Economic and Political Development of Taiwan
1991, 1994
Economic Development (1991)
I've been slow to write any judgments about the economy partly because I quickly realized that my views were changing too frequently to be reliable. Taiwan is mostly controlled by a single political party (KMT) which until recently was dominated by a group of aging leaders who, in 1949, escaped to the then 6 million-peopled island with its leader Chiang Kai Shek and 2 million troops and refugees retreating from the communist revolutionary Mao Tse Tung. The island escaped communism and its people survived under the U.S. cold war umbrella until, in the 1960s, Taiwan became economically self-sustaining, though like South Korea, still dependent for "independence" on the U.S. threat of military intervention against an overly-aggressive Mainland.
The philosophy of the KMT is that sooner or later Taiwan will be reunited with the mainland. In its official view, since the KMT is the legitimate government of China (its duly elected leaders under a democratic constitutional government having been driven out by communist rebels), it will eventually extend its powers over all of China. It does not expect to take over the mainland by force. It seems to hold out a vague, indefinite, and mostly unarticulated hope that the mainland government will observe Taiwan's economic success and see the benefit of reuniting under KMT rule. But by the time that serious plans for reunification are proposed, the KMT may not be the ruling party. Thus, instead of KMT rule, reunification will have to occur in the context of democracy, not a likely prospect in my view.
After 40 years of separation and the obvious strength and resolve of the Mainland leaders, the idea of a unified China under the KMT or democracy is clearly a myth. It would probably disappear in an environment of open and free discussion and debate. But open debate is unpopular, since most people on the island seem to believe that open discussion of this issue or the alternative, Taiwan independence, will provoke an attack from the Mainland.
Shortly after I arrived in 1990, several dissidents were arrested for advocating Taiwan independence, which at that time was still a seditious act. In the past, such people had been sent to jail for ten years or so for similar crimes. Rumor has it that they used to be killed. Three American radio hosts were fired by their employer, the KMT, for their openness in public affairs programming. The only three TV stations permitted under law are owned respectively by the army, the KMT, and the provincial government. More recently, however, one former dissident (a professor of political science at the top-ranked Taiwan National University), who would have probably been jailed or killed if he had not clandestinely fled to the U.S. twenty years ago, was admitted back and now is the opposition party's presidential candidate. Also, a relatively free cable TV industry has sprung up with several independent stations. Only about 20% of the country is connected, I believe, but there is widespread access through friends. Radio and newspapers are also quite free.
More on this later. The limited freedom to dissent until recently is countered by Taiwan's rapid economic development. Measured national income has been growing at about 8 per cent a year for the past twenty to thirty years. Per capita income is about to exceed US$10,000 (1991), whatever that means. I have been reading and interviewing people to try to explain this. Here are my preliminary hypotheses, mixed with some history.
The Japanese had ruled Taiwan (Formosa) and used it as a source of agricultural products and raw materials throughout the 20th century. They had left a reasonably modern infrastructure of transportation and communication but the war had disrupted the normal patterns. Immediately after the war, Taiwan could probably have gained its independence or it could have become a U.S. protectorate like Guam, if the U.S. and the Taiwan people had wanted it. But the Taiwanese had many voices and there was no strong independence movement. Also, Truman and Churchill had to deal with Chiang, who was the nominal head of the Eastern Allied forces. (Chiang's dedication to the Allied effort was relatively weak compared with other allies, since he wanted to rid China of communists as well as Japan.) So the territory was turned over to the weakening, reputedly-corrupt and inefficient KMT on the mainland.
After 1945, until the KMT began to regard Taiwan as its Post-defeat haven, the Taiwanese were either disregarded or subject to looting and persecution by ruling KMT bureaucrats. In 1949, the KMT retreated with all its forces, including the government officials and the national art treasures, to Taiwan. Mao could seemingly have conquered Taiwan, at no small cost, if it was not for U.S. intervention.
Once on Taiwan and totally dependent on U.S. military aid for survival, the KMT undoubtedly felt pressure to develop a market economy and its attendant rights in property. Moreover, in the longer term, there was no guarantee of continued aid. To survive both short and long, the KMT had to promote development and growth. It is also possible that had Chiang been able to fulfill his dream of unifying the mainland under KMT rule, he would have imposed a similar system of property rights there. But this is uncertain. Fortunately, I think, the U.S. did not give more aid than was necessary for defense. The statistics indicate that the dominant form of aid was non-military; but this aid enabled the KMT to maintain relatively low taxes while building up its own military. Still its own defense capability must have been meager during the early years and, relatively speaking, it probably still is.
