 55 percent
of total foreign investment.
13. Japan has been especially important to
Taiwan because of the latter's former status as
a Japanese colony, the complementarity of the
two economies, and their geographical proximity.
During 50 years of colonial rule, Japan signifi-
cantly developed Taiwan's agriculture, established
a large sugar refining industry, built a consider-
able infrastructure, and contributed to the growth
of commercial practices, skills, and institutions
favorab~e to subsequent development. Since Word
War II, Japan has maintained a prominent role in
Taiwan's foreign economic relations. It continues
as the best customer for Taiwan's exports and
accounted for nearly a third of Taiwan's foreign
trade in 1966. Japan has purchased about one-half
of Taiwan's sugar exports since the war, and until
about 1964, sugar exports to Japan alone generated
a major share of Taiwan's foreign exchange earnings.
However, the importance of sugar as a share of
Taiwan's total exports has declined significantly
in recent years, from 65 percent in 1957 to only
l1 percent in 1966.
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14. Japan also has been an important source
of foreign investment in Taiwan. Although
Japanese private investments totaled only 13 per-
cent ($10.2 million) of tY.e value of foreign
investment by the end of 1966, they were more
numerous than those from any other source. The
Japanese private ventures norma?ly involve
smaller, more labor-intensive enterprises than
those of the United States. Many of the Japanese
equity investments are in product lines intended
for exports to markets in other advanced countries,
particularly the United States, and participation
by Japanese trading firms in the marketing of
these and other manufacture:, from Taiwan provides
an important stimulant to the expansion of Taiwan's
trade. Moreover, the presence of numerous active
~Tapanese trading firms in Taiwan generally has
facilitated the marketing of export merchandise
to third countries. These firms are among the
largest, most widely distributed commercial
channels in the world and can readily provide
detailed, accurate information to Taiwan manufac-
turers on international market openings. In
addition to commercial benefits of the relationship
with Japan, Taiwan is receiving official economic
aid in the form of a $150 million development
credit extended by Japan in 1966.
Problems of Ftttura Develo ment
15. Prospects for continued rapid growth will
be determined primarily by the demonstrated
resiliency of Taiwan's economy and flexibility of
Taiwan's leaders in making adjustments to changing
conditions. Some of the potential bottlenecks to
further progress that are now confronting Taiwan's
economy are characteristic, directly or indirectly,
of the stage of development for the economy, and
others are attributable to occurrences or decisions
of a more political nature. Among the emergent
obstacles to economic growth are: (1) propor-
tionally greater requirements for capital funds
as Taiwan develops more heavy industries, (2) ter-
mination of US economic aid other than PL 480,
(3) probable diversion of domestic resources from
development to military uses following a decline
in US military aid, (4) more urgent demands for
infrastructure and social welfare, and (5) limited
capabilities in the field of applied science and
Technology.
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16. Nevertheless, if the governmental economic
guidance continues i:o be sound, Taiwan is ex-
pected to surmount these restraining Influences
on growth. Despite increasing strains on the
consolidated budget, Taiwan's economy probably
will have a~-ailable sufficient funds in the neu~
future to maintain a high rate of growth. Private
investment probably will continue to expand
vigorously in response to government inducen.ents.
This will be facilitated by the pact that net
private saving, which recently has amounted to
about 65 to 70 percent of gross investment, will
probably increase more rapidl~~ than national
incomQ over the next few years. Also, the outlook
fo.r a sustained growth in exports is bright and
favors rapid industrial development.
Rising Defense Spending
17. Since the Government of the Republic of
China was reestablished on Taiwan in 1949, defense
expenditures have been very large for a country
at the stage of development of Taiwan, and have
generally amounted to about 10 percent of national
income. Their share in the consolidated budget
has been more than 50 percent. 2n contrast, social
services accounted for only 13 percent of total
expenditures in fiscal year (FY) .1967. Most of
the less developed countries in Asia have allo-
cated at least 20 to 25 percent of their budgetary
expenditures to current social services over the
past decade, reflecting ambitious social welfare
goals as well as lower defense spending. During
the 1950's, local currency funds ge,zeral.ed by
the sale of US economic aid commodities defrayed
considerable portions ~f the budgetary expendi-
tures, thereby permitting the laz~ge defense outlays.
