A Pioneer in Development Success through Trade:

Taiwan

Submitted by:

Sukeerti Shrestha

Roll no: 187105

BBA Fall 2018, Year II Sem III

Group B

Kathmandu University School of Management (KUSOM)

Pichhe Tole, Gwarko, Kathmandu

Date: December 1, 2019

Submitted to:

Ms. Anupama S. Panta

Development Economics

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 Synopsis

The case talks about the rapid economic development of Taiwan, and examines

the various reasons that contribute to it such as emphasis on education, technology development,

infrastructure, effective policy and many more.

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 Identification of Core Issues

1. What are the factors that played a major role in the development of Taiwan?

2. What negative effects can be seen that can hamper the country in the future?

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 Facts on Core Issues

1. Taiwan has what one can consider to be quite an influential economic growth. It has

managed to maintain a fairly high growth rate. Taiwan has achieved universal elementary

and middle school education, a healthy population with a life expectancy of 75 years, and

an infant mortality rate of only 5 per 1,000 live births. Absolute poverty has essentially

been eliminated, unemployment is extremely low, and relative inequality is modest even

by developed-country standards. The success can be accredited to a combination of

factors and not just one. Taiwan put an emphasis on education and infrastructure

development. These helped the process of industrialization in the nation. There were also

high rates of saving and interest. In fact, in 1950s and 1960s, recorded saving rates were

the highest, reaching 30% to 40%. The government actually supported high rates of

savings. They also had other developmental policies such as land reforms, operation of

free market, and policies that supported education.

2. Taiwan also faces some issues that high-income nations face. Taiwan has a below-

replacement fertility rate. Its population growth rate has dropped to less than a quarter of

a percent per year. Basic manufacturing as plants have moved to China in search of

lower-wage labor. Tapei, the capital of Taiwan, has high amounts of air pollution. In the

process of high speed development, Taiwan seems to have pushed environmental

concerns aside. The wastes from the industries affect the agricultural industry, with their

landfills being so close to rice fields and prawn pools.

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 Analysis

The Taiwanese government implemented a thoroughgoing land-to-the-tiller

reform program in the 1950s. Landowners received stock in state-owned enterprises in return for

transferring land to peasants. This helped increase agricultural productivity a lot. The surplus of

agricultural products, in turn, reduced their price in the market. While the land reform gave small

farmers a larger income, they also increased the savings of current customers this way. As we

can see in the diagram below, the increase in supply moves the supply curve from S1 to S2. This

decreases the equilibrium price from P1 to P2.

The savings are used in a productive way, as well. High savings and investments

are needed to accumulate additional capital. Countries with a high rate of household savings can

accumulate funds to produce capital goods faster. This speedy capital accumulation helps to keep

the production efficient which is always an added bonus for the national income. It helps the

industrialization to be smoother and more productive. This means that the industries grow faster

which leads to an increase in demand of labor.

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 Basically, what we can see is that the investments and savings are being used to

increase productivity by bringing changes in the industries and other sectors. This increases the

demand for labor. The additional income of the people further drives consumption and

investment. This means that there is an increase in demand for products and service, and

consequently an increase in demand of Money. This helps to increase the national income.

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Such industries are further encouraged to invest in sectors like education through

incentives such as tax breaks. This is important because Taiwan is looking forward towards a

technologically advanced future where unskilled jobs are non-existent. They have nine-year

mandatory schooling, and are aiming for twelve. Such huge industries funding education makes

it more accessible to poor people. This helps to increase the HDI of the country. It also helps

many families break free from the vicious cycle of poverty. Education arms people with

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knowledge and skills. Skilled jobs have higher incomes and we have already discussed the

benefits of a higher income.

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Further, having a skilled manpower means that the country can develop

technologically faster and more efficiently. This is a huge comparative advantage. Their

extensive infrastructure developments also help as they are basically the “vehicles” for industrial

growth. This issue can be highlighted by Nepal itself where the lack of infrastructures like

transportations have left many rural areas behind. They also focus more on public goods as

opposed to military, considering how thousands of soldiers retired to build infrastructure. They

built a very challenging highway as well. The free press helped minimize the amount of waste,

fraud and abuse in infrastructure spending. In present, Taiwan is focusing on high-tech

infrastructure such as telecoms. All this helps make the industries more efficient and increases

the productivity of a nation. It shifts the PPC outwards, which is the equivalent of an aggregate

supply curve shifting rightwards.

