Until recently, Taiwan has lagged behind some of its neighbors in developing democracy. Economically, in contrast, the island had undergone rapid and profound changes in the years since the KMT took over in 1945. Then, wartime restrictions and Allied bombing had caused considerable damage and disruption. Also, while the Japanese colonialists had developed some industry, the government acquired a land where 75% of the economically active population worked in agriculture, mainly as tenant farmers, subject to the high rents charged by a small group of wealthy landlords, or as landless farm laborers. Today, commerce, manufacturing, and service industries employ 75% of the workforce. In 1990, Taiwan’s gross national product (GNP) of US$162 billion was the world’s 13th largest trader. Taiwan’s Evergreen Lines is the world’s largest container shipping company, and Kaohsiung is the world’s third largest container port. Taiwan-based computer companies like Acer, Mitac, and Tatung produce internationally sought after goods, and others like Formosa Plastics have become major international investors, with ventures in the United States and other developed countries.

Since 1949, Taiwan’s economy has grown more than 14 fold after adjusting for inflation. Between 1952 and 1987, economic growth averaged nine percent per year. Between 1980 and 1988, a period of slow growth for the world economy, Taiwan experienced 8.3% expansion annual, the fourth highest growth rate in the world during this period. Per capita GNP stood at US$145 in 1951; by 1990, it had reached US$7,997.


All this resulted from what economists call "export-led growth." Like Japan, Taiwan is relatively poor in natural resources, and depends on trade surpluses for the money to import raw materials. With industrialization, earnings from overseas sales of manufactured products have far outstripped those of traditional exports such as rice, sugar, pineapples, sweet potatoes, deer hides, and forest products. Today, the key export industries and electronics goods, textiles, plastics and other petrochemical products, machinery, and processed food. These have allowed Taiwan to $80 billion, the world’s second largest.

Furthermore, Taiwan achieved all of the while avoiding some of the problems which have plagued other high-growth developing countries in recent years. In addition to trade surpluses, the island has enjoyed balanced government budgets, low external debt, high employment levels, a record savings rate, and low inflation. Most importantly, government statistics show that income inequality declined dramatically between 1945 and 1980. The ratio between the top and bottom 20% of income earners in Taiwan fell from 15:1 to 4:1 during this period; since then, the gap has grown, reaching 5.2:1 in 1990. But it remains smaller than in South Korea, Taiwan’s Key rival among the "newly industrialized countries."

While the government’s economic policies unquestionably had a great deal to do with this remarkable economic transformation, the willingness of the people of the island to undertake hard work and the development of a skilled, literate workforce during the Japanese period played perhaps a larger role. And, unlike in South Korea, where a few giant companies have dominated the "economic miracle," small family-owned businesses continue to play a key role in Taiwan’s economy. In the late 1980s, firms with 30 or fewer employees accounted for over 90% of the 90,000 locally-owned manufacturing companies (up from less than 6,000 in 1950) and employed 80% of the industrial workforce.

Despite this impressive record, critical underlying problems will affect Taiwan’s economy in the years ahead. These include rising labor costs and labor shortages, mounting environmental problems, energy shortages, growing protectionism in leading markets and competition from lower cost producers, and outdated financial system, and serious imbalances among economic sectors (especially between agriculture and manufacturing). These problems and a sluggish world economy reduced Taiwan’s growth to 7.2% in 1989 and 5.3% in 1990; they are likely to restrain future growth as well.


Background to Economic Change

After a period of reconstruction and consolidation of Nationalist rule, including the party’s retreat from the mainland, Taiwan’s economy entered a phase of import substitution during the 1950s and early 1960s. During this time, the government encouraged the production of consumer goods for local consumption. Taiwan benefited enormously from a huge infusion of economic and military aid from the United States, totaling more than four billion U.S. dollars. Economic aid alone accounted for 7.4% of GNP and 30.5% of government revenues; altogether, U.S. aid provided 85% of the money spent by the government carried out one of the most extensive land reform programs undertaken in Asia. It virtually eliminated tenancy among farmers, as most "tillers of the soil" received small plots of land. The main effect, however, was not a more just rural society, but the transfer of both labor and capital out of farming and into the island’s emerging industries.

