Taiwan Miracle

From Wikipedia, the free encyclopedia

This article may require cleanup to meet Wikipedia's quality standards.
Please improve this article if you can. (March 2007)

Taiwan's quick industrialization and rapid growth during the latter half of the twentieth century, has been called the "Taiwan Miracle" (台灣奇蹟 or 臺灣奇蹟, Tongyong Pinyin: ,Hanyu Pinyin: táiwān qíjì) or "Taiwan Economic Miracle". As it has developed alongside Singapore, South Korea and Hong Kong, the ROC became known as one of the "Four Asian Tigers".

1 Background
2 Era of globalization
3 Future growth
4 References
5 External links

[edit] Background

After a period of hyperinflation in the late 1940s when the 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 Kuomintang (KMT) government fled to Taiwan following the Chinese Civil War, it brought the entire 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^[1], those reserves helped to establish a gold-standard reserve currency in Taiwan, which in turn helped to stabilize prices and reduce hyperinflation. More importantly, as part of its retreat to Taiwan, the KMT brought with them many of the Chinese intellectual and business elites from the China.^{[citation needed]} 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 jumpstart 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 [1], 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.

Immediately after losing the civil war and retreating to Taiwan, the KMT, under the leadership of Chiang Kai-shek had a policy towards the Taiwanese that lead to mistrust between the Taiwanese population and the new Chinese rulers. For instance, the new rulers confiscated the sugar production of the whole island to send it to the still KMT controlled areas on the mainland. Also, the fear of having to deal with a Japanese educated society (Taiwan had been a governed by Japanese for 50 years) when the second world war was just over lead to the 228 Incident in which between 10,000 and 20,000 Taiwanese died. The subsequent repression of any anti KMT sentiment which lasted, in the form of white terror, through the '50s.

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.^[2] It inverted capital creation, and liberated the agricultural workforce to work in the urban sectors. However, the government imposed to 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 4-year plans were also enacted. Between 1952 and 1982, economic growth was on average 8.7%, and between 1953 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.^[3]

Much of this 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. The support of the authoritarian government, which was helped by the American USAID. The import-substitution policy was now changed (we are now in the 1960s), and the Taiwanese economy became, and still is, an exports oriented one. This occurred because the national market was now incapable of continual growth. Following, again, the advice of the American experts, the KMT dictatorship created an ambitious program to restructure the whole economy of Taiwan, now exports oriented.

In 1960, a 19 points 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, were 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.

Neither then, nor now, the foreign investment represents an important component in the Taiwanese economy, with the notably exception of the electronic market. For instance, in 1981, direct foreign investment was a mere 2% of the GNP, foreign companies employed a 4.8% of the total workforce, their production was 13.9% of the total production and their exports were the 25.6% of the 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 the 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 familiar companies 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.

[edit] Era of globalization

In the 70's protectionism was on the rise, and the United Nations switched recognition from the Republic of China to the People's Republic of China as the sole legitimate representative of all China. It was expelled by General Assembly Resolution 2758 and replaced in all UN organs with the PRC. The KMT began a process of enhancement and modernization of the industry, mainly in high technology (such as microelectronics, personal computers and peripherals). One of the biggest and most successful Technology Parks was built in Hsinchu, near Taipei.

Many Taiwanese brands became important suppliers of worldwide known firms such as DEC or IBM, while other established branches in Silicon Valley and other places inside the United States and became known. The government also recommended the textile and clothing industries to enhance the quality and value of their products to avoid restrictive import quotas, usually measured in volume. The decade also saw the beginnings of a genuinely independent union movement after decades of repression. Some significant events occurred in 1977, which gave the new unions a boost.

One was the formation of an independent union at the Far East Textile Company after a two-year effort discredited the former management-controlled union. This was the first union existing independently of the KMT in Taiwan's post-war history (although the KMT retained a minority membership on its Committee). Rather than prevailing upon the state to use martial law to smash the union, the management adopted the more cautious approach of buying workers' votes at election times. However such attempts repeatedly failed and by 1986, all of the elected leaders were genuine unionists.^[4] Another, and, historically, the most important, was the now called "Chung-li incident".

In the 80's, Taiwan had become an economic power, with a mature and diversified economy, solid presence in international markets and huge Foreign exchange reserves.^[5] It's companies were able to go abroad, internationalize their production, investing massively in Asia (mainly in China and in another OECD countries, mainly in the United States. Higher salaries and better organized trade unions in Taiwan, together with the reduction of the Taiwanese exports quotas meant that the bigger Taiwanese companies moved their production to China and Southeast Asia. The civil society in a now developed country, wanted democracy, and the rejection of the KMT dictatorship was bigger day by day.^[6] A major step occurred when Lee Teng-hui, a native from Taiwan, became President, and the KMT started a new path searching for democratic legitimacy.

