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Economic development strategies and policies in postwar Taiwan

Hemstock, Hsiaofen, Ph.D.

The Ohio State University, 1990

Copyright ©1990 by Hemstoch, Hsiaofen. All rights reserved.

UMI 300 N. ZeebRd. Ann Arbor, MI 48106

ECONOMIC DEVELOPMENT STRATEGIES AND POLICIES

IN POST-WAR TAIWAN

DISSERTATION

Presented in Partial Fulfillment of the Requirements for

the Degree of Doctor of Philosophy in the Graduate

School of the Ohio State University

By

Hsiaofen Hemstock, B.A., M.A.

*****

The Ohio State University

1990

Dissertation Committee; Approved by

Dr. William Liddle

Dr. David Pion-Berlin

Dr. Tetsunori Koizumi Adviser Department of Political Science Copyright by Hsiaofen Hemstock 199Ù To My Parents, Mother-in-law, Husband, and Son VITA

October 15, 1959 ...... Born - Kaohsiung, Taiwan, Republic of China

1983 ...... B.A., National Chengchi University, Taipei, Taiwan

1989 ...... M.A., The Ohio State University, Columbus, Ohio

1989-Present ...... Ph.D. Candidate, The Ohio State University, Columbus, Ohio

FIELDS OF STUDY

Major Field: Political Science

Studies in (a) Comparative Politics Subfields: Politics of the Developing World ; Politics of the Communist World (b) International Relations Subfields: International Political Economy

11 TABLE OF CONTENTS

VITA ...... ii

LIST OF TABLES ...... v

LIST OF FIGURES ...... vi

CHAPTER I: INTRODUCTION ...... 1

The Topic and a Review of the Theoretical Framework of the Study ...... 1

The Approach and Organization of the Study ...... 10

The Outline of Each Development Period Studied ...... 19

CHAPTER II: THE JAPANESE COLONIAL PERIOD ...... 27

CHAPTER III: THE PRIMARY IMPORT-SUBSTITUTION PERIOD ..... 49

Outline of Chapter III ...... 49

A General Description of the Internal and External Environments in the Primary Import-Substitution Period ...... 51

The 1949-53 Land Reform Program ...... 65

The Anti-inflation Policy ...... 92

The Import-Substitution Policy...... 100

Conclusion ...... 113

CHAPTER IV: THE PRIMARY EXPORT-PROMOTION PERIOD ...... 117

Outline of Chapter IV ...... 117

A General Description of the Internal and

iii External Environments in the Primary Export-Promotion Period ...... 120

1958-1960 Economic Reform ...... 129 a. the Encouragement of Private Enterprises ...... 139 b. the Liberalization of the Foreign Investment Climate ...... 149

The Establishment of Export Processing zones ...... 163

The decentralized Industrialization Policy ...... 184

Conclusion ...... 198

CHAPTER V: THE SECONDARY IMPORT- AND EXPORT-SUBSTITUTION PERIOD ...... 202

Outline of Chapte V ...... 202

A General Description of the Internal and External Environments in the Secondary Import- and Export-Substitution Period ...... 205

The Ten Basic Construction Projects ..... 239

Trade and International Investment Policies ...... 247 a. Trade policies ...... 247 b. International Investment Policies ...... 275

The Second Land Reform ...... 291

Conclusion ...... 304

CHAPTER VI: CONCLUSION ...... 309

BIBLIOGRAPHY ...... 351

IV LIST OF TABLES

TABLE PAGE

1. Comparison of Approved Non-Chinese Foreign Investment Between the Import-aubstitution and the Export-substitution Periods ...... 155

2. Approved Investment in Kaohsiung EPZ at the End of January 1970...... 168

3. Foreign Technology Participation Between Foreign and Domestic Exporting Firms, 1972 ...... 174

4. Workers Employed in Taiwan's EPZs (1967-1984) ...... 177

5. Contribution to Exports of Foreign and Domestic Firms, by Industry and Source, 1974 and 1980 ...... 181

6. The Distribution of Women Workers and the Ratios of Women Workers to the Total Employed Across Various Industries ...... 196

7. Distribution of Industrial Production by Ownership (Based on Value Added at 1981 Prices) ...... 232

8. Trade Dependency Ratio of Taiwan, 1952-1985 (%) ...... 248

9. Time Table, Planned by the Council for Economic Planning and Development, to Reduce Tariffs ..... 255 LIST OF FIGURES

FIGURES PAGE

1. Outline of the Primary Import-substitution Period ...... 48

2. Outline of the Primary Export-promotion Period ...... 117

3. Outline of the Secondary Import- and Export- substitution Period ...... 202

VI CHAPTER I

INTRODUCTION

The Topic and a Review of the Theoretical Framework of the S-tu.dy.-‘

Since the end of World War II, the topic of finding factors within the newly independent countries that would facilitate or inhibit their development has attracted the attention of social scientists from different perspectives, ranging from orthodox economists to radical dependency theorists. In the 1950s and 1960s many American social scientists tried to study this from a "modernization" approach. However, their image of modernity was generally derived from the example of the developed countries. Thus, their arguments and suggestions were not of much use to the leaders of the less developed countries (LDCs).

In response to this, some scholars in Latin America tried to use the dependency approach to explain the reasons for persistent underdevelopment in their countries. In general, they tended to emphasize the power of the international capitalists from the core countries in shaping the behavior of the states and class stru -tures in developing countries, thereby dismissing the internal origins of their interactions. 2

The industrialization of some Latin American and East

Asian newly industrializing countries (NICs) has generated a new wave of revisionist dependency writing, called the

"dependent development" approach. In response to the excessive focus on the external variables of the classic dependency theory, one of the main arguments of the dependent development approach is that central to a change in the political balance in the development process of a given Third World country is the growth of a stronger local state apparatus. Thus, Peter B. Evans (1979; 11) asserts

"if classic dependence was associated with a weak state, dependent development is associated with the strengthening of strong states in the 'semiperiphery'. The consolidation of state power may even be considered a prerequisite of dependent development." Suddenly, the statist approach becomes fashionable among scholars of the political economy of the Third World.

Under the framework of the statist approach, scholars in the field of Third World development have begun to search for interesting cases of state-managed mixed economies. At this juncture, the four East Asian NICs — Taiwan, South

Korea, Singapore, and Hong Kong -- are experiencing unprecedented growth. Their combined current account surplus reached about $30 billion in 1987, as compared with

$39 billion for the European community (Housego, 1988: I).

Thus, David Housego predicts that by the year 2000, East 3

Asian economies will have a joint national product greater than Europe's and as big as North America's. Moreover, the four East Asian NICs have high growth rates of real income and real consumption per capita and low inflation and unemployment rates.

Under the influence of the statist approach, many scholars have attributed the economic success of the four

East Asian NICs to the authoritarian nature of the state.

However, from the events of the last three years in South

Korea and Taiwan, the statist approach has shown some defects because authoritarianism is crumbling in Taiwan and

South Korea without noticeably damaging economic growth. On the contrary, in the Taiwan case, economic liberalization, internationalization, and institutionalization are vigorously advocated by the government to reduce the level of the government's intervention-. So, although the statist approach reveals important facts of the East Asian development pattern, it tends to overstress the independent role of the state and ignore other important factors for their economic success.

Knowing the defects in each of the above-mentioned approaches, my own approach in explaining Taiwan's economic success will have a different emphasis. Before I get into explaining my approach, an examination of Taiwan's economic performance over the past four decades is necessary.

Taiwan's post-war economic development has often been cited 4 as a miracle. One characteristic of the data presented here is that Taiwan's economic development is a type of shared growth. Almost all scholars of Taiwan's development process agree that, in contrast to what has happened in other developing countries, economic development in Taiwan has been characterized by equal distribution of the benefits of economic growth and social progress among the population.

Statistical facts of those achievements are briefly outlined as follows:

a. Rate of economic growth: From 1953 to 1980, the annual growth in GNP averaged 9 percent, wh^^h surpassed the average annual growth in GNP of the industrialized countries

(4 percent) and other developing countries (5.2 percent) (Li and Yeh, 1962: 14), Per capita growth in GNP, which is a better measure of improvement in the standard of living of the population, is also impressive. Annual per capita growth in GNP from 1960 to 1977 was 6.6 percent, which surpassed the average annual growth in per capita GNP of the low-income countries (3.0), the middle-income oil-importers

(3.5), and the industrialized countries (3.3) (Barrett &

Chin, 1987:26). In terms of the growth rate of GDP, Taiwan has experienced real GDP growth of 10.6 percent a year from

1965 to 1979 (Wade, 1988: 30).

b. Changes in economic structure and sectoral shifts in

GNP: Taiwan's post-war economic growth was caused in large part by a substantial structural transformation of the 5 economy from an agricultural to an industrial one. Labor forces in Taiwan's industrial sector have expanded rapidly since the 1960s. Industry's share of GN'? increased from

32.3% in the 1950s to 50.9 percent in the 1970s, and agriculture's share declined from 27.8 percent in the 1950s to 8.4 percent in the 1980s. As to the service sector's contribution to GNP, it stayed roughly the same over the first three decades, about 40-43 percent of GNP (Ho, 1987:

229). However, due to the changing industrial structure and the government's willingness to let foreign and overseas

Chinese firms invest in the growing service sector to accommodate the growing domestic market, its share is growing in the 1980s. This is one of the early signs of economy maturity.

c. With the exception of the massive inflow of US aid in the early stages of development, Taiwan has relatively low dependence on foreign sources of capital. In the area of foreign indebtedness, unlike South Korea's strategy of heavy foreign borrowing for its economic development, Taiwan has been successful at increasing domestic savings rates, and shows low dependence on foreign loans. In the area of foreign investment, due to both political and economic reasons, foreign investors were excluded from the import- substituting industrialization. However, since the export- promotion strategy was started, the government has been trying to create and maintain a favorable climate for 6 foreign investment through many incentives. However, data on actual, investment by Multinational Corporations (MNCs) in

Taiwan shows that the proportion of direct foreign investment on the capital formation is quite low.

Taiwan, however, has a high degree of dependence on foreign trade and international technology. The open and booming world economy in the 1950s and 1960s and the arrival of U.S. and Japanese MNCs to the island made important contributions to Taiwan's export growth. Nevertheless, later development shows that Taiwan not only faces growing protectionism in the Western markets but also faces increasing competition from other developing countries.

Therefore, something needs to be changed to survive. In fact, the Taiwan government has shown its ability to implement a growth strategy substantially independent of external influences. Important examples to show the government's policy of reducing external economic dependence are concerted efforts by the government and entrepreneurs to diversify overseas markets and upgrade Taiwan's economic structure. The policies of diversification and internationalization will be studied in later chapters.

d. Growth in manufactured exports: According to Robert

Wade's statistics, the share of manufacturing in Taiwan's

NDP was 36% in 1973, which is considered as being high even by the standards of developed countries (1988: 30). With a small domestic market, a large portion of manufactured 7 production has been exported. The following figures show

that industrial manufactures dominates exports. 8 Percent

of Taiwan's exports were industrial products in 1953. By

the 1970s this number increased to over 80 percent (Clark,

1987a; 5).

e. Price stability: The Taiwan government has always been very sensitive to the problems of inflation. It has been emphasizing the importance of maintaining economic growth and price stability. Indeed, Taiwan has simultaneously achieved these two goals. From 1983 to 1972 the annual increase in Taiwan's wholesale price index was

1.8 percent with a GNP growth rate of about 10 percent a year. The increasing price of imported oil and raw materials destabilized the domestic price level in 1973-

1974. At that time, wholesale prices went up to 41 percent

in 1974. However, after 1974 and until the second oil crisis in 1979 wholesale price increases were kept down to about 3 percent per year (Prybyla, 1981: 139).

f. Employment: Due to decades of high-speed growth in

labor-intensive, export-led industries, demand for workers often exceeds supply. Unemployment rates are extremely low.

Since 1968 the annual unemployment rate in Taiwan has been below 2 percent. However, as the economy continued to expand in the export-promotion period, Taiwan's industrial manufacturers faced a labor shortage. The labor shortage has created both advantages and disadvantages for the 8

economy. It brought about rising wages and benefits for

Taiwanese workers and speeded up the process of automatization, but it has resulted in agricultural degradation (a subject to be discussed in detail later on) and the inflow of illegal foreigners into Taiwan's labor markets.

g. Income equality: Many studies have shown that

Taiwan has been able to achieve a high level of income equity despite its rapid economic growth. According to professor Tibor Scitovsky's study (1986), income distribution is more equal in Taiwan and South Korea than in any other developing countries, and it is more equally distributed in Taiwan than in South Korea. The Gini in

Taiwan decreased from 0.46 in 1961 to 0.30 in 1980. It is probably the largest decline in this measure in any non­ socialist nation since 1900 (Barrett and Chin, 1987).

According to another index of income inequality, the proportion of national income received by various strata of households in a given country, the ratio of the income of the highest 20 percent to the lowest 20 percent of the population in Taiwan decreased from 20.5 in 1953 to 5.3 in

1964 and 4.6 in 1986 (Yu, 1987; 2). Today, Taiwan's experience is constantly held out as an example to developing countries of how to achieve both growth and equity. 9

The economic success story of Taiwan is a useful case

study for not only development economists, but also political scientists. The above-mentioned economic accomplishments are not unique when compared with other East

Asian NICs, but, without an abundance of natural resources,

it certainly is one of the best in representing a more balanced and remarkable development. Among almost all the studies about Taiwan's economic development, there is an agreement that Taiwan is a dynamic, progressive society that is constantly building and improving upon the foundations of a prosperous life for its people. Yet, this was not easy to come by. There are many factors which can be attributed to the economic success, and it is precisely what this dissertation research is all about.

In this dissertation research, this remarkable economic performance is the dependent variable. In explaining this dependent variable, different sets of policies, put into effect in different stages since the end of World War II, will be the intervening variables. Careful and informed calculations of political, economic, and social factors in formulating and implementing these policies will function as the independent variable.

One important note about those policies pursued is that they were made in response to changes in the domestic and international settings. Since internal and external factors influencing Taiwan's economic development are not only 10 economic in nature but also political and social, a study of the leaders' calculations in formulating and implementing those policies should be based on economic, as well as political and social factors.

Also, in Warren F. Ilchman and Norman T. Uphoff's book,

Ihe. E.al.LLi.c.9.1 Economy O i Change (1969), they argued that non-economic requirements or consequences of economic development strategies can not be ignored and calculations of the political and social costs of economic plans and proposals need to be made. Thus, although the topic of my dissertation is strictly economic, I intend to examine not only economic, but also political and social calculations of policy-makers in Taiwan as well.

The Approach and Organization of the Study:

I believe that farsighted economic planning and correct development strategies and policies pursued by the

Taiwan elite are the main factors of Taiwan's economic success. K. T. Li, one of the main promoters of Taiwan economic development, once said that among the many factors that contributed to Taiwan's rapid industrial development,

"successful implementation of economic plans is certainly one of the most important." (Li and Yeh, 1982: 1)

Since the Nationalist government retreated to Taiwan, there have been many economic plans. The targets of each

Plan are summarised as follows (Wu, 1987: 77): 11 The First Four=Year ioonemio Plan <1163=11); Plan targets: 1. Promote agricultural and industrial production 2. Foster economic stability 3. Improve balance-of-payments

The Second Four-Year Economic Plan (1957-60): Plan targets: 1. Promote industrial and mining development 2. Promote exports 3. Increase employment 4. Improve balance-of-payments

The Third Plan (1981-84): Plan targets: 1. Maintain economic stability 2. Accelerate economic growth 3. Expand industrial base and upgrade economic structure 4 . Improve investment climate

The Fourth Economic Plan (1965-66): Plan targets: 1. Modernize the economy 2. Maintain economic stability 3. Promote development of advanced industries

The Fifth Economic Plan (1989-72): Plan targets: 1. Maintain price stability 2. Promote exports 3. Expand infrastructure 4. Upgrade industrial structure ; 5. Modernize agriculture

The Sixth Economic Plan (1973-76): Plan targets: 1. Accelerate industrial modernization 2. Expand infrastructure 3. Upgrade quality of manpower 4. Promote exports

The Six-Year Economic Plan (1976-81): Plan targets: 1. Improve living standards 2. Upgrade industrial structure 3. Strengthen manpower development 4. Promote balanced economic & social i development 5. Complete the Ten Major Development Projects

The Seven Four-Year Economic Plan (1982-85): Plan targets: 1. Maintain reasonable price stability 2. Sustain economic growth 3. Balance the growth of various sectors 4. Ensure adequate job opportunities 5. Promote equitable income distribution 6. Balance regional development 12

7. Promote harmonious social life

To achieve the targets of those economic plans, three prominent development strategies have been pursued in the history of Taiwan's post-war economic development. They are the primary import-substitution, the export-promotion, and the secondary import- and export-substitution strategies.

The main body of my dissertation will be organized by the discussion of sequential phases of development in Taiwan.

They are the Japanese colonial period, the primary import- substitution period, the export-promotion period, and the secondary import- and export-substitution period. Except for the Japanese colonial period, those sequential phases are based on the different natures of development strategies pursued from 1949 to the present.

It should be noted that a look at the Japanese colonial period is necessary because, as this study will show later on, although the most dynamic and rapid growth in Taiwan occurred roughly from 1950 to the present, the foundation of its success, politically and economically, was set up during the era of the Japanese colonial rule. Also, one of the main reasons for organizing the study in this way is that

Taiwan's development did not take place overnight; it has been a gradual evolution, and by examining different development policies in various periods, it allows us to be able to compare and assess changes and continuities systematically over time. 13

At the beginning of each period, a general description of the internal and external environments of that particular period will be presented first. By stressing both domestic and international favorable conditions as well as constraints for formulating and implementing these policies,

it can help us understand where those policies came from and

lead to. It can also tell us on what political, economic, and social bases the Taiwan leaders made their choices.

As will be shown, external factors which have had a great impact on Taiwan's policy-makers in formulating economic policies include the massive arrival of U.S. aid and its termination, the cold war between the United States and the Soviet Union, the world economic situation changing from an open to a more protectionist one, the rise of Japan in the world economy, the penetration of multinational corporations into Third World countries, the energy, monetary, and trade crises of 1972-1974 in the international setting, and the establishment of diplomatic relations between Communist China and other major nations such as the

United States, Japan, and so on.

Internal factors which have exerted influences on the making of development policies in Taiwan include the vulnerability of the Mainlander-controlled regime in the new environment, the threat from Mao's military force, the need to feed the growing population, the tension between the

Mainlanders and the Taiwanese, the hyperinflation problem. 14

the need to protect indigenous industries and to promote private entrepreneurs, the labor shortage problem, the growing political opposition force and assertive middle class, and so on.

In each period, several decisive policies will be carefully chosen for study. In the phase of import- substitution, three policies fundamental to Taiwan's economic growth in later periods of development are the

1949-53 land reform, the anti-inflation policy, and the

import-substitution policy. In the following period, the export-promotion period, another three crucial policies pursued in response to changes in the domestic and

international environments of the 1950s and 1960s are the

1958-60 economic reform, the establishment of export processing zones (EPZs), and the decentralized industrialization policy. In the secondary import- and export-substitution period, policies chosen for careful study are the Ten Basic Construction Projects, trade and international investment policies, and the program to stabilize agriculture through the Second Land Reform.

My argument is that although Taiwan is generally regarded as a capitalist or free-market economic system, its rapid growth has been closely related to these state- initiated policies. Unfortunately, in the current literature about Taiwan's economic development, there is no systematic study about these policies. Therefore, I hope my 15 study will make a major contribution to the understanding of

Taiwan's economic development, and will provide an aid to political leaders of other developing countries in formulating development strategies.

Another theme of this dissertation research is that careful calculations and continuity in leadership at the national level and the economic and political authority and autonomy they enjoy contributed partially to Taiwan's success. In Taiwan's development history, a group of people who came to the island with Chiang were in charge of

Taiwan's economic development. Many of this group had party, government and industrial experience as organizers and administrators. Walker (1973: 364) claims that "the more than one million civilians who, in addition to almost half a million military, came to Taiwan represented some of China's most sophisticated scholars and competent technicians."

There are four features of Taiwan's economic policy­ makers which explain their active role in the process of economic development. First, there is a high level of coherence among Taiwan's elite. They have common recognition that Taiwan is their last chance, thereby preventing division. Also, up to the late 1970s, opposition forces, at least at the national level, were minimized.

Second, as will be shown, in the process of economic development, Chiang Kai-shek made two important moves regarding his personnel which contributed partly to Taiwan's 16 economic success. The first one was the thrust of economic power to the hands of modern technocrats. The second decisive move was the downplaying of military influence in economic affairs. The initial KMT national leadership was composed of the top political and military figures who had retreated from the Mainland with Chiang Kai-shek. However, as Taiwan's society became more industrialized, the key decision of the initially strongly military regime was to encourage economic development and structural change and to give substantial political power to the economic technocrats.

Consequently, modern technocrats have had unusual economic and political authority and autonomy to define national goals and to get those goals achieved. This is in sharp contrast to some bureaucratic-authoritarian regimes in

Latin America in which many existing groups in the society already had considerable autonomy from the government when it came to power. Samuel P.S. Ho (1967: 246) once said that

"it is perhaps not so unusual that a developing country would have a small number of capable technocrats; what is surprising is that in Taiwan they have had such an enormous influence, and that their economic recommendations, once formally adopted as national policies, were carried out so effectively."

Third, unlike economic technocrats in other Third World countries, the power to oversee Taiwan's development 17

strategies and policies is not used to maximize their personal power and material gains. Actually, it is the whole

country that experiences economic advancement, and certain

societal strata such as businessmen and native Taiwanese who

increase their economic power as well as their political power.

As will be shown in this study, individual examples of promoters of ''oonoraic growth will include top political

leaders and party members as well as economic and planning experts. Chen Cheng, who was once Governor of the Taiwan province. Premier, and Vice President, initiated the 1949-53

land reform. S.C. Tsiang and T.C. Liu, two prominent economists, advocated a high interest rate policy to bring hyperinflation down and recommended economic reform in the

late 1950s and early 1960s. K.T. Li, who is recognized as the architect of Taiwan's economic success and served as the

Minister of Economic Affairs and later Minister of Finance, supported for the establishment of the export processing zones. Yin Chung-jung called for an increase in the role of private businesses. Chiang Ching-kuo advocated the Ten

Basic Construction Projects when he served the country as

Premier. Y.T. Chao called for liberalization, internationalization and systemization when he was the

Minister of Economic Affairs.

The fourth feature of Taiwan's economic policy-makers is their skillful political management in adjusting 18 functionally to both internal and external constraints.

Polities in Taiwan are in a sense concerned with the

logistics of survival. Thus, one major responsibility put on the political and economic leaders is to fight for the country's continued viability. Indeed, as this study will show, many policies were formulated as a result of anticipation of the political consequences. Examples which will be shown include the implementation of local-self government, land reform, liberalization of political system since the late 1970s, etc.

The final emphasis of my dissertation research is to make a comparison betweem import-substituting industrialization (ISI) pursued in Taiwan and some Latin

American countries. In the 1950s, both Taiwan and Latin

American countries were pursuing similar development strategy of ISI. However, after a mild and short period of

ISI, Taiwan shifted to a strategy of export-promotion industrialization (EPI), which included the adoption of more rational market-oriented policies. In contrast, in most

Latin American, prolonged ISI resulted in the dominance of

MNCs, extensive commercial borrowing, and economic crises, such as high inflation rates, low economic growth, an acute contraction of domestic investment, and other political and social distortions.

In the concluding chapter, I will suggest that the smoother path of ISI policy and the less problematic 19

transition from the ISI policy to the EPI policy in Taiwan were not only due to the quality of leadership and hard work of the people, but also due to some "special factors,"

including the unique colonial experience, the relative

autonomous relations of the KMT vis-a-vis the rest of the society, the outbreak of the Korean war, concessional aid

from the U.S. between 1950 and 1964, the expanding global

economy of the 1950s and 1960s, and substantial discriminatory state intervention.

Outline of eaoh development period studied:

In chapter 111 on the primary import-substitution period, three important policies will be discussed. They are the 1949-53 land reform programs, the anti-inflation policy, and the import-substitution policy. These policies were pursued in very unfavorable domestic and international environments. In addition to domestic problems, such as the destruction caused by the intensive bombings of February-May

1945, raging inflation, and the February 1947 riots, the regime faced the potential of international isolation and

invasion from the Communists on the Mainland. Fortunately, the outbreak of the Korean War and the sequential arrival of

U.S. military and economic aid helped mitigate Taiwan's heavy military burden and reduce the serious conflict between defense and stable economic development.

In the discussion of the land reform, 1 will show how 20

KMT leaders, in the face of potential domestic instability

and external isolation, made their policy choices and

created an autonomous position over the landlords and

peasants. I will argue that political considerations of

gaining support and legitimacy for the newly arriving regime

carried more weight than did economic and other

considerations. However, to the growing population and the

budding light industries, economic utilities of the land

reform programs could not be understated. The realization

of land reform restored the agricultural sector and created

the agricultural surplus to meet the government's increased

fiscal burden and to support various urban-biased policies.

In the discussion of the anti-inflation policy, the political leaders' concerns about the political, economic, and social impacts of the hyperinflation problem are discussed. Under the persuasion of the economists, the

Taiwan leaders rejected the popular policy of low interest rates in favor in most developing countries around that time and introduced very high interest rates. The high interest rates not only brought the inflation problem under control, but stimulated people to save, thereby contributing to growing domestic savings. Politically, the initial confidence among the population in the regime's ability to stabilize the economy was sharply increased.

In the section on the import-substitution policy, I will argue and illustrate that the pursuit of the import- 21 substitution policy was based on ideological, political, and economic considerations. In addition to policy measures such as a multiple exchange rate system, import constraints, and tariff protection, one major part of this development strategy was the heavy government involvement in the economy.

Chapter IV studies the primary export-promotion period in Taiwan's economic development. In this period, the political situation at home was by and large well-controlled due to the success of the 1949-53 land reform and initial industrialization and the existence of an efficient security police apparatus. Externally, there was a favorable international economy, and Taiwan had close relations with two of the world's most dynamic economies -- those of the

U.S. and Japan. Three crucial policies pursued in response to changes in the domestic and international environments of the 1950s and 1960s are discussed. They are the 1958-60 economic reform, the establishment of export processing zones (EPZs), and the decentralized industrialization policy.

In the discussion of the 1958-60 economic reform, policy debates and economic and political calculations of

Taiwan's leaders about liberalizing the economic system are presented. Compared with the 1949-53 land reform, which was primarily a political decision, economic considerations in response to limitations of the previous import-substitution 22 policy carried more weight in shaping the 1958-60 economic reform than did political considerations. However, some political calculations by the KMT leaders were still critical, especially the needs to meet pressures from the

AID mission and to promote some pro-KMT big businessmen.

Two major aspects of the economic reform — the encouragement of private enterprises and the liberalization of the foreign investment climate — are selected for discussion in detail. These policies made important contributions to Taiwan's economic transformation from an inward-looking into an outward-looking nation and from an agricultural into an industrial economy.

In the discussion of the establishment of EPZs in

Taiwan, some of the features and functions designated to the

EPZs will be pointed out. General intellectual criticism of the export zones in Third World countries is presented too.

At the end of this section, direct foreign investment within and outside the three EPZs in Taiwan are evaluated based on four criteria -- domestic and overseas investors attracted, labor-intensive technology transferred, exports promoted, and employment created. This evaluation will show that although the amount of direct foreign investment in Taiwan was never high, it made many direct and indirect contributions to Taiwan's economy in the 1960s and 1970s.

In the section on the decentralized industrialization policy, political leaders' concerns about potential urban 23

instability and rural degradation resulting from rapid

industrialization are discussed. Also, factors contributing

to a successful implementation of the policy in the 1960s are presented. More importantly, consequences and their

implications for the development of the rural sector and the whole economy are discussed.

Chapter V studies the secondary import- and export- substitution period in Taiwan's economic development. In this period, Taiwan's economy fell victim to its own success. In the external environment, the overall world economic climate was not as favorable as it was in the 1950s and 1960s. Factors, such as increasing protectionism in developed countries, rising competition from newcomers, diplomatic setbacks, and world economic crises, forced the

Taiwan government to adopt a new development strategy. As far as the internal environment is concerned, the rising civil society, the growing opposition force, and the surfacing of intersecting social cleavages have forced the government to be more responsive to demands and criticisms.

However, economic planners in Taiwan, who excel in pulling advantage out of disaster, made important policy decisions to mitigate the diplomatic setbacks. In this chapter, three more policies will be selected for study. They are the Ten

Basic Construction Projects, international trade and investment policies, and the second land reform.

In the section on the Ten Basic Construction Projects, 24 we will see increasing involvement from the government in the economy due to the need to modernize Taiwan's defense

industries and to upgrade the country's infrastructure so that self-reliance could be achieved under a situation of

increasing diplomatic isolation and the potential threat of an economic blockade from Communist China.

In the section examining current international trade and investment policies in Taiwan, I will argue that aside from increasing domestic political and social demands, the

increasing trade surplus with the U.S. and the trade deficit with Japan have resulted in the redirection of Taiwan's international trade and investment policies. In the area of international trade, due to pressures from the U.S. government, imports are being liberalized, and trade with

European countries and Communist countries are being expanded in order to diversify the country's export market.

I will also show that to implement the new trade policy is not an easy task as important interest groups and opposition forces utilize the current open political system to criticize economic policies and try to influence the policy making process.

With regards to the current international investment policy, high-quality manpower, an ethic of hard work, good public facilities, a broad consumer market, and a relatively stable political environment all continue to attract foreign investment to the island. It will be argued that foreign 25 participation in Taiwan's economy is continuously needed for both political and economic reasons. To continue to utilize foreign investment for the growth of technology-intensive industries, a new type of industrial zone, the Science-based

Industry Park was established in December 1980 in Hsin-chu.

The park is a deliberate attempt to create a Taiwanese version of California's Silicon Valley.

The other important part of the current international investment policy is the encouragement of overseas investment. Outward investment is being vigorously promoted as part of Taiwan's technology-intensive industrial development program and part of the nation's "all-out diplomacy." For political leaders in Taiwan, the encouragement of outward investment will be the most effective solution for the country's rising foreign reserves, diplomatic setbacks, rising energy and labor costs, growing environmental concerns, and shrinking export markets.

In the discussion of the Second Land Reform, I will show that the role of agriculture in Taiwan's economic development has shifted from that of a supporting sector providing important resources to the rest of the economy to that of a dependent and protected sector. Indicators of agricultural degradation will be presented too. One important difference in the government-agriculture relationship is that the coercive, statist approach to 26 agricultural problems has given away to the pluralist approach. This switch was caused by the gradual liberalization of the political system and structural changes within the agricultural sector. CHAPTER II

THE JAPANESE COLONIAL PERIOD

Scholars who follow the history of Taiwan's economic development all agree that the economic base built during the Japanese colonial period, including a strong agricultural base and physical and institutional infrastructures, contributed greatly to Taiwan's industrial take-off in the 1950s and 1960s and the rapid economic growth later on (Amsden 1979; Ho 1965, 1978; Lee 1971).

