Taiwan As a Model for

Economic Development
Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)

Kwoh-Ting Li Professor of Economic Development

Department of Economics
Stanford University
Stanford, CA 94305-6072, U.S.A.
October 4, 2002

Phone: 1-650-723-3708; Fax: 1-650-723-7145

Email: LJLAU@STANFORD.EDU; WebPages: WWW.STANFORD.EDU/~LJLAU
Reminiscences
u Professors Ta-Chung Liu and Sho-Chieh Tsiang
u Professor Mo-Huan Hsing
u Professor Tzong-Shian Yu
u Professor Paul K. C. Liu
u Prof. Yung-San Lee, Prof. Jia-Dong Shea, Prof. Sheng-Cheng Hu,
Prof. Chung-Ming Kuan

Lawrence J. Lau, Stanford University 2

An Overview
u Taiwan’s Economic Record
u Taiwan as a Pioneer of and “Laboratory” for Economic Policies
u Lessons from the Taiwan Experience for Developing Economies
u Lessons for Taiwan from the Rest of the World

Lawrence J. Lau, Stanford University 3

The Economic Record
u Taiwan is one of the first “Newly Industrialized Economies” (NIEs) in East Asia.
u Taiwan began its industrialization drive after Hong Kong and before South Korea
as a result of rising wage rates in Japan, and subsequently Hong Kong, and quota
restrictions imposed by the U.S. and subsequently Europe on textile exports.
u Taiwan has done exceptionally well despite relatively unfavorable resource
endowment and population density.
u Over the last half century, real GNP and real GNP per capita have grown from
approximately US$6 billion to over US$300 billion and from slightly more than
US$700 to almost US$13,000 (2000 prices), achieving rates of growth of more
than 8% and 6% per annum respectively.
u Taiwan survived the East Asian currency crisis relatively unscathed, thanks to its
large foreign exchange reserves and low external debt.
u How has it been able to achieve this remarkable economic performance?

Lawrence J. Lau, Stanford University 4

Taiwan’s Economic Record:
Real GNP per Capita
NT$ GNP Per Capita of Taiwan
1,000,000

GNP PER CAPITA in 1996 prices

100,000

10,000
1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999
Lawrence J. Lau, Stanford
Year
University 5
Real GDP of Selected Countries and
Regions, 1970 and 2001
Real GDP of Selected Countries and Regions, 1970 and 2001
(1995 US$)
10,000

9,000
1970 2001

8,000

7,000
Billion US$

6,000

5,000

4,000

3,000

2,000

1,000

0
Brazil

China

France

India

Indonesia

Italy

Japan

Korea, Rep.

Mexico

Nigeria

Taiwan

United Kingdom

United States
Lawrence J. Lau, Stanford University 6
Real GDP per Capita of Selected Countries
and Regions, 1970 and 2001
Real GDP per Capita of Selected Countries and Regions, 1970 and 2000
(1995 US$)

50,000

45,000
1970 2000
40,000

35,000

30,000
US$

25,000

20,000

15,000

10,000

5,000

0
Brazil

China

France

India

Indonesia

Italy

Japan

Korea

Mexico

Nigeria

Taiwan

UK

US
Lawrence J. Lau, Stanford University 7
Exports and Imports (US$):
Selected Countries and Regions, 2000
Exports and Imports of Selected Countries and Regions, 2000
(US$)

1,400

1,200 Exports Imports

1,000
Billion US$

800

600

400

200

0
Brazil

China

France

India

Indonesia

Italy

Japan

Korea

Mexico

Nigeria

Taiwan

UK

US

Zone Euro
Lawrence J. Lau, Stanford University 8
Exports and Imports per Capita (US$):
Selected Countries and Regions, 2000
Exports and Imports per Capita of Selected Countries and Regions
(Year 2000)

7,000

Exports per Capita

6,000
Imports per Capita

5,000

4,000
US$

3,000

2,000

1,000

0
Brazil

China

France

India

Indonesia

Italy

Japan

Korea

Mexico

Nigeria

Taiwan

UK

US
Lawrence J. Lau, Stanford University 9
The Rate of Inflation
Annual Rate of Inflation (Implicit GDP Deflator)
%
35.00

