Taiwan has undergone a process of swift industrialization after 1948. Rapid accumulation of physical and human capital enabled Taiwan to exploit new technologies and products, resulting in rapid catch up in labour productivity relative to more advanced economies. Using the industry-of-origin approach, this paper shows that in 1961, Taiwan's labour productivity in aggregate manufacturing was 11% of the level in the United States, increasing to 26% in 1986. This catch up process was found for all 13 manufacturing branches. After 1986, a process of deindustrialization set in and inflow of labour in the manufacturing sector stagnated. Relative labour productivity in aggregate manufacturing still continued to increased to 31% in 1993, but catch up was not shared by all branches. The increase in labour productivity was driven by a large rise in capital intensity from 7% of the US level in 1961 to 47% in 1993. In 1993, capital intensity in Taiwanese manufacturing was about equal to the capital intensity in US manufacturing in 1961. This shows that there are still plenty of opportunities for further capital intensification. TFP growth in Taiwanese manufacturing averaged 2.2% per year for the period 1961-1993, of which only 0.2% was due to a reallocation of resources between manufacturing branches. In contrast to the catch up process in terms of labour productivity and capital intensity, aggregate TFP did not increase relative to the US and stagnated at around 40%. Some branches like wearing apparel and electrical machinery showed strong catch up, but this was offset by the performance in branches like chemicals and paper which were falling behind the performance levels of more advanced economies. Economies of scale do not provide an explanation of the gap in TFP levels between the US and Taiwan. An adjustment for the relatively small size of Taiwanese manufacturing firms adds only 3% to the Taiwanese TFP level. Differences in human capital are more important. Using a growth accounting framework, they explained about 7% of the TFP gap relative to the United States.
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Paper provided by Groningen Growth and Development Centre, University of Groningen in its series GGDC Research Memorandum with number
199840.