Incentive Policies for Import Substitution and Export Expansion in the Republic of China
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(2) (I) The transfer of land ownership in Taiwan was not centered on splitting large. land holdings into small land units as in the case of land reform in some other countries. -'4. The tenant farmers had assumed managerial responsibility of their farm operations even before the land reform. As a result, the implementation of the land reform program produced a neutrai effect on the size of the farm operation unit and farm management. Perhaps the most important aspect of land reform had to do with its positive effect on growth incentive. It resulted in the adoption of multiple-cropping and the subsequent rapid growth of land productivity. The successful development of land-intensive and diversified farming and new inputs, articulated by a high rate of economic adoption on the part of an educated and suitably motivated farm population, ensured an adequate supply of foodstuffs over time.. This contributed to price stability even as Taiwan. continued to be saddled with one of the world's highest natural rates of population increase. Furthermore, agricultural and processed agricultural exports retained their dominant position in the island's growing total exports throughout the 1950's. Thus,. -j. during its critical stage of economic development, the Republic of China's policy makers skillfully implemented agricultural development programs that met the essential conditions of the well-known two-sector model for industrialization and modernization. (2) Landlords were duly. compe~sated.. Of the total compensation based on the. selling price being fixed at 2.5 times of the annual main crop yields, 70% was paid in land bonds redeem a ble in kind over a 10-year period and carrying a 4 % interest. The other 30% was paid in stocks of several public enterprises, thus, converting land holdings into industrial holdings and broadening the economic interests of the landed class. Both forms of remuneration also served to minimize the consumption consequences that would. \. ". ". otherwise arise had payment been made in cash. (3 ) Land reform and the consequent expansion of agricultural output contributed to Taiwan's industrial development in many ways.. Increased demand for inputs and. consumer goods, under a rising and more equally distributed income, provided a powerful stimulus to industrial expansion, at its initial stage of development when industry was inward-oriented.. Taiwan also enjoyed continuous net capital contribution from agri. culture through government taxes and other direct and hidden levies. 2 ) ( 4) Through land reform, farmers developed a strong vested interest in the economy. This was instrumental in creating a condition conducive to social and political stability. (5 ) Land reform, by removing distortions inherent in certain tenancy con tracts, not. ". only contributed to a more equitable distribution of income within agriculture, but also stimulated the demand for and formation of human capital.. Increased income made. 2) Teng·hui Lee, Intel"Sectaral Capital Flo'U's in the Economic Development oj Taizvan, 1895·1960 ( Ithaca: Cornell Uni versi ty Press, 1971). IND UST R Y. OF. F R EE. C HI NA .. APR .. 3. U 78. ·t.
(3) possible by land reform removed or lessened cost barriers to education.. Furthermore, by. placing scarce land in the hands of the cultivators, land reform helped prevent transfer of benefits from education and adoption of innovations from the cultivators to the owners of scarce resources . A broad base for economic development was thus laid by land reform.. The. POSi. tive role played by the agricultural sector in Taiwan offers a sharp contrast to the ex periences of many other less developed countries and regions, where lack of agricultural development acted as a drag on industrial and general economic development.. In addition to the successful land reform program, Taiwan was the beneficiary of a "rich" aid program. The prewar production level was by and large restored during the years 1948-51, and there was the timely resumption of U.S. economic aid to the Re public of China in June 1950 after the outbreak of the Korean war. A total of US$ 1,444.3 million had been appropriated over the 15 fiscal years, 1951-65, amounting to an average of almost US$lOO million (or about US$10 per capita) a year. Conse quently, aid obligations averaged about 5.6% of Taiwan's GNP over the entire period. Were it not for U.S. aid, Taiwan's trade gap wou!d have become a serious factor limit ing its economic development until the early 1960's. U.S. aid broke this bottleneck by augmenting foreign exchange resources and sustaining the import of necessary inputs that complemented domestic labor and other investment components. It was only with the. II. I. help of U.S. aid that domestic savings were enabled to be transmitted into productive investments.. The share of U.S. aid imports in total imports had been kept above 30%. before 1961, but declined rapidly after that in favor of ordinary imports. 3 ) Since our major concern is with the import-substitution strategy for industrialization, the most important development was the currency reform introduced in June 1949 and the subsequent exchange rate and trade policy reforms. As pointed out earlier, Taiwan suffered from severe foreign exchange shortages and violent inflation during the late 1940's.. The government introduced a currency reform. in June 1949 which consisted of the following main measures:. (1) A new currency. called the New Taiwan Dollar (NT$) was issued backed 100% by reserves which were made up of gold, silver, foreign exchange and export commodities. rate was pegged at five NT dollars to one U.S. dollar. of the currency issue was limited to NT$200 million.. 4. (2) The exchange. (3) The maximum amount ). (4) The old currency was. 3) Kuo-shu Liang and Teng-hui Lee, "Process and Pattern of Economic Development in Taiwan," in Shinichi Iehimura (eel.), The Economic Development of East and Southeast Asia ( Honolulu: The University Press of Hawaii, 1974), pp. 296- 299 . 4) Taiwan Bank Note issued during the prewar normal years was approximately equal to USS50 million at · 1949 constant prices. The production in 19i9 reached about 60 % of the prewar pea k. With an allowance of USS10 million for further economic development, the government set the prescribed limit of NTS200 million. See Fu-chi Liu, Essays on llrlonefal'Y De~'elopment in Taiwan (Taipei: China Committee for Publication Aid and Pri~e Awards, . 1970) , p.13.. 4. INDUSTRY. L. •. OF. F REE. CHINA .. APR .. 1978.
