China - Current economic position and prospects (Vol. 1 of 2)

RESTRICTED ILE COPY Report No. AS- 142a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF THE REPUBLIC OF CHINA (in two volumes) VOLUME I MAIN REPORT September 11, 1968 Asia Department CURRENCY EQUIVALENTS 1 U. S. dollar 40 New Taiwan dollars NT$1 = US$0. 025 NT$1, 000, 000 US$25,000 PLAN PERIODS Fourth Four-Year Plan: 1965 - 1968 Fifth Four-Year Plan: 1969 - 1972 INTERNATIONAL BANK FOR RECONSTRUCTION,V AND DEVELOPM1ENT FILE COPY RESTRICTED R68-180 FROM: The Secretary September 17, 1968 CHINA There is attached for information a copy of a report entitled "Current Economic Position and Prospects of the Republic of China" (in two volumes) (AS-142a) as follows: Volume I - Main Report Volume II - Statistical Appendix. Distribution: Executive Directors and Alternates President President's Council Executive Vice President, IFC Vice President, IFC Department Heads, Bank and IFC This Report was prepared by a Mission which visited Taiwan in February-March 1968. The Mission was composed of Messrs. Shu-Chin Yang (Chief), Guenter H. Reif and Fred A. Brume. Mr. Cornelis J.A. Jansen was also with the Mission in Taiwan for most of the time. TABLE OF CONTENTS Page No. BASIC DATA SUMMARY AND CONCLUSIONS i - iv I. INTRODUCTION 1 II. RECENT RAPID GROWTH 4 A. Output, Capital Formation and Employment 4 B. The Growth of Sectors 8 C. External Trade 17 III. DEVELOPMENT FINANCING 21 A. Introduction 21 B. Foreign Capital 23 C. Public Finance 25 D. Private Saving 33 E. Financial Markets and Interest Rates 36 F. Money and Prices 42 IV. GROWTH OUTLOOK AND PROBLEMS 43 A. Growth Rate 43 B. Development Strategy 44 C. Investment Requirements 146 D. Price Policy, Incentives and Controls 48 E. Mobilization of Domestic Resources 50 V. EXTERNAL FINANCING REQUIREMENTS 56 A. The Trade Gap 56 B. External Financing Requirements 57 C. Possible External Sources of Funds 58 ANNEX I: Population Growth and Family Planning 1 - 3 ANNEX II: Sectoral Development Programs Indicated for Inclusion in the Fifth Plan 1 - 5 MAP OF TAIWAN BASIC DATA/ 1961-64 2/ Average 1966 1967- Area (sq. miles) 13,885 3/ Population - Total (million at end of year) 11.7 13.0 13.3 Growth rate () 3.2 2.9 2.6 Gross National Product Total value (billion NT$ at current prices) 84.0 125.5 141.6 (billion US$) 2.1 3.1 3.5 Annual average real growth rate (%) 10.1 9.4 8.9 Per capita GNP: In US$ (at current prices) 179 241 265 Annual average real growth rate (%) 6.7 6.3 6.3 Industrial Origin of Net Domestic Product (M) 100.0 100.0 100.0 Agriculture, Forestry and Fisheries 28.7 25.8 24.4 Manufacturing 18.4 19.1 20.1 Transport and public utilities 6.0 7.0 6.9 Commerce and finance 16.7 18.5 18.8 Other branches 30.2 29.6 29.8 Investment and Saving (% of GDP at current market prices) Gross domestic investment 18.7 23.0 24.0 Gross domestic saving 15.7 22.2 20.7 Gross national saving 15.6 22.1 20.6 Private saving 13.4 17.8 Public saving 2.2 4.3 (% of gross domestic investment at current market prices) Gross domestic saving 84.1 96.6 86.3 Resource gap 15.9 3.4 13.7 Incremental Gross Capital Output Ratio (at current prices) 1.7 2.4 2.5 Money and Credit {Annual average nominal rate of increase in %) Money 22.3 17.2 27.1 Quasi-money 26.7 29.7 22.6 Total bank credit outstanding 17.0 10.9 27.9 -2- 1961-64 2/ Average 1966 1967- Prices (increases in o) Cost of living index 1.7 2.0 4.0 14holesale price index 4.0 1.4 2.1 Public Finance (% of GDP at current market prices) General Government current receipts 18.6 19.5 General Government current expenditures 19.2 18.2 General Government saving -0.6 1.2 General Government capital expenditure 4.5 5.1 (including loans to private sector) Over-all budget balance -4.0 -2.8 Balance of Payments (US$ million) Exports, f.o.b. 297.1 5h3.2 651.6 Imports, f.o.b. -360.6 -585.6 -768.9 Net merchandise -63.5 -42.h -117.3 Net services -o.4 18.1 1.4 Net investment income -1.5 -1.9 -0.9 Deficit on current account, excluding transfers -65.5 -26.7 -116.8 Total net transfers received: 54.5 23.7 18.1 Private 13.9 18.2 20.0 Central Government 40.6 5.5 -1.9 External Trade Exports of goods and services as % of GNP 16.0 20.8 21.7 Annual average growth rate (%) 25.9 25.2 17.8 (of value in U.S. dollar) Imports of goods and services as % of GNP 18.9 21.5 25.0 Annual average growth rate (/) 9.2 12.4 31.6 (of value in U.S. dollar) Export price index (1964 = 100) 90.5 89.8 Import price index (1964 = 100) 100.8 109.9 Terms of trade (1964 = 100) 89.8 81.7 International Reserves (Central Bank, Gross) Total value (US$ million, end of period) 297 337 437 Months imports of goods and services 6.0 5.9 -3- 1961-64 2/ Average 1966 1967- IMF Position (US$ millions) Quota 550.0 550.0 550.0 Drawing, gross - - - External Debt Total Public Debt Outstanding- (US$ milion) h6 605 738 of which: undisbursed 62 154 185 Total annual debt servAce-5/ 23.3 28.1 43.1 Debt service ratio (%f)- 7.5 4.3 5.6 1/ For the Province of Taiwan only. T/ Preliminary. / Excluding not registered servicemen and foreign nationals. I/ Including loans not in service, amounting to US$178.54 million. 5/ Interest and repayments of debts with maturity of one year or more. 67 Annual debt service as percentage of exports of goods and non-factor services. SUMiRY AND CONCLUSIONS A. Facets of Growth 1. The economy of Taiwan has continued to grow vigorously, despite the cessation of U.S. grants and the abatement of the sugar boom since 1965. In 1967, GNP in real terms increased by 8.9 percent, exceedingappreciably the Plan target of 7 percent. With further decline in the population growth rate per capita GNP reached US$265 in 1967. 2. Investment and exports have been the engines of growth. Gross fixed capital formation increased by almost one-third in 1967 and reached 22 percent of GDP, as compared with 15 percent five years ago. Public investment, predominantly in infrastructure, increased appreciably in recent years, but was still unable to meet the rapidly growing demand. In response to the Government's promotion, private investment moved for- ward both in amount and in diversity. In five years, its share in total investment increased from 50 percent to over 65 percent. 3. Merchandise exports, which rose at an impressive annual rate of 22 percent during 1961-66, came down modestly to 16 percent in 1967 due chiefly to the fall in sugar and rice exports and to some extent also to trade restrictions exercised in the importing countries. Such a fall would have been more serious if Taiwan's export basket had been not so diver- sified as it is presently. In 1967, industrial products accounted for 56 percent of total exports. 4. Agriculture, already quite well developed, grew at a fairly satisfactory rate of 5.6 percent in 1967, although slightly below the past trend line. High value cash crops, chiefly fruits and vegetables, showed higher growth rates than traditional food crops. With successful crop diversification, agricultural production has been able to adjust readily to changing demand patterns and relative prices. There has been no appreciable increase in cultivated area during the past decade because of land scarcity, but land productivity has increased substantially through the introduction of new techniques, as well as the increasing use of chemical fertilizers, insecticides, improved seeds, farm machinery, irrigated water, etc. 5. The industrial sector has grown much faster and its share in net domestic product (27 percent) exceeded that of agriculture (24 percent) for the first time in 1967. Manufacturing performed remarkably and out by 18 pen1967. In recent years, growth has been more pronounced in new industries manufacturing intermediate and capital goods and consumer's durables, such as electrical machinery and appliances, transport equipment, chemical products, wood products, metal products and machinery, electronic parts and components, etc. 6. Although the installed capacity of Taiwan's power system has been increasing at an average annual rate of 12.5 percent, power supply has fallen behind demand. Protracted droughts added further strains on the system and caused some power shortages in the dry seasons of the last two years. - 11 - 7. Rapid economic growth has resulted in increases in land traffic, averaging 6.7 percent yearly for passengers and 4.9 percent for freight since 1961; appreciably exceeding all forecasts. The expansion of the railway system has taken place almost entirely by the addition of locomotives and rolling stock. There has been very limited expansion in the mileage of highways, but the number of vehicles doubled since 1965. 8. The education system in Taiwan is generally well-developed. Literacy rate is over 93 percent and the percentage of school-age children in school reached 97 percent in 1967. 9. The Republic has one of the most extensive family planning programs in the world, initiated outside of the Government as a health program. The birth rate declined from 3.74 percent in 1962 to 2.85 percent in 1967 and natural rate of population growth was reduced from 3.1 percent to 2.3 percent during the same period. B. Financing Development 10. Gross domestic saving has accelerated to 86 percent of gross domestic capital formation in 1967 as compared with 66 percent in 1962. Public saving has in recent years increased much less rapidly than private saving. The small amount of saving achieved on the general government account was due more to containing current expenditures than to increasing revenues. Total tax revenues, at a level of 14 percent of GNP, appear to be low. Saving of public enterprises has been increasing steadily but for the boom and bust in profits from sugar operation. 11. Private saving accounted for four-fifths of gross domestic saving, or 17.8 percent of GDP. The marginal saving rate was around 40 percent in 1966. Major factors for these rather high private saving rates are rapid expansion of private industrial enterprises, political and monetary stability, and realistic level of interest rates. 12. Public investment has always exceeded public saving. The resultant deficit at 2.8 percent of GDP in 1967, was largely financed by medium-term bond issues at market interest rates, subscribed mainly by the private sector. Thus, internal debt service payments have been rising rapidly in the Government budget. 13. The proportion of foreign funds in financing development has been substantially reduced since 1963. U.S. non-military grants which dominated foreign finance in the fifties disappeared from the pipeline in 1967. In recent years, however, external official and private long- term loans tended to rise. In 1967, net inflow of foreign funds was almost 14 percent of gross capital formation and 3.3 percent of GDP. 14. The increase of net foreign capital inflow from US$72 million in 1966 to US$159 million in 1967 enabled the Republic of China to import more equipment and machinery for capital formation. Due to increased - iii - income from tourists and U.S. servicemen, the service account has shown a surplus since 1965. (The total effects of the Viet-Nam war on the Republic's exchange earnings is estimated at US$50 million, or 6-7 percent of total exports of goods and services in 1967.) The Republic was able to build up more exchange reserves in 1967. By the end of that year Central Bank's gross reserves stood at US';,37 million, which is almost equivalent to 6 months' imports. C. Prospects and Problems 15. The Fourth Plan (1965-68) will end this year on a satisfactory note with an annual average growth rate in real terms of nearly 9 percEnt which is appreciably higher than the 7 percent target. Nevertheless, the Chinese Government is still planning for a 7 percent growth rate for the Fifth Plan, 1969-72. 16. Judging from the continuous vigorous growth in the early part of 1968, past trends and the growth potentials of the major economic sectors, the Mission believes a minimum growth rate of 7.5 percent during 1968 and subsequent years should be feasible. 17. The strategy of Taiwan's development in the next five years will be dominated by the need for correcting the lag in investment in infra- structure, especially power, transport, public utilities, and urban devel- opment. Without overcoming bottlenecks in infrastructure, the directly productive sectors may not be able to move forward as fast as in the past decade. 18. In agriculture, the development of the Island's slopelands, livestock and fishery claims high priorities. In manufacturing, new attention will be directed toward the expansion of iron and steel, petro- chemical, and machinery industries. 19. Expenditure on education during 1968-1970 will show a sharp increase because of the extension of compulsory education, and the extension of facilities for industrial vocational training and scientific research. 20. On account of the above-mentioned development strategy, invest- ments in power and other public utilities, transportation, and education are likely to increase faster than other sectors. This implies an increase in the over-all capital-output ratio and the share of public investment in the total investment. As percentage of GDP, gross capital formation is expected to increase from 23.9 percent in 1967 to 26.2 percent in 1972. 21. In order to achieve growth and investment targets, greater efforts have to be made to mobilize domestic resources. In the field of public finance, the Mission feels the past policy of maintaining expend- iture at low levels cannot be continued because of the need for expanding infrastructure and education. Greater tax efforts should be made in improving tax administration and implementing a tax reform. Also, ways - iv - and means have to be found to increase the internal finance of public enterprises. Otherwise, the continuous resort to domestic borrowing at market interest rates would be too costly to the budget. It is gratifying to know that the Chinese Government is taking serious steps in this direction. 22. In the field of private finance, the urgent task is to make more medium- and long-term capital available to private enterprises. This should be possible because savings deposits of one year and over have increased quite substantially for a number of years. A first step is to reform the existing antiquated banking law by allowing banks to lend for more than one year. Term loans should also be introduced soon. 23. For achieving a better allocation of resources, the Mission feels that in the field of agriculture the sugar procurement price should be reduced to facilitate the shifting of more resources out of sugar. Meanwhile, fertilizer prices should be lowered in order to increase the production of rice and other crops. In the field of industry and trade, the mission feels that import liberalization should be accelerated, that protective import restriction and tariffs reviewed and import duty rebate procedure simplified. The Mission also suggests that a cost-benefit study on tax incentives be made in order to determine the efficiency of the device. D. External Financing 24. Export growth is expected to slow down because of the possible decline in Viet-Nam demand, growing competition and foreign restrictions. The need for foreign capital to close both the trade gap and the resource gap is estimated at $525 million for the Fifth Plan period (1969-72). Counting also the need for some increase in foreign exchange reserves after 1970 and for servicing external debts, and allowing for some other minor items, the gross external loan requirement is estimated at US$800 million for the Fifth Plan period. 25. Against these requirements, there will be US$ million in the pipeline and US$1,000 million which the Chinese Government expects to negotiate or contract during 1968 and 1969-72; but not all of them will be available for the Fifth Plan. 26. In 1967, in the total net inflow of loan capital, 40 percent was from official sources on conventional terms, 25 percent from official sources on concessional terms and 35 percent from private sources on com- mercial terms. In the future, loans on concessional terms may be reduced and substituted by the other two. Assuming 50 percent will be on conven- tional terms, 10 percent on concessional terms and 40 percent on commercial terms, the Republic's debt service ratio will increase from 5.6 percent in 1967 to 7.2 percent in 1972. It is likely to go up further to over 11 percent in 1977, but the expected decline in net capital inflow after 1974 will bring the debt service ratio down after 1977. Such a magnitude of external debt service ratio should not constitute a serious burden for a vigorously growing economy, provided there are no unexpected increases in military imports, major export difficulties,and too large a proportion of supplier's credits in the external debt structure. I. ITRODUCTION 1. Post-war economic development in Taiwan has become a frequently cited example of a success. Indeed, during the past 15 years, real output has grown on average almost 8.5 percent per year and per capita GNP doubled, reaching the equivalent of US$265 in 1967. The Island's economy has been transformed from one predominantly agricultural, with exports relying heavily on sugar and rice, to one in which a fairly diversified industry is now the leading sector. Rampant inflation was halted and exchange rates were unified at a realistic level toward the end of the 1950's. With monetary stability maintained and income levels rising rapidly, domestic savings increased con- siderably. The country extricated itself from its heavy reliance on foreign grants, with virtually no new U.S. non-military assistance since 1965. 2. The availability of ample U.S. financial and technical assistance was, of course, essential for sparking and supporting the Republic's rapid development. U.S. economic aid totalled US$1.48 billion by 1967 and amoLnted to US$9.70 a year per capita during 1953-63. More basic favorable elements, however, have been continuing political stability, the country's hardworking, enterprising, and intelligent population, plus the technical, managerial and business experience contributed by those who fled from the Mainland, the absence of major labor disputes, and the sound and pragmatic development policy pursued by the Government. More recently the Island's growth was favorably influenced by extraneous factors, such as the 1963-64 world sugar boom, Japan's inport liberalization, and the war in Viet Nam. As such favorable external conditions are now diminishing, further growth will depend more on the internal dynamism which seems to have been firmly established in the economy. 3. An outstanding feature of the Republic's postwar development policy has been the attention paid to the rural sector. Following the highly successful land reform, advance in irrigation, great irprovement in-agricultural credits and extension work, increased fertilizer con- sumption, crop diversification and considerable technological advances, agricultural productivity per man and per acre has been raised impros- sively. The achievement is particularly noteworthy in view of Taiwan's scarcity of arable land. Iith the rural living st andard rising contin- ously, the Republic was able to prevent the occurrence of any marked disparity betwoon rural and urban incomes, a problem causing serious social friction in many other developing countries. This has also contributed much to easing tensions between the local population and the 2.5 million Mainlanders concentrated in the cities. 