1 based on a misunderstanding of the sources of Taiwan's dynamic economic growth and were bound to be proved false. Private foreign investment on Taiwan, for example, has averaged around U.S. $100 million per year during the 1970's, or only 2 percent of Taiwan's annual rate of capital formation. Even if all foreign investors had been scared away by the United States-PRC normalization, an unlikely event given that these investors commonly take much higher risks of expropriation elsewhere, the impact on Taiwan's economic growth would not have been great. Only if normalization had seriously reduced the willingness of Taiwan's domestic entrepreneurs to invest would normalization have had a major impact on the island's growth. While U.S.-PRC normalization of relations did not slow Taiwan's growth rate, over the longer run there are more fundamental reasons for expecting a slowing down in that rate. As already indicated, Taiwan's growth has been fueled by an export drive that has steadily raised the ratio of exports to GNP to its current very high levels. World resistance to Asian export drives makes continued reliance on this source of growth increasingly difficult and it is unlikely that the growing domestic Taiwan market will prove to be a complete substitute for a slowdown in the export market. Taiwan's economic growth has also benefitted from the ability to shift workers out of low productivity agricul ture into high productivity industrial occupations, but farm workers are already down to 25 percent of the labor force, and further gains from this source are likely to run out in a decade or so. For these and other reasons Taiwan's economic growth rate is likely to slow down during the coming decade, but the slowing will be to rates that anywhere else would be considered an economic boom. The one event that would bring Taiwan's growth to a halt would be the direct takeover of the island's economy by mainland economic planners operating under economic rules similar to those presently practiced on the mainland. This paper. however, is concerned with trends that are likely to occur in the absence of such a takeover and hence will not discuss this possibility further. The prospects over the next decade or two, therefore, are for China's growth rate to accelerate and for Taiwan's to decelerate, but it is unlikely that the changes will be of sufficient magnitude to close the gap in per capita income by any significant amount. Still, if the standard of living in the People's Republie is rising rapidly, that fact alone would remove much of the pressure on mainland planners to reduce Taiwan's people to a standard similar to that found on the mainland, if they had the power to do so. But the same token rising standards of living on the mainland will make association with the mainland economy less frightening to the people on Taiwan. CONCLUSION Economic trends over the next decade or two, therefore, are likely to be moderately favorable to closer economic association between the People's Republie and Taiwan. A bitter trade rivalry between the two regions does not seem to be in store. While the economies of the two areas are not really complementary on the model of Hong Kong and the mainland, there is some basis for mutually beneficial Taiwan-mainland economic cooperation, particularly if the PRC re mains receptive to certain forms of private investment. Finally, if PRC efforts to raise mainland standards of living begin to bear fruit, economic reconciliation between the two sides of the Taiwan straits on terms not threatening to the people of Taiwan is more likely. This paper, however, must end with the same major caveat with which it began. Politics, not economics, is at the heart of what separates the interests of the people on Taiwan from those of the people on the mainland of China. Closer economic relations could be one way of building confidence in the god will of the two sides toward each other. But the ultimate test of that good will will depend on the ability of leaders on the mainland to ensure the basic human rights of the people on Taiwan and on he imagination of leaders on Taiwan to accommodate to that situation when and if it occurs. Needless to say, such a change will not happen quickly. Mr. SUTTER. Thank you very much. Our next discussant is Prof. Jan Prybyla from Pennsylvania State University. Professor Prybyla is a professor of economics at Pennsylvania State University, the author of numerous articles and a number of books, including "The Political Economy of Communist China" and "The Chinese Economy, Problems in Policies." He has also written on the economic development in Taiwan in a book edited by Mr. Chiu. Professor Prybyla, please. STATEMENT BY JAN PRYBYLA, PROFESSOR OF ECONOMICS, PENNSYLVANIA STATE UNIVERSITY, UNIVERSITY PARK, PA. Mr. PRYBYLA. My paper is divided into essentially three main meaty parts and one conclusion. The first part of the paper examines the long-term performance of the Taiwan economy from 1952 to 1980. The second part examines the short-term performance and problems around the time of the derecognition, that is, 1979 to 1980. The third part is concerned with prospects within what we could call the reasonably foreseeable future. And then the paper ends with some general conclusions regarding United States-Taiwan relations. I will summarize briefly those three main parts and the major conclusions. With regard to the long-term record, 1952 to 1980, I think there is no doubt whatsoever, at least in my mind, that Taiwan represents an unprecedently successful example of a mixed economy, an economy based on free enterprise but with considerable governmental intervention, governmental sector, governmental leadership and development. Under almost any heading, under almost any indicator that you wish, you find not only rapid progress but smooth progress, whether it is