The extent to which the U.S. influenced Taiwan economic development in a direct way is not easy to determine. Even before the mainlanders arrived in 1949, U.S. government officials had been sent to set up a stable currency, the mainland and Taiwan having experienced hyperinflation as Chiang Kai Shek printed money to prop up his faltering military on the mainland. One of the first steps taken by the desperate KMT upon its arrival in Taiwan was a program that combined mainland technical expertise with local gentry financial capital into processing and manufacturing enterprises, some initially owned by the government, while turning over the gentry's land to the tenant farmers. The new era of political (property rights) and economic (no inflation) stability gave the former tenant farmers unprecedented production incentives. In addition, small businesses, largely beyond government control, also thrived as they seem to do everywhere where the Chinese are permitted entrepreneurial freedom and given a framework of law and order and property rights. The new government enterprises were apparently run reasonably efficiently and, given the open Western markets and low wages in Taiwan, were able to generate substantially foreign exchange for the government. There were also a number of new larger private enterprises that employed the money capital of the arriving civilian mainlanders (gold and foreign bank accounts, I assume).
I just spoke with one of the early engineers involved in the process of facilitating the changeover. He gives the impression that the planning problem was a relatively simple one and that the political leaders gave the economic planners an almost free hand. The planners did not follow the Soviet-style. They were pragmatic individuals who had an underlying philosophy that, except in unusual circumstances, the aim of the government should be to facilitate business not control it.
Besides of the apparently industrious Chinese people, Taiwan had a ready market in the U.S. and a U.S. government willing to allow technology transfer. In addition, the "native" Taiwanese still maintained some trade ties with a rapidly developing Japan.
Some people claim that the Taiwan government planned the development and that, for this reason, it is an example of successful central planning. On the basis of official reports and casual discussions, this appears to be a widely held view. Several facts about government involvement need to be pointed out, however. First, Taiwan is not a particularly large place geographically. (I think that I've heard it compared geographically with New Jersey, but practically all of the production was west of the mountains on a strip on average maybe 15 miles wide and 150 miles long. And this land had to house nearly 20 million people.) So central planning could be more effective at least in the early stages. Second, the economy was in shambles when the process started. Third, like early Japan, Taiwan actively sought technology transfers. This is consistent with their ethical system, which requires intellectual leaders to share their knowledge while rewarding them with status (as opposed to a system of respect for "intellectual property" rights, a pervasive problem among Chinese). Fourth, regarding exports and imports, Taiwan eventually established export processing zones where tariffs on imported inputs and taxes on exported finished goods were virtually eliminated. Fifth, the government helped to arrange foreign financing for its port expansion. Sixth, although the government typically protected its own firms from foreign competition and often subsidized exports initially, it maintained a policy of gradually eliminating the subsidies. The government in most cases has behaved like a parent -- first seeking technical assistance, then subsidizing a trial and error process, and finally removing the subsidies completely. This has been easier here since there was no democracy.(see below) It has been slower at opening up its markets but some progress in that area is now being made. (There's probably a substantial currency arbitrage gain to be made here but also some political risk.) Seventh, the Chinese people are peaceful, respectful of others' property, and industrious. For example, the threat of theft and robbery until recently have been so low that with the exception of large businesses, Taiwan has been able to survive as a cash economy. Twice my wallet with over $200 in cash has slipped out of my pocket on the street and been returned by some stranger. Of course, the cash economy enables the small businesses to avoid taxation. This is one reason why there are thousands of small shops and few department stores and shopping centers. Finally, regarding internal regulation of business and other aspects of life, although the laws are sometimes restrictive, the people do not seem to pay much attention to them and enforcement is lax. Since the government has not engaged in extensive expropriation, prohibitive taxation, or overregulation; the people have developed a strong internal economy. A recently-passed "fair trade" law, however, is not a good sign. Oh, yeah. The high rate of saving has been a facilitator, especially during the times when foreign investment would have been difficult to attract.
As I said, I am still learning about the economy, so these hypotheses are tentative.
Political Development(1991, partly updated in 1994)
Taiwan's political development is also remarkable, though not so "progressive." A constitutional democracy with a full bill of rights was created on the mainland in 1945 or 46 possibly with the aim of pleasing the U.S., on which Chiang Kai Shek relied for aid in his battle with the communist insurgents but also probably in the vain hope that a promise of democracy might help to win the hearts and minds of the rural population and greater support from warlords and the less loyal military. The first elections in 1946 or thereabouts are likely to have been rigged in large measure, the Chinese not having experienced a national democracy in modern times at least. Even if there was not direct rigging, voter turnout was tiny and the communists boycotted. The country was about to become embroiled in a civil war anyway, so the benefit of voting in the usual sense was probably not significant. The evidence is anecdotal, however, since it has been in the interest of both sides to distort the history.