30.00

GDP Deflator

25.00

20.00

15.00

10.00

5.00

Year

0.00
1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999

Lawrence J. Lau, Stanford University 10

-5.00
Pioneering Economic Policies
u Land Reform —the successful (and peaceful) land reform, one of the
very few in the world, helped raise agricultural productivity, i mprove
the income distribution, and release savings for investment in t he
industrial sector.
u Promotion of Family Planning.
u Reliance on Private Rather Than Public Enterprise.
u Export- Oriented Industrialization (as opposed to import-substituting
industrialization).
u Maintenance of Macroeconomic Stability.
u Maintaining Equity with Growth.
u Promoting the Transition from Tangible Capital -Based to Intangible
Capital -Based Industrialization.

Lawrence J. Lau, Stanford University 11

Land Reform
u Raises agricultural productivity through the incentive effect
u Releases both tangible capital and human capital from agriculture
u Improves the distribution of income, providing the basis for an
increase in aggregate demand (both consumption and savings)
u Enhances investment in human capital
u It was successfully implemented because the reformers themselves
did not own any land and did not want any for themselves
u The Joint Commission for Rural Reconstruction (JCRR) played an
important role in the land reform.

Lawrence J. Lau, Stanford University 12

Reliance on Private Enterprise
u There were extensive debates in Taiwan in the mid-1950s as to
whether private or public enterprise should lead the drive for
industrialization. It was finally decided at the highest level of
government that private enterprise was consistent and compatible
with the Three People’s Principle and should be allowed to grow.
u Similarly, in South Korea, President Park Chung- Hee, having
observed the degree of incompetence and corruption within the
government (army), also decided in the early 1960s that private
enterprise would be allowed to lead the drive for industrialization in
South Korea.

Lawrence J. Lau, Stanford University 13

Reliance on Private Enterprise
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
Lawrence J. Lau, Stanford University 14
justified.
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 enco urages 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 15

The Exchange Rate
SPOT EXCHANGE RATE - N.T.$ PER U.S.$ (MONTHLY AVERAGE)

45

40

35
NT$ per US$

30

25

Month

20

195908 196207 196506 196805 197104 197403 197702 198001 198212 198511 198810 199109 199408 199707 200006
Lawrence J. Lau, Stanford University 16
Transformation from a Closed to an Open
Economy
u A small economy must be open in order to grow.
u Enterprises are free to export and import, exploiting their international
comparative advantage and access to a much larger market. (There was
protection in Taiwan, although over the years the degree of protection
gradually declined.)
u The openness keeps the enterprises efficient by keeping the markets
competitive. Inefficiencies cannot exist long in the face of international
competition. This in turn puts pressure on the domestic factor markets,
principally labor and land, to remain competitive.
u An open economy facilitates the transfer of technology in both production and
management.
u An open economy solves the transfer problem for foreign capital in the forms
of either loans or direct or portfolio investment.

Lawrence J. Lau, Stanford University 17

Exports as a Percent of GDP:
Selected East Asian Economies and U.S.
Exports as a Percent of GDP

HONG KONG INDIA INDONESIA KOREA

%
MALAYSIA PHILIPPINES SINGAPORE THAILAND
180
CHINA Taiwan Japan U.S.

160

140

120

100

80

60

40

20

0
1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001
Lawrence J. Lau, YStanford
ear University 18
Imports as a Percent of GDP:
Selected East Asian Economies and U.S.
Imports as a Percent of GDP
%
HONG KONG INDIA INDONESIA KOREA
240
MALAYSIA PHILIPPINES SINGAPORE THAILAND

