Drew, Donald R. with Lee D. Han, "System Dynamics Model of Infrastructure Induced Development of Taiwan", 1987

THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 151

SYSTEM DYNAMICS MODEL OF INFRASTRUCTURE INDUCED
DEVELOPMENT ON TAIWAN

Donald R. Drew and Lee D. Han
Virginia Polytechnic Institute and State University

ABSTRACT

This paper describes a pilot model, the harbinger of a comprehensive package
of interactive national, regional and sectoral models of Taiwan, to be used
for long range planning. The model, called DMT (Development Model of Taiwan)
is distilled from many mental and verbal models of Taiwan, each of which
involved various segments of the system with considerations given to cer-
fein vartables and to various policy interventions involving still other
variables.

DMT is organized into seven sectors: (1) Industrial Sector, (2) Environmen-
tal Sector, (3) Infrastructure Sector, (4) Social Development Sector, (5)
Demographic Sector, (6) Agriculture Sector, and (7) Employment Sector. The
Industrial Sector is subdivided into manufacturing, mining, construction and
business. The Infrastructure Sector is modeled to include highways, rail-
roads, ports, airports, power and energy, water supply and distribution,
telecommunications, and sewage collection and treatment. The Social Devel-
opment Sector is comprised of the following elements: health, education,
housing, family planning, and welfare. The Demographic Sector is made up of
a rural population component and an urban population component. The En-
vironmental Sector is organized according to the socio-economic pollution-
generating sources. The Employment Sector consists of 18 categories corres-
Bonding to the Industrial, Infrastructure and Social Development Sector sub-
‘ivisions.

The ultimate purpose of the examination of Taiwan's development experience,
indeed any country's development experience, should be more than simply at-
tempting to understand what happened during a certain period. It should be
to distill conclusions that may be translated to policies and strategies for
guiding its future development. We consequently have tried to illuminate
the possibilities at various levels of aggregation and analysis through the
use model generated scenarios. Seven policy experiments are described in
the paper: (1) Government Support of Agriculture Policy, (2) Government
Allocation to Social Services, (3) Industrial Development Policy, (4) Infra-
structure Induced Development Policy, (5) Environmental Protection Policy,
(6) Zoning Policy, and (7) Inmigration Policy.

INTRODUCTION

Taiwan shares a number of common characteristics with many developing so-
cieties: (1) it is only modestly endowed with natural resources; (2) it is
located in the tropics; (3) its economy, until recently, was based on the
export of a small number of primary products; and (4) for a part of its
history, it was a colony. But, as with every society, Taiwan also has its
unique features: (1) several major migrations brought to Taiwan not only
additional manpower but also skills and technology more advanced than those
152 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA

possessed by the indigenous population at the time; (2) throughout most of
the twentieth century, Taiwan's government participated actively in develop-
ing the economy; and (3) from time to time in critical situations, Taiwan
has been the recipient of significant amounts of external aid. Its similar-
ities with other less developed regions and its unique features combine to
make Taiwan an extremely useful and illuminating case study of socio-eco-
nomic development.

Qur case study is all the more interesting because Taiwan has been relativ-
ely successful in its development efforts. Its agriculture output has
increased ten-fold in the twentieth century and its industrial output over
twenty-fold in the past three decades. Not only does Taiwan rank among the
fastest growing economies in the world but its phenomenal growth has been
accomplished with equity. This is rare because accelerated growth in
developing countries has most often been accomplished by a worsening of
already unfavorable indices of equality. An examination of the relations
between growth, equity and stability in Taiwan may help to isolate the
critical elements of this performance.

PURPOSE AND APPROACH

Taiwan is committed to development and social welfare achieved through, and
based on, free-market principles. It has practiced fiscal conservancy so
as to maintain a balanced budget and to prevent renewed inflation. It ini-
tiated land reform without compromising agriculture production and protected
infant industries without reducing productivity. The government took the
difficult step of reorienting the economy to exvorts via trade liberaliza-
tion, price reforms, and other increatives. It created a good business cli-
mate for local and foreign investment in labor intensive rather than show-
case capital-intensive industry, which helped to absorb labor and distribute
income more equitably. Last, but not least, the government wisely invested
heavily in infrastructure which has paid-off handsomely in increasing the
value-added of its industrial output. Miraculously, this socio-economic
take-off..was achieved in a world environment that can be described as un-
sympathetic, and perhaps even hostile, to Taiwan.

The key question is: can Taiwan sustain the economic growth, social equity
and political stability that it has attained over the past 35 years? If the
mood is optimistic and our response is affirmative, then we must ask our-
selves, “how long"? Slowly and painfully we have begun to appreciate the
fact that growth cannot be maintained indefinitely in a finite world; can we
ignore this principle in the case of a small island?

The purpose of this study is to determine if Taiwan should, or indeed must,
make a transition from growth to equilibrium and, if so, how best to achieve
it. The aim is to obtain a deeper understanding of this problem which every
country in the world faces to varying degrees and in assessing the possibil-
ity of Taiwan serving as a model for the rest of the world.

Recognizing that Taiwan's future will be the product of the interaction of a
number of forces -- economic, political, and social; endogenous and exogen-
ous; constructive and destructive; fortuitous and planned; ideological and
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA153

pragmatic -- a comprehensive approach is needed. Until recently, there has
been no way to estimate the behavior of a complex national socio-economic
system such as Taiwan except by contemplation, discussion, and speculation

It is now possible to construct realistic mathematical models of nations and
experiment with these. models using computers. The system dynamics method-
ology, specifically developed for this type of analysis, is used in this
study. The premise is that planning Taiwan's future should concentrate on
avoiding the types of problems that typically occur in the pursuit of un-
realistic, unachievable goals. .

OVERVIEW

DMT (Development Model of Taiwan) is distilled from many mental and verbal
models of Taiwan, each of which involves segments of the system with consid-
erations given to certain variables and policy interventions involving sti11
other variables. To link the goals and policy variables, the various ex-
perts have implied an understanding of the complex set of intervening re-
ationships. However, often this understanding is implicit and subjective.
In contrast, the complex set of intervening relationships between variables
in DMT are expressed explicitly in two complementary forms -- causal dia-
grams and. DYNAMO equations. The verbal descriptions of Taiwan contained in
reams of pages spanning many subjects and disciplines cannot promote the
type of communication and understanding leading to informed consensus and
they are too fuzzy, static, incomplete, and imprecise to be used for
decision-making. DMT can be represented in a single page in the form of a
causal diagram displaying the intervening relationships between goal and
policy variables (see Fig. 1).

The causal diagram in Fig. 1 not only facilitates writing the equations that
permit one to perform the arithmetic tasks that will trace Taiwan's develop-
ment through time, but portrays a gestalt-like statement of the Taiwanese
social-economic development system in its’own right. The significance of
this graphic gestalt in the modeling paradigm is that it takes us out of a
communication cul-de-sac providing a common vocabulary and structure of rea-
soning between individuals,. professions, specialists, administrators, and
cultures.

DMT is structured to accommodate three development orientations: (1) re-
source development, (2) regional development, and (3) sectoral development.
Resource components include natural resources, land resources, water re-
sources, and human resources (manpower). Regional development is organized
on the basis of rual and urban in DMT. Economic elements represented in the
model include agriculture, manufacturing, business, infrastructure and gov-
ernment. Obviously, the three orientations overlap. They are also tied
together by two quantities most responsible for material growth: (1) popu-
lation -- including the effects of all economic and environmental factors
that influence human birth, death, and migration rates, and (2) capital --
including the means of producing industrial, service, and agricultural out-
puts. For the purpose of this report, DMT is organized as follows: Indus-
trial Sector, Environmental Sector, Infrastructure Sector, Social Develop-
154 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM D¥NAMICS SOCITY. CHINA

ment Sector, Demographic Sector, Employment Sector, and Agriculture Sector
(see Fig. 2).

INDUSTRIAL SECTOR

Taiwan's industrial development pattern in the past can, broadly speaking,
be defined as an early primary import-substitution period followed by a
principally unskilled-labor funded primary export orientation period. In
modeling industrial development, many of the sectors of DMT can be thought
of as elements in a national account. The national account is concerned
with the measure of aggregate product originating within some geographical
avea., in this case Taiwan, so that a picture of economic performance can be
gained.