growth, equity of income distribution, stability of employment, stability of price level and so on, Taiwan has performed remarkably well. It provides, I think, in terms of economic development, with all the limitations that one has to bear in mind-that it is 200 miles by 80 miles and its experience cannot be directly transferred to large continental entities and so on-a most interesting model for economic development with equity of distribution of income and wealth. I am not talking about distribution of political power but distribution of income. There are some problems in the long-term record. I think they are three in number. The first problem is that Taiwan is enormously dependent upon foreign trade. It lives and dies by foreign trade. Taiwan is not the only country so dependent. Japan heavily relies on foreign trade. But in Taiwan's case, there are two complicating factors in this dependence. One is that Taiwan is very heavily dependent upon two countries: The United States for exports, and Japan for imports. Forty percent of Taiwanese exports go to the United States; 40 percent of Taiwanese imports come from Japan. So that whatever happens in the United States will, of course, affect to a considerable extent the internal domestic economy of Taiwan, and the Taiwanese policymakers do not really have all that much command over these influences. So that is the first problem. The second long-term problem is that the Taiwanese economy is almost totally deficient in sources of power except for hydroelectricity and some nuclear power that is being developed with U.S. aid. It is, therefore, dependent almost totally on two Middle Eastern countries, Saudi Arabia and Kuwait, for the import of petroleum, which represents over 60 percent of its energy consumption. This obviously presents some problems with regard to the increase in the price of oil. The third problem, which is unlike the Japanese problem, is that the domestic market in Taiwan is still very modest; relatively small, so that it cannot serve as a screen against the cold winds that blow from outside. With regard to the short-term record-the record of 1979 to 1980I participated in this city in some discussions of what will happen if the United States derecognizes China. There were dire predictions in some quarters that there would be a panic, a flight of capital, et cetera. None of this has materialized. My conclusion, tentative though it is, is that derecognition had a zero effect on Taiwan's economy in the short run: 1979 to 1980. I think there may have been some positive side effects of derecognition. It removed a certain burden from the American voter, that kind of uncertainty of what to do with this burden we are carrying on our shoulders. Not only that, it provided, in the form of the Taiwan Relations Act, a model of unofficial official recognition, which may serve other countries, which is, I think, more advanced and bolder and more courageous than the German and Japanese models of unofficial recognition. The short-term economic problems Taiwan faces in 1970 and 1980 have nothing to do with recognition or derecognition; they have everything to do with worldwide economic stagflation. You have a rise in oil prices and the sluggish performance of the U.S. economy, and fluctuations in the Japanese yen. These are the main problems, external problems, that have produced two internal problems in the short run in Taiwan. One is two-digit inflation. Inflation is running at between 10 and 12 percent per annum for consumer goods prices; the wholesale price index is rising more rapidly. The second problem is a slowdown in the growth of all the main indicators: GNP, industrial output, et cetera, caused largely by a sluggish export performance, which in turn has been caused partly by a sluggish U.S. economy to which Taiwan sends 40 percent of its exports. There was one internal reason for the inflation, and that was excessive money supply, which has now been remedied by the action of the Central Bank, to the point where the business community is complaining about a money squeeze. The prospects? I think, on the basis of the past record the longrun prospects are excellent. What Taiwan has demonstrated is an ability to run its economy well; it has done the right things at the right time. It has moved, for example, to restructure its industry from import substitution to capital-intensive industries, and then to knowledgeintensive industries. Against all the advice and head-shaking of outsiders saying: "It is too early for you to go into steel building, machine building and whatnot," Taiwan has moved ahead and diversified its markets. It is very active in promoting its exports in Western Europe, for example. I mentioned in the paper that Taiwan might explore trade with the Soviet Union. It might explore Eastern Europe. It is, in fact, cautiously exploring Eastern European markets. It might even, unthinkable as it may seem, end up trading, as Professor Perkins has mentioned, with the mainland. In order to reduce its dependence on and vulnerability to outside influences, the Taiwanese are expanding very rapidly their internal market. Look at the per capita income figures. They are producing now all kinds of goods. The automobile industry is being expanded, and part of the output goes for domestic consumption. So the domestic market is being expanded as an insurance provision against outside uncertainties. My conclusion is this. I think over the long run the prospects for the Taiwanese economy are good. I agree with the optimistic predictions issuing officially from Taiwan, although these are very political documents. In the short run, I think the problem is simply a problem of economic management that any nation faces, the problem of regulating the money supply, of promoting exports, of not discouraging foreign investors. There are a number of measures they