More recently, part of the PL 480 local currency
proceeds have been earmarked for the fir_ancing of
defense expenditures (Military Budget Support).
From FY 1961 through FY 1967 about 9 percent of
the budgetary outlays for defense was covered by
Military Budget Support. Until about 1956, when
much of the US economic aid began to be appraised
with an eye to its economic development merits
alone, the political rationale for all US aid was
to provide the economic conditions on Taiwan
necessary to achieve common US-Chinese security
objectives.
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18. To supplement the large defense appropria-
tions from the GRC budget, the US has provided
abou?c $2.5 billion of military grant. aid since
1951, or an annual average of about $160 million.
The US Military Assistance Program (MAP? has
financed the acquisition by the GRC armed forces
of nearly all of its military hardware and equip-
ment. From FY 1961 throuS?~. FY 1967 this aid
amounted to about 28 percent of total Taiwan
defense costs, including {:oth US aid and budget
expenditures, With the help frcm the United
S?~ates, the GRC has rebuilt a 600,000?-man military
force equipped with modern weapons, including two
air-Defense missile battalions and an all-jet
fighter force.
19. The United States had been expected to
pro~aide $90 million of MAP annually in fiscal
years 1968 and 1969, to be followed by a reduced
allocation of $70 million in FY 1970. Because of
the 37 percent cut iri military assistance appropri-
ationG effected by the US Congress in Nover~tber
1967, the $90 million package f_or FY 1968 is ex-
pected to be reduced by about one-half and the
FY 1969 appropriation by at least as much. The
GRC reaction was tc affirm that it is politically
infeasible at this time to reduce the strength and
size of the armed forces, suggesting that the GRC
would substantially increase budgetary expenditures
to compensate for the intended MAF reduction. The
United States is planning other measures of indirect
assistance as partial offsetting benefits, such as
a new $20 million long-term credit for purchases of
military equipment and opportunities to increase
foreign exchange earnings through contracts for
repairing and rebuilding US equipment.
20. The MAP reduction will require some sig-
nificant adjustments in GRC military procurement
policies. The shortfall of approximately $45 mil-
lion of US military aid is, however, equivalent to
less than the foreign exchange earned by one month's
exports in 1967, and could be generated by a
7-percent growth in exports during 1968.
Need for Rising Public Ex enditures
for Develo ment
21. Rising defense outlays, however, will
coincide with growing requirements for public
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spending on infrastructure and social welfare.
The result is likely to be a severe squeeze on
budgetary resources. Usually less than 10 per-
cent of the budget expenditures over the past
ten years has been allocated to capital invest-
ment, although these shares have been somewhat
enlarged by allocating to investment part of US
aid .local currency counterpart funds. In recent
years the Sino-American Fund for Economic Develop-
ment (SAFED), which constitutes the balance of
uncommitted local currency counterpart funds in
Taiwan, has contributed an amount of capital
investment nearly as large as that provided by
the budget. Although only 9.6 percent of the
consolidated budget in FY 1S68 is slated for
capital investment, when the SAFED appropriations
are added, the capital expenditures as a pro-
portion of the combined total will be about 16.5
percent. However, this combine6 allocation of
funds may prove to be inadequate. Shortcomings
in housing, urban development, sanitation, water
systems, and other public works have become
increasingly aggravated and make more urgent the
need for increased social overhead capital. More-
over, capital expenditures from the consolidated
budget and from SAFED must take up the slack left
by the cessation of the US economic aid program.
Since 1951 the amount of infrastructure construc-
tion financed by US economic aid has averaged from
$30 million to $40 million annually.
22. Budgetary appropriations for education
have fallen far short. of a requirement in the
Chinese Constitution, which specifies that e~:pen-
ditures on education, science, and culture are
to be a minimum of 15 percent of the central budget
and 25 perce:~t of the provincial budget. Although
the annual provincial budgets havE~ satisfied this
requirement, only 3.5 percent of tie central budget
in FY 1966 and 3.2 percent in FY 1967 have been
allocated to education, science, and culture.
