Growth and Technology: Interdependence between Taiwan and Japan

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NOT FOR QUOTATION WITHOUT PERMISSIOX OF THE AUTHOR

GROWTH AND TECHNOLOGY:

KNTERDEPENDENCE BETWEEN TAIWAN AND JAPAN

Mitsuo S a i t o Ryoichi Nishimiya

March 1 9 8 5 WP-85-16

Working Papers a r e interim r e p o r t s on work of t h e International Institute f o r Applied Systems Analysis and h a v e r e c e i v e d only lim- ited review. Views o r opinions e x p r e s s e d h e r e i n d o not neces- s a r i l y r e p r e s e n t t h o s e of t h e Institute o r of i t s National Member Organizations.

INTERKATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg, Austria

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PREFACE

Yany of today's most significant socioeconomic problems, such a s slower economic growth, t h e decline of some established industries, and s h i f t s in p a t t e r n s of foreign t r a d e , a r e international o r transnational in n a t u r e . But t h e s e problems manifest themselves in a v a r i e t y of ways; both t h e intensities and t h e p e r c e p t i o n s of t h e problems d i f f e r from one country t o a n o t h e r , s o t h a t i n t e r c o u n t r y comparative analyses of r e c e n t historical developments a r e n e c e s s a r y . Through t h e s e analyses w e attempt t o identify t h e underlying p r o c e s s e s of economic s t r u c t u r a l change and formulate useful hypotheses concerning f u t u r e developments. The understanding of t h e s e p r o c e s s e s and f u t u r e p r o s p e c t s provides t h e focus f o r IIASA's p r o j e c t on Comparative Analysis of Economic S t r u c t u r e and Growth.

Our r e s e a r c h c o n c e n t r a t e s primarily on t h e empirical analysis of i n t e r r e - gional and intertemporal economic s t r u c t u r a l change, on t h e s o u r c e s of and con- s t r a i n t s on economic growth, on problems of adaptation t o sudden changes, and especially on problems arising from changing p a t t e r n s of international t r a d e , r e s o u r c e avaiiability, and technology. The p r o j e c t r e l i e s on IIASA's accumulated e x p e r t i s e in r e l a t e d fields and, in p a r t i c u l a r , on t h e d a t a b a s e s and systems of models t h a t have been developed in t h e r e c e n t past.

In this p a p e r , Mitsuo S a i t o and Ryoichi Nishimiya p r e s e n t a quantitative analysis of t h e t r a d e p a t t e r n s t h a t have c h a r a c t e r i z e d t h e interdependence between Taiwan and Japan during t h e p r o c e s s of r a p i d industrial development. The method t h e y a d o p t is t h e simulation of medium-scale econometric models f o r both countries, which a r e linked t o g e t h e r by t h e i r e x p o r t and import functions. I t i s shown t h a t a d i f f e r e n c e in t h e rates of technical p r o g r e s s in t h e two countries h a s tended t o s t r e n g t h e n t h e t r a d e friction between them.

Anatoli Smyshlyaev Project Leader Comparative Analysis of Economic S t r u c t u r e and Growth

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GROWTH

AND

TECHNOLOGY:

INTERDEPENDENCEBETWEEN TAIWAN AND

JAPAN

Mitsuo Saito and Ryoichi Nishimiya

1. INTRODUCTION

I t is well known t h a t Japan enjoyed a v e r y high r a t e of economic growth during t h e 1960s; t h e a v e r a g e annual growth rate of GNP was about 1 0 p e r c e n t . Within a period of twenty y e a r s Japan r o s e from being a developing country where t h e p e r c a p i t a GDP was 462 US d o l l a r s in 1960 t o a developed c o u n t r y with a p e r c a p i t a GDP of 8,627 US d o l l a r s in 1979. It is interesting t o note t h a t high economic growth of t h i s s o r t h a s r e c e n t l y a l s o o c c u r r e d in s e v e r a l o t h e r E a s t and Southeast Asian countries, such as Hong Kong, Singapore, South Korea, and Taiwan. A s shown in Table 1, t h e a v e r a g e annual growth rate of r e a l GDP of t h e s e newly industrialized c o u n t r i e s (NICs) was 8.8 t o 10.4 p e r c e n t b e f o r e t h e oil c r i s i s , and even a f t e r t h e oil c r i s i s i t w a s 7.3 t o 9.6 p e r c e n t ; only in t h e c a s e of Japan w a s i t significantly lower (3.6 p e r c e n t ) . I t is important t o note t h a t all t h e s e c o u n t r i e s have t h e following t h r e e f e a t u r e s in common:

(1) They are relatively p o o r in n a t u r a l r e s o u r c e s , such as oil, coal, and metal o r e s . This implies t h a t t h e advantage of n a t u r a l r e s o u r c e s is not a n e c e s s a r y precondition f o r high economic growth.

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TABLE

1. The Growth of

GDP

of East and Southeast Asian Countries.

1960-73.

Average growth r a t e Per capita GDP Per capita GDP (percentage of of r e a l CDP (%) (US dollars) US value)

Hong Kong 9.0 8.6 348 3809 12.4 35.3

Japan 10.2 3.6 462 8627 16.5 80.1

Korea, Republic of 8.8 9.6 150 1613 5.4 15.0

Singapore 10.0 7.3 430 3829 15.3 35.5

Taiwan 10.4 8.3 153 1868 5.5 17.3

(2) They a r e open t o f o r e i g n c o u n t r i e s , in t h e s e n s e t h a t t h e y a r e a b l e to f r e e l y i n t r o d u c e s c i e n t i f i c knowledge a n d t e c h n i q u e s , a n d t o import a n d e x p o r t goods a n d s e r v i c e s .

(3) They c a n d r a w upon a b u n d a n t a n d well-disciplined l a b o r f o r c e s .

One might a r g u e t h a t t h e s e t h r e e f e a t u r e s h a v e e n a b l e d t h e c o u n t r i e s con- c e r n e d t o r e a l i z e high economic growth t h r o u g h two mechanisms: b o r r o w e d t e c h - nology on t h e supply s i d e a n d wide f o r e i g n m a r k e t s on t h e demand side.' I t i s q u i t e n a t u r a l t h a t t h e rate of t e c h n i c a l p r o g r e s s will b e much f a s t e r in a c o u n t r y t h a t i n t r o d u c e s existing technology f r o m a b r o a d t h a n i n o n e t h a t i s e x p l o r i n g i t f o r t h e f i r s t time. In a developing c o u n t r y , t h e l e v e l of technology c a n b e high d u e t o imported o r b o r r o w e d technology, while t h e wage l e v e l r e m a i n s v e r y low. If a cieveloping c o u n t r y s u c c e e d s in introducing f o r e i g n high technology f o r t h e p r o - duction of a given commodity, e.g. a t e x t i l e , a n d in a c q u i r i n g a c e r t a i n l e v e l of c a p a c i t y f o r p r o d u c i n g t h e commodity using t h i s technology, i t s p r o d u c t i o n costs will b e v e r y low c o m p a r e d with t h o s e in a developed c o u n t r y w h e r e t h e wage l e v e l may typically b e t e n times as high as in t h e developing c o u n t r y . The f o r e i g n demand f o r t h e low-price commodity from t h e developing c o u n t r y will b e v e r y IS. Kuznets emphasizes "the existence of a technological backlog, the exploitation of

which could generate accelerated advance elsewhere" i n discussing conditions for strong economic performance i n an LDC. He also writes that "given the power of modern technology and effectiveness of modern trade ties, the potential growth of an LDC should only moderately be constrained by scarcity of natural resources, or by scale problems because of smallness of the internal markets." S. Kuznets, M o d e m Economic G r o w t h a n d t h e L e s s Developed C o u n t r i e s , a paper presented a t the Conference on Experiences and Lessons of Economic Development i n Taiwan, held i n Taipei i n December, 1981.

