Taiwan Miracle - Background

Background

After a period of hyperinflation in the late 1940s when the Kuomintang (KMT) military regime of Chen Yi overprinted the new Taiwan Yuan against the previous Japan Taiwan Yen, it became clear that a new and stable currency was needed. When the KMT government retreated to Taiwan after the loss of mainland China in the Chinese Civil War, it brought part of the precious metal and foreign currency reserve of mainland China to the island. Although war-ravaged China had held only a very small reserve, some $170 million in all, those reserves helped to establish a gold-standard reserve currency in Taiwan, which in turn helped to stabilize prices and reduce hyperinflation. More importantly, many of the Chinese intellectual and business elites moved with KMT to the island. The Japanese had built up the agricultural and industrial infrastructure as well as chemical, material, and food reserves on the island that allowed the elite of the KMT supporters to jump start their own economic endeavors. Along with the $4 billion in financial aid and soft credit provided by the US (as well as the indirect economic stimulus of US food and military aid) over the 1945-1965 period, Taiwan had the necessary capital to restart its economy. Further, the KMT government instituted many laws and land reforms that it had never effectively enacted on mainland China.

A land reform law, inspired by the same one that the Americans were enacting in occupied Japan, destroyed the landlord class (which also happened in Japan), and created a higher number of small peasants whom, with the help of the state, increased the agricultural output dramatically. This was the first excedent accumulation source. It inverted capital creation, and liberated the agricultural workforce to work in the urban sectors. However, the government imposed on the peasants an unequal exchange with the industrial economy, with credit and fertilizer controls and a non monetary exchange to trade agrarian products (machinery) for rice. With the control of the banks (at the time, being the property of the government), and import licenses, the state oriented the Taiwanese economy to import substitutive industrialization, creating initial capitalism in a fully protected market.

It also, with the help of USAID, created a massive industrial infrastructure, communications, and developed the educational system. Several government bodies were created and four-year plans were also enacted. Between 1952 and 1982, economic growth was on average 8.7%, and between 1983 and 1986 at 6.9%. The gross national product grew by 360% between 1965 and 1986. The percentage of global exports was over 2% in 1986, over other recently industrialized countries, (like South Korea), and the global industrial production output grew a further 680% between 1965 and 1986. The social gap between the rich and the poor fell (Gini: 0.558 in 1953, 0.303 in 1980), even lower than some Western European countries, but it grew a little in the 80's. Health care, education, and quality of life also improved. Much of that was made possible through US economic aid, subsidizing the higher cost of domestic production. The flexibility of the productive system and the industrial structure meant that Taiwanese companies had more chances to adapt themselves to the changing international situation and the global economy.

In 1959, a 19-point program of Economic and Financial Reform, liberalized market controls, stimulated exports and designed a strategy to attract foreign companies and foreign capitals. An exports processing area was created in Kaohsiung and in 1964, General Instruments pioneered in externalizing electronic assembly in Taiwan. Japanese companies moved in to benefit of low salaries, the lack of environmental laws and controls, a well educated and capable workforce, and the support of the Government. But the nucleus of the industrial structure was national, and it was composed by a large number of small and medium sized enterprises, created within families with the family savings, and savings cooperatives nets (會 Pinyin: Huì). They had the support of the government in the form of subsidies and credits loaned by the banks.

Most of this Huì appeared for the first time in rural zones near metropolitan areas, where families shared work (in the parcels they owned and in the industrial workshops at the same time). For instance, in 1989 in Changhua, small enterprises produced almost 50% of the world's umbrellas. The State attracted foreign companies in order to obtain more capital and to get access to foreign markets, but the big foreign companies got contracts with this huge net of small sized, familiar and national companies, which were a very important percentage of the industrial output.

Foreign investment never represented an important component in the Taiwanese economy, with the notable exception of the electronic market. For instance, in 1981, direct foreign investment was a mere 2% of the GNP, foreign companies employed 4.8% of the total workforce, their production was 13.9% of the total production and their exports were 25.6% of nationwide exports. Access to the global markets was facilitated by the Japanese companies and by the American importers, who wanted a direct relationship with the Taiwanese brands. No big multinational corporations were created (like in Singapore), or huge national conglomerates (like South Korean chaebols), but some industrial groups, with the support of the government, grew, and became in the 90's huge companies totally internationalized.

Most of the development was thanks to the flexibility of family businesses which produced for foreign traders established in Taiwan and for international trade nets with the help of intermediaries. But the importance of the state must not be forgotten. It was the central organism which coordinated the industrialization process, it created the infrastructures, it attracted foreign investment, it decided the strategic priorities and, when necessary, recurred to impose its conditions.