Taiwans Economy in the 1980s and 1990s This

Taiwans Economy in the 1980s and 1990s This

Taiwans 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The period of the 80s and 90s saw the democratization of Taiwan (a) Martial Law Lifted 1987, Temporary Provisions repealed, ROC Constitution amended in 1991, Multiparty system, 1992 Second Revision providing for the direct election of president and mayors, additional amending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 Dont 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. Moores 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 mid1970s 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 Taiwans 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. Taiwans 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 CBCs 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 ones wealth that is held in money form. As ones wealth rises, so does ones 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 2012 2011 2010

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989

1988 1987 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 0 1986 1985 0.0 Number of Computers in the World 1400 1200

1000 800 600 400 200

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