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strong. Keeping p a c e with t h e i n c r e a s e in production capacity f o r t h e commodity, e x p o r t s will continue t o grow v e r y rapidly, until t h e wage level of t h e developing country a p p r o a c h e s t h a t in t h e developed country. This s o r t of r a p i d growth in e x p o r t demand will continue t o b e a s t r o n g driving f o r c e behind t h e economic growth of t h e developing country. I t is t r u e t h a t t h i s p a t t e r n , which h a s been dis- c e r n e d v e r y generally in t h e so-called NICs during t h e l a s t twenty y e a r s , h a s v e r y important policy implications f o r development s t r a t e g y . But s e v e r a l negative a s p e c t s must a l s o b e noted: social and economic maladjustments accompanying v e r y r a p i d industrialization, environmental d e t e r i o r a t i o n , and t r a d e f r i c t i o n s due t o t h e rapid growth in t h e e x p o r t s from developing c o u n t r i e s t o t h e developed ones.

An example of t h e l a s t t y p e of problem a r o s e between Japan and t h e United S t a t e s during t h e 1960s and 1970s because of t h e r a p i d expansion in Japanese e x p o r t s of textiles, s t e e l , e l e c t r o n i c appliances, and c a r s . Recently, similar t r a d e frictions have a r i s e n between Japan and Taiwan, and between Japan and South Korea.

The main p u r p o s e of t h i s study is t o make a n econometric analysis of t h e underlying p a t t e r n of high economic growth. More specifically, w e attempt t o make a quantitative assessment of t h e contribution of borrowed technology t o t h e r e c e n t r a p i d growth of t h e Taiwanese economy, and a l s o t o analyze quantitatively t h e r e c e n t t r a d e f r i c t i o n between Taiwan and Japan. The p r o c e d u r e followed is f i r s t t o c o n s t r u c t a n econometric model of Taiwan, t h e n t o make a comparison of growth p a t t e r n s between Taiwan and Japan on t h e basis of econometric models of both economies,' and finally t o study t h e t r a d e friction between t h e two c o u n t r i e s by linking t o g e t h e r t h e two econometric models through e x p o r t and import functions.

Section 2 d e s c r i b e s t h e main f e a t u r e s of t h e econometric model of Taiwan, and discusses t h e implications of i t s estimated r e s u l t s . Section 3 is devoted t o testing t h e explanatory power of t h e model f o r t h e p a s t performance of t h e Taiwanese economy and examining i t s dynamic p r o p e r t i e s . Section 4 links t h e Taiwanese and Japanese models and t h e n tests t h e explanatory power of t h e linked models and examines t h e i r dynamic p r o p e r t i e s . Finally, Section 5 p r e s e n t s a simulation study

he

e c o n o m e t r i c m o d e l o f J a p a n is d e s c r i b e d i n a c o m p a n i o n IIASA W o r k i n g P a p e r , The Causes of the High Economic Growth of Japan , p u b l i s h e d i n 1985 b y t h e I n t e r n a t i o n a l In- s t i t u t e :or A p p l i e d S y s t e m s A n a l y s i s , L a x e n b u r g , A u s t r i a .

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of t h e impact of technological p r o g r e s s within one country on t h e economic p e r f o r - mance of o t h e r c o u n t r i e s as well as t h e impacts on t h e domestic economy.

2. PAIN FEATURES OF THE TAIWANZSE MODEL

The model i s essentially a n annual a g g r e g a t i v e model of t h e Keynesian t y p e , whose sample period is 1960-81. The equations and v a r i a b l e s of t h e estimated model are listed in t h e Appendix. In g e n e r a l , t h e method of estimation is o r d i n a r y l e a s t s q u a r e s .

E2

is t h e measure of goodness of f i t adjusted f o r d e g r e e s of f r e e - dom; and D.W. is t h e Durbin-Watson s t a t i s t i c . The f i g u r e in p a r e n t h e s e s below e a c h r e g r e s s i o n coefficient indicates i t s t-value. Some of t h e equations are estimated by t h e Cochrane-Orcutt i t e r a t i v e method, where p i s t h e s e r i a l c o r r e l a - tion coefficient of t h e f i r s t o r d e r in e r r o r terms.

The f i r s t important c h a r a c t e r i s t i c of t h e model i s t h e disaggregation of e x p o r t s and imports, which enables u s t o deal with t h e t r a d e relationship between Taiwan and Japan. Imports are then disaggregated into imports from Japan and t h o s e from c o u n t r i e s o t h e r than Japan. Imports from Japan a r e f u r t h e r disaggregated into six items: (1) food and a g r i c u l t u r a l products, (2) chemicals, (3) textiles, (4) metals, (5) machinery, and (6) o t h e r s . These imports are mainly explained in t e r m s of t h e GDP of Taiwan, r e l a t i v e p r i c e s , and t h e level of capacity output of Taiwan ( s e e eqs. (2.1) t o (2.6)) The level of capacity output, r e p r e s e n t i n g t h e e f f e c t of import substitution, i s calculated from t h e estimated production function, as explained below.

Imports from c o u n t r i e s o t h e r than Japan are disaggregated into (1) fuels and (2) nonfuels. These are a l s o explained in t e r m s of t h e GDP of Taiwan and r e l a t i v e p r i c e s (eqs. (2.11) and (2.12)). T h e r e is a slight s t a t i s t i c a l discrepancy between t h e sum of disaggregated imports from Japan and t h e t o t a l import from Japan, MGJPMO, since t h e f o r m e r is based on MITI t r a d e s t a t i s t i c s from Japan and t h e l a t t e r on t r a d e s t a t i s t i c s from Taiwan. The two f i g u r e s are i n t e r c o r r e l a t e d through a s t a t i s t i c a l equation (eq. (2.19)). The sum of commodity imports from Japan and nonfuel commodity imports from c o u n t r i e s o t h e r than Japan is t h e t o t a l nonfuel commodity import, MO PMO, (eq. (2.18)), and t h e total commodity import and s e r v i c e imports add up t o t h e imports of goods and s e r v i c e s d e r i v e d from t h e national income account, Fd, (eq. (2.14)).

