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How the power of economic ideas led to Taiwan’s export-led growth

Summary:
Douglas Irwin highlights the importance of economic ideas in pushing growth in Taiwan. Irwin starts with Krugman pointing to the role of ideas in pushing economic growth: In a recent New York Times piece, Paul Krugman discussed two drivers of the “hyperglobalization” era that began in the mid-1980s and lasted until the global financial crisis of 2008. These drivers are improved transportation technology (shipping containers and airfreight) and lower trade barriers (tariff reductions) in developing countries. These factors combined to reduce trade costs and dramatically increase global integration.[1] Krugman calls particular attention to the “trade policy revolution” in developing countries.[2] (At the time, the managing director of the International Monetary Fund (IMF), Michel

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Douglas Irwin highlights the importance of economic ideas in pushing growth in Taiwan.

Irwin starts with Krugman pointing to the role of ideas in pushing economic growth:

In a recent New York Times piece, Paul Krugman discussed two drivers of the “hyperglobalization” era that began in the mid-1980s and lasted until the global financial crisis of 2008. These drivers are improved transportation technology (shipping containers and airfreight) and lower trade barriers (tariff reductions) in developing countries. These factors combined to reduce trade costs and dramatically increase global integration.[1]

Krugman calls particular attention to the “trade policy revolution” in developing countries.[2] (At the time, the managing director of the International Monetary Fund (IMF), Michel Camdessus, called it the “silent revolution.”) The opening of markets and reduction in trade barriers in China, India, Mexico, and many other countries during the 1980s and 1990s fundamentally reshaped the world economy. As Krugman put it, “We wouldn’t be importing all those goods from low-wage countries if those countries were still, like India and Mexico in the 1970s, inward-looking economies living behind high tariff walls.”

What accounts for this trade policy revolution? Many factors could have played a role, such as lobbying by exporting interests in each country or strong-arm tactics by the IMF and World Bank. But Krugman claims that ideas about policy brought about the change. Is that right?

Irwin points to the example of Taiwan in this regard:

Yes! After World War II, import substitution—an approach to economic development that emphasized protecting domestic industry with barriers against imports—was popular among economists and policymakers around the world. By the 1970s, as a result of theoretical developments (optimal policy ranking, effective rates of protection) and the successful experience of export-oriented countries (such as Taiwan and South Korea), support for this view diminished considerably. This sea change in economic ideas about trade policy—led by economists such as Bela Balassa, Jagdish Bhagwati, and Anne Krueger—eventually proved influential among policymakers in the 1980s.

Taiwan provides a concrete example of Krugman’s claim that economic ideas matter for policy. As explained in a new PIIE working paper, How Economic Ideas Led to Taiwan’s Shift to Export Promotion in the 1950s, economist S. C. Tsiang (then working at the IMF but acting in an unofficial capacity) convinced K. Y. Yin (a leading policymaker) to support a devaluation of Taiwan’s overvalued currency, the end of foreign exchange rationing, and a dismantling of import controls.

After heated debate within the Taiwanese government, Yin emerged victorious and was promoted to oversee far-reaching changes in the country’s trade regime from 1958 to1963. Taiwan did not change its policy because of export interests, which were politically weak, or because international financial institutions insisted upon a different policy stance. Nor was Taiwan in an economic crisis that required major policy adjustments. Instead, Tsiang’s then-novel idea that a realistic exchange rate and an open market in foreign exchange would promote exports and reduce distortions proved to be compelling to government officials—particularly in an environment where foreign exchange was scarce.

As a result, Taiwan became the first developing country after World War II to shift away from import substitution and focus on incentives for exports. Its economic success in doing so was widely noted at the time, and the country soon became a model for others.

Wow. Super interesting to know. We know of Taiwan’s economic growth but not the actors and the thoughts which led to the growth.

Profile of the architect of Taiwan reforms, Dr Sho-Chieh Tsiang is super interesting as well

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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