Transforming Taiwan's Economic Structure in the 20th Century

Author(s): Cheng Tun-jen

Source: The China Quarterly, No. 165, Taiwan in the 20th Century (Mar., 2001), pp. 19-36
Published by: Cambridge University Press on behalf of the School of Oriental and African
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Transforming Taiwan's Economic Structure
in the 20th Century

Cheng Tun-jen

This article analyses Taiwan's economic changes that have occurred from
the Japanese colonization of Taiwan in 1895 to the recent Asian financial
crisis, focusing on the interplay between policy and structure. Pre-
colonial Taiwan was a frontier society with a settlement economy,
primarily subsistence-based, and with a thin state structure, politically
barely governed by the Qing dynasty. Under Japanese rule, Taiwan was
turned into an essentially open economy and an agrarian base of the
Japanese Empire. In the post-Second World War era, the Taiwanese
economy under the Nationalist regime was briefly turned inward for
import substitution industrialization, but rapidly transformed into one
based on industrial exports in labour-intensive sectors, and increasingly
on modern services as well. By the end of the century, Taiwan had
already become the world's third largest maker of information technology
products, behind the United States and Japan. The permutation of owner-
ship structure was equally drastic. Dominant Japanese capital in the
pre-war era became omnipresent state capital in the immediate post-war
era. Subsequently, however, indigenous private capital overwhelmed the
industrial sector and, towards the end of the century, made inroads in the
financial sector as well. All these structural changes in market orientation,
sector composition and ownership pattern did not reflect natural evol-
ution, but rather were cumulative results of government policies under
three successive regimes in Taiwan, the colonial, the Nationalist authori-
tarian and the democratic.
Economic policies in colonial Taiwan were predetermined by its
assigned role in the Japanese Empire. In the post-war era, the local state
elite had more latitude in making policy choices. Policies, imposed or
homemade, are effective only if the state can elicit compliance or inspire
responses from private economic agents. Throughout the century, Taiwan
has had a state capable of leading concerted actions for economic
modernization. Autonomous, yet highly penetrative and effective, the
colonial state built and staffed by expatriates quickly embarked on
agricultural development and turned Taiwan into a taxable surplus base.
Upon its retreat from the mainland to Taiwan, the Kuomintang (KMT)
regime, as heir to the colonial state structure, reinvented itself, shook off
its predatory nature and provided political space for technocrats to
implement a series of industrialization strategies. The state in post-war
Taiwan has displayed economic leadership as in Korea, but often via a
more hands-off, less discretionary approach in fostering entrepreneurship,
encouraging investment and shaping industrial structure. This approach to
industrial transformation helped Taiwan to cope with the challenge of
globalization and endure the recent financial crisis.
This article is organized in the following way. The first section
? The China Quarterly, 2001

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20 The China Quarterly

analyses how the colonial state initiated and shaped the course of
economic development from 1895 to 1941. The next section discusses
regime transition and its impacts on the state-economy relationship.
This is followed by an examination of the economic take-off and indus-
trial upgrading from the 1960s on. The final section assesses the Tai-
wanese developmental model in the light of democratization,
globalization and the fin-de-siecle region-wide financial crisis. Through-
out, Korea serves as a benchmark for comparison as it shared the
developmental trajectory.

Colonial Development

As a late imperialist power without much territory to grab, Japan took

a high cost and high yield approach to colonizing Taiwan, pursuing
extensive programmes for economic growth before exploiting the pro-
ceeds.' The long arm of the state in the economy, already evident in Japan
proper because of late industrialization, was extended to engineer Tai-
wan's development. Various projects were logically sequenced, each with
a distinct rationale, but all conducive to economic expansion.2 The main
tasks for the first colonial decade were transportation and a cadastral
survey; the former helped to maintain order and marketize the economy,
while the latter boosted tax revenue, clarified property rights and facili-
tated transactions. The second decade added two new enterprises, per-
iodic census and a natural resource survey. The census monitored labour
supply and improved on a pre-existing household registration and mutual
monitoring system, while the survey verified public ownership of re-
sources to be licensed to Japanese capitalists. During the third and fourth
decades, major irrigation and electrical power systems were installed to
enhance agricultural productivity and spark industrialization. The colonial
authority absorbed 60 per cent of cost for water control and irrigation
systems, which covered two-thirds of the cultivated land by the 1940s.3
The colonial administration also expanded education and improved
sanitation. The literacy rate increased from 1 per cent in 1905 to 27 per
cent in 1940, while the enrolment ratio for elementary schools rose from
8.7 per cent in 1905 to 57.1 per cent in 1935. To promote production and
trade, the colonial government also established financial institutions and
agricultural parastatals. Banks and credit co-operatives were introduced in
the 1900s and quickly spread throughout the rural areas, contributing to

1. Mark Peattie, "Introduction," in Ramon Myers and Mark Peattie (eds.), The Japanese
Colonial Empire (Princeton: Princeton University Press, 1984).
2. Christopher Howe, The Origins of Japanese Trade Supremacy (Chicago: University
of Chicago Press, 1996), pp. 344--45; Lin Jong-shiung, "Tai-wan jing-ji fa-zhan de ji chu"
("The foundation of economic development in Taiwan"), in Taiwan ming-yun de hui-gu
yu zhang-wang (Taiwan's Destiny: Retrospect and Prospect) (Taipei: Ji-yu xi-bao, 1996),
pp. 102-107.
3. Samuel P. S. Ho, Economic Development of Taiwan 1860-1970 (New Haven: Yale
University Press, 1978), p. 37.