The end result of economic activity is the production of goods and services
and the distribution of those goods and services to the members of society.
The most comprehensive measure of national output is the gross national pro-
duct, abbreviated GNP. It is the value of all goods and services produced
annually in the nation. The task of estimating the GNP, however, is not
merely adding up the value of all output because that would be doubl-
counting. . In DMT the "value-added" method is used because in a complex
society like Taiwan, there are very few final outputs produced solely by one
‘industry. The final value of any product is created by a large number of
different industries; each firm buys materials or supplies from other firms,
processes or transports them, and thus adds to their value.

There are four major components of GNP, each representing a final use of
GNP: consumption, investment, government purchase, and net exports. In-
vestment refers to that portion of the final output which takes the form of
additions to or replacements of capital. Government purchase of goods and
services are a second component of GNP. In addition, government makes other
expenditures, "transfer payments," which do not represent the purchase of
output and are consequently excluded from GNP. Consumption refers to the
portion of nation's output devoted to meeting consumer wants. Net exports,
exports minus imports of goods and services, are a final use of GNP and must
be included in our total.

For purposes of national income analysis, GNP statistics are subdivided into
mutually exclusive, collectively exhaustive categories. The most commonly
used scheme for subdivision is that based on the International Standard
industriel Classification (ISIC). The nine major ISIC categories are listed
in Tabie 1.

Each of the nine ISIC economic output divisions in Table 1 is associated
with a particular capital stock in DMT. In our model the agriculture pro-
vides most of the output in the first ISIC division. The "mining," "man-
ufacturing,"” and "construction," capital stock in DMT provides the output in
ISIC divisions 2 and 3. Business capital in the model is associated with
the activities listed under ISIC divisions 6 and 8. The infrastructure
sector in the model corresponds to ISIC divisions 4 and 7, and the social
development sector to ISIC division 9. This disaggregated version of the
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 155

Population Cepitatourput Lifetime Pract, GNP
‘ASzomption Pattution ao gestae ‘a'foa
sorption Pollution 4 Malipier nat Development
— (ORM Lic FGNPSDY
Ny
+ be i
1 t
Copia uctime |
Litetime Potton Shout Capita sodatBore.
anitairlare Genertion Generation ato pesiteaton Spar
LIF UPG---. m POLG COR Lspc 3
1 Mt 1 A H
i NN. H H 1
i- an yo
i Frag Indus Frat Indus, Sally Sot
infrastructure Raw Mates Supe Depreciation |
FIOIFN FIORM 10-a2---~—— IC + SCD t
t t
t ' ‘1 1 t
‘ 1 | 1 - 1
le i, Pf i
Fega ndu, Fraglades, sealing ‘so
tt Product “ “ay '
i
H
J

vA : /
/ Infrastructure jational 1 ¢ it
tnrestecun, "Meese wwGittre 7% ett ean fy a A
AK <= ——_— IF] <= ---~ FONPIF a GNP, 1 FGONPCF {SCL
ae wr ot H
H Sa koeee as

ine Jone

Infranruewore

i
cae aie PX Bla sates
Astle ee uate
LEN. SDCLR

‘
t
t
i _
ay 1-3 RD
\ i ‘
r
Lane
fn Sie
LP 1 j
od ~
N qt 4,
\ + Ny gt
Se tye ung 4
oki a eet
UCRwt----- UILR «= ---— UP a
Mattie Agicttre

Cuntivated Cropping.
‘Lane

coeeme owe.

pevecoPMiNt MODEL OF TAIWAN

FIGURE 1
OTE. 9001000 00819000800GIEENO000800001 9029000000000 00000000000

NOTE “FIG. 2. DEVELOPMENT MODEL OF TAIWAN (DMT-37
ISTE ameisoopnotaoo OG io 8 20 1 0000001000000

Wore
NOTE tupustarAaL stcroR

HOR Ari, 4=MINING. MANUF, CONSTR. BUS: AK
hofe‘Fok‘= conpuies sussenrereD equa

ere Te: RUAREEE, SCADPEDT CECE READ NE LSAROL HDT) 2~CD.IKCAD? wD
TUDUSTRIAL ‘CAPITAL Gp
(122 50E9/ 9ODES/ 20069747 069 2a
hove eae TWITIAL VALUES OF INDUSTRIAL CAPITAL (HTS) ay
BUNUAL RATE OF INFLATION CFRAC/YR) :
NCTC. K> ae
Stat inpusterAat cartrat cute) dsp
> :
fovat ENDuSTRIAL CAPITAL TMITIALLY (H#D ae
flare eb’ eae TAL i DEPAECIAT On curs7vR) en
hore Hee Liretine INDUSTRIAL caPzTAL cyR> :
CCAIZONP  KREGHECE (A) SHKC. o
FORMATION CTS/¥RD
37112500 025007 08875, Gp
CAPITAL FORMAT:
RCL Ere L9So5cCL LPCHRCL "0, TIME.K,1997) Gn
Hove Hke"~ HONO KONG’ cherval GiT#/¥R)
Be” HET =ACPRKHKH oe
Nore HKET ~ HONG KONG CAPITAL THVEST CHTE/YR) reas

©
Fiore Acre > AVER CAPITAL PER PERSON ¢NT#/YRD
DeTO.KCADRCL=FIGL KAD) w

BROBUCT “NTS 77RD

or
iettout PRODUCT (HTH YRY er

rf LBUFADE. euTeryR>

SarTonnca) ETOIE ECA) ”
TROUSTRIAL OUPUT To INPUTS (DIM)

an

77
Tabusoure

ADSELOLFUCA)RETOTFR RCA) w
“lupus out

A niattas an
Tore EISIEN': FAG’ IABUS OUTPUT To INERA NORHAL (DIN?
Rove ati acapetaBiteErOnET COAGcH A EIPEEGES Een 6 TTAW.R)- 042,59 €9)
fone F1oien “ekae tnoie goyrdt 10 tina wut fDeLteN Com
Siete es eetet teins on
fore Flower > taste eae For Fiore (orH) .
er : :
fove HHget "fora ino; caprrancoppecten Gop guptarzow cre)
t FRA PEEGET Seder SREB RODD g3
Bh deeliasercnee 8:3
Nore Heel: INDUS. CAPLTAL CORRECTED FOR IWFLATION (HT#>
Saar a

Nove con’ CaP! TPUT RATIO CYR)

Nore ENOL AAD

Hore Coan OUTPUT RATION NORMAL, (177R3
EGin cc RasTADETCCORTERGAD POURS

NOTE Cont. LToureUT RATION FULTHPTER DIM)

Tesgh K/TPce
Hove PEI’" PER CAPLTA, INCOME (NTO/YR-PERSOND

i
BCIN-K*GHPN.K/TPH
ER CAPLTA INCOME NORMAL (WTS/YR)
-THGNRRCL-AFIORN, KCAPTOZS £)/ACORY ¢MEAWHRPHARLPE
ROSS NATTONAL i

toni = soncFORRD
aed ER FRAC ‘tous OUTPUT TO RAW MATERIALS <DIM>

AYER FRAC, ThDUS OUTPLIT TO INFRA NORMAL cot"

eC CORN)
AebR SAVER CAPITAL OUTPUT RATIO NORMAL CYR
Wiel Tonstucs} Coben >

SCENDUSTRIAL OUTPUT MORMAL CATS/YRD

E
NOTE EWIROUNENTAL SECTOR

POL-KCAD=POL J¢425CT2CCPOLO.JRCAD/(1+AROL DT
fore £at-Sbacta Ls. L+AROI*DT))-POLA.JRCAD?

it
& atyeascnchea}
NOTE POLN = POLLUTION IHITEAL VALUE CaRAM?
Ro Pola. Ruy sPo EAD/BOLAT RCA
NOTE POLA’= POLLUTION ABSORPTION CORAM/YR)

POLAT CAD = CPOLATHCADNTADST PLATA), POLR-K.0, 10,139
NOTE POLAT'= POLLUTION ABSORPTION TIME CYA?