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Commodity e x p o r t s a r e a l s o disaggregated into e x p o r t s t o Japan and those t o countries o t h e r than Japan. E x p o r t s t o Japan are f u r t h e r disaggregated into ( 1 ) food and a g r i c u l t u r a l products, ( 2 ) chemicals, ( 3 ) machinery, and ( 4 ) o t h e r s . The main explanatory v a r i a b l e s f o r such e x p o r t s are t h e GNP of Japan, r e l a t i v e p r i c e s , and t h e level of t h e capacity output of Taiwan (eqs. ( 2 . 7 ) t o ( 2 . 1 0 ) ) . The second of t h e s e v a r i a b l e s is introduced t o t a k e into account t h e f a c t t h a t t h e capa- city level may impose limits on t h e maximum amount of Taiwanese e x p o r t s . A g r e a t e r p a r t of item ( 4 ) is textiles. T h e r e f o r e , in t h e estimation of eq. ( 2 . 1 0 ) w e used an estimate of 0.64 f o r t h e long-run elasticity of e x p o r t s of this item with r e s p e c t t o t h e GKP of Japan; this estimate i s t h e r e s u l t of t h e calculation 1.26 X

0 . 7 9 x 0 . 6 4 , where 1.26 and 0.79 a r e , respectively, estimates of t h e elasticity of consumer demand f o r t e x t i l e s with r e s p e c t t o total consumption and t h e elasticity of total consumption with r e s p e c t t o personal disposable income, both of which were obtained from a cross-section study, and 0 . 6 4 i s t h e r a t i o of personal dispos- a b l e income t o GNP.

E x p o r t s t o c o u n t r i e s o t h e r than Japan are explained in t e r m s of t h e world t r a d e index, r e l a t i v e p r i c e s , and t h e level of capacity output of Taiwan (eq.

( 2 . 1 3 ) ) . In t h e same way as f o r imports, eqs. ( 2 . 2 1 ) t o ( 2 . 2 4 ) are identities and s t a - tistical discrepancy equations, by which individual e x p o r t items add up t o e x p o r t s of goods and s e r v i c e s d e r i v e d from t h e national income account, X.

The second significant f e a t u r e of t h e model i s t h e system of p r i c e equations t h a t r e l a t e s t h e growth of e x p o r t s and imports t o t h e c o s t s t r u c t u r e of domestic Taiwanese products. Corresponding t o t h e disaggregation of imports, industry as a whole i s disaggregated into eight industries: (1) primary, ( 2 ) food, ( 3 ) textiles, ( 4 ) chemicals, (5) petrochemicals, ( 6 ) metals, ( 7 ) machinery, and ( 8 ) construction, util- ities, and s e r v i c e s .

Using t h e framework of input-output analysis, w e may write t h e price-cost relationship of industry i a s :

H e r e

Pi,

W , and

PI

a r e , r e s p e c t i v e l y , t h e p r i c e f o r industry i , th e wage index, and t h e d e f l a t o r f o r investment goods; A ( j ,i), L C ( i ) , D ( i ) , T ( i ) , and S ( i ) a r e material input coefficients, l a b o r input coefficients, t h e depreciation r a t i o , t h e indirect t a x

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r a t i o , and t h e s u r p l u s r a t i o , respectively. The coefficients, which r e p r e s e n t t h e technical and institutional s t r u c t u r e of e a c h industry, are adopted from t h e Taiwanese input-output table f o r 1976. By solving e a c h equation with r e s p e c t t o Pi, w e may e x p r e s s t h e p r i c e of domestic product i as a function of t h e p r i c e s of o t h e r p r o d u c t s and t h e wage:

where P i D i s t h e p r i c e of t h e domestic product. This equation implies t h a t t h e c o s t of product i consists of two p a r t s : t h e nonwage p a r t ( t h e f i r s t t e r m on t h e right-hand side) and t h e wage p a r t (the second term). Let us denote t h e f o r m e r by

Pilo,

as shown in eq. (4.2). The elasticity of P i D with r e s p e c t t o Pi I0 in t h e b a s e y e a r , when Pi

=

1 . 0 , i s calculated as

In eqs. (4.3), (4.6), (4.7), (4.9), and (4.10) t h e coefficient of In Pi I0 is set at t h e value given by formula (A.3) from t h e 1976 input-output table. On t h e o t h e r hand, taking into account t h e distinct declining t r e n d in L C ( i ) , w e introduced t h e r e c i p r o c a l of t h e l a b o r productivity of industry as a whole into eqs. (4.3) to (4.10) as a v a r i a b l e r e p r e s e n t i n g t h e s e c u l a r movement of t h e l a b o r input coefficient of industry i. In t h i s p r o c e d u r e w e assume t h a t t h e r e e x i s t s a s t a b l e relationship between t h e growth rates of l a b o r productivity in industry as a whole and in t h e individual industry i

.

The p r i c e as a c o s t item, o r t h e p u r c h a s e r s ' p r i c e , Pi, will b e defined as a weighted a v e r a g e of t h e p r i c e s of t h e domestic product, P i D , and t h e p r i c e of imported goods, Pi M (eq. (4.1)). The l a t t e r is also defined as a weighted a v e r a g e of t h e import p r i c e from Japan, PfvWi-RAZE, and t h e import p r i c e s from c o u n t r i e s o t h e r than Japan, PMEand PMO (eqs. (4.27) t o (4.34)).

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The d e f l a t o r s of individual components of final demands, P C , e t c . , are r e l a t e d t o a variable defined as a weighted a v e r a g e of t h e individual industry p r i c e s , PCIO, e t c . (eqs. (4.12) t o (4.16)), where t h e weight is calculated from t h e r e l a t i v e s h a r e of e a c h industry's output in t h e r e l e v a n t final demand (eq. (4.11)).

E x p o r t p r i c e s ,

4,

are explained in t e r m s of t h e p r i c e of t h e industry corresponding t o e a c h e x p o r t item (eqs. (4.17) t o (4.20)). Import p r i c e s from Japan, PIXJi, are determined by t h e wholesale p r i c e index of industry as a whole in US dollar terms, PWHIJeRATJ (eqs. (4.21) t o (4.26)); w e assume t h a t t h e r e e x i s t s a s t a b l e relationship between t h e t r e n d of t h e p r i c e f o r industry as a whole and those f o r individual industries. Under t h e same assumption, t h e wholesale p r i c e index f o r e a c h individual industry i s r e l a t e d t o t h a t of industry as a whole (eqs.

(J.1) t o (5.4)).

The t h i r d important f e a t u r e of t h e model is t h a t t h e supply side of t h e economy is r e p r e s e n t e d by a production function of t h e CES type:

GDPM

=

[ ~ , ( T . L ) +

+

~ , K F ~

+

d,iUE4

+

d 4 ~ 0 4 ] - " " (A.4) where a n output v a r i a b l e , GDPM, i s t h e t o t a l supply, i.e., GDP plus imports, and L ,

M F ,

ME, and MO are l a b o r input, capital s t o c k , fuel imports, and o t h e r imports, respectively; bi and I9 are p a r a m e t e r s and t h e elasticity of substitution i s 1/ ( 1

+

29). Technical p r o g r e s s of a labor-augmenting type i s allowed f o r by a t r e n d variable T. W e assume t h a t t h e level of technical knowledge is e x p r e s s e d by a n index, e x p (At ), where t is a time t r e n d , and t h a t t h e level of embodied tech- nique in existing plant a n d equipment a t time

t ,

T t , i s r e p r e s e n t e d by a weighted a v e r a g e of e x p (At) o v e r t h e preceding t e n y e a r s , where t h e weight is new investment o v e r t h e same period (eq. (5.1)). Cost minimization under eq. (A.4) gives u s a set of f o u r log-linear marginal productivity relations, e a c h of which h a s a dif- f e r e n t constant t e r m but a common elasticity of substitution, o. Pooling t h e p r o - ductivity and p r i c e d a t a f o r f o u r inputs yields t h e estimated r e s u l t s in eq. (5.1), where t h e whole sample p e r i o d i s divided into two periods: b e f o r e and a f t e r t h e oil c r i s i s . Eq. (5.1) h a s t h e smallest residual sum of s q u a r e s among t h e equations obtained by assigning t o X various values within a plausible r a n g e . Estimated r e s u l t s show t h a t t h e a v e r a g e annual rate of p r o g r e s s in available technical knowledge, X, is 7 and 6 p e r c e n t p e r y e a r f o r t h e y e a r s 1962-69 and 1974-81, r e s p e c t i v e l y , while t h e elasticity of substitution, about 0.4, is almost t h e same f o r

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both periods.