(4) convertible to the NT dollar at the rate of 40,000 to one.. (5) A stabilization fund was. established to support the currency value by selling gold and foreign exchange.. (6) A. regulation reguired that 20% of export proceeds be settled at the Bank of Taiwan in NT dollars, while 80% was to be paid with foreign exchange certificates which could be sold on the market or used for importing goods.. The Bank of Taiwan provided all. foreign exchange required for permissible imports at the official exchange rate without quantitati ve restrictions. Due to the government budget deficits and the easy credit granted to public enter prises, the currency issue, however, exceeded the prescribed limit of NT$200 million in early 1950, and continued to increase.. This on-going inflation forced the government. to devalue the exchange rate repeatedly.. At the same time, the exchange rate system. moved from a single rate to multiple ones to deal with recurrent balance of payments difficulties.. Foreign exchange rates varied depending upon the types of imports and the. '». sources of foreign exchange, with application for an import license being discouraged by requiring importers to deposit in advance of importation 100% of the total amount of foreign exchange applied for. Broadly speaking, exports of sugar and rice often received a relatively unfavorable exchange rate, either transferring re,\enue to the government, or else forming part of the government's system of taxing farmers.. There was a substantial import tax in the. form of the higher exchange rate being applied to imports other than U.S. aid imports of basic raw materials and industrial projects, and to imports by government enterprises whose prices were not controlled.. In addition to this, high tariffs were levied on many. finished goods and luxury items, and imports were severely restricted by license.. •. In September 1953, the government introduced a performance record system as the base of exchange allocation.. Each importer was given the right to apply foreign ex. change proportionate to his performance which was judged by the foreign exchange earned and / or used by the applicant.. At the same time, the cost of exchange was. raised by imposing a 20 % defense tax on exchange settlements. The performance record system gave rise to a number of unnecessary imports. Under the strict foreign-exchange and import controls, the premium over duty-inclusive import costs of many industrial materials and consumer goods. were substantial.. For instance, wheat flour commanded a premium of 48%, soybeans 141%, cotton yarn 33%, cotton piece goods, poplin 152-163%, woolen yarn 350%, soda ash 275%, ammonium sulfate 102%, and steel plate 35% in 1953. 5) These premiums were absorb ed by traders and domestic producers.. The performance record system not only re. sulted in higher prices on the domestic market, but also constituted a very static policy,. -----------------------5) Ching-yuan Lin, Industrialization in Taiwan, 1946-72: Trade and Import-Substitution Policies jor Developing Countries (New York: Praeger Publishers, 19(3), pp. 50-51. INDUSTRY. OF. FREE. CHIN ..... APR .. 1978. ". 5.
(5) not taking into account the needs of new industries.. Therefore, it was soon replaced. by a commodity import quota system in March 1955. Quotas were fixed for various categories of commodities to be imported. Importers were required to purchase a certain stipulated percentage of exchange certificates from the banks or from exporters in ad dition to the exchange supplied at the official rate. Such measures as a multiple exchange rate system and tariff and non-tariff protec tion undoubtedly increased the profitability of import substitution, and were partly re sponsible for the doubling of manufacturing production during the period 1950 to 1958. However, the import substitution strategy had some adverse effects. 6 ) Foreign exchange rates on May 1, 1955 are shown in Appendix Table!.. The im. plementation of a complicated system of multiple exchange rates would undoubtedly require considerable administrative costs.. Foreign exchange allocation would end up. being selective and discriminatory among various categories of commodities without any economic rationale.. The control system would induce entrepreneurs to compete for. licenses rather than for low-cost production.. Corruption would become inevitable.. Moreover, preferential allocation of under-valued foreign exchange for imported raw materials and capital equipment created incentive to expand capacity even when there was under-utilization of existing capacity.. The squeeze applied through direct and. hidden methods on agriculture also resulted in depressed incomes and per capita consumption of farmers. 7 ). The simple and relatively easy phase of import substitution. appeared to reach its limit in a relatively short period in a protected narrow domestic market.. As shown in Table I, the industrial survey for 1959 indicates that many plants. producing simple manufactures, such as rubber canvas shoes, electric fans, soap, insulated wire, plywood, synthetic fabrics, woolen yarn, sewing machines, iron rods and bars, and paper, were operating at only 23% to 67 % of capacity.. f. Import-substitution was a. self-limiting process, and the growth rate of GNP decelerated during the period 1956-60 as was shown in Appendix Table 2. Table!.. Rates of Capacity Utilization of Selected Manufactures, 1959 and 1970. Unit: %. Rubber canvas shoes Elect ric fans Soap Insulated wire Plywood. 1959. 1970 . 23.3 38.1 39.2 40.0 46.9. 70.9 65.3 82.1 64.6 86.2. Synthetic fabrics Woolen yarn Sewing machines Iron rods and bars ,I. Paper. 1959. 1970. 49.7 52.6 64.3 65.4 67.4. 85.4 100.0 51.2. 98.7 90.2. Source: Ministry of Economic Affairs and Council for International Economic Cooperation and Develop ment, Executive Yuan, Industry Surveys In Taiwan (various years). 6) Maurice Scott, "Foreign Trade." in W. Galcnson (ed.), The Economic Development of Taiwan 1945-75, The Experience of the Republic of China (forthcoming). 7) Anthony ~I. Tang and Kuo-shu Liang, op. cit., p. 138. 6. INQUSTRY OF. •. FREE. CHINA .. APR,. 1\176. -<.
