China - Industrial development and policies

Irv TRN T&1- %R DESK RESTRICTED -" n V [ IV Report No. IE-31a 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 The report may not be published nor may it be quoted as representing their views. LI INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT' ASSOCIATION REPORT ON TN-nTTTTPTAT. TrEVrT.0 MEPX4AFNT ANT) PC)T.TCTr IN THE REPUBLIC OF CHINA April 28, 1964 Department of Operations Far East TABLE OF CON1TENTTS Page 1o INTRODUCTION i CONCLUSIONS AND RECOMMINDATIOTS i A. Pattern and Conditions for Growth i B. Specific Measures to Support Growth ii C. Summary of Areas Requiring Special Study iv I. Recent Performance 1 II. Structural Problems 3 III. The Pattern of Future Growth 5 IV. The Architecture of Growth 5 (a) The need for planning 5 (b) A growth model 6 (c) Economic priorities 6 (d) Sector and feasibility studies 7 (e) Coal and steel 8 (f) Organization of economic planning 9 V. Direct Controls versus Tariffs 10 VI. Public Industrial Enterprise 11 VII. Industrial Finance 14 APPENDICES B. Tentative Projection of 1968 Investment Requirements in C. The Coal Mining Industry J.J Dc CIA&JontoLs anoLmLs E. Direct Controls aaad Customs Duties X e Vata onJ ULJ±-LLU ;1UZLJ-L Report on Industrial Development and Policies in the Republic of China INTRODUCTION The following observations are based upon a visit to Taiwan November 7 to December 6, 1963. This visit was in response to a request in April 1962 by the Republic of China for a general review of its industrial development and for advice regarding proper policies to foster industrial growth. The specific purpose of the mission was to ascertain the need for a comprehensive survey of in- dustrial policies in Taiwan and to formulate proposals for such a survey, if it appeared to be needed. In actual fact. it proved nossible to advance somewhat beyond these terms of reference. This was due essentially to three factors. In the first nlace. there exists a framework of analyses and data which, in spite of certain shortcomings recognized by the government and by the Committee for International Economic Cooneration and Development (CTECD). gives some guidance regarding the desirable future pattern of industrial growth and hence of the industrial nolinie needed. Spcondiv- number of nolicies have been instituted which, with exceptions to be noted below, will go a long way towards fntPring inditrial develonmen+ nho ives Finally Wr KT- T (then Secretary General of the CIECD) and his staff, made a prodigious effort in Y% r nmrl4 na fhnv~ r1e% innn+A ^r) - mr] li n-vnii",q n"eq -n e"i -v7+,~ 1 n-r (7 nvro unstintingly of their time and their experience. Before the conclusions and recommendations of this report are Svil 4ot J+ ja +r%~ 4riYM i- n ri +n ^P tmin,+-je-tn. OYnT +1 -? Taiwan is too short a time to permit a full understanding and a full discussion P all m rain mann,+e Of 4"Ade+"4 91 q_1_ C1 Pe 1P +I, -AA- +h4o- ; report are more tentative than others. All should be regarded as working -LAI V14% V V-L1LLA.J.(MU~ 1U LUL UVL VLU r1L CUI%A as,J Lp CO 1 U U On-Tn9TTTQ'r^1rLT0 A%Tn~f rVY%1fiM'1,7rAM~TM1,TQ A, . -AUL1 i-Piu %.JoU'.LUL1O L U.LUWU11I Recent performance. The solid performance over the recent decade and the favorable industrial climate hold great promise for the future. Never- theless, in oraer lor growth to continue at recent rates, Taiwan will not only have to expand existing exports in the face of increasing competition but also, increasingly, to steer into industries requiring more research and tech- nical know-how, higher standards of quality and more massive capital investment. - ii - that industrial growth averaging 9 per cent cumulatively from 1962 through .L7UU _Ls fudAasible ad.U coist~± entL wuIjl J %Li ,l P 1Li CLLIULAIL r LUvl 44 gross national product. According to these projections, the components of manufLauuur±ug growun M_LKIIU UU vjlumitwt ab iu.LuW; inereasuu dumesic on sumption (about one-half), exports (about one-third), import substitution Le-bZss than on-fift Such gUWth, hUWeVe, will not Ucur unlus imagina- tive and vigorous action is taken in several areas. Conditions for vigorous growth. The main principles by which dynamic Iuu'UILal growth wil be acueveu on Iaiwau are kaj a rlIentilt:U UAPUIUp offensive, (b) a deliberate demobilization of direct controls and their replacemuv w±v a carefufly devised new customs tar_i so as to give industry the toughness and flexibility which only a free market can offer, au c) uechnical and financial assistance to existing enterprises in mak- ing the transition from small scales of output and traditional operating methods to a modern highly flexible and competitive industrial society. Reflecting the changing structure of industrial output, investment requirements in manufacturing are likely to increase sharply and financing these investments may become a major problem (a) in sectors requiring heavy capital investments and (b) for small- and medium-sized enterprise (below the size normally served by the China Development Corporation). B. Specific Measures to Support Growth Comprehensive survey. There is no need for a full-scale comprehensive survey of Taiwan's industrial development and industrial policies. The general lines, along which the economy must develop, are well understood by leading officials. Some policies, e.g., with respect to export promotion and the encouragement of foreign investment are excellent and could serve as an example for other developing nations. An imaginative program of tech- nical assistance of particular benefit to small- and medium-scale enterprise has been launched. In certain other areas, however, action is needed to clarify public policy and to remove obstacles to growth. The architecture of growth. To fim up industrial programing and to make it a more useful tool in policy-making, strengthening is needed in the following respects: (i) A clearer outline of the future growth pattern. This will require neither large audditions to the present CIECD staff nor complicated economic calculations. Essentially, it means pulling together existing imformation in a systematic manner and attending to certain major gaps in the analysis. (ii) Economic priorities. The analysis of economic priorities will have to be pushed and some specific guidelines developed. - 111 - (iii) Sector and feasibility studies. More and better sector and feasi- bility studies are needed. (iv) Top-level advice. To give impetus to a programming effort along the above lines as well as for advice on industrial policy, it is recommended that the Chinese Government employ a top-level economic adviser reporting to the Secretary General of the CIECD. Full- time advisers on the development of the forest products, chemicals, and engineering industries are also recommended. Revision of the imort tariff. The major reason for retaining direct controls over imports and investments is that the customs tariff is not adanted to present needs and realities. It is recommended that areater pressure be put behind the revision of the present tariff. Certain general economic Puidelines are -rovided for such a revision. Future role of nuhli c enternri -e qnd nnhl ic financing in the manufacturing sector. Public enterprise accounts for about one-third of the total vqlnue qde(i in mannfacturint T+.-is prnminent. in, or ant tri enter, certain fields, from which much of the future dynamic growth may have to cnme. At the nrqnt moment, the national and nrvinninl onvPrnment nre burdened with the administration of many enterprises scheduled for eventual trnqf'Pr irt.% nrivate hands. A+.+he Qo +.rmo incniffiint .fttn n is devoted to assistance in (a) the reorganization of certain industries (coal stenel and paper are likely candidat.es) and (h) the launnching of new pioneer ventures where the financial requirements and/or risks are too ,gea+ fon +hm +n h 44+4-+ti wr -4+1-a+ r+ e-= Wyvov. adv,o( should be sought regarding Government policies and administration in this z_ea. Some preliminary ideas on Subje,-.4ct ar 4,n this Me1t .IUUs_1_1.LLL I .LlicU1ut:. XU1:t 1 I vt InvestLU MiV~ iet-. cannotL I. e cou,4-l ~L A upon to grow much above the present annual flow. Additional foreign funds, projects. Even so, growth will depend mainly upon the quality of incen- U.1. CUI"' .L11OUJ.U%ALL O J .JL UO LI . AjV O tt-U I1l .L.LVVY UL k1V1i1UO LLt, PjJL..V 0. savings into manufacturing. Present incentives would seem excellent. A ew suggestions are Miaue LUwaru ImprvuemienU ±n 1±1uanc± inu11 aouaLLuneLZ;. Thus, it is recommended that a study be made of possible improvements in commercial banking. A separate stuuy (sultably co-ordinaLea with tne first one) should be made of finance, particularly of a medium and long-term nature, for meium- and small-scale business. - iv - C. Summary of Areas Requiring Special Study Areas of industrial planning and policy requiring priority are summarized below: (I) Top-level economic adviser (witn main focus on the industrial field" (2) Full-time technical-economic advisers on the development of the forest products, chemicals, and engineering industries. Similar advice may be needed in the handicrafts sector. (3) Sector studies for coal and steel. (i) Advice on revision of import tariff. (5) Advice on policies and administration of public enterprise and of public financial support for the industrial sector. (6) Study of commercial banking with special reference to industrial development. (7) Study of finance for medium- and small-scale business. In one or two of these areas, the Chinese Government may choose to institute the necessary changes without calling upon special outside advisers. Nevertheless, it is the feeling of the author of this report that imoartial foreign advice should prove helnful in most of the areas. The Chinese Govern- ment is. in fact. alreadv receiving, or is neqotiqtinP for some such assistance. Thus, in the recent past CIECD has had foreign advisers on the development of the metal manufacturing industries and the chemicals industries; their terms are now expiring, however. The United States Government has recently offered to find an economic adviser and to pay for his services. It is also financing a study of the pulp and paper industry. At the same time the Chinese Government has requested the TIN Snecial Fund to nrovide qssi stance in the field of forestry and in the development of forest industries. Finally, the Government is lso disnissins the nossihilities of issistqnce from the Federal Renublic of Germany in studies of the coal, steel, and engineering in8n.tries. To what. PtPnt thp.. q imnaions will miterinli7.e in elpfinitive agreements and, if so, whether they will fully cover the technical assistance reCom o~nr1pri in +.h -rc,nr%,+. r-_nnnr%. )-,o r1n,7m nn n+. +hjQi +Aim.0- I. RECENT PERFORMANCE . nustrial growth on Taiwan in the last decade has been remarkable. Between 1953 and 1963, factory production grew at an average rate of 11 per cent cumulatively, or, excluding sugar refining, by 13 per cent. Far from subsiding, industrial growth has picked up speed in recent years (15.5 per cent per year in 1958 - 1962 as compared with 11 per cent per year in 1953 - 1958). Over the same period, real national income grew by about o per cent per annum, and it is clear that dynamic economic progress was propelled to a very large extent by the growth in industry. Manufacturing now accounts for about 20 per cent of the net national product. 2. As shown in the following table, there has been a gratifying diversi- fication in the industrial structure, with intermediate products and in- vestment goods claiming rapidly increasing proportions of the total industrial output. Changes in the Structure of Manufacturing, 1953-1962 Percentage Growth Proportion of M4anufacturing Sector 1953-1958 1956-1962 1953 1958 1962 (5 years) (4 years) Consumer goods 29 50 62.15 52.15, 47.3% Intermediate products 7h 90 21.h 2h.h 28.0% Investment goods 119 73 16.55 23.5% 2h.75 TOTAL T 9 100. 100.0% loC0 3. During the early half of the last decade, import substitution provided a dynamic element in industrial Pprowth. The hirrh Prowth rntes since l'8 are explained mainly by the spectacular expansion and diversification of industrial exorts. These exports (not including suLar) accounted for over one third (ITT$ 4.8 billion) of the estimated increase in the gross value of industrial outnut between 19q8 and 1962. 1i Although nme new nroducin have made a nrnmisina start. inn 1957-1958 (rayon, automobile tires, urea, polyvinyl chloride resins and manufactures, aniinrm foiIiml electric mte.rs, auto.mniomoles and n jeeps winow glassz.), Taiwan's export growth was, in the main, a reflection of increased onffinipm-irandl mimlityi in thi -eb rdutin o-f' gm- 4..srti mAn1n±'av"ctue TMis i-l creased efficiency is illustrated by the fact that employment rose far less t-hal i +.-mi f 17 r%e ,mn ne- .7 +11-. -1 C l c n bet-e-4- -11 -1~ 1962) and also in the surprisingly moderate investments (corresponding to resource endowment on Taiwan. The major factors were: -2- rilor industrial base: LOOK31g bacK, UIne SLarIrng poiIU inL was not unfavorable. By that time, war damages, which were severe, had been overcome. There was already substantial industrial diver- sification (coal, petroleum refining, steel, cement, pulp and paper, plywood, fertilizers, soda). Power and transport facilities were reasonably good, and there existed an industrial tradition and a supply of skilled and cheap labor. Entrepreneurial and managerial element: The exodus from the mainland added a nucleus of experienced and well-trained entrepreneurs and technicians. Perhaps the most important ingredient in the industrial success, however, was a desire for achievement, both in industry and in Government, and a dedication to hard work towards that end. Government policies: Dynamic growth, particularly during the last five years, was aided by a set of Government policies particularly well adapted to the present stage of Taiwan's industrial development. These include, in particular, export incentives, investment incen- tives, and policy towards foreign investors. The wide range of export incentives and export aids in Taiwan compares favorably with the one-sided emphasis on import substitution in many other developing countries. Tlith perhaps a few exceptions, no permanent subsidy is necessarily implied or intended. Rather the aim has been to give a powerful initial push to exports likely to become profitable in the long run. The investment incentives for pioneer industries have had a similar aim. And the liberal foreign investment laws have helped to attract important projects in e.g. fertilizers, lubricants, and man-made fibres. Institutional framework: Several institutions. many of them created in recent years, fulfil an increasingly important role in assisting, oranizing, nromoting and financinr in.uqtrial develonment_ Tho.e include the Industrial Development and Investment Center (of particular benefit to forpign inventor.) and the Mhina Proniivitv ind Trq.Id Center (with its specialized consultation services and industry-ide improvement a'hemen) Two nnecalized ins+itutions should make an important contribution to the future industrial potential, namely the TniuTan Uandlicranft Promotionnte andl thei new.lyt o-reate o eta In- dustries Development Center. Finally, industrial finance is being the China Development Corporation. 