The Taiwan Success Story

Rapid Growith With Improved Distribution In The Republic Of China, 1952-1979

Shirley W Y Kuo, Gustav Ranis

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000306217
• Edition: 1
• Topic: Politique et relations internationales
• Subtopic: Politique asiatique

Economists and policymakers have long been perplexed over the way rapid growth appears to conflict with the other common goal of developing nations - more equitable income distribution. But economic expansion need not preclude equity, as demonstrated by the case of Taiwan, which experienced high rates of economic growth between the early 1950s and the late 1970s while simultaneously improving the distribution of income among its people.

This book describes how the Republic of China managed this balancing of goals and analyzes the reasons for Taiwan's exceptional performance. The authors illustrate how full utilization of the country's vast human resources through emphasis on labor-intensive production has worked to make Taiwan's products competitive in international markets and to make fiscal redistribution after the fact unnecessary. They also cite Taiwan's early attention to land reform, to productivity in agriculture, and to the spread of decentralized rural industry as important factors in the country's achievements. They point out that, although the specifics may change, strategies and policy implications drawn from the Taiwan experience should be applicable in other developing countries.

1
Introduction

An Approach to Growth with Equity

The 1950s and 1960s have been characterized as exclusively growth-oriented; now, however, it is widely held that successful economic development should be identified not only with rapid growth but also with improved income distribution. Most economists and policy makers, however, share at least implicitly the assumption of the need for a tradeoff between growth and equity. The work of Kuznets, Paukert, and Adelman and Morris,¹ on the basis of cross-country cross-sections, concludes that, as income increases from low levels in a developing society, the distribution of income must first worsen before it can improve. Two facts support their conclusion. First, today's less developed countries (LDCs) generally have income distributions that are less equal than those of the rich countries. Second, accelerated LDC growth has most often been accompanied by a worsening of already unfavorable indexes of equality.

Historically, the record of almost all contemporary LDCs reinforces the general outlook of tradeoff pessimism. Taiwan, the Republic of China, is one exception. According to the best data available, Taiwan's family distribution of income in the 1950s was not very different from the unfavorable levels that plague most LDCs in the early years of their transition effort. But the distribution has improved substantially during two decades of rapid growth. This "deviant" record should therefore be of interest to academics and policy makers.

Although no two countries are ever alike and deviant performance may be based on special circumstances, an examination of the relationship between growth and equity in a country exhibiting such an unusual performance can help to isolate the critical elements of that performance. Only then is it possible to judge whether the underlying conditions, which seem to have had the effect of virtually eliminating the usual conflict between these two principal societal objectives in Taiwan, the Republic of China, are sufficient elsewhere to permit somewhat greater optimism. Such optimism would not be based on the conclusion that achieving growth with equity is easy. Instead it would be based on the conclusion that some of the obstacles are made by man, not nature, and can thus be removed by changes in policy.

The Framework of Analysis

The problem of growth with equity can, we believe, be fruitfully analyzed in a historical context. During the third quarter of this century, the less developed world experienced unprecedented growth, a phenomenon accompanied by a resurgence of interest in the theory of economic development. We therefore felt that a natural way to proceed was to construct a framework of analysis that takes advantage of this new stock of knowledge. This framework consists of three dimensions: historical perspective, spatial distinction, and wage income versus property income.

By historical perspective we mean that the quarter century after World War II can be viewed in most LDCs as a period of transition between a long epoch of agrarianism and an epoch of modern growth. This setting of transition growth includes recognition of the dualistic structure of most less developed countries: Agricultural and nonagricultural production sectors coexist, and the center of gravity gradually shifts from the former to the latter. The basic phenomena include modernizing agriculture, generating an agricultural surplus, accumulating real capital to provide nonagricultural employment, and reallocating labor from agricultural to nonagricultural pursuits. And, for a small economy like Taiwan, export expansion is a decisive factor in the course of development, as it greatly broadens the market to create production opportunities.

Spatial distinction becomes apparent when we divide all families into farm and nonfarm families, as each of these two categories follows a different pattern. Nonfarm families live in and near the major population centers and overwhelmingly engage in nonagricultural production. Farm families are dispersed and derive their income from both agricultural and nonagricultural production, the relative portions of which depend upon the location pattern of industries and services and upon job opportunities. Thus, the separation of farm and nonfarm households is a basic analytical device used in this volume.

Wage income and property income are the two essential sources of family income. The separation of wage and property incomes is indispensable for our analysis. Such a separation makes it possible to trace the inequality of family income to its various production factors and, in this way, to link income distribution to the theory of development.