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 Taiwan's Economic Structure 21

expansion of production, savings mobilization and local comme

Farmers' associations, irrigation associations and agricultural ex
stations helped to introduce new varieties of seed and farming t
ogy. All these efforts were meticulously orchestrated to comm
the agrarian economy and heighten the incentive to produce. H
the colonial authority did not engage in production and marke
instead fostered Japanese capitalists by entrusting the task of
ment to "private enterprise but with a guaranteed minimum r
return."' Essentially a risk-sharing device for huge and long-term in
ment, this shokusan kogyo formula induced leading zaibatsu to
the agents for colonial development and extraction, most notably
sugar-refining industry. Such intimate government-business re
drew little social criticism and political ire in Taiwan, unlike in
proper.
Undertaking so many interlocking development projects requi
effective state. The state-building process was, however, quite straig
ward. There was no pre-existing state structure to supercede, un
case of colonial Korea. The gentry class was small; and indee
local elite fled to China to escape Japanese rule (later, these re
helped the KMT regime to reign in Taiwan.) State officials were
in from Japan, though Taiwanese were later recruited and eve
accounted for 27 per cent of state employees. By the end of colo
there were 37,209 government officials, or 5.9 per thousand re
compared to 3.9 in Korea in 1930.6 There were also about 40,000
working in agricultural parastatals, notably agricultural supporting
tions. The police force was dense as well, one for eight residents in
the corresponding figure for Korea being one for 14.' Apart from k
law and order, the police were involved in mass mobilization fo
facilities and even for agricultural extension.
The colonial mode of production made Taiwan an agricultura
duction base and a market for industrial goods of the Japanese
Barely a decade after the Japanese takeover, rice and sugar repl
and camphor oil as Taiwan's leading export items, accounting fo
70 per cent of its total exports till the eve of the Second World
Nearly all exports went to Japan, while major imports - fertilizer,

4. Ibid. p. 66; Tun-jen Cheng, "Guarding the commanding heights: the state as b
Taiwan," in S. Haggard, C. Lee and S. Maxfield (eds.), The Politics ofFinance in D
Countries (Ithaca: Cornell University Press 1993), p. 61.
5. Howe, Origins, p. 309
6. Guang-fu tai-wan ji chou-hua yu shou-hsing jie-shou (Plan on Recovering
Receiving Japanese Surrender and Taking Over Taiwan) (Taipei: Zhong-guo-guo-
zhong-yang-wei-yuan-hui, dang-xi-wei-yuan-hui, 1990) the collection of historica
of modern China, No. 4, p. 393
7. Edward I-Te Chen, "Japanese colonialism in Korea and Formosa: a compariso
systems of political control," Harvard Journal ofAsiatic Studies, Vol. 30 (1970), pp
8. Wei Chi-lin, "Bai-nien-lai taiwan chan-yeh de guo-ji dao-shian" ("Inter
orientations of Taiwan's industry in the 20th century"), in Toshiyuki Mizoguchi and
Umemura (eds.), Taiwan ming-yun (Taiwan's Destiny), pp. 132, 153; Kyunihon shok
keizai tokei (Economic Statistics on Former Japanese Colonies) (Tokyo: Toy
shimposha, 1988), pp. 296-97.

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22 The China Quarterly

and other consumer goods - were from Japan. The expansion of industry
paled when compared with agricultural development. After Western firms
abandoned the Asian market in the 1910s, the number of factories grew
drastically, primarily in sugar refining and other food-processing indus-
tries. As the sugar industry matured in the 1930s, the growth of the
industrial sector declined substantially, in spite of a major effort to
diversify Taiwan's industry. The rise of chemical fertilizer, textile, metal
and industrial chemical industries did little to transform Taiwan's indus-
trial base.9 After all, such a "crash industrialization programme" was
essentially for war preparation and in most case a relocation of used
production facilities. The industrialization decelerated as trade within the
Empire dwindled, sea transport closed and eventually air raids intensified
during the Pacific War.
Thanks to the declining mortality rate, the population in Taiwan grew
from around three million to seven million during the colonial era.
Income level was elevated, twice as high as that in China on the eve of
the Sino-Japan war.1o Taiwan, along with Japan and Korea, and unlike the
rest of Asia, exceeded Latin America in terms of per capita output." The
Japanese colonial state developed as well as exploited the Taiwanese
economy. While domestic uses and capital formation were close to output
in the mid-1910s, they subsequently dropped to 10 per cent below gross
output.12 The growth rate of per capita consumption was far behind that
of per capita production, thanks to cartelized sugar production, organized
export and the control of input materials such as chemical fertilizer.
Effective taxation in the rural sector was a defining feature of the
Japanese colonial state in Taiwan. Other colonial states in natural re-
source-rich economies, such as France in Africa, only had to franchise
away permits for plantation and mineral exploration, while collecting
rents from the licensees. Japan, in contrast, maintained a smallholder
system in Taiwan's primary sector; even sugar plantations were essen-
tially based on tenant-owners rather than wage earners. Modernizing a
smallholder-based agriculture required the expansion of the state appar-
atus, which in turn enhanced state capacity for extraction.
Only the primary sector was significantly transformed. As Table 1
shows, the shares of the secondary sector fluctuated, but were often high
in comparison with those of the primary sector, and were much higher
than those for the first two decades of the post-war era. These figures do
not denote substantial industrial change in pre-war Taiwan, as a relatively
large share of the industrial sector in the economy was based on sugar

9. Ho, Economic Development, p. 28.

10. Weng Ji-yung, "Introduction," in Chang Guo-wei (ed.), Taiwan jin-ji fa-zhang
(Economic Development in Taiwan) (Taipei: Zheng-zhong, 1967), p. 19.
11. Angus Maddison, "Growth acceleration and slowdown: postwar experience in
historical and compartive perspective," in Ramon Myers (ed.), The Wealth of Nations in the
Twentieth Century: The Policies and Institutional Determinants of Economic Development
(Stanford: Hoover Institution Press, 1996), pp. 32-33.
12. Simon Kutznets, "Growth and structural shifts," in Walter Galenson (ed.), Economic
Growth and Structural Change in Taiwan (Ithaca: Cornell University Press, 1979), pp. 23,
26.

