The Story of Taiwan - Economy

Composed by the Government Information Office in Taiwan:

Preface

Over the years, a number of Westerners have praised Taiwan's rapid economic growth and spectacular achievements as being miraculous in scope, hence the term "Taiwan Miracle." In fact, the transformation of the Republic of China on Taiwan from poverty to prosperity, from backwardness to modern nation, did not occur overnight; nor did its success come as manna from heaven. It has come about as a result of the hard work of the people of Taiwan.

As we look back at the road we have taken over the past half century, both the rough and the smooth serve not only as a warning, but also as an inspiration to overcome the various challenges we will face in the future.

The Story of Taiwan - Economy explores how the originally poverty-stricken Taiwan area has grown into a prosperous society, and how Taiwan will face the new challenges of the future. After first recounting the historical background of Taiwan's economic development and its economic achievements, this essay analyzes this evolution from poverty to prosperity, as well as the environment and conditions under which it occurred. As it examines the changes in government roles and the problems derived from prosperity, it goes on to explain how Taiwan's experience in economic development can act as an inspiration for other developing countries.

The Post-war Era: Picking Up the Pieces

Those who are living comfortably today can hardly imagine what Taiwan looked like after the end of World War II. When the ROC government recovered Taiwan from the Japanese in 1945, the island was in a state of devastation, as destruction from the war could be seen everywhere. Railways, roads, and harbors were basically operating at half-capacity. As a result, outbound transportation was inconvenient and productivity sharply reduced. There was an extremely short supply of basic necessities, and prices were continuously skyrocketing.

In 1945, for example, rice, sugar, and hog production reached only 64, 6.3, and 41 percent, respectively, of the peak yields attained during Japanese occupation. In terms of industrial output, electric power generation was at 40 percent of its peak production level during the Japanese occupation, while coal production fell to 37 percent, fertilizer 32 percent, and steel 17 percent. Also in that year, inflation reached its worst level. The wholesale price index in Taipei, for instance, was 14.5 times greater than in 1942. Everyone suffered.

During the period between Taiwan's retrocession and the central government's relocation to Taiwan in 1949, the population of the island increased greatly. In 1949 alone, around 1.6 million civilians and military personnel emigrated from the mainland to Taiwan. Many of them were unable to find work and had no place to stay. Although grain and industrial output increased slightly during this time, it was still lower than the highest yields of the Japanese occupation.

After the Chinese mainland fell to the communists, contact between the two sides was cut off, causing a shortage of supplies and materials. Meanwhile, panic brought about hoarding and bulk purchasing, which further fueled inflation. By June 1949, the wholesale price index had already increased to 5,599 times the 1945 figure. As currency became worth little more than scraps of paper, everyone was losing hope. In addition to the fact that there were almost no foreign exchange reserves, the United States suddenly discontinued its financial assistance, dealing another major blow to Taiwan's economy. If the ROC government on Taiwan had been unable to resist the military pressure from the Chinese communists, such as during the bombardment of Kinmen, Taiwan would have been under even greater pressure militarily. The government was determined to counterattack, and it tried to continuously boost morale and foster the spirit that any hardship can be overcome. Although these efforts did much to alleviate the shortage of goods and materials, much of the public was still not optimistic about Taiwan's future economic development.

Facing such economic difficulties, the government was forced to look back upon its past mistakes, no matter how painful. It immediately started to work on solving Taiwan's most pressing economic problem, the recovery and development of the agricultural sector. To encourage farmers to increase productivity, which would lay the foundation for agricultural development, the government first proceeded with land reform. It used the achievements in agricultural development to plant the seeds of industrial development. After the Korean War broke out in 1950, the US government resumed its economic aid to Taiwan and assisted in the defense of the Taiwan Strait. This not only boosted morale, but also stabilized the island's economy.

From Poverty to Prosperity

Breaking down the ROC's economic development into two stages will be more insightful.

The Shift from Agriculture to Industry (1952-1980)

In nearly 50 years of development, the ROC's economic structure has undergone gradual reconfiguration, primarily due to international competition and the decline and growth of various domestic industries. Prior to 1962, the ROC's agricultural production contributed more to the gross domestic product (GDP) than industrial production; in 1952, agriculture's share of the GDP was 32.2 percent and that of industry 16.7 percent. However, in 1961, agriculture's share fell to just 25 percent, while the industrial sector's share rose to 23.7 percent. Since 1962, agricultural production has never accounted for the largest share of the GDP.

Thus, Taiwan had an agriculture-based economy up to 1962. Since the country was suffering from a lack of goods, and foreign exchange reserves were low, government economic measures before then came in the form of prohibitions and restrictions. For instance, stringent restrictions were imposed on the import and export of selected commodities. As the private sector lacked economic power, the government commanded great influence in the national economy. The protectionist measures adopted include the following:

• Placing restrictions on the establishment of factories, which safeguarded workers' safety and health, promoted industrial growth, avoided the waste of resources through blind investment, and optimized the utilization of precious resources;
• Regulating the local production of goods to minimize the use of foreign exchange reserves, and to encourage the growth of factories which could manufacture needed components;
• Putting up trade restrictions to protect domestic industrial growth and achieve a balance in international revenues and expenditures; and
• Imposing protective tariffs to raise tax revenues and protect the development of newly emerging industries.

Between 1952 and 1961, more agricultural products and processed agricultural products were exported than industrial products, which demonstrated just how important the farming sector was in generating foreign exchange reserves. Also at the time, the ROC suffered a trade deficit, but this decreased annually. Japan was its largest export market and the US was its major supplier of imports. The top exports, in order of export value, were sugar, rice, tea, bananas, and textiles. Cane sugar alone accounted for 62.37 percent of the total exports of 1957, underscoring the importance of this industry in the early stages of ROC economic development.

During this time, the ROC's economic growth averaged 9.21 percent per annum: agriculture grew 4.24 percent, the industrial sector 12.39 percent, and service industries 9.08 percent. These figures clearly hint at how the industrial sector would rapidly grow to predominance.

In 1962, industrial production value began to exceed that of agriculture. This period has been generally referred to as Taiwan's "industrial era." By 1986, industrial output had climbed to a full 47.1 percent of the GDP.