6. The favorable industrial climate and the solid performance in the v'ro.+ n+ kr<I rrnan4 _rn, en -r.. +I,-~ Cnr-+-"n JT.rv4l,, -e orer Pr growth to continue at recent rates, Taiwan will not only have to expand Stin stexprito ind tIes ceqi o micsIore rmettArAon Ut cl icreknow- ly, 'to steer into :industries requiring more research and technical know-how, LL'l sta Ud U ~ .1. dLLU±Ly j-.LU IUU.LVti I[U5jLVU LUJJJ-ULJ-. LIVtJOUJLVI1Ui*~ - 3 - II. STRUCTURAL PROBLEMS 7. Hanufacturing accounts for barely ten per cent of the total employ- ment on Taiwan. Yet, manufacturing activities must clearly provide a high proportion of the new jobs needed for Taiwan's rapidly growing population. 8. Within the manufacturing sector, small-sc4le enterprise accounts for about 80 per cent of all factory establishmentsY and about one-quarter of the total factory employment. Many problems of small-scale enterprise are shared by medium-sized enterprises providing the bulk of Taiwan's manufacturing output. The labor-intensiveness of these enterprises is an advantage; their smallness and the primitive nature of their operations, however, raise technical, marketing, and financial obstacles to growth. 9. Amone the lar2er enterprises. many are under national or provincial government administration. Altogether about one-third of Taiwan's manufacturing outrut is produced by Dublic enterprise. and, in some areas, there is a danger that this might hold back future vigorous development. III. THE PATTERN OF FUTURE GROWTH 10. The general lines of future development are clearly determined by apart from its intelligent, well-educated, hard-working, and low-wage manpower -- a countr whih is qUit wel" locaUtedU onI theU oUcan UItrd routes but has a narrow domestic market. For such a country, industrial UL .IUL UIR; VIILy ZJVt;JUrc U LgL)viUL IUUdUIJ-L;_w gJ-UWUII1. II. SupplementUry keys may be found in ka) the improved development of those few major natural resources which the country does possess, and which S 1 1U uEot as yeU EXp_L0UULU LU IULL auvantage, paricular_ly coal anlu timber, and (b) strong initial support of growth in those industries, in particular perhaps steel, chemicals, and engineering products where con- ditions for economic production (size of market, necessary entrepreneur- ship and industrial know-how) are now being reached. 12. To obtain a more concrete idea of the prospective growth in various sectors and the problems which will be encountered, certain illustrative projections nave been made for 1968. These projections as well as the 1/ The official Chinese definition of a small-scale establishment for the purposes of factory registration (i.e. excluding cottage industries) is a "factory establishment which has a registered capital of less than IJTTi 100,000 (about US$ 2,500 equivalent),uses motive power of less than 5 HP, and employs a labor force of less than 30 men." underlyina methodology are explained in Appendix A. Although they are extremely tentative and could be off the mark for individual sectors, the Reneral perspective should be reasonably correct. They suggest that in- dustrial growth averaging 9 - 10 per cent per year through 1968 is feasible and would be consistent with 6 Der cent per annum growth in the gross national product../ According to these projections, the components of manu- one-half), exports (about one-third), import substitution (less than one-fifth) 13. Additional import substitution for manufactured products has narrowed don in +.hn main, -n +.hrnn APnnr.q* rhPmicalst basic metals and manufn- tures, and machinery and transport equipment. These now account for 80 per c en + 4m t n1v--irp ert f m13n-f+ar m-n+2 r n ih u n A -nnov +.h fi +h most important item. The best immediate prospects would appear to be chemicals (whVTlere ex-ansion Js n1'"dAcnt%e+mnmpltedinn -nnA f' -nA petro-chemicals) and machinery, particularly light engineering products. In the_ Slightly more distant future, there a rspects for 4nm.twmsprint (from bagasse), kraft pulp and paper, and an integrated steel mill. th. Opportunities for industrial exports are also reviewed in Appendix A. IiA.A.AJV U U ULL LVL.LVU PLJ U %,V 110 LL.JI~ .. UUOUXLC VLL~ .&P%J. L%1 %JLAAUJ. w~icu~i 0"rCL& would approximately double between 1962 and 1968. Textiles might accoant .Lor CaLJL I one-quar tte Of UJ (ILLO 6LvWL,1L WiL..LL VJL1.L- J _Z LCaU_LU t 1 L _UUJ.VLAa would come from processed foods, plywood, man-made fibres, and metal manufactures and machinery, inCluding -I particular light items like UUyLesZ, sewing machines, small electric motors, refrigerators and sundry appliances. Two factors suggest the likelihood and desirability of this type of development. First, most of the industries listed are labor-intensive and do not require a highly sophisticated type of engineering development. Secondly, Japan has been a main exporter of these items in the past but rising Japanese wages may prove a competitive handicap, and Japan is consciously trying to shift its export offensive towards more complex pro- ducts. With its low wages, Taiwan is well placed to make an inroad on many of these markets. 15. It is important to ascertain the order of magnitude of the invest- ments required for this growth in manufacturing, and whether these are consistent with the overall financial resources available to the economy and the claims of other sectors. A question also arises whether investment re- quirements for some manufacturing sectors might not be so great or subject to such risks as to make it particularly difficult to obtain the necessary finance. Unfortunately, little information is available on this point. Our own very preliminary appraisal (Appendix B) is subject to wide margins of error arising both from the output estimates and from the investment requirements per unit of output. Nevertheless, the general indication is 1T The growth prospects for the economy as a whole were analyzed in a separate report prepared at the same time as this report. that capital-output ratios!/ will increase sharply from a typical level of slightly above 2.0 for the 1950's and an estimated recent value of 2.3 - 2.5 to a probable 1964-1968 average of 2.75 or higher. Financing these in- vestments might raise substantial difficulties, particularly in steel and man-made fibres but also in engineering products and textiles. IV. THE ARCHITECTURE OF GROWTH 16. (a) The need for planning. Below the expression "economic planning" is used in the sense of a model or indicative framework, to which private and public enterprises can relate their investment decisions and the Government its economic policies. The means by which the economy will be steered in this direction will be discussed in subseauent chapters. 17. Highly industrialized countries. like France and Sweden. with reasonable stability and predictability in their growth patterns, have found advantage in 1 onp-term industrial nrograms (aqy. in a four to six vtar nersnective). Such programs which are born out of a continuing dialogue between the Govern- ment and the industris orP.rnM nrninet. an neral nntf.orn for which thPrt is a fairly high degree of commitment, by the Government as well as by indiqtrv Thiin Rrnnn ha in.q titd lng-term "mdrntion and Par.nion plans" for its coal and steel industries (including special financial -rn-4i+Am-z)_ Ant them qtmAizh v^-%re3Y ni fondn it. a mtt..oe f ii-ann-v t. study the possibilities of expanding the country's already highly developed forest industries andl of aevnin a^" moeJ 4, ,r ~'4+.Q tiAro resources. 18. This type of programming holds even greater benefits for a developing lines of development are legion, and where the actual course of events will un ou±un~gily ±ui±uotu UJ ovemue~ Wiv Iu_L1 La±uleu IVu I. unluer AU programming work has already been done on Taiwan, e.g. in the Industrial have been established between CIECD and major industries, permitting a .LJ...U.L t%&k;iCU1V Of! ±informion and± iLuea onVd 'uIi ureU~±1L~,U~±UV-UAiI~ A greater effort is required, however, in the following closely related. areas: - A carefully studied growth model for the economy as a whole and for the industrial sector - Elaboration of investment criteria, by which to judge economic priorities, both as between manufacturing and other sectors and within the manufacturing sector - Hore and better sector and project studies. 1/ The capital output ratio used here is the ratio of fixed investments to the resulting increase in net output (value added). - 6 - 19. (b) The growth model. Reference has already been made to an illustrative growth model which projects the 1968 industrial output, using the 1962 output structure as the base (Appendix A). This type of industrial growth model presumes the existence, at least in a rudimentary form, of' a general model for Taiwan's economic growth, showing expected changes in major economic variables like gross national product, investments, Government and private consumption, etc. The major building blocks in the industrial model include studies of income elasticities for consumer goods, detailed export projections, detailed analyses of prospects for import substitution, and market analyses for industrial raw materials and investment goods. A conrle- mentary study (along the lines of Appendix B) would show investment require- ments necessary to meet the stated output targets and to maintain the existing plant in good working order. 20. The pattern shown in Appendices A and B is illustrative. The targets which would result from a more systematic and intensive study may well be substantially different. Yet, in spite of its imperfections, the usefulness of some such model in pinpointing areas for oriority attention can hardly be challenged. 21. (c) Economic priorities. Recent policies and institutions, taken as a whole. have been consistent with the ravid creation of an industrial potential on Taiwan. Nevertheless, in the early stages of industrialization, advanitam ran be taken .n?~ relativelv *hin no tuntA fri indus'tri l growth (e.g. canned pineapple, fertilizers). In the future, economic prio-ritis w.ill bea mn-or1ifficult+ ton esta!blis.h wLhileoa M+.e sa1qme time inves.t- ment stakes will be higher. Problems will be faced in the following areas: (i) Poor adaptation of present customs duties and subsidies to T,,si-- r"cae1-Jan r eamark- A-_4- _ L.i I U U W-L.L _ .'U_L .LJ. . ~L X-4Z_1% LIIL%A .LUXJ .J.L"6. Ji J projects like an integrated steel industry or a petro-chemicals and expansion of existing industries. (iii) Effort and money to be devoted to assist small and medium-scale ±ILs r . s eev ser.±LL U U ,UiL.LU1 UL Wit L4111JU±I t luLes to come by. Jiuch has been written about economic priorities but no entirely satisfactory muetho of analysibs has een uevelopeu. 01nce Utere may Ue differences in views both as to theory and as to practical approach, a short note on "Economic rriorities in indusrialization" has been submitted to the CIECD separately from this report, simply as a basis for discussion. In the following, an attempt will be made to bring out certain aspects of economic priorities which would not seem controversial. 23. The main problem on Taiwan, it seems, is to determine whether there is any need for permanent or semi-permanent protection or inducement to activities -7- may be asked to help define the problem more closely: Foreign exchange aspect. What is the nature of the presumed scarcity of foreign exchange.? - 10 wnat extenU Unoulu a prospective import surplus be regarded as a real imbalance, and to what extent as a corollary to a decision to borrow in order to increase domestic investments? - Is any remaining imbalance a medium-term problem (pending the development or certain export activities or import-saving activities for which the long-run profitability is ensured) or is there a deeper structural problem? Employment aspect. The existence of a vast labor reserve on Taiwan seems indisputable. Indications are that, even at a very healthy rate of industrial growth, manufacturing indus- tries will absorb only a portion, and perhaps an insufficient portion, of the new entrants to the labor market. Does this mean that, in economic calculations, the price of unskilled labor may be regarded as zero and that heavy emphasis should be given to labor-intensive industries and labor-intensive methods of production? - Or would one be justified in assum- ing that there is alrealy an adequate incentive towards labor- intensive production in view of the very low wages on Taiwan? 24. An answer to the above questions would be a priority assignment for the proposed economic adviser. Once an answer has been provided regarding the value to be attached to foreign exchange benefits or to employment benefits, the mechanics of translating these judgments into the system of protection and subsidies should present no insurmountable difficulties. Some suggestions to this effect are given in the above-mentioned note; other techniques may be found equally practical. In the absence of such a deter- mination, on the other hand, any discussion of economic priorities is apt to be Nraguep andi subjetnnive._ 94. (8) Srtor and Feaihilitv Studies. If one starts out with a general conception of what might be the most productive lines of future development (Annpnnrii -5r A). them views msnt be t.t.qtd 1thronph more i ntensive study of industrial sectors and major projects. 26. There is hardly an industrial sector for which such study would not bhringp somep t.naiblepeeis This- isq the. main reason for bringing int4!i.- trial associations and major enterprises into the planning effort as has heen done to n ooni dernhle event on Tivnn_ A. the ecnnnmy grn, irus- trial associations will need to contribute increasingly to the analysis of st.-mctural1 prnobIen-, in .p-r i n~r1m+YiP niandl of futurei- manrketn andl develrn1- ment prospects. 