Taiwan Today

After the local economy contracted year-on-year by 1.93 percent in 2009 due to the recent global recession, Taiwan bounced back to post growth of 10.82 percent for 2010. Although economies typically grow after severe recessions as investor and consumer confidence returns, the island’s recovery has been one of the world’s strongest. Further evidence that Taiwan is back can be seen in the 2010 World Competitiveness Yearbook released by the International Institute for Management Development (IMD) in Lausanne, Switzerland. The yearbook ranked Taiwan’s competitiveness eighth among the 58 largest economies worldwide, marking the first time the island had entered the top 10 since the IMD began releasing the annual list in 1989.

While Taiwan’s healthy recovery from the recession draws attention these days, the economic rise seen over the past 100 years is even more impressive. Part of the foundation for Taiwan’s current economic status can be traced to the Japanese colonial era (1895–1945). “The most visible contribution made by the Japanese was infrastructure construction,” says Chen Tsu-yu, a research fellow in the Institute of Modern History at Academia Sinica. “The [Japanese administration’s] completion of railway trunk lines running through Taiwan’s western part in 1908 was especially significant,” she says.

The Japanese should also get the credit for establishing financial institutions in Taiwan. The Bank of Taiwan, the largest bank on the island, was founded by the colonial administration in 1899, followed by several other institutions that still exist today.

Meanwhile, the Japanese also introduced new techniques to improve the quality and quantity of crops and industrial products. Chen points to the example of sugar production, the economic sector with the highest output under Japanese rule. “Previously, Taiwanese had operated small-scale sugar refining factories that relied heavily on manual labor,” she says. “But the Japanese built much larger ones that used machinery.”

It is important to note, however, that the Japanese developed Taiwan’s infrastructure and economy to serve their colonial aims, according to Chen. Much of the sugar was shipped back to Japan, as were other products like salt, she says. Another example can be seen in the Sino-Japanese War during the 1930s, when Japan used Taiwan as a manufacturing base to churn out raw materials such as aluminum for military use.

Following Japan’s surrender at the end of World War II, the Nationalist government relocated to Taiwan in 1949. To an extent, the physical and financial infrastructure left behind by the Japanese benefited the Nationalists as they sought to industrialize the island. “On the other hand, the Nationalist government should be credited with bringing a group of elite technocrats to Taiwan to fill the vacuum left by the departure of the Japanese,” Chen says.

Taiwan was in extremely poor shape following World War II, accordingly to Wang Chien-chuan, vice president of the Chung-Hua Institution for Economic Research (CIER). “No one in the world thought Taiwan could survive the post-war hardships,” Wang says, referring to the era’s expensive reconstruction, threat of conflict with mainland China, high inflation and poor government finances. “Many believed Taiwan would soon be taken by the communists.”

Far from driving the country to its knees, the crisis instead fostered a sense of resiliency. The 2.97 million taels (approximately 112,860 kilograms) of gold transported by the Nationalist government from Shanghai to Taiwan around 1949 also played a stabilizing role during those vulnerable years, according to Liu Wei-kai, a professor of modern Chinese history at National Chengchi University in Taipei. The gold was mainly used to back the initial issuance of the New Taiwan Dollar in June 1949, as well as to provide for the needs of the military and pay civil servants, Liu says.

The United States began rendering financial aid to Taiwan in 1951 as the island faced off with its intimidating communist rival across the Taiwan Strait. Providing around US$100 million annually, the aid program ran until 1965. In 1952, the Republic of China (ROC) government signed an investment protection agreement with the US government. Two years later, the ROC announced a set of investment regulations intended to encourage foreign investment. “On the US side, they also encouraged their businesses to invest in Taiwan at the time,” says Huang Deng-shing, a research fellow in the Institute of Economics at Academia Sinica.

In the agriculture sector, Taiwan achieved stability and growth thanks to the land reform policy that began around 1950. Under that policy, the government confiscated the holdings of large landlords and turned over parcels to small farmers. According to Huang, ownership greatly enhanced farmers’ willingness to till the land and stimulated increased crop production. “It also motivated Taiwan’s farmers to do research to improve the quality of their crops,” Huang says.

Taiwan’s agricultural as well as textile and consumer electronics exports received a major boost with the advent of the island’s first designated export processing zone in 1966 in Kaohsiung, southern Taiwan. “Both South Korea and Taiwan built such zones around the same time,” Huang says. “Later on, academics began viewing Taiwan and South Korea’s zones as role models for emerging economies.”

As export orders grew, the need for skilled workers also increased. That need was partly satisfied after the government extended compulsory education in 1968 for all persons from six years to nine years. “International enterprises, along with their technologies, could stimulate the growth of local businesses to a degree, but growth also depended on people’s education level,” Huang says. “Foreign enterprises also invested in other developing countries, but that didn’t help create an economic miracle there like it did in Taiwan. The key factor is upgrading the education level.”