Two aspects must be remembered: the KMT was on the center of the structure and controlled the process, and that the structure was a net made of relations between the enterprises, between the enterprises and the State, between the enterprises and the global market thanks to trade companies and the international economic exchanges.^[7] Native Taiwanese were largely excluded from the mainlanders dominated government, so many went into the business world.^{[citation needed]}

In 1962, Taiwan had a per capita gross national product (GNP) of $170, placing the island's economy squarely between Zaire and Congo. But, by 2005 Taiwan's per capita GNP, adjusted for purchasing power parity (PPP), had soared to $27,600, contributing to a Human Development Index similar to that of European countries such as Greece.

According to economist Paul Krugman, the rapid growth was made possible by increases in capital and labor, but not an increase in efficiency. In other words, the savings rate increased, and work hours were both lengthened and many more people, such as women, entered the work force.^[8]

Dwight Perkins and others cite certain methodological flaws in Krugman's (and Alwyn Young's) research, and suggest that much of Taiwan's growth can be attributed to increases in productivity. These productivity boosts were achieved through land reform, structural change (urbanization and industrialization), and an economic policy of export promotion rather than import substitution.

[edit] Future growth

Economic growth has become much more modest since the late 1990s. A key factor to understand this new environment is the rise of China, offering the same conditions that made possible, 40 years ago, the Taiwan Miracle (a quiet political and social environment, cheap and educated workers, absence of independent trade unions). To keep growing, the Taiwanese economy must abandon its workforce intensive industries, which cannot compete with China, Vietnam or other sub-developed countries, and keep innovating and investing in IT. Since the 90's, Taiwanese companies have been permitted to invest in China, and a growing number of Taiwanese businessmen are demanding easier communicationes between the two sides of the Taiwan Strait.

One major difference with Ireland, of course, is the native English fluency of the Irish, which many economists believe has contributed to the Irish economic miracle. Mirroring Hong Kong and Singapore, the ultimate goal is to become a country fluent in three languages--Taiwanese, Mandarin (the national language of both the People's Republic of China (PRC) and the ROC), and English, becoming a bridge between East and West.

According to western financial markets, consolidation of the financial sector remains a concern as it continues at a slow pace, with the market split so small that no bank controls more than 10% of the market, and the Taiwanese government is obligated, by the WTO accession treaty, to open this sector between 2005 and 2008.^[9] However, many financial analysts estimate such concerns are based upon mirror-imaging of the Western model and do not take into account the already proven Asian Tiger model. Yet, recently, credit card debt has become a major problem, as the ROC does not have an individual bankruptcy law. Taiwan also remains undeveloped in some sectors, such as the lack of a bond market, a role that has been filled by small entrepreneur-oriented investment or direct investment by foreign persons.

Generally, transportation infrastructure is very good and continues to be improved, mainly in the west side of the island. Many infrastructure improvements are currently being pursued, such as the first rapid transit lines are to open in Kaohsiung by the end of the year; the country's highways are very highly developed and in good maintenance and continue to be expanded, especially on the less developed and less populated east coast, and a controversial electronic toll system has recently been implemented. The completion of theTaiwan High Speed Rail service connecting all major cities on the western coast, from Taipei to Kaohsiung is considered to be a major addition to Taiwan's transportation infrastructure.The ROC government has chosen to raise private financing in the building of these projects, going the Build-Operate-Transfer route, but significant public financing has still been required and several scandals have been uncovered. Nevertheless, it is hoped that the completion of these projects will be a big economic stimulus, just as the subway in Taipei has revived the real estate market there.

Taiwan continues to rely heavily on its technology sector, a specialist in manufacturing outsourcing. Recent developments include moving up the food chain in brand building and design. LCD manufacturing and LED lights are two newer sectors in which Taiwanese companies are moving. Taiwan also wants to move into the biotechnology sector, the creation of fluorescent pet fish and a research-useful fluorescent pig being two examples. Taiwan is also a leading grower of orchids.

Debate on opening "Three links" with mainland China is also ongoing, with the security risk of economic dependence on mainland China being the biggest barrier. By decreasing transportation costs, it is hoped more money will be repatriated to Taiwan and that businesses will be able to keep operations centers in Taiwan while moving manufacturing and other facilities to mainland China. By law, any firm investing in the People's Republic of China must not invest more than 40% of its total assets on the mainland, a question which is open to political debate. Taiwan hopes to become a major operations center in East Asia. In addition, many businesses and areas in Taiwan hope to make money from mainland Chinese tourists if and when the three links are negotiated.