However, there are also some scholars who warn us that we should not exaggerate or generalize the positive contributions of the Japanese legacy. There were both benefits and costs of the economic base built under the

Japanese rule. For instance, Yu-hsi Chen (1981) pointed out that the economic structure during the colonial period was a productive agricultural base and developed infrastructural facilities, but it was an uneven development and Taiwan suffered substantial exploitation from Japan. Politically, the costs inflicted on the native Taiwanese were even greater.

In a similar way, Samuel P.S. Ho (1978) stresses that although foundations set up during the colonial period have imposed great positive influence on Taiwan's post-war

27

-4 28 economic growth, the costs of colonialism can not be

ignored. There were many intangible political, social, and economic costs. The political and social costs included

"the humiliation of being ruled by foreigners, the loss of political and often personal freedom, and the lost opportunity to develop its own type of society." (Ho, 1978:

101) Economic costs included the irrational allocation of resources to the production of sugar and the discouragement of a Taiwanese capitalist class.

Indeed, this chapter is intended to show that over the course of fifty years, the Japanese brought about fundamental changes in Taiwan's economy, politics, and society. It is correct to say that the Japanese left a mixed economic legacy in Taiwan. Based on the pattern of development imposed by the colonial government on Taiwan, I will discuss some far-reaching economic, political, and social impacts of colonial policies on Taiwan's post-war economic development.

The first and most important contribution which

Japanese colonial rule made to Taiwan's post-colonial economic development was the creation of a highly productive agricultural base. When the Japanese colonized Taiwan in

1895, it did not take them long to realize that Taiwan's agricultural potential could be exploited to complement their own growing industrial sector. The agricultural sector was the most important employer and producer in the

- i 29 colonial economy. Ho (1978: 28) claims that it was the development of agriculture that was most responsible for colonial Taiwan’s economic growth. At least one-third of the central government's development expenditures was spent on promoting agriculture. Because of this, Taiwan was able to achieve a steady increase in agricultural output and became an important source of sugar and rice for the rest of the Japanese empire. According to Ho (1978: 31), by the

1930s Taiwan supplied 30 percent of Japan's rice and 75 percent of its sugar. Taiwan engaged in so-called "vertical trade" with Japan in which Taiwan exported agricultural goods and imported manufactured and processed products from

Japan.

To transfer Taiwan's agriculture into a highly productive one, the government spent considerable money and energy to prepare the island for agricultural transformation. Physical infrastructure, such as transport facilities, irrigation networks, and the like, was built and modern agricultural science and new rural institutional arrangements were introduced to carry out research and development. They included farmers' associations (FAs) and cooperatives, agricultural experiment stations, the Pao-chia

(tithing) system, and financial institutions.

As far as the building of an infrastructure in Taiwan is concerned, the railway system, roads, and hydroelectric power were three important contributions from the Japanese 30 colonial government (Ho, 1965). Indeed, construction on transportation and communication consistently received the major share of the government's annual investment. At the time when Japan gained control of Taiwan, the island had virtually no railroads or roads. Nevertheless, due to heavy investment by the colonial government, by 1920 Taiwan had

637 km of railroads and 3,553 km of roads. By 1940 this amount had grown to 907 km of railroads and 12,076 km of roads (Ho, 1978: 35). The construction of the rail system facilitated the transportation of sugar cane crops to refineries and sugar products from the refineries to cities and seaports. It also made transportation among villages and towns easier and facilitated the delivery of modern agricultural technology and farming inputs to the rural areas and raw materials needed by town-based small manufacturing industries to the cities (Chen, 1981: 164- 165).

The importance of the railway system continued in the post-colonial period, especially in the earlier stage of

Taiwan's post-war economic development. As will be shown, the success of the 1949-53 land reform programs and the decentralized industrialization policy all owed much to this relatively efficient transportation system.

In addition to the renovation and expansion of railroads and roadways, the Japanese improved the two largest harbors, Keelung in the north and Kaohsiung in the 31 south. Easy access to those harbors was certainly one of the main factors for trade expansion in colonial as well as post-war Taiwan.

Electric power was first developed for agriculture- related industries, such as sugar refining and other food processing industries. However, as Japanese imperial desires grew in the 1930s, so did the need to expand electric power for Taiwanese industry. Therefore, the development and expansion of electric power helped expand such new industries as aluminum, chemicals, textiles, etc.

In fact, power-generating capacity was increased from 50,000 kw in the early 1930s to over 300,000 kw by the end of World

War II (cited by Chen, 1981: 166). The continued development of those industries were hampered by the outbreak of the war, but "these infant industries and the hydroelectric power projects laid the foundation for post­ colonial industrialization of the island" (Chen, 1981: 166).

The colonial government also established many agricultural institutions for transforming Taiwan's agriculture and for controlling the farmers. The Farmers'

Associations (FAs), the Agricultural Cooperatives, and the

Small Agricultural Units (SAUs) were the three important examples. Initially, the Japanese government had to rely on the police and the pao-chia system for maintaining social order and providing agricultural services. The police under

Japanese colonial rule had many duties in addition to 32 maintaining order and peace. The promotion of higher- yielding rice seeds and new farm techniques in the rural areas was one important duty.

The Pao-chia (tithing) system was also used by the colonial government in the rural areas and cities to maintain social order and disseminate information. It was a mutual responsibility scheme which organized families into groups, and each group was assigned join responsibility for the conduct of its members. A chia was a group of about ten households. Ten chia constituted a pao. The head of each chia and pao was elected by the member households and approved by the government. Ho (1971: 302) describes the significance of this administrative device as follows:

‘ ... it allowed the government and the police to reach literally every household, without creating a huge bureaucracy at the same time. Furthermore the system was self-supporting, adding little or no fiscal burden to the government."

FAs were also set up throughout the island to function as a channel of communication between the colonial authority and the farmers and as a means for police surveillance and control over the local population (Amsden, 1979). During the course of the colonial period, FAs gradually undertook many important functions in promoting agricultural productivity, such as "the improvement and the extension of seeds; the maintenance of a seed multiplication system; the prevention and control of animal and plant diseases; the 33

training of agricultural technicians; the execution of

agricultural surveys; the purchase of fertilizers, seeds,

and equipment; and the management of warehouses." (Ho, 1963:

330) One feature of the FAs is that they were highly

controlled by the government and were regarded as "an arm of

the government" (Ho, 1978; 63). The important role of FAs

continued in the post-colonial period. As will be shown,

FAs and other agricultural organizations are an important element in the Nationalist government's management of agricuIture.

Several thousand SAUs were also developed to facilitate dispersal of agricultural information and communication between farmers and agricultural experts. SAUs provided more personal contacts between farmers and the agricultural experts than FAs did. The number of SAUs increased from 1

in 1906 to over 3500 in 1928 and 5277 in 1942 (Ho, 1968:

330) .

The agricultural cooperatives were created to give the farmers better access to loans (Ho, 1978: 63-64). There were 13 credit cooperatives in 1913, when the Japanese started to regulate and encourage the establishment of cooperatives. The number increased to 214 in 1920, 332 in

1930, and 443 in 1940 (Ho, 1968: 331). As I will show in the next chapter, those agricultural institutions already set up by the Japanese colonial administration continued to fulfill their duties in the post-war period. Basically, the 34

Nationalist government utilized them the same way as the

colonial government had done, and active state intervention

through these institutions helped provide the political

foundations of the Nationalist government by extending its

political and security networks into the rural areas.

Modern banking and financial institutions were developed by the Japanese for the expansion of internal and

external trade. At the end of the nineteenth century there were no modern banks in Taiwan. By the late 1920s five banks

had opened with over 50 branches throughout the country.

Moreover, there were between 300-400 credit cooperatives serving the rural sector (Ho, 1978: 29). However, almost all of them were controlled by the colonial government and

Japanese capitalists.

When Taiwan was returned to the Nationalist government,

it moved quickly to confiscate the Japanese banks, such as the Bank of Taiwan, and the majority share ownership in the

Taiwanese-owned private commercial banks. The inheritance of modern banking and financial institutions by the

Nationalist government proved to be crucial for tight control of Taiwan's economy in the following decades.

According to Huang (1986: 123), until 1961, when the Central

Bank of China was reactivated, the Bank of Taiwan issued currency and carried out important banking policies. The

Central Bank and the commercial banks together held about 75 percent of the total financial assets of financial 35 institutions in Taiwan. The Central Bank has been acting as banker and fiscal agent to the government as well as supervisor and regulator of almost all the financial institutions in Taiwan (Caldwell, 1976, Gold, 1981, Huang,

1986). Due to its dominant position in the financial system, the Nationalist government was able to use this to obtain various policy goals, especially in the early stages of development. Huang (1986: 123) notes:

'With this dominant position in the financial system, it [the Nationalist government] almost monopolized credit during the 1950s. The loans and investments made by it were dictated not by commercial considerations, but by official policies. Prior to 1955, it made no investments in private enterprises at all. The loans and discounts it made to the private sector also were insignificant and did not surpass those to public enterprises until 1965."

One important aspect of the agricultural development in the colony was that primary agricultural production was not confined to a foreign enclave with limited spillover on subsistence agriculture. Indeed, both modern and backward sectors in the agricultural sphere coexisted. For example, sugar and rice promoted by the colonial government were cultivated by family smallholder tenants without the introduction of a plantation system. So, the development of the food processing industry did not dramatically disturb the traditional system of peasant cultivation (Ho, 1978: 40;

Clark, 1987a: 2; Barrett and Whyte, 1982: 1076-1077).

Moreover, in order to spur agricultural productivity. 36

large investments in the irrigation system, transportation

system, marketing agencies, and fertilizer manufacture were

made. Modern agricultural knowledge and machine technology were dispersed to the traditional peasant sector too.

Farmers applied improved technology, new seeds, fertilizers,

and other inputs to increase agricultural production. Thus,

the effects of agricultural development were very clearly diffused throughout the countryside, rather than confined to export enclaves. However, due to the fact that both economic and political power were in the hands of the

Japanese, the benefits from this were limited. Ho (1978: 32) explained that:

"The very large and persistent export surplus was made possible because in Taiwan the income distribution decision was largely in Japanese hands. The real wage in Taiwan was kept low, so total consumption as well as imports of consumer goods also remained low. Profit, on the other hand, was high. Part of the profit was reinvested in Taiwan, but much of it was transferred to Japan."

The sugar industry is a good example of this. Sugar was Taiwan's major export crop during the colonial period.

However, due to the fact that 90 percent of capital

investment in the sugar industry was from Japanese capitalists, profits realized were largely repatriated

instead of being absorbed by the Taiwan economy.

Another positive impact of the colonial agricultural policy was that due to this scientific approach to 37 agriculture and its far-reaching spillover, the living standard of the Taiwanese farmers was increased, and farmers became more receptive to technological change and advances than farmers in other developing countries at the end of the colonial period. Most important, it established a sound foundation for scientific farming in post-colonial rural development and usefulness to the later land reform of the

Nationalist government (Ho, 1968, Lee, 1971, Amsden, 1979).

While agriculture was overdeveloped in the colony, industry was underdeveloped. Official Japanese policy was always to keep Formosa simply as a huge farm and a ready market for homeland factories. According to the first census conducted by the Japanese administration in 1905, the ratio of Taiwan's agricultural workers to the whole population was 73 percent of the total population. By 1940, when the seventh census was conducted, Taiwan's agricultural workers still constituted as high as 64 percent of the total population (Li, 1964: 464).

In the early years of the colony, industry was only related to agriculture such as the food processing industry.

Statistics show that the food industry received a great proportion of the total investment in Taiwan's industry.

Out of a total investment of 191.5 million yen in 1937, the food industry's share was about 60 percent, while the share of chemicals was 5.2 percent, 2.5 percent for machines, and

1.5 percent for textiles (Chen 1981, 87-88). Due to this 38 heavy investment in the food processing industry, the gross value of production of this industry was about three quarters of the total industrial production in Taiwan between 1929 and 1939 (Chen 1981, 87).

Agriculture-related industries, i.e. sugar and other food processing industries, were linked to other sectors in the indigenous economy, and this more integrated economy made post-colonial development in Taiwan easier. Other than this, the rest of the industrial sector was not rooted in the indigenous economy. Industry was divided into a modern enclave and a large backward traditional sector. Ho (1978:

85-89) provided a clear comparison between these two sectors. The modern enclave was a Japanese sector. The techniques of production and management as well as the majority of the skilled labor and capital used in large private enterprises were from Japan. The traditional sector, made up of small industrial establishments, handicraft shops, and traditional commerce, were left for the Taiwanese. The small manufacturing establishments, such as rice mills and noodle factories, used simple techniques and were undercapitalized. Therefore, the industrial technologies were limited to the enclave, and most profits were removed from Taiwan.

In summary, although a certain degree of industrialization existed, colonial Taiwan was basically an agrarian economy. Much of the industrial growth experienced 39 in this period came from the modern enclave. The Japanese colonial administration excluded the native Taiwanese from participation and mainly used Japanese immigrants to develop the industrial sector. This policy created another legacy of Japanese colonialism, that is, the underdevelopment of the Taiwanese industrial bourgeoisie. As I just discussed, industrial skilled labor and technicians were drawn as needed from Japan. In addition to firm control over agriculture, the non-agricultural sector was, by and large, owned and operated by the government and private Japanese capitalists. For example, there was a decree in 1908 by the colonial government which made it illegal for the Taiwanese to operate companies. Although this decree was abolished in

1923, Taiwanese enterprises did not play any significant role in any major industries.

The sugar industry presents itself a good example.

According to a Japanese scholar, Tadao Yanaibara, only 0.7 percent of the total investment in the Teikoku Sugar

Company, the largest sugar company in Taiwan, was from the

Taiwanese. Even in the Taito Sugar Company, where the

Taiwanese had the largest investment, only 18 percent of the total investment was made by the Taiwanese (cited by Chen,

1981: 99).

For the colonial government, relying on the Japanese could ensure total Japanese control of the economy and the profits produced by the economy. The Japanese immigrants 40 supplied the bourgeoisie and the political elites in the

Taiwanese society. This prevented most natives from rising

into managerial or other elite positions and posed a danger that if these Japanese entrepreneurs and capitalists were withdrawn from Taiwan, economic growth and social order would have been retarded. This actually happened after

Japan's defeat in 1945. Fortunately, the arrival of many educated and experienced Mainlanders filled the top posts which the Japanese had occupied during their rule, thereby reducing the negative impact.

Due to the emphasis on agricultural development on the island, domestic industry remained insignificant and Taiwan was flooded with Japanese manufactured goods. However, as

Japan became remilitarized, the colonial government changed its policies. After the mid-1930s the colonial government took steps to broaden the island's industrial base to include heavy industries such as cement, chemicals, pulp, paper, fertilizer, petroleum, etc., but the achievement was not impressive and any development of consumer goods manufacturing was consistently discouraged.

Around the time when industrial activities were sharply increased after the mid-1930s, Taiwan took on the new role as an industrial adjunct to Japan's war preparations. The

Japanese government tried to broaden industrial activities in Taiwan with South-east Asia as its market as well as its source of raw materials (Ho, 1971; 325). Under this 41 arrangement, Taiwan’s economy was tied with South China and

South-east Asia and became a semiperipheral area of the

Japanese empire, trading industrial products to other peripheral areas in return for primary goods, while importing capital goods from Japan for food and raw materials (Crane, 1982; Gold, 1986).

There were two main reasons for the lack of industrial development during the Japanese colonial period before the

1930s and the unsuccessful industrial projects after the

1930s. The first reason was that the colonial government first intended to make Taiwan an agricultural base for two primary goods -- rice and sugar -- to supply Japan's home market. In exchange, Taiwan would import manufactured consumer and producer goods from Japan. Thus, industrializing the colony was not on the policy agenda.

Under the policy of "Agricultural Taiwan, Industrial Japan," the colonial administration deliberately kept Taiwan industrially underdeveloped. Therefore, the necessary infrastructure and manpower for industrial development were lacking. The need to pursue industrial development in

Taiwan came much later in the colonial period.

Second, as Ho (1971: 325) noted, the early policies of the colonial government frustrated its later projects. The education policy under the colonial rule is a good example of this. The government's early restrictive education policy was one of the factors contributing to the delay in 42

the process of training manpower which industrialization

required. Another example is the nature of the

infrastructure built. Most parts of the infrastructure which were initially built to support agriculture could not be readily expanded for military and industrial uses

(Amsden, 1979: 348).

In terms of the impact of this industrial policy on post-colonial economic development, it raised the quality of

labor force and set up an industrial superstructure to provide a strong foundation for further industrialization.

Moreover, as Ho (1978: 90) points out, the extensive transport system, a substantial electric power generation capacity, and a limited number of fairly modern manufacturing enterprises also constitute an industrial superstructure to be a strong foundation for post-colonial industrialization.

The way the Japanese colonial government promoted agricultural and industrial developments formed a very important legacy: a strong and active role played by the government in promoting economic growth. Since the beginning of the colonial period, the colonial government committed itself to being an active force in achieving two economic objectives -- to promote the production and export of sugar and rice and to keep economic power in Japanese hands (Ho, 1978: 32). Thus, in contrast to an argument of the dependency school saying that foreign economic 43 penetration keeps the state weak and prevents it from playing its role in protecting domestic industry and promoting economic growth, the Japanese government played a central role in developing Taiwan. It not only invested heavily in the agricultural and other infrastructures, as I have discussed, but also monopolized the production and distribution of important commodities such as tobacco, wine, and liquor.

During the colonial period, one of the sources of government revenue was its operation of monopolies for goods like camphor, salt, tobacco, wine, alcohol, matches, opium, gasoline. About 35 to 50 percent of the colonial government's annual revenue was from this source (Hsu, 1987:

92). After World War II, theNationalist government benefited enormously from its take-over of these state monopolies. The Nationalist government has not only been able to maintain the market stability of those commodities, but the surplus earnings of the Tobacco and Wine Monopoly

Bureau also helped the earlier economic development a great deal, especially when in the earlier stages of development a direct income tax was not possible because the level of people's income was very low.

Another contribution which the colonial period made towards the post-colonial economic development of Taiwan was the relationship between the state and the rest of the society. In the Japanese colonial period, benefits for the 44

Taiwanese were secondary to Japanese concerns. Economically, as I have discussed, the colonial government and Japanese capitalists controlled the production means. The colonial government promulgated laws to exclude Taiwanese entrepreneurs from particular sectors of the economy.

Politically, the Taiwanese had no voice in the colonial government. They were treated as second-class citizens.

The political power of the traditional governing class and landowners was taken away and replaced by Japanese immigrants.

The existence of a strong colonial government vis-a-vis the native society led to the reformation of state-class relations. Before colonialism the state in China was relatively weak vis-a-vis the traditional governing class and landowners, but under Japanese colonial rule the state was a dominant force over the class structure and over society. This pattern persisted into the post-colonial period. Wade (1988: 36) summarized this by saying that the

Taiwanese had "fifty years of a growth-oriented state, which maintained public order with a penetrating administrative system backed by a strong police force, and permitted them almost no political activity." The Nationalist government has benefited much from this legacy of being a strong state.

As far as economic development is concerned, it presents itself in the economy by various ways, such as providing infrastructural needs for development, reorganizing the 45 productive enterprises, subsidizing the export sector, entering the economy directly in the form of state enterprises, and so on.

Another legacy of the Japanese colonial period was the creation of a literate population receptive to technological change and advance. I have argued that the presence of a

large group of Japanese in the colonial administration and the Japanese enterprises in Taiwan contributed to the success of Japan's rule in Taiwan because their presence gave great stability and security to the island and reduced the pressure on government and business to train the local population and upgrade their skills. However, there is no doubt that the presence of those Japanese technicians, entrepreneurs, administrators, professionals, and skilled workers helped to raise the quality of Taiwan's labor force and to train the local population.

The colonial government adopted a restrictive education policy relative to formal education until the late 1920s because a large educated population would be a potential threat to the colonial regime. This restrictive educational policy was reversed later on because of the increased tension between China and Japan in the 1930s and the need felt by the government to assimilate the Taiwanese. The percentage of school age Taiwanese youth enrolled in primary schools was 33 percent in the beginning of the 1930s, and 71 percent in 1943-44 (cited by Ho, 1978: 100). The literacy 46

rate in Taiwan increased from 1 percent in 1905 to 27 percent in 1940 (Clark, 1987a: 2). Thus, it contributed to one of the important aspects in Taiwan's comparative advantage in latter export-led industrialisation, that is, a relatively educated and efficient labor force when compared with that of other less developed countries.

Another important change in society that had already taken place during this period was the weakening of

landowners. The colonial government carried out land reform which simplified the ownership system by eliminating sub­ tenancy and absentee landlords. Thus, even though the

landowner class itself did not disappear, the large landlord class was seriously undermined. This certainly directly contributed to the success of land reform under the

Nationalists from 1949-1953 and indirectly to Taiwan's economic take-off in the 1980s. As will be shown, the successful land reform under the Nationalist government changed the class structure of the Taiwanese society because by the end of the land reform program, the large landowner class disappeared and most of them diverted their interests to the expanding industrial sector.

It should be noted that, comparatively, Taiwanese landlords benefited more from the basic agricultural policy of the colonial government than other sectors of the society. Landowners were excluded from industrial activities, but they were allowed to pursue their interests 47

in agriculture-related activities. To the colonial

administration, landlords served some important functions,

such as forcing modern techniques onto rural communities which resisted change and helping stabilize the Taiwanese

society (Chen, 1981, Ho, 1978, Myers and Ching, 1964). Chen

(1981: 109) points out that the traditionally authoritarian

image of the village-based landlords was a distinct asset which the Japanese utilized for this purpose. The success of the pao-chia system was attributed to the collaboration of the landlords, especially those who served as the head of each chia and pao.

In short, during the colonial period the average

Taiwanese had a better life than was possible under the rule of Imperial China. In terms of material benefits, the real wage, the per capita income, and the per capita consumption of the average Taiwanese were improved, at least until the

late 1930s (Ho, 1978). However, I have argued so far that the most enduring legacy of Japanese colonial rule was the establishment of a foundation for post-colonial development, then the improvement of living standards. Improvements of material life deteriorated sharply when World War II broke out and when massive numbers of Mainlanders retreated to the

island after the civil war. The pre-war level of the living standard was not recovered until the 1950s. However, some foundations set up during the colonial period have imposed great influence on Taiwan's post-war economic growth. These 48 foundations included an extensive infrastructure, a modern and productive agriculture, a literate population receptive to technological change and advance, the beginning of an industrial sector, a growing indigenous and well-disciplined industrial labor force, a limited number of fairly modern manufacturing enterprises, lucrative state monopolies, some modern commercial institutions, and state-society relations with a strong state over the traditional governing class and landlords. CHAPTER III

THE PRIMARY IMPORT-SUBSTITUTION PERIOD

(International and domestic contexts) . lack of legitimacy . tension between native Taiwanese and Mainlanders . potential military threat from the CCP . potential international isolation . loss of export markets . wartime economic damage . hyperinflation . pressure from increased population . the outbreak of the Korea war . the arrival of U.S. aid towards the end of the period

(Policy I studied ^ (Policy calculations) in this period) ^ — Political: . to seek political legitimacy 104S“S3 Land Raferm and support from the peasants . to correct past mistakes of neglecting rural construction . to fulfill the ideological commitment of implementing Dr. Sun's land policy . to reduce urban instability . to use land reform as a propaganda weapon to win support from farmers on the Mainland . to increase social justice and equity

Economic : . to restore the agricultural sector to provide food and to support the urban-biased policy

49 50

Figure 1 (continued)

to increase rural income and income equality to transfer landlord capital from land investment to industrial investment

(Policy II studied (Policy calculations) in this period) Political : . to seek political legitimacy Anti-inflation Policy and popular support

Economic : . to stabilize the economy

(Policy III studied (Policy calculations) in this period V Political : . low confidence of foreign Import-substitution investors in Taiwan's Policy political future . to avoid possible loss of control over the country's own development process

Economic : . to protect underdeveloped indigenous bourgeoisie . to accommodate economic problems, such as the lack of capital, technology, natural resources, and foreign exchange

V (Outcome Produced) . agricultural output increased and standard of living in the rural areas increased . redistribution of political power between the landlord class and the peasants. . political quiescence and support in the rural areas . inflation brought under control . high interest rate policy stimulates domestic savings . initial industrialization

Figure 1: Outline of the Primary Import-substitution Period 51

Sên.e.E.aJ, P.990ri,P t l o n a f tiia Internai and External Eay-ir-Q.nment.s in the. Primary. Import-Substitution Period:

When the Nationalist goyernment took over Taiwan from

Japan in 1945, it encountered serious military, political, social, and economic problems on the island. The threat from the Communists on the Mainland required the Nationalist government to maintain a large military force. The military burden at that time amounted to about 80 percent of the

Nationalist government's annual budget (Tai, 1970: 424).

Economically, the situation was very precarious. Dr.

Anthony Kubek (1987, 55) described the situation as follows:

"American bombing had done extensive damage to industrial and agricultural facilities before the Japanese had raised the white flag. The production of rice, the most important staple food, had sunk to forty-five percent of its peak production - enough to meet only a quarter of the Island's minimum need. Electric power production was at only sixteen percent of its peak capacity, and sugar, the largest industry, had fallen to a mere eight percent of its 1940 peak. The loss of preferential markets in Japan and mainland China had a depressing effect on the farmers who constituted fifty- two percent of the population, and sixty percent of whom were tenants paying exorbitant rents to their land­ lords . "

The severance of Taiwan's trade and financial ties with

Japan and Mainland China further complicated the task of restoring the economy. Japan was Taiwan's biggest export 52 market before and during the war. Under the Japanese colonial rule, over 90 percent of Taiwan's foreign trade was with Japan. However, in the last three years of the war,

Taiwan's foreign trade dropped sharply because of falling agricultural production and wartime damage. At the time of

Taiwan's restoration and readjustment (1945-1949), it was almost at a standstill (Li, 1976: 39). The sharp decrease of Taiwan's foreign trade was also caused by the lose of

Mainland China in 1949. Another serious economic problem was hyperinflation. Between June 1949 and the end of 1952, prices increased at an average annual rate of about 80 percent (Li and Yeh, 1982: 14). More on this will be discussed in the section on the anti-inflation policy.

The political problem facing the new government was even tougher. The incident of February 1947 riots resulted in about 10,000 to 20,000 Taiwanese killed and many arrested. Accounts of this incident vary depending on the person's political position and attitude toward the

Nationalist government, but it is certain that there were two important political consequences resulting from this incident. The first was the creation of cleavage in the relationship between the Mainlanders and the Taiwanese which has been utilized by the members of the "Formosan

Independence Movement" to attack the government and to get support from the Taiwanese as well as sympathetic foreigners. The second resultant phenomenon was the 53 depoliticizaton of the majority of the Taiwanese. These two consequences, as will be shown, have profound impact on the pattern of Taiwan's economic as well as political development.

In addition to military, economic, and political challenges, the huge government bureaucracy and military force and the mass migration of people from the Mainland during the period of 1947-1950 brought about social problems and put great pressure on the economy.

The regime also faced a potential of international isolation and military invasion from the Chinese Communists.

The international political environment right after World

War II seemed very unfavorable to the future destiny of the

Nationalist government. After their defeat by the Chinese

Communists, the Nationalists almost lost international support. The most concerned problem of the Nationalist leader at that time was the U.S. attitude and policy toward

Taiwan. Unfortunately, the official China policy of the

U.S. government was uncertain and ambiguous. The U.S. supported the KMT in its fight against the Communists, but there was hesitancy to commit the U.S. troops to ensure a

KMT victory. With the victory of the Communist force on the Mainland, the China policy of the U.S. government began to shift to disengagement.

In January 1950, the U.S. President Truman, in a news conference, made a statement declaring that Taiwan was a 54 part of China and that "the United States has no desire to

obtain special rights or privileges, or to establish military bases on Formosa at this time. Nor does it have any intention of utilizing its Armed Forces to interfere in the present situation." (Truman, 1950: 11) And he continued to declare that the U.S. would not provide military assistance to the Taiwan government. For Taiwan, this policy created a potential of isolation in international politics and of military invasion from the Chinese

Communists. Unlike Taiwan's declining international status in the 1970s and 1980s which has been largely mitigated by

its economic achievement and "all-out diplomacy" (a topic to be explained in a later chapter), without any economic achievement to back up its political and military vulnerability at the time, the survival of the regime on the island was seriously questioned.

Under these extremely difficult and uncertain conditions, how did the KMT elite manage to overcome it and to lay the foundation of the country's successful economy

later on? There are two answers to this. First, the government pursued a set of important policies in response to ideological commitment and political and economic calculations. Second was the arrival of massive U.S. aid.

There were three important policies pursued in this period — the 1948-53 land reform programs, the anti­ inflation policy, and the import substitution policy. The 55 discussion of these policies will be the main focus of this chapter. I will devote one section to each policy. In addition to political and economic calculations of political

leaders in pursuing these policies, some anticipated and unintended consequences will be studied too since they, more or less, had an influence in the formulation and implementation of policies pursued in the following periods.

In this section of a general description of the domestic and international environments, I will discuss the importance of

U.S. aid to early economic development in Taiwan.

A series of historical events took place right after

World War II turned the U.S. policy from disengagement to active support for the government in Taiwan. Those events included the explosion of the first Russian atomic bomb,

Mao's alignment with the Soviet Union, and the breakout of the Korean War. For the U.S. decision makers, the explosion of the first Russian atomic bomb and the alignment between the Soviet Union and China posed a threat of Communist expansion. Nevertheless, it was the outbreak of the Korean

War on June 26, 1950, that caused a quick and basic change in the U.S. attitude and policy toward the role of Taiwan.

After the outbreak of the Korean War and the Chinese intervention in the conflict, Taiwan was included in the

United States defense perimeter on the Pacific coast of

China. The Seventh Fleet was sent to patrol the Taiwan

Straits, and military and economic aid began to arrive in 56

Taiwan from America. Moreover, in 1954, a Mutual Defense

Treaty was signed between the government of Taiwan and the

U.S. to defend each other in the face of aggression, presumably from Mainland China. In 1955, a joint resolution was passed by the U.S. Congress which gave further power to the U.S. President to use American forces to defend Taiwan,

if necessary.

There were several attempts by Communist China to regain the island of Taiwan by attacking Taiwan's off-shore

islands. However, due to the determination of the

Nationalist armed forces, the demonstration of U.S. intent to protect Taiwan, and the lack of full support from the

Soviet Union, the Chinese Communists finally backed off from their attempts to take the off-shore islands. This greatly increased the sense of security in Taiwan, since the Chinese

Communists could not easily take the off-shore islands by force, and therefore, not Taiwan itself. Thus, exempted from a direct external military threat, the government in

Taiwan started to pursue policies which might lead to political stability and economic growth at home.

Relative to the evolution of US-KMT relations at this crucial moment, Bobrow and Chan (1985; 28) present an argument which shows that in international relations

"apparent strengths can sometimes entail important weaknesses, and apparent weaknesses can sometimes provide significant sources of leverage." Under the cold war

-rl 57 competition, the exposure to threats from Communist China formed the "strategic assets" for the government in Taiwan and enabled it to enlist help from the United States. On the other hand, fear of a further expansion of Communism in

Asia forced the U.S. government to take the responsibility to defend Taiwan as well as South Korea.