A bottleneck limiting economic development appeared in the 1970s as the nation’s infrastructure began reaching maximum capacity. As a result, then Premier Chiang Ching-kuo proposed the Ten Major Construction Projects, with six of the projects addressing highway, rail, sea and air transportation infrastructure, while the others covered shipbuilding, oil refining, steel manufacturing and electrical power generation. Work began in the early 1970s and most of the projects were completed by the end of the decade. In developing the nation’s transportation, power and steel-making capacities, the government established a firm foundation for an increasingly export-oriented economy.

Pushing Technology

Meanwhile, the government was also working to foster high-technology industries. One of the major figures in that effort was Sun Yun-suan (1913–2006), who served as the ROC’s premier and economic affairs minister (1969–1984). Sun is known for pushing for the creation of the government-supported Industrial Technology Research Institute (ITRI), which was founded in 1973 and has since played an important role in many of Taiwan’s technological advancements. Another important figure was K.T. Lee (1910–2001), who served as the ROC’s economic affairs and finance minister (1965–1976). Lee was a major factor behind the 1979 establishment of the Science and Technology Advisory Group under the Executive Yuan.

Sun and Lee also worked together to launch the Hsinchu Science Park in northern Taiwan. The park began operating in December 1980 and witnessed the birth of global information technology players such as United Microelectronics Corp. that year and Taiwan Semiconductor Manufacturing Co. Ltd. in 1987. With ITRI’s support, the companies have gone on to become two of the world’s biggest makers of integrated circuit chips.

Thanks in part to the efforts to reinvent Taiwan as a high-tech manufacturing hub, average economic growth between 1963 and 1980 reached 10 percent, up from 7.93 percent between1952 and 1962. Meanwhile, per capita gross domestic product (GDP) skyrocketed from US$2,385 in 1980 to US$8,124 in 1990, US$14,704 in 2000 and US$18,603 in 2010. Average economic growth reached 7.8 percent in the 1980s, but growth slowed as the economy matured, dropping to 6.4 percent in the 1990s and then to 4.5 percent in the 2000s.

The economy’s transformation and growth, however, led to a significant negative impact on the environment. A case in point is RCA Corp., which began operating in Taiwan in 1967. Then headquartered in the United States, RCA played a major role in the development of Taiwan’s high-tech sector through technology transfers and the creation of jobs. Academia Sinica’s Huang, however, points to the pollution caused by RCA’s operations in Taiwan, mainly at its factory in Taoyuan, northern Taiwan. Most people in Taiwan were unaware that the company had caused soil and groundwater pollution by releasing considerable amounts of untreated toxic wastewater, he says. RCA closed its operations in Taiwan in 1992 and the public was not informed of the pollution it caused until 1994, when its extent was revealed by a legislator.

Held accountable for the environmental disaster, RCA has finished treating polluted soil and is now tackling the more complicated problem of polluted ground water. Meanwhile, the government is drawing up a plan to seek compensation from RCA.

In a similar vein, Taiwan’s ship-breaking industry, which thrived in southern Taiwan until the mid-1980s, brought significant financial gains but also did great damage to the environment, says Huang, who worked part-time in the sector in the early 1980s. Among other things, dismantling ships can release waste oil into the sea and produce toxic emissions from the burning of plastic-coated cables. Rising environmental awareness among the public and the creation of the Cabinet-level Environmental Protection Administration in 1987 has since led to the gradual decline of the ship-breaking industry in Taiwan.

A more recent industry-related environmental concern centers on the potential for greenhouse gas emissions to cause climate change. While the government has set ambitious targets for reducing such emissions, Huang calls for larger changes such as gradually reducing the economy’s dependence on the petrochemical industry. Petrochemical plants began to operate on the island in the 1970s, but construction of new plants has run into stronger opposition in recent years due to concerns over airborne emissions of volatile organic compounds and carbon dioxide.

The government has been taking steps, however, to nudge Taiwan away from polluting, high-emissions industries and toward those that have environmental benefits. In March 2009, for example, the Executive Yuan announced a policy targeting the development of six key emerging industries. One of them is the so-called “green energy” sector, which includes the manufacture of photovoltaic cells that generate electricity from sunlight, while another is the light-emitting diode (LED) sector, as LEDs require less power than other lighting sources. The policy also targets the development of the cultural and creative industry, which primarily centers on creating intellectual property and thus generates little pollution or greenhouse gas emissions. In March 2010, the Executive Yuan added green architecture, patent commercialization, electric vehicles and cloud computing—all of which are relatively benign or beneficial to the environment—to the list of industries targeted for development.