Capacity output i s defined as t h e value of GDPM obtained by substituting l a b o r f o r c e L E f o r L in t h e estimated version of eq. (A.4) (namely, eq. (5.2)).

Since GDPM i s t h e output of t h e whole economy, l a b o r input must include self- employed and family w o r k e r s , NU, as well as employees, NW. In view of t h e l a r g e differential between t h e productivities of t h e s e t y p e s of input, however, l a b o r input is defined h e r e as t h e sum of

NW

and a discounted NU, where t h e discount rate i s t h e income differential, D m (eqs. (6.4) t o (6.9)). The d e s i r e d level of L , i.e. L ^{I ,}i s calculated from t h e marginal productivity formula f o r l a b o r (eqs. (5.1) and (6.1)). The a c t u a l level of L is r e g r e s s e d on t h i s d e s i r e d level and a lagged value of L (eq. (6.2)). Finally, a version of t h e Phillips c u r v e is estimated t o d e t e r - mine t h e wage level of employees (eq. (6.10)).

3. THE FaT& TEST AND DYNAMIC PROPERTIES OF THE MODEL

The explanatory effectiveness of t h e model o v e r t h e period 1965-76 was examined by t h e so-called final method of e z post f ~ r e c a s t i n g . ~ In t h i s method f o r e - c a s t values of t h e endogenous variables f o r t h e s t a r t i n g y e a r (1965) are obtained by using o b s e r v e d values of t h e exogenous v a r i a b l e s and t h e lagged endogenous variables, while those f o r subsequent y e a r s are obtained by using observed values of t h e exogenous v a r i a b l e s f o r e a c h sample y e a r and calculated values of t h e lagged endogenous v a r i a b l e s obtained by p a s t f o r e c a s t . The r e s u l t s a r e p r e s e n t e d in T a b l e 2. In t h i s simulation t h e variables r e l a t i n g t o Japan, such as GNP, whole- s a l e p r i c e indexes f o r industries, and t h e exchange r a t e , were t r e a t e d a s exogenous. In addition, t h e constant t e r m of t h e employment equation w a s r a i s e d by 80 thousand p e r s o n s , since t h e equation t u r n e d out t o b e unsuccessful in explaining t h e observed dynamic behavior of t h e unemployment rate.

Column (1) of t h e table shows t h e a v e r a g e absolute p e r c e n t a g e e r r o r of selected endogenous v a r i a b l e s . I t c a n b e s e e n t h a t t h e e r r o r s f o r t o t a l supply, GDPM, and p r i v a t e consumption, C, a r e small, while t h o s e f o r e x p o r t s , imports, 3 ~ e e A. S . Coldberger, Impact M u l t i p l i e r s a n d D y n a m i c P r o p e r t i e s # t h e Mein-Goldberger

Model (Xorth-Holland Publishing Co. 1959), pp. 49-51.

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TABLE 2. T h e R e s u l t s of Ex Post Forecasting. 1965-73

( 1 ( 2 ) (3 ( 4 )

Average Average Average Error:

absolute growth growth ( 3 )

-

( 2 )

percentage rate: rate:

errorx actual computed ( 1 ) G D P : CDP

( 2 ) GDPM : total supply

( 3 ) C : private consumption ( 4 ) 1: fixed investment ( 5 ) X: exports

( 6 ) M : imports

fl) p : CDP deflator

( 8 ) P C : consumption deflator ( 9 ) W: wage earings

( 1 0 ) N : persons engaged (11)MGJPPAO :imports from Japan (12flGJFXG : exports t o Japan

*The average absolute percentage error

where 2t

-

the calculated value of a variable in period t ,

4 -

the actual value of a variable in period t ,

T

-

the number of periods.

and p r i c e v a r i a b l e s are r e l a t i v e l y l a r g e . Columns (2) and (3) p r e s e n t t h e a c t u a l and f o r e c a s t a v e r a g e growth rates of t h e variables o v e r t h e period 1965-73. By and l a r g e , t h e f o r e c a s t value of t h e a v e r a g e growth rate is f a i r l y close t o t h e observed value, implying t h a t t h e g e n e r a l t r e n d s in most of t h e v a r i a b l e s are followed by t h e mode! simulation.

T a b l e 3 examines t h e multiplier effect of government expenditure. A dynamic path was calculated in which government consumption e x p e n d i t u r e w a s r a i s e d by a one billion Taiwanese d o l l a r s (T$), o t h e r exogenous v a r i a b l e s being k e p t at t h e same level as in t h e ex post f o r e c a s t d e s c r i b e d above. The f i g u r e s in T a b l e 3 are t h e d i f f e r e n c e between t h e ex post f o r e c a s t solution (call i t t h e "control" solution) and t h e expansionary one. A s shown in Row

(I),

t h e value of t h e multiplier is 1.089 in t h e f i r s t y e a r and r e a c h e s a peak value of 1.657 in t h e t h i r d y e a r . These values are lower t h a n t h o s e f o r Japan. The value of t h e multiplier f o r t h e J a p a n e s e model is 1.28 in t h e f i r s t y e a r and r e a c h e s a peak of 1.92 in t h e seventh y e a r . 4 The lower ' I ~ e e It. Saito and T. Oono, A n E n e ~ g y Model of the J a p a n e s e E c o n o m y , 1961-2979.

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value of t h e multiplier f o r Taiwan may b e a s c r i b e d t o t h e f a c t t h a t "import leak- a g e 3 is l a r g e r in Taiwan t h a n in Japan: t h e r a t i o of imports t o G N P in 1975 w a s 0.30 in Taiwan b u t only 0.11 in J a p a n . O t h e r rows of T a b l e 3 show t h e e f f e c t s of t h e i n c r e a s e in government consumption on s e l e c t e d v a r i a b l e s in terms of t h e p e r c e n - t a g e c h a n g e in t h e level of t h e c o n t r o l solction f o r e a c h v a r i a b l e ( s e e t h e f o o t n o t e t o Table 3).