220 CHINA, P.R. TAIWAN JAPAN UNITED STATES

200

180

160

140

120

100

80

60

40

20

0
1970

1971
1972

1973

1974
1975

1976
1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001
Year
Lawrence J. Lau, Stanford University 19
Maintenance of Macroeconomic Stability
u A low rate of inflation and a positive real rate of interest were also
considered unconventional economic policies in the 1950s.
u Prof. Sho-Chieh Tsiang was the major proponent of low inflation
and a positive real rate of interest; in particular, he emphasized that
only the former could only be achieved with the latter.
u Maintenance of a low rate of inflation (an imperative because of past
experience with inflation on both Mainland and Taiwan, and also
necessary if the exchange rate is to remain stable).
u Maintenance of a low but positive real rate of interest (to control
inflation and to promote savings and investment).
u Conservative fiscal policy, in part also necessitated by the inability to
raise revenue through printing money or issuing bonds.
u Institution of a new system of taxation (since inflation tax through
the issuance of money and borrowing at negative real rates of interest
are no longer available).
Lawrence J. Lau, Stanford University 20
Macroeconomic Stability: Coordination of the
Three Rates
u A positive real rate of interest--maintenance of a positive real rate of
interest is one of the most effective way of preventing inflation from
getting out of control.
u A low rate of inflation—a low relative rate of inflation is essential
for a stable exchange rate to remain a long-term equilibrium
exchange rate.
u A stable exchange rate is in turn consistent with long-term price
stability—however, it must also be consistent with long-term
equilibrium in the balance of payment accounts.
u Capital control was maintained in Taiwan until the 1980s, which
permitted a degree of independence in the monetary policy prior to
that time; however, from the early 1960s to the lifting of capital
control, the gap between the official exchange rate and the black
market exchange rate was never large, indicating that the official
exchange rate was probably close to being an equilibrium exchange
rate most of the time. Lawrence J. Lau, Stanford University 21
Transformation of the National Savings Rate
u Ultimately, an economy has to rely on its own savings to finance its investment—
foreign resources can only help in a transition.
u U. S. aid in the early years helped bridge the initial savings gap and the foreign
exchange gap.
u A low rate of inflation and a positive real rate of interest promote savings.
u The true savings rate of Taiwan is higher than the measured savings rate
u R&D expenditures are typically expensed rather than capitalized but they are in fact
investments--yielding a stream of benefits beyond the current period
u If R&D expenditures and other investments in intangible capital, such as software, are
included, the savings rate of Taiwan should be higher by at least 5 percentage points
u Translating domestic savings into investments—financial intermediation and
capital markets--the role of self-fulfilling expectations.
u Creating and maintaining an environment in which investments are productive
u In more recent years, however, the government has become a net dis-saver because
of its deficits, both on and off-budget.

Lawrence J. Lau, Stanford University 22

The Savings Rate and Real Output per
Capita: Taiwan
Savings Rate versus Real GNP per Capita

45

40

35
Savings Rate (Percent)

30

25

20

15

10

0
0 2000 4000 6000 8000 10000 12000 14000
Lawrence J. Lau, Stanford University 23
GNP per capita in 1999 US$
The Savings Rate and Real Output per
Capita: East Asian Economies
National Savings Rate and Real GNP per Capita

55

China Hong Kong

50 Indonesia Japan
Korea, Republic of Malaysia
Philippines Singapore
Thailand
45

40
Percent

35

30

25

20

15

10
100 1000 10000 100000
Real GDP per Capita, 1995 US$

Lawrence J. Lau, Stanford University 24

National Savings Rate as a Percent of
GDP: Selected Countries and Regions
% National Savings Rates of Selected Countries and Regions
60

1982 1998
50

40

30

20

10

0
Brazil

Canada

China

France

Hong Kong

India

Indonesia

Italy

Japan

South Korea

Mexico

Nigeria

Philippines

Singapore

Taiwan

Thailand

United States
Lawrence J. Lau, Stanford University 25
The Savings Rate as a Percent of GDP:
Selected East Asian Countries and Regions
50
The Savings Rate as a Percent of GDP

40

30
Percent

20

China Hong Kong

Indonesia Korea, Republic of
10
Malaysia Philippines
Singapore Taiwan
Thailand Mexico
India
0
1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999
-10
Lawrence J. Lau, Stanford University 26
The Savings-Investment Gap
Selected East Asian Economies
The Savings-Investment Gap as a Percent of GDP
China Hong Kong
25.0000 Indonesia Korea, Republic of
Malaysia Philippines
Singapore Taiwan
20.0000
Thailand Mexico
India
15.0000