Wages grew even faster than economy in the 1970s and 1980s, as firms competed for skilled labor. This has helped make Taiwan into a "consumer society." The booming economy also make it possible for many factory workers to open their own small enterprises. By the late 19980s, though the average industrial wage remained below US$3 per hour, Taiwanese wage rates exceeded those of the Philippines, Sri Lanka, and China; this encouraged Taiwanese investors to put their money into those countries. Also, local manufacturing and construction firms are now relying increasingly on Southeast Asian and Chinese immigrant workers, most of whom are in Taiwan illegally, and receive one-third to one-half of the average wage. Because of labor shortages and rising costs, the government is hoping to move the economy into more capital-intensive, high technology directions.


The Six-Year National Development Plan

Faced with growing environmental and social imbalances and an overburdened infrastructure, the government has announced implementation of a Six-Year National Development Plan, its blueprint for nationalization. Extremely ambitious in scope, it calls for a number of major public construction and transportation projects, the establishment of self-contained communities and industrial and educational facilities, the strengthening of environmental protection and increased spending in research and development. Its key policy goals include raising national income, providing sufficient resources for continued industrial growth, promoting the balanced development of various regions and raising the national quality of life. The plan also provides for a national health insurance program to be launched in 1994. However, recent news reports suggest that the plan is experiencing budgetary and backing problems.


State and Party Role in the Economy

Contrary to popular perception, Taiwan’s economic growth did not result from the ruling party’s commitment to a purely capitalist, free market economy. Instead, the government has exerted direct influence by operating enterprises and through economic planning. It also has channeled capital, contracts, and other resources to favored sectors and firms, and is able to make life difficult by denying licenses and funds to entrepreneurs who support the opposition.

Government enterprises only accounted for 10% of industrial output in the late 1980s, down from 57% in 1952, but the government maintains monopoly control in such industries as ship building, steel, electric power, petroleum refining, and tobacco and alcoholic beverage production and distribution. The state also enters into joint ventures with local and foreign firms: the Taiwan Semiconductor Company, for example, is jointly owned by the government, Taiwanese private investors, and the Dutch electronics firm Philips. Until 1989, the government also held monopoly control over domestic banking, and greatly restricted the activities of foreign bank branches. Government-owned enterprises produce some 50% of state revenues, thereby offsetting extremely lax income tax collection.


Fiscal and Monetary Policies

Direct government spending through the fiscal budget has accounted for 20% of GNP in recent years. In the late 1980s, the authorities abandoned their longtime fiscal restraint and engaged in deficit spending. Military spending has accounted for 40-50% of government expenditures over the past decade, down from 85% (and over 10% of GNP) in the 1960s and 1970s. This drains vital resources from productive activities, needed public works and social welfare programs. Because the authorities have financed the revenue gap from already tight local credit sources, fiscal and public borrowing policies pose the risk of igniting inflation.

For much of the 1980s, the government pursued a loose monetary policy further adding to inflationary pressures. In 1989, the government raised interest rates and bank reserve requirements, but this only temporarily limited the growth of the money supply. Liberalization of banking and foreign exchange controls will make it difficult for the authorities to gain permanent control in this area. The authorities have also failed to channel high rates of savings into domestic investment. Net capital outflows in 1989 reached $12 billion, due to the easing of foreign exchange restrictions and the rising cost of doing business on the island. In a related matter, the government’s policy of placing foreign exchange reserves in private overseas bank accounts has raised concern. The government claims that this step is necessary to prevent PRC efforts to gain control of the reserves, but critics wonder about embezzlement and local investment of the funds to meet pressing needs on the island.


Dependent Development

Export-oriented industrialization has benefited many Taiwanese with new wealth and opportunities. It also provides the island with the foreign exchange needed to import raw materials, energy, and food. On the negative side, reliance on exports makes Taiwan extremely vulnerable to downturns in the world economy and rising import prices. In 1974, 1982, 1985, and 1990, changes in petroleum prices and softening foreign markets led to recessions in Taiwan. While large trade surpluses make sense in a resource-poor economy, they also add to inflationary pressures.