(6) The government promulgated the Regulations for Rebate of Taxes on Export Prod. ucts in July 1955, provided for the rebate of import duties, defense surtaxes, and com. i. .f. modity taxes so as to encourage processing of imported materials for exports.. The. government began to recognize that only an outward-looking or export-oriented industriali zation could sustain a high rate of economic growth in such a small island economy as Taiwan, and a series of major policy reforms was undertaken during 1958-60. 2.. Policies Incentives for the Period of Outward-oriented Growth. The timely promulgation of the Program for Improvement of Foreign Exchange and Trade Control in April 1958 had epoch-making consequences.. The following major. steps were carried out after that date. (1) The government devalued over-valued currency, and a dual rate, namely the basic official exchange rate and the exchange certificate rate, replaced the multiple rate structure. Export proceeds and inward remittances were given the exchange certificates which were transferrable and represented full import rights. Market demand and supply determined the exchange certificate rate, and the rate was stabilized at NT$40 to US$1 by August 1958. The basic official exchange rate and the exchange certificate rate was finally merged at this level in June 1961, giving rise to a single unitary exchange rate. This unified and stable exchange rate not only simplified the administration of foreign exchange, but also assured the exporters of making a sound economic calculation and realizing reasonable earnings free from exchange uncertainties. I.. Table 2 shows the purchasing-power-parity effective exchange rates on exports. The purchasing-power-parity effective exchange rate on exports is defined as the official ex change rate of NT dollars per US dollar of exports, adjusted for changes in export incentives, in wholesale prices in Taiwan and abroad, and in the exchange rates of Taiwan's major trade partners.. Since the estimates of export incentives include only. interest subsidies and rebates of customs duties and indirect taxes, they are an imper fect estimate of export incentives. These export incentives reduced costs of production for export below those of production for the domestic market. The resulting estimates clearly show that the repeated devaluation and simplification during the late 1950's following the policy reform, plus the export incentives provided and the relative domestic. ,. price stability, together maintained the purchasing-power-parity effective exchange rate at a fairly stable level over the period 1958-73. It was particularly favorable for exports during the periods 1959-60 and 1971-72.. The fairly stable purchasing-power-parity. effective exchange rate undoubtedly induced producers to prefer export over the domestic markets and accelerated export expansion despite a continua.1ly expanding base. I N OU ~ TRY. OF. F RE E. CHI N A .. APR .. 1976. ,1. 7.
(7) Purchasing-Power-Parity Effective Exchange Rates on Exports: 1956-76. Table 2.. 1. 1956. 1957. 1. 1. 1958. - ~- ~ ~--. ~- "". -. 24.71. A. Official exchange rate for exports! ' (NTS per US dollar). 25.53. 34.14. I 1959l -- -. I. 39.38. 1960. I. I 39.73. 1961. 1. 1962 39.83. 39.83. B. Incenti ves NTS per US dollar of exports. 0.005 0.22 0.06 0.285 25.82 78.11 102.63. 0.50 0.15 0.667 34.81 79.56 97.30. 0.021 1.22 0.36 1.601 40.98 88.39 98.54. 0.031 1.69 0.68 2.401 42.13 100.00 100.00. 78.70 26.62. 79.67 27.03. 89.24 37.99. 95.84 43.79. 100.00 42.13. 1973. 1974. -. In d irect tax rebate" Sub-total C. Nominal effec tive exchange rate (A+B) D. Taiwan's wholesale price index (1960=100) E. Average wholesal e price index of major trade partners" F. Exchange rate index" G. Purchasing-power-parity effective exchange rate on exports (C/DxExF). 1963 \ 1964 39.87. 40.00. j. 1965 \ 1966 \ 1967 40.00. 40.00. 40.00. 1. 1968. 1969 1. 40.00. 0. 017 1. 0.21 0.01 0.22 24.93 72.79 98.77. Interest subs idy" Customs duties reba te ". 1970. 1. 1971 1 1972 1. 1. 40.00. 40.00. 40.00. 40.00. 0.086 2.23 1.87 1.00 0.97 3.316 2.878 43.15 42.71 103.14 106.41 10LlO 100.93. 0.D38. I. 96.80 40.53. 1975 ' 1 1976 1. 38.16. 37.90. .. .. 37.95. 0.086' 0.06 0.073 0.083 0.077 0.096 0.1 0.083 0.093 0.1 0.095 0.083 0.074 2.48 2.69 2.97 3.24 3.49 3.37 4.06 3.68 2.47 2.7 4.27 2.82 8 3.4 0.77 0.92 1.07 1.07 1.19 1.34 1.23 0.98 0.87 1.12 1.27 1 1.36 1.24 3.336 3.67 4.113 4.393 4.7571 4.696 4.85 ! 5.513' 5.71 5.015 3.874 3.423 3.903 43.21 43.67 44.11 44.39 44.76 44.70 44.85 45.51 45.71 45.02 41.32 42.03 41.85 113.18 114.99 11 0.28 112.21 114.99 117.90 118.26 120.92 121.52 128.17 155.50 218.62 207.50 104.34 103.93 105.36 110.40 11·1.18 113.57 117.90 122.64 126.01 130.53 146.96 187.49 201.88 93.76 37.35. 95.79 37.81. 94.55 39.85. 90.26 39.42. 86.18 38.30. 91.50 39.39. 90.32 40.38. 90.80 41.91. 90.79 43.04. 95.47 43.77. 96.71 39.58. 98.20 39.00. 84.48 29.94. 83.79 34.12. 37.95. 0.076 2.14 0.89 3.106 41.06 213.20 201.75 99.88 38.81. Sources: Directorate General of Budget, Accounting and Statistics, Commodity-Price Statistics Nlonthly, Taiwan District, The Republic of China; IMF, International Financial Statistics; Economic Research Department, the Central B,mk of China, The Republic of China, Taiwan Financial Stati,tics Nlonthly; Dep artmen t of Statistics, Ministry of [,inance, Yearbook of Financial Statistics of the. Republic of China. Notes: 1) Where th e rates fluctuated over a period, the mean of the range given was taken. The rate up to April 14, 1958 was that applicable to exports by private enterprises. Therefore, until Septem ber 30, 1963, it was the rate applicable to all exports other than a few commodites (e.g. sugar, rice, salt, banan as) for which lower rates applied. The same rate applied to all exports after Septem ber 30, 1963. See M. Scott, op. cit., Table 3. 2) The difference in the interes t rate on export loans and that on unsecured loans is treated as an export subsidy. The interes t subsidy is es timated by multiplying outstanding export loans with th e interes t rate differential. 3) includes defense surtax and harbor dues. 4) includes comm odity tax, salt tax, and flood rehabilitation surtax . 5) An average of wholesale price ind exes in Australia, Canada, West Germany, Hongkong, Japan, Korea, Netherlands, Singapore, United Kingdom, and th e United States, weighted by Taiwan's annual export value with th e respective countries. 6) An average of exchange rate index weighted by Taiwan's annual export value with the respec tive major trade partners.. 8. INDUSTRY. J...... ". OF. FRE:E. CHINA.. APR.. 1978.