LUTION ABSORPTION, TENE woRNAL. vA

aI ot
POLATMCHsMINING)=1/I¢1c19/1032/Teadet coe] S171, 65¢1 6871.77.78 Ch

1327
H yates: FoR pot AaSORPHLON Time MUG CDI)
Hore pote’= aS GENERATION coRAN/YRD
MOTE UPO,~ UiET POLLUTION ceuenatton conansnt4>

POUR. x=SUMCPOL 1K), SUMCPOLN:
Nore POLR'= POLLUTION RaTTO. COIMD

iq
NOTE INFRASTRUCTURE SECTOR

ae ‘hip

NS TOTAL INFRASTRUCTURE INITIALLY (NTS)
NOTE FOR'< COMPUTES SUBSCRIPTED EQUATIONS

INFRA” CAPLT
TEGE RCD eLPeL “JCBDSCDEDCCIFL IRCDD/CL¢AROLODTD )-IFD.JKCBD)
TECTGB sTEWCE)

tigate eavenine CORRECTED FOR INFLATION RTS)
hore TIFEL'S TOTAL HHPRA, CORRECTED FOR INFLATION «MIs?
NOTE SOCIAL DEVELOPMENT secTOR

IDUSING, FAMPLHL, WEL FRE

ic),
SBektw stevie caen/ tence icoea7 eae 9

DEVEL CAPITAL INITIAL VALUES (NTS)
130e. xeSumesber8)
Wore 150e = TOTAL Sicrat aeveL cartraL cwTs)
SOCTAL DEVEL CAPITAL INITIALLY (HTS)

ry
Nove SpcPcR SOCIAL ARE Edetrat RATIO (DIM)

PER CAPITA
SBEEE xCcoespeer .JCCdeCDNICCSCT. Snobs CLoanvEeD!> 3c, JKCCI?

aw _ Sbecréedespenccy

Nove SECeL = SOCIAL DEVEL, CAPITAL CORRECTED FOR INFLATION ¢HT#)
Fsbecr .R2SUNCSDCCT.K)

Nove FSpccr

1.4171.501 Bren 8371 G81 75/138

25,3:
‘FOTAL SOCEAL DEVEL. CAPITAL CORRECTED FOR INFLATION (NEC)

as

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aya

aa
as
asp

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3
3

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as
agp
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(21.2)

(21.3)

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(23.23

(22.39
(22.4
as
(ast
ra)
aD
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gen
(23.2)

2
2
o2
2

YNIHO *ALIOOS SOIWWNAG WALSAS AHL dO AONZNAANOO IVNOILVNYAINI 2861 AHL 9ST
atesae
ir
IEE | EXPECTACY miptipurer comm
Pet om
pre e 171/1.005/1 01371, 025/1.06371 0772 1121.: Ages peers 2

fiove EF <"Ehioaarion cacrog. ceRact“B)
KeTABKT CERT, PCL-R/PCIN, 0,2,

UES
g FcoGC TP CnHeG TERE Ke L992 3eCU TPCARM +O» TIME, K, 1997 9¢NIN
NOTE IM’= IRMLGRATION’ CPERSONS/YRY

ce ia
Hove TKR." MONG KONG MIGRATION PERSONS/YRD
ot

NORMAL ThmTGRATION ¢PERSONS/YR)
ERGRD JHC DTDERB. OR

hh Rear
NOTE HP = RURAL POPULATION (PERSONS)

c e

Fiore RPN = RURAL POPULATION INITIAL VALUE (PERSONS?
Bere Rani car RaRFX.

Hore RB's. RURAL BIRTHS (PERSONS YR)

ene Re KeRPRERERSR
ore Re RURAL FERTILITY (FRacT/YR?

Ro. RD-KL=RP KARA,
Nove Ro > gugat Beats CPERSONS/YR)

RLENT: be
URAL aLige expecraich wot tiptren, comm
Te RLENT=1/17,987.957.9017 87, 48627 Ber B67 86
Hove SLEMT Ruma (TPE Exrectanér mitt TABLE val

a
ERACT POPULATION URBAN (DIM)

7a
Nove PD'= POPULATION DENSITY (PERSONS/S@ KH?

REA: 56000.
NOTE AREA = AREA OF TAIHAN (SQ KM)

>
ea

ap
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NOTE
pa AGRICULTURE SECTOR
Gg KARUMX an
fun IRBAN HTORATION CPERSONS/YR) ta
oe 8
fore finre’= WATURAL RURAL poruLaTzoN gronty creKsonscrey
Bo RUMM.K=TABXTCRUMMT, REA, K/REAM.K, 0,2) 5). «49>
fore Runm S RORAL URBAN’ RYGRATTON HUCTIFLEER comm
ore gunmt=27 9D
wore Ri
Pattie 0
Hove REAN'S RECATIVE CARNINGS AGRICULTURE NORMAL (DIM)
HENAN A= CONTI R-HEAUIREHAREPT 4 EAN oo
OTE NENAN= WORKER EARMINGS NON-AGRICULTURE WORMAL (NTS/HORKER-YR)
tenn uewe ‘ULPF (50.29
Hove Levan LABOR FORCE HON-AGRICULTURE NORMAL <HORKERS)
KREA. op
Rove REA “RELATIVE EanuING, ty AcKICULTURE ¢DIM)
(ENA.K=SUN(IP..K)/ JOBSN 29
ove WENA’S SomkER’ EaantNGS HON AGRECULTURAL CHTS/HORKER-YRD
EA“ K=MERNSCEROPA, RO ‘CROPAN)*CADL 33
x ROLWDT nat TEMES K-198039
Hove wea. -"NORKER EARUENGS AGRICULTURE CNTS/WORKERD
weaN=20000 o3.b
Hove HEM = WORKER EARNINGS AGRICULTURE NORMAL cWTS-HORKER-YRD ee
(53.2
NOTE ADIN ~ AGRICULTURAL DIVERSITY: INDEX NORMAL (DIM)
ADI-K*TABATCADIT, TIME.K, 1980, 2080, 10) we
NoTe ADI’= AGRICULTURAL DIVERSITY’ INDEX (DIN)
ADIT=10/12/11.8712.5213.1713.6/16714.3 we
1 UES FOR ADT
ss)
SULTLWRMC TN. os.
NOTE GROPAN ="CROP AREA MORMAL CHA) 5

(55.29
Nore Hein ="MutTteLe croppinc_1"0ex nonmay (D1)
ae vel KSTABEECRCTNT FONPA/EGHPAN- 054
% (CIT, FHME. Re 1980, 2038 56)
NOTE ner ~ PAULI GROPING ENDEX' (DIM)

Poi He N=2/2. 572.975. 2/8,4/5.575.575.5 en
iH aes 56.23
hore RELY ~ TABLE VALUES

fecha. KEEEROPA RITE RoeceKoPaNTPHY on
NOTE Pe SPER,CAEITA CROP PRODUCTION RATIO (OTH?

«58>
wore tras TABOR FORCE AGRICULTURE CWORKERS? us.
NOTE RUPE = RURAL LABOR PARTICIPATION FACTOR COIMD
fo CULTL eseucTy deBry CER. 459)
fe Gann
hove court cut avaren LAND CHAD

2000. (59.2)

tore eure * eu tivaTeD LanD INITIALLY
t SSSCOTNCLCR. IRD (60>
fh uicbree 60.1
More Ut = URBAN INDUSTRIAL LAND (HAD
Wee UELmec LEWC 3a ToHEZDFTONESDATCHEG)
x TENCL Ds 1FRC2) 3 TFRC3)¢ LENCG) +LENCS) #1 ENC6 24 TENCT D4 TFHCB
x SE3DenCd3 ssnenCadosbentShesDentedsSDenc3)9 dake
x TOPLRHLPPN «60.2
Hove uruw “"URbaN NDUSTAIAL LAND INITIALLY CHAD
Co UPCM=T.26~ 460.3)
Nove LPCH ~ "LAND PER CAPITAL NORMAL CHANTS)
Co. LPpHs 008. (60.4)
NOTE LPPH LAND PER PERSON NORMAL cHA/PERSON?