4. Efforts towards diversifying the economy have been handicapped by the rather poor endowment of natural resources. Although tropical forests cover 55 percent of total land area, a large proportion of the timber is inaccessible and of low quality. Mineral resources are limited to large limestone deposits and some coal, which has to be extracted from narrow and irregular seams. However, recently discovered natural gas fields may develop into a major energy resource. - 2 - 5. Despite these impediments, the Republic's industrialization effort has been very successful. Going step by step, and looking all the time for markets, it first emphasized processing of agricultural products, then turned to other light industry, like textiles, and only more recently proceeded to the manufacturing of heavier and more sophisticated products. It only now envisages the erection of its own heavy industry. Even within the field of heavy industry the Government wants to promote as much as possible labor and skill- intensive sectors, being aware of the fact that Taiwan's main com- parative advantage is abundant and low-cost labor which can be easily trained to become highly skillful. 6. More recently, shortage of power and transportation has become a constraint on economic growth. The Government also realizes that further industrialization will require more modern technology and skill as well as scientific knowledge. Although the literacy rate is as high as 93 percent and the children's school attendance rate 97 per- cent, the educational system has not been well geared to the requirement of an industrial society. A related problem is the "bran drain", espe- cially to the United States, which has to be contained.2 i 7. Another striking feature of the development policy is the attention paid to market opportunities, especially in exports. Owing to the relatively small domestic market and limited scope of import substitution, agricultural and industrial development have been going hand in hand with the promotion of exports. Export performance has been very impressive, with the dollar value of total exports rising by 22 per- cent per annum since 1960. Meanwhile, considerable diversification in commodities and markets has been achieved; as a result, the preponderence of sugar and rice has been greatly reduced. 8. Taiwan has one of the most comprehensive family planning programs in the world with one out of every four eligible women having had an IUD insertion. The program has relied heavily on non-Government initiative and perseverance, but recently received the Government's open endorsement. The result of the program is reflected in the decline of the natural increase of population from 3.7 percent to the present 2.3 percent in 10 years. In view of the high density of population on the Island (1,474 persons per square kilometer of cultivated land) the high proportion of children (44 percent of the total population) and the still rather high growth rate, the importance of population control is evident. 9. In general, the Republic's economic success has been due more to pragmatic development policy and strategy than any sophisticated and 1/ The trend of outflow of students, largely graduate students, had been up and more than 95 percent of each hundred who left the country were staying abroad, according to Economic Minister K.T. Li's address at the American University Club in Taipei on December 21, 1966. detailed development planning. Development plans have so far been more of an indicative nature, although the current Fourth Four-Year Plan (1965-1968) used some more refined techniques. As the economic structure is growing more and more complicated, further refinement in planning may become necessary. First steps in this direction have been the recent comprehensive revision of the national accountsi/ and the decision to establish an annual overall resources plan in coordination with the Government's fiscal budget. 1/ All national accounts figures used in this report are recently revised data, which are not necessarily comparable with the data contained in previous Bank reports. II. RECENT RAPID GROWTH A. Output, Capital Formation and Employment Growth of GNP 10. Taiwan's economy has continued to grow vigorously in recent years. Real GNP increased at an average annual rate of 8 percent during 1953-1964; growth accelerated to more than 10 percent during 1965-1967, exceeding substantially the target of 7 percent set in the Fourth Four- Year Plan. Exceptionally high growth rates were achieved in 1964 and 1965 mainly due to buoyant export markets. The 1967 growth rate of 8.9 percent was somewhat lower than in the three preceding years.1/ (See Table 1) The price levels have been rather stable since the beginning of this decade. 11. Domestic capital formation and exports have been the major stimuli of growth. The level of consumption at constant prices has increased steadily at an average annual rate of 6.8 percent during the past 14 years. On the other hand, gross fixed capital formation and exports of goods and services (both at constant prices) alternately surged ahead providing forces of growth for all sectors of the economy. While during the Third Plan period (1961-1964) exports grew faster than gross fixed capital formation; the pattern was reversed in the first three years of the Fourth Plan period with gross fixed capital formation increasing much faster than exports, particularly in 1967. (See Table 2) This change may indicate a new phase of Taiwan's economic development, for the exceptionally rapid export expansion based on the existing commodity pattern may now have passed the peak and further intensification of indus- trialization will require heavier capital investment. In fact, the incre- mental capital-output ratio showed an upward trend in the last two years. Capital Investment 12. The rapid economic growth has changed significantly the long- term pattern of aggregate expenditure. The ratio of consumption to GNP has been lowered from 92 percent in 1953 to 78 percent in 1966, while that of capital formation increased from 14 percent to 23 percent and that of exports of goods and services from 9 percent to 21 percent. A substantial amount of capital formation was made possible by imports of equipment, machinery, and materials for making capital goods; to that extent it raiseds of course, the productive capacity of the economy, although it did not generate demand for domestic goods. 1/ However, if the terms of trade effects on the GNP are eliminated, the adjusted GNP growth rate in 1967 would be 9.1 percent, which is higher than the corresponding rates in the two previous years. Table 1 Growth of Employment, Capital and Product (at 1964 prices) 1953-60 1961-64 1965 1966 1967a,/ Annual rate of growth of real GNP (%) 7.2 9.6 12.4 9.4 8.9 Gross capital formation as percentage of GNP (%) 16.5 18.8 22.5 23.0 23.9 Incremental gross capital output ratio 2.1 1.7 1.5 2.4 2.5 Annual rate of increase of employment () 1.6 2.6 1.2 3.0 Annual rate of increase of GNP per person employed (%) 5.5 6.7 11.1 6.1 a/ Preliminary Source: DGBAS, National Income of the Republic of China: National Accounts in Taiwan for 1951-1966 and Preliminary Estimates of National Income in Taiwan for 1967. - 6 - 13. The continuous acceleration of capital formation over the last 15 years was due mainly to favorable investment conditions and the ability of both the public and private sectors to undertake invest- ment projects, large or small. Political stability, absence of social unrest and labor troubles, and monetary stability have been the basic factors contributing to a favorable climate for both domestic and foreign investment. At the same time, the Government adopted various economic and financial policy measures to provide incentives to the private sector, including tax concessions, credit facilities, tariffs, and other protective measures, creation of industrial zones and sites, liberal treatment of foreign investment, etc., although certain control measures and the administration o f,regulations may have created some obstacles to private enterprises.-' In general, the private sector has responded readily, with ability and willingness to go into new and risky undertakings. Some of the entrepreneurs were former landlords who obtained their capital funds from compensations out of the land reform program. In the past three or four years, the speed of private investments (predomi- nantly domestic) is particularly impressive; the share of private investment in total gross fixed capital formation increased from 49 percent in 1956 to 64 percent in 1966.Zy 14. While the rate of capital formation accelerated further in 1966 and 1967, the increase in output was not as rapid as in the two preceding years. The incremental ca yital-output ratio was particularly low in 1964 and 1965 (at around 1.5)-'but increased steeply since then, reaching 2.5 in 1967. Despite all qualifications regarding the concept of capital-output ratios and the shortcomings in the national accounts statistics, a change of such a magnitude deserves attention. Productive equipment almost fully utilized by 1965 apparently needed further expansion, together with the complementary infrastructure facilities. 1/ See Chapter IV, Section V. Y/ For more details, see Table 17. 5/ During 1964-1965 agricultural production increased considerably due to good weather conditions and favorable export markets, and industrial production rose sharply in response to export demand, including that relating to the Viet-Nam war. These factors apparently helped to keep the ICOR low. Table 2 Growth of Major Components of Aggregate Expenditure (at 1964 prices; annual rate of increase in percentage) 1953-196o 1961-1964 1965 1966 19672! Consumption 6.4 7.6 7.5 6.4 Gross capital formation, 9.6 11.3 32.2 11.8 17.6 of which gross fixed capital formation 10.8 9.4 26.7 25.3 32.4 Exports of goods and services 9.1 19.0 25.2 18.9 17.8 Gross domestic product 7.2 9.6 12.6 9.3 8.9 a/ Preliminary b/ Based on figures in New Taiwan dollars at 1964 prices. Source: DGBAS* Employment 15. The rapid growth of the economy has drawn more labor force into employment. At the same time, the accelerated capital formation has pro- vided employed labor with more and better equipment and tools. This, to- gether with the training and experience gained in the production process, has raised labor productivity. In the past 14 years GNP per person employed increased atan impressive average rate of 6.3 percent per annum. However, the rate of increase in employment itself, at 2 percent, has been rather slow, although it is showing a rising trend up to 3 percent for 1966. The ratio of employment to population of working age (15-59) has continued to decline from 67 percent in 1962 to 58 percent in 1966, indicating that while GNP has risen at a very high rate, the speed at which new jobs are made available has been too low to absorb the increment in the labor force./ Nevertheless, in the long run the situation will improve, for employment is accelerating, while the growth rate of total labor force is declining as a result of the continuous fall in the population growth rate (from 3.8 percent in 1953 to 2.6 percent in 1967). By actively implementing its family planning program and maintaining a high rate of economic growth, Taiwan can anticipate a decade later an appreciable detente in the employment situation.Z/ B. The Growth of Sectors Sectoral Balance 16. The pattern of economic growth in recent years has further enhanced the role of industry. In 1967, the share of industry (including mining, manufacturing, and construction) in net domestic productY (27 percent) exceeded for the first time that of agriculture (24 percent). Although the relative importance of agriculture in the economy has decreased, the agricultural sector has grown on the average at about 6 percent annually since 1952, which can be considered high in international comparison. The industrial sector has grown even faster, at 15 percent per annum. Agricultural production slowed down somewhat in 1967, but industry surged ahead by 17.5 percent. Both surpassed substantially the Plan targets of 3.5 percent and 11 percent respectively. 1/ Available statistics indicate that the ratio of unemployed persons in total labor force has gradually been reduced from 6.6 percent in October 1963 to 3.9 percent in October 1966 and that of underemployed fell from $.4 percent to 2.7 percent. These figures seem too low for a developing area with rapid population growth. It is likely that some shortcomings may exist in the labor statistics. 2/ For more detailed discussion on population control and family planning, see Annex I. 3/ Mining, which grew at 5 percent in 1966 and in 1967, is the only branch in this group lagging behind the Plan target of 7.6 - 7.7 percent. -9- Table 3 Annual Rate of Growth of Selected Sectors (in percentage) 1953-60 1961-64 1965 1966 1967 GDP at constant prices 7.2 9.6 12.6 9.3 8.9 Agricultural Production 5.5 6.3 8.7 5.9 5.6 Crops 4.1 3.1 13.2 T. T.2 Livestock 7.0 7.2 4.1 10.7 12.0 Forestry 7.4 6.8 4.h -9.9 5.6 Fisheries 9.9 9.6 1.1 11.1 7.3 Industrial Productiona/ 10.2 15.0 16.5 13.7 17.5 Manufacturing 10b 1 .q -S.1 12.9 17.2 Construction of B4ildings 8.3-/ 9.6 245.4 57.1 24.4 Public Utilities.2 10.4 11.5 8.4 13.5 13.8 (Power only) (12.5) (13.0) (9.1) (13.7) (1.6) Transportation Rail and road freight traffic 7.7 4.8 4.8 4.2 5.6 Rail and road passenger traffic 11.0 5.4 11.4 6.4 8.2 Number of vehicles registered 20.8 13.6 30.2 31.3 52.7 a/ Includes mining, manufacturing, construction of buildings, and public utilities. b/ 1954-1960 only. j/ Includes electric power, gas, and city water. Source: CIECD, Industry of Free China and for transportation Statistical Appendix Table 20. - 10 - Table 4 Incremental Gross Capital-Output Ratio of Selected Sectors, 1963-66 a/ In Terms of In Terms of Gross Capital Gross Fixed Formation Capital Formation Agriculture, forestry, and fisheries 1.08 1.06 Manufacturing 2.99 1.98 Public utilities (largely electricity) 6.10 5.86 Transportation, communications, and storages 2.68 2.66 Wholesale and retail trade 1.70 0.50 Banking, insurance, and real estate 0.42 0.42 a/ In the absence of constant price figures for value-added and capital formation in various economic sectors, only a few years, 1963-66, were selected in this calculation; prices were generally stable during the period. The figures for capital-output ratios for the transportation sector are unusually low. In Korea, for instance, the ratio is 6.89in terms of gross fixed capital formation. In other sectors, however, the ICOR's are much closer to the corresponding ones for Korea. Source: DGBAS, National Accounts data. - 11 - 17. The growth trend of electric power (and other public utilities in the urban areas as well) since 1952 has been appreciably below that of manufacturing production. Power shortage persisted and adversely affected the production of the few large power-consuming industries. 18. The growth rate of land freight traffic has been below that of agriculture and much lower than that of industry and the GDP as a whole. The rapid pace of motorization requires more and better roads. In the face of continued increase in overall traffic, neither rail nor road facilities have expanded at a rate keeping up with demand./ Agriculture 19. Growth of agricultural production has slowed down from the record rate of 1965, when very favorable weather and a somewhat delayed response to the world sugar price boom brought about a boost in sugarcane and other crops. In 1966 and 1967, growth rates declined appreciably (see Table 3), as the sudden sharp fall of world sugar prices reduced sugarcane (Taiwan's second most important crop) output by 30 per- cent, and the production of other crops did not increase much because of typhoon and drought damages. Production of rice, the most important crop, increased by only 1.4 percent annually in 197nd 1967 and the present output level (2.4 million tons) remained slightly below the Plan target. Production of sweet potato - another major crop - and corn benefitte from the growing demand for feed for livestock (see paragraph 23) .. 'How- ever, recent import liberalization has put feedstock growers in an in- creasingly difficult competitive position. 20. High value cash crops have in general shown higher growth rates than most of the traditional food crops particularly in response to the rapidly rising export demand and to some extent also reflecting growing domestic consumption and higher per capita income. Banana output in 1967 was nearly one-half higher than in 1965, because of import liberali- zation and buoyant demand in Japan, with more sugarcane cultivators 1/ IBRD, Appraisal of Second Railway Project, China (Report No. TO-601a, November 29, 1967), p.3. See also Chapter IV, Section B. 2/ A few years ago sweet potatoes showed temporarily a declining trend as human consumption of this staple food was gradually substituted by cereals. - 12 - shifting to banana growing. Substantial increases were also registered in vegetables, tobacco, peanuts, and soybeans. Mushrooms, pineapples, and citrus fruits also gained, but asparagus production declined somewhat after a peak in 1966, following recent EEC import restrictions which affected adversely Taiwan's exports to the Federal Republic of Germany. 21. In general, Taiwan's agriculture appears to have already achieved considerable crop diversification and to be able to adjust its production continuously to the changing demand pattern and prices. The harvest area of high value cash crops increased in a decade from 16 percent of total crop area to 21 percent. 22. Taiwan's land resources are limited; only a quarter of total land area is arable. Valuable farm land is continuously being lost in the Island's fertile lowlands to growing urbanization. Because of acute scarcity of land which can economically be brought under cultivation, cultivated land area increased by less than 3 percent over the past one and a half decades. The expansion in crop production has largely been the result of more intensive farming by introducing new and improved techniques, increasing capital inputs like chemical fertilizers, pesticides, improved seeds, and farm machinery, as well as the substantial expansion of multi- cropping, inter-cropping, and crop-rotation. The Government's land consolidation program which has covered 120,000 hectares of farm land since 1961 has provided the precondition for meaningful irrigation projects. The well-established network of agricultural extension, technical assistance services, and farmers' organizations has provided an effective institution to implement these development programs. As a result of the various improvements, both unit acre yields of crops and rural labor productivity have doubled since 1952. 23. Stimulated by rising domestic demand for meat, resulting from the continuous increase of percapita income, livestock production increased by around 11 percent a year since 1965 as compared with only modest increases before. The increased use of semi-mixed feed and the expansion of the integrated hog and poultry-raising programs have also helped to make livestock industry profitable. 