(8) (2) The reform initiated in April 1958 also aimed at reducing the strict controls. J..,. on foreign exchange allocation.. The government gradually liberalized and finally. abolished the commodity import quota system.. The restrictions on imports of materials. and equipment to be used for exports were substantially eased from 1958 onwards. Table 3 shows the ratio of customs revenues to imports.. Column (1 ) lists the. ratio of net customs revenues ( including import duty, defense surtax, and harbor dues ) to total imprts, while column (2) lists the ratio of gross customs revenues ( sum total of net customs revenues and those rebated to exporters) to total imports.. The gross ratio. is probably a better measure of the average degree of protection since it is not affected by the increasing importance of processed exports and assembl y operations based on im ported inputs which were tax exempted.B). Both net and gross ratios show an obvious. declining trend in the average level of protection during the period under review.. 'I». The higher ratio on gross revenues than that on net revenues suggests that tariffs on intermediate products were often fairly high.. Unless these taxes were rebated, the. manufacturers could not possibly export. Table 3.. Ratios of Customs Revenues to Imports: 1955-1976 Un it; percent. Fiscal Yea r. --. 1955. f '" •. [. I Gross Revenues ') (2). Ne t R evenues ' ) (I). [I. Fiscal Yea r. Ne t R evenues!). " 66.94- (~2.2~)~)-1 ~ ( 42."98- )-"-"1[--1-97-0- - - + - -. (1) 1-8.00. I. Gross R evenues'). I. (2) 26.1 3. 1960. 28.12. 31.72. 1975. 11.82. 17.97. 1965. 22.01. 31.81. 1976. 13.62. 19.12. Department of Statistics, Ministry of Finance, NIonthly Statistics of Exports and Imports, 1'he Republic of China and Yearbook of Financial Statistics of the R epublic of China. Not e: 1) Net customs revenues include import duty, defense surt ax, a nd h arbo r dues. G ross customs revenues arc sum total of net customs revenu es a nd th ose reba ted to exporters. 2) For fisca l year 1955 the average exchange ra te used by cust om s to convert im ports from US dollars to NT dollars was NTS15.65 per US d oll ar, whereas the exch ange ra te appli cable to the bu lk of imports was probably NTS24.78. Th e fig u res in p arenth eses show th e ra ti os w ith appro priate corrections.. Sources;. The ratio of customs revenues to imports is a crude measure of the average degree of protection since it is affected by the changing composition of imports.. Changes in. legal tariff rates for 54 commodities are shown in Table 4 for years 1948, 1956, 1961, 1966, 1970, and 1972. Comparing 1948 with 1961, we find three times as many increases as decreases. From 1961 to 1972, many items still tended to increase, but the increase was very slight in many cases. This suggests that legal tariff rates tended to rise for most items shown in Table 4 during the period under review.. The apparent contradic. tion in the conclusion derived from Tables 3 and 4 is due to the fact that Table 3 8) Maurice Scott, op. cit. INDUSTRY. OF. FRE'E. CHINA ,. APR .. 9. 197 0. .~.
(9) Table 4.. Changes in Classification and Tariff Rates (inc1uing defense surtax) for Selected Commodities: 1948-72 Commodity. __~:~___l. Preparations for flavoring fond. 80. Whea t floll r Confectionery items. IS. Milk powder Sugar (including raw sligar) Alcoholic beverage Cigarettes Raw cotton. 120 40 100 100 100 10. Cotton yarn Cotton piece goods, gray Sheep's and lamb's wool, degreased Wool yarn and thread Woolen knitted tissue Artificial staple fibre Synthetical staple fibre Artificial or synthetical fiber knitted tissue Perfumes, cosmetics, tooth paste, etc . Plywood Chemical wood pulp Common printing paper and news printing paper Household soaps and compound detergent Crude oil for refining Fuel oil Plastic powder Antibiotics Sulfa drugs Caustic soda Soda ash Chemical fertilizer Tires. 20-30. IS 22.5 40 100 100. ISS. •. 1956. 1961. 80 t 25<. 96 t 30 120 t 30 120 t 192<. 120 t 25. lOOt 160 t 160< 10 17t 40< 85< 90< 100< 140< 140< 155<. 120 35 10 15-20. 120 t. 50 7.5 18-60 25 25 35 25 25 5 40-45 70 40 35 20 25 10 22.5. SOt. 35 t 10 25 t. 7.5 18-60 t 25< 25 35 35 t 25 t 5. t. Shuttles, pickers, picking straps, wire healds for textile machinery. IS. 40-45P 70 t 40 t 1S t 20P 20 20 t 20 t 7.5 10 1St 1St 10 15 t. Electric fans. 80. 70 t. Cement Plate glass Pig iron Steel bars Tinned still plates and sh('('ts Aluminum ingots Aluminum sheets Power tillers Steam engines. 7.5 10. Household sewing machines. IS IS. Sewing machines for industrial usc Textile machinery. 10. 10. I ~_~ ~ '. 192 t. 96 c 30 t 120< 24P 120< 120< 120 t. IS<. 15<. 30 t. 30 t. SIt. SIt. 30 78< 102<. 144P 42< 12<. 96t 144P 42t 12<. 30 t. 30 c. 60 t 9<. 60< 9<. 21-60 t 30 t 21-27P 27-39 60 t. 21-60< 30<. 30 t 6< 48-54P 84 48 t 12t. 30 24< 36< 12 12 1S t. IS-30 24-36 42< 42t. 6t 48-54P 6 48 t 12< 18P 30 24 36 c 12<. 104 c 32.5 c 130< 36P. 104P. 130 t 130t 130< 16.3<. 130< 130< 130<. 33c 130<. ZIP. 16 33<. 32.5 t 55.3t 32.5 84.5< II 0.5<. 30 7S t 102 c 48 t 48<. 96 t 60 t 120<. 18P. ". 1972. sse 33 85<. III C. 52". 52 t 52 t 104t 156 46 c 13 33<. 52 c 104< 156P 45.5 t 13 t 32.5< 65 t 9.8 22.8-65 c 32.5<. 65 t 10 23-65< 33 t 35 35 46 46 t. 19.5-32.5 26-39 45.5< 45.5< 6.5 c 52-58.5P 6.5 52 c 13 19.5p. 7c 52-59 P 7 52 t 13. 26 39 26t 39P 7t. 32 .5 26< 39 13<. ISc 30. 12 18c 18P. 13 19.5 t 19.5p. 30. 30 t. 30 c. 19.5 32.5<. 32 32 t 32 19 32. 60 t. 60 t. 65 t. 65. INDUSTRY. OF. FREE. CHINA.. APR.. 1978.