Many scholars have argued that U.S. aid played an extremely important role in Taiwan's early industrialization. According to Ho (1978: 107), there were three conflicting goals of the Nationalist government in the early stage of development. They were: rapid economic growth, stable price, and a strong military force. With little political and economic resources at their disposal, the KMT leaders utilized this timely and massive U.S. aid to reduce this conflict to a manageable one.

U.S. aid had two parts — military aid and economic aid. From the arrival of U.S. aid (1951) to its termination

(1965), American military aid to Taiwan averaged about $165 million per year, and economic aid averaged about $100 million a year (Schreiber, 1970: 14). The huge amount of military funds helped mitigate Taiwan's heavy military burden and reduce the serious conflict between defense and stable development.

As to the economic aid, it helped the implementation of

Taiwan's import-substitution strategy in the early 1950s in many ways. First, the inflow of the U.S. aid contributed to 58

filling the gap between domestic saving and capital

requirements. In 1952, Taiwan's gross capital formation was

15.4 percent of GNP, and gross saving was only 9.2 percent

(Yu, 1987; 7). it was U.S. aid that helped make up the difference. Second, economic aid also helped mitigate the problem of total current deficits in Taiwan. Third,

American economic aid also increased foreign exchange resources and sustained the imports of necessary inputs.

Fourth, U.S. aid and technical assistance created the opportunity for a transfer of technology needed in pursuing the strategy of import-substitution. Fifth, a large amount of American aid went to investment in infrastructural development and agriculture. According to Hamilton (1983:

54), during the years of 1951-65, about 74 percent of investment in the Taiwanese infrastructure was funded by

U.S. aid, and about 59 percent of agricultural investments came from U.S. aid for the same period. This investment included electric power, communication, transportation, the public school system and health services.

As a result, the majority of people in Taiwan residing in the rural areas was able to benefit from American aid too. Electric power is a good example. While most power output was for industrial use, enough was made available for farm families. The development of Taiwan's public school system and health services in the rural areas directly raised the rate of literacy and living conditions in the 59 rural areas.

In short, it is very true to say that the foundation of the rapid export-oriented growth in Taiwan was laid in the

1950s through U.S. aid. Neil H. Jacoby claimed that

"without aid, it was calculated that the GNP of Taiwan would

have grown only 3.5 percent a year until 1983" and that the aid "cut 30 years from the time needed to attain 1964 living standards" (1968: 152).

However, there are some scholars, like Keith Griffin

(1973), who argue that the aid actually retarded economic growth in Taiwan because a great amount of money went to strengthening the military. However, the countering argument would be the fact that massive U.S. aid helped reduce serious conflicts among the government's goals.

Also, this large amount of funds controlled by the government and the maintenance of a large military force indicated a strong Taiwan government. Among those who acknowledge positive contributions of American military aid,

Gregor, Chang and Zimmerman (1981; 28) once attributed the continuous survival of the Nationalist government at that time to U.S. military aid, since it made possible maintaining one of the largest standing military forces in

Asia.

American aid also had many political consequences for the KMT leaders. The most important one was to increase the sense of confidence and security among Taiwan's political 60

leaders in pursuing their domestic policies. Also, it

enhanced the position of the government over the society.

Peter Evans (1985: 205-206) once argued that receiving

foreign aid and loans can increase the government's economic

role and its control over native industrialists because the government is not forced to rely on private domestic elites as its sole source of resources and because the government has the control over the allocation of foreign aid and loans

(Evans, 1965: 205-206).

This argument certainly explains the strong role played by the Taiwan government vis-a-vis the rest of the society

in this period. Moreover, due to the Japanese legacy of a strong state role and the fact that the Nationalist government was not beholden to the local elite, the government had an even stronger hand over the society. This

is very important because receiving aid from the U.S. certainly reduced the problem of scarce resources and enhanced the government's autonomy in choosing policy alternatives.

The most important contribution from U.S. aid administration was the support of institutional reforms and structural transformations, which was considered a prerequisite for development. One example of structural change induced by U.S. aid was the interrelationships between the rural and urban sectors. To the mission from the Agency for International Development (AID), the rural 61

sector had to be changed through land reform and green

revolution so as to channel agricultural surplus and excess

labor force into the urban sector to serve future industrial

development (Chen, 1981: 121). The Joint Commission on

Rural Reconstruction (JCRR) was established in Taiwan to

perform this goal. (This will be discussed shortly in the

section of "1949-53 land reform programs.")

Another example regarding AID-promoted institution

reforms and structural transformations was the active

intervention in the liberalization of the government's economic policies and the promotion of the private sector.

In the next chapter, I will show that without AID's

influence and active intervention, private enterprises would not have become Taiwan's foremost source of economic growth.

The influence of the AID mission in Taiwan over the economy of this period was great. With control over aid funds, the AID mission made sure that the policies pursued

in Taiwan would create a stronger basis for Taiwan's military defence and make Taiwan a showcase of capitalist development. It is precisely this strong influence of the

AID mission that leads some dependency theorists to argue that the US-KMT relation at this time was an asymmetrical power relationship. On one hand, the Taiwan government and dominant elites willingly participated as junior partners and collaborators. On the other hand, dominant elites in

America established and used collaborative mechanisms to 62 attain their ends (Chen, 1981: 71-72). Thomas Gold (1986:

68) also describes this situation in the following words:

"Chinese government did not have final say over its economy, as the Americans, through AID, had de facto veto power through their control of the Nationalists' economic lifeline."

Although the Nationalist government in Taiwan was highly dependent on foreign aid at this time, its hand was not entirely empty. With some resources at hand, political leaders in Taiwan were able to gain autonomy and increase capability in dealing with the AID mission. First, the agricultural and industrial developments and improved infrastructure developed under the Japanese colonial rule and left behind by the Japanese were significant enough for a quick restoration and readjustment of the war-ravaged economy.

Second, although the repatriation to Japan of technicians, managerial personnel, professional workers, and government officials at the end of World War II caused some problems, the influx of two million Mainlanders somehow solved this problem. Many of them were well-educated, with practical experience in government, commerce, or industry.

Thus, the government in Taiwan did not have to use its scarce resources to train people in government administration, industry, finance, and trade from scratch

(Wade, 1988: 36). 63

Third, as I just mentioned, one of the Japanese

legacies was the strengthening of state power over the class

structure and over the Taiwanese society, which persisted

into the post-colonial period. Thus, the Taiwan government

had autonomy in formulating its development policies.

The role played by the JCRR (Joint Commission on Rural

Reconstruction) is essential to answer whether or not the

Nationalist government was controlled by the dominant elites

in America, as predicted by the dependency school. JCRR was

a trans-governmental organization staffed by Chinese and

Americans. Chiang Mon-lin, once the president of the JCRR, described the responsibilities of the Taiwan government and

the U.S. aid organizations in carrying out land reform as

follows (Kindermann, 1987: appendix):

"...the Chinese government contributed largely on providing a strong will for reform, shaping policies, supplying personnel and material resources. JCRR, representing U.S. aid, contri­ buted largely with ideas, planning, organi­ zation and technical services. Each acted like one of the two wings of a bird."

At the national level, JCRR served as a source of values, concepts, planning, and organization of rural development and a source of expert, technical, and apolitical pressure for development-oriented agricultural policies. After land

reform it continued to help the rural structural change by

introducing new techniques to increase agricultural productivity. Many regard it as "the de facto Agriculture 64

Department of the Taiwan government".

Moreover, according to Mick Moore (1968: 136-137), JCRR enjoyed a higher degree of autonomy and influence on agricultural policies than Taiwan's Ministry of Agriculture in the following points. First, the JCRR had great power to initiate and monitor action in the fields and within subordinate institutions, such the Provincial Department of

Agriculture and Forestry. Second, it had privileged access to American aid funds. Third, it could afford to pay high salaries to attract talented staff. Fourth, the constraints normally imposed on public bureaucracies were not applicable to the JCRR. In this sense, by respecting the expertise of economic development, the government allowed the JCRR a degree of freedom and political independence that no other public agencies enjoyed. Thus, rational planning and effective management of land reform programs and other agricultural policies was made possible.

While the JCRR had, in some ways, greater capacity than

Taiwan's Ministry of Agriculture, it did not have absolute power and sometimes was quite powerless. Moore also pointed out different aspects of JCRR which show its relative powerlessness. First, foreign trade decisions affecting the degree of import protection to be given to agriculture were under the responsibility of the Ministry of Economic

Affairs, not the JCRR. Second, the JCRR had some influence on the details of agricultural policy, but major 65 macroeconomic policies and decisions affecting agriculture were made by the KMT leaders. Third, the KMT had kept a close eye on the JCRR by appointing senior party men as

'consultants' to it.

Thus, it is clear that the development of Taiwan's relations with the U.S. after World War II disproves one of the classic dependency arguments that dependence on foreign interests and foreign aid will keep the state weak and prevent it from effectively playing its necessary role in modernizing its economy. On the contrary, the U.S. aid helped maintain social and political stability and economic growth in Taiwan. And, foreign aid dependency at this period seemed to have been one of the essential elements in maintaining a strong state apparatus in Taiwan.

In summary, this general description of Taiwan’s internal and external environments tells us that the postwar years, 1946-52, were a time of turmoil and trial for the

Nationalist government. Fortunately, military, political, and economic problems were somehow mitigated by domestic efforts as well as American aid. At this moment, the KMT leaders were prepared to launch different policies based on their political and economic calculations.

Tiie-ia.49L-:53.. Land Ref Qj.m-Pr.ggr.am :

Taiwan's land reform from 1949 to 1953 is the most widely studied policy of the import-substitution period. A 66

study of this policy will show how political leaders in

Taiwan, in face of potential domestic instability and

external isolation right after World War II, made their

policy choice and created an autonomous position over the

landed class and the peasants.

The majority of scholars who are interested in rural

reform in Taiwan have argued that the Nationalist government's motivation to solve the land problem should be understood more accurately as a political move. For

instance, Ching-yuan Lin does not consider the land problem

in Taiwan at the turn of the 1950s as a very urgent issue in

terms of its economic implications. He (1981: 140) argues that :

"The fact that these [Land reform] measures were taken does not necessarily mean that the tenant-landlord relationship in Taiwan was at the boiling point at that time.... The tenant-landlord relationship was basically no longer feudal in nature after the first land reform instituted by the Japanese governor-general a half-century earlier. Furthermore, although land rents were high (owing to the worsening man-land ratio), perhaps the more urgent problem confronting the rather price-responsive rural economy of Taiwan at that time was the depressing effects of the loss of preferential markets in Japan and mainland China for many farm products, plus runaway inflation, which raised the cost of living on the one hand and which forced the authorities to adopt a low rice price policy on the other."

Lin's observation is correct; therefore, a comprehensive examination of the political calculations of the KMT leaders 67

in formulating this policy is crucial.

The first political calculation that the Nationalist elite had in mind was to exploit political utilities and avoid political liabilities of land reform. After fifty years of development under the Japanese colonial rule, what

Taiwanese peasants wanted was a new government which could govern in their interests. On the other hand, right after the Nationalist regime retreated to Taiwan, the government needed to achieve control and gain acceptance from the peasant. The best way to achieve this goal was uhe realization of Dr. Sun Yat-sen's land policy.

In the period of the Chinese civil war, the Communists were able to draw massive rural support and defeat the KMT.

Learning from this experience, political leaders in Taiwan tried to avoid committing the same mistake again. Moreover, the majority of the Taiwanese society were peasants; thus the newly arriving political leaders expected to use land reform as an instrument for building up the popular image of the elite and gaining the sympathy of the peasants as well as of other groups of the Taiwanese society. They hoped that legitimation of the regime would be restored as soon as possible. Tai (1974) pointed out that the first land reform program, "37.5 Percent Rent Reduction," was started in 1949, the very year in which the civil war came to an end; this shows the immediate political significance of land reform and determination of political leaders at that time. In 68 short, the 1949-53 land reform in Taiwan should be understood as a political action taken to avoid the mistake of alienating peasants and to create a broad political base among the Taiwanese peasants (Tai, 1974; Lin, 1981; Gold,

1986; Ho, 1987).

Political leaders' strong commitment to land reform is one of the essentials in the success of land reform. Indeed, this is the most important factor contributing to the realization of land reform in Taiwan because no reform can be initiated and executed where a government refuses or lacks the will to exercise its power. In Tai's comparison of land reform among eight countries, strong political commitment of political leaders to land reform is one

important factor in explaining the smooth and successful land reform. In the Taiwan case, among its leaders, Tai singles out Chen Cheng as an example. Tai (1974: 274) wrote :

"Raised in a farm family of meager income, Chen was exposed to rural poverty in his boyhood and subsequently showed considerable empathy with the peasants....In the 1930s, while in charge of the Nationalist military campaign against the Communist, 'he was much impressed by the way in which the Communist used... [social and economic] reforms to win widespread support among the peasants.'... A man of forceful personality, incorruptible character,and unswerving loyalty to Chiang Kai- shek, Chen became Governor of Taiwan in 1949, Premier in 1950, and Vice President in 1954. In these years, in the councils of both the KMT and the government, he established himself as the strongest advocate for land reform, and demonstrated his capacity for effective implementation of the programs. The implementation of the first of these 69

programs -rent reduction- was the most difficult and hazardous... In the midst of all this chaos and uncertainty, Chen resolutely pushed the program."

Anthony Kubek (1987, 58) also describes Chen Cheng's understanding of the rural problem in China's history in a similar way as Tai does. He wrote:

"...he was keenly aware that the Com­ munist seizure of the Mainland had not been accomplished by military means alone; he knew well that the selfishness of the old landlords had been a major contributing factor. He believed, moreover, that the recurring patterns of war and peace throughout 2,000 years of Chinese history were the inevitable consequence of the failure of the ruling classes to maintain any reasonable balance between China's arable land and its expanding population."

It was the same reason and determination that the KMT launched two more programs, "Sale of Public Land" in 1951 and "Land to the Tiller" in 1953. The immediate result of land reform was the establishment of a broad rural base for the Nationalist government, thereby stopping occurrence of agrarian radicalism in the future. In this sense, both the present and future authority of the Nationalist government was retained.

However, land reform has political liabilities too.

The biggest one is the opposition from the influential landed class and thereby dissension within the elite. This is true for some countries, like the Philippines, in which landlords are closely affiliated with the ruling elite, and 70

landed interests are represented among political leaders.

In cases like this, any proposal for changing the "status quo" in the rural areas will meet severe opposition from

landlords. 1

In the Taiwan case, opposition from landowners was minimised, and the government downplayed the influence of

the landlords and extended power to the village level, bypassing any traditional brokerage by local landlords.

This could be done because of two reasons. I First, the

Nationalist government was an "outsider." The political

leaders were made up of Mainlanders who had no ties to the

Taiwanese landlords. Second, there were no landed interests represented among political leaders at that time. Landed interests were excluded from the decision making process 1 of the 1949-53 land reform.

Indeed, the three land reform programs were formulated by the executive authority which included thje KMT, the

Executive Yuan (cabinet), and the Provincial Council

(executive branch of the Provincial Government),! with only

limited participation by the national and jprovincial legislatures. Of all these participating groups, only the

Provincial Assembly had some representation from the landed

interests. However, "the Assembly was the least influential, possessing only advisory or consultative functions." (Tai,

1974: 19)

Another political reason for the Nationalist government 71

in Taiwan to have a series of land reform programs between

1949 and 1953 was to forestall a Communist threat and to

fulfill an ideological commitment of implementing the land

policy of Dr. Sun Yat-sen's Three Principles of the People.

The Three Principles of the People was made as the

theoretical foundation of the land reform programs.

According to Sun, a resolution of the land problem was

critical to future economic development and

industrialization. Land reform would be adopted not only to provide relief for the rural population of China but also to

release capital for industrial and commercial use. In 1943

Chiang Kai-shek reiterated Sun's argument of economic development and the necessity to solve land problems and advocated that coherent agricultural policy was necessary for both rural stability and industrial and commercial development (Gregor, Chang, Zimmerman, 1980: 26-27).

The adoption of this ideology formed a basic distinction between the programs the KMT party introduced in

Taiwan and those enforced by the CCP on the Mainland. In

Taiwan, the entire process of land reform was quite gradual and peaceful. A series of land reform programs -- "37.5

Percent Rent Reduction," "Sale of Public Land," and "Land to the Tiller" -- were launched over the period between 1949 and 1953. In the first program, rents were reduced on tenant-cultivated lands. In the second stage, the government sold lands which it had taken over from the 72

Japanese. In the finally stage, ownership of all tenanted

lands over a certain size was transferred to tenants of

those lands. In this process, landowners were compensated

with bonds and stocks in four major public corporations--

the Taiwan Cement Corporation, the Taiwan Paper and Pulp

Corporation, Taiwan Agricultural and Forestry Development

Corporation's Canned Pineapple Division, and the Taiwan

industrial and Mining Corporation. The compensation consisted of seventy percent in bonds and thirty percent in

stocks.

One important feature of the landlords compensation scheme was the minimal cash transactions involved. The value of the bonds were expressed in two crops, rice and sweet potatoes; when redeemed, the rice bond was paid in

rice, and the sweet potato bond in cash (Kubek 1987, 56).

The important contribution of this measure to the economy at

this time was that it created little financial burden for

the government and indirectly avoided inflation.

On the Mainland, the process of land reform was more radical. It took place in two stages. The first one was during 1945-49, when the KMT-Communist civil war was going on. The second stage took place from 1950 to 1953. Although the second stage was more moderate than the first one, all farmland belonging to landlords and rich farmers were confiscated and redistributed among tenants and poor peasants. Landlords in both stages were not only forced to 73 give up their lands to peasants without compensation, but also were massacred or sent to slave labor camps to undergo

"reform through labor."

There were many reasons for the different results of land reform carried out on the Mainland and in Taiwan. The two most important factors were the quality of the rural population and competent personnel and technical readiness necessary for the success of land reform. As I have mentioned in the last chapter, one of the contributions of the Japanese ,colonial administration was to teach the society the need for land reform. So, compared to landlords and farmers in other regions, those in Taiwan were better informed, more appreciative of the need for land reform, and thereby willing to cooperate with the Nationalist government to carry out land reform measures (Kindermann,

1987: Appendix).

However, it should be noted that although landlords in

Taiwan understood the economic advantages of land reform, they were also the group which had to give up vested interests. Thus, protests and complaints from landowners could not be avoided. Fortunately, due to the fact that landed interests were excluded from the decision making process of the 1949-53 land reform and the fact that the ruling group during the 1950s was dominated by Mainlanders, land reform was able to proceed smoothly in Taiwan.

Another factor explaining the different results of land 74

reform in Taiwan and Mainland China was the expertise that

Taiwan had. As Chiang Mon-lin, in an interview held in the

autumn of 1959, pointed out, with many experts on land

economics, agricultural specialists, and technical personnel, who were either from the mainland or were native

Taiwanese, the technical aspects of the land reform projects

could be implemented smoothly and successfully (Kindermann,

1987: Appendix 1).

In all, compared to the policy of violence adopted by the Chinese Communists, the peaceful land policy in Taiwan certainly got unanimous support of all segments of the society. Due to these differences in implementing land reform, especially in the treatment of former landlords, the

Nationalist elite actually hoped that the success in land reform in Taiwan would provide it with a propaganda weapon to win support from the farmers on the Mainland. Tai cited and translated a paragraph from an editorial of the Central

Daily News, the KMT's official daily, as follows:

"The land problem is of both economic and political significance. In the long history of China, the land problem was a vital factor affecting the operation of the cycle of political uprisings and stability.... Realizing this fact, the Chinese Communist have utilized the land problems as their political capital of subversion. Land reform, therefore, is a major battle field in the long struggle between the Communists and us. We must maintain this perspective when viewing our achievements in land reform in Taiwan..." (Tai, 1974: 406). 75

Another political rationale of adopting land reform in the early stage of development in Taiwan was to reduce urban instability. According to Tai (1974), land reform can contribute to the lowering of urban instability in at least two ways. First, by successfully implementing land reform, political leaders may have a feeling of mass rural support so that they may confidently deal with urban problems.

Second, land reform can contribute to the lowering of urban instability because of the restraining effect of land reform on the outflow of rural population.

During this period, the majority of the Taiwanese lived in the countryside; therefore, most urbanites of this time consisted of people who had retreated from the Mainland.

They had a difficult time in making a living and adjusting to the new, unfamiliar environment. As a consequence, their demands had to be answered; otherwise, potential political and social problems could occur.

However, with scarce resources for the government to meet those demands, urban discontent could be a source of political support for opposition candidates at election time. In fact, as the above-cited statistics of the 1968 elections for members of the provincial assembly and the chief executive officers of counties and municipalities have already shown, the KMT had confronted keen electoral competition in the cities. To keep its political position in the urban areas, the KMT leaders must continue to draw 76

their support from the rural sector because a popular base

in the rural areas would convince the urban residents of the desirability of accepting the pclitical leadership of the

KMT.

As to the second utility of land reform in terms of promoting urban stability, the 1949-53 land reform had its positive influence too. One of the major side effects of

industrialization in many Third World countries is the problems caused by rapid urbanization, such as over­ population, poverty, unemployment, crimes, etc. If the outflow of people from the countryside can be reduced, it will be conducive to urban stability. In the case of

Taiwan's land reform, the increased rural income and narrowed gap between rural and urban income and life standards have helped slow down rural emigration, thereby reducing the potential of urban instability.

In the following period of export-led industrialization, we will see the outflow rate of people from the rural was still kept low due to the implementation of decentralized industrialization policy which will be examined in detail later on. Since the late 1960s, however, there has been an increase in the outflow of rural residents and the resultant labor shortage in agriculture, thereby forcing the government to reexamine its agricultural policies in the

1970s. This subject will be discussed in the section on

Taiwan's second land reform. 77

Land reform was adopted not only for building up the popular image of the Nationalist government, but also for economic and social change that the political elite would

like to bring out. Undoubtedly, the 1949-53 land reform was also motivated by concerns for social justice and equity

(Wickberg, 1978: 254). According to Chiang Mon-lin, social justice (or fair distribution) and material well-being (or

increase of production) were the two fundamental principles of the land policy (Kindermann, 1987: Appendix 1).

The first program, "37.5 Percent Rent Reduction," greatly reduced the tenants' rent burden and allowed them a greater share of their production. The programs of "Sale of

Public Land" and "Land to the Tiller" enabled tenants to own their land. In short, those programs increased the number of owner-cultivators and decreased the number of tenant- farmers. Thus, it motivated farmers to increase production, thereby upgrading the living standards of the rural sector.

Foo Chien (1975: 12) correctly pointed out that in Asia,

"land reform symbolizes the ultimate in freedom. Given land of his own, the Asian farmer will overcome almost any difficulty."

Although the economic calculations of adopting the

1949-53 land reform were obvious and were not as important as the political considerations of the KMT leaders, they should not be overlooked. Taiwan's political leaders were aware of the fact that without a sound agricultural base. 78

industrialization could not proceed smoothly. Indeed,

Chiang Mon-lin was quoted (Kindermann, 1987: Appendix 1)

thus:

"Land reform is the most important work for social justice. However, it is only one of the two wings of a bird. That is, land reform will not have its full effect, unless it is followed by an increase of production with the aid of modern techno­ logy. It is our belief that a well- coordinated program of distribution and production is the key to the solution of agrarian problems in some developing countries."

Let us first review the economic situation at the time.

The majority of Taiwan's population was then living in the countryside. Taiwan, under Japanese rule, was basically an agricultural supplier for Japan. However, in the last three years of the second World War, its production fell sharply due to war damage and a decline in the supply of

fertilizers. In addition to the agricultural sector, the economy as a whole suffered wartime destruction and post-war

inflation too. Making matters worse, there was an urgent need to supply food to the urban population, the massive numbers of immigrants, bureaucrats, and the military at non-

inf lationary prices. Thus, a quick and complete restoration of the agricultural sector and a control over the agricultural surplus would feed the urban population and allow the government to channel agricultural surplus into the establishment of light industries that had purposefully 79 been neglected during the Japanese colonial period.

Many studies have shown that the 1949-53 land reform,

coupled with substantial investments in infrastructure

contributed to the increase of agricultural productivity.

Agricultural output grew by 4.5 percent annually between

1951 and 1970. This increased agricultural production made

it possible for the government to meet the domestic food

requirements of fast-growing population, averaging 3.2 percent per year between 1946 and 1966 (Li, 1976; 39). By providing cheap food to the city dwellers and, particularly, rice rations to three predominantly Mainlander groups at that time -- the military, the public bureaucracy, and teachers, the KMT could ensure support from those groups.

Agricultural surplus was also channelled to support the budding industrial sector in many ways. Indeed, right after the completion of land reform programs a set of government taxes and other direct and hidden levies were employed to extract various surpluses from agriculture which made important contributions to later industrial development. George T. Crane (1982) terms those measures as a form of "superexploitation."

The government's pricing and tax policies made terms of trade between the urban sector and the rural sector favor the former. Regulations made land taxes and land payments payable in rice, and there was a schedule of compulsory rice sales to the government. Taxes on agriculture provided the 80

government with domestic financial resources which could be

invested in industry. The government also imposed a barter

system of rice for fertilizer. The government forced the

growing of rice by withholding fertilizers from farmers who did not cooperate. Also, direct government intervention in

the rice market was considerable.

The farmers were further exploited by the artificially

low price the government gave them for their rice. Those extraction measures not only kept wage costs low for

boosting industrial profits, but also helped to make possible light taxation for the industrial sector so that

high profits could be obtained for the industrialists to use for further investment (Kuo & Fei, 1985: 81).

Due to the existence of the above-mentioned phenomena,

there are some people who argue that agriculture was squeezed to fuel the growth of industry in the early stage of Taiwan's economic development and that the state replaced

the landlord as exploiter. Griffin (1973: 37) put it in the following words — "taxes and land payments replaced

interest and rent payment; in effect, the state replaced the

landlord." Thompson also (1984: 558) claimed that "despite the steady gains recorded in agricultural production, profits did not accrue to the agricultural producers.

Instead profits were siphoned off to nurture the comparatively under-developed industrial and manufacturing sector. " 81

Per capita consumption of farmers in Taiwan was also kept low by the above-mentioned measures of non-voluntary savings and tax policies. Tang and Liang (1973: 138) reported that farmers' consumption expenditures in Taiwan were only 88.1 percent of non-farmers in 1984, and 84.8 percent in 1986. In all, according to critics of Taiwan's land reform, the land reform programs, which redistributed farm income in favor of the tenants, was utilized by political leaders as an instrument to meet its increased fiscal burden and to support the urban-biased policy.

At this moment, we need to examine these charges and ask whether the rural population had been squeezed or not.

The government was formed largely by Mainlanders, and the farmers were largely Taiwanese, so it would have been politically dangerous to squeeze agriculture too much. In fact, comparatively, they were squeezed no harder than those who were in other less developed countries. Many benefits were provided to farm families to supplement the increasing income that attended the process.

A few examples are offered here. First, the entire program was supervised closely by the Sino-American JCRR to ensure that assistance was made equally available to all farmers. Second, the government, through its own agencies of Farmers' Associations, supplied 85 percent of all agricultural loans by 1985 (Gregor, Chang & Zimmerman, 1981:

38). Also, as I mentioned earlier, the government spent 82 part of the US aid in investing in the rural areas and upgrading rural life.

Moreover, extraction of resources from the agriculture sector in Taiwan did not bring about major damage to agriculture itself. This is so partially because of the high level of agricultural development achieved under the

Japanese colonial rule (Chang and Myers, 1963; Moore, 1988).

Also, agriculture and industry had become mutually

interdependent. As extraction of economic resources from the agricultural sector would promote the development of

industry, the expanding industry in turn stimulated agriculture by supplying inputs and manufactured consumer goods to the agricultural sector and processing its outputs.

Finally, immediate improvement was not only found in the agricultural sector, but also in farmers' living conditions. One example which will illustrate this is one of the Cabinet Rent Reduction Inspection Team's reports right after the first stage of the land reform. The report went: "'Everywhere we went, we saw newly-built or newly- repaired farmhouses. The women and children were better dressed. There is a general improvement in the food which people eat. Those whose main article of consumption has been sweet potato are now eating polished rice.'" (cited by

Tang, 1954: 60)

In addition to meeting the domestic food requirements of the fast-growing population and the need to keep wage 83 costs low, another economic calculation of land reform was to restore the agricultural sector, to increase agricultural exports, and to made it the foreign exchange earner for the under-developed industrial sector. According to Tang and

Liang (1973; 145), during this stage of development, foreign exchange rather than domestic savings was the constraint on

Taiwan's growth. By exporting agricultural goods to earn foreign exchange, capital goods and raw materials needed for industrialization at home could be purchased.

Agricultural and processed agricultural goods composed

80 percent of Taiwan's exports during the 1950s (Clark,

1087a: 8). At the critical point agriculture financed more than half of Taiwan's total imports. The importance of agricultural exports declined sharply as the economy was oriented toward the export-led strategy later on, but many critical contributions made by agriculture to the early development of the industrial and manufacturing sectors were quite far-reaching. It is commonly believed that it was the successful performance of the agricultural sector in the

1950s and early 1960s that helped finance the industrialization drive.

Another economic rationale of the 1949-53 land reform was to transfer landlord capital from land investment to industrial investment. As will be discussed in detail shortly, the social, economic and political position of the landlord class in the rural communities was seriously 84 weakened after the 1949-53 land reform. After land reform,

it was no longer profitable or safe to invest in land. The former landlords' interests, thus, shifted to the industrial and commercial fields. This goal of converting land holdings into industrial holdings was achieved through compensating landlords for their lands in part by stock in government-owned corporations -- the Taiwan Cement

Corporation, the Taiwan Paper and Pulp Corporation, Taiwan

Agricultural and Forestry Development Corporation's Canned

Pineapple Division, and the Taiwan industrial and Mining

Corporation.

Economic results of the land reform were many. First of all, due to the strongly expanded production incentives and improved farming methods, agricultural output increased at an annual rate of about 5 percent through the 1950s despite Taiwan's limited land resources and small-size farming. It indirectly helped to achieve growth and equity in the early stage of economic development.

The scope of influence of those land reform programs was quite impressive. According to Yung Wei (1988: 5), in

1949 the ratio of tenant farmers to all farmers was 39 percent; the ratio of semi-self-tilling farmers to all farmers was 25 percent; the ratio of self-tilling farmers to all farmers was 38 percent. After the land reform, the ratios were 10, 12, and 78 percent respectively in 1971, and

6, 12, and 82 percent respectively in 1985. Gottfried-Karl 85

Kindermann (1987: 124) claims that "the land reform in

Taiwan thus had achieved to a large extent Sun Yat-sen's objective of using legal and nonviolent methods for the purpose of letting the tillers of the soil become the owners."

Another socioeconomic transformation caused by the land reform program was to strengthen the power of the political elite and weaken other social actors politically. One of the Japanese legacies was the strengthening of the state vis-a-vis the rest of the society. Through the 1949-53 land reform, this trend was reinforced. Land reform did not only remove an issue around which the left Taiwanese might have developed a base, but also created rural support for the government because through land reform farmers developed a strong vested interest in the economy. And, by improving the economic welfare of large numbers of farm families land reform made it politically feasible and less risky for the government to introduce the mechanisms to extract the surplus from the agricultural sector.