24. Forestry contributes 4 percent to the total value-added of the broad agricultural sector. Timber production has been temporarily checked by legal restrictions which had to be imposed in 1965 to stop generally unsound logging practices. Recently, domestic building boom and increased export demand have pressed on the scarce supply and caused prices to soar. 25. Fisheries contribute 7.6 percent to the total value-added of the agricultural sector. Total fish production reached almost h60,000 metric tons in 1967, 20 percent more than in 1965. This increase came largely - 13 - from a rapid expansion of deep-sea fishing (h0 percent) and improved inshore catches as a result of additions of new vessels and improvements in fishing methods and gear. IBRD financing played an essential role in enlarging and modernizing the Chinese fishing fleet. The number of powered vessels has increased since 1960 by 60 percent, and its tonnage by 70 percent, indicating the trend toward larger-size boats. Fishing fleets are now operating in all oceans supported by a world-wide marketing and supply system. However, coastal fishing with unpowered vessels or without vessels continued to decline due to backward fishing techniques, inferior equipment and depletion of fish resources. Manufacturing 26. Manufacturing industry continued to expand at a rapid rate, particularly in 1967 when the value of output increased by 18.2 percent. During 1961-67, growth has been more pronounced in the relatively new industries, such as electrical machinery and appliances, transport equip- ment, metal products and machinery, chemical products, wood products, rubber products, apparel, and footwear. Recent development of chemical, metal product and engineering industries has brought about further depth and width into Taiwan's industrialization. Industrial structure has progressed steadily towards more production of intermediate and producers' goods as well as consumers' durables. In 1961, the net value-added of such products combinedl-/ amounted to 43 percent of the total net value-added of the manu- facturing sector; it rose to almost 5h percent in 1966. Correspondingly, the share of non-durable consumer goods industries declined, among them the most important one is the food processing industry - Taiwan's largest industry 27. In the food processing sector, while canned mushrooms and monosodium glutamate experienced large increases lately, sugar, canned pineapples and canned asparagus fell in output owing to declining export demand or import restrictions in foreign markets. With the expansion and renovation of equipment, the productive capacity of textile industry - the second largest - has been increased, with output rising by 17 percent in 1967 as compared with only 5 percent in 1966; the quality of its products also improved. The output of apparel, although small, rose sharply in 1967, presumably in connection with the expansion of tourism and mail orders. The continuous boom in building construction and,' to some extent, also rising export demand brought about considerable increases in the output of plate glass, cement, and some metal products. 28. Electrical appliances and transport equipment experienced the fastest growth due to the steady rise in the income level which led to fast-rising demand for such electrical products as transistor radios, refrigerators, air conditioners, television sets, telephones and telephone 1/ Including groups 6 and 11-18 in Table 5. - 14 - Table 5 Growth and Structure of Manufacturing Productiona/ (in percentage) Annual Rate of Percentage Growth of Distribution Production of Net Product 1961-67 1967 1961 1966 0. All manufacturing 16.6 18.2 100.0 100.0 Oa. Excluding sugar 18.2 20.3 1. Food 4.2 -1.3 26.7 16.3 la. Excluding sugar 9.4 9.9 2. Beverages 9.8 13.5 0.6 0.7 3. Tobacco 3.3 8.1 2.5 3.1 4, Textiles 10.3 17.0 10.6 12.4 5. Apparel and other wear 24.5 58.2 3.8 3.3 6. Wood and wood products 22.5 5.8 5.2 6.4 7. Paper and paper products 13.1 14.7 3.2 2.6 8. Printing 7.7 7.1 4.7 4.7 9. Leather b/ 5.6 0.3 0.1 10. Rubber products 25.5 11.7 1.3 1.0 11. Chemicals and chemical products 27.8 19.9 8.9 9.1 12. Products of petroleum and coal 17.4 9.0 6.0 8.7 13. Non-metallic mineral products 13.4 18.5 7.9 7.8 14. Basic metals 14.4 21.1 4.2 3.5 15. Metal products 19.7 39.4 3.1 2.5 16. Machinery 18.3 20.5 2.9 3.9 17. Electrical machinery, apparatus and supplies 42.0 50.7 2.2 5.8 18. Transport equipment 34.5 54.8 3.0 5.8 19. Miscellaneous 12.1 3.9 2.9 2.3 a Annual rate of growth of production is based on index of production; per- centage of distribution of net product, calculated at factor cost, is based on data from the National Accounts. b/ Negligible. Source: C.I.E.C.D., Industry of Free China; DGBAS, National Income of the Republic of China. - 15 - exchanges. Above all, production of electronic parts and components for foreign manufaturers expanded as much as 2.7 times in 1967, topping the rest of all other major products. 29. In the transport equipment industry, shipbuilding tonnage and output of motorcycles and scooters soared spectacularly. Automobile production, however, slowed down substantially despite heavy protection. In machinery industry, sewing machine output scored the highest gain, because of rapidly-growing demand by the local garment industry and private households. 30. In the chemical industry, production of plastic raw materials and manufactures showed large increases, following the completion of a new polyethylene plant. Fertilizer production was constrained by power shortage and competition with cheaper imports. A new nitrogen fertilizer plant is scheduled for completion before mid-1968; it will use modern and more economical techniques to produce at lower costs. Energy and Power 31. Total consumption of energy materials, increasing at an annual rate of about 7 percent during 1960-64, accelerated to 13 percent during 1964-66. (See Appendix Table 19) Official estimates forecast that the growth rate may remain at 13 percent up to 1968. As domestic supply of energy materials did not increase at the same speed as consumption, the ratio of self-sufficiency fell from 82 percent in 1960 to 68 percent in 1966 and is expected to fall further to 61 percent in 1968. 32. The production of coal, the major domestic energy material, has been stagnant since 1964. Irregularity and thinness of coal seams and the need for excavation at greater depth make economical production increasingly difficult. 33. The supply of recently discovered natural gas increased sharply in 1966, but by only 20 percent in 1967 because of delays in completing a pipeline to Taipei, It is expected that by 1968 natural gas will replace water power as the second largest domestic energy source. Owing to the widening gap between domestic consumption and production of energy materials, imports of crude oil - the single most important energy material - have risen sharply from 1.25 million to 2.57 million kilolitres during 1960-66. 34. Although the installed capacity of Taiwan's power system has been increasing at an average annual rate of 12.5 percent, power supply has in general fallen behind demand. In addition, protracted droughts affected hydroelectric generation in 1966 and 1967. Despite the instal- lation of three new generating units in the last two years, adding con- siderably to thermal power supply, power shortage forced the authorities to impose restrictions on consumption which hit in particular aluminum and fertilizer production. Main elements in the upsurge of power consumption - 16 - have not only been growing requirements for industry, irrigation and commerce, but also the fast-growing domestic use of electrical household appliances, resulting from increased per capita income and ready avail- ability at cheap prices of such appliances from local production. The rate structure, distinguishing between users chiefly according to the amounts of their consumption, appear to bear a close relationship to the costs to serve them, without anysubstantial inter-class subsidiza- tion. The average realization rate calculated at US 1.2 cents per kwh (US1.0 cents on industrial sales and US2.2 cents on residential sales) seems low rather than high in worldwide comparison Transportation and Communications 35. Rapid economic growth has resulted in increases in land traffic, averaging 6.7 percent yearly for passengers and 4.9 percent for freight during 1960-67; appreciably exceeding all forecasts. 36. Growth of highway traffic has been spectacular. Highway passenger and freight traffic grew on the average at 8 and 14 percent a year respectively during 1960-67, far exceeding the Plan targets. It is expected to continue to grow rapidly, in view of the fact that the number of automobiles (including motorcycles) has increased almost 40 percent a year in the last three years. Also, truckers have begun to bid for service over longer distances; the average length of road haul rose from 28 to 4l kilometers in the last 10 years. 37. Recent increases in railway traffic were also notable, although less spectacular than highway. Passenger and freight rate increases in 1967 had apparently little effect on the volume of traffic. In 1965, an IBRD loan was extended to the Chinese Government to finance the procurement of rolling stock and signal equipment. Because of further increase in the volume of traffic, another loan was extended in 1967 to meet additional requirements of rolling stock and equipment. 38. As a result of the continuing growth in international trade, cargo loaded and unloaded at the seaports of Kaohsiung, Keelung and Hualien surpassed Plan targets by registering an annual growth of lb percent during 1965-67. 39. Domestic and international telecommunications services have been increasing rapidly. During 1965-67, the number of telephone stations rose by 16 percent a year and at the end of 1967 there werel .73 installed telephones per 100 population compared to only 1.19 in 1964.- In inter- national service, the traffic growth of telephone calls hit a record of 75 percent in 1967, following the successful inauguration of the Taipei- Hong Kong Transhorizon Microwave System. 1/ Japan has 14.18 per 100 population. - 17 - C. External Tradel/ Exports hO. Exports, overcoming the limitations of Taiwan's small-size domestic market, have played a leading role in the Island's economic development. During the last 7 years, the dollar value of commodity exports increased at an annual rate of about 21 percent, substantially exceeding the GNP growth rate. Consequently, the ratio of exports to GNP rose from aDproximately 10 percent to 19 percent during this period. 4l. As in many primary goods exporting economies, Taiwan's export level used fluctuate widely because sugar - previously its major export item- - is always subject to the oscillations of the world market. This was particularly so for Taiwan, for 90 percent of its sugar has usually been sold to the small residual free-world market outside the large and stable markets under bilateral agreements. However, due to agricultural diversification and the development of manufacturing industries, the share of sugar in total exports dropped sharply from 62 percent during 1952-54 to 29 percent in 1964 - despite the sugar boom in that year - and further down to 7 percent in 1967. Thus, the impact of the recent slump in world sugar prices on the Island's export earnings has been softened considerably. The total value of exports rose by 18 percent in 1966, and 16 percent in 1967; standing at US$675 million, it exceeded the Plan target by 29 percent. 42. This remarkable export performance is attributed mainly to the introduction of new products, progressive market exploitation and export incentives offered by the Government. These factors made it possible for Taiwan to realize its potential comparative advantage in low labor cost. Among export incentives, the rebate of import duties on raw materials and components used in making export goods and low interest credits for financing the working capital of qualified export manu- facturers are the major instruments. The export credits at interest rates one-half below that charged on other loans are extended chiefly by the Bank of Taiwan - the Provincial Government bank. As reported by the last Mission, agricultural producers and processors have continuously been seeking new export markets for high-valued items. In addition to canned mushrooms (mainly to the Federal Republic of Germany and the United States), fruits and vegetables (chiefly to 1/ The trade figures used in the sub-sections on exports and imports are from trade statistics which are slightly larger than the balance of payments figures based on foreign exchange records. 2/ Exports of Taiwan's traditional important export items, rice and sugar, dropped sharply in recent years; sugar by 9 percent in 1966 and 29 percent in 1967 and rice by 23 and h0 percent, respectively. Such a drastic fall would have been very serious to the economy had Taiwan still relied on these two commodities for obtaining export earnings - their combined export proceeds still amounted to 7h percent of the total export value during 1952-54, but declined to 33 percent in 196h and further to 10 percent in 1967. - 18 - Japan) are beginning to gain some importance. The most spectacular increase was in manufactured exports. Increasing at an annual rate of more than 30 percent, their share in total export value expanded from 13 percent in 1956 to 56 percent in 1967. Textile exports, now Taiwan's leading export item, exceeded $110 million in 1967, thanks to expansion and improvement of production capacity, particularly in producing blended fabrics, and because of Taiwan's readmission to the Indonesian market. Exports of chemical products, largely to Southeast Asia, leapt from $1 million to $53 million in eleven years, due to large-scale capacity expansion and brisk sales of plastic products. Exports of metals and machinery, and cement and building materials rose sharply in 1966, mainly in response to the war in Viet-Nam, but slowed down somewhat in 1967. Owing chiefly to the recent sluggishness in building activity in the United States and growing competition from Korea, plywood exports in 1967 were rather discouraging. On the other hand, a number of new items have been added to the export list in the last two years, including toys, wigs, jade and marble objects. 43. The Republic has been successful in diversifying its export markets. Since 1956, the proportion of Japan in Taiwan's total exports was reduced from over one-third to one-fourth and that of other Asian countries, excluding Viet-Nam, decreased from 45 percent to 20 percent. Meanwhile, sales to the United States increased sharply from 5 percent to 23 percent of total exports. The share of other countries increased considerably, with exports to the Federal Republic of Germany achieving the most spectacular gains. The recent extraordinary increase in Viet- Nam's share can be attributed chiefly to the war and may therefore be to some extent a temporary phenamenon.2/ However, this does not suggest that when the war is eventually over Taiwan's exports to South Viet-Nam will fall back to the pre-war level, because the latter will presumably need a substantial amount of imports for rehabilitation and reconstruction. 44. Exports to Japan are predominantly primary products which Japan does not produce at all or produces only in insufficient amounts. These include mainly bananas, timber products, rice, sugar, fruits, vegetables, and sea products. It is very difficult for Taiwan's light manufactured goods to enter the protected Japanese market although Taiwan is competing with Japan in third markets. Exports to the developed countries of North America and Western Europe consist mainly of canned foods and labor- intensive manufactures such as textiles, plywood, toys and some chemical and electronics products. Exports to other Asian countries, concentrating on the Republic of Viet-Nam, Thailand, Hong Kong, Malaysia, Singapore, and the Republic of Korea, include mainly manufactures such as textiles, chemical products, metal products and machinery, cement, and other building materials. Imports 45. In the fifties, owing to import control and import substitution measures, the dollar value of imports increased at a very low rate. 1/ Total sales to South Viet-Nam in fact declined from US$90 million in 1966 to $74 million in 1967. - 19 - However, with industrialization gaining momentum and the export drive showing good results, import restrictions were gradually lifted and imports began to rise at a much faster pace. Having only poor natural resources and no sizeable capital goods industries, Taiwan had to rely heavily on imports of raw materials, machinery and equipment, although import substitution for capital goods has gradually been making progress. In recent years, the level of imports showed wide fluctuations on a rising trend, responding to the availability of external finance for purchasing foreign capital goods and the inven- tory situation of raw materials. In 1967, imports rose by 4l percent to US$848 million, owing chiefly to an 84 percent increase in capital goods imports, financed mainly with loans from the World Bank, the U.S. Export-Import Bank, and Japan. 46. The rapid industrialization has changed appreciably the pattern of import trade. During 1956-1967, the share of capital goods in total imports rose from 23 to 36 percent, at the expense of both raw materials and consumer goods. Raw materials accounted for 57 percent in 1956 and although falling gradually still constitute about one-half of total imports. Consumer goods imports, which now stand below one-fifth of the total, con- sist chiefly of food items and pharmaceuticals whereas imports of other manufactured items account for only a small portion. 47. Japan has in recent years overtaken the United States as Taiwan's largest supplier with its share of 37 percent in Taiwan's total imports in 1967. In addition to geographical proximity, this change was due to the sharply increased supplies of capital goods and intermediate goods from Japan in connection with Japanese yen credits and direct investment. Another significant change is the growing importance of the Federal Republic of Germany and Australia in Taiwan's import trade; both supply primarily capital goods. On the other hand, the share of other Asian countries, supplying chiefly food and raw materials, declined. Services 48. During 1964-65, Taiwan had a deficit on its services account, averaging around US$20 million, due mainly to large payments for trans- portation and insurance. The situation changed since 1966 when the balance turned into a surplus because of the sharp increase of income from tourism and visits of United States military personnel from Viet-Nam. During the past 7 years, foreign tourists visiting Taiwan increased at an annual rate of over 60 percent, reaching 253,90 in 1967. And, for the first time since World War II, Japanese tourists outnumbered Americans. Proceeds from foreigners' travel, negligible 5 years ago, now is the largest source of foreign exchange from services, estimated at US$36 million for 1967. (See Statistical Appendix Table 26) - 20 - 49. The rapid increase in the number of foreign tourists visiting the Island has stimulated the establishment of a number of new hotels which contributed to the current building boom in Taiwan's major cities. 