However, during Taiwan's transformation from an agriculture-based into an industrial-based economy, it encountered a number of socioeconomic problems. The principal issue was the employment of labor no longer needed in rural areas. When the agricultural sector's peripheral productivity fell, the ROC government took the initiative to develop foreign trade and establish export-processing and industrial zones to absorb the excess labor. Since providing employment opportunities for the huge labor force was a matter of crucial importance, the government encouraged the development of labor-intensive export industries. As a result, foreign investment poured in to capitalize on the island's inexpensive labor.

To encourage such development, the ROC government promulgated the Nineteen Financial and Economic Reform Measures in 1959 and the Statutes for the Encouragement of Investment in 1960. The former eased trade restrictions, promoted exports, and encouraged savings and thrifty consumer spending, thereby greatly increasing investment in factories. The latter helped improve the investment environment, attract foreign capital, and encourage the development of export industries.

In 1973, the first energy crisis hit, causing economic recession as well as increased inflation throughout the world. In the ROC, commodity prices soared, as shortages of food and industrial raw materials added fuel to the fire. Although commodity prices did not increase as much during the second energy crisis in 1979 as it did during the first, it still produced an adverse impact on economic growth.

During this time, the government came up with the Twelve Major Construction Projects, which laid the foundation for basic infrastructure and the development of the heavy chemical industry, as well as partly deflected the negative impact from the energy crisis. In addition, to promote foreign trade, the government lifted many trade restrictions, lowered tariffs, set up a unitary exchange rate, and abolished the required permits for remitting money abroad. In 1979, the foreign exchange rate system went from a fixed rate to a floating rate, while controls on interest rates were loosened the next year.

The period between 1963 and 1980 witnessed the most rapid growth in the history of Taiwan's economic development. Despite the adverse effects from the two energy crises, the Republic of China maintained an annual growth rate of 10 percent over these 18 years.

Industrial Growth (1981-1995)

Beginning in the 1980s, drastic economic, social, and political changes took place in the ROC. Relations with the Chinese mainland also developed rapidly. The economy became increasingly open and free from earlier restrictive and protectionist tendencies.

First, in 1984, the ROC government announced plans for the liberalization and globalization of the economy as well as the privatization of government-run enterprises. In addition, interest-rate controls were abolished, tariff rates were slashed, and the central exchange rate was abandoned. To boost industrial development, the government established the Hsinchu Science-based Industrial Park in 1981. Three years later, a strategic scheme for industrial development was promoted, and, in 1990, the Statutes for the Encouragement of Investment were allowed to expire. In 1991, the Statutes for Industrial Upgrading were adopted. Due to the rapid growth of trade and a sharp increase in trade surplus, ROC foreign-exchange reserves reached the US$70 billion mark by 1987. However, a lack of other appropriate channels for the investment of personal savings resulted in the uncontrollable growth of the stock market toward the end of the 1980s. As land prices soared and underground money brokers and gambling became rampant, the bubble economy finally burst in 1990.

The massive trade surpluses led to a rapid accrual of foreign exchange assets and a sharp appreciation of the New Taiwan Dollar against the US greenback, thus lowering Taiwan's competitiveness. Many small and medium-sized enterprises with labor-intensive operations were unable to keep their foothold in Taiwan and relocated to Southeast Asia or the Chinese mainland, seeking new business opportunities and room to expand.

The greatest changes in the structure of Taiwan's industrial sector took place in the 1980s. Labor-intensive industries were no longer the mainstay of the industrial sector and were slowly being replaced by technology- and capital-intensive industries. This transformation of Taiwan's industrial structure stemmed in part from global economic trends at that time. The government's plans for technological development toward the end of the 1970s, which led to the establishment of the Hsinchu Science-based Industrial Park in 1981, also played a hand in this transformation.

In the 1980s, all Southeast Asian countries, such as Indonesia, Malaysia, and Thailand, delved into developing their economies, tapping cheap and thus profit-yielding domestic work forces to develop labor-intensive industries and then heading straight for the world market. Meanwhile, the competitiveness of many of Taiwan's labor-intensive industries eroded as the New Taiwan Dollar suddenly appreciated and wages rose sharply. This forced some industries to upgrade technical standards at a faster pace than originally planned. More importantly, the Hsinchu Science-based Industrial Park enticed many highly skilled overseas Chinese into returning to Taiwan. They used their technological expertise to develop the electronics and information industries, which, in turn, helped enormously to change Taiwan's industrial structure.

The transition of Taiwan's industrial sector from light to heavy industries is quite apparent: In terms of production value, the ratio of light industries to heavy chemical industries, respectively, was 51.52 percent to 48.48 percent in 1986. In 1995, the output of the light industries dropped to only 33.63 percent, while the heavy chemical industries' share rose to 66.37 percent. Heavy chemical and technology-intensive industries have been occupying a growing share of the total value of manufacturing output; in 1986, they accounted for 59.65 percent of the total, while in 1995 the figure was 73.26 percent. Meanwhile, export figures also reflected this growth. Heavy chemical and technology-intensive industries accounted for 54.9 percent of the total value of exports in 1986, and 69.9 percent in 1995.

The year 1987 was very important politically in the ROC. The Emergency Decree was lifted, and a myriad of social movements erupted as workers, environmental protectionists, consumers, and farmers voiced their demands. Needless to say, political protests spread like wildfire. These events had a detrimental effect on the investment environment, causing some businesses to relocate overseas.

That year also marked the beginning of civilian contacts between Taiwan and the Chinese mainland. In 1987, the ROC government announced that Taiwan residents could visit their relatives on the Chinese mainland, an event that led to growing private exchanges between the two sides. By 1996, Taiwan's business sector had invested US$6 billion on the mainland, according to the ROC's official records. However, according to Peking's statistics, the figure surpassed US$20 billion.

Investments in the Chinese mainland by Taiwan's private sector spurred cross-strait trade. This sharp increase of exports to the Chinese mainland since 1990 has decreased Taiwan's dependence on the US market. For instance, over the last three years, Taiwan has registered trade surpluses with Hong Kong: this surplus amounted to US$19.73 billion in 1994, US$24.26 billion in 1995, and US$25.1 billion in 1996. A major part of the exports were actually destined for the Chinese mainland through Hong Kong.

In the second stage (1981-1995) of Taiwan's economic development, the annual growth rate dropped to 7.52 percent from the near 10 percent average seen over the preceding 18 years (1963-1980). This mild slowdown was perhaps a natural consequence of structural changes in the nation's industrial sector. However, political and social transformations were also partly to blame.