Leena cma wn
fore tpe'= LAND PER CAPITAL CHANTS)

ter. Sec gian % (62)
NOTE LPP’= LAND PER PERSON CHA/PERSON)
a teen CTARAT Gren OTL KZUTLM, 0, 5,2) 1639
tow 7a 63.1)
Nore UPcH = "ano BER CAPLTAL MULTIPLIER CDIMD
a ABKTCLPPRT ULL xZUILN,0,5,1) 6a

rs 52 8 arn
Sub’ FER PERSON FULTIPLIER COIN
LORSKU*CUILR. K-UTL 1O/LET (65)

NOTE LCR'= LAND CONVERSION TIME CYR)

281 YNIHO, “ALIOOS SOIWVNAG WHLSAS FHL JO AONAUTANOO ‘IVNOLLYNYALNI 2861 FHL
cores 165.19
fiore Ler = LanD conversion TIME «¥R)
Bole UILR-KSCTIC KS TIF ReTSDC.KOALPC_KeUP KHL PP.K (6s)
Hove UIUR"S "Ural INDUSTRIAL CAND REQUIRED (HAD ‘
foe APLRSHER 3 670
Hore Ae C RORICULTURE rxoDUCT curseyR)
c 167.
“Fact cue To AGRICULTURE (DIM)
c a (67.2
fiove FoNPan = "Faact our vo aoatcu.TuRe voRnal (Im
5 RECCULTERZCULTUNDRCRENZRP RDM «6a
HOTE AFS"= AVERAGE FARM SIZE CX
co. AFSN (68.
OTE AESN AVERAGE FARM SIZE I 1960 (HA)
5 PK «699
fore PRES POPULATION PER FARMER (DIM
no
NOTE EMPLOYMENT SECTOR
nove
ALL. QUD.KCAD=ICCE. KCADZTCLR-KCAY oD
hore 311"= S083 IW
Ro” Tcta.KAdsrceRNCA MIL
Nove Tet iS
Tr feta ve
NOTE ICLAN — THDUS CAPITAL-LABOR RATIO NORMAL (HT2/PERSON)
Roe TCtRM. Ra:
Nove TctRM = 1H
Yo retarew
1 delete.
1 revere
1 teterex
hore 1ccRT. =
Bo STLELKG
fore J1LF =
a” Tecte.x oe
Hove TECUR " INERASTRUCTURE CAPLTAL“UagOR gaTzo, twrscpenso
cl
Hove TECURN = Nee EAPITAL=CABGR RAY IO NORMAL ClITS#
c
NOTE IFCLRM = INFRA CAPITAL
OTe Tretarca, Lost
1 teeter 27s17
Tt  PectRTOw $)237
T  Tecuarons
1 Tectar(e:
T  TRCtRTOR g)=171
Bo HreuRren 73172
To iretrronay=:
Nore TFCURT
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THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 159

model, written in DYNAMO IEI, is called DMT-3.

Referring to Fig. 2, we see that the Industrial Sector of DMT is comprised
of Mining, Manufacturing, Construction and Business as described above. Of
particular interest is Taiwan's manufacturing sector which has undergone
substantial structural changes over the last 30 years. In the 1950's when
the economy was centered on the farm sector, agricultural based operations
such as sugar refining and fruit and vegetable processing were the mainstay
of the manufacturing sector. In addition import substituting manufactures
were expanded, namely cement, fertilizer, textile and paper processing,
mostly for domestic consumption. By 1960, manufacturing accounted for 22%
of the GNP. Government policies and the creation of export processing zones
greatly aided manufacturing. In the 1970's second phase import substitution
in capital goods and industrial intermediates used in the production of ex-
isting export goods (so-called “upstream industries") was promoted.

Table 1. International Standard Industrial Classification

Code Classification and Description

1 Agriculture, hunting, forestry, and fishing

2 Mining and quarrying

3 Manufacturing

4 Electricity, gas, and water

5 Construction

6 Wholesale and retail trade, restaurants, and hotels

Z Transport, storage, and communication

8 Financing, insurance, real estate, and business services
9 Community, social, and personal services

Each of the nine ISIC economic output divisions in Table 1 is associated
with a particular capital stock in DMT. In our model the agriculture pro-
vides most of the output in the first ISIC division. The "mining", "man-
ufacturing", and "construction" capital stock in DMT provides the output in
ISIC divisions 2 and 3. Business capital in the mode? is associated with
the activities listed under ISIC divisions 6 and 8. The infrastructure
sector in the model corresponds to ISIC divisions 4 and 7, and the social
development sector to ISIC division 9. This disaggregated version of the
model, written in DYNAMO III, is called DMT-3.

Taiwan's comparative advantage for exports has traditionally been its large
and relatively inexpensive labor. However, since the 1970's, the trend has
been towards rising real wages and this will eventually erode Taiwan's com-
parative edge. In order to counterbalance this trend, the government's
strategy in the long run is to replace labor intensive production.
160 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA

INFRASTRUCTURE SECTOR

Where the people go, public works follow--and vice versa. A ready supply of
fresh, clean water must be available along with a sanitary sewer system to
handle the wastes. A transportation network of highways, bridges, airports,
and railroads make cities accessible to each other, while streets and public
transit systems allow movement within the cities. Public works, however,
are not limited to urban areas; they stretch far beyond to include rural
highways, dams, power plants, irrigation systems, electric utility lines and
others. This underlying foundation of public capital facilities, the basic
framework which permits a nation to function is “infrastructure."

For almost a hundred years, public works have provided the physical infra-
structure essential to the social and economic development of Taiwanese
civilization. They make human settlements possible and are indispensable to
commerce and industry. Effective public works facilities and services are
of utmost importance in every community and, in Taiwan, they account for
expenditures of more than NT$40 billion annually. Additional billions are
aio Invested in similar privately developed and operated facilities such as
utilities.

It is not money that ultimately determines the effectiveness of public works
systems, however--it is people. The planning, design, construction, oper-
ation, and maintenance of public works facilities have always demanded a
high level of training and proficiency in a variety of disciplines. Sky-
rocketing costs of government, rapid advances in science and technology, and
the pressing need for public works to serve an increasingly urbanized popu-
lace have made it imperative that public works practitioners be able to re-
spond to the gamut of social, economic, environmental, and political factors
inherent in program planning, policy resolution, and project management.

In the 1970's major infrastructure work was carried on under. the govern-
ment's Ten. Major Construction Projects costing over NT$250 billion. Six of
these projects were addressed to Taiwan's major transportation infrastruc-
ture, which, though already extensive was becoming saturated. The North-
South Freeway, running from the port of Keelung in the north to the port of
Kaoshiung in the south relieved chronic traffic tie~ups on existing -highways
as well as easing the railroad's passenger and freight burden. Electrifi-
cation of the mainline West Coast railroad cut fuel imports and increased
the carrying capacity of the railroad. Two new ports, at Suao and Taichung,
greatly relieved overcrowding at Keelung and Kaoshiung and further encour-
aged regional growth. The Suao-Hualien railroad spur ended the relative
isolation of Taiwan's East Coast, which still lays far behind in develop-
ment. Other infrastructure projects in this package included a new inter-
national airport at Taoyuan, several nuclear power plants, an integrated
steel mill, a large shipyard, and several petrochemical plants.

Following on the Ten Major Construction Projects of the 1970's are the 14
Key Investment Projects of the 1980's, scheduled for completion in 1990.
These include the expansion of the China Steel Corporation's facilities, the
Taiwan Power Company's fourth nuclear power plant, thermal and hydroelectric
power plant facilities, a naphtha cracking plant and storage transport fa-
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 161

cilities for liquified natural gas, modernization of the telecommunication
system to include the introduction of a digital switching network, railway
expansion to include a southern link from the west to east coast lines,
highway expansion to include a second highway in the north, a mass transit
system for Taipei, water and drainage systems, new reservoirs for drinking
water, new national parks, garbage treatment plants, and improvements to the
rural infrastructure.

In DMT the Infrastructure Sector is modeled to: include the following com-
ponents: highways, railroads, ports, airports, power and energy, water
senly and distribution, telecommunication and sewage treatment (see Fig.
2).

