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The spatial dimension of economic structural change

The spatial pattern of investment

Because of growing population pressure on arable land in the 1950s, the government initiated a series of land reforms and innovative improvements in agriculture. When agricultural output stagnated in the late 1960s, the government made every effort to improve the agricultural infrastructure, building many new irrigation systems and dykes to prevent damage from floods and coastal storms. Other measures included guaranteed farm prices, the encouragement of multi-purpose cultivation, and the consolidation of farms to raise management efficiency. The successful implementation of these agrarian reforms and development strategies induced many farmers to remain on the land. Since 1973, the government has also implemented rural construction and infrastructure projects to foster agricultural growth and improve the rural environment, hoping to reduce the income differential between farmers and non-farmers. Improvement of the agricultural economy has helped to slow the pace of urbanization.

When Taiwan was retroceded to the Republic of China, the government adopted a primary import-substitution strategy in order to save foreign exchange. The strategy promoted the dispersion of food-processing plants and small-scale textile mills to create more job opportunities in the rural areas. Cities gradually formed around these industrial establishments. Hsinchu, with its booming textile mills, is a good example. During the 1960s, economic policy emphasized labour-intensive industries and promoted export industries through the gradual liberalization of foreign trade, low-interest loans, and tax rebates to export-oriented businesses. Manufacturing growth, especially that of export-oriented industries, contributed to the growth of the medium-sized cities. In the early 1970s, the government emphasized heavy (energy-intensive) industries, most of which were located in Kaohsiung. Jobs attracted people from rural areas and helped Fengshan (near Kaohsiung) to grow rapidly. Fengshan's position rose from 14th among Taiwan's largest cities in 1970 to 11th in 1980. After the first oil crisis, the policy emphasis shifted to structural adjustment and the promotion of so-called strategic or capital-intensive industries. These urban-oriented industries also absorbed many in-migrants and promoted urban growth. By the 1970s, extensive movements of people both northward and southward had begun to result in regional population disparities. To address this problem, the government commissioned the Council for International Economic Cooperation and Development (CIECD) to draft a comprehensive development plan for Taiwan. The plan, approved by the Executive Yuan and formally launched in 1979, was a physical plan focusing on new townships, housing construction, transportation, harbour development, industrial zoning, electrical power plants, steel production, and shipbuilding. These and other major construction projects provided a great boost to the industrial development of Taiwan and helped to raise living standards.

During the 1970s, the government implemented the Ten Major Construction Projects, including the North-South Freeway, Suao Harbour, Taichung Harbour, railway electrification, the Taoyuan International Airport, and the North-Link Railway (fig. 6.3). These projects affected the distribution of population. The North-South Freeway and railway electrification projects link all the major cities along the west coast of Taiwan, shorten travel times between the north and the south, and promote Taiwan's economic and social development. The North-Link Railway gives the eastern part of the island better access to the Taipei Metropolitan Area, facilitating eastern out-migration. Taichung Harbour facilitates the import and export of materials and products for Taichung's industrial development. Following the completion of the Ten Major Construction Projects, the government launched the Twelve Major Construction Projects and the Fourteen Major Construction Projects.

Infrastructure affects both regional population distribution and regional economic activities. Most of the investment capital for the Ten, Twelve, and Fourteen Major Construction Projects was concentrated in the north and the south. This induced people to move northward or southward and thus stimulated the formation and expansion of cities.

The encouragement of export-oriented industries brought rapid industrialization and urbanization, and stimulated the development of the service sectors. Promoting international trade also encouraged tertiary industries. To strengthen infrastructure and develop human capital, transportation, communications, and social overhead capital were promoted. Tertiary industry provides a strong stimulus to the growth of urban areas, and has been a major factor in the expansion of metropolitan areas and urbanization since the 1970s. The formation of the Taipei Metropolitan Area, with its very high employment ratio in tertiary industry, is a typical example.