The newly-elected officials of the Leninist-type KMT began arriving at the Capital in 1946, I think. These people were among those who retreated from the mainland in 1949 as the new rulers of Taiwan. Yet they never did rule either on the Mainland or on Taiwan. They declared martial law immediately after promulgating the constitution in 1946. This continued for about 40 years until 1987. After the elder Chiang died (1975, I think), his liberal son was elected president by the aging National Assembly. Toward the end of his life (1987?), the son successfully engineered the lifting of martial law. A real opposition political party was now permitted for the first time, although a real competitive system did not occur until a KMT split in 1994. My Chinese friends doubted that a split would occur because of the KMT's willingness to compromise with the current opposition party in order to retain its status. I must admit that it has shown a flexibility that is hard for a Westerner to understand.
In fact, the excitement is just beginning in Taiwan politics. Beginning in 1986 or so, as the aging members of the mainland-elected national assembly and legislature began to die, they were not replaced by elected local officials, although they were typically KMT members. Next followed a policy of active retirement, probably not unwelcomed by the aging assemblymen themselves (unlike their counterparts on the mainland who appear to cling to power like flypaper). With the lifting of martial law, the national assembly and legislature are now elected from among the people in Taiwan. Provincial elections have been held all along. (Under the law Taiwan is a province; the Republic of China just happens to be stationed here for the time being until it can return to the Mainland. Thus there are, in essence, two governments of Taiwan; but the provincial government's powers were sharply curtailed under martial law. It is not clear what its powers will be in the future. This is on the agenda.) There are also local elections in cities. So there is some limited experience with democracy. However, mayorial elections in Taiwan's major cities were suspended since 1949. In 1994, the first mayorial elections were held and an opposition party candidate was elected to the most prestigious post -- Taipei mayor. This is probably the most powerful political position held so far by an opposition party member. The first presidential elections are scheduled for 1996.
The first true set of national assembly and legislative elections was held in 1992. In both cases the ruling KMT won a large majority of seats in the major law-making bodies. Yet the opposition party won enough seats to impose costs on the ruling party. Besides, the Chinese tradition of attempting to avoid conflict has often led to preemptive compromises that have shifted the KMT positions from conservative to liberal -- more in the sense of power to the people than in the free enterprise sense. The shift to more liberal economic policies has been continuous and seems likely to continue regardless of politics.
With the lifting of martial law and the recent elections, the attention is turning to the Constitution. I've recently begun to sift through it. But I have by no means completed an analysis. Preliminarily, it appears to be a sensible document. There are enough levels of government and checks and balances to keep the politicians fighting among themselves sufficiently to prevent them from doing too much damage to the people. And it contains a bill of rights that seems stronger in name than that of the U.S., except for the usual catch -- the public interest may come first. There are some major conflicts such as the right to property vs. a national economic policy that "seeks to effect equalization of land ownership and restriction of private capital in order to attain a well-balanced self sufficiency in national wealth!" The Constitution was made by and for the mainland, with voting powers to representatives from places like Tibet and Mongolia and the primitive hinterland. Somehow the National Assembly must figure out a way to customize it for Taiwan without doing too much damage to it.
If the politicians succeed in creating a federalist system on Taiwan (a commonwealth of semi-autonomous counties, districts, or sub-provinces), they will perhaps have instituted the first modern Chinese constitutional democracy. A model for the mainland perhaps. But the process of constitutional change will probably go on for some time. And the Chinese have virtually no experience with Western-style democracy at the national level. Even at the local level, they are not accustomed to holding political leaders accountable. Instead they typically treat government officials either as benevolent parental figures or like bad weather from which to seek shelter. Education in public choice, expanded to include "constitutional economics" (I guess you know what I mean), is sorely needed here and, since the people have virtually no experience with democracy, it ought to be welcomed everywhere. (I'll be working on this.) My students have virtually no knowledge of democratic government or of their own "true" history.
Copyright © 1996 by James Patrick Gunning
Gunning’s Address
J. Patrick Gunning
Visiting Lecturer
Department of Economics
Bryant University
1150 Douglas Pike
Smithfield, RI 02917
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