The Ministry of Communication reports that in 1983 there were 18,891 km of
roadways of which 15,885 were paved. The total length of railway track was
4,900 km. Most domestic traffic is carried by these two modes with the
split about 3 to 1~in favor of vehicle traffic. International air services
now operate out of Kaoshiung airport in the south as well as Taoyuan airport
outside of Taipei in the north. Kaoshiung, now the world's tenth largest
port and fifth largest container port, accounts for 62 percent of Taiwan's
shipping with the remainder split between the ports of Keelung, Hualien,
Taichung and Suao. During the 1970's, Taiwan's telecommunications expanded
at a rapid rate with the number of telephone subscribers increasing at an
average rate of 120 percent a year between 1974-1983, to reach 3.6 million.

Regarding energy, Taiwan is heavily dependent on imported energy with 88
percent of the supply of primary commercial energy coming from this source.
Taiwan's: modest resources in coal, natural gas and petroleum are commer-
cially exploitable on a limited scale. The Taiwan Power Company jis govern-
ment owned and operated and has a monopoly on power generation. In 1983,
"Taipower" generated 45.52 billion KWH of electricity. Coal and oil fired
thermal power accounted for 49.2 percent of this, nuclear power accounted
for 39.9 percent and hydro-power for 10.9 percent. A comparison of the
annual growth rates of real GNP and power consumption between 1974-83 i1-
lustrates the success of conservation measures taken in wake of the 1973-74
oil crisis. While real GNP grew by an average 10 percent per year, power
consumption grew by 8 percent on average over the same period.

DEMOGRAPHIC SECTOR

+ In 1985, when the Japanese annexation began, Taiwan's population is thought
to have exceeded 2.5 millions, 95 percent Chinese in-migrants and their
descendents. By the end of the occupation period in 1945 the Taiwanese pop-
ulation was close to 6 million.

The 1980 census’'put the population of Taiwan at 17,805,067 and it was esti-
mated at 19 million at the end of 1984. The rate of natural increase has
declined fairly steadily from 3.7 percent in 1956 to 1.6 percent in 1983.
The birth rate has fallen to 23 per 1000 in the last decade from 39 per 1000
in the Tate 1960's. The death rate fell rapidly in the 1950's and 1960's
and more slowly after; nevertheless, mortality is now at a level that is low
162 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA

compared with many countries in the region. Jn 1982 about one-third of the
population was under 15 years of age. Immigration is a minor factor, at
present, in the population increase. The population is is almost entirely
Chinese in origin including 2 million mainlanders who came to the island in
1947-49. The population density is high, at 528 persons per sq. km in 1984,
and is concentrated in the western and northern coastal fringes. Government
encouragement of migration to the eastern coast has met with limited suc-
cess. Over 90 percent of the population is literate with nine years of
school. being compulsory. Urban population, 42 percent of the total in 1978,
has been steadily increasing.

Family planning has not received the emphasis it has in a comparable state
of development in many parts of the world. For example, the issue of
legalizing abortions--already numbering 300,000 to 400,000 annually--brought
on a debate in 1984 when the population reached 19 million. Population con-
trol has long been a controversial subject on Taiwan since it implied that
the mainland would not be recovered and Taiwan's surplus would have nowhere
to go.

EMPLOYMENT SECTOR

Wherever there is very low marginal productivity in agriculture. and many
people scratch out a bare living in peripheral urban activities, conditions
that existed in Taiwan in the 1950's as in most developing countries today,
the human benefits of a highly labor-demanding development are obvious. This
sort of development is probably the only way in which the benefits of growth
can be widely spread. From the production point of view, a highly labor~
demanding development is also efficient. The real cost to the econony of
supplying labor is low, and there is an advantage in making things which are
made in relatively labor-intensive ways.

In 1983 around 7 million civilians were employed ane chere was about one-
half million in the military. The official minimum working age is 15; based
on this Taiwan has had virtually full employment for over a decade. One of
the most important trends in employment has been the concentration of the
labor force in the productive sector of the economy, the manufacturing
sector.

In the 1950's and early 1960's the economy was based on agriculture, with
some light industry directed toward import substitution. Since then there
has been a major ‘structural change so that the emphasis now is on manufac-
turing and export oriented industry. This has meant a substantial redis-
tribution of the labor force with workers leaving the land to take up the
increasing job opportunities in industry as exports of manufacturers have
grown and agriculture became more efficient. At the beginning of the 1960's
half the workforce was engaged in agriculture, and only 15 percent in manu-
facturing; a decade later the proportion were 33 percent and 25 percent,
while in the early 1980's less than 20 percent worked on the land and almost
a third were employed in manufacturing. Taiwan's labor force is also becom-
ing more educated, in part the result of the need for skilled workers as
production becomes export oriented, which is more technology interactive.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 163

SOCIAL DEVELOPMENT SECTOR

Rapid economic growth in Taiwan has not only raised income but has also been
accompanied by a steady improvement in its distribution. While the 1952
income of the top 20 percent is estimated to have been some 15 times that of
the bottom 20 percent; by 1964 the gap had narrowed to 5.33 to 1 and by 1976
further to 4.18 to 1. Indeed, this favorable development has drawn the at-
tention of many an international economist and has often been rated as a
successful example of rapid economic growth with equity.

The phenomenal economic growth in recent years has brought an unprecedented
degree of material well-being to the people of Taiwan. In the 25 years up
to 1977, the level of consumption tripled and was accelerating. Economic
prosperity has also brought significant changes in consumption patterns. In
1952, 55 percent of a family's expenditure was for food; in 1977 the figure
had. dropped to 40 percent. However the quality of food improved substan-
tially over the same period, with the daily calorie and protein intake per
person among the highest in Asia. It will also be noted that as people
spend relatively less on food, they are enjoying better housing and educa-
tion with more leisure for recreation.

The literary rate of 90 percent is twice what it was in 1946. The crude
death rate and life expectancy, two typical indications of the level of
sanitation have improved dramatically over the period from 1952 to 1980: the
death rate from 9.9 per thousand to 4.8 and the life expectancy from 58.6
years to 70.8 years. Housing construction during the past three decades has
been quite successful. About 90% of the houses in Taipei and 80% of the
houses in Taiwan were built after World War II. Living space per head has
increased from 4.6 square meters in 1949 to 17.9 square meters in 1980. The
share of dwelling investment in the GNP increased from one percent in 1952
to 4.5 percent in 1980. One particular welfare item, the wide-scale
diffusion of public utilities, increased in scope far more than can be
measured in terms of monetary income. For example, the percentage of houses
equipped with electric lighting grew from 33 percent in 1944 to 99.7 percent
in 1980.

In sum, it is obvious that industrialization and urbanization have brought
in their wake significant social welfare benefits. However, Taiwan has not
yet moved very far toward becoming a welfare state. In this area the Chinese
worker lags furthest behind his Western counterpart. There is currently
much discussion in Taiwan about improving the social insurance system. At
present about one-fourth of the national budget goes to social development,
over half of which is allocated to education. To place this figure in
perspective, 40 percent of the budget goes to general administration and
defense, a higher percentage than in the U.S. for example.

ENVIRONMENTAL SECTOR

Many benefits and costs of economic growth are not reflected in national
product and consumption measurements discussed in the previous section.
Examples of excluded items are readily available which significantly affect
1g4 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCT'TY. CHINA

the quality of life -- especially pollution. Statistics released by the
Taiwan Provincial Institute of Environmental Sanitation show that the av-
erage faliout in Taipei increased from 39 tons/square mile/month in 1959 to
56 in 1966: In Taipei's residential areas, the increase was from 30 tons/
square mile/month in. 1959 to 61 in 1965. Clearly, for those living in
Taipei and its vicinity the quality of life has been adversely affected by
this development -- a change not taken into account by the usual social de-
velopment indicators such as per capita consumptions.

AGRICULTURE SECTOR

Agriculture's share in GNP has declined significantly since the 1950's when
Taiwan's economy began to be transformed from one based predominantly on
agriculture to one which has a fairly diversified industrial base. In 1963,
agriculture accounted for 26 percent of real GNP whereas in 1984, this pro-
portion had declined to 6.7 percent. The decline in agriculture's relative
importance has been due to the rapid development of the industrial sector
and to the limited land resources in Taiwan. Only about a quarter of the
island is cultivated, about 900,000 ha. After a slow annual average rise of
0.2 percent in area of cultivated land during 1955-77, a slight decline
began in 1978, mainly due to increased industrialization and urbanization.