Nevertheless, because of the considerable ~.mphasis
the GRC has attached to education, Taiwan, already
one of the most advanced countries in Asia with
respect to education, continues to rank high in
budgetary expenditures in this area (see Table 2).
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Public Expenditures on Education
as a Percent of. National Income
in Selected Coun*_ries
1962
Percent
Japan
7.2
South Korea
6,8
Malaysia
5.3
Taiwan ~
4.1
Cambodia
4,1
Philippines
3.6
India
2.8
Thailand
2,~
Pakistan
1.8
South Vietnam
l,g
23. There has, however, been an insufficient
adaptation of the educational system to the needs
of Pcoromic development. During the coming year
the GRC: is expected to make significant advances
toward resolving this deficiency by inaugurating
a program for extending free and compulsory educa-
tion from the present six years to nine school
years. This new examination-free junior high
school admission program is designed to help meet;
the growing demands for a higher quality labor
force. Education will become more vital to Taiwan's
development as the economy shifts into the more
capital-intensive industries that require a
.reservoir of skilled laborers, managers, and tech-
nicians. The budgetary expenses arising from
the free nine-year educational program might well
involve more than $15 million per year over the
three-year implementation period, a significant
addition to the current level of $20 million now
being allocated annually to education, science,
and culture in the consolidated budget.
24. The GRC consolidated budget has provided
minimal expenditures For research and development.
In response to US initiatives, however, Chiang
Kai-shek has recently shown greater interest in
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devoting domestic resources to scientific and
technical development. In accordance with Chiang's
decision that funds for scientific research alone
should account for 3 to 5 percent of the total
budget in FY 1969, the GRC has decided to allocate
an average of $30 million per year for the next
decade for development in the fields of science
and ~:echnology. This allocation compares with a
3.3 percent share of the Japanese budget assigned
to the promotion of science and technology,
although such expenditures of the private sector
in Taiwanese research and development will remain
quite small compared with those of Japan. Taiwan
may profit from the Japanese expex?ience by con-
centrating on support for industrial research and
commercial applications, thereby favoring further
rapid expansion of exports. The US government
is planning a program for pooling publ9.c and
private resources to offer the GRC advisory and
technical assistance in the field of industrial
research and development.
25. The consolidated budget has expanded at a
rate of nearly 19 percent per year during the
past three years and could continue to increase
at the same rate during the next few years because
of the following GRC commitments: (1) to introduce
a nine-year Free education program in 1968, (2) to
increase, military expenditures consequent on the
cut in the MAP, (3) to exFend more funds on s~~ience
and technology, and (4) to meet requirements for
extensive public work projects. Revenue increases
have lagged well behind expenditures, causing a
budgetary deficit equal to 19 percent of total
expenditures in FY 1967, and, unless a major tax
reform is undertaken, the deficit in FY 1968 could
be similar in scale. A sharp increase in debt
service charges and repayments could impede Taiwan's
development efforts. The GRC relies primarily on
the sale of national bonds to finance the budget
deficits, but in the past couple of years bank
loans and overdrafts have financed larger shares
of the deficit, thereby increasing the risk of
inflation.
Other Sources of Funds for Development
26. The insistence of the GRC on maintaining
the present size of its armed forces will continue
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to have inhibiting effects on economic growth.
But despite this decision, Taiwan's governmental
leaders are showing an awareness of the coun?try's
economic deficiencies and a growing capability
for managing its economic problems in a manner
favorable to rapid economic growth. GRC economic
policies emphasize the development of private
enterprise by providing for government financial
and technical aid to the private sector and by
offering tax benefits and various other incentives
for private investment. Recently, the government
has been promoting investment by developing indus-
trial areas and duty-free export processing
districts, such as the Kaohsiung Export Processing
Zone. 2n the longer run, fiscal and monetary
policies will reflect the GRC's continuing concern
for economic stability and will likely contribute
to a growing confidence in the national currency.