During this period of time, the agricultural sector had the lowest performance, with an average annual growth rate of a mere 1.24 percent and a GDP share of 4.74 percent. The average annual growth rate of the industrial sector was 6.46 percent, far below the 14 percent of the preceding 18 years; its GDP share dropped to 43.16 percent. The service sector, meanwhile, experienced the highest growth rate, with an average of 9 percent per annum. The sector's GDP share rose to 51.67 percent, far above that of the industrial sector.

Between 1952 and 1995, the ROC set economic performance records in comparison to other countries around the world by attaining an average annual economic growth rate of 8.63 percent. Nevertheless, the fact that its economic growth rate had been declining was undeniable. Over a period of 44 years (1952-1995), agriculture in Taiwan grew at an average rate of 3.64 percent per annum, exceeding the natural population growth rate. In the second stage (1981-1995), agricultural growth was affected not only by decreased productivity, but also by a "counteroffensive effect" resulting from the destruction of the ecological environment. A drop in the industrial sector's growth rate to 10.37 percent, intense international competition, rapid change in the domestic industrial structure, and a deteriorating social environment have all been factors in its declining economic growth rate. Meanwhile, the service sector, by being closely related to the industrial sector and enjoying an annual growth rate of 9.05 percent, has become a major force behind Taiwan's economic growth over the past several years.

Elements of Success

In the early stages of the ROC's economic development (the 1940s and 1950s), Taiwan's society and economy were in a precarious state. Everyone lived a hard life, and the island's future was bleak and uncertain. How then did Taiwan manage to become prosperous, going from rags to riches, by the 1980s? Let us take a look at the factors which led to the island's prosperity.

External Environment

After the Second World War, two common phenomena impeded many developing nations from economic growth:

Communist organizations infiltrated and instigated revolts in many developing nations. Those that succeeded overthrew the old governments and established new regimes. Since these new regimes adopted planned economic systems, their economies in most cases were stagnant. Revolutionaries who failed continued their insurgence. No one could live in peace, let alone engage in economic development.

Colonized nations demanded independence one after another. As they strove for independence, most underwent a long period of incessant war and unrest. Even if successful, they lacked governing experience and factions sought personal gains, causing infighting and power struggles as well as widespread human catastrophe. Such struggle only rendered them more incapable of fostering economic development.

Most developed nations had risen from the ruins of World War II within ten years of its conclusion. Even nations such as Japan and West Germany, which were defeated, regained their vitality and became active on the world stage. Meanwhile, Great Britain and the United States emerged as two of the wealthiest nations of the world. In such an environment, international competition was not severe, and in general the industries of developed nations were not threatened by overseas commodities. Therefore, these nations were more open and more inclined toward free trade.

It was at this point that Taiwan's economy began to take off. The export of commodities went smoothly, and manufactured products always had a market. In addition, Taiwan met almost no competition on the international market, as Korea did not enter the scene until the late 1960s. Under such favorable conditions, Taiwan's foreign trade took off by leaps and bounds, fueling high economic growth.

Domestic Conditions

A favorable external environment is no guarantee for economic growth, as domestic conditions are of equal importance. Overall, Taiwan enjoyed the following conditions: a stable and harmonious society; a universal and continuously upgraded system of compulsory education; a frugal and hard-working population; the correct developmental strategies and measures; and a responsible government.

1. Social Stability and Harmony

Taiwan society settled into stability after 1950. Everyone had the common goal of "seeking survival and development," and competitive spirit was thus instilled in the whole society. With the cross-strait situation very confrontational, all citizens were especially willing to work together wholeheartedly for the nation's development. It is therefore little wonder that Taiwan was able to recover so quickly from the ravages of war; only with a stable society could the people rest at ease and go on to reconstruct the nation.

2. Education for All

A solid academic foundation helps immensely for absorbing new ideas and coordinating government policies. Prior to the 1970s, the people of Taiwan were required to attend at least six years of school. Since science and technology improved as the economy grew, the government extended compulsory education to nine years in 1968. Meanwhile, additional technology and vocational colleges were established to meet the needs of an industrial sector that was being continuously upgraded.

3. Thrifty Habits and Hard Work

A society that isn't frugal cannot save money, and money that isn't saved cannot be used as capital for investment. Many nations are either unable to accumulate saving or have a relatively low rate of savings. Thus, they have little capital to invest in production and carry out economic development. Luckily, the majority of the people on Taiwan are frugal and hardworking. Prior to the 1980s, in order to improve their standard of living, many people had two factory jobs and were more than happy to work overtime during holidays and weekends to earn more money. In the 1980s, the savings rate climbed as high as 40 percent. While consumer habits have changed somewhat over the past few years, the savings rate remains above 26 percent.

4. Strategic Economic Planning

There is nothing worse than poor decisions in government planning. This can be seen by comparing economic strategies and the results of their implementation. Bad strategies result in the economy's failure to develop and the impoverishment of the people. Like a ship sailing in an ocean, a wrong turn will not only get it lost, but will also probably trap it in dangerous waters. Many nations possess abundant natural resources, yet their economies are not developed. The root of this failure lies in not having the proper strategies and wasting precious resources without achieving the expected results. We can evaluate the ROC's strategies for development from this perspective. While some measures may achieve the expected results in the early stages of implementation, they may be implemented for too long without regard for changing times. This also will result in many adverse effects.

4.1. Market Economy Magic

After the Second World War, governments with communist and socialist philosophies adopted centrally planned economic systems. They believed that a nation's ruler could control and coordinate "production quantity," "market behavior," and even "consumer taste." These governments confiscated land and abolished the system of private property.

The market economy, on the other hand, is a completely opposite system based on the assumption that competition is the driving force of progress. Private property serves as a primary foundation. Since resource distribution is determined by market forces, resources are not wasted and efficiency isn't adversely affected. The Republic of China opted for a market economy. In the early stages of economic development, the government did set up many regulations and even a rationing system (confined to military, civil, and educational personnel). However, in the later stages of development, the number of regulatory measures was lowered and the rationing system was gradually abolished by the end of the 1970s. In the 1950s, it was hard to tell which economic system was better, but by the 1970s all became clear. Almost all centrally planned economies had stagnated, while nations with market economies advanced from developing to developed status. Moreover, the general public had the freedom of choice

4.2. Agriculture as Springboard for Industry

In the 1950s, Taiwan's economy was heavily dependent on agricultural production. Agricultural production accounted for more than 30 percent of the GDP, while industrial production made up a mere 20 percent. Under such conditions, Taiwan first developed the agricultural sector in what came to be known as the strategy of "fostering industry through agriculture, while supporting agriculture through industry." In the 1950s, land reform in the agricultural sector significantly boosted both farm production and income. High agricultural yields provided for the island and surpluses could be exported. The foreign exchange generated by such exports was used to purchase raw materials, machinery, and equipment for the industrial sector. With exports looking bright, traditional agricultural crops were often replaced by high-value crops. Exports of agricultural surplus then became exports of processed agricultural goods.

