Wise Central Planning?: The Chinese on Taiwan


(2005) "Wise Central Planning?: The Chinese on Taiwan." Commentaries on Law and Economics.



One of the most remarkable post World War II contrasts is that between the Chinese in Communist China and the Chinese in other parts of the world. During this fifty-year period, the Chinese who left the motherland out of fear or in search of economic opportunity flourished. Their success often came in spite of harsh anti-Chinese racism and envious expropriation. They worked, saved, and built large estates to hand down to their descendants. Meanwhile their brothers and sisters in the motherland faced persistence poverty and occasional famine due to unwise and often fatal central planning.


The Chinese success story is a story of the 20th century. With regard to technology, the feudalistic Chinese of the nineteenth century were centuries behind their Western counterparts. It was only in the 20th century, and especially after World War II, that the Chinese began to make their mark. This raises two questions: (1) why were they so far behind economically at the dawn of the 20th century and (2) how have so many been able to catch up so quickly? I believe that the answer lies with two factors: the market economy and the character of the people.


That the market economy played a key role is clear. Both the dynasties that ruled China for millenia prior to the 1911 revolution and the communists that emerged as the post-war leaders suppressed trade, both internally and with other nations. The Chinese on Hong Kong, Singapore, and Taiwan embraced it. There, and in other countries where the Chinese did well, they were free to act entrepreneurially and to gain the rewards from their actions. The Chinese earned their fortunes in business. And they were able to do so because markets were open to them.


Let's turn now to the second reason: the character of the people -- or what amounts to the same thing, their traditions. The characteristic that is relevant here is the sanctity of the historical family. Typical Chinese heads of household who left the Mainland during this century aimed to carry on a tradition in which they would be remembered and revered as noble ancestors, just as they remembered and revered the best of their own ancestors. They wanted permanent homes for their families. And they wanted children and grandchildren who would love them and honor their families. The best way to insure this, in a market economy, is to work very hard to build an estate. To represent this motivation, we might use the term dynastic impulse. Just as an emperor of China wanted to continue the dynasty of his family and to be remembered as a great emperor, so also did the head of the Chinese household.


In pre-20th century China, opportunities to exercise this dynastic impulse were limited. An ordinary man could study for government examinations, join the army, or try to marry his sons and daughters into rich or distinguished families. In communist China, opporunities were hardly any better. The main road to success was by rising in the communist party. Compare this with the market economy. A person could adopt practically any specialization he wanted. If he worked hard at it, he would make enough money for his family. If he saved, he could buy land and a home. Most importantly, he could assure that his children had opportunities and incentives to acquire the specialized talents that he himself lacked and that limited his own success. In the process, of course, his specialization and that of his children would contribute to the welfare of the others, in classic Adam Smith fashion.


Thus, it is no surprise that the Chinese societies have flourished in second half of the 20th century, after they were finally freed first from feudalism and later from the anarchic chaos that preceded World War II on the Mainland. What seems surprising is that many academics attribute the Chinese success story to government planning. It is true that the governments of Hong Kong, Singapore, and Taiwan were, in different measures, dictatorial during most of the period and that they had the ability to impose their will on the people. But the salient characteristics of these governments were (1) their desire for economic growth and (2) their recognition that in order to achieve it, they needed the market economy. So the government leaders planned. But their planning sessions were mostly about how to encourage initiative and inventiveness and, if appropriate, how to undo previous planning that had stifled them.


Let's take Taiwan as an example. The man most responsible for "planning" the miracle, Mr. K. T. Li, introduces his book about his planning experience with the following paragraph:


 


I have always believed that government can serve only as a guide and catalyst in the process of economic development -- that it can help establish the type of environment needed for economic development to take root, but that the true success of any national development effort depends on the will and the commitment of the people.(K.T. Li,Economic Transformation of Taiwan, 1988)



What kind of environment did the Taiwan government help create. First, it created a stable business environment by severely restricting inflation. The same pressures to control inflation that existed in post-War West Germany and in Japan also existed in Taiwan in 1949. All three countries had just experienced the hyperinflation of war. As a result, the leaders of the government had learned the lesson that inflation disrupts business. They knew first hand that people would not use money if they had to worry about hyperinflation again. So Chiang Kai Shek, like the other leaders, did what was necessary to convince people that the government currency was worth using in trade.



The second action was to protect property rights. The Taiwanese (the people who lived on Taiwan before 1945 and their descendants) were especially worried. They needed to be reassured that the retreating nationalist army and other functionaries who arrived in 1949 would not arbitrarily seize property or tax and regulate their earning opportunities. Chiang and his aides had enough insight to realize that if they wanted to be secure from invasion by China in the long run, they needed rapid economic growth. They could hardly achieve this without at least tacit support from the Taiwanese. So Chiang sought to make good on his promises to end the confiscation of Taiwanese property and to allow Taiwanese to keep whatever new property they accumulated. At the same time, he avoided some errors of his previously appointed governor by eliminating price controls and other regulations. He retained control over transportation, communication, energy, and a number of other industries. But because the island is small, because he was highly motivated, and because he received modernization help from outside, these industries succeeded relative to their socialist counterparts.



In a word, during the early 1950s and 60s Chiang sought to establish a system of secure private property rights and a relatively free domestic market economy in essentials. By the end of the 1950s, he had succeeded. The result was a proliferation of small businesses and a flourishing of regional and even neighborhood economies.



Third, the Taiwan government embraced western technology. In the 1950s it sought technical and business assistance from a number of foreign advisors, most notably from the U.S. It also bought foreign education by financing the graduate studies of a large number of Taiwan university graduates in western universities. As many of these emissaries returned, they became the brains behind low-wage electronics and computer products that, beginning in the 1970s, brought Taiwan into the modern age. Many also became teachers at Taiwan universities.



Fourth, the government instituted "land reform." Over a period of time the government phased out the feudalistic tenure system that it had inherited from the Japanese and substituted a relatively free market in farm land. The remaining restrictions of land sales did not allow the flexibility necessary to take advantage of economies of scale. Nevertheless, the reform created entrepreneurial opportunities for numerous small farmers. Having previously been restricted by their traditional status in the feudal farm communities, they took advantage of the countless unregulated and untaxed outdoor food markets that blanket the Taiwan landscape. In short, many small, landless farmers became land-owning entrepreneurs who could sell their products on the market for profit.



Fifth, the government instituted a program of relatively slow but steady phasing out of government-owned businesses. The importance of public enterprises in Taiwan shrunk from 57% of value added in 1952 to 18% in 1992.



Sixth, the government maintained a free labor market, allowing employers and employees to choose jobs without wage or other restrictions.



Seventh, the bulk of public spending went for national defense and education and infrastructure, none of which impact heavily on the incentives in the market economy.



Eighth, the government encouraged trade, for the most part, by freeing export businesses from taxes and other regulations that applied to domestic businesses. It seldom gave direct subsidies. And when it did, it usually had the strength of will (and the dictatorial power) to withdraw them after a period of time).



Ninth, the government's lax enforcement of sales and income taxes among low income-earners helped stimulate a large underground market in untaxed goods. The sellers in these markets are highly mobile retailers, who operate in outdoor markets and who sell practically all of the necessities.



Some scholars have attributed Taiwan's "economic miracle" to wise central planning. They are certainly correct to say that the Taiwan government was wise. However, they are wrong to attribute the growth to central planning. A wise central planner is one who recognizes the limits of central planning and the great potential of individual planning. He frees individuals to profit from their planning, so long as their actions do not coerce or defraud others.




Copyright © 2005 by James Patrick Gunning



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