Taiwan's agriculture is largely based on family farms with the average land
holdings per farm being around 1.1 ha. In 1984, agriculture labor accounted
for 17.6 percent of the total labor force and the agriculture population was
23 percent of the total population in 1983. Both of these ratios have de-
clined since the 1952-64 period when agriculture provided all of. the prin-
cipal export products and was the backbone of government's development plan.
At the end of 1983, 83.3 percent of the total 816,000 farm families were
farmers who owned all of the land they cultivated, 10.7 percent were past
owners, and 6.0 percent were full tenant farmers. The high ratio of owner
farmers is attributable to the land reform program carried out by the
government in 1953.

Agricultural production rose sharply during 1952-64 at 5 percent a year on
the average and more slowly from 1965-83 at 2.4 percent a year. Increases
in output were brought about by the introduction of mechanization, the use
of high yield varieties of crops, multiple cropping, agricultural diversi-
fication with increased emphasis on higher value crops, improvement to the
agricultural infrastructure including irrigation, and the expansion of live-
stock and fisheries production.

DESIGN OF EXPERIMENTS

In Taiwan, as in many places in the world, a growing number of scientists,
business leaders, government officials, and other individuals from all pro-
fessions are making a concerted effort to understand and forecast future
social, economic and technological developments. An important function of
decision-aiding models. such as DMT is the estimation of uncontrolled de-
velopment variables over time.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 165

Forecasting techniques tend to fit into six categories: extrapolation, trend
correlation, analogies, intuitive forecasting, dynamic forecasting and
scenario analysis. Extrapolative techniques are the most common. They base
forecasts of future behavior on “hard” data usually obtained from past per-
formance and include regression, exponential smoothing and time-series
models. Trend correlation analysis, the second technique, makes use of one
or more trends to determine another. An example is forecasting energy
demand by correlating it to the Gross National Product, or to population, or
to both. ‘Analogies, the third technique, have conceptual appeal and have
been extensively applied to technological forecasting because of the ap-
parent similarities between technological and biological growth.

In cases where statistical or pseudo-mathematical estimation may be impos-
sible because either there is no historical precedent or the relevant at-
tributes of the system are inherently difficult to quantify and to measure,
it may be possible to generate “soft" data obtained from a panel of experts
or from opinion polls and make use of intuitive forecasting. In explaining
this category forecasting fs often paraphrased into a tautology involving
prediction. Any-of the above categories of procedures results in a fore-
cast. There may be causal factors at work, however, that will not be ex-
hibited in the data. For example, the demand for petroleum will be strongly
influenced by. improved solar energy technologies or by the onset of a reces-
sion. Inclusion of such possible events results in a prediction based on an
intuitive revision of the forecast. In such instances the Delphi method,
based on a revised group consensus arrived at by an iterative process which
collates, summarizes and communicates to the group individual predictions of
experts, has proven useful.

If there is a difference between forecast and prediction in ordinary com-
munication, it is a subtle one. Both are based on observation, experience,
or scientific reasoning. Both differ from an opinion in that they rest upon
quantitative relationships, stated assumptions, and a logic that yields
relatively consistent results. Only in the relatively new and prolific
field of forecasting called technological forecasting is the distinction
explicit. A technological forecast is defined as a prediction with an indi-
cated level of confidence of a technical achievement in a given time frame
with a specified level of support. The specification of level of confidence
has proved to be unrealistic in the application of forecasting to such prac-
tical questions as the timing of new scientific knowledge, technical capa-
bility, and socio-economic consequences. When misguided, statistical esti-
nation and forecasting can only give the illusion of accuracy by providing
jetail.

We prefer a far less ambitious interpretation of a forecast as a statement-
giving advance warning in sufficient time for beneficial action to be taken.
This simply says that to predict is to declare in advance, to forecast is to
plan ahead. A. forecast ought to be directed toward the consequences of a
system which means concentrating on variables that are useful indicators of
system performance rather than on variables that may be convenient to pre-
dict -- the difference between information as a means to an end and infor-
mation as an end in itself. In this context the remaining two categories of
forecasting techniques -- dynamic forecasting and scenario analysis -- will
166 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM. DYNAMICS SOCITY. CHINA

be discussed in the next section.

SCENARIO ANALYSIS

A mathematical model is a set of equations that characterizes a real-world
system to the extent that the excitation-response relationships of the sys-
tem are correctly represented. By expressing the exogenous inputs mathemat-
ically, they can serve as the excitation of the model; the solutions of the
model equations then constitute mathematical representation of system re-
sponses. In general, the closer the correspondence to the real-world sys-
tem, the more reliable the model as a tool for predicting responses. to ex-
citations other than those used in constructing the model. At the same
time, the realization that constructing the model is an inverse problem
makes it clear that there can never be a unique solution -- a unique model.

To be useful to policy makers, a model must be capable of performing some
information-producing ‘tasks regarding the future. In the physical sciences,
absolute precise predictions suchas the times and places of next ten solar
eclipses are possible. In the social sciences the information producing use
of models are limited to unconditional forecasting, conditional forecasting,
and descriptive clarification. Unconditional forecasts indicate circum-
stances that policy and decision makers are likely to face -- unemployment
rates, interest rates, travel patterns, energy demand, etc. Conditional
forecasts are contingent on the actions that policymakers are likely or at
least capable of taking -- increasing taxes, land zoning, low-income housing
programs, etc. A third more indirect and elusive use of models is simply in
refining the intuition of policy makers as instruments for exploring reality
as well as portraying it.

The capacity of DMT for conditional forecasting is demonstrated in the next
section in the form of computer plots of selected variables from the various
sectors for a period covering the next one hundred years. However, unlike
forecasting techniques described in the previous section -- regression, ex-
ponential smoothing, time-series, and trend correlation -- DMT is built up
from the internal nonlinear structure of Taiwan's socio-economic system and
is therefore capable of generating modes of behavior that have never been
observed in the island's history. This emphasis on capturing intrinsic
structure and interdependences between sectors in the construction of DMT is
in keeping with the purpose of the model -- to make conditional forecasts so
as to provide useful inputs to future policy decisions that will have a sig-
nificant impact on Chinese society for many generations to come.

Policymakers require information, not only about the effectiveness of ex-
isting programs but about the kinds of programs that ought to be brought
into existence, and the present state-of-the-art of policy evaluation leaves
this need ummet. The problem is that program data are nonexistent, and
‘implementing a hypothetical program and observing its effects is not only
costly but defeats the purpose of policy analysis in the first place. How-
ever through simulation, policy analysts can produce the conditional fore-
casts essential for estimating the effects of alternative policy proposals,
external repercussions, untried ideas, and innovative administrative ar-
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 167

rangements.

The information-producing functions of DMT which make it such a powerful
tool for policy research in conjunction with development planning involve
two aspects of analysis: objective and subjective. The objective aspects
are those based on the relationships describing a system's functioning which
are established through experience, scientific analysis, and available data.
For example viewed as an economic system we can relate Taiwan's industrial
ouput to its supply of infrastructure capital. As a population system,
migration from one region to another can be explained by quantifiable mea-
sures of relative attractiveness. The subjective aspects are those which
refer to the uncertainty that is always present when looking into the future
and when dealing with human beings. The objective aspects of Taiwan's de-
velopment are represented in the equations of DMT which are presented in the
ig. 2.

The subjective aspects of national development will be dealt with in this
section in the way the computer model is used to analyze possible future
patterns. The method is called scenario analysis with a scenario being a
sequence of possible events and socio-political choices. The likelihood of
any future evolution depends on the likeifhood of events which constitute a
given scenario taking place in reality. A great deal of understanding of
the future can be gained. For example, if the set of alternative scenarios
is broad enough, and the system (national development) shows a certain pat-
tern persistently in all scenarios, it can be considered as inevitable that
this pattern will occur in the future. 2

A scenario is a forecast of the future states of a system based on the
likely interactions between system variables and the external constraints
to, and forces for, change. As a forecasting technique, scenario analysis
has been widely applied to international political system, to regional de-
velopment planning, and to national defense planning. Scenario analysis
helps to illuminate the interaction of psychological, social, economic,
technical, cultural and political dimensions in a form that permits under-
standing many such interactions at once, making it an ideal tool for policy
research.