TABLE 3. The E f f e c t o f a S u s t a i n e d I n c r e a s e o f One Billion Taiwanese Dol- lars (Tt) o f Government Consumption. 1965-70

(1) GDP (billion T$) (1)' GDP (%)

( 2 ) GDPM (billion TB) (2)' GDPFd

G)

(3) C ( 4 ) 1 (%)

( 5 )

X

(%)

( 6 ) M (%I (7) P ( 8 ) PC (%)

( 9 )

w

(%)

(10)N (11 )MGDMO (12)XG J m G

*(%) implies (Xt

-zt)

^{/ f t}^{j x}^100,

where Xt

-

t h e solution o f a variable i n period t f o r t h e "expansionary" economy,

zt -

t h e "control" solution o f a variable i n period t .

4. LINKING THE TAIWANESE AND JAPANESE MODELS

The Taiwanese a n d J a p a n e s e models were linked t o g e t h e r by making t h e following v a r i a b l e s common t o both c o u n t r i e s : ⁵

PWHIJ: wholesale p r i c e index of t h e whole of J a p a n e s e industry 5 ~ o r t h e purpose o f linkage, e x p o r t s from Japan were disaggregated i n t o e x p o r t s t o Taiwan and t h o s e t o other countries. Similarly, imports i n t o Japan were disaggregated Into imports f r o m Taiwan and t h o s e f r o m other countries.

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PJi : wholesale p r i c e index of item i in J a p a n R A T J : e x c h a n g e rate of J a p a n

MGJPMO: imports of commodities from J a p a n XGJFXG : e x p o r t s of commodities t o J a p a n

The e x p l a n a t o r y e f f e c t i v e n e s s of t h e linked models o v e r t h e p e r i o d 1965-1973 was t e s t e d by t h e final method as d e s c r i b e d e a r l i e r . In T a b l e 4 t h e r e s u l t s of t h e linked models are compared with t h o s e of t h e unlinked Taiwanese model. Columns (1) a n d (2) of t h e t a b l e contain t h e a v e r a g e a b s o l u t e p e r c e n t a g e e r r o r of t h e linked models a n d i t s d i f f e r e n c e from t h a t of t h e unlinked Taiwanese model,6 r e s p e c t i v e l y . I t c a n b e s e e n t h a t , by and l a r g e , t h e a v e r a g e a b s o l u t e p e r c e n t a g e e r r o r s of t h e linked models a r e f a i r l y close t o t h o s e of t h e unlinked model.

Columns (3) a n d (4) a r e t h e e r r o r s in t h e a v e r a g e growth r a t e f o r t h e linked models a n d t h e unlinked o n e , r e s p e c t i v e l y . The f i g u r e s are v e r y c l o s e t o e a c h o t h e r , indicating t h a t linking t h e Taiwanese model with t h e J a p a n e s e o n e d o e s not give r i s e t o any significant i n c r e a s e in e r r o r s . Columns (5) a n d (6) p r e s e n t , r e s p e c t i v e l y , t h e a v e r a g e a b s o l u t e p e r c e n t a g e e r r o r a n d t h e e r r o r in t h e a v e r a g e growth rate of t h e J a p a n e s e v a r i a b l e s obtained from t h e simulation of t h e linked models. Generally s p e a k i n g , t h e e r r o r s in t h e r e a l v a r i a b l e s f o r J a p a n a r e l a r g e r t h a n t h o s e f o r Taiwan, while t h e e r r o r s in t h e nominal v a r i a b l e s ( p r i c e s a n d wages) are smaller.

Now we examine t h e i n t e r d e p e n d e n c e between t h e economies by estimating t h e multiplier in t h e linked models. T a b l e 5 p r e s e n t s t h e r e s u l t s of a simulation in which t h e government consumption e x p e n d i t u r e s of Taiwan are r a i s e d by o n e billion TQ o v e r t h e p e r i o d 1965-68. The f i r s t f o u r columns of t h e t a b l e show t h e e f f e c t s of t h e i n c r e a s e in government e x p e n d i t u r e o n t h e Taiwanese economy. By 7

comparing T a b l e s 5 a n d 3 i t c a n b e s e e n t h a t t h e r e i s p r a c t i c a l l y no c h a n g e in t h e multiplier e f f e c t between t h e unlinked a n d linked Taiwanese models. In addition, t h e l a s t f o u r columns of T a b l e 5, which p r e s e n t t h e impact multiplier of Taiwanese government e x p e n d i t u r e o n t h e J a p a n e s e economy, show t h a t a 0.4-0.6 p e r c e n t i n c r e a s e in t h e G D P growth rate of Taiwan d o e s not e x e r t any significant influence 6 ~ h e e r r o r s i n t h e unlinked T a i w a n e s e model a r e p r e s e n t e d i n Column (1) o f Table 2.

he

s o l u t i o n o f t h e unlinked T a i w a n e s e model is p r e s e n t e d i n Table 3.

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TABLE 4. The Results (Percentages) o f Ex P o s t F o r e c a s t i n g Using the Linked Models. 1965-73

Taiwan Japan

(1) (2 ) 0) (4) (5) (6)

Average (1)

-

^Error Error in t h e Average Error in absolute of unlinked growth r a t e absolute t h e growth percentage model p e r c e n t a g e r a t e

e r r o r * Linked unlinked e r r o r * (linked) (linked)

*See Table 2

**In the case of Japan, CKP or CKPK.

on Japanese economic activities.

On t h e o t h e r hand, Table 6 p r e s e n t s t h e r e s u l t s of a simulation in which t h e government consumption expenditure of Japan is r a i s e d by one billion yen o v e r t h e period 1965-68. The f i r s t f o u r columns show t h e effects of Japanese expansion on t h e Taiwanese economy. On a v e r a g e o v e r t h i s four-year period a 1.813-percent annual i n c r e a s e in t h e growth r a t e of Japanese GNP will give r i s e t o a 0.055- p e r c e n t annual i n c r e a s e in t h a t of Taiwan; i.e. a one-percent r i s e in t h e growth r a t e of Japanese GNP might b e expected t o yield a 0.030-percent r i s e in t h a t of Taiwan. T h e r e f o r e , i t may b e concluded t h a t economic r e p e r c u s s i o n s from Japan t o Taiwan will b e much l a r g e r t h a n those from Taiwan t o Japan.

5. THE IMPACT OF TECHNICAL PROGRESS ON ECONOMIC PERFORMANCE In t h i s section w e attempt t o make a quantitative assessment of t h e e f f e c t of technical p r o g r e s s on economic performance. The method adopted h e r e is simulation using t h e estimated models. The assessment i s f i r s t made on t h e basis of t h e unlinked Taiwanese model, and t h e n r e p e a t e d using t h e linked models.

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TABLE 5. The Effects of a Sustained Increase of One Billion Taiwanese Dol- lars (TS) in Taiwanese Government Consumption. 1965-68 (Linked Models)

Taiwan J a p a n

1965 1966 1967 1968 1965 1966 1967 1968 (1) GDP (billion T$ o r yen)*

(1)' G D P 6 ) *

(2) GDPM (billion T$ o r yen)*

(2)' GDPM (%)*

(3) C G ) (4) 16) (5)

X(%)

(6) M G )

(7) P (8) P C (9) 'U

(10 )N (% )

(11)MGJPMO (% ) (12 )XGJEiG (2 )

*In the case of Japan, CNP or CNPM.