4.3. An Open Door to the World

A closed economy means self-sufficiency and self-reliance. In times of war, the ROC could not help but isolate itself, because it was surrounded by the enemy. However, in peacetime, a closed-door policy would stop the ROC from gaining a foothold in the world market and adjusting production and consumption. It would also block the flow of new ideas into the country and prevent Taiwan from keeping up with the times.

In the early stages of Taiwan's modern economic development, the government decided to promote trade, as Taiwan's resources were extremely limited and the island was ill-suited for self-reliance. However, to make the best use of these limited resources, Taiwan implemented many regulatory measures. In addition, the government adopted certain protective measures to protect the development of emerging and traditional industries in Taiwan. Due to rapid economic growth and international pressure, these regulative and protective measures were gradually narrowed in scope. By the 1980s, the government advocated economic liberalization and globalization and thereby greatly opened up Taiwan.

4.4. From Labor- to Capital-intensive Industry

Whether to first develop labor-intensive or capital-intensive industries was a hot topic in the 1950s. Many developing nations first developed capital-intensive industries, but by the 1980s their economies were still lagging behind and in poor condition. Since Taiwan's private sector lacked capital and job opportunities in the 1950s, the government chose to encourage the development of labor-intensive industries. As labor was the most readily available factor of production, these industries developed rapidly. However, by the late 1980s, Taiwan's labor force had gradually lost its comparative advantage.

4.5. From Light to Heavy Industry

Heavy industries are typically upstream industries, while light industries are usually downstream. In general, light industries produce goods for daily use, and perhaps can be referred to as industries for daily life. In big countries, these two types of industries must work closely together and must be equally valued. Small nations face more difficulties if they develop heavy industry in the early stages of economic development, as it not only requires a large amount of capital, but also faces direct competition from abroad. Light industry does not require large-scale investment and can be set up by the private sector, assuming it has the economic means. At first, Taiwan's private sector almost exclusively developed light industry. It wasn't until the latter half of the 1970s that the private sector tried its hand at heavy chemical industry. For Taiwan, the decision to first develop light industry was the right one.

5. A Responsible Government

While the preceding four conditions are essential for economic development, without good government the criteria for development are still incomplete. Over the past 40 years, the government has played a very important role in Taiwan's economic development. Before the 1980s, the government had the power to maintain a stable and secure society and a good state of law and order, all in the face of a strong enemy. It is understood that this was a necessary condition for attracting investment and for sustaining a good living environment. From the 1980s onward, the government's authoritarian style was gradually replaced by legislative politics. Legislative politics went through a period of "learning to walk," occasionally "tripping over itself." Perhaps this must be suffered by every country that walks down the road of democracy. In any case, it influences the various aspects of economic development.

People and Government Working Together

When reviewing the magnificent achievement of Taiwan's economic development, we discover that there are some important factors outside the government's timely adjustment of its role. These include economic growth fueled by the diligence of ROC nationals, and the industrial sector's fearless pursuit of industrial development and foreign trade.

The Power of the Industrial Sector

With a diligent labor force and high adaptability to market changes, the ROC's small and medium-sized enterprises normally have been able to rely on their own capabilities and explore resources and markets throughout the world. They have therefore been able to shoulder the great responsibility of being at the forefront of foreign trade. In the initial stages of economic development, countless small and medium-sized enterprises sprang up in export processing zones, on the outskirts of urban areas, and near farming villages. By the end of the 1970s, they constituted over 98 percent of all the ROC's businesses and accounted for 75.1 percent of total exports.

The emergence of small and medium-sized enterprises is closely linked to the government's economic, social and educational policies. Of these, the "land-to-the-tiller" land reform program implemented in 1953, the Statutes for the Encouragement of Investment enacted in 1960, the nine-year compulsory education program adopted in 1968, and the Ten Major Construction Projects launched in 1973 have created an environment that is highly conducive to the development of small and medium-sized enterprises. The ROC government has maintained greater latitude in its economic measures than those of other developing nations. As a result, there was more inclination to work industriously for personal benefit and make efficient use of Taiwan's limited resources.

Positive factors related to traditional culture have also played a vital role in the development of small and medium-sized enterprises. Influenced by traditional social standards, most people prefer to start their own businesses and put their talents to use. Since most small and medium-sized business owners enjoy much decision-making power, they possess a vigorous and enterprising spirit. They are prepared to work hard for their money and not afraid to take great risks to expand their operations. As a result, quite a number of small businesses have developed into large enterprises.

Although traditional cultural factors have served to boost Taiwan's small and medium-sized enterprises, one cannot overlook how the overall economic environment has had a positive impact on their establishment. In the 1950 s, the relatively small capital requirements and an abundant supply of labor meant that most small and medium-sized enterprises were light industries. Due to growing international competition in recent years, however, the versatile small and medium-sized enterprises have gradually shifted from labor-intensive to technology-intensive operations.

A People Undaunted by Hardships

The Chinese people are industrious, frugal, and not afraid of hardship. Equal opportunity to receive an education has allowed them to apply their talents and wisdom. Furthermore, a free environment with a level playing ground has also allowed the Chinese people to use their talents and wisdom to the fullest extent.

The development of human resources has greatly compensated for Taiwan's lack of natural resources. At the economic policy-making level are a group of experts on economics, finance, and technology who contribute their wisdom for the recovery and development of the ROC's economy. In the private sector are highly capable, accomplished and far-sighted entrepreneurs who are prepared to work hard for their businesses and who strive and make sacrifices for the ROC's economic development. Indeed, the rising standards of education have to a large extent met the needs of industrial upgrading. Between the 1950s and the 1970s, the average worker received six years of basic education. By the 1980s and 1990s, the ROC has shifted from low-tech to hi-tech production. Industrial transformation has been made possible by a nine-year system of vocational education, while education at the university level and above has contributed to the rapid takeoff of the island's electronics and information industries.