As far as the impact of land reform on the landlords is concerned, they suffered a lot both in their economic and political interests in the rural communities. Economically, the most commonly cited example is that landlords were made to sell their lands at a disadvantageous price. According to this account, although landowners were given compensation, such compensation was not fair and equitable. 86

For example, the government commodity bonds provided as compensation for confiscated lands earned only 4 percent interest, which was much lower than the real market interest rates. Also, except for the shares of the cement corporation, whose products enjoyed high domestic demand at that time, the market values of other corporations were much lower than their face values for several years amid the rise in the general price level (Lin, 1981: 143). Also, after

1953 the land reform made the acquisition of large amounts of land no longer a good investment option for the landlords. Many landlords decided to invest their wealth in commerce and industry. However, many were not lucky enough to make it.

A redistribution of land ownership in rural Taiwan also led to a redistribution of political power between the landlords and the peasants. As the former landlords diverted their interest to economic activities in the urban areas, they gradually lost interest in politics in the rural community. According to Martin M.C. Yang's 1984 rural survey, about 70 percent of the 575 former landlord households under survey responded that they had become either less interested or had felt no interest at all in the rural politics since land reform (cited by Tai, 1974: 335).

On the other hand, landlords' declining interest in the rural politics, coupled with the implementation of Local

Self-rule, gave a rise to two new trends in the rural areas. 87

First, there was an increased interest among farmers in participating in community affairs. Second, there was an increased desire among the children of farmers to pursue a higher level of education.

In Taiwan, direct elections have become an integral part of political participation at the local level since the

"Program for the Practice of Local Autonomy in the Province of Taiwan" was implemented in the early 1950s. As the rural economy prospered, farmers became the core of political power and were increasingly represented in local government and rural organizations. Today, the majority of the provincial assemblymen and city mayors and county magistrates are Taiwanese (Wei, 1988: 7). However, although farmers can elect their own representatives in the local community, the decision-making power is still kept in the central government and the Taiwan Provincial Government.

Local officials arc to implement the directives laid down by central government (Thompson, 1984: 562).

Another statistic showing an increasing interest among farmers to participate in politics was the voting rate.

According to Tai (1974), a survey of seven townships in

Taiwan shows that, compared with elections held before land reform, farm voters of various tenure groups increased by 30 to 40 percent in the elections held after land reform.

Education wise, many scholars are prepared to argue that with the more equal distribution of land ownership in 88

Taiwan there has been an increase in educational opportunities, and especially so for the children of farmers

(Yu, 1987; Wei, 1988). This is so because increased rural income made more money available to the farmers to pay for education. Moreover, by letting cultivators own their scarce land, land reform helped prevent transfer of benefits from education and adoption of innovations from the cultivators to landlords. According to the Land Reform

Institute of Taiwan, between 1948 and 1971 the number of former tenant farmers' children enrolling in primary schools rose by 257 percent; those attending middle schools by 2,827 percent and those attending colleges by 16,820 percent (Wei,

1988: 6).

Also, according to a survey conducted by the Research,

Development, and Evaluation Commission of the Executive Yuan of Taiwan in 1986, the children of workers and farmers have experienced the highest degree of upward social mobility since the 1949-53 land reform. 28.9 percent of farmers' children have become either professionals or civil servants

(Wei, 1988: 6-7). The spread of educational opportunities to the lower segment of the population and the resulting increase in upward social mobility toward better occupational positions have helped Taiwan's economic development and social equality.

An interdependent relationship between the KMT and the rural voters has been established since the land reform too. 89

The KMT depends more on rural support than on the urban vote. Unlike the situation in the cities, consistent electoral support from the rural voters has been an

essential factor for the KMT to maintain a commanding position in electoral contests. Indeed, due to its

sponsorship of the 1949-53 land reform programs, there was substantial peasant voting support for the KMT. In the 1968

elections for members of the provincial assembly and the chief executive officers of counties and municipalities, KMT candidates got 53.55 percent of popular votes in metropolitan areas, as compared to 48.45 for non-KMT candidates. In the non-metropolitan areas, KMT candidates got 75.80 percent of popular votes, whereas the non-KMT candidates got 24.20 percent (Tai, 1970: 420-421). On the other hand, farmers who seek elective positions in the provincial and local governments depend on the KMT for nomination and electoral support. Tai claims that "this mutually dependent relationship has led to a continuous growth of farmer representation in public institutions."

(1974: 336).

After the landlords diverted their interest and wealth to commerce and industry in the cities, one actor involved

in filling the "leadership vacuum" at village level was the state-supported agent, such as those representing Farmers'

Associations and Irrigation Associations. Active state

intervention through agricultural institutions has helped 90 provide the political foundations of the government by-

extending its political and security networks into the rural areas. As I have shown in the last chapter, these agricultural institutions were already set up by the

Japanese colonial administration for transforming Taiwan's agriculture and controlling the rural sector. Basically, the Nationalist government utilized them the same way as the colonial government did.

For example, the Taiwan Sugar Corporation, which has a large Hainlander staff, has been utilized by the KMT as a mechanism to buy political support of Taiwanese village leaders (Moore, 1988: 131-132). Also, despite bearing the cost themselves. Farmers' Associations and Irrigation

Associations are security' departments staffed by the KMT party or security personnel (Moore, 1988: 132). By putting the KMT and national security personnel in those rural organizations, it helps stop any organized opposition to the

Nationalist rule in the countryside.

Nevertheless, as Taiwan's economy expands and socioeconomic transformation takes place in the development process, high level political participation at the provincial and local levels has resulted in the proliferation and differentiation of interest groups and an expansion in the number and background of agricultural organizations' membership. This constitutes one of the reasons for the shift from statism to pluralism in the 91 relationship between the state and the agricultural economy and population in the 1970s.

Due to the success in land reform, unlike the agricultural sector in other less developed countries which acted as a drag on industrial and general economic development, Taiwan was able to achieve a balanced growth between agriculture and industry under the policy of

"developing industry through agriculture and expanding agriculture through industry." Its land reform produced a sturdy agricultural economy and rural stability which, in turn, became the bedrock for all subsequent phases of

Taiwan's economic growth.

However, the role and importance of agriculture in

Taiwan have changed significantly in the course of economic development so far. According to Tang and Liang (1973: 136-

137), Taiwan's food supply exceeded consumption by more than

5 percent during 1946-1980. This ratio dropped to under 2 percent in the early 1960s and has been negative since then.

Declining investment, poor terms of trade between the urban sector and the rural sector, and fragmented lands prohibiting mechanization all contributed to decreased agricultural productivity and growing agricultural problems in the late 1960s and 1970s. It has become an economic burden as well as a cause of potential political unrest for the government since then. Also, the government-agriculture relationships has undergone changes as time has passed. 92

Active state intervention in agriculture in the 1950s has given away to a more pluralist approach to agriculture.

This subject will be discussed in chapter V which will deal with Taiwan's agricultural problems and Second Land Reform since the very late 1960s.

When land reform had almost been accomplished, the political leaders proceeded to launch a policy of industrialization through import-substitution. However, to initiate the policy of import-substitution and to guarantee a smooth path, the KMT leaders knew quite well that the hyperinflation problem must be solved first.

In the memory of the Nationalist leaders, uncontrolled inflation on the Mainland during and after the Second World

War was still vivid and terrible at that time. It was one of the reasons for losing the Chinese Civil War to the

Communists. Thus, the Nationalist elite was very sensitive to the inflation problem, especially facing serious military, political, and economic challenges.

Statistics show that between November 1945 and January

1947, prices rose about 700 percent for food, 1,400 percent for fuel and construction materials, and 25,000 percent for agricultural fertilizer (Gregor, Chang and Zimmerman, 1981:

23-24). At the end of 1949 the overall inflation rate had climbed to the unbelievable level of 3400 percent (Kubek 93

1987, 89). This runaway inflationary economy could lead to

uncertainties and difficulties in the economic decision­ making process and undermining of the legitimacy of the government.

Fortunately, the timely arrival of U.S. economic aid

helped relieve the situation a lot. U.S. economic aid

helped to slow down the hyperinflation in the 1950s by two ways. First, it helped increase the supply of commodities.

Right after World War II, Taiwan's foreign exchange was very scarce. The inflow of U.S. aid help supplement the financial ability of the government for imports of essential daily goods such as wheat, flour, soybeans, and cotton, as well as raw materials and capital goods needed for promoting the relatively under-developed industry sector.

Second, it reduced money supply through the requirement to deposit the counterpart funds. (Lin, 1973; Gregor, Chang and Zimmerman, 1981). As a device used by the AID mission to mitigate the inflation problem, substantial amounts of national currency needed to be withdrawn from circulation as

"counterpart funds." Thus, during 1951-52, the growth of money supply slowed down, thereby helping reduce the inflation rate.

However, the availability of U.S. aid was a necessary, but not a sufficient, condition to stop inflation in Taiwan because U.S. economic aid was mostly used as a reconstruction and short-term stabilization aid rather than 94 a longer-run development aid (Myint, 1982). Several other nations have received similar or larger amounts of aid per capita, but they have not used it as efficiently as Taiwan has. A comparison with the situation in South Korea will make this point clear. During 1953-63, South Korea's

inflation ran widely despite the inflow of substantial U.S. aid.

Taiwan's capacity to utilize U.S. aid productively and to make appropriate economic policies to stabilize its economy at this critical time was crucial. Policies pursued to control inflation and stabilize the economy in this period were the high interest rate policy and policies to restrain demand and increase supply. In this section, I will show that by adopting these policies the Taiwan government was able to not only bring down the hyperinflation in the early 1950s, but also encourage savings and capital formation and the use of labor-intensive methods of production.

As a result, for the KMT leaders the ability to check inflation could be used as a base to increase the government's legitimation and continuous support from people who resided on the island, both the Taiwanese and

Mainlanders. Due to this political consideration, there was no disagreement among the top leaders regarding the need to make appropriate economic adjustments. However, as to what policy would work effectively, there were great debates 95

among the top leaders.

According to a famous economist in Taiwan, 3. C. Tsiang

(1985), there were two popular misconceptions in development

policy of the 1950s and 1960s. The first one was basically

the infant-industry argument which claimed that the best way

to develop industries in a developing country was the use of

high tariffs or quantitative import restrictions. The

second misconception was that low interest rates should be

adopted to stimulate investment in industries even in the

face of considerable inflation. The first argument and the policy of import-substitution will be examined in the

following section. As to the second argument, the Taiwan government went against it and introduced very high interest

rates to bring its inflation under control by 1952.

Due to the influence of Keynesian economics of the

1950s and 1960s, in choosing their fiscal and monetary policies, most political and economic leaders of developing

countries tended to adopt the low interest rate policies even in the face of high inflation in order to have cheap

supply of credit to the new industries (Tsiang, 1985).

According to Tsiang, such an enforced low interest rate policy in the face of considerable inflation and great scarcity of capital in the developing countries "would

aggregate domestic inflation by creating enormous excess demand for bank credit and slow down real capital formation by discouraging the public from depositing their savings in 96 organized financial intermediaries." (1985: 16).

Due to the persuasion of two of Taiwan's prominent economists, S. C. Tsiang and T. C. Liu, the KMT elite abandoned the popular low interest policy and increased the interest rate to the prevailing inflation rate, which was well above 100 percent at the beginning of 1950. In March

1950 the government proceeded to set up a system of

Preferential Interest Rate Deposits offering nominal interest of 7 percent a month on savings deposits. When compounded msnthly, this high interest rate came to 125 percent per year. In addition to the high interest rate for savings deposits, the government also used other tax measures to encourage savings and investment. For instance, depositors did not have to pay income tax on the interest income from savings and time deposits, if their maturity, terms were two years or more (Tsiang, 1985: 17).

The economic results were very impressive and had profound influences on Taiwan's economic development later on. First, Taiwan is one of the few countries able to achieve rapid economic growth and remarkable price stability simultaneously. Inflation was controlled, averaging 12 percent per year during the 1950s. It was brought down to 4 percent per year during the 1960s. Since then the annual inflation rate has been about 2-3 percent a year. So, prices has remained quite stable except during a few years, namely, 1959-60, due to the shelling of Quemoy from the 97

Chinese Communists and 1973-74 and 1980-81, due to two worldwide oil crises. During the 1973-74 oil crisis prices increased by 47 percent, and during the 1980-81 oil prices rose by 19 percent (Galenson, 1982: 48-49; Myint, 1982: 60;

Yu, 1987: 2; Clark, 1987a: 5). However, compared to any developed or developing country, these price increases were still low.

The second economic result of the relatively stable price level and the high interest rates was the creation of substantial domestic savings by stimulating the traditional thriftiness of the people. Indeed, the propensity to save started to exceed the requirement to maintain a constant capital/labor ratio in the face of population growth in

1963. Increased savings, in turn, made it much easier for the government to provide the needed non-inflationary financing for domestic investment stimulated in the later course of development, especially in the export-promotion period. In other words, it made possible efficient allocation of available capital funds. Also, the high interest rate policy created substantial domestic savings which contributed greatly to Taiwan's economic growth later on, particularly when U.S. aid was terminated in 1965.

Domestic savings not only filled the gap left by foreign aid, but also became the main supplier to domestic capital formation. The importance of this contribution to Taiwan's economy will be discussed in the following chapter. 98

The political result of these policies was even greater. For the city dwellers and, particularly, the

Mainlanders, the inflation problem at this time posed a great threat to reduce their livelihood unless it could quickly brought under control. After the inflation rate was slowed down, there was an increased confidence among the population in the government and the island's future destiny. The sensitiveness of the people at that time to the interest rates and the economy as a whole was quite shocking. When the government felt that the per annum interest rate of 125 percent was not consistent with stable prices, it decreased the interest rate payable on one-month deposits to 3.5 percent per month in July 1950, and again to

3.0 percent in October at the same year. The immediate reaction to this policy was a sharp drop in the flow of savings deposits, even withdrawal of those deposits. As a result, the inflation rate increased. By February 1951 it was 85 percent higher than in July 1950, when the first cut in the interest rate was announced (Tsiang, 1985: 17). Thus, the slowing down of inflation in the early 1950s was more important than anything else.

Aside from the high interest rate policies used to check inflation in the late 1940s and early 1950s, political leaders in Taiwan also fought the hyperinflation problem by restraining demand and increasing supply simultaneously.

The former measures focused on tightening government 99 expenditures in order to reduce budget deficits and

inflationary pressure despite a heavy defense burden. Here, again, massive U.S. military aid made it possible to maintain a huge military force in the island while keeping government expenditures low.

The latter focused on promoting small-scale investments to increase agricultural and industrial production without adding to inflationary pressure. In agriculture, a series of land reform programs were successfully carried out. By owning the land they tilled, farmers had more incentives to work hard, thereby increasing agricultural output. In the industrial sector, labor-intensive industries were protected and promoted. These industries usually involved little capital and a short setting-up time, thus industrial production could be raised immediately. Also, taxes were kept low, averaging from 14 to 15 percent of the GNP. The merit of these policies was that while inflation was gradually slowed down, the economy was still able to expanded smoothly in the early period of development.

Also, the government made efforts to balance the budget. K. T. Li (1976: 155) wrote:

'...mindful of the fresh painful lesson of a vicious unarrested inflation of the currency, our financial authorities have since made painstaking efforts to maintain a balanced budget in spite of all sorts of difficulties. Consequently, the infla­ tionary issue of banknotes was forsaken as a method for meeting government deficits and a firm foundation was laid for economic 100

stability."

In the early stage of development, the Taiwan government had already been subjected to considerable budgetary strain because of the military burden, its huge, over-staffed bureaucracy, and the rising expenditure for education and public health resulting from the drastic increase in population. Despite this fact, however, the government's ability to curtail expenditures in order to balance the budget reflected the wisdom and competence of the political leaders.

Im&ort-Substitution Policy:

After the land reform programs were successfully implemented and the inflation problem was brought under control, the political and economic situations in Taiwan's rural and urban areas were, more or less, stabilized. The attention of Taiwan's political leaders was soon extended to economic development. Based on the infant-industry argument, a policy package of a multiple exchange rate system, import constraints, and tariff protection was employed in order to foster the profitability and productivity of import-substituting industries.

As I have already illustrated, land reform and the consequent increase in agricultural production in Taiwan contributed greatly to the initial development of the industrial sector. Main points are summarized as follows. 101

First, with cheap rice for the urban residents, the government was able to lower the wage costs for the industrial sector. Second, through various non-voluntary savings and tax policies, the industrial sector enjoyed net capital contribution from agriculture. Third, as farmers' income increased, the demand for inputs and consumer goods in the rural areas provided a stimulus to industrial expansion. Fourth, by promoting the export of agricultural goods, Taiwan was able to earn foreign exchange and import capital equipment and raw materials needed for the establishment of light industries that had been neglected during the Japanese colonial period.

In addition to extraction from the agricultural surplus to the industrial sector, other urban-biased policies included various discriminatory measures to provide more incentives to the industrial enterprises. For instance, the domestic producers were heavily protected through a high tariff wall, an overvalued exchange rate, and a multiple exchange rate system. Higher exchange rates were applied to imports than to exports. Within imports, lower rates were applied to capital equipment and raw materials than to other goods. Also, the control of the whole financial sector by the government made it possible for inexpensive credits to be offered to industrial enterprises in this period. Those measures helped promote import-substituting industries because capital equipment and raw materials were made less 102 expensive and because the domestic market was highly protected from foreign competition.

In the early 1950s, Taiwan's market was small and the per capita income was very low. Why did the Nationalist elite think that it was necessary to limit industrialization

to the development of industries producing cheap consumer goods for the highly protected domestic market? Did the government just blindly follow one of the "popular misconceptions" in development policy of the 1950s and

1960s, namely the infant-industry argument? Or were there other considerations by the political leaders? In this section, I will show that ideological commitments, certain constraints of the island's economy, and political vulnerability of the regime all had played parts in the choosing of this development policy.

Taiwan at this stage could adopt the strategy of export-oriented industrialization, like that of Hong Kong.

Nevertheless, this development strategy was politically not feasible due to two reasons (Gregor, Chang, and Zimmerman,

1981: 50-55). The first one was the low confidence of foreign investors in Taiwan's future. As Taiwan faced tremendous political and economic challenges at home and possible international isolation and military threat from

Mao's army, the inflow of foreign capital either through direct foreign investment or economic aid were impossible.

As I have argued in the section on the internal and external 103 environments of this period, when the import-substitution policy was launched in the very beginning of the 1950s the

U.S. government did not intend to involve itself in any KMT-

Communist struggle. Only after the outbreak of the Korean

War and the Chinese intervention in the conflict did the

United States see the strategic importance of Taiwan and assist the Nationalist government with a huge amount of aid.

Even so, up to the late 1950s several attempts by the

Chinese Communists to regain the island of Taiwan by force still frightened potential foreign investors. One example was the 1954 Chinese Communist attack on Tachen, an offshore island under KMT control and geographically close to the

Mainland China. According to Jacoby (1966: 89), the attack

"raised a spectre of continued insecurity that frightened the investor at a time when Taiwan's investment opportunities were not clear.” It was not until the defeat of the Chinese Communists in the second Taiwan Strait crisis in 1958 was fear of potential foreign investors disappeared.

The second reason for forgoing an export-led development strategy at that time was the fear of the KMT leaders of becoming dependent on foreign countries for the nation's economic development. In fact, I will argue that such a fear was derived from the Chinese modern history.

The sense of humiliation caused by the subordination of

Ching dynasty to foreign powers for about one hundred years 104 still troubled any Chinese. Thus, the possibility of rendering Taiwan's future development up to foreign interests was not acceptable.

The exclusion of foreign enterprises in the period of import-substitution proved to be a very important factor for explaining why the ISI strategy in Taiwan encountered less problems than countries in Latin America and why the major policy transition from ISI to ESI went so smoothly in

Taiwan. A further study of this important point will be given in the concluding chapter, chapter VI.

There were also serious economic problems facing the country, such as the scarcity of capital, technology, natural resources, and foreign exchange. At this time, most daily necessities, such as wheat, soybeans, cotton, flour, chemical fertilizer, and so on, needed to be imported which, therefore, worsened balance of payments deficits. With the rising agricultural output and exportation of agricultural goods, the government was able to mitigate this foreign exchange shortage. But agriculture was in the process of recovering and growing. Thus, an import-substitution policy, coupled with a heavy involvement from the government, would be seen as a rational, though not the best, way to start the economic development of the country.

For one reason, this policy would reduce some of the imports of consumer goods, thereby helping ease the problem of balance of payments deficits. 105

Also, the only productive and abundant resource Taiwan

had at that time was an unskilled labor force. The development of small-scale, labor-intensive, and import- substituting industries such as food processing, wearing apparel, textiles, leather goods industries, and so on would be a correct choice because these industries involve little capital, skilled labor and short setting-up time. ISI policies related to this decision were all aimed at providing a direct protection to a new indigenous industrial class and at transferring voluntary and nonvoluntary agricultural savings to the industrial sector.

One important aspect of the import-substitution development strategy was that some important private enterprises were encouraged and protected. The pressure from the AID mission for a larger degree of participation from the private sector did not become strong until the late

1950s and 1960s. (This will be discussed in the next chapter.) Here, I will overlook AID's influence and concentrate on other factors contributing to the expansion of private industries in Taiwan in this period. First, there was great support and advocation from economic technocrats and scholars. Examples of arguments favoring promoting private enterprises in this period are presented here.

Premier Chen Cheng made a speech in 1953 and clarified the official attitude towards the role of private 106 enterprises in the following way: "we are of the opinion that whatever enterprises capable to be run by the people should be finally transferred to private ownership. This is not only a basic principle in the development of national economy but also one of the best means to uproot bureaucratic capital." (Cited in Industry of Free China.

April 1954: 1)

The same article in Industry of Free China also cited concerns of Dr. Hu Shih, a prominent and respected scholar in Taiwan at the time. Hu's opinion was that in the past

"goyernment officials often thought the development of

China's economy depended entirely on industrial, mining and other enterprises directly operated by the government."

Therefore, "the public enterprises either bought up the priyate enterprises or strangled them to death." Strongly condemning this situation, he called for an aotiye participation from priyate enterprises in the industrialization process. Due to the wisdom and influences of economic technocrats and scholars, there was a changing attitude among the KMT leaders from "restricting priyate capital" to a "middle way" economic policy combining elements of goyernment interyention and free economy.

The second factor contributing to this change was the flexible nature of Dr. Sun Yat-sen's ideas towards the role played by the public and priyate sectors. The public sector has an important ideological rationale in the history of 107

Taiwan. According to Sun's economic doctrine that "private capital should be restricted and public capital should be developed," the public sector should have a commanding position in the economy. Public enterprises should be set up to manage defence, transport, communications, and other social services which private enterprises are unable and unwilling to undertake. On the other hand. Dr. Sun also acknowledged the basic inefficiencies in the public-owned enterprises and saw the necessity to promote private enterprises. However, except for this general guidance about the role of the state to promote private capital, the details about the public-private enterprises relations were very much ignored by Dr. Sun.

This left much room for different interpretation of

Sun's ideas. As Chen-kuo Hsu (1987) correctly pointed out, every camp of thought will find justification for its arguments and policy preferences from some parts of Sun's doctrine. Thus, we see, throughout the history of Taiwan's post-war economic development, a various degree of direct and indirect government involvement in the economy along with increasing participation from the private sector.

However, we should not overstress the scope of freedom given to the private sector in this period because there was a heavy government involvement in the import-substitution strategy. Almost all scholars studying Taiwan's post-war economic development agree that while there are log fluctuations over time, Taiwan has had one of the biggest public enterprise sectors outside the Communist bloc since the beginning of the import-substitution period. This feature also continued throughout the period of more liberal, export-led period of industrialization.

Tzoiig-shian Yu (1985: 3-5) pointed out that there are three functions of the public sector in Taiwan's economy.

The first one is the fiscal function. This means that surplus earnings from public-managed enterprises, such as revenue from the Tobacco and Wine Monopoly Bureau, is to help economic development. In the period of import- substitution, income tax played a very insignificant role because national per capita income was very low at that time. More than 20 percent of total government revenue before 1972 was from the surplus earnings of the public- owned enterprises (Yu, 1987; 9).

The second function of the public sector is the economic function. In this aspect, public enterprises of

Taiwan have contributed to the economic development by setting up reasonable price structures and offering adequate services and supplies of raw materials. One public enterprise most cited to explain this function is Taiwan

Power Corporation. According to Gregor, Chang and

Zimmerman's statistics (1981: 37), about 70 percent of U.S. economic aid made to infrastructural development between

1950 and 1965 went to Taiwan Power Corporation. While most 109 power output was designated for industrial use, the rural areas benefited from available and cheap electricity too.

In terms of the economic function, the public sector has also had provided private enterprises with many managers and engineers. The public sector is the largest employer in the country too. This indirectly contributed to the urban stability especially in the early stage of development because the majority of the Hainlander immigrants at that time were employed in different public enterprises. The third function of Taiwan's public sector is the social function. The function is to increase social welfare by offering low-priced services to the public, such as buses, postal service, telephone utilities, etc.

There are two major explanations for the ability of the above-mentioned public enterprises to fulfill the three functions in the very early stage of development. First, as the government took over many enterprises from the Japanese colonial government and Zaibatsu right after World War II, it sharply increased the assets of the Nationalist government. Indeed, as an Industrial and Commercial Census conducted in 1976 shows, the average assets per government enterprise were 600 fold more than that of private enterprises (Huang, 1986: 135).

Second, an overwhelming proportion of U.S. aid was channeled into the public sector. During the years of 1951-

65, about 74 percent of investment in the Taiwanese 110 infrastructure, such as transportation and Communications networks, and power-generating plants, was funded by U.S. aid (Hamilton, 1983: 54). Those basic industries are owned by the government. Thus, despite the fact that inefficiency, corruption, and a lack of management responsibility in public enterprises had already existed by the early 1950s, some were able to continue serve their functions. However, as will be shown, there was a gradual reduction of the role of public enterprises, and as the private sector grew strong enough to compete with the relatively inefficient public enterprises, the government was forced to reform the management of some inefficient public enterprises or shut down firms that cannot cover their costs.

Evidences of heavy government involvement in this period were many. First, the Nationalist government took over Japanese enterprises at the end of the War. The possession of those public enterprises helped the government control the economy and make a clear centralization of political and economic power. According to Galenson (1982:

45), about 56 percent of total industrial products was from these enterprises. At the end of the 1949-53 land reform, the government transferred the ownership of four major public corporations to private investors. After becoming private enterprises, many factory units of them became important bases of the newly developed private industries.

The second evidence of a heavy government intervention Ill

in the economy was the concept of a planned but market- oriented economy. Indeed, there was an economic rationale for the government to commit itself to the practice of economic planning in the early years of economic development in Taiwan. According to Yu (1985: 13-14), the first benefit was to give both the public and private sectors information about the types of business activities that had potential for growing and earning money. Second, government guidance and assistance would certainly help the development of private enterprises which were still small and backward in the early stage of Taiwan's economic development. Third, economic planning gave the government a timetable to implement infrastructural construction for the economy as a whole. Finally, economic planning could make possible the efficient allocation of scarce resources, thereby helping reduce economic distortions.

The scope of planning has been more extensive and directive in the public sector than in the private sector.

In the relationship between the government and the private sector, the government preferred to use U.S. aid and policy measures to encourage the activities of private entrepreneurs, especially those which had potential for growth and were useful to Taiwan's economy. This was important to the development of the private sector. It is argued that the absence of government guidance and assistance might have retarded the development of the 112 private sector.

Some political developments in the 1950s also played the part in motivating the KMT elite to pursue the policy of

import-substitution. After a successful transfer of the ownership of land in the countryside, there was an

increasing rural support for the Nationalist government because through land reform farmers came to have a strong

interest in the economy. This political quiescence and support in the rural areas made possible an urban-centered

industrial development.

Also, the government was much aware of the danger of restricting activities of those Taiwanese businessmen too much because their political influence and economic benefits in the rural communities had been taken away by the KMT- launched land reform. A further deprivation of their freedom in pursuing the economic interest in the industrial sector would form a potential source of hostility and political challenge to the exogenously imposed regime.

Thus, by following the prevalent development strategy of the time, i.e., the import-substitution policy, the government offered the Taiwanese businessmen many incentives and a highly protected domestic market to produce cheap consumer goods, thereby hoping to gain good will from those businessmen. Thanks to this policy, some private enterprises were able to grasp the opportunity and have become big businesses investing heavily at home and abroad. 113

Examples include Ting-sheng Lin, owner of the Tatung

Company, Taiwan's largest electronics company, and Yung- ching Wang, who is the owner of the Formosa Plastics Group and is the richest man in Taiwan.

The government-enterprise relationship at this time was more of a dependency of businessmen on the government for protection and development. This relationship, however, has undergone many changes. It has become more like an interdependent one, especially after Taiwan's international status declined sharply in the early 1970s. (More on this will be discussed in chapter V.)

At the end of the import-substitution period, the political situation in the rural and urban areas was well- controlled, and initial industrialization was started. The

1949-53 land reform programs had contributed to the creation of a supportive rural base. Also, the initial economic development and cheap rice satisfied the urbanite, thereby helping maintain urban stability. Under the balanced development strategy of "Developing Agriculture by Virtue of

Industry and Fostering Industry by Virtue of Agriculture," agriculture became the source of feeding the fast growing population and labor transferring to the industrial sector.

Agricultural and processed agricultural foods were made the main earners of foreign exchange, which in turn helped 114

Taiwan to finance the capital and raw material imports for promoting the industrial sector.

The import-substitution policy had promoted a formation of a local industrial bourgeoisie who depended heavily on the government for protection and development. Business organizations in the period of import-substitution were not politically active. Most businessmen preferred to channel their influence through individual contacts with government officials, especially those who had political connections, rather than through their associations. Thanks to the government's willingness to allow some freedom for private enterprises and to protect some domestic industries, Taiwan was able to produce some big, competitive enterprises. As will be seen in the following chapters, they became the engine of Taiwan's export expansion in the 1960s and the bridge to the international economic community in the 1970s and 1980s when Taiwan suffered diplomatic setbacks.

As far as the political situation of industrial labor is concerned, unlike Latin American countries, Taiwan did not experience populist mobilization in the early stage of development. Political quiescence was partly due to the strict enforcement of labor law and partly due to the lack of well-developed labor organizations. The Nationalist government brought with it most of the repressive labor legislation enacted on the Mainland. This legislation prohibited strikes and controlled all unions. In the 115 discussion of the next period, I will show that Taiwan's

latter export-led industrialization was highly dependent on this disciplined labor.

In this chapter, I have discussed the contributions of

U.S. military and economic aid to the security of Taiwan and collaboration between Chinese and American officials to find solutions to such problems as monetary and price stability, infrastructure building, and agricultural and industrial development. Massive U.S. military aid helped reduce conflict between economic growth and military strength and made it possible for the Nationalist government to maintain a huge military force. Politically, the arrival of U.S. aid made Taiwan's political leaders more confident in dealing with occurrences in the domestic as well as international environments. Economically, U.S. aid was utilized to fill the gap between domestic savings and capital requirements, to help reduce current deficits, to increase foreign exchange for imports of necessary inputs, to help overcome serious inflationary pressures, etc.