Fig. 6.3 The location of the Ten Major Construction Projects, 1970s (Source: Council for Economic Planning and Development, The Evaluation of the Ten Major Construction Projects,Taipei: CEPD, 1979)

In the early stages of economic growth the government stressed capital efficiency and economies of agglomeration. It invested in social overhead capital (education, sanitation, health, and other public services) in cities. The marginal cost of urban public services almost always exceeds the price charged to the user, hence the subsidy fails to be capitalized into rent. This "urban bias" also promoted migration to the cities. On the other hand, the growing agricultural sector, exporting an agricultural surplus, was able to absorb a substantial portion of the population increase, restraining, at least temporarily, the out-migration of people to the cities.

In addition, most of Taiwan's institutions of higher education are located in cities, and the Chinese have traditionally placed a high value on education. People are strongly motivated to pursue higher education and are therefore attracted to the cities. Urban public housing has also attracted people from the countryside and thus affected city growth and city distribution.

Industrial location policies

Owing to the development of rural resource-oriented industries and the launching of the first and second four-year plans in the 1950s, both of which focused on fostering industrial development via agriculture, industry grew rapidly and was widely dispersed throughout the island by the 1960s. The improvement of infrastructure (highways and railways connecting the Kaohsiung and Keelung harbours) accelerated the growth of local resource-oriented and labour-intensive industries. This is the reason industry became rooted in rural areas and cities sprang up all over the island.

The development of industrial estates occurred in two ways, export-processing zones and industrial districts, in three stages. During the 1960s, in order to introduce and diffuse technology, the first export-processing zone was set up in 1966 in Kaohsiung, a harbour city. Two more zones were added, one in Tantzu, Taichung Prefecture, and the other in Nantzu, Kaohsiung City, in the 1970s. Export-processing zones contributed importantly to production, and created many employment opportunities. A major concern of the first stage, the 1960s, was to meet industrial investors' demand for land and to enhance industrial development in the Taipei and Kaohsiung areas. The total area devoted to this purpose during the decade was only 229 ha. Except for the Kaohsiung export-processing zone, all industrial estates were located in the Northern region. This concentration of industrial estates accelerated the pace of urbanization at both ends of the island. All new industrial estates developed during the 1970s were located in widely dispersed rural areas. About 66.9 per cent of the total developed area was in the Southern region, 23.5 per cent in the North, 7.6 per cent in the Centre, and 2.1 per cent in the East (table 6.13 and fig. 6.4). This uneven distribution reflects the emergence of the Southern region as an industrial area. The major goal was to stimulate industrial development in rural areas so as to retard out-migration to cities.

Table 6.13 Regional distribution of industrial estates, 1960-1990 (hectares)



Northern Centrala Southerna Eastern
1960 229 - (66) - 229
1970 1,559 503 (23) 4,442 (88) 140 6,644
1980 2,179 1,921 1,026 18 5,144
1990 - 248 - - 248

Source: Industrial Development Bureau, Ministry of Economic Affairs, "Introduction of Industrial Development in Taiwan," 1991.

a. Export-processing zones in parentheses.

In order to promote balanced regional growth, industrial estates were located with a view to influencing the distribution of population and economic activities in the 1980s and thereafter. Table 6.13 also shows that more industrial estates were established in the Northern and Central regions in the 1980s than in the 1970s. Urban areas are the product of industrial development. With the dispersion of industrial estates, cities spread all over the island.

Economic structural change

From 1949, the government encouraged agricultural production to meet the need for food, and agriculture dominated the economy until 1960. Agricultural production accounted for 32.2 per cent of gross domestic product (GDP) in 1952, and industry for only 19.7 per cent. In other words, industrial production was only about 60 per cent of agricultural production.

Taking advantage of Taiwan's abundant labour force, the government employed a strategy of promoting exports to maintain economic growth and developed industrial estates in rural areas. As a result, the value of industrial output surpassed that of agriculture for the first time in 1962, with the former accounting for 28.2 per cent of GDP and the latter for 25 per cent. Industry thereupon began to play the leading role in Taiwan's economic development. From 1962 through 1986, the pace of industrialization accelerated and industry was the mainstay of the economy. By 1986 industry's share of GDP had risen to 47.6 per cent, while agriculture's had decreased to 5.5 per cent. At the same time, a structural transformation was occurring in industry itself, with the private industrial sector accounting for a larger share of industrial output than public enterprises, and heavy industry assuming greater importance than light industry. The location of industrial estates at both ends of the island accelerated the pace of urbanization.