10.0000

5.0000
Percent

0.0000
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

-5.0000

-10.0000

-15.0000

-20.0000 Lawrence J. Lau, Stanford University 27

Growth with Equity
u During the period of the most rapid economic growth, approximately from 1965 to
1985, the distribution of disposable income has become more equitable, contrary to
the prediction and expectation of most development economists at the time.
u The principal instruments used are the creation of employment in the non-
agricultural sector and the investment in education.
u The creation of employment was mostly through the private sector.
u Universalization of education, first nine years and then twelve years.
u The distribution in income in Taiwan is improved by improving the distribution of
tangible wealth, through land reform, and intangible wealth (human capital),
through massive government investment in education. It was not done through the
direct redistribution of income.
u Giving people human capital rather than income, so that they can seek employment
rather than welfare, helps to encourage self-reliance and preserve individual
dignity and reduces moral hazard.
u Complementarity between tangible capital and human capital--investment in one
type of capital enhances the rate of return of the other type of capital, and vice
versa. Lawrence J. Lau, Stanford University 28
The Distribution of Income
The Distribution of Disposable Income in the Republic of China on Taiwan
45 7

40
6

35

5
30

4
25
Percent

Ratio
Income Share of Lowest Quntile. l. scale

20 Income Share of Highest Quintile, l. scale 3

15 Ratio of Income Shares of Highest to Lowest Quintiles, r.

scale
2

10

1
5

0 0
Lawrence J. Lau, Stanford University 29
65

19 6
68
70

19 2
74

19 6
77

19 8
79
80

19 1
82

19 3
84
85

19 6
87

19 8
89
90

19 1
92

19 3
94

19 5
96
97

19 8
99

20 0
01
6

0
19
19

19
19

19

19

19
19

19

19
19

19

19
19

19

19

19
19

20
Year
Taiwan’s Transition from Tangible Capital to
Intangible Capital-Based Economic Growth
u From shoe-maker to global contractor
u Backward integration from assembly operation
u From OEM (original equipment manufacture) to ODM (original
design and manufacture)
u From intellectual “pirate” to innovator
u The role of the public education system
u The role of public research and development (R&D) institutions such
as Industrial Technology Research Institute (ITRI)
u Establishment of the Hsin-Chu Science-Based Industrial Park by the
government, the world’s first, and one of the very few successful
ones.
u The importance of private enterprise and free entry
u The role of venture capital (CDIB, formerly CDC)
u The role of returnees from the U.S. and elsewhere
u Networks of human capital
Lawrence J. Lau, Stanford University 30
The Sources of Economic Growth: Findings of
Kim & Lau As Reported by Krugman (1994)
u Using data from the early 1950s to the late 1980s, Kim and Lau (1992, 1994a,
1994b) find that:
u (1) No technical progress in the East Asian NIEs but significant technical progress
in the industrialized economies (IEs)
u (2) East Asian economic growth has been input-driven, with tangible capital
accumulation as the most important source of economic growth (the latter applying
also to Japan)
u Working harder as opposed to working smarter
u (3) Technical progress is the most important source of economic growth for the
IEs, followed by tangible capital, accounting for over 50% and 30% respectively,
with the exception of Japan
u NOTE THE UNIQUE POSITION OF JAPAN!
u (4) Technical progress is purely tangible capital-augmenting and hence
complementary to tangible capital

Lawrence J. Lau, Stanford University 31

The Sources of Economic Growth--
Developing Economies in East Asia
u Different types of measured inputs play different roles at different stages of
economic growth
u Tangible capital accumulation is the most important source of growth in the early
stage of economic development
u But simply accumulating tangible capital is not enough--it must also be efficiently
allocated
u Efficient tangible capital accumulation is the major accomplishment of the East
Asian NIEs, including Taiwan, in the postwar period
u Market-directed allocation of new investment, aided by export orientation,
promotes efficiency
u Private enterprises have the incentives for prompt self-correction
u Intangible capital accumulation becomes important only after a certain level of
tangible capital per worker is achieved but has begun to be important for some East
Asian NIEs such as South Korea and Taiwan