TABLE 6. The Effects of a Sustained Increase of One Billion Yen in Japanese Government Consumption. 1965-68 (Linked Models)

Taiwan J a p a n

1965 1966 1967 1968 1965 1966 1967 1968

*In the case of Japan, CKP or CNPK.

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5.1. T h e U n l i n k e d T a i w a n e s e Model

In t h e Taiwanese model t h e rate of labor-augmenting t e c h n i c a l p r o g r e s s was estimated as 7 p e r c e n t p e r y e a r f o r 1961-73 in e q . (5.1) a b o v e . S u p p o s e now t h a t t h i s rate is 6 p e r c e n t p e r y e a r , i.e. one p e r c e n t a g e point lower t h a n t h e initial estimate. A simulation f o r 1965-73 u n d e r t h i s l a t t e r assumption, o t h e r things being k e p t unchanged, d e s c r i b e s t h e growth p a t h whose main f e a t u r e s are p r e s e n t e d in T a b l e 7. Columns (1) a n d (2) of t h e t a b l e give t h e a v e r a g e growth rates of s e l e c t e d v a r i a b l e s f o r t h e 6 - p e r c e n t p a t h a n d t h e i r d i f f e r e n c e from t h e

"control" solution ( s e e Columns (3) of T a b l e

2).

I t c a n b e s e e n t h a t a slowdown of o n e p e r c e n t in t h e r a t e of Taiwanese t e c h n i c a l p r o g r e s s will r e s u l t in a d e c r e a s e of 2.10 p e r c e n t in t h e growth rate of GDP, a n i n c r e a s e of 5.70 p e r c e n t in t h e inflation rate of t h e GDP d e f l a t o r , and a n i n c r e a s e of 0.13 p e r c e n t in t h e growth rate of employment. The a n n u a l i n c r e a s e of 0.13 p e r c e n t in t h e a v e r a g e growth r a t e of employment f o r nine y e a r s , r e p r e s e n t i n g a f a l l of 1.18 p e r c e n t in t h e unemployment rate in 1 9 7 3 may b e impossible, s i n c e t h e l a b o r m a r k e t of Taiwan r e a c h e d a s t a t e of full employment a r o u n d 1 9 7 1 a n d t h e unemployment r a t e w a s 2.24 p e r c e n t in 1 9 7 3 . ~ T h e r e f o r e , if t h e rate of t e c h n i c a l p r o g r e s s h a d b e e n o n e p e r c e n t slower, e f f e c t i v e demand would h a v e h a d t o b e r e d u c e d . Let u s s u p p o s e t h a t government e x p e n d i t u r e s were c u t down s o as t o k e e p t h e unemployment r a t e at t h e level of t h e c o n t r o l solution. Columns (3) a n d (4) p r e s e n t t h e growth r a t e f o r t h e simulated p a t h a n d t h e d i f f e r e n c e s between t h i s a n d t h e c o n t r o l solution, r e s p e c t i v e l y . They show t h a t a o n e - p e r c e n t slowdown in t h e r a t e of t e c h n i c a l p r o - g r e s s would l e a d t o a f a l l of 1.04 p e r c e n t in t h e a v e r a g e growth rate of GDP and a n i n c r e a s e of 0.95 p e r c e n t in t h e inflation rate of t h e GDP d e f l a t o r . One might a r g u e , assuming t h e c a u s a l r e l a t i o n s h i p outlined a b o v e t o b e l i n e a r , t h a t if t h e rate of t e c h n i c a l p r o g r e s s were z e r o p e r c e n t , t h e Taiwanese economy would h a v e e x p e r i e n c e d a f a l l of 7.28 p e r c e n t a g e points in t h e growth rate of GDP, which i s a b o u t two-thirds of t h e t o t a l GDP growth rate. Column (5) p r e s e n t s c a l c u l a t e d values f o r t h e J a p a n e s e model c o r r e s p o n d i n g t o t h e Taiwanese f i g u r e s of Column (4). The J a p a n e s e f i g u r e s i n d i c a t e t h a t t h e e f f e c t o n economic p e r f o r m a n c e of t h e o n e - p e r c e n t slowdown in t h e rate of t e c h n i c a l p r o g r e s s i s somewhat w e a k e r in J a p a n t h a n in Taiwan. In f a c t , a calculation showed t h a t in t h e case of J a p a n , if t h e 's.w.Y. Kuo, The Taiwan Economy i n firznsition (Westview Press, 1983, Chap.4).

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r a t e of technical p r o g r e s s were z e r o p e r c e n t , t h e Japanese economy would have e x p e r i e n c e d a d r o p of 6.12 p e r c e n t a g e points in t h e growth r a t e of GNP, which i s about 60 p e r c e n t of t h e t o t a l GDP growth r a t e .

TABLE 7 . T h e E f f e c t o f a One-Percent Slowdown in the R a t e o f Taiwanese T e c h n i c a l P r o g r e s s . 1965-73 ( U n l i n k e d Model)

(1) (2) (3 ) (4) (5)

1% fall in (1)

-

(1) and (3)

-

Japanese the r a t e of (control slower growth (control figure

technical solution) of government solution) comparable

progress consumption t o (4)

.In t h e c a s e of Japan, CNP or CNPH.

5.2. T h e Linked M o d e l s

Let us now t u r n t o t h e linked models. T a b l e 8 p r e s e n t s t h e r e s u l t s of a simulation using t h e linked models, in which t h e rate of Taiwanese technical p r o g r e s s i s set at 6 p e r c e n t , i.e. one p e r c e n t lower t h a n t h e initial estimate, and Taiwanese government consumption i s r e d u c e d s o as t o k e e p t h e unemployment rate at t h e same level as in t h e c o n t r o l solution. Column (1) shows t h e d i f f e r e n c e between t h e Taiwanese growth-rate values f o r e a c h v a r i a b l e and t h e corresponding c o n t r o l solutions. I t i s c l e a r t h a t t h e impact of a one-percent slowdown in Taiwanese technical p r o g r e s s is p r a c t i c a l l y t h e same as t h a t obtained from t h e simulation of t h e unlinked Taiwanese model (see Column (4) of T a b l e 7). Similarly, Column (2) of T a b l e 8 shows t h e d i f f e r e n c e between t h e Japanese growth rate values f o r e a c h v a r i a b l e and t h e corresponding c o n t r o l solutions. W e notice t h a t t h e one-percent

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slowdown of Taiwanese technical p r o g r e s s would have led t o a slight stimulus favor- a b l e t o J a p a n , f o r example, a 0.01-percent r i s e in GNP growth rate, a 0.03-percent r i s e in t h e growth rate of e x p o r t s , and a 0.85-percent fall in t h e imports-from- Taiwan growth r a t e . These f i g u r e s s e e m v e r y s m a l l . One might a r g u e , however, assuming t h a t t h e causal relationship i s l i n e a r , t h a t Japan would have experienced a 0.07 (= 0.01 x 7) percentage-point r i s e g in GNP growth, 0.21 p e r c e n t a g e points more e x p o r t growth, and 5.95 p e r c e n t a g e points less growth in imports from Taiwan t h a n if t h e r e had been no technical p r o g r e s s in Taiwan. The f i r s t two of t h e s e might h a v e had a n insignificant e f f e c t on t h e J a p a n e s e economy as a whole, b u t t h e 5.95 percentage-point change in imports from Taiwan would have had a sub- stantial impact on t h e businesses concerned in both countries.