Government: From Babysitter to Mentor

Many economists believe that the less a government interferes in the economy, the better. They say that at most, a government should adopt corrective measures only when a market became highly unstable. In quite a few nations where economic development is advanced, democracy is already well-established, and the government's role clearly designated, this belief is being put into practice.

However, in general, developing nations are not like their advanced counterparts. Since a government exercises direct influence over a nation's economic development, it can make or break the economy. The role of the ROC government has changed along with advances in the nation's economic development, the general level of education, and the arrival of full democracy.

From the 1950s to the 1960s, the government assumed the role of an economic babysitter. As such, the government usually approached problems related to industrial development from the protectionist angle, while solving such problems in an equally controlling fashion.

For instance, in the 1950s, the government employed US aid to steer the course of industrial development, such as that of the textile and milling industries. In addition, it distributed limited foreign exchange reserves to those industries that were capable of exporting, just as it protected the domestic auto industry from international competition by levying import tariffs at a rate of over 100 percent. In the 1960s, the government influenced the direction of investment from the private sector by enacting the Regulations for the Encouragement of Investment (REI).

By the 1980s, Taiwan's economy had achieved considerable success, with private enterprises sprouting up in large numbers. The government's grasp of the international market was nothing compared to that of the private sector. This fact rendered REI less attractive to investors. At the same time, the utilization of the export processing and industrial zones set up by the government was also on the decline. Private enterprises wanted the government to loosen up regulations and provide a better investment environment. However, economic planning at that time only targeted government agencies and state-run enterprises, and not the private sector.

Under such circumstances, the government had to adjust its role, from that of babysitter to mentor. As mentor, it could provide private enterprises with information on economic growth and technology as well as assistance in training personnel. In the 1990s, the private sector is now no longer so concerned with incentives created by government financial and monetary policies. Instead, companies hope that the government will furnish a healthy investment environment and regulations which conform to the times and are efficiently implemented.

Economic Policies

Prior to 1990, the government implemented four-year economic plans, which gave it power over public agencies but not the private sector. The plans therefore served largely as "indicators." In this way, the government could control state-run enterprises and public investment while supervising those private industries receiving government assistance and guidance.

1. State-run Businesses

Some of the ROC's state-run enterprises were inherited from the Japanese upon Taiwan's retrocession, and some were established to further develop the economy. During Taiwan's economic development, state-run enterprises have served the following functions:

• Financial: these enterprises have been required by the government to pay a certain amount of their profit as a form of indirect taxation;
• Economic: the government has created production incentives for the private sector by setting up price scales. For example, electricity for industrial use is the cheapest, while that for commercial use is the most expensive;
• Societal: the government provides the public with cheaper services and facilities, such as transportation and medical care.

The output of state-run enterprises accounted for 57 percent of the total industrial production value in 1952. However, this share decreased to 20.9 percent in 1980 and shrunk further to 18 percent in 1990. Since state-run enterprises are often monopolistic and inefficient, they have often been the target of public criticism. The government, therefore, has decided to privatize them over the next few years.

2. Public Investment

Just after Taiwan's retrocession, the average person earned little and private enterprises were still small in scale, and thus the private sector was not interested in bidding on public construction projects. The government has therefore taken the initiative. Since the 1970s, the government has launched a series of large-scale public investment projects: the Ten, Twelve, and Fourteen Major Construction Projects; the Six-Year National Development Plan; and the Twelve Economic Construction Projects. These projects have primarily involved the construction of the ROC's infrastructure, such as airports, railways, highways, ports, and new cities and towns.

3. Revision of Laws

Social order and trade transactions should be regulated by law, and it is the government's responsibility to enact and administer these laws properly. Prior to 1980, the government administered the laws quite strictly, resulting in a high level of public and economic order. However, in the 1980s, government authority weakened in the face of the challenges brought by heightened democracy and political opposition. Due to rapid social change, existing regulations and laws became outdated and urgently needed an overhaul. Yet, before new laws could be instituted, societal disputes had already started to spring up in many areas. The government was hard pressed to formulate laws to solve these disputes and achieve economic breakthroughs.

4. Incentives and Guidance

The government failed to supervise protected industries with the result that they remained unable to compete in the international market. In the initial stages, the government's policy to reward and guide these industries did achieve positive results, but these results gradually wore off over the course of a decade. More importantly, some incentives eventually began to backfire. Some people pretended to engage in export to take advantage of export tariff returns and government subsidies. Meanwhile, many private enterprises, without receiving any government assistance, grew to be export leaders in Taiwan by breaking new ground.

The Fruits of Economic Development

The ultimate goal of economic development is to elevate the standard of living. Economic development usually includes three parts: economic growth, distribution of wealth, and quality of life. Generally speaking, not only has Taiwan achieved great results in all these three aspects, but it has also done quite well according to other economic indicators. For example, it has enjoyed a mild inflation rate, low unemployment rate, and has accumulated vast foreign-exchange reserves with almost no foreign debt. A prosperous society has been firmly established. It could be fairly stated that the number of countries today which possess all of these outstanding characteristics are few and far between.

Rapid Growth and Equitable Prosperity

The first stage of Taiwan's economic development extended from 1952 through 1980. During this period, Taiwan averaged an annual economic growth rate of 9.21 percent, which at that time was the highest in the world. Since 1962, agriculture lost its key position as the driving force behind Taiwan's economy, making way instead for the rapidly developing industrial sector. During this time -- with the exception of two energy crises in 1973-1974 and 1979-1980 -- Taiwan's industries maintained an average annual growth rate of around 14 percent.

The second stage of Taiwan's economic development ran from 1981 through 1995. During this period, both the world economy and economic conditions within Taiwan itself underwent great changes; combined, these external and internal forces exerted a rather detrimental effect on Taiwan's economic development, slowing the growth of the economy to a low of 7.52 percent. During this time, the focus of Taiwan's economy slowly shifted from the industrial sector to the service sector. Meanwhile, the agricultural sector grew a mere 1.24 percent annually; thus, its GDP share continued to diminish.