The role of government policies is also crucial in the transition to modern growth. First, governments must set the policy environment for private economic activity through their actions with respect to agricultural activities, trade, foreign exchange, domestic credit, tariffs, and so on. These actions — whether they work through the market by way of indirect controls or circumvent the market by way of direct controls —may be critical for the kind of growth path and the pattern of income distribution generated. Second, governments act through their tax and expenditure policies to affect income distribution after the fact of production. Third, because extensive education contributes to higher income as well as to higher productivity, the quality and equality of educational opportunity provided by the government affect growth and equity.

The organization of this book should be viewed in light of the preceding considerations. Chapter 2 acquaints the reader with the general story of transition growth and income distribution in Taiwan, the Republic of China. In the succeeding chapters we examine factors contributing to the achievement of growth with equity. We also attempt to forge a more precise link between the distribution of income and the theory of development in a labor-surplus economy. In Chapter 3 we discuss growth, distribution, and government policies in the period of import substitution—the 1950s and early 1960s. Chapter 4 reviews economic policies for export promotion and investment encouragement. In Chapter 5 we try to assess the relationship between growth and the family distribution of income for the 1964-79 period. Chapter 6 analyzes the effects of trade on labor income and economic growth. In Chapter 7 we consider the impact of taxation on income distribution. Finally, Chapter 8 presents our conclusions.

The study of income distribution is at a pretheoretical stage in which much of the effort must consist of examining empirical evidence. By sorting out the essential from the nonessential and the relevant from the irrelevant, it is to be hoped that the essential and the relevant can then be integrated with the mainstream of economic ideas, especially those related to development theory.

2
Rapid Growth with Improved Income Distribution: Historical Perspective

Economic development in the Republic of China over the last three decades can be considered highly satisfactory, as rapid growth has been accompanied by stable prices, successful labor absorption, and improved income distribution.

At the outset of the postwar period Taiwan was still a predominantly agricultural economy, with more than half of its labor force employed in agriculture. However, as a result of successful industrialization, this share declined dramatically over the following decades. The rapid economic growth was accompanied by improved income distribution: The incomes of poorer people rose much more rapidly than those of richer. Unemployment was virtually eliminated by the end of the 1960s. Inflation moderated in the 1950s and was very stable in the 1960s. Although it accelerated in 1974 because of the oil crisis, inflation was stemmed in 1975 and remained at around 3 percent until 1978, after which it started a climb in response to a second oil crisis in 1979.

Overall growth was accompanied by favorable changes in the structure of the economy. The share of production and employment in various sectors of the economy changed appreciably. The share of exports in gross national product (GNP) did not rise much during the 1950s, but it increased significantly thereafter. The major export items had been sugar and rice, comprising well over half the total exports up until 1959. However, because of rapid industrialization and export expansion in the 1960s, the share of sugar and rice dropped to 3 percent by 1970. Imports showed the same tendency. The import-export deficit dropped significantly and turned into an export surplus for many years during the 1970s.

The postwar development of Taiwan can be divided into two subphases, with 1961 as the demarcation year. The first phase was characterized by inwardly oriented import-substituting industrialization; the second phase was characterized by outwardly oriented export expansion. 1961 is used as a demarcation year for the following reasons:

1. Monetary reform was successfully achieved by 1961.
2. The multiple exchange rate was abandoned and a unitary exchange rate became effective in 1961.
3. The real wage rate, having remained nearly fixed, began to rise rapidly after 1961.
4. The rate of labor absorption into the nonagricultural sector, having kept pace with the increase in total population, started to exceed population growth rapidly after 1962.
5. The rate of investment in the manufacturing sector accelerated after 1961.
6. Private foreign investment started to flow in after 1961.
7. The average propensity to save increased from 4.9 percent in the 1950s to 8.0 percent in 1961 and 13.4 percent in 1963.

It can be inferred that a fundamental change in saving capability occurred between 1960 and 1963.

In discussing the historical aspects of development it is useful to select some basic processes that appear to be essential features of development. The basic processes thus chosen in this chapter to show a typical pattern of development in Taiwan, the Republic of China, over the past three decades are: (1) growth rate, (2) speed and pattern of industrialization, (3) labor allocation and labor absorption, (4) changes in productivity, (5) changes in wage rate, (6) structure of trade, (7) savings and investment, (8) income distribution, and (9) some other social and economic features. These topics will be discussed in the following sections.

Growth Rate

Growth rate measures the speed of increase in the production of goods and services. A higher growth rate means the amount of goods and services produced is increasing at a higher rate. In a developed country, where the production of goods and services is in excess of people's basic needs, a higher growth rate brings about an advancement in the standard of living. However, in a...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Tables and Figures
• Preface
• 1. Introduction
• 2. Rapid Growth with Improved Income Distribution: Historical Perspective
• 3. Growth, Distribution, and Government Policies, 1953-64
• 4. Economic Policies in the 1960s
• 5. Growth and Income Distribution, 1964-79
• 6. The Effects of Trade on Economic Growth and Labor Income
• 7. The Impact of Taxation on Income Distribution
• Notes
• Index