(10) ( Continued) I. 1948. Commodity . J. .-. .. Fluorescent lamps Batteries Household refrigera tors (com pleted). ,I. I I. I. Radio sets Telecommunication equipment Water meters Automobiles . I. Sedan cars . I. Bicycles l\'!otorcycles . j. I. 45 40 150 30 25-30 15 25-60 60 45 60. 1956. I. I I. I. -- .. r. 45 e 40" 100c 30 e I 25-30 e I 15 I 25-60P 60 c 45 I 60 c. I. I. I. 1961. 1966. 1972. 1970. ,. 60 e 42P 42 e 24 c 6-24P. 60 e 48P 60 e 24. 6-24P 18 30-72P. I. 7Z. 36 c 42. 58.5 e 45.5P 45.5 c 26 e 6.S-26P 19.5 18 42-60 P 45.5-65P 65 60 I 36c 39 c c 42 45.5 e. I. I. 52 46 46 c 33 c 7-33P 20 46-75 75 46 c 39 c. Sources: Foreign Exchange and Trade Commission, Board of Froeign Trade, Ministry of Economic Affairs, Classification oj Import and Export Commodities, Republic oj China (various years); the Inspectorate General of Customs, Customs Import Tariff oj the Republic oj China (August 1972). Note: c=total import control, p=partial import control.. gives a summary picture, while Table 4 is an attempt to provide detail, but the sample size is very limited.. Moreover, Table 4 provides information as to whether the com. modities in question were permissible or subject to total or partial import contro!' ports are controlled mainly for prot~ctive purposes.. Im. Control signifies the granting of. import licenses only if comparable goods are not produced domestically.. In the case of. permissible imports, licenses are in general granted automatically, although there may be restrictio-ns on particular sources of origin or the status of the applicants.. The. principle that domestic availability justifies import control is an important part of the protective system in Taiwan as in many other developing countries. ~r' •. protected in many cases by tariff as well as non-tariff restriction.. Manufactures were However, there has. been 'some liberalization since the early 1960's as the criteria used to justify the control or banning of imports of a commodity have been progressively tightened.. Domestic. manufacturers seeking protection have to show that the quantity and quality of their products are adequate to satisfy domestic demand, and that the cost of imported raw materials required for the manufactu,re of the product does not exceed 70% of the total production cost.. The ex-factory price of the controlled commodity was not allowed to. exceed the prices of comparable imports (inclusive of all duties) by more than 25 % m 1960.. In 1964 this was reduced to 15%, in 1968 to 10%, and in 1973 to 5%. Even. though these rules were not applied strictly, they helped direct entrepreneurial attention more toward production efficiency rather than to the maintenance of a quasi-monopoly. ,.,. position. Table 5 groups industrial commodities in commodity categories totalling 672 in 1956 and 771 from 1961 onwards.. These categories were classified depending on whether. they include only controlled items, controlled as well as uncontrolled items, or uncontrolled INDUSTRY. OF. FREE. CHINA... APR .. 1978. 11.
(11) Table 5.. Changes in the Classification of Various Categories of Importabies: 1956-69. ___ _ _ __._. __ . _ _.. L. 1956. 1. Number of commodity categories. 672. 2. Commodity categories containing items subject to import control. 398. (a) Commodity categories contain ing only items subject to import control Of which with average tariff rates higher than 30 %. 347. 1961. 1966. 1969. 771. 771. 771. I. 460. 471. 448. I. 327. 304. 288. 260. 233. 220. 133 311. 167 300. 160 327. r. I. 276. I. (b) Commodity categories contain ing controlled as well as uncon trolled items. 51 274. 3. Uncontrolled imports. Source: Th e Foreign Exchange and Trade Commission, Classificatioll of Import and Export Commodities of the Republic of Clu'na (various editions).. items alone.. Although changes in the number of items falling into the different cate. gories provide only a crude indication of the extent of import control, it appears that there has been a general tendency towards trade liberalization during the period under consideration.. Thus, commodity categories containing only items subject to import con. trol as well as such categories subject to average tariff rates higher than 30% have shown a decreasing tendency since 1956. Furthermore, the margin deposit on import applications was removed in September 1963. The margin deposit required to be paid on ordinary imports on the date of an. LIC being opened was reduced from 100% to 50% in May 1967. It has been further reduced to 10-30% as of August 1969.9 ). The interest burden of importers was thus. substantially reduced. There is much more competltlOn between manufactures now than there used to be a decade ago. The prevailing market situation in most of the newly developed industries is one of oligopolistic or monopolistic competition rather than monopoly.. Even goods. on the controlled list have been permitted to be imported, provided they are for the use of export processing.. When import controls are relaxed, resources that would other. wise be absorbed in competing import industries are released to export industries, tending to lower the costs exporters have to pay and resulting in their being able to expand exports more efficiently than would otherwise be the case.. The increased competition. from imports has also helped improve the quality of domestic manufacturing. (3) The emphasis of trade policy has gradually shifted from strict import controls to export promotion following the 1958 reform.. Export incentives in Taiwan comprise. 9) The government changed the minimum margin requirements from time to time as an instrument of selective cred it controls.. 12. INOUSTRY OF. '1. FREE. CHINA.. APR .. 1978.