Due to a combination of limited natural resources and high population density, Taiwan is not self-sufficient. Hence, foreign trade has come to play a leading role in the country's economic development. The development of foreign trade and the increase of foreign investment are the driving force behind Taiwan's industrial sector, which in turn fuels development in the service sector. From 1952 through 1980, the annual growth rate of commodity and labor exports averaged 16.5 percent, while local demand grew an average of 10.97 percent per year. During the second stage of economic development, the commodity and labor exports grew 10.05 percent per year, while local demand grew 7.51 percent. From these figures we can see quite clearly the importance of foreign trade to Taiwan's economic development.

Despite the fact that the average economic growth rate declined between the two stages of economic development, the average economic growth rate overall from 1952 through 1995 was still 8.63 percent. Such an astonishing rate of growth has seldom been seen in other countries.

Of course, whether the results of rapid economic development will be enjoyed by a select few or by everyone is a major concern for many. In other words, has the high economic growth rate narrowed the gap in the distribution of income, or widened it?

Two methods are often used to evaluate how evenly a country or society's income is distributed. The first method is the Gini coefficient. A small coefficient means a fairly equitable distribution of income, while a large coefficient signals inequities. The second method involves dividing all income-earning households into five groups according to the amount of income earned. A ratio is then calculated by comparing the income of the top fifth with that of the bottom-fifth earners. The higher the ratio, the more unfairly the income is distributed.

In 1964, the Gini coefficient for Taiwan was 0.321. This figure fell to 0.277 in 1980, indicating that the distribution of income had improved in step with Taiwan's advancing economic development. However, since 1981, the Gini coefficient has been slowly increasing. By 1995, the coefficient had reached 0.317.

By using the second method, a similar trend in the distribution of Taiwan's wealth can be seen: in 1964, the income ratio between the top fifth and the bottom fifth was 5.33. It declined to 4.17 times in 1980 but then increased annually from 1981 to 1995, when it reached a high of 5.34. Examining the reasons for the reversal of these figures yields several causes:

• In 1986, the price of real estate began to skyrocket. Those lucky enough to own land or property suddenly found themselves members of the rich upper class almost overnight. Members of the middle class who did not own any land or property discovered that, even if they saved money for their entire lives, they would still find it difficult to purchase a home.
• Large households were slowly broken down into groups of smaller households. Since both of the aforementioned methods of evaluating income distribution use the number of households as the basis for their calculations, an increase in the number of small families had an adverse effect on how income appears to be distributed.
• As industries became more technologically advanced and knowledge-intensive, demand for those with specialized skills and a higher level of education also increased. Thus, those who possessed such expertise could often command a higher salary than those who did not.

These three factors are the main reasons why the disparity of income distribution has been increasing for the past 15 years (see Table 1 and Chart 1).

Mild Inflation and Low Unemployment

Mankind has always viewed inflation as public enemy number one. Indeed, inflation is a matter of concern in countries throughout the world -- not only because of its unfavorable effect on a country's competitiveness, but even more so because of the negative impact that it has on the standard of living and distribution of income.

During the early stages of Taiwan's economic development following the relocation of the central government, the aftermath of several wars and an overall lack of basic necessities drove the inflation rate up very high. Afterward, though, with the exception of two energy crises from 1973 to 1974 and from 1979 to 1980, inflation in Taiwan has been moderate. For example, between 1953 and 1980, the consumer price index rose at an annual rate of 7.95 percent, whereas the wholesale price index averaged an annual increase of only 7.14 percent. If the four years of energy crisis are excluded, the consumer price index rose only 5.39 percent annually, and the wholesale price index increased by a mere 4.3 percent per year.

From 1980 to 1995, the inflation rate in Taiwan was even lower. In fact, it could be termed a period of mild inflation. During this period, the consumer price index averaged an annual increase of 3.35 percent, and the wholesale price index averaged an annual increase of a mere 0.24 percent. On average, from 1952 through 1995, the consumer price index went up annually by 6.34 percent and the wholesale price index by 4.79 percent (see Table 2).

Many countries struggle to keep unemployment down, or are already suffering from high unemployment that refuses to drop. Fortunately, with the exception of 1950, Taiwan has not had a serious unemployment problem. This is mainly because exports from Taiwan have always been strong. Moreover, labor-intensive export enterprises have provided jobs to large numbers of unemployed people from both rural and urban areas. Before 1970, the unemployment rate in Taiwan stood above 3 percent; since then, the rate has been steadily dropping. In fact, during the latter half of the 1980s, it dropped below 2 percent and a labor shortage emerged, forcing Taiwan to begin employing foreign laborers. Again, such a low unemployment rate was a phenomenon rarely seen in the world (see Chart 2).

Money in the Bank and No Debt

Foreign-exchange reserves accumulate when a country's exports exceed its imports (i.e., when there is a trade surplus). Between 1952 and 1980, Taiwan for the most part imported more than it exported, enjoying a trade surplus for only eight of those years. From 1981 to 1995, however, Taiwan has enjoyed a continuous trade surplus. In fact, in 1985, exports accounted for about 20 percent of Taiwan's total GNP. By 1995, accumulated foreign-exchange reserves had already reached US$100 billion. Foreign-exchange reserves have decreased slightly since then, but by the end of 1996, they still amounted to US$85 billion -- a truly outstanding accomplishment, especially considering Taiwan's small size. In fact, Taiwan has been one of the world's largest foreign-exchange reserve holders, and was second only to Japan for many years.

Taiwan's ability to maintain an almost continuous trade surplus in recent years is a result of the government's policy of encouraging exports and limiting imports. Such significant foreign-exchange reserves have the following special implications for Taiwan:

• Since the ROC is no longer a member of the United Nations nor a participant in the World Bank, it needs to have the large foreign-exchange reserves to demonstrate its credibility.
• Although the number of countries that have official diplomatic relations with the ROC are few, more than 100 nations have established trade and cultural ties with Taiwan. Thus, having extensive foreign-exchange reserves helps demonstrate that Taiwan commands solid financial power.
• Lastly, having large foreign-exchange reserves guarantees Taiwan's domestic security; should any crisis occur, Taiwan knows that it has to fend for itself without having to rely on foreign loans.

On the other hand, having excessive foreign-exchange reserves could have some harmful consequences for the entire economy. For example, during the latter half of the 1980s, Taiwan suffered from a financial crisis and bubble economy. At the same time, Taiwan's excessive trade surplus caused the New Taiwan Dollar to appreciate drastically, reducing the competitive edge of Taiwan's exports and forcing many labor-intensive industries into the "sunset" stage.