DEVELOPMENT INDICATORS

Development requires change, but change with direction is required. De-
velopment must be planned, analyzed and managed which requires that we be
able to describe where we are going and where we are. The output of scen-
ario analysis is a description of future states, in this case Taiwan's de-
velopment over the next 100 years. This raises the questions: "What ele-
ments are necessary to describe Taiwan's future development profile?"

The development indicators selected for aiding in scenario analysis are sum-
marized in Table 2. In the table the indicators are grouped into arbitrary
socio sconanic categories and will be discussed briefly in this section on
that basis.
168 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA

Table 2. Development Indicators

Category Indicator Variable
Human Resources Total Population TP
Fraction of Population Urban FPU
Wealth Gross National Product GNP
Per Capita Income PCI
Distribution of Wealth Unemployment Non Agriculture UNEMNA
Relative Earnings in Agriculture REA
Land Resources Population Density PD
Average Farm Size AFS
Agriculture/Food Per Capita Crop Production Ratio PCCPR
Population Per Farmer : PPF
Environment Infrastructure Capital Per Capita Ratio ‘IFCPCR
Social Devel. Capital Per Capita Ratio  SDCPCR
Pollution Ratio POLR

Indicators in the Human Resources category include Total Population, TP,, and
the Fraction of Population Urban, FPU. In addition to these indicators,
such variables as birth and death rates in both urban and rural areas are of
interest. Of particular concern will be the effect of various development
policies on these variables because, even today with a density of over 500
persons per square kilometer, Taiwan is one of the most densely populated
areas in the world. Urbanization provides a good measure of the relative
proportion of the population exposed to modernity. Cities are important in
introducing a money economy, new social patterns, and the possibility of.
developing intellectual centers -- windows to the outside world.

Gross National Product and national per capita income as measured by GNP per
capita are traditionally used as indicators of many different values. Most
often, total GNP is employed as a measure of production of total wealth or
resources of a country. Not uncommonly GNP is also used as a measure of
power, of the resources available to a country to control its own destiny.
National per capita income is a better measure of comfort or wellbeing. The
combination of these two items -- GNP and per capita income -- is quite use-
ful.

Taiwan's recent development achievement over the past few decades is unique
because it has been accomplished with distribution of wealth. In the model
rural to urban migration is assumed to depend on Relative Earnings in Agri-
culture, REA, an indicator of the distribution of wealth. A second indi-
cator in the Distribution of Wealth category is Unemployment Non-Agricul~
ture, UNEMNA.
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 169

Population density is a measure of land resource utilization. A nation with
limited territory may be blessed with other resources of a material or human
nature. Many of the economically most advanced states are among the most
densely populated. A second indicator of land resource utilization used in
the model is Average Farm Size, AFS. The two indicators selected for the
Agriculture and Food category are Per Capita Crop Production Ratio, PCCPR,
and Population Per Farmer, PPF.

Indicators of the quality of life and of the environment are Infrastructure
Per Capita Ratio, IFCPCR, Social Development Capital Per Capita, SDCPCR, and
Pollution Ratio, POLR. In the base year, 1980, these indicators have a
value of 1.0 and change over time -- increasing if the infrastructure cap-
ital, for example, increases faster than population size. Since infrastruc-
ture capital in the model includes highways, rail, ports, airports, power,
water, telecommunications and sanitary engineering services, and social
development capital includes health, education, housing, family planning and
welfare, the two indicators combine to provide surrogate measures of a very
wide spectrum of personal services. With respect to the third indicator,
"pollution" denotes any material or energy stream that either disrupts the
natural processes of the ecosystem or impairs the aesthetic qualities of the
environment. Materials will inevitably be released to Taiwan's environment
through the output of industrial activities.

THE POLICY MENU

Development strategies are combinations of projects, programs and policies
for inducing desired socio-economic impacts. An intervention or impact
strategy is an attempt to translate theories regarding the regulation, modi-
fication, and control of national conditions into policies on which deci-
sions can be based. Intervention strategies are predicted on some notion of
cause and effect. A fully developed national policy should try to examine
the cogency of the hypothesized causal explanation.

In this report all the assumptions regarding illustrative intervention
strategies are implicit for obvious reasons -- all are hypothetical. In the
implementation of DMT, there would be the resources and time available to
make them explicit. The importance of this cannot be underestimated. The
absence of an explicitly stated intervention model prevents replication of
the policy, program or project and severely. limits the opportunities for
controlling its quality, and evaluating its effectiveness.

In identifying policy alternatives it is useful to review the functions of
government. There are five major areas in which government units, on the
national and local levels, are involved in the economy:

1. Protection of the rights and freedoms of individuals -- economic,
political, and religious -- through courts and the administration
of laws.

2. Providing goods and services in the interest of all citizens --
such as highways, national defense, and education.
170 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA

3. Regulation -- the promotion of fair economic competition and the
protection of public health and safety.

4. Promotion of economic growth through various economic policies and
* programs.

5. Direct support to individuals such as programs to reduce hardships
for those who can not meet their minimum needs because of special
circumstances or lack of employment.

In countries pursuing economic development, the formation of policy is made
especially difficult by two factors: first, by the conflict that may exist
between the immediate impact and the longer range effects of any action and,
second, by the degree of which policies aimed at one set of economic phenom-
ena may have unintended side effects on other aspects of the economy.
Ideally, it is desirable to be able to estimate the effects of economic
interventions on noneconomic goals such as social development and political
stability. Using DMT this can be done to the extent of estimating the com-
parative effects of alternative policies. The difficulty here lies in value
Judgements for policy research -- the judgement of "facts" but also the de-
bate. over value judgements or the implications of those facts.

For pursuit of various national goals a variety of instruments is available.
The principal instruments traditionally used are the allocation of financial
resources achieved through fiscal policies. However, in addition to finan-
cial resources, there are other resources at governments disposal. They
include human resources, raw materials, land, energy, information, and tech-
nology, if we use an ecosystem image, rather than a purely economic one, to
define the dimensions of policy impact.

IDENTIFICATION OF SCENARIOS

Seven policy experiments were identified which will be referred to as
follows:

Government Support of Agriculture Policy.
Government Allocation to Social Services.
Industrial. Development Policy.
Infrastructure-Induced Development.

. Environmental Protection Policy.

Zoning Policy.

7. Inmigration Policy.

OnPwenm

Considering the first policy experiment, agriculture production must be in-
creased in order to satisfy future needs. This can be accomplished by using
more intensive agriculture, by bringing more tand under cultivation, and by
increasing on-farm efficiency. This policy control variable is Fraction GNP
to Agriculture, FGNPA.

In the second policy experiment, the strategy to be investigated is increas-
ing Government's allocation to social development programs. The policy
THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 171

“variable is Fraction GNP to Social Development, FGNPSD.

Many developing countries tie their futures to industrial development. In
DMT the policy variable for simulating this approach is Fraction GNP to
Industrial Capital Formation, FGNPCF.

Taiwan has generally pursued a policy of infrastructure-induced development.
The effect of accelerating ‘this policy in the future is investigated in an
experiment by increasing the value of the policy variable, Fraction of GNP
to Infrastructure, FGNPIF.

The fifth policy experiment can be thought of as investigating development-
al-environmental trade-offs. Environmental achieves a reduction in Pollu-
tion Generation (a reduction in UPG) by increasing industrial capital-out
ratios (an increase in CORN).

Referring to the sixth scenario, zoning decisions determine the supply of
Jand available for various socio-economic activities. In Taiwan, zoning is
a viable policy instrument. The amount of land and its use influence such
things as the present and future housing market, population mix, economic
growth, employment conditions, and environmental quality. Since a country
must live with its zoning decisions for decades, local decisions affecting
land use should be made in the context of the total national system. Land
zoning policy tests afford a basis for accomplishing this. Specifically,
Land Per Capital Normal, LPCN, Land Per Person Normal, LPPN, and Fraction
Industrial Qutput to Raw Materials, FIORM, are the variables used to gener-
ate this scenario.