Another problem is the government’s longtime reliance on a narrow range of increasingly unreliable markets for sales. In the late 1980s, Taiwan traded with virtually every country and territory on earth, but the U.S., Japan, and Western Europe took over 70% of the island’s exports. The U.S. alone bought 45-50% of Taiwan’s exports. As these partners have become increasingly projectionist in recent years, Taiwan has slowly begun trying to diversify it’s markets, sending trade missions to a number of Communist countries, expanding trade with China, and viewing change in Easter Europe as a target of economic opportunity.

Taiwan also relies on Japan and the West for over 70% of imports, consisting mainly of machinery, spare parts, chemicals, technology, components for assembly and resale, and iron and steel. Japan alone accounted for nearly 35% of imports in the late 1980s, and Taiwan’s chronic surpluses in trade with the United States have served in part of finance deficits in commercial intercourse with Japan.

Reliance on a narrow range of trading partners has made Taiwan highly vulnerable to their demands, such as U.S. calls for import liberalization and currency revaluation which have hurt export-dependent Taiwanese firms. The importance of foreign capital in Taiwan’s manufacturing sector has added to this loss of economic sovereignty. Manufacturing has in recent years accounted for about 50% of GNP, 40% of all employment, and most experts. Foreign companies employ just five percent of the total workforce, but 15% of the manufacturing workforce provide 25% of the manufacturing wags. These firms are a major source of industrial imports, accounting for a good deal of external economic vulnerability. About 75% of Taiwan’s exports to its number one market, the United States, are by local subsidiaries of U.S. firms. Domestic textile and electronics firms also depend heavily on foreign companies for marketing services.


Future of the Economy

Rising labor costs and the government’s desire to move the economy in more capital and technology-intensive directions raise the prospect of increasing unemployment in the future. This will mean continued reliance on the underground economy despite liberalization of credit. Increasing capital requirements will make it more difficult for Taiwanese workers and farmers to open successful new businesses. Research and development spending currently accounts for just one percent of GNP, and about 80% of the Taiwanese who go abroad to study science and technology do not return home (although this percentage is growing smaller). However, the government is making efforts to boost R&D and the portion of GNP that goes to it. It is offering financial assistance and tax credits to new companies that target a strategic technology such as microcomputers of telecommunications.

Taiwan also faces competition from South Korea and Singapore in its reindustrialization effort. Given the serious imbalances in the economy, and slower growth rates, President Lee Teng-hui’s dream of GNP of $300 billion and a per capita income of 417,000 by the year 2000 will be impossible to achieve. Current government plans call for continued reliance on international trade for growth. Some economists argue for an alternative strategy based on improved utilization of domestic resources, especially people, and deepening the local market for goods and services.


Decline of Agriculture

The Taiwanese farmer in his or her conical hat, driving a water buffalo, has become the symbol of the hard working people who live on the island and their desire for economic security. Yet agriculture, the onetime backbone of Taiwan’s economy, has suffered over the years, creating threats to food security and the long-term productivity of the island’s dwindling stock of arable land. During Japanese rule, Taiwan had produced all of its own food and exported surpluses of agricultural products.

Agriculture now employees just 13 percent of the workforce and contributes only five percent to gross domestic product. The average farming household earns 66% of the national average family income, and 75% of rural households earn a quarter or less of their income from farming. Few young people seek agricultural careers, given the low rewards, and so the agricultural populace is aging rapidly. The stock of farmland is dwindling, too in the face of demands for land for housing, industrial sites, highways, and recreational facilities.

The authorities have also encouraged farm consolidation-- the average farm size is about one hectare (2.5 acres)-- offering marginal producers incentives to sell out to larger, more efficient and mechanized farms. These farms rely heavily on high-technology, "green revolution" agriculture, utilizing high-yielding seeds and chemical fertilizers and pesticides. This "reverse land reform" led to the re-emergence of landless farm workers.

During the 1980s, the United States pressured Taiwan to lower barriers to imports of U.S. fruit and poultry products. Taiwan had already become a major market for U.S. grain and the leading purchaser of the U.S. soybeans. The new imports contributed to the island’s chronic agricultural trade deficit, and also hurt government efforts to encourage local fruit and poultry production, so as to ease the costs of acquiring rice. Now, Taiwan only produces about 70-80% of its food supply.