50. Receipts from U.S. servicemen vacationing in Taiwan are estimated at US$10 million. This, together with the increase in commodity sales to South Viet-Nam over the pre-Viet-Nam war level would add up the total effect of Viet-Nam on Taiwan's exchange earnings to approximately US$50 million, or 6-7 percent of Taiwan's total exports of goods and services. Table 6 Receiptsand Payments on Goods and Services (in million US dollars) 1962 1963 1964 1965 1966 1967 Receipts: 253 388 491 529 659 779 Goods 21 3 UT Services 35 52 56 78 116 127 Payments: 379 402 483 624 685 896 Goods M365 23 769 Services 38 42 75 101 100 127 Balance: -126 -14 8 -95 -26 -117 Goods -123 -T1 27 -72 -2 -117 Services -3 10 -19 -23 16 - Source: Statistical Appendix Table 26. - 21 - III. DEVELOPMENT FINANCING A. Introduction 51. A striking feature in the financing of Taiwan's development is the acceleration in domestic saving formation. Domestic savings, which financed only 66 percent of gross capital formation in 1962, rose to 86 percent in 1967, thereby greatly reducing the reliance on foreign capital. U.S. grants, which dominated foreign capital inflow in the fifties, virtually disappeared in 1967, while external official and private long-term loans rose. In 1967, available foreign savings were almost l percent of total gross capital formaticn and 3.3 percent of GDP. 52. Both public and private saving increased almost at the same rate over the past 15 years. However, while during the fifties public saving rose faster than private saving, the trend reversed in the sixties. Indeed, at current prices, public saving increased only 1.8 times during 1960-66 while private saving rose 3.8 times. In 1966, private saving accounted for more than three-fourths of gross capital formation and almost 18 percent of GDP, while public saving was less than one-fifth of capital formation and amounted to 4.4 percent of GDP. The 1967 domestic saving rate of nearly 21 percent of GDP is certainly high in international comparison. (See Table 7) 53. Rising income has been a major factor in the rapid increase in private saving. To some extent this has also been helped by the low actual tax burden. The recent stagnation in public saving appears to be due mainly to the fall in profits of the Government Sugar Corporation. Regarding general government saving, the national accounts data show continuous improvement since 1961. The trend of dissaving reversed to positive saving since 1964. However, this can only be regarded as a general indication, for such saving figures depend to a large extent on the reclassification of government expenditures between current and capital, which seems not always accurate. The present level of the public sector's saving (including public enterprises), estimated at NT$5 billion, is insufficient to meet the rising requirements for investment in power, transportation, public utilities, the expanded education program, etc., for which the Government assumes entire or major responsibility. - 22 - Table 7 Trends and Composition of Saving 1960 1961 1962 1963 1964 1965 1966 1967 A. Amount (in billion NT$) Gross Domestic Capital Formation 12.59 13.93 14.44 15.23 19.25 25.51 28.88 33.98 "Foreign Saving" a/ 4.69 4.88 4.92 0.47 -0.30 3.73 0.97 4.64 Gross Domestic Saving: 7.90 9.05 9.52 14.76 19.55 21.78 27.91 29.34 Private Sector b/ 5.94 7.56 8.05 11.86 14.81 16.10 22.42 General Government -0.52 -0.96 -0.66 -0.35 0.56 1.61 1.58 Public Enterprises 2.48 2.45 2.13 3.25 4.18 4.07 3.91 (Gross National Saving) (7.90) (8.97) (9.42) (14.66) (19.59) (21.68) (27.87) (28.94) B. In Percentage of GDP at Current Market Prices Gross Domestic Capital Formation 20.12 19.94 18.85 17.1 18.75 22.74 22.95 23.98 "Foreign Saving" a/ 7.50 6.98 6.42 0.54 -0.29 3.32 0.77 3.28 Gross Domestic Saving: 12.62 12.96 12.43 16.87 19.04 19.42 22.18 20.70 Private b 9.49 10.82 10.51 13.55 14.43 14.35 17.81 General Government -0.83 -1.37 -0.86 -0.40 0.54 1.44 1.26 Public Enterprises 3.96 3.51 2.78 3.72 4.07 3.63 3.11 (Gross National Saving as Percentage of GNP) (12.63) (12.85) (12.32) (16.78) (19.12) (19.17) (22.21) (20.46) a/ Deficit of the nation on goods and non-factor service account. b/ Including statistical discrepancies. Source: Based on DGBAS, National Income Data,and Central Bank of China, Balance of Payments data. - 23 - B. Foreign Capital 54. The Republic used to rely heavily on foreign resources for financing both capital formation and balance of payments. During 1960-61 the annual deficit on goods and services account ran at US$130 million, 7.5 percent of GDP, or 37 percent of gross capital formation; it was met largely by transfer payments from abroad, predominantly official U.S. grants. The picture changed fundamentally since 1962 when U.S. grants were halved and since then have gradually been reduced to zero. Meanwhile, Taiwan's exports have continued to rise; there was even a small trade surplus in 1964, due to the sugar boom. Another pronounced change, since 1965, is the substantial increase in the net inflow of long-term loan capital; at over $50 million a year during 1965-66, it surpassed considerably the dwindling amount of transfer receipts from abroad. (See Table 8) 55. In 1967, the net inflow of foreign long-term capital reached the amount of US$100 million, compared with only US$18 million transfer receipts from abroad. Foreign and overseas Chinese direct investment also rose sharply from US$8.4 million in 1966 to US$26.6 million in 1967. Political and monetary stability, the easy availability of cheap and disciplined labor, and various tax and other incentives offered by the Government (especially for export industries) have created a favor- able investment climate, increasingly attracting overseas investors. The large inflow of loan and equity capital, including the disbursements of IBRD, U.S. Export-Import Bank and private loans as well as Japanese credits, made it possible for imports of capital goods to be substantially increased, further stimulating capital formation.l/ As capital inflows and external transfers exceeded the deficit on goods and services, the Republic was even able to increase further its net foreign assets, by US$58 million in 1967. The gross foreign assets of the Central Bank of US$437 million at the end of 1967 were equivalent to 57 percent of 1967's imports.L/ 1/ The merchandise import surplus increased sharply from US$42 million in 1966 to US$117 million in 1967 according to the foreign exchange records. 2/ The foreign exchange reserve situation is as follows (in million U.S. dollars at end of period): April 1960 1964 1965 1966 1967 1968 Central Bank 117 297 300 337 437 408 Comercial Banks 10 25 17 19 21 20 Total Gross 127 322 317 35 W 27 Total Net 0 280 264 334 392 Central Bank's Gross Reserves as % of Annual Imports 41 73 57 58 57 - 24 * Table 8 External Transfers and Capital Flows (in million US$) 1960 1961 1962 1963 1964 1965 1966 1967 A. Goods and Services -130.0 -130.7 -125.5 -14.4 8.6 -95.8 -26.2 -116.8 (of .hich non-factor income payments) (-0.5) (-2.0) (-2.4) (-2.6) (1.0) (-2.6) (-2.0) (-0.9) B. Transfcr Payments, of which: 88.3 98.4 54.8 44.7 20.2 32.9 23.7 18.1 U.S. Grants (84.8) (86.1) (42.4) (36.6) (16.7) (18.4) (6.9) (- ) C. Direct Investments 5.8 9.5 9.0 18.3 15.6 10.0 8.4 26.6 D. Long-Term Loans, Net 22.2 29.1 16.0 28.2 20.5 54.0 53.1 100.1 Central and Local Governments (11.3) (22.8) (20.6) (33.4) (23.4) (40.3) (30.7) (22.7) The Private Sector a/ (10.9) (6.3) (-4.6) (-5.2) (-2.9) (13.7) (22.4) (77.4) E. Short-Term Loans, Net -2.0 30.1 32.1 29.6 17.9 -13.1 12.2 34.1 Central and Local Governments (-28.5) (12.9) (17.3) (9.5) (-1.0) (-8.2) (-28.5) (1.9) The Private Sector a/ (26.5) (17.2) (14.8) (20.1) (18.9) (-4.9) (40.7) (32.3) F. Total External Transfers and Capital Inflows 11T.3 167.1 111.9 120.8 74.2 35 97 .4 17709 G. Monetary Sectors (- indicates increase) -2.5 -1. 17.7 -105.0 -65.7 16T. -77 79.7 H. Others 38.2 -18.1 -4.1 -1.4 -17.2 -b.9 -1.b -3.4 a/ Including Government enterprises. Source: Statistical Appendix Table 26. - 25 - 56. Among long-term net capital inflows, those received by the Central and Local Governments declined from US$40 million in 1965 to US$23 million in 1967, while those received by public and private enterprises increased from US$14 million to US$77 million. The shifts in the composition of foreign finance from grants to loans, and from loans to the Government sector to loans to the enterprise sector, reflect the change in the international aid picture and tend, of course, to add to the Republic's debt burden. Calculating total repayments and interests on debtawith a maturity of one year or more as a percentage of total exchange earnings from exports of goods and non-factor services, the debt-service ratio increased from 4.5 percent during 1964-66 to 5.6 percent in 1967. While the increase is appreciable, the ratio is still low, as compared with many other developing countries. C. Public Finance General Trends 57. Until 1967, Chinese budgets were not broken down by current and capital accounts. The need for such a classification was recommended by previous Bank missions. In the course of recent attempts to coordinate Government budgets with development plans, the budgets are now being reclassified. When the Mission was in Taipei, the exercise had not yet been completed for the past. However, in the recently revised national accounts data, based on some rough classification, revenue and expenditure were presented separately for current and capital accounts of the "General Government"_/. Although these figures are in calendar years and may differ from the eventually more exact classification of the budgets, they are at present the best available data to reveal the fiscal trends. 58. As shown in Table 9, the improvement of Government savings since 1962 is due mainly to the containment of Government current expenditure. Total consolidated current receipts of governments at all levels as a percentage of GDP remained almost unchanged, while total current expendi- ture in relation to GDP declined from the 1962 peak of 20.4 percent to 18.2 percent in 1966. Capital expenditure, including capital transfers to public and private enterprises, has also been kept low at around 4.3 per- cent of GDP during 1962-1965. Although the level rose steeply to 5.1 per- cent in 1966, it was still appreciably below that in the late 1950's. By keeping both current and capital expenditure down the Government has 1/ Including Central, Provincial, and Local Governments. According to the budget data, Central Government receipts and expenditure account for roughly 55 percent of total receipts and expenditure of govern- ments at all levels on a non-consolidated basis. - 26 - Table 9 General Government Revenue and Expenditure A. Amounts (in billion NT$) 1955 1960 1961 1962 1963 1964 1965 1966 Current Receipts 5.81 11.85 12.73 14.97 16.40 18.53 22.21 24.50 Current Expenditure 5.93 12.37 13.69 15.63 16.75 17.97 20.60 22.92 Saving -0.13 -0.52 -0.96 -0.66 -0.35 0.56 1.61 1.58 Capital Receipts 0.14 0.47 0.67 0.70 0.75 1.36 1.05 1.34 Capital Expenditurel' 1.71 3.49 3.70 3.62 3.44 4.08 5.14 6.43 (of which: General Government Capital Formation) (0.55) (1.44) (1.60) (1.67) (1.78) (2.22) (2.41) (2.56) Overall Bud et Balance -1.69 -3.54 -3.99 -3.57 -3.05 -2.16 -2.48 -3.50 B. In Percent of GDP at Current Market Prices Current Receipts 19.3 18.9 18.2 19.5 18.7 18.1 19.6 19.5 Current Expenditure 19.7 19.8 19.6 20.4 19.1 17.5 18.2 18.2 Saving -0.4 -0.8 -1.4 -0.9 -0.4 0.6 1.4 1.2 Capital Receiptsa/ 0.5 0.7 1.0 1.0 0.8 1.3 0.9 1.1 Capital Expenditure - 5.7 5.6 5.3 4.7 3.9 4.0 4.5 5.1 (of which: General Government Capital Formation) (1.8) (2.3) (2.3) (2.2) (2.0) (2.2) (2.1) (2.0) OveralLBudgpt Balance 5 -5.6 -5.6 -5.7 -4.6 -3.5 -2.1 -2.2 -2.8 a/ Capital receipts comprise sales of assets, appreciation of assets, refund revenue of previous years and provision for consumption of fixed capital. b/ Capital expenditures comprise gross capital formation, capital grants and transfers to public and private enterprises, expenditure for other funds and amortization of Government debts (domestic and foreign). c/ The overall budget balance figures are computed on a national accounts basis and differ from the budget data shown in Table 12. Source: DGBAS - 27 - been able to reduce the relative size of its deficit from 5.6 percent of GDP in the late 1950's and early 1960's to slightly over 2 percent during 1964-65, but it rose again to nearly 3 percent in 1966. The Mission feels that the policy of maintaining expenditures at a low level cannot be continued very long and ways and means for raising revenues have to be found. This will be discussed further in Chapter IV. 59. Retained earnings and depreciation of public enterprises treated as gross savings of public enterprises are, of course, not included in savings of General Government. Such savings are quite sizable and have increased from NT$2.5 billion in 1960 to a level of NTh billion during 1964-66. However as percentage of GDP, gross savings of public enterprises fell modestly in recent years (see Table 7). 60. Investments in both General Government and public enterprises exceeded the savings generated within each respective sector. The "deficits" had to be financed by foreign capital and by private savings since 1963 when that sector began to realize "excess savings". In 1966, out of NT$9 billion gross capital formation in the public sector, about 60 percent was financed by savings of the public sector itself and 40 percent by foreign capital and private sav_ngs (see Table 10). In view of the growing bottlenecks in infrastructure and the urgency of invest- ments to overcome them, the Mission felt that it is important for the Government and the public enterprises to take a fresh look at their rate and price policy with a view to finding out whether the existing price and rate structures of the various public enterprises are adequate to generate sufficient internal finance for expanding the facilities.l/ Revenue;' 61. Total receipts of governments at all levels3 increased by an average of 13.4 percent a year during the 1960's; this was slightly below GNP growth at current prices. Considering the fact that the budget deficit has widened again lately, although Government expenditure has been kept down, recent revenue increases have definitely been too small. 1/ Cf. Chapter IV, Section F. 2/ In the rest of this section on "Public Finance", fiscal data rather than national accounts data are used. 3/ About two-thirds of total tax receipts go to the Central Government, around 20 percent to Taiwan Provincial Government, and the balance to Hsien (county) and municipal governments. - 28 - Table 10 Saving and Investment by Major Sectors (in billion NT$) 1960 1961 1962 1963 Saving Investment Saving Investment Saving Investment Saving Investment General Government -0.52 1.44 -0.96 1.60 -0.66 1.67 -0.35 1.78 Public Enterprises 2.48 4.24 2.45 4.25 2.13 4.75 3.25 3.96 Public Sector 1.96 5.68 1.49 5.85 1.47 6.42 2.90 5.74 Private Sector 5.94 6.91 7.56 8.09 8.05 8.02 11.86 9.49 Foreign Sector 4.69 - 4.88 - 4.92 - 0.47 - Total 12.59 12.59 13.93 13.93 14.44 14.4 15.23 15.23 . 1964 . . 1965 1966 Saving Investment Saving Investment Saving Investment General Government 0.56 2.22 1.61 2.41 1.58 2.56 Public Enterprises 4.18 4.34 4.07 5.58 3.91 6.55 Public Sector 4.74 6.56 5.68 7.99 5.49 9.11 Private Sector 11.81 12.69 16.10 17.52 22.42 19.77 Foreign Sector -0.30 - 3.73 - 0.97 - Total 19.25 19.25 25.51 25.51 28.88 28.88 Source: Compiled by the Mlission on the basis of DGBAS National income data. - 29 - Especially tax receipts did not reflect adequately the rapid overall expansion of the economy. Also revenues from the tobacco and wine monopoly which have tax character have been insufficiently raised. Receipts from Government enterprises were bolstered in FY 1964/65 by windfall profits of the Taiwan Sugar Corporation, but dropped in FY 1965/66 when the slump in world sugar prices caused losses. In FY 1966/67 revenues from Government enterprises went up again, owing to increases in contributions from China Petroleum Corporation and Taiwan Power Company. (A list of Central Government enterprises is given in Statistical Appendix Table 31.) 62. Tax burden is comparatively light in the Republic of China. Tax revenues(including revenues from monopolies) as percent of GNP remained constantly at the relatively low level of 13-1 percent since FY 1960/61, although defense surtaxes have been imposed on a number of taxes. Mainreasons for the disappointing performance of tax revenues have been the obsolete tax structure, which is only insufficiently responsive to expanding incomes, inadequate tax collection, and the Government's reluctance to raise the tax burden. 63. In addition, tax exemptions and tax rebates granted for invest- ment and export promotion cut into tax collection. In FY 1966/67, total tax losses due to investment encouragement (mainly in income tax and stamp tax) amounted to NT$741 million, almost 5 percent of total tax revenue. The tax loss from rebates of customs duties and other minor taxes on imported materials embodied in export commodities, was even larger, being NT$2,660 million, or 17.5 percent of total tax revenue. It may be argued that this may not represent a real revenue loss, for without such incentives there would perhaps not have been so much investment, manufactured exports and raw material imports. The indirect benefits on foreign exchange earnings, income and employment should also be taken into consideration. In order to assess whether tax incentives are excessive or not, it would be necessary to make a comprehensive cost-benefit study as has been done in some other countries.i/ 64. The present tax system rests heavily on indirect taxes which account for around 75 percent of total tax receipts. Customs duties (including defense surtax) represent the largest source of tax income (around 30 percent), followed by commodity tax (roughly 20 percent). The scope of the commodity tax was recently expanded to cover a number of new commodities including TV sets, refrigerators and air-conditioners and its rates on several existing items were raised.2/ Direct tax revenue in proportion to tax revenue and 1/ See, e.g., Paul L. Chen-Young, "A study of Tax Incentives in Jamaica", National Tax Journal, September 1967. 2/ See page 54, footnote 1. - 30- Table 11 Consolidated Budget of All Levels of Government I. Amount (in billion NT$) (FY = July 1 - June 30) FY FY FY FY FY FY 1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 A. Total Revenue: 13.65 16.67 20.34 21.89 25.86 24.88 Taxes 8.37 9.97 11.97 13.59 15.20 15.26 (Direct Taxes) (2.35) (2.88) (3.36) (3.53) (3.63) (3.98) (Indirect Taxes) (6.02) (7.08) (8.61) (10.06) (11.58) (11.28) Revenue from Tobacco and Wine Monopoly 2.52 2.88 3.27 3.70 4.24 4.12 Profits of Public Enterprises 1.09 2.18 3.11 2.37 3.92 2.28 Other 1.67 1.65 1.99 2.23 2.50 3.22 B. Total Expenditure: 16.46 18.49 22.39 23.84 29.76 29.16 Defense, Administration and Internal Security 10.29 10.80 12.09 15.62 15.h4 16.31 Economic Reconstruction and Communications 1.54 1.80 1.82 2.28 2.22 1.95 Investments in Public Enterprises and Funds 0.76 0.77 2.5 1.11 3.92 1.35 Education, Science, and Culture 2.22 2.55 2.79 3.46 3.98 4.57 Other 1.65 2.57 3.24 1.37 4.20 4.98 C. Deficit: 2.81 1.82 2.05 1.95 3.90 4.28 - 31 - Table 11, cont'd, II. In Percentage of GNPb FY FY FY FY FY FY 1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 A. Total Revenue: 16.66 17.56 18.87 1.35 18.30 Taxes 10.22 10.49 11.10 11.39 10.75 Revenues from Tobacco and Wine Monopoly 3.08 3.03 3.03 3.10 2.91 Profits of Public Enterprises 1.33 2.30 2.88 1.99 2.77 B. Total Expenditure: 20.10 19.8 20.76 19.98 21.05 Defense, Administration and Internal Security 12.56 11.38 11.22 13.09 10.92 Economic Reconstruction and Communi- cations 1.88 1.90 1.69 1.91 1.86 Investments in Public Enterprises and Funds 0.93 0.81 2.27 0.93 2.77 Education, Science, and Culture 2.71 2.69 2.59 2.90 2.82 C. Deficit: 3.43 1.91 1.90 1.63 2.76 a/ Actuals FY's 1962/63 - 1966/67, budget estimates for FY 1967/68 excluding supplementary budgets of Taiwan Provincial Government and local governments. bJ GNP at current prices adjusted to fiscal years. Source: Statistical Appendix Table 28. - 32 - to GNP had continuously dropped since 1964/65 and reached 24 and 2.6 percent rospectively in 1966/67. The share in total tax revenue of land tax, a provincial tax applied to agricultural land evaluated on the basis of pro- ductivity as recorded many years ago in the local land register, declined in recent years despite the fast rise in rural per capita income. The land tax now accounts for less than 5 percent of total tax receipts as compared with 7 percent in FY 1962/63. This indicates that there may be some de- ficiencies in the tax assessment. The recent increase of the actual land tax rates to the maximum legal limit will add slightly to the revenues. The revenue increment has been earmarked to finance partly the extended compulsory education program. 65. With the revenue gap widening the Government is now making de- termined efforts to improve tax structure and tax collection methods and to raise the rates of public services. Basic railway and bus fares were raised by 15 percent and the temporary electric power surtax (20 percent for household and 8 percent for industrial uses) was extended until mid-1968. Recently, a temporary levy of 10 percent on telephone and telegram bills has been introduced, effective from July 1, 1968 for one year. Other measures included increases in sales tax, harbor dues, and fees. Efforts are parti- cularly directed toward strengthening direct taxes such as the income tax and toward the elimination of loopholes in income tax legislation. Expenditure 66. Defense and administration expenditure, growing at over 27 per- cent per annum during the past six years, accounted for almost half of General Government expenditure in FY 1966/67. Separate data on defense expenditure are not published as a matter of policy, but defense outlays are estimated to be considerable in view of the 600,000 men armed forces maintained. Some of the increase of defense expenditure can be explained by the reduction of U.S. military aid, shifting some of the financial burden to the Chinese treasury. More recently the rise in administration expenditure also reflects periodic increases in civil servants'salaries and soldiers' pay. Government salaries have in the past been very low as compared with corresponding jobs in the private sector. Despite recent increases, an appreciable discrepancy still exists. 