Pioneering Economic Policies
- Land Reform—the successful (and peaceful) land reform, one of the
very few in the world, helped raise agricultural productivity, improve
the income distribution, and release savings for investment in the
industrial sector.
- Promotion of Family Planning.
- Reliance on Private Rather Than Public Enterprise.
- Export-Oriented Industrialization (as opposed to import-substituting
industrialization).
- Maintenance of Macroeconomic Stability.
- Maintaining Equity with Growth.
- Promoting the Transition from Tangible Capital-Based to Intangible
Capital-Based Industrialization.
12
Land Reform
- Raises agricultural productivity through the incentive effect
- Releases both tangible capital and human capital from agriculture
- Improves the distribution of income, providing the basis for an
increase in aggregate demand (both consumption and savings)
- Enhances investment in human capital
- It was successfully implemented because the reformers themselves
did not own any land and did not want any for themselves
The Joint Commission for Rural Reconstruction (JCRR) played an
important role in the land reform.
13
Reliance on Private Enterprise
- There were extensive debates in Taiwan in the mid-1950s as to
whether private or public enterprise should lead the drive for
industrialization. It was finally decided at the highest level of
government that private enterprise was consistent and compatible
with the Three People’s Principle and should be allowed to grow.
u Similarly, in South Korea, President Park Chung-Hee, having
observed the degree of incompetence and corruption within the
government (army), also decided in the early 1960s that private
enterprise would be allowed to lead the drive for industrialization in
South Korea.
Lawrence J. Lau, Stanford University 14
Reliance on Private Enterprise
u A private-enterprise economy can also be inefficient if the markets are not
competitive or if there are artificial barriers to entry and to movement of goods and
factors. The resulting allocations can be very much worse. Simply changing the
system of ownership of the means of production from public to private does not
necessarily guarantee economic efficiency. In the cases of Hong Kong, Singapore,
and Taiwan, the economy is forced to be efficient because of its participation in the
competitive world markets. In other words, the world markets provide the
discipline and replace the antitrust laws that are sometimes necessary in developed
economies to keep the markets competitive. The world markets also make sure
that special privileges are not sufficient, in the absence of efficiency, for profits or
even survival. In the final analysis, it is competition, with free entry and exit and
not just profit maximization, that guarantees efficiency.
u Private entrepreneurs are not necessarily smarter than public officials. Their
advantage is that they do not have deep pockets and so have to cut their losses very
quickly when a project turns out to be a mistake. Public enterprises, supported
financially by the government, tend to hang on long after they can be commercially
justified.
Lawrence J. Lau, Stanford University 15
Export-Oriented Industrialization
u Export-oriented industrialization was in the mid-1950s a bold and unconventional
economic policy, outside the mainstream of economic development at the time, but
proved to be extremely successful.
u It was advocated by Prof. Ta-Chung Liu and Sho-Chieh Tsiang, among others.
u Maintenance of a single, competitive but stable, equilibrium exchange rate that
facilitates exports and imports.
u Exchange rate was unified and pegged to NT$40/US$ in 1960 and was held stable for
almost two decades.
u Stability is just as important, perhaps even more important, than a low level from the
point of view of economic development—producers, exporters, importers and investors
can make long-term plans.
u A stable exchange rate also promotes domestic savings as it encourages the reliance on
the domestic currency as a store of value.
u Reduction or rebate of tariffs in support of exports.
u Establishment of the first export-processing zone in the world in Kaohsiung.
Lawrence J. Lau, Stanford University 16
The Exchange Rate
SPOT EXCHANGE RATE - N.T.$ PER U.S.$ (MONTHLY AVERAGE)
2 0
2 5
3 0
3 5
4 0
4 5
195908 196207 196506 196805 197104 197403 197702 198001 198212 198511 198810 199109 199408 199707 200006
Month
NT$ per US$
Lawrence J. Lau, Stanford University 17
Transformation from a Closed to an Open
Economy
u A small economy must be open in order to grow.
u Enterprises are free to export and import, exploiting their international
comparative advantage and access to a much larger market. (There was
protection in Taiwan, although over the years the degree of protection
gradually declined.)
u The openness keeps the enterprises efficient by keeping the markets
competitive. Inefficiencies cannot exist long in the face of international
competition. This in turn puts pressure on the domestic factor markets,
principally labor and land, to remain competitive.
u An open economy facilitates the transfer of technology in both production and
management.
u An open economy solves the transfer problem for foreign capital in the forms
of either loans or direct or portfolio investment.