As far as the development of the industrial sector is concerned, U.S. aid helped create conditions in which capital could be accumulated industrially. In other words, the early development of Taiwan's industrial sector depended heavily on the aid-sponsored economy; that is, an economy with a well-developed infrastructure and an expansion of the agricultural surplus under JGRR-assisted land reform. In 116

the next chapter, I will show that under this sound

infrastructure, booming agriculture, and liberal policies, the industrial sector in Taiwan was in a position to take off. In short, it is more than adequate to stress that the foundation of Taiwan's rapid export-oriented growth of the

1960s and 1970s was laid by many U.S. aid-sponsored development projects in the 1950s. CHAPTER IV

THE PRIMARY EXPORT-PROMOTION PERIOD

QuJLLiaa. of .. .Ciiapie.r XV. : (International and domestic contexts) . well-controlled political situation . low inflation rate . rising domestic savings . favorable world situation: expanding world economy, favorable market conditions, easy credit, cheap energy costs, the emergence of multinational firms, etc. . unique relationship with the U.S. and Japan

V' (Policy I studied____,____ _ (Policy calculations) in this period) V Political: . to meet pressures from the 1958-60 Economic Reform AID Mission . to promote some pro-KMT businessmen . to realize Dr. Sun's concept of international economic relations . to open the chance of economic advancement and social mobility for former landlords and native Taiwa ise . to insure foreign interest in the continued viability of the KMT government

Economic : . the nature of Taiwan's economic structure: small market, low per capita income, lack of economies of scale in ISI, abundance of labor . to introduce direct foreign investment as a substitute for fading U.S. aid . to reallocate resources from

117 118

Figure 2 (continued)

agriculture to industrial production to stimulate the activities of private enterprises

(Policy II studied . (Policy Calculations) in this period) v Political : . to realize Dr. Sun's concept Establishment of EPZs of international economic relations . to insure foreign interest in the continued viability of the KMT government

Economic : . to attract domestic and overseas investors . to bring in labor-intensive technology . to promote exports . to create employment . to stimulate the activities of private enterprises

(Policy III studied (Policy calculations) in this period) V Political : . to prevent proletarianization Decentralized which usually occurred in Industrialization Policy urban areas . to prevent potential urban instability caused by rural migration . to prevent agricultural degradation from leading to rural degradation

Economic : . to create non-farm rural employment . to help still the pace of migration to cities . to help raise average rural income and income equality . to give industrial manufacturers direct access to a cheap and abundant labor 119

Figure 2 (continued) force to spread industrialization

4/ (Outcome Produced) . people take full advantage of more open economic system to show their entrepreneurial talent . fragmented business structure formed . more equal distribution of income between the rural and urban sectors , industrialization process spread throughout the country . hard working and enterprising rewarded by free enterprise system . Foreign investors contribute to Taiwan's economic growth

Figure 2: Outline of the Primary Export-promotion Period 120 &.ft)3Qi;.jip.tiQn af the Interna l and External Emdjconments in the Primary Export-Promotion Period:

By the end of the 1950s, much had occurred in Taiwan's

internal and external environments, thereby forcing the government to reorient its development strategy. In the

internal environment, the political situation was by and large well controlled due to the successful land reform and

initial industrialization. Also, an extensive network of quasi-military security agencies came to exist for the purposes of maintaining KMT rule and suppressing dissent.

Those security agencies included the National Security

Conference, National Security Bureau, Investigation Bureau,

Intelligence Bureau, General Political Warfare Department,

Taiwan Garrison Command, military police, and police (Gold,

1986: 62-83). Although this security police network was notorious for its penetrative and suppressive nature towards political dissent, its existence has helped create an atmosphere of peace and stability which has been conducive to rapid economic development and to personal security for ordinary citizens. Many people in Taiwan do not hesitate to say that without this efficient political machine, the impressive record of economic growth simply could not have been achieved.

Due to this tight control in the political arena,

Taiwan enjoyed a degree of political stability as its economy started to take off. The only time the KMT's rule 121 had been seriously challenged was when Lei Chen and his supporters tried to organize an opposition party in the late

1950s and early 1960s. Lei Chen was a former high-ranking

official of the KMT. He organized a group of intellectuals and Taiwanese politicians to oppose the government and published the journal -- Tzu Yu Chung Kuo (Free China

Fortnightly) -- to attack any misconduct of the KMT and the

Nationalist government. Fearing potential dissatisfaction toward the party and the government among the populace, political leaders had Lei Chen arrested and the journal closed down.

Economically, due to the Taiwan elite's determination to avoid excessive inflation, economic growth of 10 percent or more in this period was not accompanied by the inflation problem. The actual annual inflation rate averaged 4.6 percent in the 1953-72 period, and for the entire period of export-promotion, 1963-72, the average was an astonishingly low 1.7 percent (Liu, 1974a: 12). This low inflation rate, coupled with increased domestic savings made it much easier for the government to provide the needed non-inflationary financing for domestic investment stimulated in this period of development.

Enough domestic savings had been generated in the

1960s. The high interest rate policy pursued in the early

1950s, general political stability, rising income resulting from the 1949-53 land reform and initial industrialization 122 all contributed to the increase in domestic savings. Gross national savings claimed for 60 percent of gross domestic capital formation in the 1950s, 85 percent in 1981-65, and

93 percent in 1968-70 (Ho, 1978: 239-240). Those domestic savings helped finance domestic investment stimulated by the concurrent change of development policies from import- substitution to export-led policies.

High domestic savings also contributed to the economy later on, especially when U.S. aid was terminated in 1965.

Domestic savings not only successfully filled the gap left by foreign aid, but also sustained domestic capital formation at an increasing rate. After 1975, Taiwan even became a capital exporting country for the first time

(Tsiang, 1985: 23).

In addition to the low inflation rate and increasing domestic savings, in the first years of the this period, there was a continued inflow of U.S. aid to Taiwan.

However, as Taiwan's economy started to take off, there was a decline in the importance of foreign aid and an increased inflow of foreign investment to the island. As we can recall from the last chapter that there were both political and economic reasons for the exclusion of foreign investors in Taiwan's import-substitution industrialization. In this period, however, political leaders in Taiwan started to see the need to attract foreign investors for four major purposes -- foreign-exchange earnings, labor-intensive 123 technology, employment generation, and export promotion.

Many incentives for attracting foreign firms were set up.

One important factor for attracting direct foreign investment to the island was the changed economic structure. In the early 1950s, Taiwan had almost nothing to offer foreign firms due to its small market, backward industry, lack of natural resources, and economic and political uncertainty. However, as Taiwan's internal and external political situations stabilized and as Taiwan started to encourage the inflow of foreign capital and technology for building export industries, there was an increase in the inflow of foreign investment. More on direct foreign investment in Taiwan will be discussed in the following section.

As to the external environment facing Taiwan in this period, the existence of a favorable international situation and Taiwan's unique relationship with two of the world's most dynamic economies -- the U.S. and Japan -- were two main factors accounting for Taiwan's economic expansion, especially in its performance of exports.

The world political and economic climates in this period were quite conducive to the early expansion of

Taiwan's exports, and the KMT leaders had turned this opportunity to their advantage. In her book The Taiwan

Economy in Transition (1983), Professor Shirley Kuo points out some favorable external factors which greatly helped 124

Taiwan's growth during the 1950s and 1960s. They were the availability of cheap energy, the rapidly expanding world economy, a sound international financial system, and speedy technological progress.

Indeed, the growth of international trade peaked at an annual rate of 16 percent between 1967 and 1973 (Schmitz:

1984: 11). These were exactly the years in which Taiwan scored its greatest successes. There were few trade barriers against goods from Third World countries and little competition from other developing countries, except from

South Korea. In effect, the key international policy accounting for Taiwan's as well as other NICs' success in pursuing export-led industrialization has been the liberal trade policies of the advanced industrial countries that enabled them to find markets for their increased output of manufactured goods.

In addition to the favorable market conditions, core capitalists were eager to invest. Easy credit was available and interest rates were low. Also, Taiwan's neighbor,

Japan, was experiencing economic boom, thereby spilling over to Taiwan and other neighbors.

In this sense, the timing of Taiwan's as well as South

Korea's opening up its economy in the 1960s was a critical element in explaining their economic expansions over the past decades. Both countries pursued export-led industrialization ahead of most other LDCs . Thus, the gains 125 of these two countries in the zero-sum world of

international trade reduced the possibility of similar gains elsewhere. The Vietnam war also provided an opportunity for

increasing Taiwan's exports. According to Hamilton, of

Taiwan's exports to underdeveloped countries 10-20 percent went to Vietnam in 1966 (1983: 56).

The other important factor that shaped Taiwan's development process in this particular period was its economic relationships with the United States and Japan.

These two countries have contributed to Taiwan's economy by capital and advanced technology.

There was a history of close relations between the U.S. government and the KMT. In addition to close military ties and flows of aid, Taiwan's economic relations with the U.S. increased as the import-substitution strategy of the earlier

1950s gave way to more liberalized outward-looking policies.

The United States opened up its huge domestic market to goods from Taiwan and encouraged American businessmen to invest in Taiwan. These generous economic gestures stimulated Taiwan even more than foreign-aid dollars had.

According to Dr. Kubek (1987, 92), from 1965 when U.S. aid was terminated to 1972, Taiwan's gross national product increased at an average annual rate of over ten percent.

Thus, even without the existence of U.S. aid to Taiwan, relations between the two countries reached a high level of friendly cooperation due to the rising importance of the 126

U.S. market, increasing American investments, and continuing military sales.

In the meantime, Taiwan became one of the most important places in the Far East for the relocation of some

American manufacturers and to compete with Japanese goods.

The reason for this was that as Japan recovered from World

War II destruction in the 1960s and as its government intervened heavily in promoting the exports of manufactured products, American manufacturing industries, especially electronics, suffered losses as a result of severe price reduction offered by Japan. Because of rising labor costs at home, many of these industries began to lose their competitive edge and had no choice but to move to countries like Taiwan, South Korea, and the like, which would allow them to be competitive pricewise. Therefore, since the early 1960s Taiwan saw itself gradually becoming a site for

U.S. multinational corporations to fight against the invasion of Japanese products in the U.S. market. More on

American and Japanese direct foreign investment in Taiwan will be discussed in the contents of Taiwan's 1958-60 economic reform.

Taiwan's postwar economic relations with Japan were important too. As wages in Japan increased, a policy of direct foreign investment was encouraged by the Japanese government. Terutomo Ozawa (1979: 21) wrote

"The Japanese government recently has begun to 127

realize that direct foreign investment is an important catalyst in implementing its ambitious plan to reorganize and upgrade Japan's economic structure while integrating her industrial activities with those of the rest of the world, supplementing the tra­ ditional route of trade. Japan now desires to transfer by means of overseas investment some of her traditional industries (parti­ cularly those that are less skill-intensive, resource-consuming, or pollution-prone) to developing or resource-rich countries and to encourage simultaneously the develop­ ment of modern, technology-intensive, and clean' industries at home."

As Japan's small and medium firms, encouraged and assisted by their government, were seeking favorable foreign sites for their investments, Taiwan also began to pursue an export-promotion development strategy by encouraging the inflow of direct foreign investment. As a consequence,

Taiwan, with its stable political environment, abundant and cheap labor, and geographical proximity attracted many

Japanese manufacturers of labor-intensive products. As will be shown in the section of "the Establishment of Export

Processing Zones," Japanese investment was strongly attracted to the Kaohsiung Export Processing Zone (KEPZ), completed in 1965.

Also, as Japan's economy continued to expand in the

1960s, Japan began to look seriously to its Asian neighbors as additional markets for its products in order to supplement its Western markets. Although imports of

Japanese consumer goods were highly controlled by Taiwan authority at that time, Taiwanese manufacturers imported 128 many materials and capital goods from Japan. This was so because of the following reasons.

First, due to changes in the development strategy started with this period, the government of Taiwan encouraged manufacturers to import materials and capital goods from Japan so that Taiwan could learn from Japan's technology. Second, Taiwanese businessmen were, and still are, inclined to purchase those goods from Japan because of their low cost, convenient delivery, better service after sales, and adaptability in use. Although imports of these goods from Japan have supplied Taiwan's manufacturers with cheap inputs of good quality, it has also widened the trade gap and has caused economic and political conflicts between the two countries. More on the trade imbalance between

Taiwan and Japan will be discussed in Chapter V.

Although the favorable world economy and Taiwan's ties with the two giant economies in this period had facilitated

Taiwan's economic take-off, one should not consider them as sufficient explanations for growth in export industries.

There are two reasons behind this argument. First, Taiwan's exports expanded much more rapidly than did world trade.

Second, heavy dependence on international trade has caused backfire which worries political and economic leaders in

Taiwan greatly. Now Taiwan has over US$70 billion foreign exchange reserves, the second highest in the world. Taiwan also runs a huge trade surplus with the U.S. and a big trade 129 deficit with Japan. Those trade conflicts and their political implications for Taiwan are subjects to be discussed in the following chapter.

The main argument presented here is that other factors such as development strategies and policies pursued by the government in the domestic political, economic, and social contexts are more important in explaining Taiwan's economic performance. In this chapter, three more development policies -- the 1958-60 economic reform, the establishment of export processing zones, and the decentralized

industrialization policy -- will be discussed to show how government policies continued to remain crucial to facilitate the domestic redeployment of labor and other resources within the context of various international crises and domestic difficulties.

g m i d . R g f Q r m ••

As I have repeatedly pointed out, economic growth and political stability are two basic goals of the KMT elite.

From the three policies discussed in the last chapter, the land reform, the anti-inflation policy, and the import- substitution policy, I have shown that the formulation and

implementation of those policies were not based on purely economic considerations. In some cases, such as land reform, political calculations played the dominant role in shaping the policy. 130

In this section, I will argue that unlike the 1949-53 land reform, which was primarily a political decision, the

1958-60 economic reform was less political. However, some political calculations by the KMT leaders were still critical, especially the needs to meet pressures from the

AID mission and to promote some pro-KMT big businessmen.

Another important feature of this reform was that, while the 1949-53 land reform was initiated by political leaders, the economic reform was initiated by modern economic technocrats. As 1 have argued earlier, Taiwan has been lucky to have had very experienced and educated modern technocrats who helped formulate and implement different development strategies. Equally important is the fact that the top KMT leaders were willing to give a substantial degree of economic power to those technocrats.

Modern technocrats have been heavily involved in shaping and implementing Taiwan's 1958-60 economic reform.

The core of this technocracy includes American-educated economists, aid administrators, and economic experts working for the World Bank and the IMF. The first to recommend economic reform were T.C. Liu and S.C. Tsiang, who were educated in the West and worked for the IMF at that time.

They suggested the government pursue a policy of devaluation of Taiwan's currency, coupled with trade liberalization.

For political leaders and other economists at a time when the import-substitution policy was highly fashionable among 131 academic circles, these recommendations were somewhat unorthodox. As would be expected, Liu and Tsiang's policy recommendations resulted in great debates among economists and government officials.

Some people were much afraid that liberal policies might increase the inflation problem that the government tried so hard to reduce in the late 1940s and early 1950s.

Their argument was that since devaluation would increase the domestic prices of imported goods and since Taiwan was dependent on imports for much of its raw materials and finished goods in this period, a policy of devaluation would result in cost-push inflation. However, Liu and Tsiang argued that to devalue the currency of Taiwan to a realistic level would ensure an equilibrium balance of trade (Tsiang,

1985: 8-9).

Another economic argument of the reform had to do with the question of whether the government should stimulate exports or not. For some policy makers at that time, Taiwan seemed to be a typical developing country capable of producing only a few traditional export products, such as rice and sugar, which were highly price-inelastic. For this reason, political leaders were content to think of some light industries producing import substitutes.

Industrialization efforts were, therefore, limited to the development of industries producing cheap consumer goods for the domestic market. Except for a few traditional products. 132 such as rice, sugar, bananas, and pineapples, export industries in Taiwan were purposely discouraged under the import-substitution strategy.

However, with a small market and a very low per capita income of domestic consumers, import-substituting industries failed to achieve the economies of scale necessary for efficient production. Liu and Tsiang, therefore, argued that even if the traditional exports were facing highly inelastic world demand, if the relatively cheap and abundant labor in Taiwan was not artificially offset by the overvaluation of its currency, Taiwan could, with this comparative advantage, produce and sell products to countries with relatively scarce labor (Tsiang, 1985: 8-9).

In other words, the correction of price distortions would enable the economy to expand, along lines closer to its true comparative advantage.

Ting-an Chen (1974: 264) also argued that there are certain conditions for successful import-substitution industrialization and export-oriented industrialization.

For the import-substitution industrialization, a country needs a large domestic market to permit realization of economies of scale from production. For the export-oriented industrialization, the country must possess a comparative advantage in the production of given goods to gain a competitive edge in world markets. Due to the fact that

Taiwan had a small domestic market and a relatively abundant 133 labor force, it would be quite rational to shift the development strategy from an inward-looking one to an outward-looking one.

Another economic argument favoring an export-promotion policy was that it is unwise for a country with a large population and a shortage of capital to pursue capital- intensive industries simply because in doing so capital- intensive industries can not accommodate as many workers as labor-intensive industries can. In the 1950s, Taiwan's population grew very rapidly, averaging 3.3 percent per year, and in the rural areas, there was underemployed labor for which the government wished to create job opportunities.

According to an industrial survey of 1959, many factories producing simple products such as rubber canvas shoes, soup, insulated wire, woolen yarn, electric fans, plywood, and the like, were operating at only 23 percent to 67 percent of capacity (Tang and Liang, 1973: 138). So, in such a small island economy with a large amount of surplus manpower, the

KMT leaders recognized that only an export-oriented development strategy emphasizing labor-intensive and light industries could produce enough job opportunities and sustain a high rate of economic growth.

Another argument for promoting labor-intensive industries for exports was the need to reallocate Taiwan's productive resources from agriculture to industrial production (Tsiang, 1985: 14-15). Some economists argued 134 that Taiwan's agriculture would be inevitably subject to the law of diminishing returns because Taiwan had little farm land. To circumvent this law, labor should be shifted away from agriculture, where land was the limiting factor, to industrial production, where land was not a limiting factor.

This resource reallocation was made possible only by the currency devaluation and trade liberalization (Tsiang, 1985;

14-15).

Although Liu and Tsiang's arguments were very persuasive, political opposition to their recommendations of economic reform were also important. First, they encountered opposition from some elements in the government, such as politicians, bureaucrats, and high-ranking military men. With market forces playing the leading role in the economy, their previous power to channel resources to favored projects and public enterprises would be greatly challenged. Another political opposition force was from some parts of the private sector, which had benefited from the import-substitution policy. In order to protect their dominant position in the domestic market, those producers naturally made an effort to express their objections to the reform.

In addition to persuasion from the modern technocrats to relax economic controls, pressure from the AID mission was another catalyst to economic liberalization. Pressure from AID was first witnessed in the early 1950s when it 135 asked the KMT government to transfer the ownership of four government-owned companies to landlords in partial compensation for land expropriated under the 1949-53 land reform programs. Apart from this move, AID did not get the

KMT government to do too much in liberalizing its economic policies at this moment. Indeed, most of U.S. aid was channeled into public enterprises in the early period.

The Nationalist government was not opposed to the idea of free enterprise. In fact, as I have discussed in the last chapter, the Taiwan government had already started to adopt policies designed to assist the development of many profitable private enterprises in the early 1950s. I have also argued that this was due more to the competence of the political and economic elite and flexible ideology than to pressures from American aid agencies. However, the pace of promoting free enterprise in the beginning was quite slow.

Based on Dr. Sun's economic ideas, the government tried to reduce some defects in capitalism by introducing some socialist measures, such as state enterprises and economic planning.

The AID mission, however, believed that the most efficient method of economic development was to rely upon private enterprises rather than public enterprises. As a result, in 1959-60, through a control over development funds and participation in economic planning AID formally urged the Taiwan government to adopt a series of reform programs 136

including the encouragement of the private sector, the

liberalization of the foreign investment climate, the

liberalization of foreign exchange control and trade

regulations, the promotion of non-inflationary monetary and fiscal policies and tax reform, and a decrease in military

expenditures.

Some dependency theorists, like Yu-hsi Chen (1981), argue that the Council on U.S. Aid (CUSA) was another collaborative mechanism set up by the United States in

Taiwan to serve mutual interests in economic progress and military strength. CUSA was an interministerial government organization under the Executive Yuan of the Taiwan government to handle the use of aid funds. It was financially controlled and politically manipulated by AID.

Moreover, not being subject to all Chinese civil service regulations, the Council was able to offer high salaries to recruit many pro-American development-minded staffers, consisting of economists, economic bureaucrats, and technical experts (Jacoby, 1966: 61).

It is true that the Council was financially controlled and politically manipulated by American aid agencies, with many competent staffers being recruited to it. However, after all, the Council was able to formulate developmental projects which were conducive to Taiwan's economy. I tend to see CUSA operating under the direction of AID as a positive effect on Taiwan's economic development. There are 137 several reasons for this argument.

First, at the very point of policy transition from

inward-looking to outward-looking, CUSA gave Taiwan's conservative state bureaucracy a necessary push to follow the economic ideology of a free economic system. Also, U.S. aid gave Taiwan's policy makers psychological reassurance in the face of such an important but difficult policy change.

Second, with years of training in CUSA, those people employed by the Council became members of the remarkably technocratic cast and were able to influence political leaders to pursue economic policies and reforms which have accounted for Taiwan's economic growth for the past 40 years.

Regarding this point, one of the most cited examples is

Chen Cheng. He was a military man-turned-politician and was a capable but conservative bureaucrat. As I have shown in the discussion of Taiwan's 1949-53 land reform, he was the major advocate of land reform. His commitment to land reform was derived from his experience in rural poverty and in fighting against the Chinese Communists on the Mainland.

When Chen Cheng became Premier in 1950, he was the chairman of CUSA too. Due to the influence from reform-minded technocrats inside the CUSA, he made another important contribution to Taiwan's economic success; that is, he abandoned the Nationalist tradition of "bureaucratic capitalism" and vigorously called for more freedom for 138 entrepreneurial ventures and opportunities for private enterprises, Chen (1981: 132) made the following comments about Chen Cheng's attitude change that "without a nucleus of developmentalist-oriented proteges around him, Chen Cheng could not have come up with such a radical view of economic development at the initial stage of U.S. aid."

The third positive influence of the U.S. connection was the needed technical assistance offered by AID to facilitate the economic reform. To show AID's determination to promote the private sector in Taiwan, 26.4 percent of $532.8 million for non-military use was devoted to human resources development, including personnel training in management, economic analysis and investment decision-making (Chen,

1981: 129). This training helped upgrade employees in the public sector as well as those in the private sector. Also, some funds were allocated to setting up low-interest loans to selected small-and medium-sized enterprises. Moreover, in order to facilitate the development of a strong private sector in Taiwan, 44.3 percent of economic aid went to improve the infrastructure, such as transportation, communication, electricity, and the like (Chen, 1981: 129).

The important result of AID's efforts to influence

Taiwan's economic policies for a free economic system was the establishment of the 19-point Economic and Financial

Reform and the Statute for Encouragement of Investment in

1960. By emphasizing a lower rate of protection, unified 139

foreign exchange rates, tax rebates, and trade loans, these

two programs served two main functions. First, they helped

shift the inward-looking import-substitution policy to an

outward-looking development strategy, based on export processing industries. Second, they created a better

investment environment for domestic as well as foreign

investors.

The 1958-60 economic reform in Taiwan touched many policy areas including trade liberalisation, currency reform, incentives created for promoting export-oriented

industries, a liberalized foreign investment climate, and policies to make domestic entrepreneurial activities easier and more open. Two major aspects of this reform -- the encouragement of private enterprises and the liberalization of the foreign investment climate are selected for detailed discussion in this section.

a. The Encouragement of Private Enterprises:

The most important policy change of the 1958-60 economic reform was the formation of policies designed to encourage the full exercise of private entrepreneurial talent. The following discussion will show that it was this group of entrepreneurs who played a great role in exploring the domestic and especially the foreign markets in the booming world economy of this period.

The KMT government's pro-business and economic 140 expansionist policies were also based on some political calculations. Since Taiwanese are the majority of the business community, this type of policy would benefit

Taiwanese businessmen in particular and make them approve, if not actively support, the government.

Also, one possible political implication of the economic reform was that it would show that the government was receptive to the needs of the society - at least the business community. By opening the door for economic advancement and social mobility for former landlords and native Taiwanese and by carrying out this reform successfully, it would give the KMT leaders the chance to overcome the image of being corrupt and inefficient and boost Taiwan's economy.

The Chinese have been great entrepreneurs. Many people certainly took full advantage of this opportunity to demonstrate their talents. Since policy changes regarding the role of the private sector have started, the private sector of Taiwan's economy has gradually outgrown public projects. For instance, in 1952 only 42 percent of the nation's industrial production came from the private capacity, whereas in 1976, less than 22 percent came from public operation (Kubek 1967, 94). Essentially, Taiwan has followed a mixed economic system. While the government owns some major basic industries such as steel, ship-building, defense, railroads, public utilities, electric power, and 141 petrochemicals, almost all the light industries and virtually all of the services and trading firms are privately owned.

One phenomenon which resulted from the economic reform was the rapid growth of small- and medium-sized enterprises

(SMEs) during the last four decades. According to an estimate made by Taiwan's Medium and Small Business

Administration of the Ministry of Economic Affairs, SMEs accounted for over 95 percent of the total number of registered firms in Taiwan. This fragmented business structure has played a key role in the acceleration of economic growth since small and decentralized producers can take the opportunities produced by changes in the international market better than large enterprises. SMEs account for approximately 55 percent of the total Gross

National Product, 70 percent of the total labor force, 65 percent of total export revenue, and 65 percent of total business revenue (Yu, 1985: 6; 1987: 7),

An unusual feature of SMEs in Taiwan is that each operation is usually owned by a single family. Families in

Taiwan employ many strategies to promote their own mobility and advance Taiwan's development. These strategies include family extension, advanced education, short-term migration, economic diversification, and property accumulation

(Greenhalgh, 1984: 534). According to Greenhalgh (1984), the family system has made many contributions to Taiwan's 142 economy, especially in the labor-intensive stage.

First, the lack of public sources of social security and credit forces families to provide their own support for the elderly and unemployed and investment funds. Most Banks in Taiwan are résistent to lending money to SMEs because of their inability to provide sufficient collateral, the lack of a sound accounting system, and a lack of expertise in capital planning. Thus, even after foreign firms in the banking and security industries are allowed to operate in

Taiwan, the family and social networks are still the main sources from which small businessmen get money to establish and finance their enterprises. In this sense, the family has increased the resources available to the government for solving larger developmental problems.

The second contribution of Taiwan's SMEs to the economy has to do with their effects on capital accumulation and income equality. While SMEs' profits are smaller than those of large enterprises, their profits are largely concentrated in single families that own the enterprises and are plowed back into productive reinvestment more effectively (Chen,

1981: 184). As far as their contribution to increasing income equality is concerned, through strategies of family extension, advanced education, short-term migration, economic diversification, and property accumulation, the family has mitigated inequalities. Also, since 70 percent of the total labor force is employed by SMEs, their job- and 143 salary-generating capacity is tremendous and helps promote

income levels and income equality.

The third contribution of SMEs is the way by which they

help link Taiwan's economy to foreign markets. There is a dichotomous market structure that exists in Taiwan's economy. In this structure, SMEs dominate the export market and are more competitive; on the other hand, large enterprises dominate the domestic market and are more monopolistic. Unlike those in Latin American countries,

large and wealthy private enterprises in Taiwan are not an entrenched group tied to foreign interests. As I have shown, during the 1950s import-substitution phase they were highly protected and mainly oriented to the domestic market.

Since the 1960s and 1970s they have vigorously utilized periods of economic boom to pursue their profits. In this sense, large private enterprises, especially those who have political connections, are highly dependent on the state.

On the other hand, SMEs have experienced less intervention from the government, and they are relatively flexible and efficient in doing business in the international market, despite the nature of fragmentation.

It is quite interesting to find out the answer to this.

According to Wu and Chou (1988: 22-23), the pattern of the international division of labor enables Taiwan's SMEs to avoid being restricted by the scale economies of international marketing and still able to specialize in 144 manufacturing business because the economies of scale in the export business are essential in the marketing stage rather than the manufacturing stage. Also, since SMEs in Taiwan are usually engaged in labor-intensive and mature industries, economies of scale in the manufacturing stage are not important.

As to their weakness in international marketing,

Taiwan's SMEs have help from Japanese general trading companies and importers from export markets. In general,

Taiwan's SMEs specialize in the production of labor- intensive goods, leaving the international marketing task to

Japanese general trading companies, multinational trading companies, and foreign importers. At this point, it is quite clear that the success of Taiwan's SMEs is directly connected to the existence of a more open domestic economic environment and the presence of MNCs attracted by the 1958-

1960 economic reform into the island.

In addition to foreign trading companies and importers, there is another source that enables Taiwan's SMEs to penetrate foreign markets. By dispersing family members abroad, the family has created transnational networks that link Taiwan's economy to foreign markets by themselves.

This will be shown in the following chapter as an important contribution, especially when Taiwan's international status declined sharply in the early 1970s. It helped link

Taiwan's economy to countries and areas it is not linked to 145 politically or diplomatically.

Another potential contribution from the existence of such a fragmented economic structure, I believe, is that a flexible, entrepreneurial economy will eventually enable

Taiwan to have an easier solution to difficulties of growing labor unrest, labor costs, and currency appreciation at home and increasing competitiveness abroad than South Korea.

Why is then Taiwan's economy so dominated by SMEs?

Aside from the fact that Chinese families see themselves as a self-contained unit, the development philosophy of the

Taiwan government is a major factor for the fragmented and competitive business structure in Taiwan. The government's role in Taiwan's rapid development has been of considerable significance. At every important phase in Taiwan's growth, the government has exercised direct control or indirect influence to guide economic activities. However, when compared to the development style of South Korea, economic controls in Taiwan tend to be more moderate, and Taiwan puts more emphasis on the strength of market forces than its

Korean counterpart. Lawrence J. Lau (1986: 10) compares the two by saying "where South Korea has tended to enforce vigorously an elaborate roster of economic do's and don'ts,

Taiwan's government has aimed instead to create an economic environment conducive to growth." Thus, the Korean policies tend to encourage larger-sized firms, whereas SMEs dominate

Taiwan's economy. 146

According to Scitovsky's figures (1986: 146), after the

1958-60 economic reform in Taiwan, the number of manufacturing firms increased by 150 percent between 1966 and 1976, while the average size of individual firms increased by only 29 percent. In South Korea, the number of manufacturing firms increased by only 10 percent, while the average size of firms increased by 176 percent.

There are serious political calculations in the philosophy bchird Taiwan's economic policies. As I argued in the last chapter, businessmen in Taiwan were purposely kept fragmented from the beginning so that the government could control them easily. Another political reason was to avoid anticapitalist sentiment among the populace. In South

Korea there are increased criticisms about the monopolistic growth of those big companies and of the government's policies that have facilitated such development. In contrast, the government's encouragement of small businesses has given the people in Taiwan the chance to become capitalists, thereby reducing an acute political issue in the future.