67. Expenditure for education has been rising rapidly in the last three years. This reflects largely higher salaries for teachers and the growth in the enrollment of students. Further substantial increases in education expenditure will be required for the future when in fall 1968 the Government will start to extend Government-financed education from six to nine years. Outlays for social and relief affairs have also been stepped up considerably since FY 1964/65. This includes in particular improvements in health care, provision of low-cost housing, and higher pensions. 68. For the first time budget breakdowns by current and capital out- lay of governments at all levels are available for FY 1966/67. The new classification shows that out of total expenditures of NT$29.5 billion, capital expenditures amounted to 27.5 percent. And out of the NT$8.1 billion capital expenditures, almost two-thirds were allocated for economic de- velopment and investment in public enterprises and public funds. - 33 - Financing of Deficits 69. Use of Central Bank credit as a primary means of financing budget deficits was given up in the 1950's because of its inflationary consequences. Subsequently, counterpart funds also lost importance in the early 1960's. The covering of the budget deficit has thus become more and more dependent on the sale of Government bonds amounting to 84 percent of the deficit in FY 1966/67. By the end of 1967 the out- standing amount of Government bonds had climbed to NT$6.6 billion as compared to NT$0.63 billion at the end of 1960 (see Table 15). Since the majority of the bonds carry about 10 percent interest and have a fairly short repayment period of only 4 years, debt service (including amor- tization and interest) has been increasing rapidly from NT$0.38 billion in 1960/61 to NT$1.54 billion in 1966/67, the latter accounted for almost one-half of the new issues in that year, or 5.2 percent of total Govern- ment expenditures (see Appendix Table 29). The Government realizes now that it has to turn to other sources of revenues, including the sale of public enterprises and urban land. A more satisfactory and lasting solution, however, will depend greatly on the outcome of the comprehensive tax reform currently under discussion. D. Private Saving 70. Figures on private saving, estimated essentially as residuals in the national accounts, are probably not very reliable. Estimation of provisionfor capital depreciation is also somewhat arbitrary. However, the general trend is quite indicative. A striking feature in Taiwan's recent economic development is the sharp increase in the private saving rate. Gross private saving as a percentage of GNP rose from 8 percent during 1957-60 to 15 percent during 1961-64 and further to 17 percent in 1966. Measuring net private saving in relation to disposable income of the private sector, the average saving rate rose from 5.7 to 11.8 percent and further to 18 percent during the corresponding periods. Meanwhile, the marginal net saving rate rose from 8 to 26 percent and then to almost 44 percent in the corresponding years. 71. To explain the rapid rise in the private saving rate, one would need to know more about the saving behavior of the various segments of the private sector. However, only very little reliable data are avail- able.l/ The sample survey of family income and expenditure taken by DGBAS tor "1964 does contain same interesting data, but owing to the smallness l/ The weakest part is private corporate savings; on which reliable infor- mation is very difficult to obtain. Available data are limited to large corporations and their reliability is in doubt. The Mission was informed that the Research Department of the Central Bank of China is now planning to conduct a survey of corporations with the cooperation of commercial banks. - 34 - Table 12 Financing of Deficit in Consolidated Budget of all Levels of Governmenta/ (in million NT$) FY FY FY FY FY FY 1962/63 1963/64 1964/65 1965/66 1966/67 1967/68 Sales of Property 374 625 1,066 348 124 391 Transfers from Counterpart Funds 1,060 910 760 6h0 480 360 Domestic Bond Issues 760 848 1,217 2,315 3,118 3,ho Use of Cash Balanceb/ 616 -568 -994 -1,353 178 88 Financing of Deficit 2,809 1,815 2,069 1,950 3,900 1,279 a/ Actuals for FY 1962/63 - FY 1966/67 and budget data for FY 1967/68. Deficit figures based on budget data are different from those in Table 9 which was compiled on the basis of national accounts data. b/ Minus sign indicates increases in cash balances. Source: Statistical Appendix Table 29. - 35 - of the sample (0.1L percent), sampling errors are at times too large to yield meaningful results. Also the survey covers only one year. By careful scrutin3y however, some of the statistical information both in the national accounts and in the sample survey can nevertheless throw some light on the various factors responsible for the rapidly rising marginal saving rate. 72. It seems clear that the rise is closely connected with the expansion of private industrial enterprises. During the past 15 years, income generated by the private non-agricultural sector increased much faster than that of the private agricultural sector and the public sector (including public enterprises). It now accounts for slightly over one-half of national income as compared with 43 percent in 1952. 73. Industrialization has expanded the class of managers, adminis- trators and supervisors in private business, who have a much higher average income and a higher saving propensity than most other professions. The sample survey shows that the average disposable income of this class in 1964 was NT$77,300 per household, and NT$12,340 per capita, which is almost double the per capita income of the entire population. The average propensity to save of the group was estimated at 26.7 percent in 1964. Employees in private enterprises, who on the average receive3higher income than employees in public enterprises (which in turn was higher than those in the General Government and public schools), also had a higher average propensity to save than the latter groups according to the sample. In addition, owners of small scale enterprises, although earning an average income lower than employees in private enterprises, have a higher propen- sity to save. Such small enterprises have also prospered and expanded along with industrial development. Table 13 Private Saving Rates 1953-56 1957-60 1961-64 1966 Gross saving rate- Average 7.0 7.9 15.0 17.1 Marginal 7.8 10.5 23.6 38.7 Net saving rate- Average 4.8 5.7 11.8 18.0 Marginal 5.1 8.4 26.2 43.8 a/ Gross private saving in relation to GNP. b/ Net private saving in relation to disposable income of the private sector. Source: DGBAS, National Income Data. - 36 - 74. Income distribution by size is another important factor affecting private saving. The survey shows that the distribution of family incomes in Taiwan may be more equal even than it is in a number of economically more advanced countries. Indeed, the distribution suggests the need for insuring that wage and promotion policies will attract people to occupations in which they are needed. However, the reported income of the upper 10 percent of the families is still almost as large as that of the lower half and there is evidence that propensity to consume tends to move inversely with the level of income. Families with annual average incomes of below NT$38,000 have a marginal propensity to consume of over 83 percent, while those earning between NT$38,000 and NT$90,000 a year have a marginal propensity to consume of 72-75 percent.1/ Thus, like in any other economy, the formation of private saving depends heavily on the upper income groups. The general frugality of the population becomes also evident, for according to the sample survey, even the ordinary worker family saves on the average over 5 percent of its income. E. Financial Markets and Interest Rates 75. Although industrialization is progressing fast, the development of financial markets in Taiwan has not made much headway in channelling efficiently savings into medium- and long-term financing of the production sectors. Along with currency stability and expansion of the monetized economy, there has been a steady increase in the willingness of the public to hold money and other financial assets, as indicated by the rising ratio of money and deposits to GNP. However, the annual flow of domestic2 inancial assets in relation to GNP seems still low, being 16 percent in 1965- as compared with 27 percent in Japan in 195._3 76. The financial assets are primarily deposits, and the financial liabilities predominatly loans by commercial banks. Thus, in 1965, the major surplus sector (saving in excess of investment) - the household sector (including farmers, professionals, etc.) - held about 88 percent of its financial assets in currency and deposits (62 percent in savings and time deposits). On the other hand, the major deficit sector, the private enterprises sector, financed its investment gap chiefly by borrow- ings from financial institutions, in fact, 75 percent of its annual increase in total financial liabilities. The use of other financial instruments like corporate bonds, corporate stocks, government securities, pension fund subscriptions, and life insurance policies, is very limited and such instruments as deposit certificates and term loans, are practically un- available. 1/ Incomes above NT$90,000 are so few in the sample that the statistical results are not meaningful. 2/ See Central Bank of China, Economic Research Department, Flow of Funds in Taiwan the Republic of China, 1963-65 (Preliminary data). Althogh thne data are pre.3.minary estia tes containing bold assu-ptions, they give for the first time scme broad comprehensive magnitudes of the financial structure of Taiwan. y' The Bank of Japan, Economic Research Department, A Study of Flow of Funds in Japan, December 1959. - 37 - Table lb Long-Term Money and Price Movements as Compared with GNP Changes 1953-56 1957-60 1961-64 1965-66 1967 A. Annual Rate of Increase () Real GNP 7.4 7.3 9.6 10.9 8.9 Wholesale prices 9.4 8.3 3.8 -1.6 2.5 Money s applya 25.0 17.3 22.0 13.8 27.1 Savings and time depositsb 22.5 43.0 35.0 22.0 20.6 B. As Percentage of GNP at Current Prices Money supply 8.4 10.4 11.4 13.5 15.6 Savings and time deposits 4.0 7.6 16.6 22.1 25.1 a/ Comprises currency in circulation and net deposit money. b/ Comprises time deposits, savings deposits and foreign currency deposits (excluding the amount held by Government agencies) with banks and credit cooperative associations, and all deposits with mutual loans and savings companies, the credit departments of farmers' associations and post offices and savings banks. - 38 - 77. WJhile the overall financial structure is narroily based, the number of branch offices of banks and other financial institutions has grown steadily (from 682 in 1952 to 803 in 1966). The branches of commercial banks, credit departments of farmers' associations, and postal savings offices are widely distributed all over the Island. The spread of such a financial network, together with the rapid growth of income, realistic levels of interest rates, and monetary stability, has contributed greatly to the collection of savings from the public. In channelling these funds into desirable field of investment, however, more innovative development is urgently needed. V Deposits 78. Bank deposits are the major form of savings, particularly as time and savings deposits, which account for almost two-thirds of all deposits held by businesses and individuals. The ratio between time and savings deposits is about 1 to 3. Savings deposits have one-year, two-year and three-year terms; one-year savings deposits have proven to be the most popular kind and account for about tbree-fourths of total savings deposits. Time and savings deposits increased at an annual rate of 43 percent during 1957-60, at 35 percent during 1961-64, and 22 per- cent during 1965-66. These growth rates considerably exceeded the rates of increase in money supply and thereby contributed greatly to price stability (see Table 14). 79. A major factor in the rapid increase of time and savings deposits was the rise of interest rates, one of the main instruments used by the Chinese authorities to regain monetary stability. Interest rates on one-year savings deposits were at times higher than 20 percent per annum and remained most of the time above 19 percent during 1954-58. As the price level was gradually stabilized, the monetary authorities have since then been pursuing a policy of gradually reducing the interest rate levels. For instance, the interest rate on one-year savings deposits was reduced from about 17 percent in 1959 to 10.08 percent in 1966 and further to 9.72 percent on May 6, 1967. Interest rates on other savings deposits and time deposits were reduced accordingly.Z/ 80. Along with the reduction of interest rates, the rate of increase of time and savings deposits also declined. In 1967, at 20.6 percent, it was for the first time below the growth rate in money supply. How- ever, time and savings deposits, like money supply, as a percentage of GNP at current prices, have continued to rise appreciably. This seems to indicate that the habit of depositing surplus funds in the banks 1/ See discussion in Chapter IV, Section E. 2/ A amounced by the Central Bank, the rates applicable to time deposits of one-month, three-month, six-month, and nine-month duratbon were reduced from 4.20, 6.00, 8.40 and 9.00 percent per annum to 3.60, 5.10, 7.80 and 8.40 percent per annum, respectively. - 39 - has been widespread among the people, in the absence of other avenues of financial investment. This trend can continue only if the interest rate in relation to price rise is attractive. If one considers a further lowering of interest rates to be beneficial to general economic develop- ment (particularly for financing development projects with long gestation periods), it is necessary to keep pricesstable in order to attract savings. Government Bonds and Public Finance Implications 81. While the interest rate reduction served the purpose of facilitating investment and production after inflation had subsided, it has recently also become necessary for public finance reasons. The termination of U.S. aid and the slow increase of current revenue forced the Government to issue short-term government bonds to meet the over- all budget deficits as discussed above. Government bonds outstanding at the end of 1967 amounted to NT6.6 billion, or 37 percent of commercial banks' time and savings deposits. It is in the interest of government finance that public bonds can bear an interest rate as low as possible to keep the debt burden low. Also, with a given rate of interest on govern- ment bonds, a fall in the market interest rate would make government bonds more attractive than other alternatives of financial investment, chiefly deposits. For this reason, the interest rate on government bonds (new issues)!/ was gradually reduced from 14 percent in 1961/62 to 10 percent for FY 1967/68 bonds, following the reduction of interest rate on deposits, all selling at par. These rates are for most of this period higher than the rates on three-year savings deposits (9.72 percent p.a. at present). Moreover, interest receipts on time and savings deposits are taxable while interest on government bonds is tax-free. Government bonds are also more liquid, for the Bank of Taiwan has since June 1966, on the instruction of the Central Bank, been buying and selling government bonds at par and thus unlimitedly supported the bond price. The necessity of supporting government bonds may,however,impair the power of the monetary authorities to apply interest rate policy for influencing bank credits, if and when it is needed. 82. The marketing of government bonds has been quite successful, judging from the smallness of the holdings in the hands of the Central Bank and the Bank of Taiwan - being only 7.7 percent of the total amount outstanding at the end of 1967. The largest holders are business and private individuals (42 percent) and commercial banks (37 percent). Government bond holdings by business and individuals have increased at an annual average rate of more than 50 percent in the last two years. The apparent shift of preference from time and savings deposits to government bonds indicates that there has been a redirection of private saving towards the Government, for which the Government is paying interest almost at market rates. 1/ In addition to the ordinary short-term bond (usually 4 years), the Government has also issued patriotic bonds with an interest rate of 4 percent per annum. - 40 - Table 15 Holdings of Government Bonds (million NT$ at end of year) Percentage Distribution 1960 1962 1964 1966 1967a/ 1960 1967 Central Bank and Bank of Taiwan 162 126 154 371 508 25.7 7.7 Commercial Banks 155 352 881 2,049 2,428 24.6 36.6 Other Financial Institutionsb/ 91 214 468 656 908 14.4 13.7 Enterprises (Public and Private) and Individuals 223 431 591 1,677 2,781 35.3 42.0 Total 631 1,123 2,09 2,753 6,625 100.0 100.0 a/ Preliminary. b/ Including Credit Co-operative Associations, Mutual Loans and Savings Companies, Credit Departments of Farmers' Associations, Postal Savings System, Insurance Companies, etc.. Source: Central Bank of China, Taiwan Financial Statistics Monthly. - 41 - Credits 83. During the early 1950's the banking system financed predom- inantly General Government through overdrafts and advances and government enterprises by means of loans and discounts. Along with the agricultural and industrial development and following the Government's policy of encouraging private enterprises, the banking system's accommodation of the private sector later on increased sharjly; it exceeded that to government enterprises substantially in 1960, doubled it in 1964 and almost trebled it in 1967. During the past 11 years, accommodations to the private sector have increased at an average rate of 28 percent, as compared with a 20 percent growth of all credits and investments financed by the banking system. At the end of 1967, loans and discounts of all commercial banks accounted for 71 percent of their total combined assets; more than two-thirds of which were extended to private enter- prises. The Bank of Taiwan as a Provincial Government bank is unique in extending more credits to public enterprises than private enterprises and in equity participation in public enterprises.l/ 84. Following the lowering interest rate policy, maximum legal interest rates on commercial banks' loans have also been gradually reduced by small steps; for secured loans from 21.60 percent per annum in 1955-56 to about 14.04 percent in mid-1963. On May 6, 1967 it was further reduced to 13.32 percent. Similarly, the interest rate on unsecured loans has been reduced from 22.32 percent in 1955-57 to 14.76 percent in early 1966, and further to 14.04 percent on May 6, 1967. The most recent reduction in the rates for loans was larger than for deposits, 1/ The following are loans and discounts of all banks classified according to borrowers outstanding at the end of 1967 (in billion NT$): Central Bank of Other Bank Taiwan Banks Total Private enterprises - 3.87 18.17 22.o Individuals and others 0.45 0.30 5.6o 6.34 Government enterprises - 4.13 4.70 8.84 Government 0.87 0.41 1.15 2.44 Total 1.32 8.71 29.62 39.66 - 42 - narrowing the gap between loan and deposit rates. This move serves to stimulate improvement of banking efficiency. The downward movement of interest rates on loans has apparently helped to stimulate private investment. F. Money and Prices 85. The general price level has been fairly stable since the begin- ning of this decade: Taipei wholesale prices rose at an annual average rate of 2.1 percent and the major city consumers' prices at 2.5 percent. General price stability has been maintained in spite of a considerable increase in money supply, chiefly because of the rapid increase in output and the willingness of the public to hold liquid assets. The increase of money supply, after a substantial slowing down in 1965, quickened again in 1966 (17 percent) and 1967 (27 percent), due chiefly to the fast build- up of foreign assets. In 1967, following another reduction in interest rates, the large expansion of domestic investment, as evidenced by the NT$3 billion increase in bank credits extended to the private sector and public enterprises, was also an important factor. To counteract the ex- pansionary effects of the interest rate reduction, the Central Bank raised simultaneously the commercial banks' reserve requirements to the maximum legal limits (e.g. for commercial banks' demand deposits from 12 percent to 15 percent, time deposits 8 percent to 10 percent, etc.). 