Industrial policy, Structural Change, and Pattern of Industrial Productivity Growth in Taiwan

1. Industrial policy, Structural Change, and Pattern of Industrial Productivity Growth in Taiwan Tsu-tan Fu Department of Economics & Center for Efficiency and Productivity Research, Soochow University Hsing-chun Lin Department of Applied Economics, National Chiayi University Yih-ming Lin Department of Applied Economics, National Chiayi University Wei-sing Kong Taiwan Research Institute To be presented at the third World KLEMS Conference, Tokyo, Japan on May 19, 2014.

2. 1. Introduction • The purpose of this paper is to investigate the relationship among industrial policy, structural change and TFP growth pattern at industry level in 1981-2010. • We review the main Taiwan industrial development policy • We construct the Taiwan KLEMS Database, in which the economy is divided into 31 industries based on the Asia KLEMS manual. • Investigate the structural change among industries. • We decompose the output growth into contributions of capital, labor and intermediate inputs as well as total factor productivity. • We further conduct cross-period and cross-industry comparisons on the structures of industry output growth and of the factor contribution in Taiwan.

3. The Main Taiwan Industrial Development Strategies

4. Challenges during 1981-2010 • Oil crisis • the appearance of a powerful opposition party • the appreciation of the New Taiwan dollars (NT$) • Labor and land cost increase • inflation and asset bubbles (stock market and housing price)

5. The Main Taiwan Industrial Development Strategies • Economic liberalization and Internationalization • ITRI and the technical support of the NSTP • The Establishment of the HSIP • Tax incentives under the Statute of Upgrading Industries • Promotion of the Semiconductor industry

6. 3.1 Growth Accounts

7. 3.1 Growth Accounts

8. 3.1 Growth Accounts

9. 3.1 Growth Accounts

10. 3.2 Taiwan KLEMS Database Outputs (GO, VA): • Based on DGBAS data • Directorate General of Budget, Accounting and Statistics, Taiwan (DGBAS) • http://www.dgbas.gov.tw • Time period: 1981-2010 • 93SNA (asset classification) • 31 sectors (the 32th sector, the “EXTRA-TERRITORIAL ORGANIZATIONS AND BODIES” in Asia KLEMS manual, is not available) • GO = II+ VA (Gross output = intermediate inputs + value added) • Using National Income Survey data • Convert 63 sectors into 31 sectors

11. 3.2 Taiwan KLEMS Database Capital input (K): • Capital = real net capital stock (DGBAS) • Capital stock- adopt the Benchmark extrapolation method • Benchmark year: -those when each Industrial and Commercial Census took place and national wealth census (only once) • Convert capital data from DGBAS (16 sectors available after 2001 and 11 sectors available before 2001) into the capital data in format of 31 sectors • Base year: 2005

12. 3.2 Taiwan KLEMS Database Labor input (L): • Man Hours: including man hours of employees, employers, own-account workers, and unpaid family workers • Data sources: • Man hours - from Manpower survey • Adjusted working hours– Employees’ Earnings Survey • The source of average wages –The Manpower Utilization Survey

13. 3.2 Taiwan KLEMS Database Labor input (L): • Total Labor compensation = Average Labor compensation (wage)* total equi-employed persons (Taiwan wage and productivity report) • Total working hours

14. 3.2 Taiwan KLEMS Database • Data from Intermediate Input of national income • Divide all sectors into three sectors, energy (E), Materials(M), Services(S) • Using Input-output table to get the inputs of E, M, S for each industry

15. 3.2 Taiwan KLEMS Database K, L, E, M, S Shares: • K, L, E, M, S are known • Nominal value shares for L, E, M, S, and K: • SL = L/Gross output • SE = E/Gross output • SM = M/Gross output • SS = S/Gross output • Capital share SK= 1 – SL – SE – SM - SS

16. 3.2 Taiwan KLEMS Database Total Factor Productivity (TFP): • TFP growth (dlnTFP) is defined as: • (1) for Growth Output (GO) dlnTFP_GO= dln(GO) – SL*dlnL - SK*dlnK - SE* dlnE – SM*dlnM– SS*dlnS

17. Table1: The industry Value Added weights by sector unit:% Primary and Secondary sectors decreased over time. Tertiary sector increased up to 67%. Secondary to 31%.

