Pioneering Economic Policies 

- Land Reform—the successful (and peaceful) land reform, one of the very few in the world, helped raise agricultural productivity, improve the income distribution, and release savings for investment in the industrial sector. 

- Promotion of Family Planning. 

- Reliance on Private Rather Than Public Enterprise. 

- Export-Oriented Industrialization (as opposed to import-substituting industrialization). 

- Maintenance of Macroeconomic Stability. 

- Maintaining Equity with Growth. 

- Promoting the Transition from Tangible Capital-Based to Intangible Capital-Based Industrialization.  

12 Land Reform 

- Raises agricultural productivity through the incentive effect 

- Releases both tangible capital and human capital from agriculture 

- Improves the distribution of income, providing the basis for an increase in aggregate demand (both consumption and savings) 

- Enhances investment in human capital 

- It was successfully implemented because the reformers themselves did not own any land and did not want any for themselves 

 The Joint Commission for Rural Reconstruction (JCRR) played an important role in the land reform. 

 13 Reliance on Private Enterprise 

- There were extensive debates in Taiwan in the mid-1950s as to whether private or public enterprise should lead the drive for industrialization. It was finally decided at the highest level of government that private enterprise was consistent and compatible with the Three People’s Principle and should be allowed to grow. u Similarly, in South Korea, President Park Chung-Hee, having observed the degree of incompetence and corruption within the government (army), also decided in the early 1960s that private enterprise would be allowed to lead the drive for industrialization in South Korea. Lawrence J. Lau, Stanford University 14 Reliance on Private Enterprise u A private-enterprise economy can also be inefficient if the markets are not competitive or if there are artificial barriers to entry and to movement of goods and factors. The resulting allocations can be very much worse. Simply changing the system of ownership of the means of production from public to private does not necessarily guarantee economic efficiency. In the cases of Hong Kong, Singapore, and Taiwan, the economy is forced to be efficient because of its participation in the competitive world markets. In other words, the world markets provide the discipline and replace the antitrust laws that are sometimes necessary in developed economies to keep the markets competitive. The world markets also make sure that special privileges are not sufficient, in the absence of efficiency, for profits or even survival. In the final analysis, it is competition, with free entry and exit and not just profit maximization, that guarantees efficiency. u Private entrepreneurs are not necessarily smarter than public officials. Their advantage is that they do not have deep pockets and so have to cut their losses very quickly when a project turns out to be a mistake. Public enterprises, supported financially by the government, tend to hang on long after they can be commercially justified. Lawrence J. Lau, Stanford University 15 Export-Oriented Industrialization u Export-oriented industrialization was in the mid-1950s a bold and unconventional economic policy, outside the mainstream of economic development at the time, but proved to be extremely successful. u It was advocated by Prof. Ta-Chung Liu and Sho-Chieh Tsiang, among others. u Maintenance of a single, competitive but stable, equilibrium exchange rate that facilitates exports and imports. u Exchange rate was unified and pegged to NT$40/US$ in 1960 and was held stable for almost two decades. u Stability is just as important, perhaps even more important, than a low level from the point of view of economic development—producers, exporters, importers and investors can make long-term plans. u A stable exchange rate also promotes domestic savings as it encourages the reliance on the domestic currency as a store of value. u Reduction or rebate of tariffs in support of exports. u Establishment of the first export-processing zone in the world in Kaohsiung. Lawrence J. Lau, Stanford University 16 The Exchange Rate SPOT EXCHANGE RATE - N.T.$ PER U.S.$ (MONTHLY AVERAGE) 2 0 2 5 3 0 3 5 4 0 4 5 195908 196207 196506 196805 197104 197403 197702 198001 198212 198511 198810 199109 199408 199707 200006 Month NT$ per US$ Lawrence J. Lau, Stanford University 17 Transformation from a Closed to an Open Economy u A small economy must be open in order to grow. u Enterprises are free to export and import, exploiting their international comparative advantage and access to a much larger market. (There was protection in Taiwan, although over the years the degree of protection gradually declined.) u The openness keeps the enterprises efficient by keeping the markets competitive. Inefficiencies cannot exist long in the face of international competition. This in turn puts pressure on the domestic factor markets, principally labor and land, to remain competitive. u An open economy facilitates the transfer of technology in both production and management. u An open economy solves the transfer problem for foreign capital in the forms of either loans or direct or portfolio investment.