27. The GRC is expected to continue to free
the movement of capital to and from Taiwan in
order to attract needed foreign investment. A
sustained drive has also been under way by the
government in recent years to liberalize controls
on foreign trade in order to rationalize the
allocation of resources to its growing industrial
economy. As the economy proceeds further toward
export orientation, the greater exposure of in-
dustry in Taiwan to the forces of international
competition should enhance the competitive posi-
tion of Taiwan's products in the world market.
The present pattern of Taiwan's industrial and
commercial development indicates a growing level
of international specialization, and future
investment is likely to show even more of the
same pattern.
28. Having successfully provided a foundation
for light industry on Taiwan, the GRC is moving
forward with plans for the development of heavier
industries, such as petrochemicals and heavy
machinery. Partly in support of phis structural
transformation, the GRC also will place rPneu~ed
emphasis on the improvement of the investment
climate and the expansion of exports. Taiwan
will rely heavily on both the exports of its
light industrial products and the introduction
of foreign capital, primarily US private invest-
ment, to finance the foreign exchange costs for
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new capital plant and equipment in its budding
heavy industrial sector.
29. As the development of Y~:avy industry on
Taiwan proceeds, a given expansion in industrial
output will require proportionately more capital
than in the past. Accordingly, there will be a
need for expanded sources of savings to meet the
growing capital requirements. Until the end of
1962, foreign capital usually contributed a third
to a half of the annual gross domestic investment.
Taiwan has succeeded remarkably well since 1962
in maintaining an upward trend in gross investment
despite the sharp drop in US aid that began in
1963. Gross domestic saving increased at an annual
rate of 31 percer_t from 1962 to 1965 and provided
about 85 percent of gross investment in 1965.
Domestic saving is expected Lo continue shouldering
a p~?edominant share of inves i:ment as the public
conEid~nce in the currency and the economy in
general increases.
30. Partly on the basis of conservative esti-
mates of Chinese authorities, it appears that from
$100 million to $150 million of foreign capital
will be needed annually through 1972 to supplement
the available domestic sources of capital funds.
Some economic aid will continue to arrive from
the United States. For example, the US Govern-
ment agreed on 12 December 1967 to provide Taiwan
with $37.5 million of PL 480 assistance during
1968 and 1969. Taiwan's credit standing among
conventional lending institutions has become
sufficiently strong over the last five or six
years to gain subs~`antial loan commitments from
the International Bank for Reconstruction and
Development (IBRD), the International Development
Association (IDA), the US Export-Import B anlc, and
others. Taiwan is also receiving capital under
a $150 million credit from Japan and is likely to
win further loan concessions from Japan in the
future. Private foreign investment, principally
from the United States, Japan, and overseas
Chinese, has risen much more sharply than Taiwan
had expected. The GRC approved $66 million of
private foreign investment in 1967, nearly double
the amount in 1966, although it had not e arlier
counted an more than $40 million. The existing
sources of foreign capital, increased export
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earnings, and a growing capability for borrowing
abroad should provide sufficient foreign exchange
to insure continued rapid industrial development.
Export Demand
31. Although domestic demand may favor the
development of some import-substituting indus-
tries, the primary impetus to Ta?_v~2n's industrial
development over the next few years probably will
come from export demand. The excellent perform-
ance of exports in recent years can be explained
in part by temporary circumstances, as well as
the alertness and ability of Taiwanese business
to seize new opportunities for export. Taiwan
enjoyed windfall earnings from its large exports
of sugar in 1964 and 1965 because of the abnormally
high international market prices :for sugar that
then prevailed. Taiwan has also benefited substan-
tially from increased exports to South Vietnam
arising from the war. Greater efforts need to be
made by Taiwan to widen the geographic distribution
of its exports in the less developed countries,
and, more importantly, in Western Europe. Never-
theless, export prospects appear good. The
increasingly active GRC overseas trade missions are
evidence of a growing Taiwanese interest in developing
new export markets Taiwan's principal hopes for
trade expansion, however, will har..g on its ccmmerc~al
relations with the industrially advanced countries.