18. Figure 1: Industrial structure of Taiwan: 1981-2010 1987 is the year of industrial structure turning in Taiwan.

19. Table 2-1: Industry Value Added Weights by selected year (Primary & Secondary) unit:% Most manufacturing industries decreased over time. Industry #8, 11, 13, 17 remain important.

20. Table 2-2: Industry Value Added Weights by selected year (Tertiary) unit:% Most service industries increased over time. Industry #19, 20, 24, 25, 27 are more important.

21. Figure 3a: Growth of Industry Output 1982-2010 Growth rate varies by industry; Most are positive. Only 3 industries among top 10 are Secondary industries. Other top 7 are Tertiary industries.

22. Inputs : 1982-2010 Capital, Labor, Intermediate Inputs (Energy, Materials, Services)

23. Figure 3b: Growth of Industry Labor Input (HEMP, working hour)1982-2010 There are about 10 industries among primary and secondary industries which labor input growth rate are negative or close to 0.

24. Figure 3c: Growth of Industry Capital Stock Input 1982-2010 The growth rate of Capital input is relative higher than labor input.

25. Figure 3d: Growth of Industry Energy Input 1982-2010

26. Figure 3d: Growth of Industry Material Input 1982-2010

27. Figure 3e: Growth of Industry Service Input 1982-2010

28. TFP at Industry Level

29. Table 4a: Growth of TFP by Period (Primary & Secondary) unit:% 13.Electrical and optical equipment is the highest TFP growth rate among manufacturing

30. Table 4b: Growth of Industry TFP by Period (Tertiary) unit:% 23.Post and telecommunications is the highest among tertiary industries.

31. Figure 5: Growth of Industry TFP 1982-2010

32. Sources of Output Growthat Industry Level 31 Industries 1982 – 2010

33. Table 6a: Sources of Industry Output Growth (in growth rate): 1982-2010 (Primary & Secondary)

34. Table 6b: Sources of Industry Output Growth (in % share): 1982-2010 (Primary & Secondary) unit:%

35. Table 6c: Sources of Industry Output Growth (in growth rate): 1982-2010 (Tertiary)

36. Table 6d: Sources of Industry Output Growth (in % share): 1982-2010 (Tertiary) unit:%

37. Figure 6: Sources of Industry Output Growth (in growth rate) 1982-2010

38. Sources of Growth for 3 selected Industries

39. Table 7a: Source of GO growth for “13.Electrical and Optical Equipment” industry (with the highest VA weight in the Secondary sector) unit:%

40. Table 7b: Source of Go growth for “19.Wholesale trade and commission trade” industry ( with high % share on II & S ) unit:%

41. Table 7c: Source of Go growth in “23.Post and telecommunications” industry unit:%

42. Conclusion Remarks • Taiwan’s industrial policy focused on to support the socalled “hi-tech” industries, such as ICT industry (13 Electrical and Optical Equipment, Post and communications). • The strategies include establishment of science-based industrial parks, technological support from national research institute and national plan, providing tax incentives and special support for developing semiconductor industry.

43. Concluding Remarks • Significant structural changes happened in past decades. • Weights for primary and secondary decrease over time, except for “Electrical and optical equipment” and “Basic and fabricated metal”. • Tertiary industry weight increases. • Several industrial, such as food products and textile, rubber and plastics, the growth rates of labor input (measured by total working hour, HEMP) are negative.

44. TFP growth rate of “Electrical and Optical Equipment” industry is the highest in manufacturing industries. • TFP growth rate of “Post and communications” is the largest among the tertiary sector. • The impact of the industrial policy does not have impact on structural change, but also influences the TFP growth rate.

45. Thank you for your attention!