Taiwan Today

There is something enjoyably Grinch-like about the premise of Taiwan’s Political Economy, a new study of Taiwan’s economic boom years by political scientists Cal Clark and Alexander C. Tan. While most political scientists tend to home in on aberrations in political trends, Clark and Tan focus on the predictable challenges presented by reaching a high level of economic maturity, that plateau of sluggish economic growth rates that resemble those found in advanced industrial nations. Today’s Taiwan, in their view, is left grappling with the problems of too much success.

To get to that point, Taiwan’s economy underwent a remarkable transition from a reliance on agriculture, fishery and light industry in the 1950s to growth fueled by the service sector and high-tech manufacturing in the 1990s. Resulting in part from government policies that either intentionally redistributed capital or unintentionally created an environment favorable to those with entrepreneurial instincts, Taiwan’s economy achieved in a few decades what it took the Western world centuries to accomplish.

This is the tale of Taiwan’s “economic miracle,” and according to Clark and Tan it has left Taiwan in a position admirably suited for the modern economy, yet also with some very salient challenges. The challenges they describe as the “costs of success” make it hard not to think of children at Christmas receiving so many presents that they fret over having to find places for them. These are problems, in other words, that less developed nations would prefer to their own. Yet, no matter how enviable Taiwan’s problems are, they are problems nonetheless. The authors are at their best in analyzing the path that led to Taiwan’s earlier success and explaining why that path arrived at the obstacles slowing growth in Taiwan today.

To understand just how Taiwan’s economic engine got moving, Clark and Tan take a close look at the earliest phase of economic transformation—agricultural reform. As soon as it arrived in Taiwan in 1949, the Kuomintang government adopted an ambitious reform policy to stimulate industry by reducing the traditional reliance on agriculture. To enfranchise tenant farmers, the government sold public land to those who actually worked it. To engineer a similar transition with private land, the 1953 Land-to-the-Tiller Act “forced landlords to sell their agricultural land over about three hectares to the government that then resold it back to the tenants,” the authors explain. This policy had two outcomes: The farmers became small landholders and saw profits go up, and the former landlords found themselves with capital to invest, often in the nascent manufacturing sector.

Hidden Tax

After explaining how the Land-to-the-Tiller Act established a private pool of investment capital, Clark and Tan describe an interesting mechanism set up to fund public investment in industry. The government bought large quantities of rice at depressed prices and sold fertilizer to farmers at inflated prices, resulting in a “hidden rice tax” on farm output. “Ironically, it was fairly similar to policies pursued by colonial Japan (1895–1945),” the authors write, “with the one fundamental difference being that Japan siphoned those resources off to the colonial center while Taiwan used them as a major source of financing for its industrialization in the 1950s.”

After generating both private and public investment capital, the government sought to create incentives for manufacturers by adopting an import substitution program. This essentially raised tariffs on imports, thereby creating a demand for locally made products. As industry began to draw more of Taiwan’s workforce away from agriculture, the government was also investing heavily in education to create the human capital necessary in an industrial economy. If this seems like a rosy picture, it was. Between 1952 and 1962, Clark and Tan note, the country’s growth averaged a robust 7.9 percent. Rapid growth, moreover, was unexpectedly acting as a leveler of income disparities. “Primarily because of the land reform program,” they write, “Taiwan was quite successful in bringing down its initially high level of income inequality as the ratio of the incomes of the richest to the poorest fifths of the population was almost cut in half.”

If the government’s approach to land reform seemed almost omniscient in its efficacy, the second stage—the transition to an export-based economy—was a momentous gamble, according to Clark and Tan. As Taiwan’s domestic market became saturated with locally produced goods, the government was forced to choose between switching to export controls for heavy industry—essentially, doubling down on protectionist policies—or opening the domestic market to international competition by encouraging the export of its labor-intensive products. The authors note that the second strategy, which effectively involved liberalizing the economy, was the riskier of the two and had failed in other developing nations. Nonetheless, this is the path Taiwan took, and it led to a remarkable surge of entrepreneurial activity. Small and medium enterprises (SMEs) sprouted up to churn out export goods for the global market and Taiwan averaged 11 percent growth rates through the 1960s.

Taiwan’s success in making export products became an internationally celebrated story. The nature of the export strategy, however, weakened the government’s ability to control growth. Exporters were subject to the whims of global markets and independent-minded SMEs focused more on pursuing their own strategies than those of the government.

Founding an Empire

Clark and Tan illustrate the changing nature of the government-business relationship through their case study of the founding of Formosa Plastics Corp., which they describe as having something of a “comic opera air.” The plastics industry in Taiwan developed as a result of direct government investment and import controls on plastics made abroad. In the early 1950s, the government built several plastics plants but found few interested buyers until the arrival of Wang Yung-ching (王永慶), “a small businessman who had run a rice and lumber business in a far from spectacular fashion,” according to the authors.

After purchasing a PVC plant in 1954, Wang quickly ran into the problem of low demand. “There was even a time when his relatives and employees were taking unsold pellets to their homes to store,” Clark and Tan write. With considerable ingenuity, however, Wang decided to drum up interest in plastics by building a modeling plant that demonstrated the many uses of the wonderfully pliable substance for local manufacturers. He did this, moreover, with capital raised from family and friends. International demand also began booming, and Taiwan soon found itself pumping out toys and other plastic products for the global economy.