Fig. 6.4 The development status of industrial districts in Taiwan, 1991 (Source: Ministry of Economic Affairs, A Brief of Industrial District Development in Taiwan, 1991)

With rapid industrialization, tertiary industry grew quickly. Services overtook industry as the dominant sector of the economy in 1988. The service sector's share of GDP reached 49.3 per cent that year, compared with a 45.7 per cent share for industry (table 6.14). Since then, service industries have dominated the Taiwan economy. Dynamic structural change is characterized by changes in the availability of resources - increases or decreases in labour, capital, raw materials, technology, etc. As the pace of industrialization quickened, the industrial structure shifted away from labour-intensive light industry to capital-intensive heavy and chemical industries, and then to knowledge-intensive high-tech industry. As a result of successive stages of import substitution and export expansion, as well as the location of industrial estates, industry grew rapidly, becoming the engine of Taiwan's sustained and rapid economic growth and the impetus behind the formation of the urban system.

Table 6.14 Change ID the economic structure: shares of GDP, 1952-1990 (%)

Year Total Agriculture Industry (Manufacturing) Services
1952 100.0 32.2 19.7 (12.9) 48.1
1960 100.0 28.5 26.9 (19.1) 44.6
1962 100.0 25.0 28.2 (20.0) 46.8
1973 100.0 12.1 43.8 (36.8) 44.1
1984 100.0 6.3 46.2 (37.6) 47.5
1986 100.0 5.5 47.6 (39.7) 46.9
1988 100.0 5.0 45 7 (37.8) 49.3
1990 100.0 4.3 43.0 (34.1) 52.7

Source: CEPD, Taiwan Statistical Data Book, 1991.

The economic status of Taiwan's regions also changed significantly between 1966 and 1989. As its population has grown, the Northern region has gained importance in production, with its share of Taiwan's GDP increasing from 45.1 per cent in 1966 to 50.3 per cent in 1989. By contrast, the economic importance of the Central and Eastern regions has diminished, with their shares of GDP decreasing from 22.8 and 3.7 per cent in 1966 to 19.5 and 2.2 per cent in 1989, respectively. The economic weight of the Southern region has remained quite stable, with its share of GDP decreasing from 28.5 per cent in 1966 to 28 per cent in 1989. Table 6.15 shows the industrial division of labour among Taiwan's four regions according to the principle of relative advantage. Because of a relatively abundant agricultural labour force, primary industry has been concentrated in the Central and Southern regions, which accounted for 37.4 and 38.9 per cent, respectively, of Taiwan's agricultural GDP in 1989. With the development of industrial estates, secondary industry has been spreading over the Southern and Central regions, with those regions increasing their shares of total industrial GDP from 26.4 and 18.1 per cent, respectively in 1966 to 29.7 and 18.7 per cent in 1989. Owing to rapid industrialization, urbanization, and the emergence of metropolises, tertiary industry has become heavily concentrated in the Northern and Southern regions, which accounted for 53.7 and 25.5 per cent, respectively, of total service sector GDP in 1989.

Table 6.15 Regional shares of Taiwan's GDP, 1966 and 1989 (%)




Total Primary Secondary Tertiary Total Primary Secondary Tertiary
Taiwan 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Northern 45.05 17.75 53.47 52.49 50.27 17.28 49.95 53.68
Central 22.77 36.75 18.09 19.21 19.49 37.43 18.73 18.44
Southern 28.45 38.68 26.39 24.93 28.00 38.92 29.71 25.51
Eastern 3.73 6.82 2.05 3.37 2.24 6.37 1.61 2.37

Source: CEPD, Urban and Regional Development Statistics, Republic of China, 1991.

Table 6.16 Exports, Indstrialization, and urbanization, 1953-1989 (%)

Period Growth rate of exports Growth rate of industry Growth rate of urban population Level of urbanization
        29 (1953)
1953-60 4.4 11.7 8.6a 40 (1960)
1961-72 27.4 17.6 6.1 57 (1972)
1973-83 21.4 9.6 3.7 70 (1983)
1984-89 17.5 8.7 2.3 74 (1989)

Source: CEPD, The Modernization of Taiwan's Economy, 1991

a Growth rate between 1954 and 1960.

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