Taiwan's Economic Miracle

The island of Taiwan has successfully managed 60 years of fast-paced economic growth - Taiwan's Economic Miracle introduction. Taiwan is a demonstrably resilient player in the global economy, while also maintaining high levels of income equality. However, there is a great deal of uncertainty surrounding whether the factors that have enabled and sustained the Taiwanese development project thus far will be an adequate means of managing the contemporary challenges facing the island. Taiwan may be becoming increasingly vulnerable to global economic conditions, and the island’s future seems also to be increasingly tied to developments in the Chinese mainland.

This paper examines the prospects for a continuing Taiwanese growth paradigm from both a cultural and an economic perspective and finds reason for optimism. This optimism is contingent on the strength of international export markets and prudent management of cross-Strait relations with the Chinese mainland. Taiwan is the 17th largest economy in the world, 14th largest exporter and 16th largest importer, and the third largest holder of foreign exchange reserves, with over US $180 billion. After 1949 Taiwan’s productivity in agriculture increased.

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This was a result of land reforms that were initiated by Chiang Kai-shek after his KMT government moved from Nanjing to Tai’pei. Foreign investment was important to Taiwan during the 1960s, so they developed export processing zones with some enticements designed to bring in more foreign investors. The emphasis slowly moved to technology or capital-intensive commodities from that of labor-intensive goods during the 1980s. Deregulation of various financial areas (banking, stock market, trade, finance, etc. during the 1990s was an attempt to liberalize the economy and was a sign of Taiwan’s desire to join the World Trade Organization.

It is apparent these policies have been successful as Taiwan has one of the world’s highest standards of living. Also one of Asia’s “Four Tigers”, along with South Korea, Singapore and Hong Kong, Taiwan’s per capita gross national product (GNP) rose from $1100 in the 1950s to approximately $11,600 in the 1990s. The gross domestic product during the 1990s was $216. billion, with manufacturing accounting for about 37 percent, and services make up the largest portion with about 60 percent. This Paper can be divided into four parts, the first is a historical review of the Taiwanese economy, pre and post war, Second is the Planning and policies that made Taiwan more resilient than most of the other Asian economies. Next a detailed analysis of the Resilience of the Taiwanese economy and lastly a section pertaining to the sustainability of Taiwan’s economic resilience. POST-WAR TAIWAN.

Taiwan’s colonial heritage undoubtedly made an important contribution to subsequent economic growth. The Japanese colonial administration – if for its own selfish reasons, such as its need for sugar and rice – expended substantial resources and attention on Taiwan’s rural sector, in the form of road, drainage, irrigation and power construction projects. It also improved the rural institutional infrastructure through promotion of agricultural research, creation of experimental stations and, most importantly, the establishment of farmers’ associations.

These initiatives all constituted capital and institutional investments, which together, long before World War II, led to a significant agricultural revolution, especially in rice (with yields rising by 4 per cent a year between 1921 and 1937). Even more importantly, these investments laid the groundwork for full mobilization of the agri­cultural sector in the post-war era. Taiwan also benefited from Japanese colonial policies favouring primary education: by the early 1950s, 60 per cent of the population were already literate.

This respectable initial stock of human capital was enhanced by the inflow of small-scale traders and entrepreneurs who accompanied Chiang Kai-shek’s army to Taiwan in 1949. A second, related and substantial initial advantage, shared in the region only by South Korea, was that of a three-step land reform, implemented between 1949 and 1953. Taiwan’s reforms followed the much earlier (1905) Japanese colonial land reforms.

Together, they led to an unusually equal distribution of land and proved instrumentally helpful not only in promoting increases in agricultural productivity, but also in redistributing income in favour of the lower-income groups. A third initial condition was the unusually helpful intervention of Tai­wan’s main external aid donor in the 1950s and 1960s – the USA – which had three extremely positive manifestations. First, in the 1950s, it helped break the back of the customary early development deficit/inflation syn­drome via budget support. Second, it led to the very helpful announcement, in 1961, to the effect that while the USA would upport the famous Nineteen-Point Economic and Financial Reform Programme through much enhanced programme lending, economic aid would be terminated by 1965. Third, by establishing a structure centred on the Joint Commission on Rural Reconstruction (JCRR)· and farmers’ associations, it provided a useful framework for the promotion of economic democracy in the context of decentralized decision-making, the creation and spread of rural credit facilities, and the dissemination of technological information in agriculture and rural non-agriculture.

Although apparently counter-intuitive, I would add as a fourth favour­able initial condition the overall scarcity of natural resources, which not only forced early attention to human capital and the broad enhancement of human development, but also helped Taiwan to avoid some of the ‘stop-go’policies that have bedevilled many other middle-income developing countries. I return to this below. Finally, I would emphasize the presence of three institutional ingredients, which Simon Kuznets identified as being critical to a successful transition to modern economic growth.

They are secularism, egalitarianism and nationalism. Secularism in Taiwan was by no means confined to the elite; the attitude of ‘stomach first and spiritual values later’ was widespread. Egalitarianism, emphasizing equality of opportunity, was reflected in the com­petitive examinations system inherited from the past, as well as in a pronounced tendency to provide equal access in the workplace and in credit markets.

Perhaps most important of all was the third element, organic nationalism (‘a community of feelings grounded in a common historical past’) – a force that acted as a bonding cement the impact of which, after some initial hiccups, was all the more powerful because of the perceived threat from mainland China in much of the period under consideration. The favourable presence of organic nationalism within a system obviates the prior need to create some kind of synthetic substitute.

As a result, the government is less likely to make promises and commitments that it cannot deliver – to the ultimate detriment not only of the fulfilment of restricted but critical developmental functions, but also of its own credibility. Far from taking place in a vacuum, the policy choices that were subsequently made in Taiwan cannot be separated from the existence f a favour3:ble overall institutional setting. The policy framework The story of Taiwan’s development experience after the 1950s is, in its broad outlines, well known. It embraces the passage through an import-substitu­tion phase during that decade and into the early 1960s, into an export­orientation phase, and on to a science and technology-oriented phase that began in earnest in the 1980s.

Certain specific dimensions of policy pursued during these decades deserve special emphasis because they have con­tributed significantly to Taiwan’s ability to avoid some of the worst effects of the recent East Asian crisis. A critically important, often neglected, part of the success story was the early mobilization of Taiwan’s agricultural sector, which provided the required domestic savings and became the first focus of Taiwan’s export orientation.

The export drive was built on the shift from rice and sugar cultivation to the production of mushrooms and asparagus – non-traditional crops that were much more labour-intensive and susceptible to labour~usingtechnology (for example, the number of working days per hectare per annum increased from 170 in the early post-war period to 260 by the early 1960s). Some 45 per cent of agricultural growth during the 1950s can be attributed to an increase in total factor productivity as a result of govern­ment-supported research and technology-diffusion activities.

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