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 Table 1: Taiwan's GDP and Employment by Sector, 1905-1998

GDP Employment

Primary Secondary Tertiary Primary Secondary Te

1905 - - - 72.7 6.1 21

1910 36.4 (42.1) 28.1 (23.5) 35.5 (34.4) -
1915 32.5 (41.4) 31.7 (24.5) 35.7 (34.1) 73.4 7.4
1920 30.0 (39.0) 29.3 (22.9) 40.7 (38.1) 71.1 9.2
1925 40.3 (39.6) 22.7 (23.1) 36.9 (37.3) -
1930 33.9 (37.3) 28.3 (25.7) 37.7 (37.0) 71.4 9.4
1935 34.5 (32.0) 27.2 (29.0) 38.3 (38.9) -
1940 29.1 (32.5) 31.5 (30.0) 39.4 (38.6) 63.2 12.3
1945 26.8 (23.4) 25.8 (29.5) 47.4 (47.1) -
1950 36.0 (36.8) 15.6 (15.0) 48.3 (48.1) -
1952 32.2 19.7 48.1 56.0 16.9 2
1960 28.5 26.9 44.6 50.2 20.5 29
1970 15.5 36.8 47.7 36.7 28.0 35
1980 7.7 45.7 46.6 19.5 42.5 38
1990 4.2 41.2 54.6 12.5 40.8 46
1998 2.7 34.9 62.3 8.8 37.9 53

Sources:
Pre-1952 GDP data is from Wu Tsong-min, "1910 nien zhi 1950 nien tai-wan di-chu
ji gu-ji" ("An estimation of Taiwan's gross domestic product, 1910-1950"), Jin-ji lu
Economic Review), Vol. 19, No. 2 (1991), pp 165-172; pre-war employment figures
Ho, Economic Development of Taiwan 1860-1970 (New Haven: Yale University Press, 1
figures are from Taiwan Statistical Data Book, various issues. GDP figures are based on
in brackets are on constant prices.

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24 The China Quarterly

refining and other agricultural food processing only. Industry in colonial

Taiwan was essentially an appendix of the primary sector, which by its
nature vacillated from year to year and led to the wide swings of
industrial production as well.13 Moreover, as the tertiary sector, including
transportation, retails and credit, tends to grow in the wake of industrial
expansion, there was only moderate growth of service sector in the
pre-war era, suggesting a low multiplier effect of Taiwan's narrow
industrial base under colonial rule.
Taiwanese capitalists were late to start and remained marginal players
in the modem industrial sector, which was dominated by Japanese
zaibatsu. After 1920 Taiwanese could form corporations without
Japanese partnership, but by the mid-1930s, they owned at most 20 per
cent of paid-in capital in joint stock corporations. The colonial authority
encouraged Japanese manpower inflow into Taiwan, which alleviated the
internal demographic pressure within Japan, but also reduced the need to
train Taiwanese to staff the government and corporate sector. After the
late 1930s, there was an intensive effort to instill "patriotism" and
assimilate Taiwanese into Japanese society. But it was too late to foster
Taiwanese entrepreneurs and train Taiwanese technicians. Samuel Ho
estimates that Japanese accounted for 80 per cent of technicians in legal
corporations, 74 per cent in trade, 80 per cent in transportation and 92 per
cent in commerce.14 Post-war Taiwanese business owners were at most
apprentices during the Japanese era, in contrast with Korean chaebols
who in most cases already had business experience under Japanese rule.

Regime Transition and ISI

The relevance of the colonial state structure and economic foundation
to Taiwan's post-war development has not been a controversy, unlike in
the case of South Korea. Taiwan had a longer colonial period and, upon
decolonization, was neither divided by great powers nor ravaged by a
civil war. Political power was directly transferred to the KMT regime
rather than to a U.S. military government equipped with little economic
expertise. The KMT take-over team triggered a local uprising in 1947
leading to the decimation of the local elite, but the protracted civil war
was waged on the mainland. Japanese specialists were not completely
repatriated, and the colonial cord helped to resume trade and investment
ties later on. While overall production in 1945 was only 50 per cent of its
peak during the colonial era, human capital was largely preserved. The
KMT regime only had to restore, not create, education, public health,
agricultural parastatals, market and financial institutions. In addition to
inheriting a state structure, the regime also acquired 494 major enterprises
in heavy industry and 484 minor ones in light industry. Major enterprises

13. Wu Tsong-min, "1910 nien zhi 1950 nien tai-wan di-chu guo-nei sheng-chan mao-er
ji gu-ji" ("An estimation of Taiwan's gross domestic product, 1910-1950"), Jin-ji lun-wen
tsong-kan (Taiwan Economic Review), Vol. 19, No. 2 (1991), pp. 127-173.
14. Ho, Economic Development, p. 90.

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 Taiwan's Economic Structure 25

instantly became state-owned enterprises, while minor enterprises

auctioned off.15
The role of mainland inputs in Taiwan's economic development
debatable issue. To some, gold shipment to Taiwan in 1949 stabilize
economy. To others, the principal stabilizers were American aid
high interest rate policy, an unorthodox one at that time.16 Inflo
technocrats was significant. The Joint Commission of Rural Recon
tion (JCRR) personnel were instrumental in land reform, the rebuildi
rural infrastructure and the increase of agricultural productivity, wh
National Resource Commission (NRC) personnel staffed the major e
prises and economic bureaucracy.17 However, the bulk of NRC t
nocrats went to Manchuria and stayed on the mainland rather than go
to Taiwan. Moreover, the arrival of more than 1.5 million immigr
mostly in civil and military services - created demand-pull inflati
1957, the first year reliable statistics were compiled, there were 7.8 st
officials per thousand residents. The ratio rose to 16 if public sc
teachers and state enterprise employees were also counted as
service. Apart from absorbing the continental-sized civil service
wan's economy also shouldered heavy defence expenditure entail
the KMT's mission of "retaking the mainland." Indeed, the civil w
the mainland had already burdened Taiwan, as its rice and sugar
siphoned off to support the war effort.'8
Upon relocating to Taiwan, the KMT regime quickly disciplined
own factions, reorganized its hitherto fragmented military and exten
its arms to nearly every social organization. Externally, thanks to
Korean War, the regime was conferred with foreign aid and a stab
security environment. The first development project it undertook
redistributive land reform. Insulated from the landlord class, the
regime assigned property rights to land tillers, thereby altering
incentive system in the agricultural sector. With the restoration o
agricultural technical research and extension service, the agricul
sector re-emerged as a surplus base. Rice, sugar and, later on, ot