Lawrence J. Lau, Stanford University 32

Real Output per Labor Hour (1980 US$)
Real Output per Labor Hour (1980 US$)
20
China Hong Kong
Indonesia S. Korea
Malaysia Philippines
Singapore Taiwan
Thailand Japan
15
Non-Asian G5
1980 US$ per Labor Hour

10

0
53

55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19
Lawrence J. Lau, Stanford University 33
Tangible Capital Stock per Labor Hour
(1980 US$): Selected Economies
Tangible Capital Stock per Labor Hour (1980 U.S.$)

60

China Hong Kong

Indonesia S. Korea
50 Malaysia Philippines
Singapore Taiwan
Thailand Japan
1980 US$ per Labor Hour

40 Non-Asian G5

30

20

10

0
53

55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19
Lawrence J. Lau, Stanford University 34
Human Capital per Labor Hour (Years of
Schooling): Selected Economies
Human Capital per Labor Hour (Years of Schooling)
0.012

China Hong Kong

Indonesia S. Korea
0.01 Malaysia Philippines
Singapore Taiwan
Thailand Japan
Non-Asian G5
Years per Labor Hour

0.008

0.006

0.004

0.002

0
53

55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19
Lawrence J. Lau, Stanford University 35
Sources of East Asian Economic Growth with 3
Inputs and Technical Progress—No Breaks
Tangible Labor Human Capital Technical Progress
Capital
Hong Kong 69.37 29.08 1.55 0.00
South Korea 75.44 22.33 2.23 0.00
Singapore 59.36 38.82 1.82 0.00
Taiwan 80.83 17.37 1.80 0.00
Indonesia 77.49 17.36 5.15 0.00
Malaysia 59.48 37.68 2.83 0.00
Philippines 54.60 41.24 4.16 0.00
Thailand 73.91 22.66 3.44 0.00
China 83.75 14.12 2.13 0.00
Japan 50.44 5.70 0.56 43.30
Non-Asian G-5 Countries 37.79 3.54 0.86 57.81

Lawrence J. Lau, Stanford University 36

Sources of East Asian Economic Growth with 3
Inputs and Technical Progress—With Breaks in 1985
Tangible Capital Labor Human Capital Technical Progress
Hong Kong 66-95 56.89 (8.79) 23.65 (2.44) 2.51 (4.80) 16.94
South Korea 60-95 65.45 (12.28) 18.62 (3.35) 3.84 (6.31) 12.08
Singapore 64-95 53.10 (10.23) 33.94 (4.70) 3.23 (5.92) 9.73
Taiwan 53-95 71.26 (11.76) 15.61 (2.33) 3.15 (5.40) 9.99
Indonesia 70-94 71.20 (10.88) 14.59 (2.72) 9.38 (10.34) 4.83
Malaysia 70-95 54.22 (9.65) 32.47 (4.68) 5.12 (8.02) 8.19
Philippines 70-95 54.05 (5.40) 37.81 (3.94) 8.15 (7.41) -0.01
Thailand 70-94 60.84 (9.68) 18.06 (2.93) 5.65 (8.00) 15.44
China 65-95 83.87 (11.63) 11.92 (2.55) 4.21 (5.99) 0.00

Japan 57-94 49.04 (7.98) 5.23 (0.56) 1.08 (2.15) 44.65

Non-Asian G-5 Countries 57-94 37.44 (3.52) 3.36 (0.17) 1.70 (1.68) 57.49

Lawrence J. Lau, Stanford University 37

Sources of East Asian Economic Growth with 4
Inputs and Technical Progress—With Breaks in 1985

Sample Period Tangible Labor Human Capital R&D Technical

Capital Capital Progress
South Korea 65-95 63.35 13.61 2.10 20.94 0.00
Singapore 77-95 47.33 21.55 1.37 29.75 0.00
Taiwan 78-95 58.73 11.42 1.32 28.54 0.00
Japan 64-94 44.83 5.20 0.82 14.63 34.52
Non-Asian G-7 Countries 65-94 33.71 3.71 1.32 12.53 48.72