27. Meanwhile, study based upon Appendix A and other considerations sug- ge.qt_q An n nri,or-i r,:.p Fnr nn - .n ir~nri~~~1 ,f +)in , 1 - - - -- -- -3- coal ks U. U.aL JLUUm,t11y UmpiVmU PUiC OuU'vvL ouv1Jij;UDU _L LLA mUpU11, high investment needs); engineering and chemical industries (growth potential), forest industries kinsuficiently tapped source of iatural wealth, structural problems), handicrafts (growth potential, export prospects, labor intensiveness). Coal and steel will be discussed separately. A few random comments on the other industries will indicate the types of problems which should be co.isidered in further study: General. Increased Government support of research and professional education for these industries is probably required. Engineering industries. The low import duties on many types of machinery would seem to be an economic anomaly (discouragement of domestic production of machinery, encouragement of capital-intensive methods of production). The importance of Government enterprise in a sector where so much depends on initiative and flexibility raises another question mark. - Finally, there may be a need for a market study of export possibilities for light engineering products. Chemical industries. Some of the projects considered are highly capital-intensive. Will the economic benefits of domestic production be in reasonable proportion to heavy customs protection? Forest industries. The structural problem is quite serious: most of the present mills are too small, and many are apparently outmoded, both in terms of pulping and Daper making equipment. In terms of raw material supply, economics of high mountain logging and of hardwood conversion have been studied but only in a preliminary way. Handicrafts. How can the Chinese artistic skills and traditions and the low wage and salary levels on Taiwan be translated into export nroducts of hioph artistic and technical minalit. and how cAn Afficipnt marketing be achieved? 28. In the recent past, a team of technical advisers financed through U.S. aid and other sources have been working for CTECD. and have covered some of the above fields, notably chemicals. In other areas, like the forest nrndintA snntilr- qaveral nartial studien have been made The next few vars are likely to be critical in the development of the above industries, and there is A need fnr A specialized nnis onrln Jndt+.r an+nhPei to then CIECD. These specialists should not only be eminently qualified in their foilds but ml.n annbnf anrn1iin+A + he financial nmanldc and ct+rctural problems in developing their respective industries and of advising the major portion of the country's energy requirements and employs some 85,000 are quite low in view of low wages and respectable productivity. The roblems ofL thei ind.,ustr.Ly are tEw-fo101L TheU exhustionLU1 of UrfaLdU 1't:Zt.'LVU will necessitate a transfer from small fragmented operations to mining at greater depth, involving consolidation of mines and heavy capital investments. At the same time, growing competition with fuel oil from domestic refinery operations and recently discovered natural gas has created uncertainties as to future markets. Hence, a study is needed to determine the scope for economic production of coal within the perspective of Taiwan's future energy requirements and of measures which would permit the industry to meet these needs. Suggestions regarding the terms of reference for such a survey are given in Appendix C. 30. Steel production on Taiwan has grown very rapidly in recent years reaching a level of about 220,000 tons of rolled steel in 1962, mainly bars and rods. Steel ingots are produced from scrap in electric furnaces; domestic production of steel-making iron is negligible. Production is generally on a small scale, with outmoded equipment and poor utilization of capacity, and with very little capital available for expansion or moderni- zation. On the other hand, the domestic market has reached a size where the economics of integrated steel production merits investigation. It is true that recent studies of this problem have not yielded a positive answer to the economics of such a scheme and have indicated extremely high investment costs. The validity of these earlier studies would appear to be somewhat limited, however, by several factors (unduly narrow terms of reference, failure to consider a natural path of arowth starting with the modernization and rationalization of the existing industry, insufficient discussion of technical alternatives, etc.). A reappraisal of the whole steel problem on Taiwan would seem justified, giving an answer simultaneously to the following auestions: (1) How can modernization of the existing industry best be aeomnlished? ( Wmfli an integarated. steel_ mnill be- ecnnnmicalqy iii_tiffd-. nnd in what manner and according to what time schedule should it be Mnor deptaniled suggestfionsq reardiingr the t.prmq n~f Pf.r.nnt- fnr siinh a su-irveyv are given in Appendix D. 31. (f) Organization of Economic Planning. The next few years will put great strains on the planning and policy staff. It is suggested that the Chinese Government employ a top-level economist, reporting directly to the Secretary General of the CIECD for advice on industrial planning and industrial policy. This economic adviser would direct the work on industrial projections, investment criteria, and sector studies, and would take a major part in establishing policies for the revision of the customs tariff. By the nature of his work, he would inevitably be concerned with certain general problems of economic growth and economic policy but his primary responsibility and expertise should be in the industrial field. 32. Once familiar with the problems and planning organisation on Taiwan, this economic adviser might like to bring over one or a few assistants to help out with respect to certain economic sectors or certain areas of policy. At the same time, as recommended above, the CIECD should also secure advisers - 10 - working full-time on the development of the forest products, chemical in- %ALL4j,riesengnVULn J ndutrie a1ndLL haUirat J.U ToA be efective,6 the ad-W visers should be employed for a minimum term of two years. The difficulty benefits would be very great. V. DIRECT CO1NTROLS VERSUS TARIFFS 33. The economic future of Taiwan lies in a highly flexible and competitive export-oriented industry. Direct controls or investments and imports axe contradictory to this goal and so are sizeable customs protection and subsidies, except for transitory assistance to infant industries. 34. There would appear to be three main reasons why strict controls of in- vestments and imports in certain industries are still maintained: - to prevent overexpansion in certain fields or the entry of firms poorly equipped, financially or otherwise, to make the grade - to prevent imports where domestic industry can meet Taiwan's require- ments at a reasonable price; also to bar luxury imports - to retain the control machinery in case, at some future date (say, in the event of a sharp fall in sugar prices or a sharp reduction in foreign assistance), the foreign exchange position should deteriorate. 35. The main instrument of investment control is to refuse imports of required raw materials and equipment but the policy is also backed up by other means, like withholding eligibility for small industry loans or foreign invest- ments. As may be seen from Appendix E. Section I, these direct controls are quite pervasive. 36. The second line of defense in the protective structure is the customs tariff which is summarized and analyzed in Annex E. Section II. In very broad outline, the structure of the tariff may be descriBoed as follows: (1) Relatively moderate duties (5-20 per cent) on important agricultural ;nd industrial raw materials and fuels (2) AverAoe duties (2q_)hO ner cent) An semi-finished or finished manufactures essential to health or education (3) High duties (45-75 per cent) on the vast mass of manufactured fibres One very broad generalization is that the tariff is based more upon some production where economically justified. There are, however, quite a few except±~ins Loo U11.0 U1-UUU I-UZ* 37e * ommenWig filrB On dIrUt ContrOl, ther il some UUth LU the contention that many entrepreneurs (quite naturally) find it easier to imitate success than to pioneer new ventures in uncharted fields. lie answer to excess capacity, however, is not government (or industry) regulation but kai more information about existing capacities and markets in certain in- dustries, about requirements in capital and know-how, and about special risks, and (b) price policies which ensure reasonable profits rather than profits so high as to exert an irresistable attraction on newcomers. Un- fortunately, such price policies are not likely to be pursued in a small and overly protected market. It should also be recognized that there is no ob- jective standard., comparable to the market mechanism, by which Government officials can determine that A should be allowed to enter an industry while B should not. In such a situation, favoritism is at best inevitable, at worst a thing bought and sold. Direct controls, in the long run, will reduce industrial flexibility, stifle initiative, encourage graft, and increase the cost of production. 38. In the final analysis, the major reason for retaining direct controls is that the customs tariff is not adapted to present needs and realities. A properly designed tariff is impartial as between different producers in the same industry, and helps to get new industries started without excluding the healthy spur of foreign competition. 39. Some work has been started on revising the present customs tariff, but progress is slow. Heans have to be found to put much greater pressure behind this effort. Advice should be sought from best available economic expertise (under the guidance of the proposed economic adviser) regarding the general economic principles. on which the tariff should be based. With- out prejudging such advice, certai.i general guidelines are tentatively su;aested in Annex E. Section III. For each item. there would in principle be a two-layered tariff (with a third layer where revenue collection is a major consideration). The second layer would correspond to strictly time- limited infant industry protection. A substantial aim of the tariff revision would be to peel off this second layer where no longer needed. The first layer would correspond to more permanent protection argued on general economic grounds (differential foreign exchange or emnloyment benefits or "external economies"). VI. PUBLIC I4DUSTRIAL EUTERPRISE 40. The share of public enterprise (national or provincial government in tobacco, beverages, and petroleum (where public enterprise is important) one llu VJ.. n WICU U11U 011CUV .UuJ~~i±j± ~ ±1~±UJ~ V.L va added in manufacturing would be less than its share in the gross output. vlub. sI ictua vey si PVULUaUrt istLUaueU i.UJUwQLU! ULU acs public share is very similar in both istances. - 12 - about 55 per cent in 1952 to about 34 per cent in 1962, reflecting both the dynamic growth of the orivate sector and the transfer of important public enterprises to the private sphere. The major fields of public enterprise are sugar. beveraLes. and tobacco. anountin,7 altoathpr for about 37 ner cent of the net value added in the public sector, and petroleum and chemicals accouniting for anot.hpr A npr np-nt. Thp rp.mindr i.q onntriHt.nd hv nmblin ventures in textiles, timber, metal products and machinery. These statistics hardly reflnt .the real imnnrt-nn of nmblic enternrise. Tt nre- dominates in the two financially most powerful sectors, sugar and petroleum. And i+ i. nIz ir.rnr+._nn. -i n ct+.rQ T.71no-r A-rn rin f7- T. Tnnir 'i expected, e.g. chemicals (particularly fertilizers but also potentially in pet- chrical tb±rougf- Ch-n s 1 I .S et" .Ja -A_I r-"_-+4 -- -A -4A.l$ -"4f. industries. 4l. In terms of the reasons for ownership, public manufacturing enterprise beverages) (2) Enterprises deemed particularly important to the national economy or the ueenUse effort (sugar, ferllizers, anu peUroleum) (3) Enterprises calling for large capital investments or entailing special risks, and which are considered unlikely to be undertaken by private entrepreneurs knone of the existing enterprises clearly fall within this category) (4) Previously Japanese-owned enterprises which the Government was forced to take over and administer, and which do not come under groups 1-3. (In terms of numbers, this group is by far the most important one.) The announced policy is to transfer Group 4 enterprises into private ownership. Group 3 enterprises would presumably also be sold to reputable private investors when feasible. In the second group, private participation in ownership is admitted (a substantial number of shares in Taiwan Sugar Company were recently sold to the public). In one case, even private majority ownership has been sanctioned (the island's largest fertilizer pro- ducer, a urea plant, recently went on stream: foreign private interests hold a majority of the shares, though the total output is sold to the Govern- ment at a previously contracted price). 42. Besides manufacturing concerns, the Government sector also includes a number of other enterprises, e.g. public utilities, forest management, ocean shipping, and the major commercial banks. 43. Summary financial statistics for 25 major public enterprises for the financial year ending December 31, 1962, including those outside the manufacturing sector, are shown in Annex F. Most of the companies have a consolidated financial position. with capital and surplus for the group - 13 - covering about 50 per cent of the total assets. The earnings picture is variable. Almost exactly one-half of the companies have annual "surpluses" (before business income tax) of less than 5 per cent of their stated equity. Funds available for investment are limited since only a small proportion of their earnings are retained by the companies, and only in the case of Taiwan Pouer did the Government supply substantial additional funds for ex- pansion. A management problem arises from Government administrative procedures, particularly with respect to procurement and personnel. Also, each govern- ment enterprise has to accept a certain proportion of retired service men and refugees from the mainland who, even when inefficient, are protected by their civil service status. Difficulties in pursuing independent price policies is mentioned as another reason for the rather weak earnings for many public enterprises. 44. There seems to be a reasonable concensus on Tqiwqn (A ht. in the manufacturing sector, private operations are preferable, with a few snecified excentions and (b) that the Government may play a useful role, financially and otherwise, in the reorganization of certain existing industries or in launching certain new industrips - Unfortunatelv the transfer of existing enterprises to the private sphere appears to have bogged down, which crnates an undirable hintus in their grnwth. At. t.hp qm tim. thPre is no really effective financial assistance towards the reorganization of struitnliv weak industries (like anl and naper) or +.ardn the lanhing of major new ventures., It is therefore recommended that the Government seek expert adv-ice on- the adir11,str!3Ar,,n- of=mtemporar Govrnment hold+ ing asJ wel IZIT1 as Government financial participations in structural reorganizations or in given below. 6. The major problems in disposal of certain existing enterprises are said would have to be sold below their nominal balance-sheet values. One cannot Se± u r uuu uU111jl"U ±O_L t U1t PUU-LL WoU.LLU 11UU _Ld..M' 1UO ouu a PIJUL UU Lt source of income transferred into private hands. 