(12) rebates ot customs duties (including defense surtaxes and harbor dues) and commodity taxes on imported raw materials/D) exemption from business and related stamp taxes, deduction of 2% of annual total export earnings from taxable income and a 10% tax. '"-;. reduction allowed for manufacturing, mining, or handicrafts corporations that meet the cri terion of having more than 50% of their output exported,ll) retention of foreign exchange earnings for the import of raw materials and machinery without having to go through the procedures for the application for foreign exchange, together with the privilege of selling such imports to other firms/ 2 ) special low interest loans to provide pre-shipment production financing and financing for the importation of raw materials, and export insurance by a government organization.. The government also encouraged. the formation of trading organizations by manufacturers to control production and export by means of export quotas and unified quotation of export prices, as in the cases of textiles, canned mushrooms, canned asparagus spears, and citronella oil.. Direct subsidiz. ing of exports was organized by a few industries, such as cotton spinning, steel and iron, rubber products, monosodium glutamate, woolen and fabrics, and paper and paper products, and was financed through the manufacturers' associations concerned.. These. schemes amounted to private levies on domestic sales, or on materials used to manu facture domestic sales, with corresponding bounties on exports. 13 ). There were many. other export promotion measures undertaken by government and semi-governmental agencies.. Exports hi:lse been assisted by these agencies for export inspection, managerial,. technical, and trade consultation services, market research, and participation in interna tional trade fairs.. The China External Trade Development Council was founded in. July 1970 to promote exports and conduct market research.. The Council has been. entitled to levy 0.0625% on exporters' revenue as a United Fund for the Promotion and Extension of Exports. H). Moreover, exports have been assisted by the creation of tax. and-duty-free export processing zones since 1965. The zones were established to en courage investment in the processing and assembling of such exportables as electronic products, garments, and plastic products.. The Export Processing Zone Administration,. representing all the relevant administrative offices of the government, is responsible for. 10) Furthermore, bonded warehouses can be established to avoid the cumbersome problem of assessing and re funding taxes. 11) The government abolished income tax reductions for exports in December 1970.. ". 12) A margin ranging from one to four NT dollars per US dollar was generally paid by the transferee. Such a practice was not in conformity with a unitary exchange rate system. Negotiation of retained or register ed foreign exchange was terminated on July 30, 1970. 13) These schemes to subsidize exports do not exist any longer. For instance, the cotton spinning scheme end~d in 1972. For a more detailed analysis, see T. H. Lee, Kuo-shu Liang, Chi Schive, and Ryh-song Yeh, "The Structure of Effective Protection and Subsidy in Taiwan," Economic Essays, Vol. VI (Nov. 1975). 14) The rate was reduced to 0.04% during the period July 1974-August 1975 as the economy was affected by the serious global trade decline. INOUSTRY. OF. FREE. CHINA .. APR.. 13. 19 7 8. '".
(13) management of the zones. It has greatly simplified procedures for registration, import and export licensillg, and foreign exchange transactions. Exports from all three zones in 1975 amounted to US$453 million and imports were US$256 million, 8.5% and 4.3% respectively of total exports and imports. Imports from the domestic customs territories amounted to 9.5 % of the exports from all three zones.. Perhaps the most important. benefit from the zones was the increased employment they offered at higher wages. Employment in the zones amounted to 66,115 persons, 4.4% of Taiwan's total employ ment in manufacturing. 15 ) In addition to changes more directly related to foreign exchange and trade policies, there were several key reforms aimed at improving the investment climate.. Laws and. regulations governing investment were liberalized. New industrial estabishments eligible under the Statute for the Encouragement of Investment were given a five-year tax holiday from the starting date of operations plus exemption from import duties on machinery and equipment.. Public enterprises, it was realized, are not ideal concerns for directly. exporting to the world market.. They find it difficult to attain the requisite initiative,. flexibility, and willingness for taking risks. Table 6 provides some key indicators of Taiwan's success in financial deepening. Of measures aimed at financial growth, the most important one should aim at keepTable 6.. Key Indicators of Financial Deepening: 1952-1976 1 1952-1955 1 1956-1960 i 1961-1965 11966-1970 1971- 1975 1. 1976. 1. Ratio of M, to GDP (%). 7.9. 10.0. 1l.5. 14.5. 18.0. 19.9. 2. Ratio of M, to GDP (%). 1l.8. 16.9. 28.8. 39.0. 52.4. 63.5. 3. Percentage change in wholesale pirce index. 8.41*. 9.15. 2.ll. 1.89. 12 .59. 2.77. 4. Interest rate on one-year deposits ( % ). 24.60*. 17.71. 12.91. 9.83. 10.91. 11.85. 5. Real return on holding deposits (%). 16.19*. 7.94. - 1.68. 8.56. 10.80. 9.08. 6. lvI, at 1971 constant prices (NTS billion). 6.0. 11.6. 29.3. 70.4. 155.6. 236.5. 7. Ratio of net private national saving to national income (%). 4.6. 5.1. 11.0. 15.4. 17.4. 14.6. DGBAS, Commodity Price Statistics l1vIonthly, Taiwan Distl'ic( The Repblic of China; Econom,c Research Department, The Central Bank of China, The Republic of China. Taiwan Financial Statistics Monthly; DGBAS, National Income of the Republic of China. Notes: · 1953-55. ;VI, = net currency + net deposit money M,=M, +quasi-money M, at 1971 constant prices is deflated by the wholesale price index.. Sources:. II I. ing deposits in the commercial banks at high enough levels to offer savers a positive real rate of return, as is clearly shown in the table. Financial deepening advanced pro gressively when stability in the wholesale price index was achieved in the 1960's. The 15) Export Processing Zone Administration, Export Processing Zones Essential Statistics (Dec. 1975).. 14. INDUSTRY. J,. OF. FREE. CHINA.. APR.. 1976.
