Taiwan’s Economy in the 1980s and 1990s
This period was characterized by (1) trade surpluses and asset bubbles, (1) high
rates of investment, (2) economic and political liberalization, (3) the personaldigital revolution, (4) beginning of extensive use of foreign workers
The period of the 80s and 90s saw the democratization of Taiwan
(a) Martial Law Lifted 1987, Temporary Provisions repealed,
ROC Constitution amended in 1991, Multiparty system, 1992 Second
Revision providing for the direct election of president and mayors,
additional amending during late 1990s
(b) 1992 Legislative Yuan Election – crucially ejecting non-mainstream KMT
(c) 1996 1st Presidential Election – Lee Teng-Hui is elected, Lien Chan is VP
Lee is the First Popularly Elected President of the ROC
China Fires Missiles to Warn Taiwan 1996
Economic growth in the 1980s and 1990s
fell secularly from 10% to 8% and then to
6%. This is a clear and undeniable trend.
Why then did it happen? No one knows for
sure. But, we can speculate.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Diminishing returns + bottlenecks
Bubble bursting in 1990
Extreme appreciation of the NT dollar
Slightly Falling Terms of Trade
Slightly slower growth in # of computers
Collapse of Japan
Recession of 1991 & Asian Financial
Crisis 1997-1998
(8) Beginnings of outward investment to SE
Asia and to China
(9) Missiles from China 1995-1996
(10) Did KMT detach from Taiwan?
(1)
(2)
(3)
(4)
(5)
Reasons that Don’t Work
Higher wage Growth – wages grew slower in the 90s
Falling Productivity Growth – no sign of this in the 90s
Lack of investment – it rose faster than at any other time
Poor US economy – US grew very fast during this time
Lack of Govt Spending – 6 Year National Dev. Plan
The graph to the right shows a lack of trade surpluses until the
early 1970s. Note however that Taiwan still grew very quickly
(10%) during this period. Taiwan began to sell heavily its textiles
and electronics, along with its successful consumer goods exports.
These surpluses fell to deficits in 1974 and 1980 because of the
two oil crises. Note how that the crises were very short lived. Also,
the surpluses as a percentage of GDP did not exceed 6% by much.
The largest of these surpluses was only 1/3 the size of those in
1986. The NTD price of the USD was 40:1 in 1970 and fell to 36:1
in 1978-1980, and it rose to about 40:1 during the period 19831985. The NTD was being thoroughly managed during the late
1970s and early to mid 1980s.
Contrast these small
surpluses to the rapid stock
boom in the US.
No surpluses, but
very high growth
Oil shock
Oil shock
The graph to the left shows how that the surplus rose to over
20% of GDP. This was an extraordinary shock to the smooth
running of the economy. It caused thousands of people to
believe that the NTD would appreciate against the USD. This
caused a heavy inflow of hot money seeking to exchange for
the rapidly rising NTD. By 1992, the rate stood at 25.4:1. The
appreciation of the NTD reduced the trade surplus. This trend
continued in 1991 due to a recession in the US. Even with the
dotcom boom in the US, Taiwan did not return to massive
trade surpluses. Part of this was trade diversion. The US was
gradually shifting its imports to China. In addition, the dotcom
boom was about internet services and not so much about
hardware. Finally, computer prices fell substantially during
this period. Moore’s law was devastating to Taiwan.
Openness is defined as (Exports + Imports)/GDP. In the graph to the
right Taiwan experienced tremendous growth of openness. This is
why I said that it was openness and not surpluses that drove the
economy forward in the 1960s and early 1970s. However, by the
mid-1970s to the year 2002, openness did not really grow. It just
hovered in a narrow range up and down about 0.90 – 1.00. The, in
2003 it began to takeoff again. This time the export boom was to
China and not the US. There is no inkling of that in the graph to the
right. Mao died in 1976 and very little happened in China until 1979.
The US was still a major export destination The graphs below show
how that China revive Taiwan’s trade openness.
