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CONFIDENTIAL R e p o r t N o. FE-ll Copy No. 7 Public Disclosure Authorized FILE COP¥' This report is available to those members of. the staff to whose work it relates. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized ECONOMIC REPORT ON CHINA (TAIWAN) Public Disclosure Authorized J'une 1.7, 195 9 Public Disclosure Authorized Howard E. Tolley Department of Operations Far: East. .. CURRENCY CONVERSION Currency Unit: New Taiwan Dollar u.s. $1.00 NT $36.08 NT$1.00 US$0.0277 US$.27, 713 NT $1.000,000 - TABLE OF CGl>TTENTS Preface i Basic Statistics ii Summary and Conclusions iii ECONQJ\ITC R"SPORT ON TAIWAN (CHINA) 1 I Introduction 1 II Production and National Income 1 Agriculture 1 Industry, Mining and Power 2 Gross Nc:-.tional Product and Total Available Resources 5 Gross Capital Formation 6 III Internal Finance 6 Goverw~ent Finances 6 Financial Institutions and Interest Rates 9 Money and Prices 11 IV Exta·.-raa.l Finance 16 Exchange Rate Policy 16 Foreign Trade 17 Nain E:z:port Items 18 CoTiposition of Imports 18 Direction of Trade 19 Balance of Payments 20 V Economic Prospects 23 Statistical Appendix (See next page for list of tables) 26 Map ;. (2) TABLE OF CO:TTElTTS (Cent' d) TABLES IN ST1tTISTICAL AP?ENDJX Table l. National Accounts Data 2. Gross National Product by Industrial Origin 28 3. Area and Output of Agricultural Crops 29 h. Index Numbers of Industrial Production 30 5. Output of Selected Hining and Industral Products 31 6. Investment Uhderthe Four Year Plans ?. Su~~ary of ICA Aid Program to Taiwan (China) by Major Fields of Activity 33 8. Consolidated Statement of Condition of the Honetary System 34 9. Interest Rates 35 10. Volume of Foreign Trade 36 11. Value of Export Exchange Settlements 37 12. Value of Import Exchange Settlements and U.S. Aid Arrivals 38 13. Financing of International Transactions 39 lh. Barik of Taiwan Foreign Assets and Liabilities hl 15. Net Gold and Foreign Exchange Reserves of Ban.!{ of TahJan 16. Short-term Assets and Liabilities in U.S. Ban.l{s 17A, China- External Public Debt Outstandi~g, December 31, 1958 44 l?B. China - External Public Debt Payable in U.S. Dollars or Local CUrrency Outstanding December 31, 1958 45 'Preface This report is intended to provide general economic background information against Nhich to consider the establishment and operating policies of the China Development Corporatio<l. This Corporation was formally established in Hay 19.59 for the primary purpose of providing medium-term finance for development of private industry. It has not yet begun operations. Because of their particular relevance to the policies and prospects of the China Development Corporation, special attention has been given in this report to industrial prospects, financial institutions and interest rates, money and prices. - i- Area ,886 sq. miles Population (Estimate, mid-1958) l0,468,oco Gross National Product (1957) NT;:·;35,8.SL~ Pillion Per Capita Gross National Product 3,538 (US~~98) Per Capita Total Available Product (including foreign aid) 3,868 (US~)l07) Production Indexes (1953 = 100) Agriculture, 1958 121 Industry, 1958 Jlr9 Consolidated Budr~et of Central and Local Governments, Fi l959 Estimate Revenue f\TT~;;8 ,538 million Expenditure 9,117 T! (Defense and Internal Security) ( 4,668 II ) Gross Deficit 580 !I Transfers from Counterpart Funds 282 !I Net Deficit NT~ 298 million Bank Credit Outstanding, end 1958 Public Se.ctor NT~;b,032 million Private .Sector NT~::4,615 million Money Sunply, t:::nd 19)8 NT .5,129 :-·1illion Price Indexes (1953 = 100) 1\lho1esale ·FJ.'=.ces, December 1958 150 Cost of Livi:1g, Decer.1ber 1958 135 Foreign Trade, 1958 (millions US dollars) "Exports: Sugar 85 Rice 29 Other so Total 164 Imports: u.s. Aid 82 Other 150 Total 233 Trade Balance ::b9 Bank of Taiwan Net Gold and Foreign Exchan~e Reserves, end 1958 (millions o:r US dollars) 47 - ii .. su~mary and Conclusions In the nearly 10 years since the Nationalist Chinese Government .. r,1ithdre1rr from the China mainland to Taiwan, economic progress in Tahran has been much greater than many people expected. In spite of the heavy defense burden imposed by the continuing state of "rrar 1rrith the Iv1ainland and a population growth of about 3.5% per year, a substantial amount of economic development has taken place and the national product has increased faster than the population. Although the population of Taiwan is more tha~ 80% higher than in 1937, per capita gross national product today is greater in real terms than in the pre-war period. This progress is attributable largely to the