'or, it is stated, is there anI easy s01ui0-.o' to0 the10 problem ofP redundant m.anpoer annual financial statements could be improved to include a considered appraisal of the per-_o-mancU oL (jac1 company, and U1ne econ1omic and fInanclaL prO_Lem5 faced. Generally applicable, realistic principles of valuation in connection with sales of Government enterprises could be laid down. The maintenance by the government of a preferred stock participation in order to facilitate acquisition by suitable entrepreneurs lacking the financial resources for a complete purchase could be considered. If an enterprise has no economic future, this could be brought into the open, and a process or orderly 1i- quidation initiated. Measures to safeguard the legitimate interests of employees and workers in the case of such a liquidation could be devised. 47. The Chinese Government may like to consider the creation of an indepen- dent agency to handle both the disposal of certain existing enterprises and any new participations. The legal form of this instrument might be that of a - 14 - nolding company out it snoula be well unaerstooa tnat its asic role wouu be that of a trusteeship, through which the State would temporarily hold enter- prises and shares eventually destined to be transferred into private hands. Thus, this new instrument would take no part in the administration of those companies which the Government intends to retain in the public sphere. 1,or would it become a public investment institution in the sense that it would make new investments at its own discretion. On the other hand, it would be the appropriate agency to administer the rehabilitation, as needed, of e.g. the coal, steel, and paper industries and to handle any Government participation in "pioneer ventures". It is assumed that prior legislative approval would be made a condition for each individual scheme or partici- pation. Hence, in its new participations, such a holding company would be limited to schemes or undertakings of major national importance. VII. IDUSTRIAL FDTAICE 48. Gross fixed domestic capital formation in manufacturing and mining was nearly 1T71 3 billion equivalent in 1961, and annual net investments averaging on the order of PT$ 4.5 billion equivalent will probably be required in 1964-1968 for sustained growth. Large capital-intensive projects (steel, petro-chemicals, man-made fibres, newsprint) might quite likely absorb a higher share of future investments. h9. According to a very rough calculation. about one-fourth of the gross domestic capital formation in 1960 was financed through reinvestment of profits and dereciation allowances by Government mnufacturing concerns. Foreign and overseas Chinese investors may have supplied another 20 per cent. Allowinr 13 nPr cernt as the rontribution of US.- nid finds- nrivats domestic financing, including reinvested profits and depreciation allowances, would have nrnvidd abont LA0 nr cni. qO- Thin futuire p)rnqntA PrA thn~t nnrciHnrqb1v less-q.- TT,q ni- T hil i available for the manufacturing sector and relatively less Government financing (prnlliin n~f + Aip in szhnwtn r-r r.nv-%Yravr-nTnnn+. =,+.o r ieiQn th totan .n.l manufacturing output). Foreign private investments, by conservative reckoning, are not expected to exceed 1800 M-1lli-on per- y-V -q n t Unn~ mr'at _ per cent of the total. In order for industrial development to proceed at the adequate incentives and institutions to speed the flow of private domestic V V ig J.11- L k~ UJ VACL J± .L.r11 -LWCUI.P UZ; L1wA C:V " .1JLZ LV.L priority projects of a size surpassing the narrow confines of the domestic apJ C~ 4--" X.U AI! --IU"j%U IV ULL."10 V.L LIIU-LV.UUU- i 1- ±-11ULZ ~l. ncenive to doesi inesor aL substntia (genally -Low ti Axe, adequate depreciation allowances, revaluation of fixed assets, special tax hoiduays for new inustries), and their adequacy is reflected in recent growth rates. 52. Foreign and overseas Chinese investment on Taiwan has been encouraged oy kaj the guarantees of Lair treatment provdued by the invsumuit,AV%,Q of 1960, (b) the valuable assistance given investors by the Industrial Development and investment Center (DI) (contacts with Government agenies and prospective business partners, preliminary market surveys, etc.), and (c) the generally favorable investment climate on Taiwan coupled with a good location and low-cost, high-quality staff and labor. In turn, many investors have contributed not only funds and technical know-how but also a new concept and new techniques of management which are leaving an imprint upon Chinese business society. With a few exceptions, however (urea, lubricants, man-made fibres), foreign investments have been relatively small (below US$ 1 million equivalent per project). While there is scope for many fruitful partnerships in the future, and while Taiwan makes an attractive manufacturing base for the South-East Asia export market, prudence dictates some conservatism in projecting the availabilities of this type of finance. 53. The major institutional sources of domestic finance for the private sector are the Taiwan Stock Exchange, the China Development Corporation (CDC) and the commercial banks. During the first twenty months of operations by the Taiwan Stock Exchange, about NT$ 400 million equivalent in shares and another NT$ 80 million in bonds were issued. As of December 31, 1963, 18 stocks were listed with a total market value of about US$ 180 million equi- valent. The annual flow of new issues facilitated through the Stock Exchange is at about the same rate as new loans and investments by the CDC. This is an auspicious beginnine. It is very desirable. however, to widen the market making it less vulnerable to speculation and increasing its attractiveness to a wide range of investors. ThA paucity of share offerings. in part. reflects the reluctance of closely held family enterprises to publish details of their financial noqition and to accnnt ont.ide share-holders. "OnAration Disclosure" a venture sponsored jointly by IDIC and by the Stock Exchange may have broken some of ths rp.istannA agninst dicinanv Thp al of additional shares in major public-owned enterprises, like Taiwan Sugar and Taiwan Petroleum, would A hAln +.n inpvon,:z +.hn cln-mlnTr nf' mrn!3n h n-v+.c A eo fr tha drimnd side, there would normally be no objection in principle to banks acquiring indntrinl qhnrP nn .- art.nin nrcentace of heir +.nl ith limitations also upon the proportion of the total shares in a given canpany tn he held by any one bank (or groups of banks under thesme cntrl,. Tn practice, as long as the Government owns the major commercial banks, the cannot be recommended. 54. In its brief existence, the CDC has helped finance nearly 200 projects, with an averag .1oanc. perJ prject. .L CILUUU U04P _Lr_V VV%J UVjJllu U,t~LJJA U.L .LUI lending is to fairly large enterprises (by Taiwan standards), one-quarter of the totaL volume u Lenudig iL fur amounts below Ub 10,000 equivaLent. According to CDC, the reasonable lower limit for a CDC-type loan, under Taiwan ondiUons, woulu normanly be on the order of voSw 0u0uu equivalent. The CDC's main function, apart from acting as an instrument for the disbursement of foreign funds, lies in the vetting and appraisal or projects. It has also made a few equity investments, and recently joined with China Man Made Fibre Corporation to start a nylon industry on the island. 55. A detailed consideration of CDC business policies falls outside the scope of the present report but a few comments of a more gener alonomic bearing are appropriate. (a) Compared. with a projected average volume of investment in manufac- turing on the order of NTO 4 1ill0o equivalent, the oDO propec- tive average annual loans and investments would be about NTO 200 million. Admitting that the CDC financing would correspond to more than twice its value in total investments, its contribution at that rate of disbursements would probably be well below the demand for this type of financing. (b) The present typical lending rate is l per cent for loans repayable in local currency. Some funds have been lent at 7 per cent with repayment in foreign currency. The borrower in this case has to deposit a certain portion of the outstanding balance of his loan in a blocked account with the Bank of Taiwan to cover the foreign exchange risk. This type of loan has not found much favor with the borrowers. With some borrowers, this may be due to a general. reluctance to accept the foreign exchange risk. Other borrowers, however, would be willing to accept the foreign exchange risk in the absence of the special security arrangements mentioned above. (c) On balance, while CDC conditions are favorable in comparison with other sources of finance, they may still exaggerate the real scarcity of savings, and discourage some worthwhile investments. Some lower- ing of these rates would seem justified as a stimulus to industrial development. In the main, such a reduction could presumably only come about through a reduction in the rates charged by the Government to the CDC on account of interest and/or fees to cover the foreign exchange risk. (d) Over the next decade. industrial development on Taiwan may well be hampered more by a shortage of equity funds than by a lack of loan funds. It seems desirable that CDC. with its seasoned management, experience, and international contacts should reserve an increasing portion of its business for equity investments. 56. The burden of providina industrial finance on a scale below tvnical CDC loans will fall mainly on the commercial banks. Whether the needs are for fixed investments or for working canital is of minor importance. Thp AmrA is that they exceed the financial resources of the individual entrepreneur; and his logical resort is to n renahle hank nriait.- Thro Q nhniit.hnif n dozen commercial banks on Taiwan. In the three largest ones, the Government has a maiority share-holding. The -onvPnn+.t.Jr lanring Tno Q oh^+ 1 nmv, cent per month on secured commercial loans, with some money apparently avail- abl ontheunecvd Phdi o prme or~owra at two addiUtional oint per month. There is an unusual amount of dissatisfaction among Taiwan industrial- their alleged excessive concern for collateral and failure to give some weight to the character and ability;4 of the, individal and th4 uaiy fhi-roet - 17 - Clearly, commercial banks in a rapidly developing export-oriented economy have a role far beyond the checking of collateral. To define that role more precisely and to suggest changes in banking philosophy and practice, and, if needed, in banking legislation is a difficult task. It could be met only by an experienced banker capable of taking a wide view and of allowing for the wide difference between Chinese and Western conditions (e.g. with respect to the cost of staff). The Chinese Government should try to secure the advice of such a person. 57. Lending to small-scale industrial enterprise presents special problems. In a rapidly changing economy. risks are great, and small enterprises are not well equipped to deal with rapid technological and market changes. The expense of serious financial and project apraisal is bound to be high. and will form a significant portion of the true cost of lending. On the other hand. small enternrises are often the seedlings out of which larger and. more vigorous plants will grow, and small enterprises, because of their greater labor intensiveness have a snecial economic importance for Taiwan. q8. A suhtqntiAl initial contributin tn qmll-nternrise financing has been made through two U.S. sponsored programs: productivity loans and spcial small industry loan, CDC acting as the lndinc in.titution in the first case and the commercial banks in the second case. In both instances, +.he i nii+ al cncnninc anfi ann ad-r l oq I 7.ae rnea lIr inri +laenn v'h thr (.hinn Productivity and Trade Center (CFTC). The average loan amount under the amount under a similar number of small industry loans was nearly $ 40,000 V '& 0 '1J.V -EA-1CL11 J4.1&UA4. .L. L111qc PJ. LJ%AkA%.V .L.Y oa s wi A C.J L 11CJ U11 term of five years was set at 12 per cent per annum. CPTC has also assisted the banks in appaiingth collateral (e.g ' -- lan ,1 ulins mac-hinery 1,--) offered by small industrial enterprises. 59. There is an obvious need for the perpetuation and expansion of this type of lending and a special study should be made of tne financuing o small-scale manufacturing enterprise (including both fixed investment and worKing Capitadl Meq1Ui1xiU0)*, In1 theu fi"st p.lace.a Chinese1t.:0 f.iancia-l. expert should be given the opportunity to study abroad the experience of a selt-eU:U 1W1Uv.e ocuno;r±eU. 0econUly, a 1oreinU expere-U may be _UV_Leu O Taiwan to make an analysis of this problem and to submit specific recommen- uations. Suc a stuuy shoulU be suitaUly co-orUinateu witu the one recommended for commercial banking. On the other hand, it would not be desirable to combine the two studies. ine financing problems of small-scale manufacturing enterprise must be viewed from a wider perspective than commercial banking and by an expert particularly familiar with small-scale enterprise. Thus, one might consider the creation of a new financial in- stituticaspecializing in medium-term credit to small business. Whatever the ultimate solution envisaged, the Government should probably be prepared to subsidize some lending activity in this area until such time as the economic justification for special encouragement for the growth of certain types of small-scale manufacturing enterprise would have disappeared. APPENDIX A PROSPECTIVE GROWTH PATTERN IN MANUFACTURING Introduction 1. The attached "Illustrative Projection of 1968 Manufacturing Output" is not an estimate but (it is hoped) a reasonably realistic illustration or the patterns, along which Taiwan industries might develop. It has a twofold purpose: (a) to provide perspective for policy recommendations and (b) to suggest an analytical framework which, with the proper refinements and studies in depth, might be of some use in development planning on Taiwan. The major building blocks in this projection are as follows: (1) Assumptions with respect to the growth in major macro-economic variables (gross national product, investments, Government and private consumption) (2) Assumptions with respect to the "income elasticities" of the demand for consumer goods (3) Very schematic analyses regarding the future investment demand for construction materials and equipment items (4) Analyses regarding the prospects for industrial exports (5) Analyses regarding the potential for import substitution in manufactured items. 