Lawrence J. Lau, Stanford University 38

Average Human Capital:
Selected Economies
Average Human Capital (Years of Schooling per Working-Age Person)
14
China Hong Kong
Indonesia S. Korea
Malaysia Philippines
12
Singapore Taiwan
Thailand Japan
Years per Working-Age Person

Non-Asian G5
10

0
53

55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19
Lawrence J. Lau, Stanford University 39
R&D Expenditures: 3 East Asian Newly
Industrialized Economies
Real R&D Expenditures (3 NIEs)
10,000

9,000
Millions of 1980 Constant US Dollars

8,000

7,000
Korea R&D Expenditure
6,000
Singapore R&D
Expenditure
5,000
Taiwan R&D Expenditure

4,000

3,000

2,000

1,000

0
66

68

70

72

74

76

78

80

82

84

86

88

90

92

94
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19
Lawrence J. Lau, Stanford University 40
R&D Expenditures as a Ratio of GDP: G-7
Countries and 3 East Asian NIES
Figure 8.1: R&D Expenditures as a Percentage of GDP: G-7 Countries and 3 East Asian NIEs
3.5
U.S. Japan W. Germany U.K. France
Canada Italy South Korea Singapore Taiwan
3

2.5

2
Percent

1.5

0.5

0
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Lawrence J. Lau, Stanford University 41
Patents Granted in the United States: G-7
Countries and East Asian Developing Countries
Table 8.3: Patents Granted Annually in the United States: G7 Countries, 4 East Asian NIEs and China
100,000

10,000
Number of Patents

1,000

100

10
U.S. Japan
W. Germany U.K.
France Canada
Italy Hong Kong
South Korea Singapore
Taiwan China
1
1971

1972

1973
1974

1975
1976

1977

1978
1979

1980
1981

1982
1983

1984

1985
1986

1987
1988

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Lawrence J. Lau, Stanford University 42
R&D Capital Stocks: G-7 Countries and 3
East Asian NIEs
Figure 8.2: R&D Capital Stocks in Billions of 1980 U.S. Dollars
1000

100

10

0.1

U.S. Japan W. Germany U.K. France

Canada Italy South Korea Singapore Taiwan

0.01
1948
1949
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Lawrence J. Lau, Stanford University 43
Patents Granted in the United States and
R&D Capital Stock
Figure 8.4: The Number of U.S. Patents Granted Annually vs. R&D Capital Stocks
100,000
US
Japan
West Germany
UK
10,000 France
Canada
Italy
South Korea
Number of Patents