15. Plan on Recovering Taiwan, p. 424.

16. See Chao Ji-chan, Mei-yuan de yun-yung (The Use of U.S. Aid) (Taipei: Lien
1985), pp. 99-114, and Liu Fu-chi, "Taiwan you tung huo peng zhang dau jing ji we
de jin-zong fa-zhan" ("Financial development in Taiwan: from inflation to stability"),
Chiu (ed.), Taiwan huo-bi yu jing-ji (Money and Economy in Taiwan) (Taipei: Lien
1980).
17. William C. Kirby, "Technocratic organization and technological development in
China: the Nationalist experience and legacy, 1928-1953," in Dennis Simon and Robert Sutter
(eds.), Science and Technology in Post-Mao China (Cambridge, MA: Harvard University
Press, 1989), and Huang Chun-chieh, interviewer, Zhong-guo nong-chun fu-hsing lien-ho
wei-yuan-hui: kou-xu li-shifang-wenji-lu (The Reminiscences of the Staffs of Sino-American
Joint Commission on Rural Reconstruction) (Taipei: Institute of Modem History, Academia
Sinica, 1992).
18. Wu Tsong-Min, "1945-1949 nien guo-ming zheng-fu duai tai-wan de jing-ji
zheng-tse" ("The Nationalist Government's economic policies regarding Taiwan, 1945-
1949"), Jin-ji lun-wen tsong-kan, Vol. 25, No. 4 (1997), pp. 521-554. Cf. Chang Jia-nau,
"Taiwan guang-fu chu-chi yu da-lu ji jing-ji guan-si" ("Economic relations between Taiwan
and the mainland in the immediate post-war years"), Zhuan-ji wen-hseuh (Biographical
Literature), Vol. 37, No. 6 (1981), pp. 101-104.

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26 The China Quarterly

commercial crops became the main export items until the mid-1960s.
Through tax payment in kind, the fertilizer-grain barter system and the
monopoly of sugar refining, farmers were squeezed to support the indus-
trial sector. Between 1952 and 1969, the official purchasing price for rice
was 27.1 per cent below the market level, while that for sugar was 12.54
per cent below the international price.19 The government collected about
50 per cent of rice that left the village, and about 60 per cent of that
collected was used to feed members of the military and civil service and
their dependents, with the rest used for the domestic and export markets,
either to stabilize prices or earn foreign exchange.20 The extraction of
agricultural surplus also helped the government to blunt wages and
entertain the tax incentive policy to promote industry.
It was in the industrial sector that there was an entirely new strategy,
namely import substitution industrialization (ISI) in the non-durable
consumer good sectors. Based on the infant industry argument and
endorsed by influential development economists such as Raul Prebisch,
ISI was in the 1950s a prevailing ideology for late industrializers. For the
KMT regime, ISI was not so much a choice as a situational imperative.21
The demand-pull inflation in the period of post-war reconstruction and
lack of savings led the regime to restrict imports, allocate foreign
exchanges and tolerate overvalued exchange rates. Once the government
slipped into ISI, it pursued this strategy most vehemently. Initially, three
industries were earmarked for expansion: chemical fertilizer, plastics and
textile. The first was to be undertaken by the existing state firms, the
second to be transferred to the private sector, while the third was to be
entrusted to existing firms. Subsequently, the synthetic fibres, glass and
food industries were added to the list, all assigned to the private sector.
ISI industries received tariff protection, hard currencies, targeted loans
and the government's tight control over new entrants. In the textile
industry, the government also used American aid cotton and guaranteed
purchases of output to encourage mill owners to expand their capacity, a
modus operandi akin to the shokusan kogyo formula in the colonial era.
While in the plastics and synthetic fibre industries the state often had to
cajole private firms to take over model plants it built, in the textile
industry there was no shortage of investors, given the huge and assured
profits. ISI industries were criticized for seeking unfair policy privileges
yet producing low-quality goods. The government remained vigilant on
corruption and suspended policy loans in 1958.
Here lies a puzzle. The KMT regime did not display so much of a

19. Teng-hui Lee, Intersectoral Capital Flows in the Economic Development of Taiwan
1895-1960 (Ithaca: Cornell University Press, 1971), and Ban Yu-yuan, "Taiwan nong-yeh
jai jing-ji fa-zhan guo-chen zhong ji gong-hsien yu de-wei" ("Taiwan's economic
development: the contribution and role of the agricultural sector"), Taiwan yin-hang ji-kan
(Bank of Taiwan Quarterly), Vol. 23, No. 2, p. 33.
20. Ho, Economic Development, p. 182.
21. Tun-jen Cheng, "Political regimes and development strategies," in Gary Gereffi and
Donald Wyman (eds.), Manufacturing Miracles (Princeton: Princeton University Press,
1990), p. 144.

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 Taiwan's Economic Structure 27

predatory nature in Taiwan as it did on the mainland.22 The opportun

to indulge in rent-seeking and plundering was actually wider in post-w
Taiwan. As well as issuing import and factory permits, the regim
had control of all tax revenue, nearly monopolized the banking se
possessed half of industrial productive capacity, and allocated fo
exchanges derived from agricultural export and foreign aid. In add
the political project of retaking the mainland permitted the regim
declare martial law and conveniently suspend national elections fo
indefinite period. Opposition parties were both unwilling and una
provide democratic oversight.
Self-imposed discipline was at work. Lessons from its defeat by
Communists on the mainland permeated the discourse within the part
the extent of canonization. As inflation and corruption were diagnosed
causes of its loss of the mainland, the KMT regime firmly believe
fiscal and monetary conservatism, and the separation of technocrats f
political elite. Any technocrat deviating from economic orthodoxy
the burden of persuasion. The KMT as a party did obtain some im
privileges, but abstained from establishing a department of econ
affairs to meddle with technocrats and foreign aid agency. Moreo
factions were streamlined into two groupings, the "in power" and the
of power." The first group was credited with the rebirth of the regim
Taiwan and would defend economic policies that technocrats pur
The second consisted mainly of those who were blamed for the loss of
mainland but would now exercise oversight over the governmen
practice acquiesced to by the regime leadership.23 Policy debates
criticisms were fierce and frequently consequential: the main architec
economic development strategy, K. Y. Yin, went through several r
of resignation and reinstatement.
Other imposed discipline was at work as well. Given that the K
regime came to Taiwan with a continental-sized civil service and w
to maintain combat readiness to recover the mainland, it had a r
budget structure. American aid hence became the major source of disp
able funding, giving the aid agency a leverage in designing and im
menting development projects. The Taiwan side could propose, b
commissioners disposed. Apart from contributing to economic sta
tion, American aid also alleviated the goal conflict between mainta
military preparedness and promoting economic growth.24
significantly, aid filled the gaps between savings and investment
between export earnings and import needs in the early post-war decad
Aid in kind was crucial to the expansion of the food and textile indus