2. These analyses and assumntions are reviewed below. Two eeneral comments may be made. In the first place, the analysis prejudges the answer to feasibility studies rAeommAnded for rertain sectors_ Secondlv. the analysis falls short of an input-output analysis of the Taiwan economy; it would be of interest to study the magnitude and direction of errors introduced by this short-cut. Growth in Macro-economic Variables 3. The projections of industrial growth have been made within the frame- uwrk of a grort.h ndAl whinh innids +h follnwuig main masqmptnsnn 1962 and 1968; (b) Fixed co.pital formation will increase by 8% annually; and (c) Personal consumption will increase by 5.5% annually - i.e. by .Jus",~JV ovr -l/0 per. cap-a.L. .L11iJ$" .L-UJULL..LUIN 1UYJ Ut: I_t;6a1U?U aQ k;VL.NjU_r_VaLdve9 rate may well be feasible, and the conditions under which it could be achieved will need study. - 2 - APPENDIX A Income Elasticities of Demand for Consumer Goods 4. The domestic demand for manufactured products was computed on the basis of assumed income elasticities for articles of final consumption, including metal manufactures and machinery intended for final consumption, like household sewing machines, bicycles, etc. The specific income elasticities assumed were as follows: Food 0.72 Tobacco and beverages 0.72 (assumed to be held back by increased taxes) Textiles 1.23 Man-made fibres 1.59 Pharmaceuticals 1.43 Leather 1,30 PaPer 1.67 ietal manufactures and appliances 2.38 Income elasticity was defined as the ratio between (a) the percentage increase in consumntion of the snecified nroduct -roun and (b) the percentage increase in income. Thus consumption of manufactured foods Was ansmed t.n increas - v hv as comnared with a ZT increase in income which gives an income elasticity of about 0.72. The actual values for thn I nnmp elhtiniti p rr P d'rive. frnm vnrinui.- nr,ea ( ECAFE for foods and textiles, unpublished Economic Staff study for paper, etc.). Somer aThn.cz~ rnpcetcs ar ipl gesses. C The very crude nature of the above demand proiections needs stressing. Apart from more profound study of income elasticities for indivial grousn it wuld have een nqrtinIrIv dep.irable to renncile the final consumer demand for industrial products with the total income purse, e.g. for agricultural products and for various types of services. Demand for construction materials and equipment items 6. The domestic demand for construction materials (cement, bricks, V4.Ll%A%JW 6-LLQ I WCXP. es im te onWO theJ basisL o.L UcaJ 0J. O4 -e - -)J -~J -L~ - 4-J. construction. 7,. about 8016 of the domestic demand for metal manufactures and muEcmiery was aWLIeU UO vLry w.Un InVe5IIIUIeU activity. IIU remaining 20% of the output of the metal manufacturing and machinery industries were assumed to be purchased by households nthe actual proportion is not APPENDIX A known, however), with demand doubling by 1968 (income elasticity of 2.38). Onmbinino hieadfrnnna +.an. nnA cnonmor ntrm . n+qn.C ob nn a increase in demand by 62%. 8. It was roughly estimated (based upon the types of steel presently cons,mmed,, orn., ad also uppn.a the 1-m-o~ywv,-nn. .jia en- s +~~ kpztte v' for ci-intrileS in a similar stage of economic development) that one-half of the steel used on T.-,. . --- 44- - a.n v,,+ A +I,- a-V,-- 1-1-P -C -- . A 1,ir +I,- --n+,I .3.41 , S.L A 5 1 VWUSIQWI LAJ.6 Uj.WI IJ11 I WP A I WU S.) ALGJ.LS **... LQ SASQ - LJ VA-. IAU VO.L manufacturing and machinery industries. The growth in the output of metal mau facturing a.nd mach.L~ .ISLII .ineJ. 3' 1%IA L L P.L UJLr-0Q WCL QrJL CZ VU.LJ K3 Q W.LAIL" U %A.aL 0.5 L/ r-P 6 This combined with the growth in the construction demand for steel yields an oJver- tL rLuwul L-U £LUL LAMjU± .L U1JCr-/a UULWJWL1 .L7VC cU1U .L7UU kC1JJ_L.LUU i LV whole basic metals sector, i.e. steel plus non-ferrous metals). Import Substitution 9. We have defined import substitution as the satisfaction by domestic manufacturers of an increased proportion of the total supply (domestic pro- duction plus imports) in a given sector. Possibilities for additional import substitution in manufactured products has narrowed down, in the main to three sectors: chemicals, basic metals and manufactures, and machinery and transport equipment. 10. With the expansion recently completed, Taiwan will become self- sufficient in fertilizers other than potash. Expansion in man-made fibres is already under way, and Taiwan is expected to become an exporter of such fibres (see discussion under "Export Prospects" below). Some imports of special types of fibres may still be necessary but would presumably not. weigh very heavily in the total picture. 11. For other chemicals and for imported machinery and transport equipment we have assumed that by 1968 Taiwan manufacturers would be able to supply about one-third of those requirements which, according to the 1962 pattern, would have been imported. As mentioned in the text, this would cover additional expansion in light engineering products, further expansion in automobile parts and subassemblies, and the initiation of some outputs of some outputs of heavy machinery. 12. While a portion of the above import substitution is already embodied in firm projects, much of the assumed substitution is conjectural and, at best, illustrative of opportunities. It is also conditioned upon supporting Government policies. A: PENDLK A -4- growth prospects for individual products indicate that it should be rw .J L J.W=Qu VWi L.' .L%; LL1A L.C L .L VAJFV.LL0 Du6a JA.LU JU bJ U "VV&~~L 1962 and 1968, corresponding to an average growth rate of about 13% per year LAMr,-WU1S .L11 .L7U.; WUZ 1=41'.Ly V~/ae L44 Xrucesed foods. The following projections were made (values in billion NT$7: 1962 1963 1968 Canned mushrooms 0.32 0.65 0.96 Canned pineapple 0.4u 0.4 0.61 Flavoring powder 0.07 0.16 0.48 Tea 0.30 0.32 0.37 Other 0.16 (0.20) 0.27 Total 1.25 (1.79) 2.77 15. Exports of canned mushrooms have proved a phenomenal success,, with the United States and Western Germany as the major markets. Sales grew from sample shipments in 1960 to about NT$ 320 million equivalent in 1962. They doubled again in 1963, and a further 50Y increase by 196 would seem a reasonable expectation. No change is assumed in the present export price of US$ 12.00 per case. 16. Soil and mosture requirements are less exacting for pineapple than for certain other crops which has permitted the extension of pineapple growing to marginal lands on Taiwan. Moreover, pineapple growing and canning is a labor-intensive industry which gives Taiwan a clear compe.- .titive advantage. Until now, Taiwan canneries have been processing as much fruit as they could obtain. The world market for pineapple (mainly the United States, Western Europe, and Japan) may be approaching saturations and we have conservatively assumed only a 2.5% per year increase in this market. Since no major increase is expected in Hawaii's production, now accounting for about one-half of world exports, production in other areas could grow by 5% per year. If Taiwan shared equally in this growth, its exports would grow from 3 million cases in 1963 (2.5 million cases in 1962) to 3.75 million cases by 1968. The coming into production of new American-owned plantations in the Philippines and elsewhere might reduce this to, say,3.5 million cases. World market prices for pineapple have been stable during the last three years, and with Taiwan canned pineapple selling in Western Europe about 250 below the Hawaiian prices, Taiwan prices should remain firm. 17. Mono-sodium glutamate is a base for flavoring powders (e.g. "Accent"), exports of which rose from virtually nothing in 1960 to US$ 1.7 million in 1962 and an estimated $.0 million equivalent in 1963. It is produced by fermentation of agricultural raw materials. The major export markets are South-East Asia, particularly among the Chinese population in Singapore and Hongkong, and, increasingly, Western Europe. APPENDIX A - 5 - about $970 per ton. The Chinese authorities project approximately a 505 __ - M. Way -L7UVj~ ISOaU J1LU. U&I LW aU5LJ1VbUU1 UAi a LEU-g5 hidden market potential. Prices, however, are expected to decline to $8ww0 ker tn. A market piOture for tns produc is cLouude by tL; difficulties in estimating a market potential so heavily dependent upon ta*t wand ut m )la UeOlopment of a native mono-sodium glutamate industry in some of the major South-East Asia markets (3) uncertainty regarding Taiwanis competitive position; due to the high cost of molasses, the industry has recently shifted to cassava as the major raw material. Mainly as a guess, we have reduced the Cninese estimate or 9oo export proceeds from UJS$ 17.6 million to $12.0 million. 18* Tea exports in 1963 are expected to exceed US$ 8 million. Given the nigh quality of Taiwan tea, and its relatively small share in the world market, the industry has a good potential for expansion. However, present yields and processing productivity are poor. Substantial investments will need to be undertaken in variety improvement, and it will be some time before full benefits of these improvements can be realized. Expectations of a 20% increase in the present output by 1968 would seem reasonably conservative. No change in the present prices has been assumed. *9 An increase by about two-thirds in the exports of all other processed foods to a total of about $7 million equivalent by 1967 would seem a conservative target. This group includes preserved fruits, canned fruits and vegetables (e.g. asparagus, bamboo shoots, tangerines), and yeast. 20 Textiles. The following projections were made (billion NT): 1962 1963 1968 Cotton yarn and thread 0.33 ( 1.32 Cotton piece goods 0.49 ( Wool yarn, cloth and manufactures 0.08 0.20 Rayon and nylon yarns 0.25 0.14 Clothing and apparel (other than wool)0.39 1.34 Manufactures of other fibres 0.14 0.20 Total 1.68 (1.96) 3.20 Exports of textile manufactures doubled between 1960 and 1962, and increased by 17% in 1963. In analyzing future export prospects, it seems convenient to look at the textile sector as a whole. Taiwan is well placed as an exporter of textiles and garments. Cotton is purchased at world market prices, and a new and promising industry manufacturing artificial and synthetic fibres has been established. Much of the textile machinery is modern, and much of it is manufactured on Taiwan at prices below the duty-free landed cost of similar imported machines. !-ames are low, and efficiency and quality in manufacturing are improving. The trend towards better fabrics (using Egyptian cotton and blends with Taiwan-made synthetic yarns) should increase averaze export values. Finally, Taiwan is still a small factor in the total world market, and with aereamaive marketina there should be anle room for expansion. ADtMWMTY A1 -6 - 21. Lumber and manufactures. The following projections were made hn i.a I I.e i~ TAM 'Y %L J %~~. S ~J J L 4 / O. & L 4 . Lumber, sleepers, etc. 0.26 (0.32) 0.50 Total 0.68 (0.96) 1.54 The overwhelming portion of Taiwan plywood exports goes to the United 0 vavd U. ue Zuajul- e;porI. vu unus uarket are Japan kabout, 5 u of tne total in 1962), the Philippines (18Z), and Taiwan (12'). Most of the plywood is cut from Philippine lauan (a Type of manogany) logs. The Philippines are not likely to restrict or tax exports in view of the existence of suostantiaLaaaTionatSu;ppLies on Borneo. rernaps to forestall excessive price competition, Japan has voluntarily limited plywood exports in recent years and seen its market share decline in favor of the other two major producers, particularly Taiwan. The Philippines enjoy substantial tariff preference on plywood imports to the United States (5% duty as compared with the regular import duty of 205) but this preference will now gradually disappear. Hence, Taiwan's export competitiveness should remain high. 22. The lumber industry on Taiwan has not reached the development which might have been expected, considering the existence of substantial forest resources, including softwoods. The Government is turning its attention increasingly to this sector. Some foreign interest in an integrated forest operation is reported. The planned conversion of low- yielding hardwood forests to conifer plantations would increase the supply of logs and should bring prices down. All this activity should also be reflected in increased exports. 23. Pulp, paper and board. Exports are projected to increase from NT$0.17 billion in 1962 to 0.42 billion by 1968. Pulp and paper production in Taiwan has been increasing rapidly in recent years but the future looms difficult for a number of reasons, including the present primitive state of the industry, the need for heavy capital investments in modern newsprint and kraft pulp mills, and the high prices for logs. There are some compensating advantages, in particular a plentiful supply of low-cost bagasse, low labor costs, and reasonable fuel and pcwer costs. 24. Chemicals and allied products. Exports are projected to grow from about NT$0.5 billion in 1962 to NT$1.2 billion in 1968, with man- made fibres which are now unimportant in the export picture providing virtually all of the increase. The China Man-Made Fibre Corporation which began production of viscose rayon in 1957, has since quadrupled its output. Over the next five years, it would convert to improved "polynosic" rayon and also expand into nylon, polyester fibre, and polypropylene fibre. The major new investments would be on the one hand in nylon (in a joint venture with the China Development Corporation) and on the other hand in polyester and polypropylene fibres (financing not yet arranged). Altogether US$33 million equivalent would be invested in 1964-69, including production of the basic intermediates (di-methyl terephtalate, polypropylene AFFEXDIX A - 7- resin, caprolactam). The attractiveness of this scheme arises, in part industry with domestic man-made fibre and providing the backbone of a J V4.L ~ " Va L . L Ir & JJ dJA L4AI .4 CLW AIJ4LVV .L".&D W1S.J.L.&A A.WU.&%A MO produced from refinery feedatocks (ethylene, propylene, aromatics). SIl JS .3___%_ fi-k U.0 _ V5 -A. - . -A . 1-2- . -- -~J A% - -A. _- I-i . a - I - zu- i.'% Inl maour uJL_WUaCA us "IVUSOUSU Jo oULe I'ype UI pou u CUsSUPIO is the small market on Taiwan (rather too small, it would seem, for caproLactam, di-metnyl terephtaLaTe, eTylene cracking, or thermo- plastic resins) and the high cost of capital which would substantially raise tne selling price for e.g. eGylene or caprolactam. On the other hand, world market prices for some of the petrochemical products are high in relation to production costs, partly to cover research and development costs and partly to allow for the risks of obsolescence. Considering the favorable investment incentives and investment climate on Taiwan, and also the low costs of research, one could easily conceive of foreign participation in such a petrochemical venture. The complicated economic, financial, and technical considerations involved in predicting the growth of this industry do not lend themselves to an easy 1yes" or "no" answer. We have assumed that the rate of expansion of exports will be considerably slower than projected by the Chinese authorities, and that the major intermediates would not yet be manufactured by 1968. Hence, there would still be a 60 import component in the projected exports of NT$0.70 billion. 25. Leather, rubber, and miscellaneous products. Exports are projected to grow from NT$0.32 billion in 1962 to $0.48 billion in 1968, i.e. by about 50. By all indications this is an extremely conservative projection but data are lacking for a more careful appraisal. Exports in this group grew slowly in 1958-60 but more than doubled in 1961, and grew by more than a quarter between 1961 and 1962. The main items aRe manufactures of plastics (60% of the total) and rubber. 