Singapore
1,000 Taiwan

100

10

1
0.1 1 10 100 1000
R&D Capital Stock in Billions of 1980 Constant U.S. Dollars
Lawrence J. Lau, Stanford University 44
Is East Asian Economic Growth
Sustainable?
u The attractiveness of investment in intangible capital depends on the protection of
intellectual property rights, which in turn depends on whether a country is a
producer of intellectual property--some of the East Asian economies, e.g., Hong
Kong, South Korea, Singapore and Taiwan are ahead of other East Asian
economies with the possible exception of Japan on this score
u Intangible capital is different from tangible capital in three important aspects:
u Intangible capital is freely mobile across countries
u Intangible capital is simultaneously deployable in different locations without
diminution of its effectiveness (increasing returns in the utilization of intangible capital)
u Intangible capital enhances the productivity of existing tangible capital whereas
additional tangible capital diminishes the productivity of existing tangible capital
u Because of its complementarity with tangible capital, investment in intangible
capital can retard the decline in the marginal productivity of tangible capital and
counteract the “Krugman effect”
u There is also evidence of positive technical progress in the more recent period in
South Korea, Singapore and Taiwan, reflecting their increased investment in
intangible capital
u The people of Taiwan (and East Asia in general) are entrepreneurial, hard-
working, and thrifty--all they needJ.isLau,
Lawrence a good,
Stanfordmarket-friendly,
University predictable and 45
stable environment
Lessons from the Taiwan Experience for
Developing Economies
u The rate of growth of population must be brought down to manageable levels
before sustained economic growth is possible.
u The transformation from agriculture to industry is inevitable.
u Private enterprise can play a major and critical role.
u A small economy with little or no natural resources must be open in order to
develop—the exchange rate must therefore be set to equilibrate the supply and
demand for foreign exchange in the long term.
u The transformation of the domestic savings rate is essential for sustained economic
growth.
u Maintenance of macroeconomic stability is essential for achieving balance of
payments equilibrium and promoting domestic savings.
u Investment in human capital can not only increase productivity but also improve
the income distribution.
u Investment in intangible capital (human capital and R&D capital) can help to
maintain economic growth after sufficient tangible capital per worker has been
accumulated.
Lawrence J. Lau, Stanford University 46
The Economic Future of Taiwan:
Transition to a Service Economy
u The transition to a service economy, with a focus on high value-added activities, is
inevitable.
u Just as it was discovered that Taiwan could not become rich by remaining in
agriculture half a century ago, Taiwan cannot become richer by remaining in
manufacturing alone.
u The Group-of-Seven (G-7) countries have shown the way, with significantly more
than half of their GDPs originating from the service sector.
u The Silicon Valley is the prime example of a successful transition—very little
manufacturing is done in Silicon Valley today--it has indeed been “hollowed out”,
but real wage and income per capita has continued to remain high.
u What made the success of Silicon Valley possible is the successful out-sourcing of
production to elsewhere in the United States (Colorado, New Mexico, Oregon) and
the rest of the World, including East Asia (and Taiwan in particular).
u As Taiwan moves up the supply chain, it too must out-source the lower-value-
added activities in order to survive the global competition and to enhance the value
that Taiwan is able to capture.
u Nike and Dell are the prime examples of a successful transition at the
microeconomic level—neither of them do any manufacturing, but both have
continued to prosper. They control intangible capital—brand name, management
organization and methods, logistics, marketing, quality assurance, etc.
Lawrence J. Lau, Stanford University 47
The Risk of “Hollowing Out”--
De-Industrialization
u If a good cannot be “made in Taiwan”, better that it is “made by
Taiwan” than by elsewhere (the value-added resides with the
branding and the reputation of the firm, not in the physical place of
manufacture).
u The distinction between GNP and GDP—it is much more important
to increase GNP rather than GDP.

Lawrence J. Lau, Stanford University 48

Models Not to Follow
u Silicon Valley
u High cost of housing
u Japan (the Japanese disease)
u More than a decade of stagnation
u Heavy hand of government
u Lack of a vision and a strategy
u Inhospitable to start-up entrepreneurs
u Asset price bubble
u High leverage
u Inefficient non-tradable sector
u Hong Kong
u Asset price bubble
u United States
u The science base in Taiwan is too small to support a full emulation of the United
States—Taiwan must be much more selective.
u Permanent agricultural price support is not a good idea—transitional aid should be
provided to individual farmers, not farms; with appropriate land use policy, farmers can
benefit from land price appreciation without
Lawrence J. Lau, Stanfordcreating
Universitya land price bubble. 49
Models Not to Follow
u South Korea
u It is too late for Taiwan to develop some of the traditional heavy industries,
such as the automobile.
u The chaebols are not, in general, a good model for the promotion of innovation
(there is the same problem with Japanese zaibatsus).
u European Union (the Dutch disease)
u The welfare state reduces the incentive to work and to save and imposes a huge
fiscal burden on the government. That is not to say there should be no social
arrangements for unemployment, retirement and health care, but the
arrangements should embody incentives for responsibility-sharing by
individuals who are able to do so and preventing moral hazard. After all, the
majority of the population has to bear the financial burden and responsibilities
themselves one way or the other.
u Legislation supposedly designed to protect labor has made it almost impossible
to dismiss any worker in France and Germany. As a result, no employer wants
to hire anyone. Unemployment rates have therefore remained at the double-
digit level. There is an attempt to circumvent the law through using temporary
employment agencies like Manpower.
Lawrence J. Lau, Stanford University 50
u Does Taiwan need a floating exchange rate?