22. For the pre-war era, see Albert Feuerwerker, Economic Trends in the Repu
China, 1912-1949 (Ann Arbor: Center for Chinese Studies, University of Michigan
Park M. Coble, Jr., The Shanghai Capitalists and the National Government, 1927
(Cambridge, MA: Harvard University Press, 1986); Thomas Rawski, Economic Gro
Prewar China (Berkeley: University of California Press, 1989), ch. 1, especially p.
23. Fu Chi-xue etal., Zhong-hua min-guojian-cha-yuanji yen-chiu (A Study of the C
Yuan in the Republic of China), n.d.
24. Wen xing-ying, Jing-ji chi-ji de bei-hou (Behind Economic Miracle) (Ta
Independent Evening News Publisher, 1989), p. 226; Ho, Economic Development,

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28 The China Quarterly

while aid funds were key to the emergence of the plastics, synthetic fibre,
glass and cement industries. Under donors' persuasion, the KMT regime
accepted their growing autonomy in economic activity and permitted
technocrats to have a high degree of operational freedom. And because of
the mismanagement of aid by the regime on the mainland, the aid agency
in Taiwan was involved in both allocative decisions and auditing, much
more so than in South Korea.25
American aid, geopolitical ties with the West, and the sub-ethnic divide
between Taiwanese and mainlanders had important implications for the
development of the indigeneous private sector. The regime dominated
heavy industry, and thus left some room for the private sector to develop
in the light industry area. Yet investment opportunities initially went to
Shanghai and Shandong capitalists - who loyally migrated to Taiwan -
rather than to native entrepreneurs who were believed to have no mana-
gerial skills.26 In the financial sector, only non-bank financial intermedi-
aries, such as co-operative credit and insurance, were open to the private
sector. Only four major state enterprises were divested to compensate the
landowners in the wake of land reform. State capitalism was in line with
the teaching of Sun Yat-sen, founding father of Nationalist China, and the
preference of many socialist-oriented KMT ideologues. However, the
doctrine and praxis of restraining private capital did not work well with
the reality of Taiwan's political association with Western capitalism. The
aid agency constantly prescribed specific development programmes to
nurture the private sector.27 Moreover, given the criticism of their inti-
mate ties with mainlander capitalists, technocrats - already burdened with
the task of managing huge state enterprises - began to entertain the idea
of promoting Taiwanese capitalists.

Outward Orientation and Industrial Change

Taiwan's economy more-or-less recovered from wartime destruction in

1955, but it began to soar only after turning outwards in 1960 to exploit
export markets for light industry goods.28 This policy was followed by
industrial deepening in the 1970s, and industrial upgrading and di-
versification from the 1980s. In each episode, a perceived economic crisis
provided the rationale for the state elite to espouse a new goal and
suggest new policies. Not all were carried out, but economic structure in
terms of market direction, the ownership pattern and industrial compo-
sition did undergo change. Taught by the American aid agency, economic
technocrats detected market opportunities and used mostly market con-

25. David C. Cole, "Foreign assistance and Korean development," in David C. Cole,
Youngil Lim and Paul W. Kuznets, The Korean Economy: Issues of Development (Berkeley:
Institute of East Asian Studies, 1980).
26. Huang Chin-shing, Ban xi-ji de fun-dou: Wu Ho-xi sien-sheng kou-xou zhoung-ji
(Business as a Vocation: the Autobiography of Mr Wu Ho-su) (Taipei: Asian Culture
Company, 1990), p. 151.
27. Neil H. Jacoby, U.S. Aid to Taiwan (New York: Praeger, 1966)
28. Stephan Haggard, Pathways from the Periphery (Ithaca: Cornell University Press,
1990), ch. 4.

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 Taiwan's Economic Structure 29

forming incentive schemes to foster industrial entrepreneurship.29 M

over, the same pool of technocrats continued to steer the course
development.

Promoting industrial export. As ISI output in non-durable consumer

good sectors saturated the domestic market, economic growth slowed
down, creating an unemployment problem. By the late 1950s, it had also
become clear that the United States would phase out aid to Taiwan. A
new development strategy was needed to sustain economic growth.
Undertaking ISI in the capital good and durable consumer good sectors
was undesirable for an economy like Taiwan's with few natural re-
sources. Yet there was initially little confidence in using the export
market as an engine for economic growth. It was as a result of the
persuasion of Chinese-American economists and the aid agency that the
regime finally undertook policy reforms to re-orient the economy towards
world markets. This decisive move simplified the exchange rate regime,
devalued currency, and adopted several measures to promote export and
private investment.
The overall policy objective was to expand industrial exports to absorb
surplus labour and eventually use foreign earnings as the main capital
source for sustained economic growth. Expecting the termination of
economic aid, technocrats proposed to use foreign borrowing and the
proceeds from the privatization of SOEs to establish a state fund to
advance seed money and long-term lending to firms. Few SOEs were
privatized, while development financing was not activated. Instead, short-
term export financing, tax incentives, import duty rebates and foreign
direct investment emerged as the main policy tools for the expansion of
export industries. The Statute for the Encouragement of Investment (SEI),
enacted in 1961, gave tax benefits to export firms in almost all sectors as
well as newly formed enterprises in "pioneer" sectors, such as electronics,
promoted by the government. Export financing was not sector-specific,
but automatically extended to any firm with export orders. Import tariff
barriers still existed, but export-processing firms would receive import
duty rebate. In export processing zones, firms had a completely duty
free environment for their production and export, a condition conducive
to the inflow of FDI already enticed by low wage levels in Taiwan.
The government also established a good dozen industrial estates across
the island to tap the abundant labour supply. All these measures
facilitated new entrants and the proliferation of small and medium
enterprises (SMEs). Numerous firms gained from fiscal incentives and
export financing, while FDI had the effect of nurturing small local
firms as component suppliers. By letting "a hundred flowers bloom,"
Taiwan managed to support the private sector without nurturing big
capital.