(14) M 2 / GDP ratio increased from 11.8% in 1952-55 to 39 % in 1966-70.. M 2 , deflated by. the wholesale price index which represents the real lending capacity of the organized banking sector,t6) grew almost twelve times during the period. of . The dampening of. inflationary expectations contributed not only to the extraordinary financial growth observed, but also to the rise in measured net private saving ratio from 4.6 % of national income in 1952-55 to 15.4% in 1966-70. With a favorable investment climate created by conducive government policies, industry underwent startling changes, aided also by an abundant and efficient labor force and the strategic location of the island. after 1963.. 17. ). Manufactured exports rapidly expanded especially. By the mid-1960's, the somewhat pessimistic views of the late 1950's had. been replaced by a popular sense of confidence and prosperity.. It can be seen from Table. I that, with the exception of sewing machines, the rates of capacity utilization of simple. .. . manufactures had improved significantly in 1970 as compared with those in 1959.. As. pointed out earlier, the economic indicators of the economy shown in Appendix Table 2 clearly reveal the fact that economic performances in the 1960's and the early 1970's improved notably as compared with those in the 1950's. Outward orientation is clearly the more desirable strategy.. The expansion of manufactured exports contributes not. only to efficient industrialization by permitting specialization according to comparative advantage and stimulating technological improvement, but also to higher living standards, and improved income distribution through the creation of more productive employment. However, the structural disequilibrium which was manifested in the form of raw material shortages, a food crisis, and a drastic rise in petroleum prices, seriously disrupted Taiwan's ongoing development and stability after 1973. With Taiwan's high dependence. ,j . upon external trade, inflation was imported and structural in nature, involving a drastic. I. realignment of relative prices. To cope with the situation, the government introduced an economic stabilization pro gram on January 27, 1974 which called for tight money (a large scale across-the-board upward adjustment of bank rates) plus substantial price increases on such government controlled goods and services as petroleum products, electricity, transportation services, and alcoholic beverages and tobacco. These measures produced the desired effect.. After. a period of sharp price increases in late 1973 and early 1974, the price level stabilized and was kept under control.. The drastic upward adjustment of bank rates not only. forced enterprises to reduce their inventories but also curtailed consumers' demand and. .'". enconuraged savings.. In addition, the subsequent fall in the prices of imports, the shift. 16) R.I. McKinnon, kioney and Capital in Economic Dez:elopment (Washington D.C.: The Brookings Institution, 1973), p. 114. 17) An exceptionally high export price of sugar in 1963 and 196+ helped to build up exchange reserves and stabilize the exchange rate. INDUSTRY. OF. FREE. CHINA.. APR.. 1978 . J. 15.
(15) of trade balance from surplus to deficit, and growing government budget surplus were also helpful to economic stabilization. As inflation in Taiwan proceeded more rapidly than abroad, the exchange rate appl1eciated 5% in February 1973.. The purchasing-power-parity effective exchange rate. as was shown in Table 2 deteriorated notably between 1973 and 1975.. Although the. estimation of export incentives only includes interest subsidy and rebates of customs duties and indirect taxes, Table 2 also clearly shows that the government appeared to have reduced export incentives during the period.. A previous program under which. exporters could borrow for working capital against a credit line based on previous year's trade performance was discontinued in January 1974.. Pre-shipment preferential export. credit to finance working capital needs is currently available only with L/C backing. More strict rules were applied to rebates on customs duties. The deterioration in purchasing-power-parity effective exchange rates for a pro tracted prriod adversely affected the profitability of exports and aggravated trade and economic slowdown created by the world recession. in 1974.. The recession bottomed out early. Although recovery was slow and erratic, the commodity trade balance swung. from deficits of US$1,327 million and US$643 million in 1974 and 1975 respectively to a surplus of US$567 million in 1976.. The purchasing-power-parity effective exchange. rate exporters received increased again, mainly attributable to success in the contain ment of domestic inflation by the economic stabilization program mentioned before. It should be recognized that the Republic of China and other countries following outward-oriented policies were able to weather the recession much better than countries which followed inward-oriented policies. IS) orientation in Taiwan.. It will be desirable to continue outward. This would involve the upgrading of traditional unskilled-labor. intensive exportables as well as the development of such skilled-labor intensive expor tables as machinery and equipment.. The availability of a literate and trainable work. ing force is Taiwan's most important resource, and world market prospects are also better for skilled-labor than for unskilled-labor intensive products.. The purchasing. power-parity effective exchange rate needs to be maintained at a level so as to provide adequate incentive to exports. Increased export incentives can take the form of extend ing the scope of export credits, especially extending medium- and long-term credits to foreign buyers of machinery and equipment, reforming the export insurance and guarantee systems, and initiating additional export promotion programs.. 18) B. Balassa, "Export Incentives and Export Performance in Developing Countries, A Comparative Analysis," World Bank Staff Working Paper No. 248 (January 1977).. 16 . INDUSTRY. OF. FREE. CHINA.. APR.. 1976.