can take to encourage investments more than they have hitherto, by allowing foreign-invested manufacturing concerns to have retailing and wholesaling operations, for example. I think that derecognition has had minimal effect on the economy. I think the act as it stands is satisfactory. There are certain areas that can be improved. Provided the administration continues to staff the Taiwan Institute with people who are interested in Taiwan and are not hostile to it, with people who have some knowledge of China, such improvements will be made. Thank you. [Mr. Prybyla's prepared statement follows:] SOME REFLEXIONS ON DERECOGNITION AND THE ECONOMY OF TAIWAN POSTULATES AND ORGANIZATION OF PAPER In this general review of Taiwan's economy before and since the severance of diplomatic relations by the United States and of the prospects for that economy in the years to come, I postulate the following: 1. It is in the interest of the United States as the leading power in the noncommunist world to be supportive of its allies within the free world on a basis of reciprocity, provide leadership, and avoid a reputation for dumping its friends in a crunch. In my estimation Taiwan is such an ally and friend. 2. The existing legal framework (Taiwan Relations Act) within which relations between the United States and Taiwan are conducted is acceptable to both parties in the present circumstances. It is the nearest thing to unofficial recognition yet devised. Credit for its development goes almost entirely to Congress, and its workability is due in large measure to the cooperative and pragmatic stance adopted by the Taiwan government. Practice will suggest what needs to be done to improve the existing legal instrumentalities of this "America model" in order to maintain, improve, and strengthen relations between the two countries. 3. An extremely important factor conditioning the internal political stability— and hence external survival of Taiwan is the health and vigor of the economy. There are many subsurface tensions in Taiwan's society. These have been kept in check more by Taiwan's prosperity than by the state of siege declared in May 1949 and never lifted. A severe and prolonged recession accompanied by loss of real income and unemployment would, I think, risk tearing apart the fabric of Taiwan's polity. It would by the same token, tempt hostile foreign intervention. 4. Because of its relative and absolute importance in Taiwan's trade, investment, and credit, and the direct influence of the economy's wellbeing on Taiwan's internal political stability and external survival, the United States shouldwith carefully considered regard to its own economic interests-conduct policies that are supportive of the continued growth and development of Taiwan's economy. The reverse of this is that the United States should avoid actions which would be likely to administer serious shocks to the economy of Taiwan, without at the same time neglecting the economic interests of its citizens as workers, consumers, and businessmen. What follows is divided into three parts. First, I examine briefly the general economic situation in Taiwan before and at the time of diplomatic derecognition. Second, economic development in Taiwan in the year after derecognition (1979) are reviewed. Third, more speculatively, the prospects for Taiwan's economy in what may loosely be called the "fairly foreseeable future" are looked at with all the abjurations and caveats appropriate to such exercises in futurology. TAIWAN'S ECONOMY BEFORE AND AT THE TIME OF DERECOGNITION Gross National Product (GNP) It is well known that Taiwan's growth record since the early 1950's has been remarkable. Together with West Germany and Japan, Taiwan's performance should be included in the post World War II catalogue of economic “miracles.” Dissimilar as are the details and points of departure, in all three instances the miracle is basically attributable to three domestic factors: an able, motivated, healthy, educated, disciplined labor force; a dynamic private enterprise sector; and enlightened governmental economic leadership. The combination of these provided fertile soil for initial American aid. In real terms (constant prices of 1971) Taiwan's GNP increased 700 percent between 1952 and 1978, at an average annual rate of 8.4 percent, and a per capita annual rate of more than 5 percent (possibly higher if the bugs were taken out of the price deflator). Of the 700 percent 1952-78 GNP increases, 117 percentage points are attributable to increased employment; the remainder to increased labor productivity. Except for the imported OPEC-sponsored recession of 1974-75, Taiwan's real GNP growth has been smooth. Both as regards the pace and path of growth, Taiwan's record is superior to that of a number of Asian developing countries, including the People's Republic of China (Table 1). At the time of derecognition (end 1978) per capita GNP (1976 prices) was U.S.$1,337. (Per capita national income in 1976 prices was U.S.$1,218, an increase of 9.8 percent over 1977.) Around the time of derecognition Taiwan was listed by the Organization for Economic Cooperation and Development (OECD) as one of ten newly industrializing countries that were rapidly rising from low income levels to comparative affluence. TABLE 1.-GROWTH OF GROSS NATIONAL PRODUCT Increase rate (percent) 1 11.27 12.90 13.31 12.82 1.12 4. 24 13.48 9.86 13.85 8.10 6.5-8.0 Sources: Statistical Bureau, DGBAS, Executive Yuan, Republic of China, National Con ditions, Autumn, 1979, p. 19; The Economic News, Taipei, December 29, 1979, p. 1. Agriculture Output of farm products (forestry, fisheries, and livestock excluded) increased between 1952 and 1978 at an average annual rate of about 3% percent. Because of fast population increase, the average annual per capita growth of farm products was only a little better than 2 percent. |