86. In 1967, wholesale and consumer prices increased moderately by 2.5 percent and 3.4 percent, respectively. Nevertheless, delayed rffects on prices due to the large increase in money supply may still become noticeable. If real GNP continues to increase a*. 7-8 percent a year and monetization progresses at 2 percent of GNP a year as in the past, any money supply increase exceeding 10 percent a year appPars to require an increase in time and savings deposits as a counter-expansionary factor. However, along with the lowering of interest rates and greater govern- ment bond sales, growth of time and savings deposits has already shown signs of slowing down. Future monetary development will therefore have to be more carefully managed than in the past, especially if the Government's large infrastructure investment would require deficit financing, or if sizable inflow of foreign capital would cause the further build-up of foreign exchange reserves. 87. Prices of individual commodities showed divergent movements in 1967. Some of the largest price hikes - notably in foodstuffs, coal, timber, and construction materials - were related chiefly to temporary inadequacies in supply from over-exportation, rapid urbanization, or production bottlenecks. - 43 - IV. GROWTH OUTLOOK AND PROBLEMS A. Growth Rate 88. The Fourth Four-Year Plan will end this year and the Government is now actively prGparing the Fifth Four-Year Plan (1969-72). The Execu- tive Yuan (the Cabinet) has already approved a 7 percent annual growth rate of GNP in real terms for 1969-72. High Government officials have also indicated publicly some major aspects of development strategies and the Plan framework. The reasons for setting up this somewhat conservative overall target are not yet known. But some of the underlying considera- tions seem to be that the rate of export increase is expected to slow down, that a large portion of new investment will be in the fields of infra- structure and heavy industries with relatively long gestation periods, and that the Government is not in favor of restraining an increase in private consumption for achieving a higher investment rate. 89. As shown in Chapter II, Taiwan's economic growth rate has accelerated from 8 to 10 percent in recent years. While the war in Vietnam has given some stimulus to the recent growth, the depressed world sugar price more or less offset that favorable effect. The impressive economic performance stemmed basically from the gradually built-up dynamism of the economy in meeting changing conditions and moving forward. Internally, there seems to be no sign that momentum is slackening. A few economic indicators available for the first half of 1968 show a continuous trend of growth. Rice crop increased by 3.6 percent, power supply by 14 percent, and industrial production by 18 percent over the corresponding period of 1967. The growth of exports, however, slowed down to 11 percent due mainly to the sharp drop in rice exports and stagnation in sugar exports. Barring any major unforeseen external setbacks, there is reason to believe that the growth trend will continue, although perhaps not at a rate as high as 10 percent, but likely to be at a level above 7 percent in 1968 or even beyond. 90. Moreover, one can also look at the growth trends of the important producing sectors to see what would be the likely overall growth rate. Table 16 shows the annual rates of growth of gross domestic value-added of the major sectors for recent years. Based on the past trends1 and the desirable strategy of development (as will be discussed below) a range of growth rates considered feasible by the Mission is given in the table for each sector. The growth rates for agriculture and manufacturing are / The past growth rates are calculated at current prices, but price changes in 1965-66 were in general rather small. GDP deflators for 1965 is 98.17 and for 1966, 99.60, using 1964 as base year. Deflators for individual producing sectors are not available. expected to slow down as indicated by the recent trend and also because exports are expected to slow down. Particularly in agriculture it is becoming difficult to find new products suitable for export. On the other hand, growth rates for public utilities, transport and housing are expected to go up to meet pressing demand. Other sectors are assumed to grow at the same rate as GNP. The Mission's assumed mini- mum rate of growth for each sector is conservative enough, but when each one is weighted by the corresponding share of that sector in the GNP, the resultant overall growth rate is already above 7.5 percent. Table 16 Growth Rates of Selected Sectors (in percent) Mission's Assumed Feasible Rate 1961-64 1966 for 1969-72 (at current prices (at 1967 prices) Agriculture 9.2 6.2 5.0 - 5.5 Mining 7.6 19.0 6.0 - 7.0 Manufacturing 19.0 13.0 10.0 - 12.0 Construction 8.7 14.8 10.0 - 12.0 Public Utilities 18.2 8.9 13.0 - 15.0 Transportation 13.6 23,8W 12.0 - 14.0 Housing 13.6 9.5 7.0 - 9.0 GDP 13.6 10.9 7.7 - 9.0 a/ Presumably affected by rate increases. Source: For 1961-66, data are from DGBAS national income data. 91. For all these reasons, the Mission considers a growth rate of 7.5 percent more realistic than the 7 percent target assumed for the Fifth Plan. 92. If the economy does in fact grow at an annual rate of 7.5 percent, GNP in 1972 will reach approximately NT$204 billion, an increase by one- third within 4 years. Assuming that the present family planning program will be carried out as expected and that the natural rate of population increase will decline from 2.3 percent now to 2.1 percent, per capita GNP will reach NT$13,380 or an equivalent of US$335 in 1972 (at 1967 prices and exchange rate),comparable to what it was in Japan in 1957, i.e., some 15 years earlier. B. Development Strategy 93. While the draft plan is not yet available, the Mission has obtained a fairly clear picture about the major development strategy for the forthcoming plan. 94. First, the Chinese Government is going to step up further the expansion of economic infrastructure, especially power and transportation; these two sectors will receive top priority in the Fifth Plan. As analyzed in Chapter II, the continuous expansion of the directly producing sectors in the past decade or so has accelerated the demand for services from the economic infrastructure. It is in these fields that bottlenecks are increasingly felt, particularly in electric power, transportation, and urban water and sewerage facilities. In power and transportation, the growth rates in the recent past have appreciably exceeded all forecasts. The need of overcoming these bottlenecks and correcting the imbalances between directly producing sectors and infrastructure has been recognj.zed by the Chinese Government and appears now to be a major consideration in the formulation of the Fifth Development Plan. 95. Secondly, the Chinese planners consider that industrial devel- opment in Taiwan has progressed to a stage that domestic market (and in some cases also export markets), engineering capability, labor skill and other factors would justify the establishment or expansion of more inter- mediate goods and capital goods industries. Thus, a modern integrated steel mill will be established to meet the requirments of the light nachinery manufacturing industry and electrical appliances and supplies industries. Also, two petrochemical industrial complexes will be set up to help develop such related industries as plastics, man-made fibres, synthetic rubber, resin, urea,and other chemical fertilizer industries.1/ Meanwhile, sophisticated industries (e.g. electronics) will be given priority in industrial production in an effort to boost further the Island's indus- trial potential and exports. 96. Thirdly, in agriculture, the development of slopelands, fishery and livostock seems to claim high priority. Promotion of production and exports of vegetables and fruits will be intensified by improved pack- ing and refrigeration. 97. Fourthly, in the social field, a major program of the extension of compulsory education from 12 to 15 years of age is being introduced which will broaden the educational base. Meanwhile, scientific research and technical training will be emphasized by the establishment or irprove- ment of a number of research institutions and technical schools, in order to support technical manpower and skill requirements for further industrial- ization.2/ (This will have to be coordinated with the efforts toward reducing the "brain drain".) 1/ See Annex II for details. 2/ Vice President and Premier C.K. Yen estimated that during 1967-71, the Republic will need a total of 69,200 professional and technical personnel to participate in social and economic development projects. This number will include 1,350 science researchers, 7,650 engineers, and 11,250 technicians. - 46 - 98. A new step has also been taken towards improving the planning pocess. Beginning with the Fifth Four-Year Plan, it has been decided that an over- all resources budget for the whole economy will be prepared annually with- in the general framework of the Four-Year Plan and in coordination with the Government's fiscal budget. While the Council for International Economic Cooperation and Development (CIECD), under the Executive Yuan with the Premier as its Chairman and the Minister of Economic Affairs as its Vice-Chairman, will continue to be responsible for the preparation of the four-year intermediate plans, the preparation of the annual plans is likely to be entrusted to a new committee, with the Director-General of Budgets, Accounts and Statistics (also under the Executive Yuan) assuming the main responsibility, because of the close link between the annual plan and the annual fiscal budget. C. Investment Requirements 99. Gross capital formation as a percentage of GDP had already increased steadily to 23.9 percent in 1967. This trend is expected to continue in the coming 4 or 5 years. According to a staff estimate of the Council for International Economic Cooperation and Development, the rate may go up to 26.9 percent in 1973, allowing private consumption to grow along its past course in relation to GNP and assuming that exports will grow at 12.5 percent per annum. By applying a slightly lower investment rate for 19721L/and a 7.5 percent growth rate, the Mission arrives at a total investment figure for 1969-72 of NT$184 billion. 100. These assumptions imply a rise of the incremental capital output ratio from 2.5 for 1967 to 3.5 for 1972. This increase seems reasonable on account of the above-mentioned development strategy that investments in power and other public utilities, transportation, and education will increase faster thanin other sectors. Moreover, ICOR's for agriculture and manufacturing also tend to increase. 101. In agriculture, fixed capital investment required per unit of output would perhaps be higher, in view of the construction of new irrigation pro- jects, slopeland development, additions to fishing fleet, and more mechanized farming and packing. For manufacturing industry the growth rate (10-12 per- cent) assumed by the M1ission seems consistent with the lower export growth rate believed to be reasonably projected by the staff of CIECD. Here again, the ICOR tends to increase because of recently fuller utilization of capacity and the planned establishment of relatively large-scale heavy industries. 102. However, with only broad "guestimates" on the growth rates and ICOR's, it is difficult to arrive at meaningful investment magnitudes for the various sectors, particularly regarding private investment. For public 1/ CIECD staff assumes the same investment rate for 1972 and 1973; the Nission believes that it would be more reasonable to assume a lower rate for 1972 than for 1973. - 47 - investment, nevertheless, the Mission attempted to suggest some pattern of allocation. The share of Government investment is expected to increase from 37 percent during 1964-66 to perhaps 40 percent during 1969-72 due to Government's heavy responsibility in public utilities (100 percent Government owned and operated) and transportation (62 percent Government in 1966) and the known emphasis on their development, and Government's intention of investing in some heavy industries. Within total Govern- ment investment, the share of transportation is expected to increase substantially and the share of power to remain more or less at the high level of 1966 (and probably also 1967). The share of Government invest- ment in manufacturing may decline only slightly from 1966 (although it will increase in absolute amounts), while that of agriculture and other sectors will decline more, following the trend in the recent years. Based on these prospects and checked with the known Government investment plans, as mentioned in Annex II, the Mission arrives at the distribution of Govern- ment investment in the major economic sectors as shown in Table 17. D. Price Policy, Incentives and Controls 103. In Taiwan, private investment responds very readily to Govern- ment's economic policy measures, such as price fixation, fiscal and financial incentives, tariffs and trade controls, etc. To assure proper allocation of resources, these policy measures must be carefully designed and implemented. In this regard, the Mission feels that there are a few areas in which further improvement is needed. 104. First, the sugar support price appears torequire some reconsid- eration. The Taiwan Sugar Corporation has maintained its price for pro- curing sugar from the canegrowers at the 1963 peak level (approximately US$96 per ton) until early 1966, despite the continuous fall in world market price to around US$h per ton. This policy has resulted in heavy subsidies paid out by the TSC (thus adversely affecting TSC's contribution to Governmevt budget) and in uneconomical utilization of the scarce land resources.1 By the establishment of the Sugar Stabilization Fund in early 1966, TSC has reduced the guaranteed support price to US$82.5 per metric ton, the maximum price provided in the previous now defunct International Sugar Agreement. It has also introduced a scheme of progressively trans- ferring to the Fund larger proportions of the excess value of the actual export price over the guaranteed price. Since the latter is well above the present level of world market price of approximately US$h2, the new scheme is far from operative. In view of the uncertain outlook for a sustained recovery of world sugar prices, one wonders whether the new support price is not too high and whether it would be in the long run interest to the Republic to switch more resources out of sugar production. Particularly, the existing price ratio between sugar and rice is unfavor- able to rice production. 105. The price ratio between fertilizer and rice is another problem. The Taiwan Provincial Food Bureau, which buys fertilizers from both domestic 1/ In fact, TSC did not pay sugar subsidies in only two of the last 16 years. - 48 - Table 17 Gross Fixed Capital Investment of the Public Sector Share in Combined Projected for Public and Private Percentage Distribution 1969-72 (Amount Investment, 1966 (o) 1964 1965 1966 1969-72a in billion NT$) Agriculture 15.1 21.5 10.7 6.2 5.5 3.5 Manufacturing 16.3 16.0 14.6 12.9 12.0 7.7 Public Utilities 100.0 18.0 28.4 33.8 32.0 20.5 Transportation 62.3 24.5 24.6 30.6 37.0 23.7 Others 22.6 20.0 21.7 16.5 13.5 8.6 Total 36.2 100.0 100.0 100.0 100.0 64.0Y a/ Assumed by the Mission. E/ Assuming public gross fixed capital investment will increase to 40 percent of total gross fixed capital investment. Source: DGBAS , National Income Data and Mission estimates. - 49 - fertilizer plants and from abroad is the sole distributor of chemical fertilizers. It in turn supplies the farmer with fertilizers cn a cash basis or in barter arrangements involving the trading of fertilizers for rice. In either case, the prices of fertilizers appear to be too high for the farmer. While TPFB purchased urea at US$125 per ton equivalent from Taiwan Fertilizer Company, the cash price for the farmer was US$160 per t-on in early 1968. The barter ratio was for paddy 1.7 ton in exchange of fertilizer 1 ton, equivalent to a cash price of US$190 per ton.1/ given the present paddy price of US$112 per ton. The average f.o.b. unit value of Japanese urea was slightly below US$80 per ton in early 1968. Similarly, while the cash price of ammonium sulphate to the farmer was about $90 per ton, the c.i.f. unit value in Taiwan was below US$5 per ton. The high fertilizer prices can be explained by the relatively high domestic production costs and the TPFB's realization of some profit margin to finance its agricultural development programs. The Mission felt that the unfavorable fertilizer prices to the paddy grower are, in essence, a form of disguised taxation and as a means of taxation, it erroneously taxes an important input, thus discouraging agricultural production. A better way would be to tax output, after allowing the farmer to use cheaper fertilizers to increase the size of his output. The forthcoming tax reform may offer an opportunity to change the pre- sent system. It is interesting to know that after the Mission left Taipei, the TPFB has reportedly decided to reduce the paddy-urea fertilizer ratio to 1.5:1 and that for paddy to ammonium sulphate from 0.85:1 to 0.83:1. Moreover, the Government expects fertilizer prices to fall after the com- pletion of the new plants operating on natural gas (see Annex II). 106. The offering of various incentives by the Government has been instrumental in stimulating investment and exports. However, whenever an incentive is offered, some administrative scrutiny has to be applied to prevent abuses. Such scrutiny sometimes can be burdensome to private business. A case in point is the administration of the remission of taxes on imports of materials when their product is exported. This in- volves specification of standard ratios of input-output and check on the exporter's actual use of imported materials. More than 5,000 items are now involved and more than 1,000 input-output formulas have been estab- lished. The Mission noticed that the current practice is too bureaucratic and time-consuming. In general, it takes about two months after the actual exportation to get the tax remitted. The calculation of input- output standards for new products for application to tax remission is said to take about six months on the average. With growing industrial 1/ Even allowing interest charges for the period between the supply of fertilizer and the procurement of paddy, it is still much higher than the cash price. - 50 - diversification the authorities are flooded with applications for new items. Moreover, the present system forces the manufacturer/exporter to keep track of all sorts of imported inputs for proof to the authorities that they were really used for manufacturing export goods. It is not hard to imagine the enormous additional red tape which this system causes in the case of complex products like electronic products. The Mission suggests that an immediate serious study on this matter be undertaken by the Government with a view to find the best ways of simplifying the pro- cedures. One simpler method would be the use of duty-exemption certi- ficates by which when an exporter would export certain amounts of finished goods he would be given a certificate of import duty exemption for future imports of the same amount of materials for future processing. He could use the certificate whenever he actually imports the materials. This forward-linked exemption system would havp the advantage of elimina- ting a number of cumbersome steps. 