26,. Non-metallic minerals (cement and flat glass). Exports are projected to grow as follows (M- billion) 1962 1963 1968 Cement 0.28 (0.48) 0.31 Flat glass 0.04 0.14 Other 0.01 0.07 Total 0.33 0.52 Taiwan cement exports have been rising in geometric progression since 1959-60, and estimated 1963 exports of about 0.75 million tons place Taiwan in the fifth place among world exporters. (Japan is in first place with 1962 exports of 1.8 million tons). The present export price level differs only slightly from domestic prices on Taiwan after considering commodity tax and transportation charges. Other South-East Asia producers are expanding their cement production, and some shrinkage of exports Ln that area may be expected. with possibly some lowering of export priZes. A reduction in exports by about 40% below the 1963 record level has therefore been asnumad. Conceivably. however. Taiwan might maintain her -- APPENDI-A Ak present rate of exports in competition with Japan. Japan is also the main competitor in flat glass. Taiwan's new flat glass industry is expanding, and is initiating the production of new qualities of glass. Since Taiwanis share in the total export market is small, a very sizeable increase in sales may be expected. Z7. Basic metals and semi-manufactures. Exports are projected to grow as follows (NT$ billion): 1962 1963 1968 Rolled steel products 0.27 0.28 Aluminum ingots and products 0.08 0.25 Other 0.01 0.10 Total 0.36 (0.48) 0.63 The outlook for the world steel market is one of hard competition and low profit margins, and Taiwan producers which are quite inefficient may find it difficult to maintain their present rate of exports. The prospects are better in aluminum where the capacity needed for the additional output is already being installed. Production would appear to be profitable at present world market prices based upon power rates which are a fair approximation of the actual cost of supplying this type of power. Economies of scale should be obtainable from a two-thirds increase in output above the 1962 level. 2R. Metal ranufactures and machinery. Exports in this sector are Drojected to arow from NT$0.22 billion in 1962 to NTl.05 billion in 2.968. The growth between 1958 and 1963 is shown below (billion NT$). 1958 0.01 1961 0.15 1979 0.03 1962 0.22 1960 0.05 177 (o.ho) There are about half a dozen major manufacturere in this field, of which four are publicly owned. The Droducts presently exported include diesel engines and engines for fishing vessels, electric wire and cable, electric meters and sundry electrical apnliances. Prosoective items are bicycles. sewing machines, textile machinery, processing machinery, small electric motors. refrigerators. small transformers. shins. These are all auite labor-intensive industries and, with a few exceptions, they do not require a highly Ronhisticated tvne of engineerin2. Janan has been a major producer of such items in the past but that country is now consciously tryina to shift its Arnort offqnsive towards more comnlax products. Taiwan is well placed to fill the gap. A five-fold increase in exports hetnn 19F9 anM 19M8 in wll within the rnnan of the nossibh. Jssuminv proper Government support for these new industries. Even at that rates exports would accun't nlY for about one-quartr of the total nroduction of the sector, and in quite a few cases would be a necessary condition APPElDI A Illustrative Projection of 1968 Manufacturig Output Tllion NT dollars at 1962 price n 1962 Actual Gross Values Projectejd1968 Grss Values -t Otpat Index of Output Imports Exports Consump- Exports Consump- Imports import Output Values 0ut Industry Sector tion tion (no sub- Substi- 1 es stitution) tution& 1962 1968 Food Sugar 2.00 - 1.84 c16 2.74 0.25 - - 2.99 1,00 1.50 150 Fishery and sea products - Cereal products 3.42 0.01 0.03 2.3 L 2e29 3> aC6 0.27 .26 1.7 11 Processed fruits and vegetables ie0.1 Animal products and groceie 0.16 0.h0 Tobacco 2.59 - 0.00 2.59 - 3.36. - - 3.36 0.31 0.h0 130 Beverages 1.70 - 0.01 1.69 - 2.2C - - 2.20 0.09 0.13 130 Textiles 6.33 0.09 1.72 L.70 3.20 7.15 0.L - 10.21 2.22 3.58 161 Timber and wood products 1.20 0.01 0.68 0."3 1.51, O.81t 0.02 - 2.33 0.59 1.14 194 Pulp and paper .1.35 0.25 0.17 1.3 0.12 2.38 0. 14 - 2.36 0.70 1.22 175 Chemicals and allied products 3.12 2.21 0.53 4.80 1.20 7.12 3.55 1.79 6.L6 1.09 2.26 207 Fertilizers (7-1) -.79) (. Pharmaceuticals (0.40) - (0.64) - Man--made fibres (0.27) (0.04) (0.70) (0.88) (0.88) Synthetic resins and prodcts (0.15) - (0.27) (0.11,) Dyes, pairts, and pigments (0.17) (0.01) 5 (0.0) (1.07) (0.37) Oils, fats, soaps, etc. (0.05) (0.32) 3undry chemicals (0.56) (0.16) Petroleum and coal products 1.L3 0.1L 0.07 1.50 0.21 2.10 2.15 .63 0.95 151 1-eather, rubber and misc. products 0.58 0.28 D.32 0.514 0.L8 0.8I 0.13 0.15 1.0L 0.23 0.41 179 :on-metallic mirerals 1.93 0.08 0.33 1.68 052 .-7t/ 0.13 - 2.96 1.16 1.78 153 Basic metals and semi- ntanufactures 1.35 0.99 0.3 2.00 0.63 .1.1&' 2.2h - 2.83 0.66 1.38 210 Metal manufactures 0.45 0.55 0.1h 0.86 11aChin-ery and tools 0.76 1.84 0.6 25 1.05 -7.104 5.h0 0. 1.80 r '4.55 1.01 P-2.96 293 Airplanes, vessels, and vehicles 0.3L 0.52 0.01 0.85 Scientific instruments (a) 0.13 - (0.13) GRA!.D TOTAL:7= .. 2 ** g/ Not separately stated. ' Based upon an assumed increase in construction activity by 75 per cent per year, i.e., 53 per cent 1962-3968* (ot. also footnote d). gi Assuming one-balf of the demand for basic metals varies with construction activity and the other half with activity in the metal manufacturing and machinery industries: 0.5 * 2.92 = 1.46 0.5 . 1.53 = 9,32 g/ The output of metal manufacturing and machinery industries is represented mainly by investment goods but also by consumer items, like sewing machines, bicycles, electric fans, electric light bulbs, etc. Lacking more precise information on this point, we have assumed arbitrarily that consumer items repre- sented 20 per cent of the 1962 output, and that the demand for them will double by 1968. This may be on the low oide., Total investment demand was assumed to increase at a rate of 7.5 per cent per annum, or 53 per cent between 1962 and 1968. The two major components of investment (construction and equipment purchases) were assumed to increase at the same rate. On this basis, the total increase in the domestic demand for the products of the metal manufacturing and machinery industries would be as follows: 0.80 . 1.53 = 1.22 0.20 . 2.00 = gAgg g/ Import substitution, in this context, is defined as the coverage of a higher percentage of the total supply (imports plus domestic production) by domestic products. A VVikMTY B JI J 5LUIVe I I YJ~ UJ.LVA1L V.L -L7ru' .L±ves+---+U ~ J.. in Manufacturing _1 L L s.UJ11CUUJg Lll j Ut. ± Vte jtWJtUL± L_t k4U _ L LI~.LUJJ_JU _ I ~ ~ .J4LJC1X%V"LA1~ LPW%d approaches have been used: (a) Overall statistical approach, based upon past trends in investment requirements and outputs for the manu'acuuriug sector as a whole. (b) Direct estimates, by sectors, based upon an appraisal of future growth prospects for major sectors and estimates of the corresponding investment requirements. 2. Both approaches have certain weaknesses. The statistical approach assumes a continuity with the past which is not entirely justified. Tnus, there may be obstacles to growth once the first rapid wave of industrial- ization has spent itself; or investment requirements may take an upward leap if it is necessary to shift quickly into more capital-intensive industries. The major weakness of the direct estimating approach, on the other hand, is lack of information regarding the actual investments required to achieve specified increases in output. Statistical approach 3. An inspection of Graph B suggests that the marginal "capital-output ratio" in manufacturing (when smoothed to a 3-year moving average) has kept rather steady at a value slightly above 2.0 during the last seven years. Statistically, there is a slight tendency for this rate to decline from 2.5 in 1953 to about 2.1 in 1962. A projection to 1968 would yield a value of about 1.75. 4. Nevertheless. both the fitted trendlines and the moving average used in computing the capital-output ratio are somewhat insensitive to recent changes, assuming these to be something more than random variations. In actual fact, there appears to be a tendency for the capital output ratio to be risina. While investments show a uniformly rising trend. there is a suggestion of a slackening in the percentage rate of increase in output which would be consistent with the hvoothesis of a constant annual incr- ment or a very slowly rising increment for the future. Combining these two trends would yield a rising canital-outnut ratio. q_ Tn fant-. the capitalq mitnnt rnt.in fnr 19611 -rarkc mit. At 9-1 Anti the ratio assumed in the 1961-661 "Industrial and Mining Program" is 2.7 which. adiusted for A nne-vp.r time la wmuld nrnhabv he ahont 9_ 6. Prnipntincr inton t.he- fuiturem- ouvr fixed po%int oF -refesrence- isz the assumption that manufacturing output will grow by nearly 80 per cent batiwen nd This coesnot neesly i mpl n p oximation ye cumulative increase. This does not necessarily imply an approximation of ~~1VV+ n-p,,+ ~ 4-1- - 4-- - ,1 ,. -l- A PPNTY ' assumption would be a gradual tapering off in the percentage rate of gwg ll. I-L -00AII,k1Ahe L"r'il .LUUC' I"--v A.L .L l ULLU LLIU jJCZOU V%IJ CL r U JW LX &CW of below ten per cent by 1968. Using the perhaps rather extreme assump.- tLo! of costn annua inreens say on- thend- ore of* i. iln _ per year, the rate of growth would decline from 13.5 per cent in 1962 to 7. per cent in 196O 7. This means that, in terms of purely statistical projections, the manufacturing investments would be associated with very different capital- output ratios depending upon the time pattern for the 0 per cent increase output between 1962 and 1968. Thus, an investment of, say, $5.2 million for L9WR;f would be associated with either a capital-output ratio or 4.0 (assuming constant absolute increments to output) or about 2.7 (assuming output growth by 10 per cent per year). A tapering off in the percentage rate of growth in output seems likely - yet substantial tapering (constant annual increments to output) leads to capital-output ratios which are a priori unreasonable viewed in relation either to the past ratios on Taiwan or the experience of other countries. In conclusion, the statistical approach would not seem to offer a practical solution to the estimation of future investment requirements. Direct estimates 8. The direct estimates of investment requirements, by sectors, and the corresponding capital-output ratios are summarized in Table B:2. These estimates are consistent with the assumed growth of output in each sector. Two types of data are used. For certain industries, some detailed know- ledge of future expansion plans and the corresponding investments was available. For other industries, investment requirements were estimated on the basis of assumed typical capital-output ratios (generally those used by the Taiwan planning authorities in their 1961-6h plan). 9. The derivation of the orobable 1968 capital investments in manufac- turing from these data would be as follows: Projected average annual net investments 1963-68 NT$3.75 billion Estimated net investments 1962 NT43.OO billion Estimated net investments 19682/ NTSh.4_ billion 1/ The reason for choosing this narticular figure is that it rpnresnnts the estimate arrived at by the direct estimating approach. 2/ Assuming net investments grow by about NT$0.22 billion per year over the 1969 1pvP1 - 3- APPENIXij 13 Estimated replacement investments 19682/ NT$o.88 billion Estimated gross manufacturing investments 1968 NT$$.23 billioiw/ 10. The estimate for investment requirements 1963-1968 is influenced in an important manner by the assumption that an integrated steel mill would be built during this period. Since the outputs from the mill, in the main, would only become available after 1968, this inevitably tends to raise the unlagged capital-output ratio for 1963-1968. 11. The work-sheets from which the estimates in Table B:2 were computed are on file in the IBRD Economic Department, and are available for cross- checking. These estimates were based both on specific information on prospective projects and on bench-mark data from other countries. Never- theless, they are necessarily rough, and their inclusion in detail in this context might give a misleading idea as to their exactness or applicability. 1/ Assuming rPn1ar!mPnt inve.qtmpnt. in 1968 wonuld h Pni1 to Prn.q investments fifteen years earlier. It is clear that replacement inv.tmPnt rin vary in raIntion tn antual investments in ho nnt. The particular relationship assumed is only a rough guess, and iamniri onl _cz.iitj1X mmn mr coz.! hdn+.+.gn-P n?%v^rrnn+jnr investments in mining and in the construction industry (equal to the investments in manufacturing, mining, and construction in 1968 of Table B::1 Basic Data for Graph B:L RelationshiBetween Manufacturinfr Investments and Manufactring Out (figures in billion NT dollarsj Gross Fixed Domestic Investment in Manufacturing Product in Manufacturing Capital Output Ratio In actual ?/In 1961 " b 1961 prices - - YE prices Deflator- -Prices Actual Value Annual Incr. Actual d"sted 1953 0.54 62 0.87 4,.28 1954 0,.49 69 0.71 4.57 0.29 3.00 2.52 1955 0.84 78.5 L.07 5,.11 0.54 1.31 1.88 1956 097 87.5 1.11 5.33 0.22 4.86 2.51 1957 1.30 92.5 1.41 6.11 0.78 1.42 1.98 1958 1,72 98 1.75 6.54 0.43 3.28 2.07 1959 1.88 100 1.88 7.49 0.95 1.S4 1.97 1960 2.43 100 2.43 8.54 1.05 1.79 2.13 1961 2.67 100 2.67 9.62 1.08 2.25 1962 99.5 10.77 1.15 2.32 / Excluding investments in increased inventories, for which no data are available. 2/ Deflated by the price index for machinery. Machinery investments predominate in total investment expenditures in manufacturing on Taiwan. / Using the 1961 net product in manufacturing as the startiy point, figures for other years were obtained from the ratio of the manufacturing index for that year to the 1961 index figure. The calculations were based upon a 1961 index value of 225.1 (Industry of Free China, Aubumt 1963). This figure has lately been revised to 222.1 which however affects only the increments 1960-1961 and 1961-1962. / Gross Fixed Investments in one year have been related to the increase in output in the following year. The adjusted ratio is based upon three-year moving averages for both the investment and the increase- in-output series. Table B:2 BU-gh Projection of Net Investment Regirements in Manufacturing Projected Increase Net Investment Annual Value Added Capital/Output Requirements Industrial Sector 1962-1968 Ratio 1963-1968 2/ sourrs and Notes 11ion NTillion D11 Sugar 0.50 (2.00) 1.00 Tai Sugar est. 0.68 incomplete? Other food processing 0.61 2.23 (1.36) Tobacco and beverages 0.13 4.30 (0.56) Textiles 1.36 2.98 (4.05) Plywood 0.21 (1.25) 0.26 Other lumber products 0.34 1.00 (0.34) Pulp and paper 0.52 (1.52) 0.79 May be on the low aide Man-sade fibres 0.70 (1.75) 1.20 China Manmade Fibre Corp. Chemicala 0.47 4.25 (2.00) Petroleum refining, etc. 0.32 (1.65) 0.53 China Petr. Corp. & other data Leather, rubber and misc. 0.18 2.00 (0.36) Cement 0.31 (1.42) 0.44 Other non-metallic minerals 0.31 1.42 (0.44) Aluminum 0.16 (2.62) 0.42 Taiwan Aluminum Steel and other basic metals 0.56 (10.00) 5.60 Major benefits accruing only after 1968 Metal manufactures and machinery 1.95 1.70 (3.32) 1/ For some seotors, direct estimates of investment requirements were available. The corresponding capital- output ratios are then shown within brackets. For other sectors, investment requirements were estimated on the basis of capital-output ratios (generally those used by the Taiwan planning authorities in their oA- a). For %,ow ClUioul, 11 uveUmo11U Un.matea are shown wlthin brackets. g/ Not considering replacement and modernization requirements. O. 311-L:312 DIETZGEN GRAPH PAPER EUGENE DIETZOEN CO. SEMI -LOGARITHMIC MADE IN U. S. A. 1 C:YCLE!5 X 12 DIVISIONS PER INCH . .. ... . . . .a~. 