By the end of the 1980s, the United States had already become the number one debtor nation in the world, despite its outstanding economic achievements. Meanwhile, the ROC has not accumulated much foreign debt. In 1986, the ROC's foreign debts stood at roughly US$4 billion; however, by 1987 this figure had already been reduced to US$1.4 billion.

The Dawning of an Affluent Society

Since the beginning of time, all able and virtuous rulers have endeavored to create prosperity for their people; however, few have actually succeeded. After 40 years of hard work and struggle, it could be said that Taiwan achieved this as early as the end of the 1980s (see Chart 3).

In Taiwan today, a full 85 percent of people own their own homes. In terms of major home appliances such as television sets and telephones, Taiwan has almost reached the same level as England and the United States, with just about every single household possessing such luxuries. The number of households in Taiwan that own automobiles and personal computers is also rising, and is expected to reach the level of the developed world in less than ten years. Finally, between 1995 and 1996, the number of trips abroad amounted to more than 26 percent of the total population of Taiwan (see Chart 4). This figure is comparable to that of others.

The Taiwan Experience

The economic development experience of the United States has already had a great impact on the rest of the world. Japan, too, has made a mark with its post-war economic development. Indeed, Japan's development has not only been emulated by many developing countries, it has also gained a great deal of respect and notice from the US itself.

So what about Taiwan's economic-development experience? Does it deserve the attention of the developing nations of the world? Overall, while it is widely acknowledged that the US is a nation with abundant resources, it has little experience struggling through times of extreme hardship and poverty. And Japan, despite its considerable experience with management and administration, is hardly a suitable model for developing nations to emulate in terms of its developmental tactics and strategies. Taiwan, on the other hand, is an island of limited natural resources. Furthermore, the numerous hardships and struggles that were overcome to rebuild its war-torn economy are apparent. Therefore, many areas of Taiwan's economic-development experience are worth the examination of developing nations.>

Adapting Western Models

Many developing nations after the Second World War have indiscriminately copied Western development models without first making modifications. Some countries tried to emulate the political and economic systems of the US, but few have succeeded. The numerous failures stemmed from the fact that the majority of these nations, in their efforts to simulate the US model, did so by ignoring their own historic and cultural backgrounds, as well as their own unique political and social environments. Taiwan's economic development differs from that of the United States, Japan, Korea and Singapore. Thus, when Taiwan first drew up its economic plans and policies, although it did refer to a number of Western patterns, in the end it developed a pattern uniquely its own.

Comparative Advantage

Every nation has its own strengths and weaknesses that need to be explored and recognized. Once found, the accepted rule is to try to take advantage of the strengths and make up for the weaknesses. Afterward, on the basis of one's strengths, the principle of comparative advantage can then be applied. Taiwan's strength lies in its manpower, which is characterized by great diligence and a system of universal education. Over the past four decades, Taiwan has effectively used its labor force to not only overcome the disadvantages imposed by its lack of natural resources, but also to maintain a high degree of economic growth.

Human Resources

The main factors contributing to economic growth include labor, capital (land, raw materials, and machinery), technology, and management. Outstanding manpower not only can produce improved techniques and efficient management, it can also bring about the accumulation of capital. Thus, the world has seen many nations endowed with abundant natural resources which have not turned out to be wealthy countries. At the same time, many nations with scarce natural resources have not turned out to be of any insignificance either, simply because of their unfavorable natural environment. Israel and Singapore, for example, possess limited natural resources, yet they have been recognized worldwide for their economic achievements. In this regard, Taiwan has proved that the key to success lies in human resources, and not just natural resources.

Peace and Stability as Magnets for Investment

When a nation's people are constantly bickering and fighting amongst themselves, political an d social instability is the result, and the country loses its appeal as a site for investment. Under these circumstances, not only will foreign investors be apprehensive about investing in the country, domestic capital will also abandon the country to find safer havens outside.

Labor-management Harmony

The successful development of any business enterprise depends upon close cooperation between labor and management. Workers need to be provided with reasonable wages and a suitable working environment; management requires an industrious work force with high productivity. Satisfying the requirements of both of these parties is the basic foundation for cooperation between the two sides. Indeed, a harmonious relationship between the two is essential for maintaining a high level of productivity. If the productivity is low, the competitiveness of the enterprise will decline and the enterprise's very existence will be threatened.

Before the Emergency Decree was lifted in 1987, labor-management relations in Taiwan were relatively smooth. However, after it was lifted, people became too focused on struggling for their own interests, and disputes between the two sides began to appear one after another. In the face of such difficulties, many entrepreneurs often opted to move their businesses abroad for development. Once they had chosen to do so, domestic workers began to lose job opportunities. Therefore, a harmonious labor-management relationship is not only beneficial to the two parties involved but also for the sustainable development of the country.

Environmental Protection

Rapid growth of industry often leads to over-exploitation of the natural environment, as evidenced in pollution and ecological devastation. Twenty years ago, Taiwan completely neglected the problem of pollution and established many highly polluting industries in order to increase employment and encourage exports. Now people have begun to realize the severity of the pollution and its damage to health. Therefore, in recent years, the ROC government has invested large sums of capital in an attempt to protect and save the environment. Unfortunately, trying to restore polluted areas is not an easy task. Hopefully, other developing nations will learn from our mistakes.

An example of over-exploitation is groundwater: Either for increased production or for recreational usage, excessive groundwater is often pumped, causing flatlands to sink. Mountain slopes have been damaged, leading to environmental destruction and soil and gravel run-offs. Like pollution, once the damage is done, it is difficult to restore the land. Farmland flooded by sea water as a result of subsidence, for example, is often irrecoverable.

Cultural Promotion

The "wealth" that is brought by economic development is often the cause of many social problems today. The inequitable distribution of wealth, extravagant and wasteful lifestyles, the spread of prostitution and illegal drugs, the increase in robbery and violent crime, and the rise in the number of broken homes are just a few examples. In recent years, Taiwan has also contracted some of these social ailments. Therefore, rapid economic development must be accompanied by a strengthening of social mores, as well as a raising of cultural awareness.

In this regard, the educational system and mass media must both shoulder greater responsibility. Close coordination in education at home, in school, and in society is a must. As for the mass media, its ability to transcend almost all boundaries makes it an even better tool for improving the social atmosphere. If social ailments are not treated early enough, they will erode the foundation of the economy and make sustained economic development impossible.