107, Although the Republicts balance of payments has greatly improved in recent years, a comprehensive import licensing system is still main- tained. The Government is gradually liberalizing trade, but the progress has been rather slow. Items which accounted for three-fourths of total import value are still on the "permissible imports" list, requiring licensing. The Mission feels trade liberalization should be accelerated. Ekcept for those restrictions imposed on items for well defined protective purposes, quantitative restrictions should be kept to a minimum. This would eliminate the unnecessary red tape in import licensing and assure smoother supplies of imported materials which are essential for main- taining efficient production. In the meantime, quantitative restrictions applied for protection should be further examined together with the tariff rates to assure that the combined effects of protection are not excessive. E. Mobilization of Domestic Resources 108. In order to achieve the projected target of investment, greater efforts have to be made in mobilizing domestic financial resources. (The prospects of foreign capital inflow will be considered in the next chapter.) Meanwhile, the Government should watch carefully any sign of inflation which may emerge from the continuous increase in the money supply.i/ Latest available data show that the consumerst price index rose substan- tially during the second quarter of 1968. This might partly be due to the increase in commodity taxes and temporary shortages of such items as vegetables and building materials. But the substantial expansion of bank credits to the private sector, to a considerable extent in connection with real estate financing, needs to be carefully examined and, if 1/ See paragraph 86. - 51 - necessary, checked. The existence of an inflation potential points even more to the urgency and importance of a tax reform which, if successfully implemented, can reduce the Government deficit and damp down the real estate fever (by an increase in the rates of capital gains tax). Public Finance 109, In the field of public finance, the Mission feels that the past policy of maintaining low levels of Government expenditure cannot be continued, for there is now great need to expand investment in economic infrastructure, education, etc., and to improve public administration by raising salaries to adequate levels. To cope with all these necessary tasks in an adequate manner, the Government has to find ways and means to increase its revenues. As analyzed in Chapter III, in view of the low overall tax rate it appears desirable to collect more public revenue by improving the tax administration and implementing a tax reform. 110, To the extent that an increase in public saving may reduce private saving, there may be no net increase in total domestic saving. However, financing government investment by current government revenues would be much cheaper than the present practice of financing by borrowing. from the private sector at market interest rates. Interest burden in the Government budget is already snowballing which may necessitate more borrowing in the future and tends to have unfavorable effects on incoma distribution. Also, it will be difficult for many infrastructure projects to bear the rather high market interest rate. Moreover, increases in taxation may not reduce private saving to the full extent, for they also affect private consumption. If the rise in private consumption can be contained to some extent by taxation, there could be a net increase in total domestic saving. To what extent this can be achieved depends, of course, on how the tax structure will be changed. 111, It is gratifying to note that the Chinese Government has already taken steps toward a general overhauling of the tax system and has set up a Taxation Committee in which several leading government officials concerned will participate. The Committee, under the Executive Yuan, with working groups on tax policy, tax administration, tariffs and other special subjects, will recommend to the Government policies and measures for a general tax reform.1 These steps are in line with the recommendations of the previous Bank missions. The Mission feels that revenue collections could be increased particularly from the following taxes: (1) personal income tax, by assessing in greater detail and more objectively the tax base and by preventing tax evasion; (2) business 1/ Professor Richard Musgrave who advised the Korean Government on tax reform will be the chief foreign advisor. - 52 - income tax, by preventing tax evasion, especially of family-held corpo- rations,and perhaps also by some cuts in tax incentives; (3) agricultural land tax, by reassessing the tax base according to up-to-date informa- tion on land productivity; (4) urban land and housing tax, by increasing the rates; and (5) comodity tax, by including more items of new products, which are now being manufactured locally, with higher rates on luxury items.1/ 112, With tax reform and further improvement in tax collection, coupled with continuous economic growth, the Governments at all levels may be able to increase the combined current revenue by 14-1> percent a year during 1969-72 as compared with 12 percent in the recent past (at constant prices). 113. MIeanwhile, Government current expenditures will also increase, particularly for education. Assuming that current expondituras for defense, internal security and general administration will increase at about 9.2 percent a year (chiefly because of continuous salary increases), that current expenditures an education will increase at the past rate of 17.8 percent per year, and that additional expenditures for the extension of free education from the age of 12 to the age of 15 will be necessaryq / total current expenditure will increase at 12.1 percent per year during 1969-72. 114. Following these broad projections Governmentts current revenue will reach about 23 percent of GDP in 1972 and current Government expenditures 21 percent. General Government savings will increase from less than one-half of one percent estimated for 1967 to 2 percent in 1972; such savings could be used for financing capital expenditure. l15. In addition, depreciation allowances and retained earnings of public enterprises will tend to rise steadily, if rates in transportation, power, water, etc. are allowed to increase further/ and the sugar support 1/ New changes in commodity tax have already been put into effect in mid- June 1968, which include increases of tax rates for 5 commodities (plastics, rubber tires, cement, gasoline,and diesel oil) to 20-55 percent and additions of 7 new items (radio receivers, electric fans, electric motors, sewing machines, automobiles and motorcycles,and some steel products) at 10-20 percent. 2/ According to the Ministry of Education, for the three-year period through FY 1970/71, at the end of which compulsory education will have been expanded for children up to 15 years of age, additional outlays totalling NT$3.6 billion will be required. A total of NT$2,8 billion is to be financed by Taiwan Provincial Government, NT$0.2 billion by Taipei Phnicipality,and NT$0.6 billion by CIED for capital expenditures (school buildings) from Counterpart (SAFED) funds. 3/ If for non-economic reasons the Government decides to keep rates low, there is hardly any other alternative for providing the required funds but to increase tax and other revenues so as to realize a larger surplus on the current Government budget. - 53- price is cut down. The rate increases, particularly in power, will help the public utilities -to generate more internal,finance for expanding the facilities. However, to put it conservatively, such savings as a percentage of GDP may remain more or less the same through 1972. 116. In short, it is clear that in public finance, more efforts should be made in collecting more tax revenues and in generating more internal finance in public enterprises. If the resulting increases in revenues from these changes still cannot moot the required Government current and capital expenditures, the Government should try to borrow at longer terms than in the past, so as to mobilize more long-term savings, avoid competition with time and savings deposits and lighten the annual debt burden. Private Finance 117. Domestic private savings will continue to rise but because of the expected increase in tax payments it may not rise as fast as in the past. Projected as residue of total and Government saving, it is expected to increase modestly to over 18 percent of GDP in 1972, One urgent task needed in the field of private finance is to make more medium- and long- term capital available to private enterprise, 118. At present, credits extended by the banks are mostly short-term with a maturity of one year or less because the present banking law forbids them to offer long-term finance. Only their savings departments may extend loans with maturities of up to 2 years. Any longer term loans can only be extended with the approval'of the inistry of Finance for special purposes, such as housing projects, etc. -As bank loans are the chief source of finance for private enterprises, such concentration on short- term lending creates a shortage of medium- and long-term funds. This is increasingly felt since Taiwan has developed a great variety of manufac- turing industries which require loan capital to finance part of their fixed assets to operate in increasingly round-about production. The equity capital market is still in an infant stage. Moreover, owing to the small scale, the great majority of private enterprises is in any case not qualified to float bonds or shares an the security exchange market. Therefore, many business firms often borrow from relatives and friends or other private lenders at interest rates higher than the bank rates. This could trigger off a wave of bankruptcies in the event of a general slackening in business which would squeeze earnings. 119. On the other hand, large amounts of savings and time deposits with terms of one year and over (84 percent of total savings and time deposits of all banks) are maintained in banks and could be utilized more for medium-term finance. (See Table 18) In fact, a considerable portion of short-term loans has been rolled over by continuous renewal. It would be beneficial to both the lender and the borrower if the present legal ' terms of lending were lengthened, say to 5 or even 7 years. In addition, some kind of term loans could be introduced, under which private enter- prise could manage their cash flows better and the banks could plan their liquidity more precisely. All this would require a reform in the banking laws which is being seriously considered by the Chinese Government. Table 18 Loans and Discounts and Deposits of All Banks by Maturities (in billion NT dollars, at the end of 1967) Short-Term Medium- and Long-Term Loans and Discounts Less than 3 months 9.82 More than 1 year to 2 years 1.61 More than 3 months to 6 months 8.42 More than 2 years to 3 years 1.16 More than 6 months to 1 year 11.67 Over 3 years 6.98 Total 29.91 Total 9.75 Grand Total: 39.66 Deposits Held by Enterprises and Individuals Demand Deposits 12.99 Time and Savings Deposits: Time and Savings Deposits: 1 year 15.74 2 years 3.23 1 month .66 3 years 1.40 3 months .73 10 years .o 6 months 3.50 Foreign Currency Deposits 1.01 Total 17.88 Total 21.42 Grand Total: 39.30 Source: Central Bank of China, Taiwan Financial Statistics Monthly The Resource Gap 120 As projected above, the Republic of China in 1969-72 may be able to generate NT$163 billion domestic saving which can finance about 88.6 percent of the total required investment, leaving a resource gap of NT$20-22 billion (or US$5o0-550 million) to be financed by foreign capital. Granting the difficulties in projecting year-to-year changes, it is expected that in 1972, the resource gap will be slightly over 3 percent of the projected GDP. - 55 - Table 19 Projected Investment and Saving (in billion NT dollars) As Percentage of 1269-72 GDP in 1972 Gross Capital Formation Gross Fixed Capital Formation 159.70 23.2 Changes in Stock 24.42 3.0 Total 184.12 26.2 Gross Domestic Saving General Government 9.04 2.1 Public Enterprises 22.56 2.9 Private Sector 131.52 18.1 Total 163.12 23.1 Resource Gap 21.00 3.1 Source: Mission projections - 56 - V. EXTEAL FINANCING REQUIREM TS A. The Trade Gap 121. The phenomenal export expansion has somewhat slowed down recently. Total merchandise export earnings in 1967 increased by 16 percent as compared with a rate of 22 percent in 1962-66. This trend of somewhat slower growth may continue for some time. One projection put Taiwan's export growth rate during 1966-70 at 14 percent per annum, after an item by item examination by either extrapolating the past trends, or adopting the plan targets, or pragmatic (or somewhat arbitrary) determination.1/ The CIECD staff believasthat the export growth in 1969-72 may be even slower for various reasons. First, the processed agricultural exports which accounted for 27 percent of total exports in 1967 are expected to encounter growing trade obstacles in importing countries and difficulties in finding new lines. Export markets for sugar at present are particularly discouraging. Among agricultural produces, while bananas and vegetable exports may grow fairly rapidly, rice and other exports tend to decline. Industrial exports, now accountdng fbr 57 percent in total exports, slowed down from an annual rate of 34 percent increase during 1962-66 to 2A per- cent in 1967. While industrial exports in the first quarter of 1968 had probably increased faster than in 1967, it is expected that during 1969-72, the rate of increase may drop because of the possible decline in export demand in connection with Viet-Nam, and the growing competition from other developing countries. Net foreign exchange earnings from non-factor services may also not rise as much as in the recent past, if tourism income in connection with Viet-Nam dwindles. For all these reasons, the CIECD staff believesthat exports of goods and non-factor services during the next plan period are likely to grow at 12.5 percent per annum. The Mission feels that this is a reasonable assumption. 122. On this basis and assuming imports of goods and services will close the resource gap projected in Chapter IV, the Mission estimated that exports, importsZ/ and the trade gap for 1969-72 will be as follows (The trade gap of US$525 million corresponds with the resource gap of NT$21 billion in Table 19): 1/ See "The Republic of China's Export Possibilities of Manufactures and Semi-Manufactures", Joint ECAFE/UNCTAD Survey, September 1967. The study apparently did not project separately export quantities and price movements. 2/ Imports of goods and non-factor services will therefore grow at 12.8 percent per annum during 1969-72, as compared with 11.8 percent during 1962-66. - 57- Projected Exports and Imports (million US dollars) 1967 1972 1969-72 Exports of goods and non-factor services 768 1,383 4,677 Imports of goods and non-factor services -884 -1,546 -5,202 Trade Gap -116 -163 -525 B. External Financing Requirements 123. In addition to the need for closing the trade gap of US$525 million for 1969-72, external finance is also required to allow the maintenance of an adequate level of foreign exchange reserves. In view of the growing diversification in export commodities and markets, Taiwan's export fluctuations tend to be further alleviated and for that reason a level of foreign exchange reserves equivalent to 4 months' imports may perhaps be adequate. On this assumption, and theexpected increase of exports, the Republic need not increase its foreign exchange reserves until 1970 but after 1970 some increases in foreign exchange reserves will become necessary. 124. While official grants are a matter of the past, private transfers and direct investment although relatively small, can still meet part of total external capital requirements. The Republic is taking progressive steps in attracting foreign private investment by offering incentives and streamlining procedures; thus direct investment is assumed to increase moderately. The likely inflow of net private transfer is assumed to follow the past trend. 125. By counting the need for increases in foreign exchange reserves and deducting private transfers and investment, total net external loan capital required for the Fifth Plan period is estimated at US$520 million. 126. Additional capital inflow is also needed to allow the servicing of existing and new external debts. Service on existing external debts is projected according to known interest rates and terms.1/ Service on new debts is projected on assumed interest rates and terms on new loans. 127. At present the major portion (estimated at over 80 percent) of official U.S. loans has been extended at concessional terms to the Republic, mostly at 3.5 percent interest with 15-30 year loan period; the rest has been on conventional terms. It is likely that in the future the proportion of concessional loans may decrease. One-third of the official credits from Japan for financing the Fourth Plan have been extended on concessional terms and two-thirds on conventional terms. The Republic 1/ See Statistical Appendix Table 2. Figures used in this Chapter are slightly higher than those in the Table, because of the inclusion here of some estimated amounts of service on two debts not included in the Table. -P 8 - may be able to obtain some more concessional loans from Japan for financing the Fifth Plan. In 1967, among the US$100 million net medium- and long-term capital inflow it is estimated that 40 percent was on conventional terms, 25 percent on concessional terms, and 35 percent from private sources on commercial terms predominantly in the form of suppliers' credits. Assuming that in the future 50 percent of new loans will be conventional, 40 percent commercial and 10 percent concessional,1/ the service on the projected amount of new external debts is estimated at $100 million for 1960-72. Adding all debt service to the new loan capital required, the gross external loan capital requirement is estimated at around US*8rn million during 1969-7?. Table 20 Required External Financing, 1969-72 (in million US dollars) Net Capital Requirements 525 Increase in Foreign Exchange Reserves 123 Minus: Net Private Transfers 65 Direct Investment 63 Net Inflow of External Loan Capital 320 Add: Service on External Debts: On Existing Debts 186 On New Debts 100 Gross Inflow of External Loan Capital i Source: Mission Estimates C. Possible External Sources of Funds 128. In addition to the undisbursed portions of existing loans of US$185 million, the Republic plans to borrow new loans of about UStl,000 million during 1968 and the Fifth Plan period. About one-half of this amount is expected to come from Japan, one-fifth from IBRD, and the rest from the United States and other sources. Out of the total amount in the pipeline and of new loans, of course, only one part will be disbursed during the Fifth Plan period. In case the Republic cannot obtain the 1/ The interest rates and terms are assumed as follows: Distribution Interest Grace Repayment () Rate (%) Period Period 7Years)T Conventional 50 6.5 18 Commercial 40 7.5 1 7 Concessional 10 3.5 6 25 - 59 - amount it needs to be disbursed during 1969-72, it may have to incur additional suppliers' credits. There have yet been no issues in foreign private capital markets. Possible External Sources of Funds (million US dollars) In Pipelinea Expectedt/ Total U.S. Government Loans 58.8 180.7 239.5 Export-Import Bank (37.5) (180.7) (218.?) AID (0.7) - (0.7) PL-480 (20.6) - (20.6) Japan 60.3 55.0 605.3 IBRD 53.0 219.8 272.8 ADB - 5.0 5.0 Others 12.8 51.7 64.5 Total 184.9 1,002.2 1,187.1 a/ Debt with an original or extended maturity of one year or more undisbursed at the end of 1967. b/ Expected to be negotiated or contracted during 1968-72. Source: Statistical Appendix Table 1 and CIECD's answers to IBRD questionnaires. 