In this period, as far as measures by which the government promoted private enterprises are concerned, they were very useful. The Taiwan government, instead of competing with private enterprises, sponsored and promoted their development. For example, the government would conduct feasibility studies in some industrial investments. 147

If they proved to be profitable, the government would invite interested private businessmen to participate, and would offer them favorable low-interest loans either through U.S. aid or other government sources.

For private enterprises which had difficulties in operation, the government would give them special loans, or even temporarily take over and manage them until their problems were fixed. Moreover, the government provided raw materials to private plants for processing in order to reduce their financial burdens and risk (Lee and Yeh, IFC,

1982: 10).

The government also helped set up and coordinate joint ventures between foreign and local investors. In promoting foreign trade, the government took the responsibility to establish necessary institutions and took the initiative to negotiate effectively on behalf of local industries for liberal trade policies in industrialized countries. Three important institutions were established for the purpose of expanding foreign trade. The China External Trade

Development Council was established in 1970; the Far East

Trade Service, Inc. in 1971; and the External marketing

Services Team in 1983. Their functions include (1) providing information on trade and overseas markets; (2) helping solve problems encountered in international markets;

(3) bringing potential trade partners together; (4) increasing the ability of domestic firms to compete 148 internationally; (5)participating in trade exhibitions; (5) sponsoring import trade exhibitions; (6) establishing Taiwan products and trade centers overseas; and (8) dispatching trade missions abroad (Yu, 1985; 9).

In addition, the Medium- and Small-sized Enterprises

Assistance Working Group was set up to help SMEs in getting credit, technology, and developing managerial and marketing skills. The China External Trade Development Corporation helped Taiwanese exporters through foreign advertising. The

Medium and Small Business Administration was set up by the government to promote the welfare of individual SMEs.

Seeing the unavailability of loans for SMEs, the government also established a financial organ, the Medium

Business Bank of Taiwan. This financial institution is considered as "a significant government contribution towards the overall welfare of the small and medium business sector." (Yu, 1985: 8) Yet, for reasons I have mentioned earlier, the vast majority of SMEs still turns to kinship and social networks or underground financial units for investment funds.

However, nowadays, the existence of the vast majority of small and medium businesses in Taiwan has become the biggest weakness in its economy, especially when the government tries to further upgrade Taiwan's economy. In the late 1970s and 1980s, in order to concentrate capital and shift Taiwan's economy to a more capital- and 149 technology-intensive one, the government has tried to promote industrial and commercial conglomerates. The obstacles it encounters and the surviving strategies of SMEs in the face of growing international competition and the government's changing policies will be discussed in the following chapter.

In summary, political and economic calculations of the

KMT leaders in response to domestic and international factors in supporting an expansion of private enterprises are clear. I have shown that many government actions were taken in this period to increase the competitive ability of

SMEs in Taiwan rather than to limit private activities.

b. The Liberalization of the Foreign Investment Climate:

One important part of the 1958-60 economic reform was to create a better investment climate to attract Overseas

Chinese as well as foreign investors. Before discussing measures to attract direct foreign investment, some political and economic considerations of Taiwan's policy makers to justify these policies should first be noted.

One rationale for inviting foreign and Overseas Chinese investment was related to the future termination of U.S. aid at that time. In other words, improvement in Taiwan's investment climate in this period was a part of the efforts to introduce foreign capital as a substitute for fading U.S. aid. Chen Cheng, then the Vice President and concurrently 150 the Premier, was cited that:

"U.S. aid to us will fade away gradually. There are two ways to make up the shortage of capital: one is try to obtain more funds in the form of Development Loans, the other is to attract more foreign nationals and overseas Chinese to invest in our country." (cited in Liu and Tso, 1983: 11)

In response to this need, lucrative investment packages were designed to encourage private foreign funds into Taiwan. A considerable infusion of private foreign capital was attracted, especially from Americans, Japanese, and the

Overseas Chinese.

Another economic calculation was the need to stimulate the activities of private enterprises. Up to this period, the government's policy of allowing the private sector to play a bigger role in the process of export-led industrialization was quite clear. Also, a sound infrastructure in which private capital could accumulate already existed due to the development of aid provided by the U.S.. However, most local enterprises at that time were still quite underdeveloped. Thus, by establishing joint ventures with foreign firms and setting local content requirements for foreign firms, domestic enterprises could get the needed capital and learn management techniques, marketing skills, and labor-intensive technology from foreign firms.

The policy of attracting direct foreign investment was 151 also a direct result of Dr. Sun Yat-sen's concept of

international economic relations. According to Sun, China's industrialization and development needed foreign capital, technology, and expertise.

Benjamin I. Cohen (1975) argued that the need to attract foreign investment might be rooted less in economic considerations than in the political needs of the Taiwan government. In order to maintain close relations with the

United States and to insure foreign interest in Taiwan's survival, the Taiwan government saw it in its greatest interest to enlist help from foreign investors. Take the

U.S. investors in Taiwan for example. The American business community with interests in Taiwan was, and still is, frequently mobilized to seek support in the U.S. on behalf of the Nationalist government. George Fitting (1982: 740) developed a similar argument:

"In the international realm, the expansion of foreign investment in Taiwan has been a considerable bonus to the regime in Taipei. As foreign capital flows into Taiwan, inter­ national corporations develop a vested interest in the continued viability of the regime that both invited and protects their investments. Foreign investors inevitably seek to influence their government's policies in support of Taiwan's international position. For Taipei, American investment in Taiwan has meant that there are additional voices in Washington calling for the support of the regime in Taipei."

The political utility of investment from Overseas

Chinese at that time was also greater than its economic one. 152

There was a substantial share of investment from Overseas

Chinese investors. About 30 percent of all direct foreign investment during the 1950s and 1960s was from this group.

Overseas Chinese are called "the mother of the Nationalist

Revolution" due to their contributions to the 1911 revolution. They have been the object of aggressive propaganda by both Taiwan and Communist China. Gold (1986:

81) claims that the main contribution of Overseas Chinese investors at the early stage of Taiwan's economic development was political, "demonstrating with their capital the conviction that KMT was the legitimate ruling party of

China."

As to the economic utility of investment from Overseas

Chinese, there are two aspects regarding the nature of

Overseas Chinese investment which can explain the argument that Overseas Chinese investors were merely an extension of the domestic investor category. First, although their investment was large, it was concentrated in the light and service industries, banking, and some speculative sectors such as construction and real estate where Taiwan's own capitalists were active. Thus, they were seen as direct competitors to the domestic investors. Second, since almost all of them came to invest in Taiwan to escape political and social instability and threat of anti-Chinese movement in

Southeast Asian countries, the technology level of their manufactures was not higher than that of the domestic firms. 153

So, in terms of economic contributions, they added more capital resources rather than technology or marketing skills to Taiwan's economy.

Policies to increase direct foreign investment and to direct such investment toward preferred industries constituted an important part of the 1958-60 economic reform. New institutions were set up to facilitate the implementation of export-oriented direct foreign investment.

The Industrial Development and Investment Center (IDIC) was established in 1959 to serve foreign investors. It assisted foreign investors in things like reducing red tape, selecting factory sites, and obtaining facilities on favorable terms. Another organization set up to assist foreign investors was the China Development Corporation. It provided financial assistance to foreign investors by extending credit and equity participation (Chen, 1981).

In addition, investment laws were promulgated and amended as necessary. The Statute for Investment by Foreign

Nationals was enacted in 1954 and amended in 1959. The

Statute for Investment by Overseas Chinese was enacted in

1955 and amended in 1960. The Statute for Encouragement of

Investment was enacted in 1960 and amended in 1965.

Generally speaking, these investment laws promised that investment from foreign nationals would enjoy the same advantages as domestic capital. In addition, many attractive tax concessions were offered. These included the 154

income tax holiday, tax exemption for undistributed profits,

tax deductions for exports, exemption or reduction of the

stamp tax, extensive protection against expropriation, protection against foreign exchange loss, waivers of import duties on equipment and parts, etc..

There are arguments about the importance of tax concessions to the development of Third World economies. It

is quite true that a developing country can not gain much from competition with other countries by offering tax concessions to foreign investors because, for example, a tax exemption by one country is soon matched by other countries.

Fortunately, Taiwan did not have this problem at that time because there were very few Third World countries offering such generous tax concessions. Indeed, the feature of tax concessions in Taiwan was among the most attractive condition to potential investors at that time. Other features included political stability, quality of work, an efficient infrastructure, lower production costs, and satisfactory social conditions (Ho, 1978).

The response of foreign investors to those incentives in the early 1960s was still low. However, in 1964, a U.S. firm -- General Instruments -- took the initiative to establish an electronics factory near Taipei. From producing only two products in 1964, it grew to produce 21 products. All of them were made exclusively for exports back to the U.S. Its quick success demonstrated the 155

potential of offshore assembly to other American electronics

producers who were seeking production sites with low cost so

that they could compete with the low-priced Japanese goods

in the U.S. market.

In the beginning of this period, the majority of non-

Chinese foreign investment in Taiwan was from the U.S. The

growth of overseas investment by Japanese firms had just

started to be promoted by the Japanese government. A

comparison of approved non-Chinese foreign investment

between the import-substitution period and the export-

substitution period is shown in the following table.

Table 1

Comparison of Approved Non-Chinese Foreign Investment Between the Import-substitution and the Export-substitution Periods

U.S.A. Japan Other Countries

Amount % Amount % Amount % Total (US$1,000)

1953- 9,452 37.0 1,372 12.6 50 0.4 10,874 1959

1960- 37,985 80.4 6,396 15.6 1,648 4.0 46,029 1964

1965- 126,946 55.0 52,709 22.9 50,438 21.9 230,093 1969

Source: Yu-hsi Chen (1981). "Dependent Development and Its Sociopolitical Consequences: a Case Study of Taiwan." Unpublished Ph.D. dissertation, University of Hawaii, p. 144. 156

From this table we can see that total U.S. direct

investment in Taiwan from 1960 to 1964 was more than four times as high as the amount for the whole decade of the

1950s. And, it accounted for more than 80 percent of

Taiwan's total foreign investment during the five-year period of 1960-1964. In 1965, the Taiwan government revised the Statute for Encouragement of Investment and enacted other legislation such as the Statute for Technical

Corporation and the Statue for the Establishment and

Management of Export Processing Zones (EPZs). With the establishment of the Kaohsiung EPZ and bonded factories after 1965 U.S. investment in Taiwan almost quadrupled from

1965 to 1969, though its weight in total foreign investment dropped to 55 percent.

Similarly, Japanese investment increased at a large scale due to the establishment of the Kaohsiung EPZ in 1965.

Japanese investment was largely concentrated in labor- intensive and lower-wage industries because of the rapidly rising Japanese wage scales. With cheap and abundant labor and the timing of the Kaohsiung EPZ's opening at this period, Taiwan naturally attracted many Japanese firms.

Ozawa (1979: 86) said that "had it not been for the 'push' effect of Japan's shortage of young factory workers on her overseas investments, KEPZ might not have been so successful." 157

In addition to the establishment of the KEPZ and the abundance of cheap labor, Taiwan was also an ideal overseas base for Japanese firms because of the extremely low cost of

"being alien." (Ozawa, 1979: 84) Taiwan is a former colony of Japan and many indigenous Taiwanese were educated under the Japanese education system. Most Japanese businessmen feel psychologically closer to Taiwan than to any other

Asian country. On the other hand, most Taiwanese businessmen are more hospitable to the Japanese. Another factor attracting Japanese firms is the fact that local partners and high-ranking local cadres are indigenous

Taiwanese and can speak Japanese. The ease of communication can save time and energy for the Japanese. Since the majority of Japanese investment in Taiwan was located in the

EPZs, more on Japanese investment will be discussed in the section about EPZs.

Foreign investors in Taiwan were not left uncontrolled, however. To show the skillful management of the KMT leaders, many examples can be presented here. The government licensed all foreign-owned subsidiaries and regulated all foreign investment through the Investment Commission under the Ministry of Economic Affairs. The Statute for Investment by Foreign Nationals, the Statute for Encouragement of

Investment, and the Statute for Technical Cooperation have provided the legal basis for such controls and regulations.

After a foreign-invested enterprise was established, the 158

Investment Commission continued to supervise its activities to prevent possible adverse effects.

As Table 1 shows, the inflow of foreign investment began to increase in Taiwan in the early 1960s. This relative lateness of the inflow of foreign investment had a great impact on the role played by multinational corporations in Taiwan's economy. By the early 1960s, some light industries such as textiles, apparel, and other light manufacturing had already been established by indigenous entrepreneurs. Local firms had also developed technological capabilities during the period of import-substitution of the

1950s and early 1960s. Thus, when export-oriented MNCs came to the island, they could coexist with domestic local firms without displacing them. A comparison of the role played by

MNCs in Taiwan's and Latin American NlCs' industrialization processes will be made in the concluding chapter.

Another indicator of little influence of foreign investors in Taiwan has to do with the small amount of their investment. According to the report of the Investment

Commission of Taiwan's Ministry of Economic Affairs in 1985, foreign firms' share in the total value of exports was 15.84 percent; share in GNP was 6 percent; share in manufactured output was 13.02 percent; share in employment was 3.09 percent; and share of the government tax revenue was 14.44 percent. Foreign firms' share of Taiwan's gross domestic capital formation was only 2.6 percent in 1968, 1.3 percent 159 in 1972, and 1.5 percent in 1978 (Haggard and Cheng, 1985).

Although the amount of direct foreign investment to

Taiwan was never a lot, it still had many economic and political utilities in the process of export-led industrialization. According to the study of Ranis and

Schive (1985), direct foreign investment was of considerable quantitative importance to Taiwan's economy, especially during the 1960s, and had increasing qualitative importance in the 1970s and 1980s. The quantitative and qualitative contributions of direct foreign investment in Taiwan will be examined in the following section, along with an evaluation of the EPZs.

Due to a record of impressive economic growth, many liberal economists try to attribute Taiwan's success to the government's liberalizing its economic policies in the late

1950s and early 1960s. According to them, the Taiwan government yielded its role to self-regulating markets once the liberalizing reforms were in place, and all it did was to regulate, supply public goods, and keep the macroeconomic balance. The neoclassical scholars also recognized that only until the oil crises in the mid-1970s did the Taiwan government become more active with the move to develop heavy and chemical goods industries.

However, in reality, the Taiwan government retained a substantial degree of control over the economy which is consistent with Dr. Sun Yat-sen's teachings. The mixed 160 economic system enables the government to influence the direction of economic activities, but at the same time preserve private enterprise and individual initiative. Thus,

import-substitution and export-led industrialization are not mutually exclusive. Taiwan did not encourage international specialization through the market alone. Direct and indirect controls continued to exist throughout the primary export- substitution period. In this period, the government not only continued to use protectionist measures to help develop certain infant industries, but also set up policies to guarantee profits for certain foreign investors.

For example, the government continued to protect capital-intensive and basic industries invested by foreign and local industrialists at this time. The case of the USI

Far East company is a good example. USI Far East was a US- invested company which produced polyethylene resins from ethylene supplied by the Chinese Petroleum Corporation. In order to facilitate the expansion of USI Far East and to guarantee profits for that company, the Taiwan government imposed controls over the import of polyethylene resins in

July 1969. Those import controls were lifted in 1972, but

USI Far East had benefited in the previous years from the controls as the domestic prices were kept steady. Also, due to those import controls the domestic sales volume of the company was also larger than it would have been able to achieve in the absence of such import controls (Chong, 1972: 1 6 1

2 6 ) .

Other evidence of continued state intervention at this more liberalized, outward-looking stage of development was the way the government helped private enterprises through the establishment of linkages with foreign firms. As I discussed in the last chapter, during the import- substitution period of the 1950s, available resources for early economic development were largely from U.S. aid, agricultural surplus, and profits from the government's own enterprises. The Taiwanese entrepreneurial class was small and weak, thereby contributing very little to the economy.

To equip private enterprises for taking advantage of a more liberalized domestic economy and the booming world economy, the government continued to serve the interests of local enterprises by constantly improving the investment climate and protecting them from MNC competition. The government tried to link MNC activities with domestic industrialists through policies such as direct exports, subcontracting and consignment work for MNCs, and joint ventures. Local content and export requirements designed to alter the trade behavior of foreign firms were also used.

In doing so, MNCs would be firmly linked with local enterprises, and local enterprises could learn foreign production technology.

As Taiwan was experiencing a period of economic boom, political and economic leaders anticipated some new trends 162 caused by the fast export growth and changes in the domestic economic structure and international economic situations.

The first one was the increasing challenge from other LDCs with cheap and abundant labor forces. Second, with the rising real wages among Taiwan's labor force, the period of cheap labor would come to an end. Third, the demand from the domestic and international markets for the products of heavy industry would increase faster than demand for food and textiles. Finally, the downstream export-oriented manufacturers would be vulnerable to input supply disruptions if most inputs must be imported (Wade, 1988;

44). So, the state did not hesitate to intervene and tried to make practical plans which reflected its comparative advantage.

One important policy move to circumvent these anticipated trends was to expand the heavy and chemical industries towards the end of this period. The purpose was to create a flexible and integrated production structure within Taiwan so that the economy could respond quickly to changes in world market conditions and be less vulnerable to interruptions in input supplies.

The Taiwan government took several paths to expand the heavy and chemical industries. First, the government started to identify certain key sectors which were of special importance for the economy's future growth such as the petrochemicals industry, basic metals, etc.. Large 163 amounts of investment went into the development of these

industries. Most of these upstream sectors were concentrated in public enterprises. This gave the Taiwan government influence over the private downstream sectors which depended on them for inpiits.

Second, the government also actively and successfully

involved leading U.S. and Japanese firms in the establishment of upstream industries in Taiwan. In chapter

V, I will show that multinationals were, and still are,

important in many of these sectors, and are often in alliance with public enterprises. In this Taiwanese version of the triple alliance, the Taiwan state plays a dominant role. '

T.he_ Establishment of Export Processing Zones :

The existence of Export Processing Zones (EPZs) in

Taiwan has been regarded as one of the most important elements in explaining its economic success, especially in the period of export-substitution. Indeed, the idea of establishing EPZs as a means Of attracting export-oriented direct foreign investment was a very important innovation in the industrial sector in the 1960s. EPZs were an important

"switching device" between Ithe primary import-substitution and export-substitution periods.

The first EPZ in Taiwan was opened in Kaohsiung.

Inspired by the success of the KEPZ, the government opened 164 two more in 1969, one in Taichung, in Central Taiwan, and the other in Nantze, in the northern part Kaohsiung City.

The domestic economy supplied labor and utilities, whereas foreign investors offered the needed materials and technology. The purposes of the EPZs in this period, according to the Kaohsiung Export Processing Zone

Administration, were to promote export-oriented industries, to attract domestic and overseas investors, to create more jobs, and to bring in new production technology.

An evaluation of the EPZs will be discussed shortly based on these principal objectives. As of this moment, it should be noted that the most unique feature of the operation of EPZs is the centralized management and administration of all affairs pertaining to the establishment and operation of firms located in the zones.

The Export Processing Zone Administration is the representative of practically all the government agencies and is responsible for the management of the zones.

Necessary procedures, registration, import and export licensing, foreign exchange transactions, and so on, are all simplified and done in the zones by one single organization.

In addition to this unique feature of convenient administrative procedures, there are other benefits offered to investors located in EPZs. Those benefits include (KEPZA,

1967: 14-15):

(1) various tax incentives; 165

(2) repatriation of capital, profit and interest

earnings (applied to foreign and Overseas

Chinese investors only);

(3) abundant supply of cheap labor force;

(4) low power and water rates;

(5) ease in the acquisition of industrial land

provided with all the public utilities required;

(6) availability of standard factory buildings which

may be paid for in installments over a period of

ten years;

(7) transportation and warehousing service; and

(8) liberalized foreign exchange and trade

controls.

Thus, the EPZs have provided both domestic and overseas investors with an ideal investment climate for manufacturing export products.

However, there are some general criticisms about the establishment of export zones in Third World countries which need to be examined here. One of them is the accusation that the export processing zones are usually utilized by certain Third World leaders to attract foreign investment as a means to achieve personal wealth and power. Second, export zones are like an artificial foreign territory within the developing country in which foreign firms stand virtually outside the local laws and social relations; therefore, their production activities do not increase the poor local 166 technical and entrepreneurial skills and provide enough jobs. Third, due to long and lucrative tax holidays and other tax concessions, foreign firms' products go virtually untaxed. Selden (1975; 26) summarized the role of the EPZs in developing countries as follows; "The proliferation of free trade zones represents in perhaps its purest form the new industrial face of contemporary imperialism."

When the idea of establishing the EPZs was put up in

Taiwan in the late 1950s, very few countries had EPZs.

Taiwan was the first developing country to have them. The

KMT government's policy to establish this type of export zones was carefully planned and conducted. It took about ten years for the first export processing zone in Taiwan to be built. Recommendations for setting up an export zone in the Kaohsiung harbor were made by civic and business leaders to attract foreign capital investment and promote trade.

Obviously, the economic consideration of this new undertaking was aimed at meeting the growing demands of economic development in this export-led period.

It is time to evaluate the EPZs in Taiwan. As I have mentioned, there were four functions designated to the EPZs

-- attracting domestic and overseas investors, promoting export-oriented industries, creating job opportunities, and bringing in new production technology. Since the majority of foreign investment in Taiwan in this period was located in the three EPZs, this evaluation also examines the 167 outcomes of the overall policy of attracting direct foreign investment to the island.

The immediate effect of the establishment of the KEPZ was a large inflow of foreign investors, especially Japanese

MNCs. After World War II, Japanese MNCs had no claim on their assets in Taiwan, and Japanese investments in Taiwan did not really take off until 1985 with the establishment of the KEPZ. The distribution of approved investment in the

Kaohsiung EPZ at the end of January, 1970, based on nationality, is shown in the following table. 168

Table 2

Approved Investment in Kaohsiung EPZ at the End of January 1970

Value of approved % investment

Taiwan $5,388,150 14.37 Overseas Chinese $5,852,439 15.67 Foreign Nationals Japan $9,502,000 25.44 United States $7,249,429 19.41 United Kingdom $750,940 2.01 Holland $2,150,000 5.76 Others $170,000 0.46 Joint Ventures Taiwan-Japan $2,100,551 5.62 Taiwan-Overseas Chinese $1,026,250 2.75 Taiwan-U.S. $1,210,841 3.24 Others $1,956,569 5.24

Total $37,350,129 99

Source: Chinese Investment and Trade Office (New York) KEPZ Administration of the Republic of China. Mimeograph. 169

The Japanese postwar re-entry into Taiwan took place later than that of the U.S.; however. Table 2 shows that

Japanese investment in the KEPZ was higher than American investment. The timing of Kaohsiung's opening in 1965 was the most important factor in attracting a large number of small- and medium-sized Japanese firms.

As to the second function designated to the EPZs, labor-intensive technology needed to promote export-oriented industries was properly transferred to local producers by both Japanese and American firms. The way by which Japanese technology was transferred to Taiwan can be understood through Kiyoshi Kojima's (1977) general analysis of Japanese technology transferred to developing countries.

Kojima presents several points for his argument that technology transferred by Japanese firms to developing countries is appropriate. First, technology transferred by

Japanese firms is less capital-intensive and highly labor- intensive. Second, technology transferred is not so much specific production techniques but rather mature and standardized. Technology is transferred mainly through the training of labor and management. Third, the transfer of technology usually begins in those industries where the technological gap between providing and receiving countries is the smallest. Since that the technological gap is small and that there exist already in the recipient economy some competitive firms and some technological foundations, the 170 new technology is easier to learn, and its spread effect is larger. Fourth, small-scale production of products which require mature and standardized techniques is exactly what developing countries need to learn in the early stage of industrialization. Fifth, Japan's firms also transfer needed technical assistance which must be provided on the site of actual operations until the transferee acquires the necessary skills.

Thomas Gold (1986) uses the theory of the product life cycle to further explain Kojima's observations of Japanese foreign investment. According to him, Japan's rapid post­ war growt'i has been characterized by careful analysis of the product life cycle by the Ministry of International Trade and Industry (MITI). The HITI breaks the production process into stages and determines where production of which products is most cost-effective. Under the guidance of the

MITI, Japanese firms made investment abroad to avoid problems like labor shortages, high wages, lack of land, quotas, and pollution at home in the early 1970s. Thus, labor intensive and simple technology were exported to the less developed Asian countries, like Taiwan and South Korea, and Japan could concentrate on producing capital- and knowledge-intensive goods.

According to Kojima (1977), U.S. MNCs usually make direct investment as part of monopolistic or oligopolistic strategies in sophisticated, knowledge-intensive industries 171 in order to maintain and expand their monopolistic or oligopolistic position in the host country and establish

"enclaves" in developing countries. However, this is not true in the case of Taiwan. Most U.S. investment in Taiwan was concentrated in the production of electronic and electric appliances, which involved highly labor-intensive technology. The Japanese were also mainly interested in electronics, followed by metal processing and chemicals. At the end of 1970 the amount of American investment in electronics products averaged US$3,975,676 with US$2,344,478 in chemicals, whereas the average Japanese investment in the electronics industry was US$339,000 with US$417,575 in the chemical industry (Ozawa, 1979: 88). As I have mentioned, the escape of American electronics producers to countries like Taiwan and South Korea was because of the abundant and well-educated labor needed to compete against Japanese products pricewise.

The most cited example to show the contribution of

American firms in upgrading Taiwan's labor-intensive technology is the Singer Sewing Machine Company. Singer established its first fully owned subsidiary in Taiwan in

1963. At this time, the protected domestic firms strongly opposed the entry of Singer because they conceived that

Singer, with its superior technology, capital, and marketing skills, would pose a major threat to their production.

However, later on, the Singer case proved that its absolute 172 technological superiority, coupled with the strong marketing skills of the parent firm, not only provided Taiwan Singer with the opportunity to succeed, but also helped the local producers in many ways.

One important aspect of the government's policy toward

Singer Sewing was the requirement of domestic procurement of supplies. Due to this policy, the local content of Taiwan

Singer's production was increased from zero in 1964 to 50 percent in 1965, 75 percent in 1966, and 80 percent in 1967

(Ranis and Schive, 1985: 126).

Singer also provided free technical assistance to

Taiwan's domestic parts suppliers in order to ensure the quality of the parts to its own specifications. For instance. Singer initiated the production of shuttle bodies and bobbin cases within Taiwan, and this technology was transferred to domestic parts suppliers. Although providing

Taiwan's parts producers with free technical assistance was in Singer's own interests, the indirect effect was that the industry grew at an average rate of more than 23 percent after 1964 (Ranis and Schive, 1985: 126).

Another contribution of Singer to Taiwan's sewing machine industry in this period was helping Taiwan move into new export markets. The domestic market-oriented nature of

Singer shifted to export-oriented as it shifted toward the production of the higher end of the product line for exports. According to Ranis and Schive (1985: 126), about 173

25 percent of Taiwan Singer's total volume was exported in

1964, by 1975, 86 percent of total output was exported. On the other hand, domestic producers who had benefited from

Singer's technical assistance moved into the medium- and lower- quality range and dominated the domestic market.

Some had even become competitors to Singer in foreign markets. One leading example is Lihtzer, which was able to take advantage of Singer's technical assistance, upgrade its own technological standards, and expand its sale at home and exports to the Japanese market.

In the Taiwan case, foreign firms, which are defined as local firms with any amount of foreign capital participation, are more likely to receive and use foreign technology than local firms. The following table, based on a survey of the manufacturing exporting firms conducted in

1972 in Taiwan, compares foreign technology participation. 174

Table 3

Foreign Technology Participation Between Foreign and Domestic Exporting Firms, 1972

Unit: Number of firm

Firms with Total % Industry Foreign Technology (2) Participation (1)

Text iles Domestic firms 7 76 9 Foreign firms 13 17 78 Majority-owned 8 10 80 Minority-owned 5 7 71 Garments & Footwear Domestic firms 2 47 4 Foreign firms 15 22 68 Majority-owned 14 18 77 Minority-owned 1 4 25 Plastic & Plastic Products Domestic firms 1 34 3 Foreign firms 24 27 89 Maj ority-owned 22 24 92 M inority-owned 2 3 66 Metal & Metal Products Domestic firms 2 11 18 Foreign firms 13 15 87 Majority-owned 12 13 92 Minority-owned 1 2 50 Electrical Equipment & Electronics Domestic firms 4 17 24 Foreign firms 43 45 96 Majority-owned 38 38 100 Minority-owned 5 7 71 All Industries Domestic firms 14 185 8 Foreign firms 108 128 86 Majority-owned 94 103 91 Minority-owned 14 23 61

Source: Cited by Gustav Ranis and Chi Schive "Direct Foreign Investment in Taiwan's Development." in Walter Galenson ed. Foreign Trade and Investment in ■ttie. Nealx iDdus-tr-ialiaing Asian. Cp.un.txies.- (1985), pp. 85-137. Mei Ya Publications, Inc.

* Majority owned foreign firms include those 50 percent owned foreign firms. 175

From the above table, 86 percent of the 126 foreign firms sampled actually applied foreign technology in their production, while only 8 percent of domestic firms did so.

Also, by breaking down foreign firms into majority- versus minority- owned, one can observe that there was a relationship between the relative amount of foreign ownership and the degree of applying foreign technology.

About 90 percent of the majority-owned foreign firms used foreign technology, whereas only 61 percent of the minority- owned firms did so.

The above-mentioned patterns hold for every one of the industries sampled, with only two exceptions. First, in the textile industry, minority-owned firms seemed to behave similarly in applying foreign technology as majority-owned firms because the competitive nature of that industry at that time. Second, in the metal and metal products industry, local firms used foreign technology just as frequently as minority-owned foreign firms because there were few minority-owned foreign firms in this industry.

The employment and export, directly and indirectly created by foreign firms, are two more important indicators for appraising the economic effects of direct foreign investment in Taiwan. At the aggregative level, foreign firms, whether in the EPZs or outside, were important for both employment generation and export promotion. However, not all industries invested in by foreign firms have made 176 such contributions. This varied substantially across

industries.

Let us evaluate the statistics of job creation first.

The overall contribution of direct foreign investment to employment in Taiwan was low. It shared about only 18 percent of manufacturing employment (Ranis and Schive,

1985). Usually, labor-intensive industries such as electronics, garments and footwear contributed more to employment generation than other industries. However, since the majority of firms investing in the EPZs was engaging in labor-intensive activities, the number of jobs created in the EPZs was larger.

The targeted number of workers employed in the three

EPZs was set at 65,000. This target was met in 1973 when the total number of workers employed in EPZs reached 69,496.