Formosa Plastics succeeded not because of direct government intervention, but because a particularly clever businessman played his cards well. “This case also shows the difficulty in resolving the debate over whether Taiwan possesses a developmental state,” the authors write. “While the regime clearly targeted the plastics industry and built the PVC plant that started Wang on the road to Fortune 500 status, it is difficult to agree with the interpretation that this represents successful state tutelage and leadership in industrial policy.”

Supporting Role for the State

While the Republic of China (ROC) government continued to provide the conditions for economic success, it was no longer pulling all the strings. The success of SMEs relied much more on the ingenuity and initiative of particular Taiwanese entrepreneurs. The state was thus cast in a supporting role, and at times left scrambling to react to the needs of SMEs as they arose. This is very much the nature of an economy that relies on innovative producers who seek to compete in the global market by finding a competitive advantage. By nature, global competition presents a host of complex policy questions as growth alters local conditions.

As Taiwan’s manufacturers climbed the global supply chain—from making toys and bicycles to assembling complex electronic devices and high-tech designs made domestically—the country prospered. With prosperity, however, came rising wages and the drying up of the inexpensive labor pool that had fueled the manufacturing boom for decades. To remain competitive, many of Taiwan’s manufacturers moved their production facilities to cheaper labor markets, mostly in the nearby coastal regions of mainland China. While the relocation of many of Taiwan’s factories to mainland China was the result of the rising standard of living, it sparked fears of “hollowing out” the economy—the permanent loss of domestic manufacturing. This is not necessarily a bad thing, however, as not all jobs are created equal. The development of computer software and brand-name laptops, for example, is considerably more profitable than the labor-intensive assembly of computer components for foreign brands.

Ideally, Taiwan’s lost manufacturing jobs would be replaced by better paying jobs in upstream high-tech manufacturing and biotechnology or by high-end service jobs in the financial sector. Achieving success at the top of the scale, however, is notoriously difficult. If Taiwan’s manufacturers are to remain a global force, they will need to find the magic formula that leads to the creation of Googles and Apples, which are brand-name companies that have exhibited remarkable skill at both innovation and marketing. Indeed, competing with the very best in the international market is a daunting challenge. And since Taiwan has shed many of its lower-paying manufacturing jobs, maintaining the country’s historically low level of unemployment will now be contingent on playing the global game at the very highest level. “Similar to the United States and Japan, [Taiwan] has been pushed out of most basic and lower-end economic sectors,” Clark and Tan write. “This means that its firms must compete with the world leaders in the most advanced sectors such as banking and biotechnology.”

In that light, the authors’ premise that success has brought Taiwan some very real consequences begins to look a little less churlish. They make a good case that today’s Taiwan, although well situated for international competition, has fewer options because of the maturity of its economy. On the one hand, the country can no longer afford to engage in lower-end manufacturing, while on the other hand it must compete with the world’s most innovative, knowledge-based economies in order to continue growing. “Thus, Taiwan now seems to be being squeezed from both above and below,” Clark and Tan write, “creating the image of an increasingly boxed-in economy.”

The Political Aspect

Just as Taiwan’s economic options have narrowed with the maturing of the economy, the successful democratization of Taiwan’s political system also introduced new challenges to the pursuit of good public policy. Clark and Tan’s study illustrates the skill with which technocratic government planners have fostered economic growth in the past. Before the adoption of a multiparty political system, this was done without the restraints and scrutiny native to partisan political competition. Today, however, powerful constituencies act as a restraint on the adoption of policies that diverge from the interests of those groups. “Thus, the political success of the ROC,” the authors write, “has brought with it a cost of success in the form of a decreased ability to formulate and implement effective financial policy.”

This situation is exacerbated, according to Clark and Tan, by the historical absence of legislative consensus-building and compromise in Taiwan. While that is true, one can find periods of equally dismal levels of political cooperation and compromise in older democracies like the United States. Indeed, just as in other democracies, Taiwan is facing the tremendous complexity of implementing effective public policy in a political environment with competing constituencies.

One interesting “cost” of success not addressed by Clark and Tan is the rise of Taiwan’s exuberantly free media environment. The press coverage of policy decisions such as raising electricity rates or health care premiums can leave the impression of a dysfunctional political system that is producing unsatisfactory results. Local pessimism, however, can be usefully contrasted with the extraordinary optimism that the country inspires in foreign observers. These Taiwan watchers tend to focus more on long-term trends and the obvious resourcefulness of a highly educated population than on the negativity generated by the blizzard of minor news events.

Thomas Friedman, a student of globalization and columnist for The New York Times, for example, regularly describes Taiwan as his favorite country (after his own). He has praised everything from the efficacy of Taiwan’s universal health care system to the flexibility of the nation’s entrepreneurs. In a recent column on the relative importance of human resources over natural resources, he recalled a pep talk to Taiwanese friends: “You have no oil, no iron ore, no forests, no diamonds, no gold, just a few small deposits of coal and natural gas—and because of that you developed the habits and culture of honing your people’s skills, which turns out to be the most valuable and only truly renewable resource in the world today.”

Clark and Tan too are ultimately infected by this optimism over the resourcefulness of a nation that has relied most of all on its own ingenuity. “Especially considering Taiwan’s past economic dynamism,” they write, “the nation must be given a fairly good chance of confronting and overcoming the costs of its past economic success.” It would appear that even after excavating the myriad problems buried in the story of Taiwan’s rapid economic growth and political democratization, success, for Clark and Tan, is not all bad.

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Robert Green is a regular contributor to Economist Intelligence Unit publications on Taiwan.

Copyright © 2012 by Robert Green