Along with the emerging emphasis on environmental protection, another major trend is the development of closer economic ties with mainland China since the late 1980s. Seeking less expensive labor and land resources, Taiwanese manufacturers have moved to the mainland in waves. In 2000, Taiwanese businesses invested US$2.6 billion in the mainland, but the figure reached more than US$14 billion in 2010. During this period, the value of exports from Taiwan to mainland China and Hong Kong rose from US$35.5 billion to US$114.7 billion.

Until just a few years ago, however, Taiwan faced substantial barriers to the development of a fuller economic relationship with its closest neighbor. ROC government regulations, for example, stipulated that Taiwanese people could only fly to mainland China after making a stop in a third country or territory, significantly extending travel time for businesspeople. Cargo ships traveling between the two sides faced the same restrictions, which resulted in increased transportation costs. Meanwhile, a government regulation prohibited the entry of most mainland tourists in Taiwan.

Such barriers remained in place until President Ma Ying-jeou took office in May 2008 and began implementing a policy of renewed engagement with the mainland. Today, businesspeople can take time-saving direct flights that link airports in Taiwan with 40 cities in mainland China.

Groups of mainland tourists have also been allowed to enter Taiwan since July 2008. Some 1.6 million mainlanders visited the island in 2010, surpassing the number of Japanese tourists for the first time and injecting at least NT$60 billion (US$2 billion) into the economy, according to the Travel Agent Association of the ROC, Taiwan. The government is now working on legislation to allow the entrance of individual mainland travelers.

Heavy Investments

The rising number of mainland visitors is also driving upgrades of the island’s tourism infrastructure. “That’s why restaurants and hotels in Taiwan have started to invest heavily in renovations and expansions,” CIER’s Wang Chien-chuan says.

Conversely, Taiwan’s service sector operators are also expanding operations in the mainland. According to the Investment Commission under the Ministry of Economic Affairs, Taiwan’s service sector players accounted for 24.87 percent of all of the island’s mainland-bound investments in 2010, up from 10.85 percent in 2005. While a drain on capital, such investment aims to help Taiwan’s service operators compete in the vast mainland market. According to Wang, as they explore the mainland further, they will have to increase their scale and innovation, which will help increase their global competitiveness.

Of course, one of the most important economic policies pursued by the Ma administration has been the Economic Cooperation Framework Agreement (ECFA), which was signed by representatives from Taiwan and mainland China in June 2010 and targets lowering tariffs on goods and widening market access for services. “ECFA will greatly boost Taiwan’s economic vibrancy, although it will take some time before we can see really substantial results,” Wang says.

While the signing of ECFA will prevent Taiwan from being marginalized in the regional economy, it also presents a number of mid- to long-term challenges. Government subsidies are now in place to help local manufacturers compete with low-priced mainland counterparts, but local companies that fail to revamp their business models will eventually be driven from the market. Even though President Ma has repeatedly said that ECFA is a purely economic agreement, fears have also been expressed that Taiwan’s increasing economic reliance on mainland China could someday lead the island to compromise its political sovereignty. “It’s still too early to say whether ECFA is really beneficial for Taiwan,” Huang says, but adds that the trend toward closer ties with the mainland is inevitable, at least for the near to mid-term future.

Meanwhile, Wang says that the main economic challenge the ROC government faces lies not in the cross-strait arena, but in the widening gap between the rich and the poor, referring to the fact that the average disposable income of the top 20 percent of Taiwan’s households was slightly more than four times that of the bottom 20 percent in the 1970s, but has grown to more than six times since the early 2000s. The government is aware of the income-gap issue, however, and has begun taking steps to address it. In December 2010, for example, the Legislative Yuan passed a revision of the Social Assistance Act that will enable more economically disadvantaged families to apply for government financial aid. For example, aid is currently set aside for low-income households located outside Taiwan’s five special municipalities in which each member earns an average monthly income of less than NT$9,829 (US$328). After the revision takes effect on July 1 this year, however, the average income threshold will rise to NT$10,244 (US$341) per month. According to the Ministry of the Interior, the change will allow 600,000 more people to take advantage of government aid.

In another measure that is expected to reduce the income gap, in March the Legislative Yuan passed the first reading of a draft set of regulations that would impose a luxury tax on housing units that are bought and then resold in a short time, among other items. Barring delays in the legislature, the tax is scheduled to take effect this summer and is hoped to slow the continued escalation of housing prices that has put home ownership out of reach for many would-be buyers. The tax specifically targets short-term “flipping” of properties by real estate speculators, which drives up prices but does little to increase ownership. “That’s a good thing,” Wang says, “but the government can do more in tax reform like levying more income tax on the rich to cover financial assistance for the poor.”

As with many countries, Taiwan must balance economic development with environmental protection and reducing the domestic income gap. It also confronts the task of developing mutually beneficial economic ties with mainland China. By successfully addressing these challenges, Taiwan’s economy will continue growing in a manner that benefits every member of society.

Write to Oscar Chung at oscar@mail.gio.gov.tw