The last policy experiment seeks to determine the socio-economic implica-
tions of a policy encouraging disaffected Hong Kong Chinese to move to
Taiwan, promoted by the recent Sino-British declaration returning Hong Kong
to China's control after 1997. Policy measures that have been proposed
include "priority consideration" in the processing of investment applica-
tions, low interest loans for home purchase and favorable school admissions.
This scenario describes an inmigration of 200,000 persons a year from Hong
Kong for a five year period from 1992 to 1997 (HKM=200000), with an inflow
of capital averaging 10,000 NT$ per person (ACPP=10000}. Fig. 3 depicts the
effects of this policy on selected development indicators.

CONCLUSIONS

Simulation of a socio-economic system like a region involves building and
operating a model designed to represent those features of the system which
are deemed to be significant in view of the objectives behind the simula-
tion. Some of the more obvious benefits of simulation include: (1) fore-
casting of macro behavior; (2) predicting consequences of government actions
and refusal to act; (3) conducting sensitivity analysis to establish re-
search and data gathering priorities, and (4) providing aids to communica-
tion among specialists and in the achievement of understanding.

It is known that the construction of computer simulation models help free
172 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. -CHINA

WENA, 381 ,WEA.B*2,PCI.

'S/HENASN, WEASA,PCT#T.

$00.7 12a

1990.52 = =

2000

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RUNS
UNEMINA.DeB, UNERNAS!

210.0 + ee ee

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THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 173

development planners from a mechanistic, deterministic view of a region, and
provide them with a more dynamic and comprehensive tool for influencing
change. Specific potential uses of DMT include: (1) providing a means for
implementing a systems capability, (2) monitoring progress during policy
implementation, (3) comparing strategic alternatives, and (4) as a pedagogi-
cal tool aiding in developing a cadre of development analysts. Each of
these will be reviewed briefly.

Implementation of a Systems Perspective. Faced with the wide range of multi-
disciplinary expertise required for regional analysis, DMT can be viewed as
a mechanism for extending the user's perception of problems and as an organ-
izational framework for ordering disparate, specialized insights. One po-
tential use of DMT is to systemize regional analysis: and planning. The im-
portance of this cannot be underestimated since the major obstacle to de-
signing regional development is the organization of local capability ‘to
initiate, sustain, and implement the effort.

A crucial question in a large scale development effort stich as Taiwan is how
systems engineering--systems planning and systems analysis--can be made an
effective tool in the management of a total program and individual projects.
Methods of initiation include the following: (1) retaining short-term con-
sultants, (2) hiring specialists, (3) training people in the organization,
(4) entering into cooperative research programs with university centers, and
(5) some combination of these.

Monitoring Progress. DMT can become a device for monitoring progress during
reconstruction and post-reconstruction. From the model much insight will be
gained toward the eventual development of a computer-based management infor-
mation system. Such a system would provide for a comprehensive data base
for the region and would support the staff in developing individual project
models, as well as in the monitoring of these individual projects.

The importance of the model in the final design of an MIS can not be over-
emphasized. Comprehensive surveys associated with regional analysis, such
as land-use surveys, economic surveys, demographic surveys, industrial sur-
veys, resource surveys, transportation surveys, etc., are expensive and time
consuming. This is not an argument against the accumulation of a large,
high quality regional data base, it is stated for two reasons. First of
all, decisions can not be differed indefinitely while the ultimate in
regional data is collected and analyzed. The pressure for development is
real. Secondly, experience tells us to beware of massive data gathering
programs which can be expansionist in their natural and obsessive in their
demands until it becomes an end in itself. The advantage of using pilot
sampling schemes, defined and designed through the modeling effort, before
embarking on any large scale data program is important.

Policy and Sensitivity Experiments. We take it to be that one of the main
functions of regional analysis to provide decision makers with knowledge
about the consequence of alternative courses of action or inaction. Rational

174 THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA

decisions are based on forecasts. The regional analyst should be able to
predict the direction of impact as an instrument of adjustment on the var-
jables to be controlled and the approximate time lag between application and
impact. It is also highly desirable to know something of the order of mag-
nitude of the impact.

The forecasts obtained from DMT are based on knowledge about relationships
between hundreds of variables gained from past and present experience, form-
ulating hypotheses about relationships between variables, and then confront-
ing this hypotheses with new experience (testing).

Pedagogical Uses. The use of simulation in both teaching and training is
quite extensive. Simulation is more than a means of solving mathematical
models that cannot be solved analytically, or a modeling technique in its
own right; simulation is also a pedagogical tool. Regarding the latter,
there can be no doubt that simulation is a growth point in education. Sim-
ulation provides the user an intuitive feel for the structure of the system
being simulated, taking them out of the role of. the spectator and moving

them into the role of player, where simulation can take on.a highly competi-
tive element.

The process of building the simulation model is itself a valuable educa-
tional tool since it- lays bare the principals involved in the system under
scrutiny. Similarily the simplification of a complex model may also reveal
what is basic to a particular process. In order that links can be securely
made with regional situations and subsystems, briefing workshops should be
made an integral part of future extensions of the models.

Simulation is perhaps the only way in which a systematic view of a region
like Taiwan can be conveyed economically, which explains why an increasing
number of regional simulational models have been developed recently. Few of
these, however, have been designed with instructional purposes in mind. The
idea here is to reproduce the essential features of Taiwan in a manageable
package. Maps are not enough. Just as years had to be compressed into
minutes, the number of actors has to be reduced to.those who carry on the
research in Taiwan. In a matter of speaking Taiwan has to be compressed to
table-top size and relevant historical background synopsized so that it can
be assimilated in a few months.

As difficult as the day-to-day operations of government are, those of order-
ly long range development are even more demanding because the answers to
these problems must be found in a new setting. Taiwan's future will not be
found by a simple extrapolation of the past. To cope with Taiwan's prob-
lems, one needs to comprehend enough of the socio-economic system from which
they originate to distinguish modes of behavior and examine the implications
of alternative actions. It comes as no surprise that government officials
should look to formal tools for representing development interactions in a
form in which they can be probed and projected by a computer in a process of
policy modeling. DMT is such a tool -- an instrument for not ‘only coping
with the immense numerical and descriptive material inherent in national de-
velopment planning but for extending government's logic by permitting it to
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1982.00 1813.43E+09 1704.11F+0S 8938. 43E-08
1983.00 1923.57E+09. 1759. 40E+09. 9429. 57E- 08
1984.00. 2035.51E*09 1816. 61E+09 9933. 585-08
1985..00-2119.26E-09: 1861. 04E+09 1034. 02E+09
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1987.00 2290. 65E+09 1954..02E-09 1118. 01E+09
1988.00 2378, 09E*09 2002. 47E+09. 1161. 27E+09
1989.00 2466.54E+09 2052. 15E+09 1205, 31E-09
1990.00 2555. 90E-08 2103. 01E+09 1250. 09E+09
1991.00 2646.05E+09 2154.97E*09 1295.58E+09
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1994.00 2984. 13E+09 2348. 89E+09 1459. 78E*09
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1998.00 3391.57E-09 2598.31E-09 1670.17E-09
1999.00 3484.38E+09 2657. 95E+09 1720. 44E- 09
2000.00 3576. 64E-09 2717.93E+09 1770. 86E-09
2001.00 3668. 18E+09 2778.17E+09 1821.36E-09
2002.00 3758. 86E-09 2838.55E-09 1871.87E*09
2003.00 3862. 21E-09 2905.68E-09 1927.33E-09
2004.00 3978. 96E+09 2980. 07E*09 1988. 14E+09
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THE 1987 INTERNATIONAL CONFERENCE OF THE SYSTEM DYNAMICS SOCITY. CHINA 179

assess the consequences of implementing alternative strategies.

This paper describes a pilot model, the harbinger of what could become a
comprehensive package of interactive regional and sectoral models of Taiwan,
to be used for long range planning. To fulfill its purpose, many versions
and many extensions of DMT will be needed such as the PC DYNAMO II version
appearing in Fig. 4 with sample output shown in Fig. 5 (Hsieh 1987).

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