Finally, T a b l e 9 p r e s e n t s t h e r e s u l t s of a simulation in which t h e rate of Japanese technical p r o g r e s s is set at 8 p e r c e n t (i.e., one p e r c e n t a g e point lower than in t h e initial estimate) and Japanese government consumption i s r e d u c e d s o as t o keep t h e growth rate of employment at t h e s a m e rate as in t h e c o n t r o l solution.

Columns (1) and (2) are, respectively, t h e differences between t h e Taiwanese and Japanese growth rates of e a c h variable and t h o s e of t h e c o n t r o l solution. The e f f e c t on t h e J a p a n e s e economy of t h e one percentage-point slowdown in Japanese technical p r o g r e s s is practically t h e same as t h a t calculated using t h e unlinked Japanese model (Column (5) of T a b l e 7), while i t s e f f e c t on t h e Taiwanese economy is v e r y small. A comparison, however, of Column (2) of T a b l e 8 and Column (1) of T a b l e 9 r e v e a l s t h a t t h e l a t t e r is significantly l a r g e r t h a n t h e f o r m e r , implying t h a t t h e e f f e c t of J a p a n e s e technical p r o g r e s s on Taiwanese performance is much l a r g e r t h a n t h e e f f e c t of Taiwanese technical p r o g r e s s on Japanese performance.

According t o o u r estimates of t h e production functions f o r both countries, t h e a v e r a g e annual rate of J a p a n e s e technical p r o g r e s s fell from 9 p e r c e n t t o 3 p e r - c e n t a f t e r t h e 1973 oil c r i s i s , while t h e rate of Taiwanese technical p r o g r e s s fell from 7 p e r c e n t t o 6 p e r c e n t . The f o r m e r implies a 0.36 (= 0.06 X 6)-percent fall in t h e GDP growth rate of Taiwan, a 4.02 (= 0.67 X 6)-percent fall in t h e GNP growth rate of J a p a n , and a 5.94 (= 0.99 X 6)-percent i n c r e a s e in t h e rate of growth of Taiwan-to-Japan e x p o r t s , while t h e l a t t e r signifies a 0.85-percent d e c r e a s e in t h e

he

e s t i m a t e f o r t h e r a t e of Taiwanese t e c h n i c a l p r o g r e s s w a s 7.0 p e r c e n t .

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TABLE 8. The Effects of a OnePercent Slowdown in the Rate of Taiwanese Technical Progress. 1965-73 (Linked Models)

(5)

A'

+0.02 -0.72

(6)

M

+0.24 -0.48

(7) p +0.61 +0.61

(8) P C +0.52 +0.52

(9)

w

+0.13 +0.09

(l0)N +0.01 +o.oo

(11)rdGJPIdO

+

0.34

-

(12 flCJTXG +0.99

-

*In t h e c a s e of Japan, CNP or CNPX.

(20)

r e s p e c t i v e r a t e s . T h e r e f o r e , t h e n e t e f f e c t s a r e a 1.39-percent fall in t h e GDP growth rate of Taiwan, a 4.01-percent fall in t h e GNP growth r a t e of Japan, and a 5.09-percent i n c r e a s e in t h e growth r a t e of Taiwan-to-Japan e x p o r t s . The f i r s t two e f f e c t s explain t h e g r e a t e r p a r t of t h e fall in t h e GDP growth rates of both coun- t r i e s . The l a s t e f f e c t must have been t h e main c a u s e of t h e subsequent t r a d e f r i c - tion between t h e two countries.

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L i s t of Variables

- --

x

N o t a t i o n Z x p l a n a t i o n Uni t

e x o g e n o u s

C p r i v a t e c o n s u m p t i o n e x p e n d i t u r e m i l l i o n s of 1976 KTS

CG x g o v e r n m e n t consumption e x p e n d i t u r e m i l l i o n s of 1976 KT$

l25P c a p i t a l c o n s u m p t i o n a l l o w a n c e s m i l l i o n s of c u r r e n t KTS

Onr d i v i d e n d s m i l l i o n s of c u r r e n t KT$

WP g r o s s d o m e s t i c p r o d u c t m i l l i o n s of 1976 KTS

WPM g r o s s d o m e s t i c s u p p l y m i l l i o n s of 1976 KTS

G h W g r o s s n a t i o n a i p r o d u c t m i l l i o n s of c u r r e n t KTP

I g r o s s d o m e s t i c c a p i t a i f o r m a t i o n m i l l i o n s of 1976 KTB

D3G i n t e r e s t on p u b l i c d e b t m i l l i o n s of c u r r e n t KTS

J i n c r e a s e i n s t o c k s m i l l i o n s of 1976 KTS

M i m p o r t s of g o o d s and s e r v i c e s m i l l i o n s of 1976 NTb

hFl n e t f a c t o r i n c o m e f r o m t h e rest of m i l l i o n s of c u r r e n t XTS

t h e w o r l d

M n a t i o n a l income a t f a c t o r c o s t m i l l i o n s of c u r r e n t NT$

P d e f l a t o r f o r g r o s s d o m e s t i c p r o d u c t 1976

^1.0

SVB s u b s i d i e s m i l l i o n s o f c u r r e n t KTk

ll i n d i r e c t b u s i n e s s t a x e s m i l l i o n s o f c u r r e n t NTS

lRP p e r s o n a l income t a x a n d o t h e r household m i l l i o n s of c u r r e n t NTk

t r a n s f e r s

W e m p l o y e e c o m p e n s a t i o n m i l l i o n s of c u r r e n t h W

X e x p o r t s of g o o d s & s e r v i c e s m i l l i o n s o f 1976 NTS

IC c o r p o r a t e i n c o m e b e f o r e t a x e s m i l l i o n s of c u r r e n t KTS

m'

p r i v a t e d i s p o s a b l e i n c o m e m i l l i o n s of c u r r e n t I T S

IG g e n e r a l g o v e r n m e n t i n c o m e f r o m m i l l i o n s o f c u r r e n t R E

p r o p e r t y & g o v e r n m e n t e n t e r p r i s e s

IW p e r s o n a l i n c o m e m i l l i o n s o f c u r r e n t NTS

W P p r i v a t e i n c o m e f r o m p r o p e r t y m i l l i o n s of c u r r e n t KTS I'7.I compound i n c o m e m i l l i o n s o f c u r r e n t KTS

(22)

Notation

exogenous

Explanation Unit

x exchange r a t e o f Japan i m p o r t s o f f u e l s

Yen/US$

millions o f 1976 NTS millions o f 1976 NTS millions o f c u r r e n t K T $ millions o f 1976 KT$

iniports o f commodities

i m p o r t s o f commodities f r o m Japan Imports o f commodities o t h e r t h a n f u e l s f r o m c o u n t r i e s other t h a n Japan

i m p o r t s f r o m Japan billions o f c u r r e n t Y e n thousands o f 1976 US46 i m p o r t s o f i t e m i from Japan;

i

-

¹( f o o d s ) , 2 (chemicals),

3 ( t e x t i l e s ) , 4 ( m e t a l s ) , 5 ( m a c h i n e r y ) , and 6 ( o t h e r s )