42 _'E: >-3_ APPENDLX C THE COAL MINING INDUSTRY Present Position 1. Taiwan's coal mining industry in recent years has been producing at an annual rate of about four million tons. It covers over 80 per ce:nt of the country's total energy requirements. The 1962 coal output was valued at about US$37 million equivalent or about Us$8.25 per ton coal. Some of the coal is metallurgical coking coal, and exports, mainly to Japan averaged nearly US$2 million equivalent per year in 1960-1963. The industry directly employs some 85.000 people. Production is predominantly from about 260 private mines. About 125 mines producing 1,000 or more tons Der month account for about 85 per cent of the output. 2. A systematic anoraisal of coal reserves in Taiwan made in recent years indicates total recoverable reserves of about 200 million tons (including measured. indicated. and inferred reserves of raw coal before washing losses). They include 50 million tons in seams 0.25-0.40 m.thick and another 80 million tons in seems OL0-60 m. thick. About LO Der cent of the total reserves are classified as of "coking coal" quality. The exact delineation of tqs nteorv i.- not shown on the survey rpnort! nor is there a discussion of the extent to which these coals might be used as metallurgical nkin canl either lonn or blended uith other Taiwan or imported coals. A substantial portion, it seems, could be so used. 3. The geological conditions for coal mining are not particularly f'.qra-rh1P Bedsc havenvaringnp, an ndl with n he p s Pmetsam thethckps often varies considerably. Moreover, the number of workable seams per s. km. o-f sur,face Js v e~wr,rv lo ths +.ccconditions an- ie s serious from an economic point of view in a country where wages are restricted. All the present mines have been opened by means of inclines and XL.1L~ p U~ U -4 4 -4. U~ d A _4U_~ . M1__ ___U J~. JIJ I. ULU ground ranges between 0.25 and 0.75 tons which seems quite respectable. .'. JLu tlvoJ UV.L W1C.L rJ. ULUIU% .LCLVU. r IJon o.L coaJ.. L JI n d o UII.~L J L basis wou"d be lower than in most other countries and this is also reflected in selling Ostacles to Develobment 4. The major problem of Taiwan*s coal industry is not today's costs but its future development. Present production has been mainly from diggings at the surface or from slope mines. But the reserves near the surface are getting smaller and the slopes longer, i.e. uneconomical. To reach the deeper beds, vertical shafts must be sunk and much larger scales of output will be required for economic operations. Such growth will be difficult for three reasons: (1) Present concessions are far too small, and do not take into account geological structure. This is particularly true for private concessions while national and provincial concessions are generally much larger and also large in relation to the share of public - 2 APPENDIX C therefore, would seem to be a necessary prelude to efficient ex- -11~ .L-..-- - --_ -4 --. kr; Uoa mining au e uUpt1 n1ow ev±UagUu i a u1Lr,1"y %;P_k- intensive operation, involving costly shaft-sinking, and necessitating a large scale of output, To increase the scale of output, a higher degree of mechanization, particularly of haulage arrangements, will also be necessary. Such greatly expanded operations raise problems of management, and particularly of finance. Loans now available at six year terms may be helpful for small improvements but are hopelessly inadequate for large scale development, involving very long-range investments. (3) Private investors cannot be expected to make long-range invest- ments in the coal mining industry unless reasonably assured of a stable market at remunerative prices. Increased production of fuel oil and, in particular, of natural gas have introduced an element of uncertainty into the future market for coal. To permit long-run investment planning in the coal industry, a national energy policy will be needed, or at least certain guidelines commiting the Government to a reasonable stabilization of markets and prices for coal. Type of Study Needed 5. The prima facie evidence is that there may still be a future for economic coal mining on Taiwan, but that a critical stage has been reached where future development on a sound basis may be seriously Jeopardized. Foreign technical assistance will be needed in preparing the blue-prints for the future development of the coal mining industry and for the neces- sary policy decisions. Without prejudging the terms of reference of such a study. it is suggested that it should cover the following main topics. (a) Markets and Prices. A study of the future market and prices for coal should be made based upon clearly stated assumptions regard- ing (n) thp futiirA grnwth nf thp Annnnimy nnd nf its enerov rniire- ments (b) the future availability and cost of other local or im- nnrf." _Qnni?e-Pn nf onorav I14lafio M1-n+iv1 yc n 1%T1^. power, and (c) the preference (e.g. through subsidies for coal or tavation of rival furils) that m±ght I -_"Ap ^ or +hono+ic or other grounds. (Cf. below point b). Allowance should be made not r-mly -P -flitu f,4 1%--l w,nn 4-Is )- 4 cos -r,p A. n4rg - l4 _P 4_ J u 4. 5.. V.4%' fOAE U tA %.tJ V tJ prodh."tA-L, CUSSi. coal (point(e) below) but also for possible improvement in the distribu.tion -A in t-he efficinc of - uiato of. coal with- specific recommendations in these areas. Finally, special at- Uention shOuuu u paiu to te possblue requIrements of metal- lurgical coking coal by the domestic steel industry, and the coal suduy would need to be closely co-ordinated with the proposed steel study. (Appendix D.) - 3 - APPENDIX C (b) Economic Priorities. The indirect economic benefits from coal mining should be compared with the alternatives of expanding other local sources of energy or of importing fuels. An out-, come of this part of the study might be recommendations re- garding the order of magnitude of future protection or sub- sidies to the industry. (c) Organization of the Industry and Production Methods. The study should compare the present organization and production methods of the TPains cet ~incitrv with the tvne of nrpanization and policies required for the most efficient production in the futurp- This would inevitably include an annaisal of existine coal resources and an evaluation of alternative techniques and notR of mining and nrnnPeing the cnn_ Thp qi7, of the future market (as determined in Parts I and II of the study) would have an mNortnt honing unn thia nroblem_ nnideration would al so have to be given to the probable future development of the cost On the other hand, detailed assumptions or recommendations as to included only if vital to the general development of the industry. (d) Institutional Conditions. Great importance should be attached GO U11t; gBLES 11LL I ULLEJ.0LL;U1U.U ,U1jO Wli.UAI WVU.LU jJU.1JL_LU ILV coal industry to make its maximum contribution to the economy: mining l.egisltioln, consolidation of conces sions, finance, stabilization of markets and prices, labor standards, etc. (e) Investment Requirements and Production Costs. Estimates should e sumitted regarding the investments in mining and processing facilities required to reach the levels of output envisaged and of.-the resulting production costs. 6. Considerable work would be involved in fixing certain general economic assumptions, e.go-the growth pattern for the economy, economic priorities, the future cost or capital and mine labor. It would seem appropriate that this portion of the work should be essentially concluded before the arrival of the main body of the study mission. APPENDIX D TIE STEEL INDUSTRY . Uween 1950 and 17u4, appareu steel co1nUptLon on Taiwan grew from about 50,000 tons to about 275,000 tons of finished steel, or by abut 17.5 per cent per year. This was a period of rapidly rising gross national product; nevertheless, between 1952 and 1962, for each percen- tage point increse it the gross national product, steel consumpulan grew by 1.7 percentage points. 2. Domestic steel production has also expanded rapidly. In 1950, imports of finished steel accounted for 70 per cent of the total supply. In 1962, this proportion had fallen to about one-third. In the same year, about 57,000 tons of steel were exported from Taiwan to neighbouring countries so that one may speak of net imports of finished steel totalling only about 56,000 tons or 20 per cent of the domestic requirements. In addition, about 27,000 tons of semi-finished items (nail rods, skelp, and sheet bars) were imported. Imports of finished products consist mainly of flat products together with some seamless pipe and heavy shapes, items which are not now manufactured in Taiwan. The wholesale price for ordinary reinforcing rods in Taipei is about US"l0 - $110 per ton which is lower than e.g. in the United States. 3. The recent rapid growth and relatively modest price level gives a somewhat misleading picture of the real strength of the Taiwan steel industry. There are said to be no less than 50 producers, of which the largest, Tang Eng Iron Works in Kaohsiung produced about 90,000 tons of finished steel in 1962, and the second largest one, Taiwan Iron Mfg. Corp. about 30,000 tons (out of a total of about 220,000 tons). Generally speaking, production is on a small scale, with outmoded equipment and poor utilization of capacity, and with very little capital available for expansion or modernization. Steel ingots are produced mainly from scrap in small electric furnaces. The Tang Eng Norks is now operated by the Provincial Government after the company encountered financial difficulties. Although these difficulties were precinated by other factors. nresent prices do not cover the company's costs. 4. No worthwhile iron ore deposits have been discovered in Taiwan. On the other hand, there are fairly substantial reserves of coking coal though scattered and of uneven quality (cf. Appendix C). A by-product coke-oven plant with an annual canacitv of 130.000 tons of mai riial noks mris at Nankong, near Taipei. There are adequate deposits of limestone in several nTness. %5 At least two nrnnnAn1A liie hpn nnmAde for a mcrpi-n in+owcnt0Af 'Z+Ptal plant, both based upon blast furnaces, oxygen converters, and continuous year of sponge iron as a substitute for imported steel scrap, using natural evgsnS t he re-ulito4 -. fuN10 t- ~ ~ ~ ~ ..J4- & on LoDJ 41-._ - -1 - . weJ fl'U ±L U UIO U U11%5 k,.lUpjUOt-.L li.- CuI ±iibUt-i.LtU P.JculUq ULL Llt'W plant would start by supplying 175,000 tons of billets to existing rolling mzevueU wuu±u grauualdy expAud inuo itS own roling mill operations. According to the other proposal, the plant would start out with an annual - 2 - APPENDIX D output of 325,000 tons of semi-finished and finished steel, of which 1qn-CM tons wmilA ho bill t. fnr wv-itina nroduncrs and tht rpmninrir an assortment of flat products. The latter project is expensive, involv inga n.nml1 7vtat+mon of over k9) millionnnivalent and remiltina in prices for both billets and flat products which, it is estimated, would 7- ~ ,,,s~+~ 1 + n- amo+A +nc vie ,, r ln1+ +-9%nA wbn'~,ftth~ti,lp idea of an integrated steel plant for Taiwan as premature and uneconomical. On the other hanA +he -ls0 k--rr4An a cl-Olenneto +fi jnth -nd a time schedule, by which efficient integrated steel production might Vws - J "% LIFL L44 LCL.6YVdULe JUA ,1V4ULJ.Y J "wAi, WL_O A provide an answer to, among others, the following questions. (a) What will be the estimated demand for steel and iron on Taiwan in -LU7 anu Ly f 41, vy types or S bee.L culu vyLmJor n uLnaum u k iiv L , based upon carefully reasoned assumptions as to the future rate and pattern of growth of the economy? (b) what can be done to modernize the existing steel industry? - What would be the investments and investment returns and what would be the employment effects of such modernization? (c) in what manner and according to what time schedule can an integrated steel industry be most economically established on Taiwan? - What would be the economic effects and the financial implications of the scheme recommended? - An answer to these general questions should include specific consideration, among others, of the following points; (i) What alternative processes for the production of iron and steel should be considered for Taiwan? - With respect to iron, would it be practical and economical to start with a direct reduction process (using natural gas) or with electric iron furnaces, taking advantage of added flexibility, lower investment requirements and lower raw material costs (if indeed they would be lower), adding blast furnace operations when the total market permitted sufficient economies of scale? (ii) Where should an integrated steel mill be located? Con- sidering, in particular, the blast furnace process, would it be economical to build an integrated mill near the existing by-product coke ovens and some of the better deposits of metallurgical coal or would it be better to lo:cate it in Kaohsiung where imported iron ore and, if needed. coking coal or coke could be delivered more cheaply? (iii) In what way could domestic coals be utilized most efficientlv fnr th. nrndntion of manlurgial cnke? What are the total resources of coal which could be thus iicz-r? WAhat. wouldi be t.h. cotnf domaei coem asnm pared with coke from imported coal, and what would be and production costs per ton of iron? - 3 - APPENDIX ) kiv At,/ what stg would U J.U v conveninu V W I.L_L U- rol -5J44 of flat products? - What are the economics and marketa- ously cast sheet bars? - At what stage would it be eco- nomical to aa strip-mlll 'Lac 2acLLti e, ay poUv.Ly a Steckel-mill? 8. These general ideas would have to be completed and moulded into exact terms of reference, Viewed as a whole, the development of an integratod steel industry (if economically feasible) will be perhaps the most expensive project to be undertaken in the next decade in Taiwan. Undoubtedly, there are quite a few consulting groups which could undertake the preliminary study* Experience from previous studies of the steel industry on Taiwan and elsewhere, indicate that