29. They display leadership, not followership, in Robert Wade's words. See his Governing
the Market (Princeton: Princeton University Press 1990), ch. 10.

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30 The China Quarterly

Industrial deepening. The result of export promotion was evident.

Labour-intensive, export-oriented industries briskly multiplied, and the
industrial sector quickly exceeded the agricultural sector in total output,
employment and export, while private enterprises replaced state-owned
enterprises as the core of manufacturing sector (see Tables 2 and 3). And
yet, in the early 1970s, economic technocrats were already deploring the
shallowness of the Taiwanese economy and beginning to call for indus-
trial deepening via backward linkage. Technocrats detected two alarming
trends, the diminishing supply of surplus labour and the creeping protec-
tionism in major markets. Additional considerations further lent support
to the call for backward linkage. First, downstream industries had ex-
panded to such a degree as to create huge domestic demand for intermedi-
ate and upstream products. In addition, steel, shipbuilding and
petrochemical industries would not only help to supply capital goods and
input materials to downstream sectors, they would also underpin the
defence industry.
Technocrats urged the divestment of state-owned banks to establish a
development fund to assist the private sector to undertake heavy and

Table 2: Production and Ownership Structure in Post-war Taiwan's

Manufacturing Sector, 1952-1998

Light Heavy and chemical Private State-owned

1952 n.a. n.a. 43.8 56.2

1960 76.0 24.0 56.2 43.8
1970 65.7* 34.3* 72.3 27.0
1980 53.8 46.2 85.5 14.5
1990 33.6 66.4 89.7 10.6
1998 28.5 71.5 92.1 7.9

Note:
*The 1972 figures.
Source:
Taiwan Statistical Data Book, various issues.

Table 3: Post-war Taiwan's Export Structure, 1952-1998

Agriculture
(raw and processed) Industrial Heavy and chemical Others

1952 91.9 8.1 4.7 95.3

1960 67.7 32.3 10.2 89.8
1972 16.7 83.3 26.6 73.4
1980 9.2 90.8 35.6 64.4
1990 4.5 95.5 46.7 53.3
1998 1.8 98.2 64.3 23.9

Source:
Taiwan Statistical Data Book, various issues.

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 Taiwan's Economic Structure 31

chemical industrialization (HCI). Yet the political leadership sh

divestment, precluded the private sector from upstream petroc
production, and hoped to recruit private participation in major
shipbuilding projects. Leading private firms in the plastics and
industries did subscribe to midstream petrochemical projects, but f
become junior partners of an integrated steel mill and a large sh
The development fund was established in 1973 to assist public
ment, high tech development and important (that is, existing) indu
the private sector. Eventually undercapitalized SOEs and the governm
sponsored infrastructure projects absorbed most loans advanced
fund. Apart from supplying capital, the state also afforded tariff p
tion and import restriction to effectuate ISI for basic and ups
chemical products. Such an ISI deepening, however, was to supp
supplant downstream export industries, unlike in the case
America. In fact, as downstream industries were the main fore
change earners, the government was often forced to lift import
input materials. The KMT leadership also boosted lending facilit
SMEs and established loan facilities for the agricultural sector. W
oil crisis and the attendant world recession set in, the government
scaled down HCI projects. Meanwhile, it continued to use tax in
to encourage the upgrading of the existing export oriented industr
Taiwan thus pursued a mild HCI, unlike South Korea's big
approach to it using massive foreign borrowing and a coterie
business firms. Taiwan thus avoided the "big push" problems
inflation, massive foreign debt, a worsening income distribut
economic crisis-induced political instability. A mild HCI also pr
the making of highly leveraged, oversized conglomerates at the
of SMEs, while permitting the government to sustain an educ
reform that extended the years of basic schooling and expanded tec
training. However, while Taiwan's industrial base was "deepene
overall structure was not as drastically transformed as in Korea. Ba
petrochemical industries did not become the mainstay of Taiwan's e
which continued to be dominated by labour-intensive items, n
textiles, garment and consumer electronics.30

Industrial upgrading. Throughout the 1970s, the industrial s

expanded further, and the agricultural sector was almost marg
now in need of subsidy and protection. However, industrial prod
was not improving, and in fact, even had a negative growth r
Table 4). Meanwhile, wages rose as the surplus labour diminished
late 1970s, then, technocrats called for the upgrading of indust
duction and the creation of high value-added export sectors. K
sector-specific policy served as a model to develop "strategic" in
mainly machinery and information, which had great market p
linkage effects, high added value, high technology input, low energ

30. For industrial promotion and deepening, I drew heavily from Cheng, "Politica
and development strategy," pp. 153-172.

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32 The China Quarterly

Table 4: Growth Rates of GDP and Total Factor Productivity (TFP)

1961-1993 in Taiwan (per annum)

GDP (real) TFP

1961-73 10.80 0.47

1973-82 7.97 - 0.14
1982-87 9.29 4.31
1987-93 6.63 2.74

Source
Chi-yuan Liang, "Productivity growth in Asian
NIEs: a case study of the Republic of China,
1961-1993," APO Productivity Journal, Winter
1993, p. 20.

and low pollution effect. Two state financial institutions would advance
long-term lending to these industries, while the 1960 SEI underwent a
major revision in 1981 to encourage spending on research and develop-
ment as well as the use of energy-saving machinery.
The policy for industrial upgrading failed in the automotive industry,
fared better in the machine tool industry, and has been lauded in the
semi-conductor and computer sectors. A huge joint venture involving
Toyota, state and local capital did not happen, as Toyota hesitated to
commit to transferring technology and increasingly exporting the planned
outputs. Behind the high tariff wall, erected in 1961, Taiwan's five
automobile makers continued to assemble foreign components. In 1984,
the government suddenly lifted the entry restrictions, allowing seven
more firms to join the fray for a well-protected market. Yet industrial
shakeout did not ensue and Taiwanese cars remained not exportable.31
The condition for machine tools - the other pillar of the machinery
industry - has not been as dismal, however. It received less protection
and support from the government, thanks to the lack of political clout of
apprentice-turned entrepreneurs.32 While overshadowed by Korean firms,
Taiwan's machine tool makers were able to carve out some niches in the
international market.
Industrial policy for the information industry did not involve any
protection or public-private joint venture. But the government did lend
strong support to the industry, unlike the case of the machine tool
industry. Apart from extending tax incentives and concessionary loans, it
sponsored research and development activities, actively nurtured skilled
personnel and transfer technology to the private sector, participated in the
formation of venture capital firms, and established a science-based indus-