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 Taiwan is very smart in terms of using its funds. It uses them productively by

investing in sectors that will reap long term benefits instead of just stimulating consumption.

This is one of the many reasons why foreign aid succeeded in case of Taiwan as opposed to other

nations. The investments are further backed by industrial policies which have actually helped in

Taiwan’s success a lot. This is opposite to the conventional knowledge that a free market is the

best and only effective market. The government has played a huge role in the market by

licensing exports, controlling direct foreign investments, establishing export cartels, etc.

In the 1980’s all imports and exports had to be covered by a license. Imports were

categorized as “prohibited”, “permissible” and “controlled”. The controlled list consists of goods

that would compete with locally produced goods. Permissible goods contain capital goods, raw

materials and essential consumer goods. The government controls the quantity of foreign goods

entering the country and, to some extent, their prices through tariffs. Due to this reason, they can

discipline the price-setting behavior of domestic producers. In case of prices of such protected

goods, usually the ones used for inputs to be used for export production, being a lot higher than

world price levels, the government can threaten to allow its foreign competitors into the market.

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This can effectively keep the domestic prices near world prices. This encourages people to use

the domestic goods while also encouraging the export promotion.

All these reasons make it seem like Taiwan is doing very good and is destined for

further success. However, it faces its own share of threats. One of the most prominent ones is the

below-replacement fertility rate. Developed countries have a low fertility rate and this leads to

lesser children. In case of a very low fertility rate, this can spell trouble for the nation as in the

future, there will be a higher number of dependents than working age people. This is what

Taiwan is facing. We can say that it is in its fourth phase of demographic transition.

The stage is characterized by low to very low birth rate and a very low birth rate.

Due to better health facilities, mortality falls. At the same time, better education and jobs causes

fertility to fall. Due to scarcity of skilled labor, plans have moved to China for cheaper labor.

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 The decrease in the supply of labor from S to S1 causes wages to rise from W to

W1. In order to combat this, plans are moving to other countries that offer cheaper labor. This

hollowing out not only deteriorates the manufacturing sector of the nation, but also can pose a

threat to the full employment. However, this also gives a chance for nations to pivot towards a

high-skill, high-wage jobs. Whether this is realistic and attainable, only time can tell.

Another threat that Taiwan faces if due to its blatant disregard of negative

externalities of environmental pollution. The country seems to be very much industrially driven,

and not controlling this will do nothing but be hazardous for them in the future. The increasing

levels of pollution can decrease the mortality rate or the productivity of the laborers. The

industrial wastes seeping into rice paddies and prawn pools can pose similar health risks. Taking

the social costs into consideration, the price should be higher than current. This can be reflected

in the diagram below. The ideal equilibrium price is higher than the current one, including

factors like taxation and CSR.

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 Solutions

1. Environmental taxes should be charged such as the carbon tax. This helps to control the

pollution by discouraging firms to use old technology that produces lots of emissions and

opting for sustainable methods instead.

2. There should be policies surrounding the disposal of industrial wastes ensuring that they

do not harm the community in any way. Such policies would protect rice paddies from

further contamination.

3. Having kids should be encouraged by allowing subsidies to families with children such as

educational subsidies, health benefits, and even conditional stipends.

4. Taiwan’s economy is very much focused on manufacturing. If threats like hollowing out

continue to grow, this could be disastrous. So the economy must diversify and also

encourage other sectors, especially service-oriented ones.

5. Taiwan should focus on protecting endangered species as it could help boost the

travelling sector. Travel could be a very lucrative field.

Managerial Implications

The case imparts the managerial implication of how managers should be equally

mindful of a number of departments as it could lead to a ripple effect, and also utilizing this

ripple effect in their favor effectively by conducting by a thorough SWOT analysis and studying

the interrelationships of various departments to focus on strengthening the weaknesses.

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 Honor Code

“On my honor as a student, I pledge that I have neither given nor received aid on this

assignment.”

-Sukeerti Shrestha-

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