New Challenges

The Problem with Prosperity

By the 1980s, Taiwan had completely shaken off its poverty and entered the realm of prosperity. Many of Taiwan's entrepreneurs remained as cautious and attentive as before and continued to work diligently. As a result, Taiwan's domestic economy began to expand outward and develop overseas, while traditional industries began to evolve into new areas. Nevertheless, a number of people harbored dreams of "getting rich overnight," indulged in the pursuit of money, or sought personal gain through shady transactions. This resulted in many adverse effects, and the following phenomena:

• The "Nouveau Riche" Mentality: When poor people suddenly find themselves rich, it is very easy for them to become caught up in a "nouveau riche" mentality. They often fall prey to material comfort, profiteering, speculation, squandering without restraint, and gambling. Some will even go so far as to rely on activities held under the guise of religion in order to get rich quickly and fulfill their desires.
• The "Free Lunch" Mentality: Growing up in a wealthy, affluent environment, Taiwan's youth today know little about the difficulties and hardships of establishing a business, and instead are more concerned with material comfort. They usually cannot comprehend the hard, pioneering life of their elders, nor the fighting spirit that was needed to survive. The most worrisome aspect of this mentality is the deterioration of family relations. The struggle and sacrifice that parents endured to bring up their children are often unappreciated and un-recorded by their offspring. In the West, these problems are alleviated by numerous welfare programs to aid the elderly; in Taiwan, where the welfare system for the elderly has yet to be completed, a large number of old people find that they have no one to rely on but themselves.
• Neglecting the Work Ethic: The warning light is flashing for the work ethic in Taiwan. The problem manifests itself in two phenomena: In the manufacturing sector, recruitment for low-paying white-collar positions often draws a large number of enthusiastic responses, whereas many blue-collar positions, despite the higher wages, face a constant deficit of applicants. Furthermore, many workers in the manufacturing sector not only show a lack of interest in working overtime, but they often refuse to speed up work to meet deadlines. These two phenomena have had a great impact on Taiwan's competitive edge.

If the above problems are not eliminated, economic development will lose momentum. Resolving these problems depends on both education and the government's attitude. If a good education can be successfully carried out, and if the government can set a good example by enforcing the rule of law thoroughly and pragmatically and expanding its horizons, then Taiwan's economic development can be maintained.

Challenges on the Economic Front

Taiwan's market is already striding toward liberalization and globalization. Although many other factors can also influence market production, a good investment environment is definitely a prerequisite for the development of resources for production. In light of this, Taiwan faces a number of major challenges:

• Taiwan has already lost the comparative advantage of inexpensive labor. Henceforth, Taiwan will have to rely on the continuous improvement of technology, skills, and techniques in order to win the competition. If these improvements are not made, Taiwan will be unable to compete with other developing nations. Only when these improvements are implemented will Taiwan be able to take advantage of its lower labor costs and compete effectively with the developed nations.
• The development of the agricultural sector has already encountered trouble from both within and without. Internally, Taiwan faces many natural disasters. These include typhoons, which result in the loss of soil and gravel; the subsidence of flatlands, which allows sea water to flood farmland; and the contamination of rivers and coastal waters, which has led to a drastic decline in aquacultural production. Externally, Taiwan will face a flood of foreign agricultural products once it gains admission to the World Trade Organization (WTO), or if direct commercial links are established with the Chinese mainland.
• In recent years, Taiwan's investment environment has not shown any signs of improvement. The influence of special interest groups on government policy; the stumbling outdated laws and regulations which block industrial development; and a deterioration of public order, which has resulted in an overall loss of "peace of mind," are among the causes.
• When an economy approaches a stage of maturity, outward investment is inevitable. In Taiwan, the private industrial and commercial sectors often view outward investment as a relocation of production. Unfortunately, prospects for the government's southward investment strategy do not at present appear bright, and the "patience over haste" policy for investment in the mainland has brought the government into a conflict of views with the commercial and industrial sectors. Clearly, government and industry need to work together to reach a consensus that balances national security with economic development.
• Although Taiwan's total population continues to grow, the proportion of people under age 18 has been decreasing. On the other hand, the number of people over 65 is on the increase, and this group already accounts for 7.5 percent of the total population. As a result, the percentage of economically productive people in Taiwan is slowly decreasing, and eventually Taiwan will face a situation where a majority of dependent people rely on a minority of productive people.

Economic regions are taking shape the world over. North America has the North American Free Trade Agreement (NAFTA) and western Europe has the European Union (EU). Although the Asia-Pacific region does have the Asia-Pacific Economic Cooperation (APEC) forum, of which Taiwan is a member economy, if relations between Taipei and Peking do not improve, then Taiwan's position in APEC will remain a point of concern. If, on the other hand, Taiwan, Hong Kong, Macau, and the Chinese mainland can all put aside their political differences and work together toward enhancing economic interaction and realizing their potential to support each other, they will be able to drive the continued economic development of the Asia-Pacific region.

Conclusion

The history and experiences of Taiwan's economic development serve not only as a worthwhile example for other developing nations, but they also provide Taiwan itself with a good opportunity for self-examination. The path of development that Taiwan's economy followed was a gradual one learnt through experience. Taiwan has not always had an open and free economy. In the early stages of its development, Taiwan's economy was partially under the control of the government and partially free. As time went by and the economy continued to grow, however, the free portion of the economy expanded and the regulated portion shrank.

In any case, if during the early stages of a country's economic development, the talents of the people are not applied, or if the government does not find a proper course to follow, then a high price has to be paid in initiating a free economy. During the early stages, the role that government plays is extremely important. This role includes the maintenance of a stable and legally sound society and the thorough implementation of government policies. Once the economy has reached a more mature stage, however, the role of government should be reduced, and more power and responsibility should be given to the market to regulate itself. The government should then step in to adjust, regulate or rectify matters only when the market loses equilibrium.

Prosperity does not come easily for any country, and once it has been achieved, maintaining it is even more difficult. If people forget the virtues of hard work and thriftiness, or if the government no longer pursues plans for the people's welfare with sincerity, then a wealthy and prosperous nation will quickly be reduced to poverty. Indeed, the Chinese have a saying that "wealth does not last more than three generations." This applies not only to a family, but also to nations. It is an iron rule that should not be regarded as trifling, but rather as something worthy of examination and observance.