31. Chen Tein-chi, "1980 nien-dai i-lai tai-wan de mau-Iji-yu-hua" ("Trade liberalization
in post-1980 Taiwan"), in Shih Jian-sheng (ed.), 1980 nien-dai i-lai tai-wan jing-jifa-zhan
jing-yen (Economic Development in Post-1980 Taiwan) (Taipei: Chung-hua Institute of
Economic Research, 1999).
32. Staffan Jacobson, "Industrial policy for the machine tool industries of South Korea and
Taiwan," Institute of Development Studies Bulletin, Vol. 15, No. 2 (1984), pp. 44-49.

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 Taiwan's Economic Structure 33

trial park to house new ventures. The role of parastatals, most notably
Industrial Technology Research Institute, was crucial. Free from bu
cratic control, yet continuously receiving budgetary support, these par
tatals have trained more than 10,000 highly skilled workers, hou
returnees from Silicon Valley, established laboratories for testing p
ucts, and brokered R & D consortia. By identifying market opportuniti
diffusing technology and co-ordinating market players, these para
alleviated information and collective action problems, and incuba
engineers-turned-entrepreneurs.33 The role of government was thus es
tial during the 1980s - the seed and start-up stages - of Taiw
semi-conductor and computer industries, though less so during the 199
- the expansion period when local firms entered strategic alliances
leading Western firms.34
While the high tech sector made progress under government supp
others were not left in the cold. Almost all industries received fiscal
incentives one way or another. Export incentives remained intact. A
credit facility for "key industries" was also established to finance broad
types of investment in anti-pollution devices and automation, the pur-
chase of locally produced machinery and software, and projects supported
by the CEPD. Credit facilities for SMEs, which were greatly enhanced in
the 1970s to help them endure the hardship of economic downturn, saw
drastic improvement in the 1980s. More importantly, there was a crucial
evolution from supporting sectors to supporting functional-oriented activ-

Table 5: Export Commodities by Intensity of Input Factor for Taiwan,

1982-1997

Degree of labour Degree of capital Degree of tech

intensity intensity intensity

High Mid Low High Mid Low High Mid Low

1982 47.2 30.8 21.9 26.9 45.4 27.6 18.3 32.6 49.1
1985 45.9 35.6 18.5 24.5 48.7 26.8 18.8 33.6 47.6
1990 41.0 38.3 20.7 28.9 50.5 20.5 26.7 38.6 34.7
1995 36.4 40.6 23.0 31.9 56.5 11.6 36.5 41.4 22.0
1997 34.9 43.1 22.1 30.3 60.6 9.1 39.7 41.1 19.2

Source:
Taiwan Statistical Data Book, 1998.

33. Greg Noble, Collective Action in East Asia (Ithaca: Cornell University Press, 1998),
ch. 6; Tun-jen Cheng, Stephan Haggard and David Kang, "Institutions and economic
policies," the United Nations Conference of Trade and Development, 1996, pp. 88, 90.
34. See Chen Dung-sheng, "Ji-ti den-lu chan-yeh zhu-zhi wan-lo de shing-shih ji chi
hsing-chen de zhi-du ji-chu" ("The formation and institutional basis of network organizations
in Taiwan's integrated-circuit industry"), in Wei-an Chang (ed.), Taiwan de chi-yeh
(Enterprises in Taiwan) (forthcoming), p. 10; J. A. Mathews, "Silicon Valley of the East:
creating Taiwan's semiconductor industry," California Management Review, Vol. 39, No. 4
(1997), pp. 26-54; Chi Schive, "The next stage of industrialization in South Korea and
Taiwan," in Gereffi and Wyman, Manufacturing Miracles, pp. 285-88.

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34 The China Quarterly

ities. In 1990, the SEI was abolished and replaced by the Statute on the
Upgrading of Industry, under which the government no longer promotes
specific industries, but rather provides only "functional incentives" for R
& D, anti-pollution spending and other industrial upgrading activities.
Taiwan's industrialization accelerated in the 1960s, but it was during
the final two decades of the 20th century that Taiwan's industry was
drastically transformed. As Table 5 shows, between 1982 and 1997, the
technology intensity of Taiwan's exports had drastically improved. The
semi-conductor and computer sectors have become leading exporters and
the mainstay of Taiwan's industry. As revealed in Table 5, total factor
productivity grew significantly from 1982, departing from the previous
pattern of economic growth described by Paul Krugman as one based on
factor inputs rather than productivity improvement.35

Liberalization, Democratization and the Asian Financial Crisis

Despite its outward orientation and export success, Taiwan's economy

remained largely closed, even in industries that were already export
competitive such as textiles and consumer electronics. Foreign direct
investment was let in only in certain sectors and often subject to local
component and export ratio requirements. Moreover, state capital contin-
ued to dominate high finance, upstream production, transportation and
telecommunication. Additionally, the exchange rate was held steady, even
though foreign exchange reserves had been piling up. Beginning in the
second half of the 1980s, however, the economy came under the pressure
of liberalization. The principal catalyst was the unprecedented 35 per cent
appreciation of Taiwan's currency in 1987-88, a result of the post-Plaza
Accord currency alignment. Economic liberalization proceeded almost
simultaneously with democratic transition from 1986 to 1996. As democ-
ratization unleashed the conflicting forces for both liberalization and
protectionism, the state was often caught in the vortex. Economic policies
often followed the private sector's audacious moves and denoted the state
following rather than leading in the market.
The pressure for import liberalization came from the United States, a
leading economic partner that ran chronic trade deficits with Taiwan. But
the main impetus was the potent threat of inflation created by the
persistent trade surplus that reached 21 per cent of GNP in 1986. The
government first removed import restrictions and then set to reduce tariff
rates.36 In lifting the import ban, the government overruled large business
groups in long-protected sectors, such as car, petrochemical and home
consumer electronics. As political democratic change unfolded, tariff
reduction met resistance in sectors with a higher degree of market
concentration and hence greater capacity to take collective action. The

35. Paul Krugman, "The myth of Asia's miracle," Foreign Affairs, Vol. 73, No. 6 (1994)
pp. 62-78; Chi-yuan Liang. "Productivity growth in Asian NIEs: a case study of the Republic
of China, 1961-1993," APO Productivity Journal, Winter 1995, pp. 17-40.
36. Chen Tein-chi, "Trade liberalization."