129. Annual debt service, at 5.6 percent of exports of goods and non- factor services in 1967,is expected to rise further to 7.2 percent in 1972. By 1977, it is likely to reach over 11 percent, but the expected decline in the new capital inflow after 1974 will bring the debt ratio down after 1977. With the dynamism now firmly built in both the public and private sectors, there is little doubt that the Republic can absorb the required amount of foreign capital and make efficient use of it. Assuming no considerable step-up in military imports or major export difficulties, the assumption of additional debt required for continued expansion should not constitute a serious burden on the economy. In view of the substantial growth and export potential which can be realized after the bottlenecks in infra- structure will have been overcome, the Republic of China's capability in servicing external debts should remain ample, provided that suppliers' credits do not assume too large a proportion in the total debt structure in the future. ANNEX I Population Growth and Family Planning 1. In the past 20 years, population growth in Taiwan had shown significant changes. Aside from the sudden large immigration of the Mainlanders during 1946-49, on account of the civil strife after the end of the second World War, the natural rate of population increase has shown a pattern of a long wave. In 1947, owing chiefly to the high death rate of 18 per thousand, the natural rate of population growth, at 20.9 per thousand, was comparatively low. Since then, while the death rate dropped sharply to about 8 per thousand in 1956, the birth rate rose to a peak of almost 50 per thousand in 1951 and then fell gradually to about 45 in 1956. As a result, the natural rate of population increase reached a peak of 38.4 per thousand in 1951, fell slightly since then and remained at a plateau of 36.5 per thousand during 1953-56. Since 1956, the birth rate has shown a continuous and significant decline at a rate faster than that of the death rate, resulting in a continuous fall in the natural rate of population growth. This trend accelerated particularly after 1964. Between 1964 and 1967, the death rate remained virtually constant at 5.5 per thousand while the birth rate dropped from 34.5 to 28.5 per thousand. Thus, although the natural population growth rate at 2.3 percent and the total population growth rate at 2.6 percent in 1967 are still high (approximately double the population growth rate in most developed countries), Taiwan is successfully going through a demographic transition. 2. At this stage of transition, the rapid population growth has resulted in an unfavorable age composition of the population and a high dependency burden. At present the population aged less than 15 years was about k percent in Taiwan as against 22-31 percent in developed countries. Consequently, every hundred people of working age in Taiwan must support 88 dependents (including population of 65 years of age and over) in addition to themselves, as compared with 50 to 60 in advanced countries. But one consequence of the continuous decline in the birth rate will be a decrease in the dependency burden. The proportion of the population aged less than 15 years will fall from approximately 44 percent in 1966 to approximately 34 percent in 1982. Another con- sequence which w,jill necessarily follow some years later, will be a slowdown in the growth of the labor force. It is projected that the annual growth rate of the labor force between now and 1970 will be 3.5 percent and will fall to 3.0 percent between 1977 and 1982.1/ Thus the solution to the unemployment problem, in the middle run at least, will depend on the creation of additional jobs rather than a reduction in the growth rate of the labor force. 1/ Based on figures from Manpower Resources Committee, Council for Inter- national Cooperation and Development, The Study Reports of Eight Workin Groups in the Development of Manpower Resources, p.221. - 2 - 3. The population is rapidly becoming more urban. Between 1958 and 1962 the proportion of the population living in urban areas increased from approximately 33 to 43 percent. Undoubtedly, the decline of the birth rate is partly a natural result of urbanization as is experienced in most industrialized countries of the world. At the same time, the existence of a highly effective family planning program has accelerated the trend toward declining birth rate. While one cannot be sure what would have been the fertility rate if there had been no family planning program, it is perhaps relevant to note that the crude birth rate has declined twice as rapidly since the introduction of the family planning program in 1963-64 as in the previous five-year period (1959-63). 4. This family planning program was initiated originally as a health program without a formal policy statement on birth control from the highest political level. The emphasis on the health aspects of the program made it more acceptable to the people than it would have been otherwise. The program has also been assisted throughout by careful collection of birth statistics and empirical studies of various birth control preferences among different segments of the population. Family planning has been extensively carried out through civilian and military channels. The civilian program is mainly carried out by the Taiwan Provincial Health Department, which has a special family planning health unit with an additional employment of 450 full time field workers for home visiting and educational purposes and 650 privately practicing gynecological doctors and general practitioners contracted to give IUD insertions. The military program is carried out by the Surgeon General's Headquarters for conducting family planning education to new military recruits in a dozen training centers and by the Chinese Women's Anti- AggressionAssociation for home sanitation improvement and family plan- ning education of military dependents' villages. Other organizations including the China Family Planning Association, farmers' associations and local governments also have family planning motivation programs. 5. By the end of 1967, a cumulative total of 381,800 IUD's had been inserted, corresponding to 23.5 percent of the total married women of ages 20 to 4h. Thus, nearly one out of every four eligible women had had an IUD insertion. However, the number of loops "currently in situ" at any point in time is much lower, since many IUD's are expelled or removed. Should the present monthly number of insertions continue, it has been calculated that by December 1969, close to 14 percent of the total married women aged 20 to 4 will be "currently using the loop". The IUD program has been supplemented by a pill program which, though still relatively small, is expected to be useful. 6. The economic effects of the program appear to be substantial. For instance, in the field of education, one estimate based on population projections with and without the birth control program indicates that the family planning program by reducing population will have saved the Chinese Government NT$5,437 million by 1982 while the program itself will have cost only 10 percent of that amount. Similarly, it has been -3- estimated that with a successful family planning program Taiwan could save 45 thousand metric tons of foodgrains in the 5th year, 200 thousand in the 10th, 500 thousand in thelyth and nearly 1 million metric tons in the 20th year of the program, 1/ See George Zaidan, "The Progress of the Family Planning Program in the Republic of China and Some Economic Implications" (mimeographed). ANNEX II Sectoral Development Programs Indicated for Inclusion in the Fifth Plan 1. Although the final draft of the Fifth Plan is not yet complete, high officials in the Chinese Government and unpublished documents have indicated the important development programs and the sectoral emphasis for the forthcoming Plan. The following is a summary of programs based on information known to the Mission. Agriculture 2. Quantitative estimates of agricultural investment in the Fifth Plan are not yet available. The emphasis seems to be on (a) land development through terracing, land consolidation and better irrigation facilities; and (b) improvement of land productivity through further crop diversification and increased use of fertilizers, insecticides, and other agricultural inputs. 3. Slopeland development covering about 1.33 million hectares has to overcome difficult soil conservation and land ownership problems. Profitable crops will have to be found and expensive investments will be needed for assuring adequate water supply. Land consolidation, a precondition for meaningful irrigation development, has been carried out successfully thus far and is expected to be completed during the Fifth Plan period. A number of irrigation and ground water development projects are planned. Among them the largest one is the Tsengwen Dam, a multi-purpose power and irrigation project which is being constructed by the Vocational Assistance Commission for Retired Servicemen.1/ The project is supported by a Japanese loan of US$hh million which has a repayment period of 20 years, a 5-year grace period and an interest rate of 3.5 percent. Japan has also provided engineering consulting assistance. 4. More up-to-date techniques will be introduced in crop cultivation (especially rice) and the growing of vegetables and fruits. These include seed improvement, pest control, fertilizer application, soil and planting management, etc. Facilities providing for the containerization of exported bananas will be completed by 1970 and new deep-freezing and canning facilities for other exported fruits and vegetables will be developed. 1/ Under the Executive Yuan, the Vocational Assistance Commission for Retired Servicemen resettles retired servicemen and, if possible, employs them in various productive ventures. - 2 - 5. Livestock development will further concentrate on pork and chicken. Stricter veterinarian and hygienic standards will be implemented in order to overcome mstrictions by potential importing countries, particu- larly Japan and the U.S.A. In addition, Taiwan's still small beef industry is to be expanded. 6. In forestry, the major program is the conversion of 25,000 hectares of poor hardwood forests into land planted with fast-growing high-quality softwood and hardwood species. 7. The Taiwan Provincial Government has envisaged a very ambitious fishery and maritime resources development program for 1968-72, providing for a total investment of NT$5.88 billion, largely for adding 155,000 tons capacity to the existing fishing fleet. Under this program fish catches are expected to increase from 458,000 MT in 1967 to 800,000 MT in 1972, largely for sales abroad. Manufacturing 8. Major industrial development programs in 1968 and the Fifth Plan period include the first steps for the establishment of an integrated iron and steel plant, the expansion of the capital goods sector, the build-up of the chemical and petrochemical industry, and further promotion of the rapidly expanding electronics industry. While the electronic industry will substantially enhance export earnings, the others serve primarily for import substitution. Simultaneously, textile and food-processing industries will be expanded further. 9. Expecting the rapid pace of industrialization to continue in the future, the Government has decided to establish a modern integrated iron and steel plant, mainly for supporting forward-linked industries, such as automobile production, shipbuilding, food processing, and machinery manufacture. The plant may also increase the Republic's sizable quantities of iron and steel exports. The Government expects local demand to rise to 1.28 million MT by 1972 from 730,000 111T in 1967. 10. The planned integrated mill, to be located in Kaohsiung, will eventually have a production capacity of 2 million MT by 1981. The construction will follow a path of "backward integration" in four stages to match expected market demand: (1) cold mill and tinning line with initially 500,000 MT capacity (1969-1971); (2) semi-continuous hot strip mill with total rolling capacity raised to 1 million MT (1971-1973); (3) iron and steel making units with total capacity of 1 million MT (1973-1976); and (4) expansion of the integrated mill's production capacity from 1 million to 2 million MT (1976-1981). 11. A committee has been set up in the Executive Yuan to review all the engineering and financial progress in connection with the project. The project is expected to be a joint investment between the Government (40 per- cent), foreign private investors (40 percent), and local private investors (20 percent). The first two steps (1969-1973) will require total investments of US$92.5 million, of which about US$60 million will be in foreign currency. US$36 million in Japanese loans have already been secured. - 3 - 12. For the Fifth Plan period, investments in machinery industries (including automobile production but excluding shipbuilding) are estimated to total US$52 million, of which about US$12 million will be in foreign exchange. At the same time, ship construction and repair facilities are to be substantially expanded. The Government-owned Taiwan Shipbuilding Corporation alone will complete a US$9 millioni/ investment program by 1970 enabling it to accommodate 100,000 ton tankers and to raise its production capacity from 40,000 dwt to 150,000 dwt. Another big ship- yard will be built as a Sino-Japanese joint venture-2/ involving invest- ments of USM million. To satisfy the country's growing motorization demand, local automobile production is to be increased to 20,000 units by 1972 and motorcycle output, presently 105,000 units, is to be raised to 180,000 units. For this purpose, three new automobile plants were approved in 1967 and early 1968; all of them have technical cooperation contracts with leading Japanese manufacturers. 13. The Kaohsiung petroleum refinery, at present processing 60,000 barrels of oil a day, is being supplemented with a new topping unit increasing total capacity to 110,000 barrels per day. The enlarged refinery will be the basis for the new planned southern petrochenical complex using petroleum reformate and naphtha as raw material.2' Another petrochemical complex is being set up in northern Taiwan to produce acetylene and ethylene using the recently discovered natural gas (ethane) deposits. After completion of the complexes by 1972, Taiwan will be independent of imports of all major synthetic fibers and other petrochemical intermediates needed by its textile and plastics industries. In addition to substantial import savings, the Republic expects by 1972 to export sizable quantities of petrochemicals, especially DMT, ethylene dichloride, and methanol. A highly desirable aspect of this project is the market share device in cooperation with the Republic of Korea which will supply caprolactam to and import DMT from the Republic of China. 14. As a result of expanding urea output, nitrogen fertilizer production exceeded domestic consumption in 1967. It is now planned to raise ammonium sulphate output to meet domestic demand in 1969.4/ Some plants are being modernized to produce compound fertilizers for special crops, such as sugarcane and pineapple. By establishing new plants and modernizing the existing ones, it is expected to reduce the relatively high production costs for fertilizer in Taiwan. 1/ Included in this amount will be the equivalent of US43.2 million in Japanese yen credits. 2/ C.Y. Tung Group and Mitsubishi Heavy Industries of Japan on a 50:50 basis. 2/ As first steps a US$9.5 million naphtha-cracking plant of the Government- owned Chinese Petroleum Corporation in Kaohsiung was completed in mid-1968. It will supply ethylene as raw material to a UStl5 million polyethylene resin plant, a private U.S. venture, which was completed at the same time. 4/ A US$25.6 million nitrogen fertilizer plant leased on natural gas was inaugurated in northern Taiwan this year. Annual output will be 100,000 MT urea and 150,000 MT ammonium sulphate. Power 15. The Premier has announced that the existing installed power generating capacity of 1,600 megawatts will be expanded to 3,000 mega- watts by the end of 1972. This gives an annual rate of expansion of approximately 15 percent. According to the Taiwan Power Company's financial plan, the corresponding investment requirement would be NT$14 to NT$15 billion, of which about 37 percent, or US$135 million, would be in foreign exchange. The major hydro project will be the Ta Chien Reservoir project, which the Bank has been asked to finance, and the Tsengwen Dam mentioned before. There will also be 5 new major thermal plants with 300 MW each. Transportation and Communications 16. The transportation and communications development program is reaching the final stage of preparation at the Ministry of Communica- tions. The general theme is to catch up with the increased demand and then keep pace with future growth. Total costs of development expendi- ture for this sector for 1969-72, first estimated at NT$20 billion, have now been raised to NT$30 billion. Final adjustments will have to be made when the program is coordinated with the overall plan. 17. In railroad transport, the estimated growth is now 8 percent a year for passenger service and 5 percent for freight service. A major project in railway expansion will be the double tracking from the center to the south so as to make the whole north-south trunk line a double-track railroad. The largest investment expenditure will be the purchases of new locomotives and cars from abroad and some cars from domestic sources. The 37 railroad crossings in Taiwan will be elevated, and a new 10-story Taipei railroad station will be built. 18. In road transport, a four-lane north-south expressway will be built section by section in the next four years. For this purpose a US$62.5 million loan is being sought from external sources. Also planned are improvements of existing highway and local roads and construction of feeder roads. The foreign exchange requirements in financing these projects seem rather small. 19. In port development, construction of a second entrance to the Kaohsiung Harbor has already been started. This together with further improvement of the two major harbors of the Island is expected to double the total handling capacity by 1972 to 2 million tons. 20. In shipping, merchant fleet tonnage will be increased by 500,000 deadweight tons, an increase of 50 percent. In addition, there will be two new 90,000-ton oil tankers. The purchases of ships and oil tankers will perhaps be the largest foreign exchange spending item in the transport plan. 21. In telecormunications, some 220,000 automatic telephone lines will be added which will enable the Island to double its total number of telephones. Another Trans-Horizon Microwave System between Taiwan and the Philippines will be completed by 1968 and a ground station for a global satellite commercial communications system will be established in 1969. 叩