Big Growth 2002 -2003
Big Growth 2002 -2003
Foreign Exchange Rate = Price of USD
FER
Here is a long time series on the NTD/USD exchange rate. The forex rate is
actually the price of the USD. It is particularly useful because it gives the
average rate during the years 1969-1998 for each year. This data is not so
easy to collect on the internet actually. Taiwan’s central bank (the CBC)
bought huge amounts of foreign assets (FER) to support the USD. It was
buying USD all throughout the period 1981-1995. Note how that FER
increased tremendously in 1981 and 1982. This is why the USD rose in
value in the graph above. It was a purposeful depreciation of the NTD. But,
this act backfired on the CBC creating a bubble in the asset market and hot
money inflows.
The manipulation of the USD price by the CBC
resulted in the buying of massive amounts of forex
or foreign assets. The CBC’s actions caused the
money supply to grow extremely quickly. Narrow
money grew 51% in 1986, 38% in 1987, and 24% in
1988. This is like an average of 39% growth in M1B
per year for 3 years. Note how the growth of narrow
money as extreme while the growth of broad money
was relatively stable at 20%. The huge increase in
the holding of narrow money was because of the
transactions taking place on the stock market.
People were also perfectly happy to hold money as
ready assets if they though that they could earn
huge returns over a few days holding period. The
crash of the stock market brought that to a quick
close. The M1B money supply during that time
actually contracted 10%. After that time, M1b went
on a wild ride growing sometimes at 20% and at
other times 0%.
Money demand is a very complicated sort of thing. It is best to think of it as a desired percentage of one’s wealth that is held in money form. As
one’s wealth rises, so does one’s demand for money. Usually, wealth rises with rising prices of assets, but that is associated with falling rates of
return (interest rates). Wealth also usually rises as income rises, which means that money demand is positively related to income and negatively
related to the average of rates of return on non-money assets. Enormous amounts of time and effort has been expended trying to specify a simple
and stable demand for money. We will not attempt to do this here, but I will make some comments in class.
The Taiwan stock market experienced an
extreme bubble from 1986 to 1990. This is
apparent in the graph to the right. The
fixing of the exchange rate too high in
1985-1986 meant that everyone knew the
rate must fall and the NTD appreciate.
This caused hot money to enter the
country looking for a short term profit.
The purchase of this hot USD with newly
created NTD could not be adequately
sterilized and therefore the excessive
money growth caused a bubble in the
stock market and housing market. The
stock values far exceeded anything that
the private market could produce in terms
of goods and services and therefore the
stock market had to correct. This it did
falling from about 12,000 to 4,000 in
about 8 months. A similar fall was going
on in Japan, something it has yet to fully
recover from. The stock market has
bubbled after this, but not so dramatic.
Bubbles occurred in 1994 and 1997. This
is shown on the next slide.
The behavior of the investment ratio was extremely
high and erratic during the late 1980s and 1990s. The
investment ratio hovered around 35% - 40% over the
1990s. The jump after 1988 was due almost
exclusively to government including state run
enterprises and public investment. In 1997, out of
1.8 trillion in total gross investment, $500 million
was referred to as gross capital formation by
“producers of government services.” This is standard
Keynesian stimulus spending on public capital.
Interesting, the economic growth rate continued to
fall during this period and the trade surplus fell to
near zero. The was much talk at this time of a shift to
domestic demand and away from external demand.
But, as we have said, the emergence of China
changed all that. The behavior of investment during
this time shows ho important it was for business to
have a good relation with the government.
Everybody wanted those annual government
contracts paid for by taxes, borrowing, and printing
money.
Age Distribution in Taiwan
Growth Rate of Computers in the World
60.0
50.0
40.0
30.0
20.0
10.0
0.0
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2010
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1985
Number of Computers in the World
1400
1200
1000
800
600
400
200
0
2011
2010
2009
2008
2007
2006
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2003
2002
2001
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1985