Despite rising competition from other Asian less
developed countries, the well-developed commercial
ties with both the United States and Japan will prob-
ably continue to hold high promise for Taiwan's
exports. In addition, there is considerable scope
for expanding exports of industrial consumer goods
to the markets of Western Europe.
32. Before some of the heaver industries can
be developed in Taiwan on a s~:f_ficiently large
scab to be economically competitive, Taiwan must
be assured of larger markets for its output than
would be available domestically. The governments
of Taiwan and South Korea agreed in August 1967
to promote the construction of petrochemical
plants in ea~.:~h country (a caprolactum plant in
Korea and a dimethyl terephthalate (DMT) plant
in Taiwan) to supply the markets i.n both countries.
Additional agreements of this type for market
integration with Korea and other East Asian coun-
tries maybe forthcoming.
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Economic Complementarity with Ja an
33. An obvious advantage f or Taiwan in the
continued rapid growth of the Japanese economy
is that higher incomes in Japan mean rapidly
increasing Japanese consumption of the ]rinds of
goods Taiwan now exports. Higher Japanese wages,
moreover, have a more profound meaning for the
future of Taiwan's exports. In recent years,
wages in Japan's light industries have not kept
pace with tt: growth of productivity, as they
have in heavy industries. This problem has been
exacerbates by an intensifying shortage of labor,
particularly at the lower levels of skill. As a
result, there is a possibility of a growing inter-
national division of labor in East Asian industry
with Taiwan benefiting from its lower costs in
light industry.
34. Early signs of such a division of labor
have included particularly rapid increases in
Japanese imports of light industrial manufactures
from Taiwan. This trend has occurred despite the
fact that Japanese effective tariffs against such
manufactures have been the highest among the
advanced nations. As shown in the following tabu-
lation, Japanese imports of textiles and clothing
from Taiwan more than tripled from 1962 through
1966 and imports of miscellaneous manufactures
associated with light industry and consumer goods
were more than six times those of 1962.
Thousand US $
1962
1963
1964
1965
1966
Textiles a/ and
clothing b/
182
401
528
589
596
Miscellaneous
manufactures,
including
printed matter,
various plastic
products, house-
wares, and the
like c/ 82 284 363 441 519
a. This designation is based on categorr~ .65
of the Standard International Trade Classifica-
tion (SITC).
b. Based on SITC .84.
~. Based on SITC .89.
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Although the values are still relatively small,
their growth indicates significant prospects for
expansion as tariff; are steadily reduced, and
these and other data point toward gains accruing
principally to East Asia.
35. During the next five to ten years, Taiwan
and South Korea should share in the gains from the
growing industrial complementarity in East Asia.
A recent announcement that a Japanese manufacturer
was about to sign a joint-venture contract with a
Taiwan firm fur manufacture and supply of shirts
to Japan indicates that Taiwan is regarded as an
important potential source of light industrial
products. Some attempts may be made to bring
Taiwanese laborers into Japan, as was recently
suggested by the Japan Spinners Association, but
the consensus is that Japanese planners and
businessmen will generally reject labor migra-
tion, which they refer to as the "West German
solution." The Japanese will probably prefer to
greatly increase private investment in light
industries in Taiwan and South Korea to assure
imports of needed intermediate and consumer
goods. This view is supported by current trends
in regular trade, considerable discussic.~ of
bonded trade, and scattered evidence on the
content of recent private investment. Because
most of the equity investment will be on a joint-
venture basis, Japanese opportunities to dominate
or exercise control c,ver Taiwan's industry will
be limited.
36. Two important policy measures that Japan
might take in the next five to ten years to
encourage the general trends described would be
the relaxation of credit facilities for Japanese
firms willing to invest in Taiwan or Korea and
the encouragement of bonding agreements and
tariff rebates to facilitate trade in light
industrial products. Considering the large capital
commitments to Taiwan ($150 million in credits)
and South Korea ($300 million in grants and
$700 million in credits) undertaken by the Japanese
government, further policy adjustments to en-
courage East Asian economic development seem
completely consistent ~vith current Japanese
policy.
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