attention to the following points may be desirable: (a) In order to make an economic choice between various alternatives, consultants should be told what wages and salaries and what interest rates and rates of return on the investment should be used for calculatory purposes, taking into account expected future changes in these factor payments. (b) In making the financial projections and in calculating the ultimate returns on the investment, it is important not to carry out these projections as though the initial plant once completed, would remain without changes for the period covered by the projections. On the contrary. allowance should be made, even though only in a general and approximate way, for future expansion and completion of facilities. Such a perspective becomes imortant because of the economies of scale typically to be expected in this industry. (c) In estimating investment requirements, it is important that the consultants be thoroughly faniliar with conditions on Taiwan. Recent experience suggests that much industrial construction work can be undertaken at very lw cost ;nd at sneeds comnaring favorably with completion periods in many Western countries. (d) Investment costs in steel are high. Great disadvantages may arise from selecting consultants associated with equinment sunnlirs- The same holds true for credits conditioned upon procurement in the inding cn+.try inann thrh suplier's credits will also normally prove a heavy burden. These factors should be given further into the future, in the financial planning. A,PPv\T1TY V nTDPT c'(-\Amf--DAT Q A NM1T PTQrrv zHTTTC I. Products on which there are investment and import controls, grouped according-to- the --snfr oto A. Fear of excess capacity Iron and steel Pharmaceuticals (except integrated plants) Vegetable oils boap Rice milling (except fat-splitting) Wheat flour milling Matches Brown sugar Bagasse board Paper Light bulbs (except for special projects) Printing Soda and chlorine B. Minimum standards in terms of quality of product and/or economic eise of plant Food preserving Canned foods (also C) Vegetable processing Can-making Tea processing Wheat flour milling Rlubber products Wood fibre board and particle board (also D) C. Orderly export marketing Plywood Mono-sodium alutamate Canned foods (also II) Textile industry. exceDt finishing and dying D. Problematic success Sawmilling Wood fibre board and particle board (also B) - 2- APFEiFDIX E II. Summary Description of Present Import Duties The following table provides a preliminary frame of reference with respect to the structure of the Chinese customs tariff. Typical Percentage Rates of Duty Commodity Group and Item 0-h 5-9 10-19 20-39 40-59 60-79 over Foods and Beverages Cereal products x x Processed fruits and vegetables X Fishery and sea products x X X Animal products x Condensed milk, lactose X Coffee, cocoa, table waters x Tobacco and alcoholic beverages x Textiles and clothing Artificial fibres x Syvnthetic fibres X Wool yarn x Cotton yarn x Silk. artificial and synthetic fibre yarns x x fishing lines., binding twine x Wool fabrics x frnt.t.nn fn'hrics x- Silk and synthetic fibre fabrics x Jeties ah ndoina synthetic x Clothn yrn Shoes (of leather) x Sawing 1 noto,n, ral t'~' hr,nd. x Mx x purpsesn ies. tindin cord) x lAter sbins xand m lie and manufactec f Jnt.ao c lth and hre p4urposes. cL (IicL.. ireUcord) Sleepers x LumberY, p ywou, veneers x Furniture x APPENDIX E Typical Percentage Rates of Duty Commodity Group and Item 0-4 5-9 10-19 20-39 40-59 60-79 over Pulp and paper Newsprint x cIaper Wallpaper x Building materials Common bricks x C en,window-glass,tls sanitary porcelain x Coal, coke, tar and asbestos products x x Iron and steel products Rails x Pig iron, ingots, blooms, reinf. bars, hoops, tool steel, wire x Plates, sheets, galv. sheets, tin-plate pipes and tubes, structurals x Metals and manufactures Unworked metals x x x x Metal manufactures x Chemicals and Pharmaceuticals, etc. Chemical fertilizers, formaldehyde x Soda ash, linseed oil, sulphuric acid, sulpha drugs, vitamins x Alcohol, DDT, caustic soda, chlorine, acethylene, soaps, detergents x Petroleum Products Fuel oil x Gasoline, Kerosene x Machinery and equipment Prime movers, steamboilers, agricultural machinery, high-voltage electrical machinery, sewing machines, industrial processing machinery x Low-voltage el. machinery, office machines x APPENDIX E I An anAlysis.q ig~. thi. thi- tnri f'f wqs nn+,ctonhpefnllryw- ing general principles (though with many exceptions): (a) Relatively moderate duties (5 - 20 per cent) on important agri- pulp, metal bars and shapes, steel bars and rods, rails and sleepers frvv._ - +a y, 4-,---ne -P nr nP-nrn f,1 .-41 -1.. r-A nl magnesite bricks. (b) Average duties (25 - 40 per cent) on semi-finished or finished thread, or used in agriculture or industry, e.g. sewing thread, binding twine fising yarn, tire ord, etc. otton yarn, new.pLn and -ou-- bricks also fall within this category. (c) High duties (45 - 75 per cent) on most processed foods, synthetic fiures, wool yarns, cotton and Jute fabrics, cheaper types of clot-ing, leather and leather goods, rubber manufactures, paper other than news- print, cement, window glass, sanitary porcelain, gasoline and kerosene, caustic soda and chlorine, soaps and detergents. (d) Very high duties on luxuries, on artificial fibres, and fabrics made of wool or man-made fibres. III. Some Tentative Guidelines for the Revision of the Customs Tariff 2. The following suggestions are not firm recommendations. Instead, they should be regarded as a contribution to the discussion regarding basic principles in revising the present customs tariff on Taiwan. 3. The major purpose of the import duty (apart from revenue considerations) is to provide time-limited protection for infant industries. Each duty therefore may consist of two parts: (a) a temporarily higher duty granted for the limited period of time it takes for a new industry to reach rea- sonable competitiveness or for an ailing industry to reorganize and regain its effectiveness, (b) a lower permanent duty justified on other grounds (see below). It may be expected that increased duties will be required for e.g. steel, machinery, and certain chemicals representing the logical next stage in Taiwan's industrial development while a lowering of duties will be opportune for many textile items, cement, window glass, etc. Since provision has already been made for the refunding of import duties on materials incorporated in exported articles. higher duties on industrial raw materials would not reduce Taiwan's export competitiveness. h. Protection is sometimes justified to compensate for the difference between the commercial cost of a certain product and its true economic cost. Another way of stating the same idea is that as long as the protective duty dos not exceed the indirct Aonomic benefits obtained by nroducing the - - APPE1"DIX E artcie domesically rater than importing i, that rat of proUtcLion iJ justified. The major indirect economic benefits are employment gains (in a country where there is substantial un- or underemployment) and foreign exchange savings (in a country suffering from a protracted foreign exchange shortage). In this context, two points may be noted. Only to the extent that one predicts a protracted shortage of foreign exchange could one justify a substantial permanent premium on import-saving activities. In the same way, while the benefits of additional employment may be high today, the premium for labor-intensiveness is likely to fall in the future. 5. It seems clear that Taiwan's economic future lies in the rapid develop- ment of industrial exports. In principle, the system of economic controls and incentives should be neutral as between import saving and exports. At the present stage of Taiwan's economic development, time-limited incentives should be given to certain new industries, including the development of new exports. In framing the tariff system great care must be taken with a view to providing balanced growth as between export industries and import-saving industries. 6. The present Chinese tariff generally provides higher percentage duties on finished products than on semi-manufactured items and raw materials used in their manufacture. There might have been some justification for this pattern twenty years ago when import substitution in light processing in- dustries offered particularly good prospects for rapid industrial growth,. Even then there were dangers in a rigid adherence to this type of Dattern. The justified protection for a given product does not depend upon whether it is a raw material or a finished item but unon the nossibility of economic pro- duction within a reasonable period of time. Very high duties on finished articles might easily lead to an eaggerated nrotAction of nrocssing margins as illustrated in the following hypothetical example (based upon costs from anothr rountv) Cost. stutr for wheat flou (US$ per ton) Without duty With 10% duty Wheat 93.5o Sacks 2.00 Supplies and utilities 4.70 Margin for processing 1.80 56.00 J L.A.-LiLr, JJ.L L% JJLC. 0 %awJ -L.j)UJ 7 Let us assume ta,i h bv xml,tedmsi iln n dustry purchases wheat and bags at world market prices. In the absence,of uuty, the elUlig prUe for flour would also be equal to the world market price (allowing for ocean freight and similar charges). If a 10 per cent duty is imposed on wheat flour, this would provide roughly a 33 per cent proTection of the margin for converting wheat into flour. In the same way, by the principles underlying the present tariff, the margin for drawing copper into wire would be heavily protected while there would be far less protection for -6 - APPENDIX E be in sharp contradiction to the real economic priorities. 8. If an addition is made to a tariff determined in accordance with criteria mention~ea in paras. - >, on account of Tne non-essential nature of the item, an excise tax of the same order should be levied on similaTr domestically produced gooas. APPENDIX F DATA ON PUBLIC ENTERPRISE I. Estimated Gross Output Value, by Princip4 Industries, and Share of Public Enterprise, 1962 Sector Gross Output Value Per cent (million NT4 Public Public % Total Sector Coal Fining 1,485.7 83.6 5.6 Metal Mining 175.9 155.1 88.2 Crude Petroleum and Natural Gas 32.0 32.0 100.0 Salt Evaporation 70.0 70.0 100.0 Miscellaneous Mining 57.6 13.4 23.3 Total Mining 1,521.2 33471 19.4 Food 6,167.4 2,525.3 40.9 Beverages 1,686.6 1,487.0 88.2 Tobacco 2,585.8 2,585.8 100.0 Textiles 5,665.2 116.6 2.1 Apparel and Other Wear 625.8 - - Wood and Wood Products 1,509.3 lo4.8 6.9 Paper and Paper Products 1,476.6 - - Printing 693.4 41.3 6.0 Leather 83.0 - - Rubber Products 538.9 - - Chemicals and Chemical Products 3.219.0 1,707.1 53.0 Products of Petroleum and Coal 2,010.5 1,934.0 96.2 Non-metallic Mineral Products 2,223.5 14.5 0.7 Basic Metals 1,355.2 385.7 28.5 Metal Products 6L7.3 104.1 16.1 Machinery 606.2 72.8 12.0 Electrical Machinery. Annarntus- Annlinncps and Supplies 754.4 - - TransDort Eauioment h64.9 52.h 11.3 Miscellaneous 130.8 2.5 1.9 Total kanuiacturinw 12.hb.8 11.133.9 =7 rink onstruction 178.3 Reiniorced Concrete Construction 80.7 Others 0.3 of Buildings 263.0 - -- Grand Total 34,528.0 11,488.0 33.3 Source: "Industry of Free China", Vol. XX, No. 5, November 25, 1963 APPp.mnTY V -2- II. Summary Balance-Sheet Data ior 25 Major Public Enterprises as 01 Dec. 31, 1962 Total Assets Proportion Proportion Capital Name of Enterprise (million NT$) Fixed Assetsl1 and Surplus 7% 70 Public Utilities 20 144.4 81.6 45.7 Taiwan Power Co. 12,000.5 0:). 44.o Directorate General of Ports 296.2 70.5 73.2 Directorate General of Tele- communications 1,884.9 83.2 80.1 Taiwan Railway Administration 3,290.9 70.7 36.U Taiwan Railway Freight Handling Service 11.6 31.9 29.3 Taiwan Highway Bureau 541.8 61.8 72.6 China Merchants Steam Navigation Co. 868.4 76.0 3.1 Taiwan Navigation Co. 368.3 79.1 34.h New China Salvage & Construction Co. 15.6 32.9 10.8 Forestry Tahsueh Shan Forestry Corp. 327.6 52.3 67.0 Petroleum and Mining 3,396.2 [2.7 41.3 Chinese Petroleum Corp. 2,770.3 &0.2 41.0 Chinese Coal Mine Development Corp. 210.4 61.4 19.0 Taiwan Metal Mining Corp. 275.8 50.7 46.5 Taiwan Salt Administration 139.7 48.0 69.6 Manufacturini 10.261.9 52.5 51.8 Taiwan Sugar Corp. 5,113.2 T-.7 61.1 Taiwan Agricultural & Industrial Enterprise 111.7 50.3 72.4 China Fishery Corn. 181.h 70.1 45.8 China Textile Industrial Corp. 133.4 26.2 43.1 Chung Hsin Paner & Pulp Corp. 396.2 57.1 60.2 Taiwan Alkali Co. 175.1 47.9 58.2 TA!wqn Fertilizer Co. -I6.h27 Kaohsiung Ammonium Sulfate Corp. 819.6 74.0 76.7 Tniwqn Alnminum Corn Al,.9 59.6 hi1. Taiwan Machinery Mig. Corp. 311.2 22.1 29.9 PS Eninuirininr n 19-iA 27C orn 1 Including Investments and Long-Term Advances. Source: Statistical Abstract of the Republic of China, 1963, and financial data- __1 uplie by1 the Governmen of; Taiwa. ~.3 '~APFEUDIX"F III. Summary Profit and Loss Data for 25 Iýaior Public Enterorises,_ 1962 Total jales Total Profit Income Tax, iietained Tot;al Profits as 1,ane of Enterprise and other or Lossl/ Dividends and Prof its per cent of Stated Inconie B3onuses Equity - Public Utilities TaLwan Poer Co. 1,980.4 377.1 315.4 61.,7 6.6 Directorate General of Post Ofiice 317.0 79.9 38.3 41.6 36.9 Directorate General of Teleconmnications 447.8 120.0 30.0 90.0 7.9 Taiiwan Railway Adinistration 1,215.8 21.9 n.a. n.a. 1.8 Taiwan Railway Freight Handling Service 57.5 0.3 n.a. n.a. 8.8 Taiwan Highway Direau 519.3 31.8 n.a. n.a. 0.1 China Lrchants Steajm Navigation Co. 346.0 -83.1 - --308.9 Taiwan Navigation Co. 135.5 - 7.5 -- 5.9 New China Salvage & Construction Co. 58.4 - 2.3 ---1353 Fore Tahsueh Shan Forestry Corp. 127.5 43.8 n.a. n.a. 20.0 Petroleup and iining Chinese Petroleum Corp. 2,019.8 495.7 25.7 237.0 43.6 Chine se Coal Hine Develop- ment Corp. 69.1 - 7.8 - -19.5 Taiwan Lietal liining Corp. 175.6 2.4 - 2.4 1.9 Taiwan Salt kdministration 14t6.2 16.3 8.L 7.5 16.0 - 4 -- APPIDIX F Total Sales Total Prof it Income Tax Retained Total Profits as Jamåe of .jrnterprise and other or loss]/ Dividends and Profits per cent of Stated Income Jonuses iquity - (iillion NTO ) bianufacturing Taiwan Sugar Corp. 2,680.9 149.0 117.0 32.0 4.8 Taiwan Agricultural and Industrial Enterprise 94.2 1.8 n.a. n.a. 2.2 China Fishery Corp. 75.6 - 1.8 n.a. n.a. -2.2 China Textile Industrial Corp. 70.6 - 9.6 - -16.7 Chung HIsin Paper ý. Pulp Corp. 281.0 15.1 n.a. n.a. 6.3 Taiwan Alkali Co. 159.8 14.9 10.7 4.2 14.6 Taiwan Fertilizer Co. 1,144.5 158.6 1/2.7 16.4 27.2 Kaohsiung Ammonium Sulphate Corp. 277.8 83.5 n.a. n.a. 13.3 Taiwan Aluminum Corp. 329.0 33.0 8.8 24.2 9.8 Taiwan Machinery !fg. Corp. 196.9 0.E 0.7 0.1 0.9 J3S Engineering Corp. 160.2 - 9.6 V Jefore income tax, allocation to reserves, dividends and bonuses. 2/ As of December 31, 1962 the total liabilities of this corm,pany exceeded its assets by about i,T, 22 million, of which NT> 9.6 million represented losses occurred during the year. Surce: Statistical _Abstrac_t f the_.Ie;.i; of China, 19 and financial data supplied by the Government of Taiwan.