ability, skill and determined efforts of the Chinese Govern- ment and people, supplemented by a large U.S. aid program. Exports have also risen substantially in the last several years, led by sugar and rice 1·rhich together accounted for about 70% of export earnings in 1958. On the other hand imoorts have been maintained consistent ly at a higher level than exports, and export earnings have been equivalent to only about 60% to 70% of imports. The gap has been more than bridged by U.S. aid finctr1cing at an average of more than US~:90 million per year. There has been a substantial inf:l.atioa. in tho !hast nine yeU"s, re sulting mainly from large increases in baru( credit to both the public and private sectors. Bebreen 1950 and 19 58 the money supDly increased nearly ninefold and wholesale prices more than threefold. The official exchange rate ha.s changed from 5 New Taiwan dollars per US dollar to 36 NT dollars per US dollar. However, despite a continued increase in the money sunply at a rather rapid rate, the inflation has been much less severe in the last tHo or three years than in the early 1950's. Interest rates, although still very high, have declined substantially; e.g. the rate charged by commercial b2nks on secured loans is 1.5% per month at present, compared to more than 8% per month at the end of 1949':" The lflholesale Price index ~·ms stable during 19waTid most of 19 58. Since the Ouemoy attack in the summer of 1958 and the sharp increase in government expenditures T.1"hich foll01..red it, the vJholesale price index has risen by about 7%. · The disparity between the increase in money supply and increase in prices is explained in part by an increase in availability of goods, but it is also due in part to a considerable decline in the velocity of money circulation. The main explanation for the decline in money velocity is to be found in the growing confidence of the public in the present regime. lJith the passage of time it has become anparent that goods Nhich the people need and ,,;ant ;:,fill be available either from their own production or aid imports; that the Government can and "t·rill protect the island; and that rene1r1ed total war is less likely or imminent than seemed the case several years ago. ~mile progress has been substantial, the country is still facing many of the problems 1rlhich it faced nine years ago: a war "tvi thout an end in sight and a large population increasing at a rate of over 3% per year. ... iii ... As long as the st3.te of v:=:.r exists, rc: curring milita:r--;J ies nust be e:::cpected v:Thich 1rill lead to inter.nittent periods of ;nonetary and price insta1Jility. HoNever, 1,7J::lile it is to predict the frequency, severity c.nd duration of these periods, there appears little likelihood of a 11 runavray" inflation developin:. judsment is supported the recent eA.":Jerience vhen prices incre2sed orly ·noclerately fo1lmr5.ng the 0;uer10y at tack. Prospects ayr1ear reaso:1ably good that there uill 1)e a "urther im prove 1ent in poli .::md fj_nanc::i.c::,l confidence ancl that there ':ill be a further cleclj_ne L1 the velocity o:': circulation. probo.ble that in the ne~:t five years t~1e price level vill rise at a some11hat slmrer rate on the average than in the past five , 1::rhen the vrholesale price index rose at an average rate of close to Tai,ran's trade position has Forsened in recent months and is likely to deteriorc<.te further ~-n -l:he il'lh"nedj_ate future, as a result of the over-supply position and fall in prices in the Horld sugar ·:~arket <md the recent decline in rice prices. After this short-run decline in earn- ' a gradual recovery should take .. 7Im;rever, total earn- :'ive yeD.rs from noH a:-e not likely to exceed substantially the 1958 le'lel. U.S. aid probably continue c;,t about the same ;:,s in recent years, but any substantial increase does not appear likely. In vievJ of this :?rosnect for foreign exchange availability, imports in t~1e short-run are not to exceed recent levels, and some temporary re- duction may even become necessary. 1Jith L:J]JOrts levelin;s off, the rate o:" grouth in G!JP in the n3xt years is likely to be slouer than in the past. However, it should be possible to r.aintain a ro.te of Qi:JP gr01:Jth approx:iJnately equal to population gro-vrt,h., Fri1:1ar-ff production is not likely to be hampered a leveling off iinpo:ets and s~1oulr\ continue to rise at a rate sli~:htly than the popul.:'.tion. On t:1e rat.e of incl.ustrial c1.eYelop .i2nt and ::;routh in :nanufacJ:,-__ ri~1g is likel7 to be slm<8d ~~O''Yl SO'",eu'1at due to l:iJtlita- tions 0'.1 i::1ports zooC.s ;:md ra't·l ·!atc;rials.