The following table will illustrate improvements in employment in the three EPZs. 177

Table 4

Workers Employed in Taiwan's EPZs (1967-1984)

Number of Workers Growth Rate (%) Employed

1967 4,961 1968 11,961 141 1969 23,388 96 1970 35,332 52 1971 44,057 25 1972 52,985 20 1973 69,496 31 1974 71,391 3 1975 60,796 -15 1976 71,931 18 1977 73,136 2 1978 74,182 1 1979 77,522 5 1980 79,257 2 1981 77,663 -2 1982 73,078 -6 1983 73,828 1 1984 81,241 10

Source: Su-mei Yang (1985). "The Evaluation of Taiwan's Export Processing Zones." Master Thesis, Chengchi University, Taipei, Taiwan, pp. 31-32. 178

In the above table, workers employed in the EPZs

increased by 141 percent in 1968, 98 percent in 1969, and 52 percent in 1970. From 1971 on, the growth rate of employment in the EPZs was not as high as it was in the 1960s due to the fact that since the late 1960s, Taiwan started to experience its own problem of labor shortages. Also, during the worldwide recessions of 1974-75 and the early 1980s when world demand for Taiwan's exports declined, the unemployment rate in Taiwan as well as in the EPZs soared.

It is interesting to note that although many workers were laid off during the two recessions, the problem in

Taiwan was not as serious as that in other countries due to the industrial decentralization policy pursued in the late

1950s and the 1960s and the widespread small- and medium­ sized enterprises all over the island. The policy of decentralized industrialization which helped create many non-agricultural jobs will be examined in the following section of this chapter. As of this moment, it is essential to prove what I have argued that one of the contributions of families to Taiwan's economic success lies in providing their own support for the elderly and unemployed if necessary.

The majority of those laid off in the EPZs was women.

Statistics show that, in mid-1977, 85 percent of the direct- labor workers employed by firms in the three Export

Processing Zones were women (Arrigo, 1980: 25). Some of 179 them returned to their rural families and got married.

Others were easily absorbed into family businesses. In this sense, the family system in Taiwan helped reduced the negative impact of world recessions and increased the resources available to the government for solving larger developmental problems.

In addition to the direct employment effect of foreign investment, there is also the indirect employment effect.

According to Rong-i Wu's study about U.S. direct investment in Taiwan (1986), industries heavily invested in by U.S. firms, such as electronic and electric appliance, chemicals, basic metals and metal products, and machinery equipment and instruments usually have high backward linkage effects to domestic industries in Taiwan, thereby generating significant indirect employment effects. He claims that the total indirect employment effect of U.S. direct investment in 1981 almost doubled the direct employment effect (1986:

8-9). Another statistics of 1975 showed that the overall employment effect per million dollars' worth of exports from foreign firms was 120 persons, while it was only 67 persons per million dollars of domestic sales (Ranis and Schive,

1985: 106).

The exports of foreign firms in Taiwan and their contributions to Taiwan's total exports appear to have more qualitative than quantitative contributions and also vary substantially across industries. Since the amount of direct 180

foreign investment and its share in manufactured output in

Taiwan were never large, foreign firms' share in the total value of exports was also low. For example, the share of

exports of U.S. firms in Taiwan's total exports was only 8.9 percent in 1974 and 4.4 percent in 1982 (Wu, 1986: 7).

Although the overall evaluation of direct foreign

investment in the area of export promotion is not great,

certain specific industries have made quite impressive contributions. The most notable one is the electronic and electric appliance industry which, as I have pointed out, was heavily invested in by both American and Japanese firms.

Figures in Table 5 show that foreign firms in the electronics industry were the only group whose share of total exports exceeded domestic firms in both 1974 and 1980. 181

Table 5

Contribution to Exports of Foreign and Domestic Firms, by Industry and Source, 1974 and 1980

Industry Total Exports % Foreign % Domestic (US$ Millions) Firms Firms

1974 636 5.87 94. 13 1980 1,331 5.11 94.89 Textiles 1974 586 11.27 88.73 1980 1,630 29.06 70.94 Garments & Footwear 1974 874 12.47 87.53 1980 2,844 5.66 94.34 Lumber & Bamboo Products 1974 377 5. 10 94.90 1980 1, 120 2.72 97.28 Plastic & Rubber Products 1974 387 20.51 79.49 1980 1,770 11.57 88.43 Chemicals 1974 149 36.41 63.59 1980 810 34.94 65.06 Machinery 1974 419 8.52 91.48 1980 1,813 12.78 87.22 Basic Metals & Metal Products 1974 277 11.56 88.44 1980 1,257 11.90 88.10 Electronics & Electrical Appliances 1974 997 70.68 29.32 1980 3,594 50.50 49.50

Source: Gustav Ranis and Chi Schive (1985). "Direct Foreign Investment in Taiwan's Development." in Walter Galenson ed. Foreign Trade and Investment in tiig. Newly Industrializing Asian Countries. Mei Ya Publications, Inc. p. 109. 182

One should not underestimate the qualitative contributions of direct foreign investment in promoting

Taiwan's exports. Foreign firms can have a significant impact on the exports of a developing country because of their marketing ability and overseas networks. Foreign investors' knowledge of technologies and markets helped

Taiwan move into unfamiliar, new export markets in the

1960s. Contacts with foreign customers also provided most of the export market information and access for domestic firms. These reasons accounted for the rapid growth of export-oriented Taiwanese firms and their large share in total exports.

In short, direct foreign investment, whether in the

EPZs or outside them, has fulfilled its functions and made substantial contributions to Taiwan's economy. The operations of EPZs in Taiwan did not fit the enclave argument of the dependency school. Foreign firms in EPZs drew labor from the countryside and even relied on daily commuters, so their effects went beyond the zones. Also, there is a high degree of labor turnover in manufacturing

(including job turnover in the EPZs), and this turnover spread technology to domestic factories. The turnover rate in Taiwan showed a fluctuation of 5 to 250 percent in 1969 as compared to 5 to 20 percent in Argentina and Brazil and 2 to 8 percent in India and the Philippines (Negandhi, 1969;

34) . 183

Also, the government encouraged foreign firms in the zones to purchase certain inputs from local suppliers, so the growth of EPZ firms has provided spin-off businesses and joint ventures for locally owned firms and has stimulated the growth of indigenous industries, thus creating an integration of the export enclave into the rest of the economy.

However, since the early 1970s occurrences in both international and domestic environments have forced the KMT leaders to change the development strategy from an export- promotion one to an import- and export-substitution one.

This will be the main theme for the next chapter. What needs to be mentioned at this moment is that the main function designated to foreign investors has changed to the promotion of capital- and technology-intensive industries in the next period. Under this new development policy, low value-added, labor-intensive kinds of manufacturing, mostly located in the EPZs, is being discouraged.

Efforts have been made to create a high-technology park in Hsin-chu, not far from Taipei. The main purpose of this type of science-based park is to attract high-tech companies from all over the world and provide them with space and scientific help for research and production. The operation of the Park has already shown some initial success. More on the development of Hsin-chu Science-Based Industrial Park will be discussed in the next chapter. 184

Ddum t ir i a li zat ion Po X ioy :

One unique feature of Taiwan's economic development has been the extent to which industrialization has spread into the rural areas. As the industrial sector came to occupy political leaders' minds, the agricultural sector was not ignored. In fact, industrial development has been more closely linked to agriculture in Taiwan than in most other developing countries. By 1966 the government had established seventeen rural industrial areas.

The policy of encouraging decentralized industrialization was based on many considerations. Since the beginning of export-oriented industrialization job opportunities in cities had increased sharply. According to estimations, there were about one million farm people who migrated to cities from 1950 to 1965. There were two direct results from this massive flow of the rural population to urban areas which worried political leaders in Taiwan.

First, there were increased crowds in Taiwan's cities, thereby increasing potential urban instability and demanding more government resources to take care of them.

Second, there was a decrease in agricultural population and production. From the early to the late 1960s, there was still further growth in agriculture. After 1968, some rural areas felt a labor shortage for the first time as a result of population shifts to the cities. Since the beginning of export-led industrialization agriculture has 185

been losing its dominant position in the economy. Several

indicators can illustrate this phenomenon. First, industry's

share of GNP increased from 32.3 percent in the 1950s to

50.9 percent in the 1970s, whereas agriculture's share declined from 27.6 percent in the 1950s to 8.4 percent in

the 1980s. Second, in 1952, agricultural products

accounted for about 92 percent of Taiwan's exports, while

industrial products accounted for only 8 percent, while in

1982, agricultural products accounted for just 8 percent of

exports (Thompson, 1984: 558). Third, the size of the agricultural population has declined in both relative and absolute terms. Agriculture's share of the population in

Taiwan was 52.4 percent in 1952; 42.9 percent in 1969; and

only 26.4 percent in 1982 (Thompson, 1984: 558). (More on agricultural degradation in Taiwan will be discussed in the following chapter about the Second Land Reform.)

Political leaders in Taiwan were quite concerned with these developments in the urban and rural areas because the need for the agricultural sector as the domestic revenue base and a source of foreign exchange and industrial development should continue until export-oriented industries could assert themselves firmly. Even more importantly, rural stability and political support for the KMT government resulting from the 1949-53 land reform must be continued too. 186

Because of the need to offset these two consequences

and to spread industrial production, the government vigorously pursued a decentralized industrialization policy

in the later part of this period. It was hoped that by pursuing this policy migrants would be attracted back to the countryside with the prospect of work or of establishing a small-scale enterprise in the rural areas, thereby reducing urban crowds, spreading industrialization all over the island, and preventing agricultural degradation from leading to rural degradation.

Another political calculation was that rural-based industries would prevent the proletarianization which usually occurred in urban areas. In fact, this policy has reduced the burden of the government's care programs, such as housing and infrastructure for the workers who have left rural areas permanently for the cities. Also, for many farmers, this policy has made the transition from agricultural to non-agricultural activities less abrupt because of fewer disruptions of rural life. Even for those who have jobs in the cities, due to Taiwan's well-developed transportation system, many of them can go to work in the city in the morning and come home to the countryside at night.

Samuel Ho (1979) did a valuable analysis of rural industry in Taiwan to show the magnitude of implementing the policy of decentralized industrialization. His main 187 argument in the study was that continued industrialization in Taiwan was not accompanied by an increased concentration of non-agricultural employment in the major metropolitan areas. The share of manufacturing employment between 1956 and 1968 in the area of Greater Taipei actually decreased from 27 percent in 1956 to 25.3 percent in 1966, and the share for other metropolitan areas decreased from 25 percent to 23.6 percent. On the other hand, due to the implementation of the decentralized industrialization policy, the rural share of manufacturing employment increased from 37.2 percent to 41.3 percent between 1956 and

1966. Furthermore, in 1971, factories located outside

Taiwan's five provincial cities and 11 other cities accounted for 50 percent of the manufacturing employment and produced 48 percent of the manufacturing value added (Ho,

1979: 83).

The same study also shows that five labor-intensive industries -- food, textiles and apparel, metal products, chemicals, and machinery and equipment -- accounted for more than 70 percent of the increase in rural manufacturing employment. Non-farm rural employment has stabilized the rural population and has given them opportunities to participate in off-farm employment. All of these factors contributed to the increase in material life of the rural population. 188

Many factors contributed to a successful implementation of the decentralized industrialization policy in Taiwan.

First, Taiwan's small size and relatively efficient transportation system, created under Japanese rule and expanded by the U.S. aid, made it possible to bring small- scale industry to the countryside and to take advantage of cheap labor. Second, the higher education level in the rural areas also helped to increase the quality of rural workers and to speed up the process of industrialization in the rural areas.

As I cited in the last chapter, concomitant with the more equal distribution of land ownership in rural Taiwan has been the increase in educational opportunities and equality. The success of land reform increased farmers' income and reduced the cost of seeking education. In the meantime, owing to the KMT government's efforts to develop a more affordable and equalitarian educational system, there is no longer sexual discrimination in education. Beginning in 1968, compulsory education was extended from six to nine years. Everyone can complete higher education if he or she works hard and passes the entrance examinations.

More educational opportunities and a more equal distribution of those opportunities among different sectors of the population have increased the ability of people, especially women and farmers' children, to find work and has helped raise individual productivity. According to the 1970 189 agricultural census, two-thirds of Taiwan's rural population had some formal education (Ho, 1979: 94). And, as I have cited in the last chapter, farmers' children enrolling in primary schools between 1948 and 1971 increased by 257 percent, 2,827 percent for those attending middle schools, and 16,820 percent for those enrolling in colleges (Wei,

1988: 8).

The consequences of the implementation of the decentralized industrialization were important for the rural population and rural society as a whole. From 1952 to 1972, the income of farm households more than doubled. The increase was due to land reform and, more importantly, to the very rapid growth of income from non-farm sources. The share of income from non-farm sources in total farm household income has increased. According to Ho (1979: 77,

91), an average farm household earned 13 percent of its income from non-farm sources in 1952, 25 percent in 1962, 34 percent in 1972, and 43 percent in 1975. Improving non- agricultural employment opportunities has caused a more equal distribution of income among farm households too because farm households with little or insufficient land are usually more dependent on non-farm sources for employment and income. Similarly, the overall income inequality in

Taiwan has been reduced because the rural population as a whole has become more affluent. 190

Another important effect of more non-agricuItural job opportunities and entrepreneurial opportunities for rural households was that it allowed them to farm on a part-time basis, while holding an off-farm job at the same time.

With industrialization spreading out into the rural sector, nine out of ten farm households worked part-time on the farm

(Myers, 1984: 520). It helped slow the pace of migration to the urban areas because it enabled greater numbers of

Taiwan's rural population to participate in industry without having to leave the countryside. Also, it gave industrial manufacturers direct access to a cheap and abundant labor force. This factor has contributed considerably to later expansion of export-led industries invested in by both foreign and domestic investors.

Another effect of decentralized industrialization was the social class transformation. As Taiwan's rural areas became more industrialized and the importance of farming declined, off-farm employment became a major source of earned income. In responding to opportunities for an improved livelihood, the peasantry has been transformed into two groups. While some farmers have become small businessmen and entrepreneurs, others have become industrial wage laborers. Griffin (1973, 39) maintained that "the relative social and occupational homogeneity of the rural community in the past has given way to occupational heterogeneity and greater social differentiation." As later part of this 191 dissertation will show, this constituted one of the

important factors in explaining the shift from statism to pluralism in the relationship between the state and the agricultural sector in the 1970s.

To Taiwan's economy as a whole, the decentralized

industrialization policy has made the economy more flexible.

Compared to the pattern of large and heavily capitalized industrialization, this policy has made small and decentralized producers in Taiwan respond more quickly to changes in the domestic economic structure and international markets. As I have cited above, urban and rural SMEs accounted for over 95 percent of the total number of registered firms in Taiwan. As land in cities becomes scarce, many of them are located in the suburban or rural areas. By virtue of SMEs' flexible operation, which I have discussed earlier in this chapter, Taiwan has been able to compete against others in the international market.

One dependency argument regarding activities of multinational corporations in Third World countries is the lack of linkages with the rest of the domestic economy, thereby resulting in unbalanced development or economic dualism. Fortunately, this did not happen in Taiwan. Many factors, discussed in the previous section, contributed to this. The decentralized industrialization policy was certainly one of them. The spread of manufacturing activities in the rural areas and small cities as well as in 192 large cities reduced the existence of the foreign enclave; therefore, it increased the multiplier effects of foreign investment and technology.

As I have mentioned, one government policy regulating the production of foreign firms is that requiring the local content. This is probably the best measure of the linkage effects of foreign investment with domestic industrialists, especially with those located in the rural areas. According to Ranis and Schive (1985: 129), the local procurement ratios of foreign firms were 41 percent in 1972, 47 percent in 1975, and 50 percent in 1978. Even for firms in the export processing zones, which are free of domestic procurement requirements, these ratios were substantial, standing at 29 percent in 1975 and 35 percent in 1978.

These high local procurement ratios tell us that foreign enclaves did not occur as Taiwan's export-led industrialization proceeded. Investments by foreign firms, either within or without the EPZs, have produced backward- linkage effects in the economy because many of those intermediate goods were produced in firms in the rural areas and labor-intensive technologies were diffused throughout the countryside, rather than confined to export enclaves.

One unanticipated consequence of the decentralized industrialization policy was the rising of wages. By the late 1960s, the rapid expansion of manufacturing and services in the cities, small towns, and in the countryside 193 was absorbing so much labor from agriculture that wages finally started to increase. Another unanticipated result was the increased cost of land. After a large portion of rural land was purchased for building manufacturing factories, land became less available and more expensive.

In response to these difficulties, lthe government has introduced mechanization in the secondiphase of land reform since the early 1970s. The goal is to have less people produce more on fewer but larger farms so that more manpower can be released from the mechanized farm and make agricultural production still more efficient. More on the second land reform will be discussed in thb next chapter.

So far, Taiwan's economy had already taken off and the industrialization process had already spread out all over the country. Due to the rapid expansion of the economy,

production workers in Taiwan increased I sharply from 18.5 percent in 1963 to 41.9 percent in 1980, arid of the non-farm labor force in 1980 they accounted for 51.8 percent (Koo,

1987: 177). However, just like what happened in the import- substitution period, economic expansion in this period had been accompanied by continuing weakness in the labor movement. In Taiwan, as well as in other Asian NICs, control over labor was motivated by political and economic concerns.

Cheap and disciplined labor has been an important factor contributing to industrialization of those countries. Yet, compared to workers in South Korea, Taiwan's labor force is 194 more compliant than that of South Korea. This leads us to ask why this is the case.

What are the political roots of effectiveness in

Taiwan's labor regime? Again, the answers lie in the state's skillful utilization of its power in linking the international and domestic factors in pursuing its goals-- political stability and economic growth. First, in terms of income distribution, Taiwan is the most equalitarian of all capitalist countries (Scitovsky, 1986). This fact plays an important role in dampening the momentum of labor movements aimed at redistribution. Second, due to geo-political competition in the post-war period, political elites in

Taiwan had enjoyed external support from the U.S. in maintaining political stability through the destruction of leftist trade unions.

Third, despite extensive control over workers and labor union activities, export-led industrialization has increased the real wage rate and has brought economically marginal families into the developmental mainstream, thereby eliminating some dissatisfaction among the working class.

Fourth, unlike Latin American countries, Taiwan did not experience successful populist mobilization before export- oriented industrialization began. Political exclusion of the populace in Taiwan has a long history, and after the bloody suppression of the February 1947 riots the majority of the populace had become depoliticized. Weak labor 195 movements gave political elites more room to pursue export-

led growth.

Fifth, due to the decentralized pattern of industrial development in rural Taiwan, relatively few farm families abandoned agriculture entirely. Usually, household heads

tended to work the farm and their children went to seek non- agricultural jobs in urban and industrialized suburban areas. Many young industrial workers maintained contacts with the rural communities by sending money to their families and returning for festival occasions, so they were less likely to claim permanent employment and resist the loss of their jobs. During recessions, like the two oil crises, as Moore (1988: 134) correctly pointed out, the rural sector has functioned as an economic safety net into which redundant industrial labor could be impelled during recessions. As a result, problems from the lay-offs would be mitigated.

Finally, women workers play an important role in

Taiwan's industrialization process. The distribution of women workers and the ratios of women workers to the total employed across various industries in Taiwan (Table 6) can illustrate the extent to which the number of women workers has grown. 196

Table 6

The distribution of women workers and the ratios of women workers to the total Employed across various industries

Industry % of Women Workers Ratio of Women Employed Workers to Total Employed

1968 1986 1966 1986

Agriculture 46.84 14.28 28.66 31.59

Mining 0.38 0.17 6.99 15.15

Manufacturing 18.45 39.58 27.88 44.11

Construction 0.53 1.58 4.04 8.76

Public Utilities 0. 17 0.14 5.98 11.76

Commerce 12.93 20.36 29.89 42.88

Transportation 1.51 2. 09 8.96 14.95

Services 18.74 18.50 34.03 44.62

Others 0.65 3.30 15.52 45.28

Total 100.00 100.01 27.05 37.66

Source: Bih-er Chou (1987). "Industrial Reshaping of the Labor Market." Free China Review. November, p. 10. 197

From the above table, we see the ratio of women workers to total employed increased for every industry. In terms of the distribution of women workers across various

industries, it has shifted from a concentration in agriculture to manufacturing. Right now, the manufacturing

industry employs the largest proportion of working women in

Taiwan (39.58 percent). This high proportion of women workers in the industrial sector not only has been instrumental in maintaining the competitive edge and profitability of Taiwan's products in the international market, but has also contributed to low levels of labor activists because the common conception is that women workers are more docile.

In short, the booming economy, the widespread industrialization, the large number of females employed in the industrial sector, and political controls established earlier sufficed to maintain labor discipline in the period of export-oriented industrialization. However, in the following period of development, we will witness a trend that the mechanism of maintaining labor peace has gradually shifted to effective enterprise-level controls with less state intervention. Moreover, since martial law was lifted in 1986, labor strikes and movements are allowed. Indeed, the first labor party was established in 1987. More on this new trend will be discussed in the next chapter. 198

After reviewing the KMT government's policies in boosting economic growth and in controlling the labor force, it is essential to discuss whether there is a causal link between economic development and political authoritarianism in Taiwan. According to the dependency view, based on the

Latin American experience, there is a correlation between dependent economic development and the emergence of authoritarian regimes. Simply put, an authoritarian regime comes to exist because of the need of the state to accommodate the interests of multinational corporations and local capitalists in a triple-alliance arrangement and to support capital- and technology-intensive industrialization.

In the process of dependent development, the majority of the people is excluded politically and economically (Evans,

1979).

However, a look at Taiwan's economic development so far, we see that authoritarian rule in Taiwan is not a direct result of dependent industrialization on foreign aid and foreign investors. Rather, political survival of the

Nationalist regime plays a major role. Thus, the KMT leaders' intolerance of organized labor and political opposition can be more accurately explained as a political necessity. The Constitution in Taiwan enumerates various human rights and freedoms for its citizens. However, there is a special emergence provision in the Constitution that 199 provides that all rights and freedoms may be restricted by law "for reasons of averting an imminent crisis, maintaining social order, or advancing the general welfare." Based on this emergence provision, the National government adopted

"Temporary Provisions Effective During the Period of

Communist Rebellion" since 1948, and through these Temporary

Provisions, many of the provisions for representative democracy promised in the 1946 Constitution were suspended.

Local elections have been regularly held since the implementation of Local Self-rule in the early 1950s.

However, political participation for the majority of people in Taiwan during the 1950s and 1960s was limited due to the concern for national security and political stability, and political power is still dominated by Mainlanders and concentrated at the national level. From 1969, the scope of the election process was widened to include the three central parliamentary bodies: the National Assembly, the

Control Yuan, and the Legislative Yuan. However, as of this date, compared to the number of senior representatives elected more than four decades ago, the number of additional representatives in the three central institutions is very small. For example, about 900 out of 1,000 members of the

National Assembly and 200 of 300 members of the Legislative

Yuan are senior representatives who have served for forty years without standing for re-election (Wu and Chen, 1989:

56). Recently, the question of how and when to complete the 200 process of rejuvenating the three aging central elective bodies has brought about serious debates.

In addition to limited political participation, martial law, coupled with repressive apparatuses, stood ready to crack down on tendencies that might lead to the formation of oppositional power bases. However, as I will show in the next chapter, as Taiwan's economy expanded, new demands from various sectors in society has made the government more aware of the necessity to liberalize its political system.

Political participation gradually expanded during the 1970s and 1980s, and martial law was ended in 1986.

In fact, since the late 1970s political leaders in

Taiwan have become less inclined to use coercive methods toward opposition forces. And, dual tactics of accommodation and repression are alternated to ensure system-maintaining capabilities under the changed social and economic circumstances. This is what Edwin A. Winckler

(1984) calls "from hard to soft authoritarian."

Furthermore, in the last years of Chiang Ching-kuo's rule, with Taiwan prospering, Chiang lifted martial law, allowed the establishment of an opposition party, ended the ban on visits to Mainland China, and relaxed the controls over newspapers. Economically, he relaxed currency controls and pushed ahead with serious tariff reform to open the economy to imports. In all, there is no doubt that successful industrialization in this period had led to a rapidly 201

liberalizing society in Taiwan. In the next period, we will witness another development strategy being employed to cope with the changes occurring in the domestic as well as

international environments. CHAPTER V

THE SECONDARY IMPORT- AND EXPORT-SUBSTITUTION PERIOD

OLU-tl-ine.. o.f. .Chap. t.e c_.V. - (International and domestic contexts) . less favorable global economic situations: increasing protectionism in developed countries; rising competition from other LDCs; worldwide economic recessions, etc. . reemergence of Communist China on the international stage . series of diplomatic setbacks since 1971 . rapid economic growth, especially in the export sector . relaxation of political control and political liberalization . growing strength of opposition forces . relations between the state and different sectors of the society (the agricultural sector, the business community, the labor force) undergoing changes . private sector becomes Taiwan's foremost source of economic growth . rising labor costs, labor unrest, and environmental concerns . increased trade conflicts with the U.S. and Japan . signs of agricultural degradation

(Policy I studied (Policy calculations) in this period) Political : . to modernize Taiwan's defense Ten Basic Construction capabilities Projects . to achieve self-reliance . to keep the economy in high gear to gain popular support despite of diplomatic weakness

Economic : . to reduce vulnerability to fluctuations in the world economy . to upgrade the economic infrastructure for the

202 203

Figure 3 (continued)

expanding economy to diversify energy sources and turn to nuclear power to improve the investment climate

(Policy II studied (Policy calculations) in this period) 4= Political : . to increase domestic International Trade and exporters' confidence in Investment Policies competing in world markets . to ensure continued political support and confidence of private foreign investors . to boost the confidence of native investors . to raise Taiwan's international recognition . to expand Taiwan's overseas contacts . to ensure the success of "all-out diplomacy"

Economic : . to correct two trade problems: commodity and trade market concentration . to correct the trade imbalance with the U.S. and Japan . to upgrade Taiwan's economic structure . to avoid U.S. trade sanctions . to learn advanced foreign technology, management skills, and marketing networks from foreign investors . to assure the continuity of supplies and access to raw materials and energy (outward investment) . to counteract protectionism in Western markets (outward investment) . to escape environmental movements, currency appreciation, rising labor costs, and labor unrest at home (outward investment) 304

Figure 3 (continued)

(Policy III studied (Policy calculations) in this period) c Political : . to prevent agricultural Second Land Reform degradation from leading to rural degradation . to regain confidence and support of farmers

Economic : . to increase agricultural production . to solve the labor shortage by allowing continued migration of labor to the expanding industrial sector

V' (Outcome Produced) . growing international economic ties mitigates diplomatic setbacks . more open domestic market for foreign goods . vitality in Taiwan's trade performance . trade relations with European and Communist countries expanded to diversify export markets . increased participation of American MNCs in the triple­ alliance type of joint ventures . increased outward investment

Figure 3: Outline of the Secondary Import- and Export- Hubfjtxtutxori Period 205

General Description of the Internal and Extegnal ED-V lr.ODmeii,t.Æ in___ the Secondary Import- and Export- S u b s .t j,t»tlo n - P e.r.i.od

After rapid export-led economic growth in the 1960s,

Taiwan's economy fell victim to its own success. The period between the late 1960s and early 1970s was a turning point for its economic development because changes were coming from both inside and outside the country.

As far as changes in the international economy are concerned, the overall world economic climate was not as favorable as that in the 1950s and 1960s. As I mentioned earlier, the world economy in the 1950s and 1960s was quite favorable to Taiwan's economic growth. The world economy was expanding; markets in the developed countries were open; core capitalists were eager to invest; credit was available and interest rates were low. However, this picture has since changed.

As an island economy with few natural resources, Taiwan is heavily dependent on the continuous expansion of world trade and on access to markets in industrialized countries to export manufactured goods to meet its import needs and to generate savings for investment. However, in this period of development, Taiwan started to face not only increasing protectionism in developed countries against its exports but also rising competition from other developing countries to maintain its market shares in the U.S., Japan, and European countries. 206

Moreover, worldwide economic recessions brought about by oil crises had produced some problems in Taiwan's economy. Fluctuations in the world economy had revealed the vulnerability of Taiwan's manufacturers to input supply disruptions. According to Wei (1981: 649), over 90 percent of Taiwan's total imports were agricultural and industrial materials and capital equipment. Such a high percentage shows the country's economic dependence on foreign supplies and vulnerability to fluctuations in the international economy. Thus, the role of foreign trade as the ultimate underpinning of Taiwan's domestic and international position needed to be downplayed so that the country would not depend excessively on fluctuations in the international economy.

Part of this chapter will be devoted to the discussion of how policy-makers in Taiwan have tried to reduce the country's vulnerability to the instability of the international economy. Those include policies to redirect its trade and international investment policies and to integrate vertically and deepen its industry.

Policy makers in Taiwan also anticipated an increase in demand for appliances, machinery products, and other products of heavy industries. This partially led to the pursuit of a new development strategy of import- and export- substitution in the 1970s and 1980s. Since the mid-1970s construction of an infrastructure and heavy industries, known as The Ten Basic Construction Projects, have been 207 carried out. Also, in anticipating that the domestic and

international demand for the products of heavy industry would increase faster than the demand for food and textiles,

the government had intervened heavily in the economy and chosen "leading" sectors in the heavy and chemical

industries. In the late 1970s, it moved to expand some of the heavy and chemical industry facilities set up earlier.

The government also called for the promotion of high technology engineering industries, which have more knowledge-intensity, more value-added, and more backwards and forwards linkages. One argument about this new development strategy is that Taiwan could make progress in these new sectors in the 1970s and 1980s because a basic productive structure already existed. The basic productive facilities were in existence because the government took the responsibility to make it happen as early as possible in the

1960s. At this stage, in keeping with the notion of comparative advantage, Taiwan was able to continue to export relatively cheap, labor-intensive products to the Western market, while selling more capital-intensive intermediate and producer goods to countries in Southeast Asia.

In all, external economic factors such as increasing competition from other LDCs, protectionism in the developed countries, labor shortages, increasing demand for appliances, machinery products, and other products of heavy industries, and vulnerability of the Taiwanese manufacturers 208 to input supply disruptions made political leaders in Taiwan realize that only concentrating on either import- substitution or export industrialization and completely neglecting the other strategy will never be a good strategy for economic development. Thus, in this period we will see that import-substitution and export diversification are used as complementary development strategies.

With respect to the external political environment,

Taiwan had suffered a series of diplomatic setbacks since

1971 which seriously threatened the survival of the country as an autonomous political entity. The first serious event was the exclusion of the Nationalists from the United

Nations in October 1971. Following this event, a number of countries decided to recognize Peiping. At present, there are just 20-odd countries which have formal diplomatic relations with Taiwan. What is worse about Taiwan's international status was that Taiwan has been excluded from all other inter-governmental international organizations.

This further isolates Taiwan in the international arena and complicates its efforts in implementing some foreign and domestic policies.

The current trade liberalization in Taiwan is a good example. For a country which is the world's 13th largest trading entity and whose trade is the lifeblood of its economy, being excluded from major international trade organizations and trade agreements, such as the Bretton 209

Woods System, which incorporates the GATT and the IMF as well as World Bank, is a major drawback. By being a member

of those international trade-related organisations and

agreements, an individual country can acquire international support for its trade policies, and trade disputes between member countries can be resolved more effectively. Later in

this chapter, 1 will show that the exclusion from

international trade-related institutions and the resistance

from Mainland China appear to be the barriers against

Taiwan's attempt to rejoin some important multilateral trade organizations, particularly the General Agreement on Tariffs and Trade, and against Taiwan's trade liberalization perspective.

