Industrial policy, Structural Change, and Pattern of Industrial Productivity Growth in Taiwan 1 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.

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 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. 2

The Main Taiwan Industrial Development Strategies 3

Challenges during 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) 4

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 5

3.1 Growth Accounts 6

3.1 Growth Accounts 7

3.1 Growth Accounts 8

3.1 Growth Accounts 9

3.2 Taiwan KLEMS Database Outputs (GO, VA): Based on DGBAS data Directorate General of Budget, Accounting and Statistics, Taiwan (DGBAS) Time period: SNA (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 10

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:

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: 1.Man hours - from Manpower survey 2.Adjusted working hours– Employees’ Earnings Survey 3.The source of average wages –The Manpower Utilization Survey 12

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 13

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 14

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: 1.SL = L/Gross output 2.SE = E/Gross output 3.SM = M/Gross output 4.SS = S/Gross output 5.Capital share SK= 1 – SL – SE – SM - SS 15

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 16

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

Figure 1: Industrial structure of Taiwan: is the year of industrial structure turning in Taiwan.

Table 2-1: Industry Value Added Weights by selected year (Primary & Secondary) unit:% Sector Industry number Secondary 1.Agriculture, hunting and forestry Mining and quarrying Food products, beverages and tobacco Textiles, textile products, leather and footwear Wood and products of wood and cork Pulp, paper, paper products, printing and publishing Coke, refined petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals and fabricated metal products Machinery, nec Electrical and optical equipment Transport equipment Manufacturing nec; Recycling Electricity, gas and water supply Construction Most manufacturing industries decreased over time. Industry #8, 11, 13, 17 remain important.

Table 2-2: Industry Value Added Weights by selected year (Tertiary) unit:% Sector Industry number Tertiary 18.Sale, maintenance and repair of motor vehicles Wholesale trade and commission trade Retail trade, except of motor vehicles and motorcycles Hotel and restaurants Transport and storage Post and telecommunications Financial intermediation Real estate activities Renting of m&eq and other business activities Public admin and defence; Compulsory social security Education Health and social work Other community, social and personal services Private households with employed persons Most service industries increased over time. Industry #19, 20, 24, 25, 27 are more important.

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

Inputs : Capital, Labor, Intermediate Inputs (Energy, Materials, Services) 22

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

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

Figure 3d: Growth of Industry Energy Input

Figure 3d: Growth of Industry Material Input

Figure 3e: Growth of Industry Service Input

TFP at Industry Level 28

Table 4a: Growth of TFP by Period (Primary & Secondary) unit:% Industry number Primary 1.Agriculture, hunting and forestry Secondary 2.Mining and quarrying Food products, beverages and tobacco Textiles, textile products, leather and footwear Wood and products of wood and cork Pulp, paper, paper products, printing and publishing Coke, refined petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals and fabricated metal products Machinery, nec Electrical and optical equipment Transport equipment Manufacturing nec; Recycling Electricity, gas and water supply Construction Electrical and optical equipment is the highest TFP growth rate among manufacturing

Industry number Tertiary18.Sale, maintenance and repair of motor vehicles Wholesale trade and commission trade Retail trade, except of motor vehicles and motorcycles Hotel and restaurants Transport and storage Post and telecommunications Financial intermediation Real estate activities Renting of m&eq and other business activities Public admin and defence; Compulsory social security Education Health and social work Other community, social and personal services Private households with employed persons unit:% Table 4b: Growth of Industry TFP by Period (Tertiary) 23.Post and telecommunications is the highest among tertiary industries.

Figure 5: Growth of Industry TFP

Sources of Output Growth at Industry Level 31 Industries 1982 –

Table 6a: Sources of Industry Output Growth (in growth rate): (Primary & Secondary) Industry number GOConKConLConEConMConSConIITFP Primary 1.Agriculture, hunting and forestry Secondary 2.Mining and quarrying Food products, beverages and tobacco Textiles, textile products, leather and footwear Wood and products of wood and cork Pulp, paper, paper products, printing and publishing Coke, refined petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals and fabricated metal products Machinery, nec Electrical and optical equipment Transport equipment Manufacturing nec; Recycling Electricity, gas and water supply Construction

Table 6b: Sources of Industry Output Growth (in % share): (Primary & Secondary) unit:% Industry number GOConKConLConEConMConSConIITFP Primary 1.Agriculture, hunting and forestry Secondary 2.Mining and quarrying Food products, beverages and tobacco Textiles, textile products, leather and footwear Wood and products of wood and cork Pulp, paper, paper products, printing and publishing Coke, refined petroleum products and nuclear fuel Chemicals and chemical products Rubber and plastics products Other non-metallic mineral products Basic metals and fabricated metal products Machinery, nec Electrical and optical equipment Transport equipment Manufacturing nec; Recycling Electricity, gas and water supply Construction

Table 6c: Sources of Industry Output Growth (in growth rate): (Tertiary) Industry number GOConKConLConEConMConSConIITFP Tertiary18.Sale, maintenance and repair of motor vehicles Wholesale trade and commission trade Retail trade, except of motor vehicles and motorcycles Hotel and restaurants Transport and storage Post and telecommunications Financial intermediation Real estate activities Renting of m&eq and other business activities Public admin and defence; Compulsory social security Education Health and social work Other community, social and personal services Private households with employed persons

Table 6d: Sources of Industry Output Growth (in % share): (Tertiary) Industry number GOConKConLConEConMConSConIITFP Tertiary18.Sale, maintenance and repair of motor vehicles Wholesale trade and commission trade Retail trade, except of motor vehicles and motorcycles Hotel and restaurants Transport and storage Post and telecommunications Financial intermediation Real estate activities Renting of m&eq and other business activities Public admin and defence; Compulsory social security Education Health and social work Other community, social and personal services Private households with employed persons unit:%

Figure 6: Sources of Industry Output Growth (in growth rate)

Sources of Growth for 3 selected Industries

PeriodCon KCon LCon ECon MCon S Con Ⅱ TFP Table 7a: Source of GO growth for “13.Electrical and Optical Equipment ” industry (with the highest VA weight in the Secondary sector) unit:%

PeriodCon KCon LCon ECon MCon S Con Ⅱ TFP Table 7b: Source of Go growth for “19.Wholesale trade and commission trade” industry ( with high % share on II & S ) unit:%

PeriodCon KCon LCon ECon MCon S Con Ⅱ TFP Table 7c: Source of Go growth in “23.Post and telecommunications” industry unit:%

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.

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. 43

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. 44

Thank you for your attention! 45