(16) Appendix Table 1. Foreign Exchange Rates on May 1, 1955 (NT dollars per U.S. dollar). •. Bllying rates R a tes for exports Exports by government enterprises Sugar, rice, petroleum, aluminum, and salt. SI5.55' 20.35 b. Others Exports by private enterprises Bananas. IS.60<. Others. 20.43 d. Rates for inward remittances. 15.55. Government agencies Private ;;. Paid in NT dollars for whole amount. 21.S5 C. Paid in NT dollars and certificate. 21.65 f. Selling ratcs Rates for imports Imports by government and government enterpri scs whose prices arc controlled. IS.7S g. Other imports by government enterprises. 24.7Sh. U. S. aid imports Basic raw materials and industrial project. IS.78. Ordinary imports under commercial procurements. 24.78. Imports by private enterprises. ,. Raw materials and equipment for end-users. 24.78. Others. 24.8S i. Rates for outward remittances Govcrment agencies' ordinary remittances. 14.78. Private ordinary remittances. 24.78. Source:. Economic Research Department, The Central Bank of China, The Republic of China,. Taiwan. Financial Statistics N[onthly, (March 1972), pp. 81-2, Table 28. Notes: a. Offiieial buying basic exchange rate. b. $15.55 (basic exchange rate) +80% xS6.00(official price of certificate). c. $15.55+50% xS6.10 (market price of certificate). d. $15.55+80% xS6.10. e. 515.55+$6.00.. •. f. $15.55+56.10 .. g. $15.65 (offiicial selling basic exchange rate)+S3.13 (defense tax). h. $15.65 +56.00+53.13. i. SI5.65+56.10+53.13. INDUSTRY. OF. FREE CHINA.. APR .. 17. 1976. j,.
(17) Appendix Table 2. Major Economic Indicators: 1952-1976 1952. -. 1955. I. I. A. Computation of per capita income GNP (NTS million at !58,070 1971 prices) Population (thousand I 8,128 persons) GNP per capita (NTS- I 7.1 1,00 0 at 1971 prices). 1976. 1975. 1970. 1965. 1960. 73,429. 97,450. 149,640. 9,078. 10,792. 12,628. 8.1. 235,121. 324,048. 362 ,459. 14,676. 16,150. 16,50B. 16.0. 20.1. 22.0. 27.8596 20.68 12.08 39.39. 18.71 % 26.81 13.53 40.94. 16.81% 28.44 15.14 39.61. 15.31 % 29.90 15.09 39.70. 20,67. 25.92 0,90. 27.48 0.73 43.97 29.84 39.22 38.59. 28.94. 11.8. 9.0. B. Percentage shares in GDP (at current pri ces) at factor cost by industrial origin. I. 36.9 f% 11.1 I 9.5 I 42.3. Primary production Manufacturing Social overhead' Services. 33.40 % 14.26 10.37 41.98. 33.61 % 17.31 11.00 38,OB. C. Percentage shares in GNP (at 1971 prices). ,. 21.8 3.7 : 2.7 I 8.4 I 8.5 I. Government revenue Government savings Total domestic savings Gross capital formation Exports. 15.8. Imports D. Percentage share of manu factured exports in total exports. ,. 24.76 5.04 3.68 9.19 7.51 11.83. I. 23.77 3,95 8.10 14.09 10.32 15.28. 2.2 14,69. I. 19.24. I. 14.99 17.49. i. exports (NTS million Y'o. 144.4. 1,688.4. 7,784.9. Manufactured exports! total exports. 7.6. 28.2. 42.6. ~Ianufactured. 1952 5 ;. E. Compound annual growth rates GNP (at 1971 prices) GNP per capita (at 1971 prices) Index of manufacturing output. 1955- 60. 1965-70. 1960- 65. I. 24.85 25.60 27.16 27.43. 1.1 5 53.74 27.57 46.32 44.47. 43,603.9. 163,528.3. 263,608,0. 76.7. 81.3. 91.2. I. 1975-76. , 1970-75. 1952-76. 6,6. I1.B. 4.7. 9.4. 7.9 4.8. 20.6. 13 ,5. 25.7. 15.3. 14.7. 32 .0. 15.8. 8.0 4.5. 5.8 2,1. 8,9 5.6. 9.4 6,3. 16.7. 10.9. 13.8. ). (at 1971. I. 3.7. 12.7. 17.4. 23.3. Population under 15; 65 and over. I. 4.5. 4.4. 3.0. 0.8. 0.05. 0.8. 2.3. 4.3. 3.8. 0.4. 5.3 0.5. 8.3 -0 ,7. 9.9 -0.3. 2.5 7.1. -0.2. 2.9 6,8. Agricul ture. 2.1 4.8 0,6. 2.3. Manufacturing. 1.2 4.B. -0.1. 5,5. 6.5. 7,8. 9.1 9.0. I.l 2.0. 5,1. 11.2 11.4. Total exports prices). Employment. ,. Total . -0.1. Real wages Manufacturing Prices GNP deflator Wholesale price index. 5.6. I. ILl 8.3. 1.9. 5,3. 13.9 I. 7.1 6.1. 4.8. 2.8. I. Sources: DGBAS, National Income of the Republic of Chi~a; Economic Planning Council, Taiwan Statistical Data Book: Department of Statistics, Ministry of Finance, iVIonthly Statistics of Exports and Imports, The Republic of China; R esearch, Development, and Evaluation Commission, Commodity Trade Statistics of the Republic of China (SITC Revised), 1954-74 (Aug. 1976); Overall Planning Department, Economic Planning Counci l, Research Report No. (66) 120. 119. (July, 1977). Notes: • Includes construction; electricity, gas and water; transport, storage and communication.. •• Includes SITC categories 5 through 8.. 18. INCUSTRY OF. FREE. CHINA.. APR .. --. 1978.
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