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 Taiwan's Economic Structure 35

liberalization schedule was slowed down, and in some sectors, not

agriculture, a compensation package is needed.37
Taiwan's outward direct investment was essentially a consequence
currency appreciation in 1987 and the ensuing decontrol of ca
outflow (capital inflow is still regulated, however). Facing rising la
costs, high land prices, more environmental regulation and, most direc
currency appreciation, export-oriented SMEs in traditional sectors spea
headed Taiwan's investment overseas without government approv
Following their exodus, the state set to assist their overseas ventur
sponsoring industrial estate development and providing legal
financial services in South-East Asia. But this policy was also desi
to direct the flow of investment away from China, which has
advantages of cultural affinity, geographical proximity and abun
surplus labour. Runaway SMEs, however, sank more capital in Ch
than South-East Asia, forcing the government to revise its policy
recognize the fait accompli. Meanwhile, these SMEs have assiduou
woven transnational production networks and become a new bree
multinationals in the Asian economic landscape.
De-regulation policies in well-protected telecommunication, airline
other service sectors, such as banking, insurance, securities and r
chains, were also responses to pressures rather than state initiati
Dominated by state enterprises or a few leading private firms, t
sectors had been targeted by American trade representatives since the
1980s. Political democratization in Taiwan triggered mounting critic
against these monopolies both among the public and the legislato
leading the government to deregulate nearly all of them. New lice
mostly went to foreign corporations, leading domestic market-orie
business groups and joint ventures of various sorts. More than anyt
else, the process and the result of de-regulation in these service sec
testify to the ascension of business to political power with the ons
democratic transition. Many business groups have become invo
during the succession battle within the KMT, as well as for elect
thereby gaining significant representation in both the legislature and
KMT ruling structure.
As a result of economic liberalization, there have been the follow
structural changes. The service sector has surpassed industry in terms
the share of GDP and employment (Table 2). Taiwan emerged
capital exporter, as established SMEs - those in traditional sector
became mini-multinationals in coastal Asia. Replacing them as the m
stay of Taiwan's exports are new SMEs in high tech sectors that ac
a link in the global production chain of Western firms. State cap
further retreated from all commanding heights of the economy excep
petroleum refining and defence industries. Big business groups, includi
the KMT-owned enterprises, and foreign corporations loomed large
liberalized domestic market.
The state has not lost its capacity to affect economic change in the
37. Tun-jen Cheng, " 'Democratic transitions and economic policymaking in South Korea
and Taiwan," Journal of International Political Economy, March 1997, pp. 41-60.

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36 The China Quarterly

newly democratized Taiwan. The age-old ruling KMT is financially rich

and, until recently, never lost its grip over political power, leaving little
opportunity for businesses to threaten to switch political loyalty to the
opposition. Loosely organized and ill-equipped, the business sector in
Taiwan rarely took collective action or offered a credible policy proposal,
a dire contrast with Korea. Many business groups are influential in the
legislative branch, but this institution lacks a seniority system to foster
expertise for policy deliberation. Yet to democratize internally, and with
a top leader approving all nominations and adjudicating all party affairs,
the KMT had been able to limit the influence-buying and rent-seeking
activities of individual businesses. The Democratic Progressive Party,
which assumed power in May 2000, has a mandate to trim political clout
of businesses.
The state, however, has refined its role and its policy preference.
Economic technocrats have become more blame-avoiding than credit
claiming, issuing, for example, as many licences as possible in the
banking, securities and telecommunication sectors, and permitting market
shake-out. This does not mean that the developmental state has metamor-
phosed into a regulatory one. Through its experience in promoting the
high tech sector, the state elite has learned not to shape industrial
structure or pick winners, but merely provide promising industries with
manpower services, technology, mechanisms of co-ordination and opera-
tions centres, and assist traditional industries in terms of product design
and automation. The state elite has also learned to increase spending on
programmes for various constituencies, yet stand firm for conservative
monetary policy.38
Not only has the developmental state not unravelled in the light of
globalization and democratization, the economic structure shaped by its
policies has weathered well the recent Asian regional financial crisis.
Fortuna - hoarding huge foreign exchange reserves - aside, the distinc-
tive features of Taiwan's developmental model help to account for its
relative immunity from the crisis. The principal incentive scheme for
industrialization has been fiscal incentives and technological support
rather than credit allocation and loose monetary policy. The primary
agent for development has always been SMEs of various sorts rather than
national champions. Hence, entrepreneurs are diverse, industrial structure
is polymorphous and no business group is too big to fall. The approach
to foreign capital is less mercantilist or nationalist than that in Korea and
Japan, and hence it is less problematic for Taiwan to embrace the
globalization trend.39 East Asia's economic development in the 20th
century began with the emergence of Japanese power in the region and
ended with a region-wide financial crisis. The fin de sidcle crisis hit as if
it would test the robustness of various developmental models. The one in
Taiwan has stood well in this test.
38. Tun-jen Cheng, "Economic implications of political democratization," in Shih
Jian-sheng (ed.), Economic Development in Post-1980 Taiwan (London: Elgar, forthcoming).
39. Tun-jen Cheng and Yun-han Chu, "State-business relationship in Korea and Taiwan,"
in Laurence Whitehead (ed.), Economic and Political Reform in Latin America and East Asia
(forthcoming).

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