Imports o f commodities o t h e r than f u e l s i m p o r t s o f s e r v i c e s

millions o f 1976 NTS millions o f 1976 KT$

1976

-

^1.0

price i n d e x o f i n d u s t r y i ; i

-

¹( p r i m a r y ) , 2 ( f o o d s ) , 3 ( t e x t i l e s ) , 4 (chemicals), 5 (petrochemicals), 6 ( m e t a l s ) , 7 ( m a c h i n e r y ) , and 8 ( c o n s t r u c t i o n , u t i l i t i e s , and s e r v i c e s ) .

d e f l a t o r f o r increase i n s t o c k s wholesale price index o f i t e m i o f Japan; see XFi f o r each i t e m d e f l a t o r f o r i m p o r t s o f f u e l s d e f l a t o r f o r commodity i m p o r t s PJ

P J i

import price i n d e x o f i t e m i f r o m Japan;

see M J i f o r each i t e m d e f l a t o r f o r i m p o r t s o f commodities o t h e r t h a n f u e l s d e f l a t o r f o r s e r v i c e i m p o r t s e x p o r t price index o f i t e m i ; see XH f o r each i t e m

d e f l a t o r f o r commodity e x p o r t s d e f l a t o r f o r s e r v i c e e x p o r t s price i n d e x o f world t r a d e (US dollar b a s e )

i n d e x o f exchange r a t e (KT$ per one US$)

i n d e x o f exchange r a t e o f Japan (Yen per one US$)

i n d e x o f gross national product i n c o n s t a n t prices o f Japan

q u a n t i t y i n d e x o f world t r a d e e x p o r t s o f commodities

e x p o r t s o f commodities t o Japan e x p o r t s o f commodities t o

1975

-

^1.0

millions o f 1976 NT$

millions o f c u r r e n t KTS millions o f 1976 KTS c o u n t r i e s o t h e r t h a n Japan

e x p o r t s t o Japan

e x p o r t s o f i t e m i t o Japan;

i

-

¹( f o o d s and agricultural

product), 2 (chemicals), 3 ( m a c h i n e r y ) , and 4 ( o t h e r s )

x e x p o r t s o f s e r v i c e s

corporate income b e f o r e t a x e s , excluding d i v i d e n t s

billions o f c u r r e n t Y e n thousands o f 1976 US$

millions o f 1976 NTQ millions o f c u r r e n t N T $

(23)

Fiotation E x p l a n a t i o n U n i t e x o g e n o u s

i n c o m e d i f f e r e n t i a l b e t w e e n e m p l o y e e s

-

a n d n o n e m p l o y e e s , d e f i n e d b y eq. (6.5)

e n d - o f - y e a r s t o c k of c a p i t a l m i l l i o n s of 1976 hT$

a d j u s t e d number of p e r s o n s e n g a g e d of t h o u s a n d s of p e r s o n s t h e w h o l e economy

d e s i r e d level of L , d e f i n e d by eq. (6.1) t h o u s a n d s of p e r s o n s n u m b e r of l a b o r f o r c e of t h e t h o u s a n d s of p e r s o n s w h o l e economy

n u m b e r of p e r s o n s engaged of t h e t h o u s a n d s of p e r s o n s w h o l e e c o n o m y

n u m b e r of self-employed p e r s o n s t h o u s a n d s of p e r s o n s a n d f a m i l y w o r k e r s

n u m b e r of e m p l o y e e s t h o u s a n d s of p e r s o n s p r i c e i n d e x of d o m e s t i c p r o d u c t 1976

-

^1.0

of i n d u s t r y f

p r i c e i n d e x of i m p o r t p r o d u c t 1976

-

^1.0

of i n d u s t r y f

c o s t i n d e x of i n d u s t r y f , d e f i n e d b y eq. (4.2)

w e i g h t e d a v e r a g e of i n d u s t r y p r i c e s , d e f i n e d b y eq. (4.11)

d e f l a t o r f o r g r o s s d o m e s t i c s u p p l y w e i g h t e d a v e r a g e of i n d u s t r , ~ p r i c e s , d e f i n e d b y eq. (4.11)

w e i g h t e d a v e r a g e of i n d u s t r y p r i c e s , d e f i n e d b y eq. (4.11)

p r i c e i n d e x of c a p i t a l s e r v i c e s , d e f i n e d b y eq. (4.35)

w h o l e s a l e p r i c e i n d e x of o t h e r s w e i g h t e d a v e r a g e of i n d u s t r y p r i c e s ,

d e f i n e d b y eq. (4.11)

w h o l e s a l e p r i c e i n d e x of t h e whole i n d u s t r y of J a p a n

maximum r a t e of medium- a n d l o n g - t e r m b a n k l o a n

p e r c e n t p e r y e a r

T i n d e x of t e c h n o l o g y l e v e l ,

-

d e f i n e d b y eq. (5.1)

ljR u n e m p l o y m e n t r a t e p e r c e n t

M C c a p a c i t y l e v e l o f g r o s s d o m e s t i c m i l l i o n s of 1976 h%

s u p p l y , d e f i n e d b y eq. (5.2)

W e m p l o y e e c o m p e n s a t i o n p e r e m p l o y e e t h o u s a n d s of NT46 p e r p e r s o n

WU compound i n c o m e p e r p e r s o n t h o u s a n d s of NTS p e r p e r s o n

(24)

List of Coefficients

-

Notation Explanation

A ( j , i ) material input coefficient; i.e., t h e amount of o u t p u t j r e q u i r e d t o p r o d u c e o n e unit of o u t p u t i

D ( i c a p i t a l consumption allowances p e r unit of o u t p u t in i n d u s t r y i F ( j , i ) t h e p r o p o r t i o n of t h e value of t h e i t h i n d u s t r y o u t p u t

which c o r r e s p o n d s t o t h e j t h final demand a n d c a t e g o r y ; j =1 ( p r i v a t e consumption), 2 (government consumption), 3 ( g r o s s domestic c a p i t a l formation), 4 ( i n c r e a s e in s t o c k s ) , a n d 5 ( e x p o r t s ) ; see Pi f o r i

=

1 , 2

,...

,8.

T ( i r a t i o of i n d i r e c t t a x e s l e s s subsidies t o o u t p u t in i n d u s t r y i s ( i mark-up r a t i o , o r t h e normal rate of business s u r p l u s e s t o

o u t p u t in i n d u s t r y i

WD ( i ) weight of domestic p r i c e in t h e p r i c e index of i n d u s t r y i WM ( i ) weight of import p r i c e in t h e p r i c e index of i n d u s t r y i

List of Dummy Variables

+

J + X - M

( 1 . 3 ) GDPiU = GDP

+

M

0.1160.999 1.850 1953-8 1

( 8 . 3 9 ) (8.64) (1.46) ( 4 . 7 6 )

A e x e d h v e s t m e n t

( 1 . 7 ) In I = 0.449 In GDP-,

+

1.925 In GDP-2 - 0.921 In K F P 1 - 6.489

(1.06) (4.05) (6.09) (22.4)

( 1 . 8 ) K I F = 0.97 KIF-,

+

I