Japan was the first important ally of Taiwan which recognized Peiping shortly after Taiwan was excluded from the United Nations. For many government officials and people in Taiwan, Japan's decision came as a big shock. For them, the Japanese had reasons to consider carefully before turning to the Chinese Communists with haste because of the generosity of Chiang Kai-shek to the defeated Japanese people right after World War 11. Ming-che Yang (1974b: 10) wrote :

"The Soviet Union marched into a North Korea which previously had been ruled by the Japanese. Forces of the United States occupied the Japanese home islands, The Republic of China occupied nothing and received from Japan only those terri­ tories which had been seized by military 210

force, including Taiwan....If China had imposed hard terms and insisted on a lengthy occupation, Japanese recovery would have been slowed and perhaps materially limited.”

Since 1972 diplomatic relations between Taiwan and

Japan have completely ended. However, economic relations between Taiwan and Japan, particularly in trade, investment, and technical cooperation, have developed substantially.

Also, in business and personal relationships, the people of the two countries have kept in close contact with each other. As will be shown shortly, this informal relationship with Japan represented a model of "separation of political relations from economic ties," and it has become the essence of Taiwan's relations with countries without formal diplomatic relations thereafter.

Taiwan's relations with the U.S. were also deeply influenced by its being excluded from the United Nations.

In 1972, President Nixon of the U.S. visited Mainland China and reached an agreement with Chou En-lai on a "relaxation of tensions." This friendly posture between the U.S. and

Communist China culminated in the recognition of Communist

China by the U.S. in December, 1978.

In response to these diplomatic shocks, the initial foreign policy reaction was the "one China policy" which states that there is only one China and the Republic of

China on Taiwan is the only legitimate representative of the country. Based on this principle, Taiwan would stop 211

diplomatie relations with countries which established formal

diplomatic relations with Communist China. Obviously, this

policy has tied Taiwan's own hands, and its international

status has worsened by this policy.

Fear of losing its power at home is the main reason why

the government insists that there is only one China and that

the government in Taiwan is the sole legitimate government,

representing the whole of China. Byron S. J. Weng (1984:

464) wrote:

'The foundation of the KMT regime's power may crumble if it officially admitted that the mainland has been lost to the Communists and that the ROC is now actually limited to Taiwan, the Pescadores and a couple of tiny offshore islands. In all likelihood the entire government machinery based on the ROC Con­ stitution would need to be reorganized, while the ageing members of the National Assembly, the Legislative Yuan and the Control Yuan elected in 1947 and serving indefinitely, as well as the president, indirectly elected by the National Assembly, would probably lose power. In any general election under a new constitution, power would in all probability pass into the hands of the Taiwanese who con­ stitute 85 per cent of the population."

Due to this unfavorable international trend, many out­ spoken intellectuals and officials gave strong criticisms about the "one China policy." In response to those repercussions and the urgent need to restore the government's authority, the government changed its diplomatic strategy and tactics, but not its basic policy.

- i 212

Political leaders instructed the Foreign Ministry to pursue the so-called "all-out diplomacy" (zong ti wai jiao).

It calls for "self-fortification, the creation of a new diplomatic era, furtherance of existing friendship and the expansion of substantive relations with non-communist and anti-communist countries." (Weng, 1984: 465) The essence of the "all-out diplomacy" is to establish "substantive relations" with countries without diplomatic ties and to separate politics form non-political substantive relations in foreign affairs. Those "substantive relations" are referred to as economic, technical, sports, cultural and educational exchanges. The overall justification of the

"all-out diplomacy" is that Taiwan's status in international politics and foreign affairs can be, and should be, somewhat secured by its economic growth within the international economy.

Later in this chapter, I will show that as this policy evolves, even non-antagonistic communist countries will be approached as well. For instance, the ban on direct trade with five Eastern European countries (East Germany, Poland,

Yugoslavia, Hungary and Czechoslovakia) and other communist countries like Cuba, Vietnam, Laos, and Cambodias was lifted in the 1980s.

The economic aspect of establishing substantive relations is especially important to the country. To the relations with the industrialized countries, Taiwan 213

concentrates on promoting trade and investment (more on this will be studied shortly), organizing commercial, industrial

and technological exhibitions, and so on. Indeed, the

strategy of substituting economic relations for diplomatic

ones has paid off, as for example, informal relations with

the U.S. and Japan, Although formal diplomatic ties with

the two countries are non-existent, informal relations continue to be improved by semi-official institutions set up by each other after the severance of diplomatic relations.

The Association of East Asian Relations and the Interchange

Association of Japan were established to improve Taiwan-

Japan relations, and the Coordination Council for North

American Affairs and the American Institute in Taiwan (AIT) for Taiwan-US relations. American and Japanese businessmen with interests in Taiwan testified and lobbied to maintain the semi-official channel for doing business with Taiwan.

To broaden its relations with less developed countries,

Taiwan is offering them a variety of economic aid, including a new US$10 billion Overseas Economic Cooperation Fund and overseas investments. Also, various teams of skilled personnel have been sent to train local people and help develop local agriculture, medical services, and intermediate technologies.

"All-out diplomacy" is highly unorthodox; however, it is innovative and is very helpful in achieving Taiwan's survival and growth in a situation of political isolation. 214

Taiwan's economic performance and its trade relations with some 150 countries or regions of the world have somewhat

lessened the anxiety of the people of Taiwan over the fact that Taiwan today maintains official diplomatic relations with only a small number of countries. Similarly, Taiwan has been able to realize its political and diplomatic objectives by utilizing its economic potential and growing economic relations with countries with whom no formal diplomatic ties exist. In short, due to political leaders' efficient and flexible policy choices, as will be shown in this chapter, diplomatic isolation did not crush Taiwan. On the contrary, as Kubek (1987, 99) describes, "no country in recent times has coped as well as Taiwan with its limited natural resources and with the adverse economic trends of the last two decades. For it to have done so in the face of diplomatic isolation is truly remarkable."

In the domestic setting, relaxation of political control and political liberalization were launched due to pressures resulting from external diplomatic setbacks, the growing strength of opposition forces, elements within the

KMT, domestic outspoken intellectuals, and American liberals and conservatives.

Actually, since the 1950s, independent candidates have participated actively in almost all elections in Taiwan, but before the mid-1970s, they had not developed any group consciousness. They were the old urban upper class that had 215

closely cooperated with the colonial Japanese government and

former landlord families who got hurt during the land reform

and who were not lucky enough to succeed in the industrial

sector. It was not until the last decade that a group of

counter-elite politicians and intellectuals, called Tangwai

(literally, "outside the party"), has increased their force

rapidly.

Compared to the old generation of the opposition elite,

the leaders of Tangwai are young intellectuals and professionals who were partially educated in the U.S. and

Western Europe. They have drawn their support from the

Taiwanese lower middle class, which has been increasingly willing to use its economic affluence for political ends and

low skilled workers whose income has not kept pace with general economic growth. Another important source of support for Tangwai is from disaffected farmers. (The decline of farmers' support for the KMT will be discussed

later on . )

Like most political groups, Tangwai as a group is highly fragmented in terms of political views. There are radical leftists and moderate reformers. In general, they criticize the defeat and inability of the government on the diplomatic front and tight control over political and economic system. They call for an accelerated

"Taiwanization" of the central government, the establishment of a pluralistic representative political system, and a free 216 market economy.

Fragmented as they are, however, their growing strength can not be underrated. Since the 1977 election, Tangwai has managed to obtain about 25-30 percent of the popular votes

in various elections. After the formation of the Democratic

Progressive Party (DPP) in 1986, the force of Tangwai got even stronger. In the legislative elections on December 6,

1986, the DPP doubled the number of legislative seats previously held by the opposition to 12; it also won 11 seats in the National Assembly, up by 4. It increased the opposition percentage of the vote from about 13 percent in the last election to nearly 23 percent. Although in almost every local and national election, the KMT is still winning clear majorities, the success of non-KMT candidates has suggested that an organized opposition might come to play an important role in the political system.

Indeed, many scholars have argued that Taiwan is experiencing a process of what Yu-Shan Wu (1989) called

"political marketization." They assert that a political market has emerged in Taiwan. The KMT is forced to first recognize, then compete with other political parties for votes. In other words, the KMT needs to marketize itself in order to survive and thrive in an open political system.

In addition to the growing strength of opposition forces, the process of civilianization and Taiwanization in the KMT and the government and the increased participation 217

of young, educated members in the KMT have played an

important role in escalating the process of political

liberalisation too. As Taiwan's economy made progress, the

influence of the military faded away, and the government needed people who had prior experience in business and

formal education in economics and commerce. Thus, in this period, we saw an increasing number of government

technocrats and officials with economic or business experience and background in helping formulate and implement economic policies.

As I mentioned in previous chapters, one of the two sources of tension in Taiwan which the KMT is most concerned with is the differing aspirations of the native Taiwanese and Mainlanders. In the 1950s and 1960s, native Taiwanese were blocked in the political area, except for local elections. On the other hand, native Taiwanese have progressively increased their influence in other areas. For instance, native Taiwanese dominate the private sector. It was precisely this economic success which served to stimulate increased Taiwanese pressure for leading political roles.

In the late 1960s and 1970s, more and more native

Taiwanese made their political achievements through the electoral process or through recruitment by the KMT elite.

As far as the extension of electoral participation for the native Taiwanese is concerned, more elections were held for 218 those people interested in politics. Since the

implementation of local self-rule, ambitious natives have been able to get elected to provincial and local offices.

At the national level, in 1967 the National Assembly gave the president power to fill elective offices that became vacant and could not be chosen because of the government's

location on Taiwan and the fact that the rest of China was not under the Taiwan government's control. Thus, the first election for national representative organizations was held in 1969. From 1972 to 1986, five such elections have been held to satisfy the increasing demand for broader political participation.

Since the scope of the electoral process was widened, more indigenous Taiwanese have taken advantage of it and have gained political influence in each election. According to John F . Copper's (1981) observation on the results of the

December 1980 election for the National Assembly and the

Legislative Yuan, most of the candidates, non-party and KMT alike, were Taiwanese. More than 90 percent of the winning candidates were Taiwanese. This gave the Taiwanese better representation in the national legislative branch.

According to an estimation from Dr. Alexander Ya-li Lu, a professor of political science at National Taiwan

University (1987: 17), after the election, native Taiwanese representation in the two national organs reached about 30 percent. The resulting nativization of the political 219 selection process has strengthened the representativeness and legitimacy of the government.

In the government, almost all important government jobs

in the 1940s and 1950s were held by Mainlanders who accounted forless than 15 percent of the population at that time (Copper, 1981: 1031). In the 1960s and 1970s, more and more Taiwanese were recruited and promoted to important positions in the government and the KMT. During Chiang

Ching-kuo's rule, he had consciously tried to build up support among the Taiwanese population and include prominent

Taiwanese politicians in the central policy-making circle.

For example, in 1972 when Chiang Ching-kuo became Premier, six Taiwanese were named to cabinet positions. Taiwanese were named as Provincial Governor of Taiwan and Mayor of

Taipei. In 1980, one-third of the KMT's Central Executive

Committee, three ministers, and a number of sub-ministers were Taiwanese (Tien, 1980: 90). As to the proportion of

Taiwanese in the KMT, more than 75 percent of the KMT members are Taiwanese.

Recruiting more Taiwanese into the central government and the party was due to political considerations by the elite. The KMT leaders had probably perceived for a long time that the Taiwanese were not well represented in the central government. Also, as diplomatic isolation undermined the government's credibility both at home and abroad, the support of the majority of the people in Taiwan 220 was needed. Having said this, however, Mainlanders still controlled most of the key positions at the national level

in both the government and party. As to the Mainlanders in general, the government continues to try its best to improve the life of people working for the public bureaucracy, the military, and teachers. The cost of public utility is kept low for them, tuition for their children is discounted, and their pay scale is upwardly adjusted every now and then.

In addition to the process of civilianization and

Taiwanization in the KMT and the government, the recruitment of a numbers of young and well-educated people into important positions in the government and the KMT is another change in domestic politics. In the 1970s, these people included many bright native Taiwanese such as Li Teng-hui, who is the current President of Taiwan, and Lin Yang-kang.

In the 1980s, a group of young social and natural scientists who were educated in the U.S. and Western Europe have been given the opportunity to serve in the government and the party too. Because of their competence, they are called the

"faction of strong young men." (Shao-chuang-p'ai) Many of them are children of leading government and party officials.

In contrast to many old and conservative party leaders, these young men are the sources for advocating reforms in the government and party bureaucracies (Domes, 1981: 1025).

They include James Soong, Chen Li-an, Robert and Frederick

Chien, and Kuan Chung. According to Copper (1979: 67), for the old KMT I elite,

there are important political utilities of using those

foreign-trained young people. He wrote (1979: 67):

'By being foreign-trained they would have a different outlook and would be more supportive of change, but they would also lack a local base of support.... Finally, placing young people in positions of importance and by associating with Young people much of the time Chiang gave the impression that he was aware of more than just immediate problems and could steer Taiwan on a course whereby it had a future."

In addition to those recruited by the top leaders, there are other ambitious young people, non-party and KMT members alike, who have managed to get into the government organs through elections. In the December 1980 election, for instance, the average age of those elected to the

Legislative Yuan was 44, and to the National Assembly 45, whereas the average age of those already holding Seats in both organs was 70 plus (Copper, 1981: 1037).

This group of young politicians, coupled with the Shao- chuang-p 'ai, are pushing rapid political reform in TkiWan at this stage. In terms of policy orientation, thé most important consequence of involving younger, better èdücated leadership in the policy-making process is that they are more likely to search for pragmatic ways to gain international recognition and continue Taiwan's economic success. They advocate a more flexible international 222 policy, a better controlled domestic economic environment, and a more relaxed domestic political environment.

For instance, in the place of political confrontation with Mainland China, they have started to press for the acceptance of two governments under one nation and advocate

"elastic diplomacy" as the way to widening Taiwan's foreign relations. "Elastic diplomacy" entails the development of official relations with some countries having diplomatic relations with Communist China. Methods suggested in this diplomatic strategy are to set up the commercial office of

Taiwan, upgrade some unofficial organizations to consulates- general, and establish or restore diplomatic relations with these countries. In other words, they have put a greater emphasis on economic competition against Mainland China and a more equal footing in international organizations, rather than insisting on the "one China policy." Also, because of its diplomatic isolation, trade is regarded as the most effective way to gain recognition aborad. As to domestic issues, they address political issues, such as freer political competition and the rejuvenation of parliamentary bodies, and economic issues, such as environmental cleanup, consumer protection, and labor rights.

So far, we have observed that Taiwan's domestic politics has changed, partially due to diplomatic setbacks and partially due to pressure from elements within and without the KMT. Another possible pressure for liberalizing 223 political system is from elements in the United States. It

is well known that some liberals in the United States had been criticizing the KMT for its tight political measures and sympathetic to the members of the "Formosan

Independence Movement." Taiwan's supporters in America were

less critical, but they reminded the KMT leaders that it would be much easier to help them survive independently if more democracy could be implemented at the national level

(Kubek 1987, 137). Therefore, due to the need to please the

U.S. and retain its support, increased democracy, especially at top levels of the KMT government, is desirable.

One unintended consequence of the ongoing political liberalization in Taiwan is the declining autonomy of the modern technocrats who had enjoyed so much power in formulating and implementing development policies in the previous periods. Since elections at the national level were opened in the late 1960s, businessmen, professionals, and ambitious people with other social backgrounds found their way into national politics through the electoral process. Thus, the modern technocrats and bureaucrats "have gradually been compelled to share power with politicians who usually started their careers from the grassroots." (Lu,

1987: 22-23)

So far, we have understood that authoritarianism in

Taiwan was not a direct result of dependent industrialization on foreign aid and foreign investors; 224

rather, it was due to the need for survival of an

exogenously imposed regime. We have also understood that

small-scale political reforms have been going on since the

early 1950s and that the process of political liberalization

since the mid-1970s was gradual. Fast and large-scale

political reforms were not launched until the mid-1980s.

Martial law was lifted in 1986. The Democratic

Progressive Party was established in September 1986,

followed by the Labor Party in December 1987. (Since the

lifting of the ban on forming new political parties, 40 parties have been established.) People are allowed to demonstrate and go on strikes. People are allowed to visit

Mainland China. The press was deregulated and new papers were allowed to enter the market on January 1, 1988. Some radical opposition leaders are allowed to come home from abroad. Economically, the government relaxed currency controls and pushed ahead with serious tariff reform to open the economy to imports.

Thus, the time lag between Taiwan's economic and large- scale political reforms is actually quite long. There are many reasons for slow political development in Taiwan prior to the mid 1980s, First, people in Taiwan did not really have any experience in political participation. Under

Japanese rule, the native Taiwanese were deprived of any rights to participate in politics and were taught to avoid political criticism. Second, as I have mentioned before. 225

the February 1947 incident made people afraid to express political views or participate in political activities.

The third reason is related to the cultivation of

Confucian values by the KMT in the school system. In a comparison to Hinduism which takes pluralism and conflict for granted. Dr. Myron Weiner argued that Confucian views of order, harmony, and primacy of the group over the individual had formed an obstacle to democratization in Taiwan.

However, there is the question of just how strong the impact of Confucian values actually is in Taiwan because Western values of competition and individualism are very influential in daily life too. I tend to argue that Confucian values have more impact on the older generations, while the younger generations are more inclined to be influenced by Western values.

Fourth, as I have mentioned at the end of the last chapter, although the Constitution in Taiwan enumerates various human rights and freedoms for its citizens, they were not implemented because of the Communist occupation of the Mainland and its military threat to Taiwan. Under

"Temporary Provisions Effective During the Period of

Communist Rebellion," martial law was promulgated. Martial law had, in general, imposed two important constraints upon political participation -- the right to organize political parties and the right to have political participation at the national level. 226

Fifth, political realities have forced the Nationalist government to place emphasis on stability rather than democracy. Dr. Alexander Ya-li Lu argued in an interview

that political reforms were not appropriate when the

Nationalist government first moved to the island because

there were so many other urgent problems which needed to be solved. After Taiwan's economy took off and began to record very high growth rates in the 1960s and 1970s, Taiwan, unfortunately, encountered a series of diplomatic setbacks; therefore, domestic political stability needed to be maintained, and large-scale political reforms appeared to be

improper. It was not until the mid-1980s that the government was confident enough to deal with large-scale political changes (Interviewed by Yu Kuo-sheng, 1987: 58-

59).

It should be noted in passing that in the process of

Taiwan's development, "economic exclusion" did not go hand

in hand with "political exclusion." In fact, "economic exclusion" never happened. It has been the KMT's goal to bring in economic prosperity in order to maintain its

legitimacy. The whole economic growth has produced more economic opportunities and greater income equality than that of other Third World countries. Moreover, martial law and other repressive labor policies had come into existence before the arrival of multinational corporations. This proves what I have argued at the end of the last chapter 227

that the authoritarian type of regime was needed because of

the need to maintain the political position of the KMT,

rather than to accommodate the interests of multinational

corporations and local capitalists in a triple-alliance

arrangement.

The emergence of a sizable middle-class population

after rapid economic growth and the growing political

conscience of this group of people since the late 1970s

directly stimulated faster and larger scale of political

reform in the-mid 1980s. Dr. Yung Wei's study of Taiwan's middle class can support this argument. According to Wei

(1983), various opinion surveys have consistently shown that more than 50 percent of the adult population identify

themselves as middle class. Among those people, 87 percent

expressed positive support of the government's policies and

felt satisfied with their living conditions. Although they felt their living standards were much better than the older generations and expected that the social status of their

children will be even better, they are critical of the

environmental proulem and social welfare problems, and have more expectations for the government to correct those problems.

Another finding of Wei's study is that more people are showing an interest in politics, demanding more channels for political participation. Those interviewed felt that the most effective method of voicing their opinions is by 228

casting votes in elections.

The final reason for slow political development in

Taiwan is that young people in Taiwan are not being

encouraged to think and talk about politics. Even in college, some issues are too sensitive to be discussed in classrooms. Some observers even argue that some scholars in

Taiwan are not allowed to teach because they have been accused of being too critical of the government. Others restrained themselves from discussing current political

issues, being fearful that students might inform on them if they are too critical (Armbruster, 1976: 28).

In the context of rapid economic growth and political changes, the relations between the government and different sectors of the society are undergoing changes. The first important one is its relations with the agricultural sector.

By the early 1970s, farmers were no longer prosperous as they had been for a period of time after the 1949-53 land reform. Farmers in the 1970s had already reduced their support for the KMT due to agricultural degradation. The current drive by the government to create capital- and technology-intensive industry also caused problems itself, especially for those currently employed in labor-intensive industries, the sort which dominates Taiwan's rural areas.

After the period of export-led industrialization and the implementation of decentralized industrialization,

Taiwan has experienced labor shortages in the urban areas. 229 and a surplus of manpower in the rural areas. For a country relying on a base of industry that requires abundant labor, such a development should alarm the government.

To solve these two structural problems in the economy, the government launched the Second Phase of Land Reform and started the drive to create capital- and technology­ intensive industries. The development of capital- and technology-intensive industries can not only help to mechanize the farms and increase their productivity, but also help upgrade Taiwan's goods for export, thereby making exports more secure. In turn, mechanization in the rural areas can not only increase agricultural productivity, but also help the industrial sector by releasing the manpower surplus from the mechanized farm. (More on the Second land reform in Taiwan will be discussed later on.)

Some significant changes have taken place in the relationship between the state and the business community too. These changes were due to both political and economic reasons. As I have discussed in the previous chapters, when

Taiwan started to industrialize, business firms tended to be small in size and were heavily dependent on government guidance and protection. Politically, they were in no position to influence official policy-making. As Taiwan's economy expanded, however, some medium-sized firms developed into large-scale firms. The government began to pay greater attention to the view of the business community. Some 230

entrepreneurs in charge of these enterprises began to be

recruited into the KMT party and the government. Some have become more assertive in attacking bureaucratic delays and

inefficiency. As far as the rest of SHEs are concerned,

they have received few special considerations from the government; therefore, they owe little to the government and are uninhibited in advocating their preferred policies. As a result, the business community has a larger say in the formulation of economic policy than before. Indeed, in the end of 1970s and the early 1980s, we started to see an

increasing number of businessmen participating in elections as either KMT or non-party candidates. They were seeking positions in the government in order to exert influence on official policy-making.

One result of the December 1980 election can illustrate this tendency. Most of the victorious candidates of the election were businessmen. The consequences of this are both positive and negative for the KMT government. Pro­ government businessmen elected to the government would guarantee continuing good relations between the government and the business community, thereby guaranteeing Taiwan's continued economic growth. Anti-government businessmen who were elected, however, would be more likely to slow down

Taiwan's future economy because most of their election platforms were aimed at programs like labor reform legislation, social welfare programs, and environmental protection (Copper, 1981; 1037). In short, the economic and political power of big business has grown too big to be

ignored in major economic policy decisions.

The economic reason for the government to take into account more seriously the opinion of the private sector is also important. After the implementation of the outward-

looking development strategy, the private sector has become

Taiwan's foremost source of economic growth. The following table depicting the distribution of industrial production by the public and private sectors can illustrate this point. 232

Table 7

Distribution of Industrial Production by Ownership (Based on Value Added at 1981 Prices) Unit: %

Total Manufacturing public private public private

1952 56.6 43.4 56.2 43.8 1954 52.7 47.3 49.7 50.3 1956 51.0 49.0 48.3 51.7 1958 50.0 50.0 47.2 52.8 1960 47.9 52.1 43.8 56.2 1962 46.2 53.8 42.3 57.7 1964 43.7 56.3 38.9 61.1 1966 38.2 61.8 33.3 66.7 1968 31.1 68.9 24.7 75.3 1970 27.7 72.3 20.6 79.4 1972 19.1 80.9 14.0 86.0 1974 19.6 80.4 14.1 85.9 1976 20.2 79.8 15.2 84.8 1978 19.3 80.7 14.9 85.1 1980 18.7 81.3 14.5 85.5 1982 18.0 82.0 13.9 86.1 1984 16.4 83.6 12.4 87.6 1985 16. 1 83.9 12.0 88.0

Source: Taiwan Statistical Data Book (1986), Council for Economic Planning and Development, Republic of China, P. 87. In the above table, in 1952, public enterprises

accounted for 56.6 percent, and private enterprises for 43.4 percent, of total industrial production. By 1958, Taiwan

started its export-led industrialization, public and private enterprises divided the value and each accounted for 50 percent. Throughout the period of export-promotion, the private sector expanded twice as fast as the public sector until it was slowed by the 1974-1975 world recession. It was also the time when the government increased its

intervention in the economy (this will be discussed shortly) .

Beginning in the early 1970s, the private sector began to account for about 80 percent of the total added value of industrial production. By 1982, the private enterprises could claim an 82 percent share, as opposed to 18 percent for the public sector. With this increase, the government- business relations have become more complicated and business reactions to government policies are important.

Due to the increased size of the private sector, there is an important role played by businessmen in the formulation of economic policy. Usually, for an important economic issue, the government will get opinions from scholars, experts, and businessmen. For example, in March,

1975, the government convened the "First Nation-Wide

Economic Conference" to discuss problems produced by the first oil crisis. In 1981, the "Second Nation-Wide Economic 234

Conference" was organized to discuss the sluggish economy

caused by the second oil crisis. In both conferences, participants were high-level government officials and

leaders of the business community and academic circles. In

March, 1985, in order to upgrade Taiwan's industrial

structure and to promote industrial development, the

Minister of Economic Affairs set up the Industrial

Development Consulting Committee and invited a group of

economic officials, entrepreneurs, and economists to serve

on the Committee (Yu, 185; 10-11).

In all, in this stage of development the Taiwan state no longer possesses the dominant position it enjoyed in the

1950s and 1960s. It enjoys only a relative, not an absolute, autonomy from its dominant class. As Taiwan's businessmen become more international and Taiwan's

international status becomes worse, the Taiwan government depends on local capitalists, not so much for their political support as for their economic performance. Under the "all-out diplomacy," the capitalists provide an

important link with the international economic community; therefore, their economic performance will be an important factor determining the survival of the policy.

The government's relationship with the labor force has undergone changes too. The following discussion will show that the government has loosened political control over the

labor force and that the era when Taiwan could count on 235

industrial peace is over. Thb KMT leaders are aware of the dangers of repressing labor in ÿavor of capital. Political control over the labor force has 1 lessened since the 1970s, and it has gradually shifted to enterprise-level control with less state intervention, i This approach is quite different from the primarily repressive one of the 1950s and

1960s and needs further explanation here.

The essence of "enterprise corporatism" can be traced back to the 1932 Factories Act. Big enterprises were required to set up factory councils made up of representatives from both labor and management. Employers were also required to provide housing, education, and other welfare for their workers. However, as I have discussed, the political situation of the early stage of development forced the government to suppress labor rights in order to maintain political stability and to create low-cost, disciplined labor at the outset of the export-oriented industrialization. i

Nowadays, the government turns to encouraging and supporting management-centered labor controls. For example, in 1978, the Ministry of the Interior called for tripartite national consultations on the expansion of union and enterprise assistance to employees and the improvement of the working conditions of wage wotkers. Under the framework of enterprise corporatism, state4mandated welfare programs at the enterprise level have increased. Labor organizations 236

have also largely been restricted within a corporatist

structure. The status of labor unions has been increased

through expanded labor representation in the National

Assembly and the Legislative Yuan, as well as in government

agencies.

Furthermore, in Taiwan, a new labor law went into

effect in the early 1980s which stipulates a maximum weekly workload of forty-eight hours and guarantees pensions and

severance pay. It also forbids employers to dismiss or lay off workers without "sufficient cause." The government also

revised labor insurance legislation to improve provisions on enticement and compensation. Also, there was an increase in the minimum wage. All of these, as Frederic C. Deyo (1987:

187) summarized, "...tend both to obviate the need for state

involvement in these areas and, more important, to tie workers ever more tightly to their employers by bonds of obligations and self-interest."

The shift from a system of "state welfarism" to

"enterprise welfarism," according to Linda Lim (1983), is caused by two trends. First, since over 95 percent of

Taiwan's registered firms are small- and medium-sized enterprises, the rising costs of providing welfare programs to workers make the government unable and unwilling to provide subsidized social services to meet the increased demands and expectations of the labor force. Second, dependence on the government has prevented the development 237

of company loyalty and long-service employment. By providing job security to workers from employers, the

enterprise-based corporatist labor policies are expected by political leaders to enhance the employment stability and

commitment of the work force, thereby encouraging productivity increases.

However, there are difficulties in implementing current

labor policies in Taiwan. On the employers' side, many of them are too small to bear the costs of responsibility for worker's housing, medical care, and pensions. Some firms fire workers in order to avoid those welfare costs. This was one of the main factors for a rising unemployment rate in the mid 1980s (Commonwealth, March 1, 1988: 16). Others are seeking alternatives, including the hiring of cheaper, illegal foreign labor, to maintain their productivity and profitability.

From the employees' viewpoint, tying workers' benefits to individual companies could mean greater insecurity because, for example, a company can fail or mismanage workers' pension funds. It could also mean greater inequality because those who work for bigger companies will get more and better benefits than those who work for smaller companies. Also, some workers do not want to be tied to one company, especially the skilled workers. For them, the only way up the job ladder is by moving out of one company to where better opportunities present themselves. 238

In addition to these new labor laws and policies, political liberalization in Taiwan also allows more freedom for the labor force. With the lifting of martial law, workers are allowed to form their political parties and go on strike. In 1987, a labor party committed to arousing workers' self-awareness and establishing independent unions was formed. Wang Ching-ping, the chairman of the central committee of the Taiwanese Labor Party, once said that

"workers were no longer ready to accept the paternalistic approach of management. They were prepared to fight it."

(Housego, 19881 vii).

In sum, the development in both Taiwan's external and internal environments of this period should alarm the government if the country's high rate of economic growth is to be maintained. However, Taiwan's economic planners, who excel in pulling advantage out of disaster, made several important development policies to help readjust the economy.

In the rest of this chapter, 1 will examine three policies pursued by the government in response to the above-mentioned changes. They are the Ten Basic Construction Projects, trade and international investment policies, and the second land reform. 239

The Ten Basic Construction ProJeots:

Taiwan's diplomatic isolation, with the reemergence of

Commcnist China on the international stage and unfavorable world economy, brought about a policy reorientation in

Taiwan; that is, a more inward-looking attitude toward the strategy of development among political leaders. This policy reorientation was aimed at reducing dependency on fluctuations in the international economy which were out of their control and achieving self-reliance. Indeed, Chiang

Ching-kuo, then the Premier, stated that Taiwan's "economy cannot depend wholly on exports and our domestic market is yet to be developed." (Liu, 1974b: 20)

Furthermore, this policy reorientation increased the role played by the state in the economy. Indeed, scholars, both from the liberal and the dependency schools, are prepared to argue that the Taiwan government has taken a more active role in the economy in the early 1970s than during the 1950s and the 1960s with the move to develop heavy and chemical goods industries (Copper, 1979; Little,

1979; Gold, 1981; 1988; Clark, 1987). This also explains why the expansion of the private sector in Taiwan slowed down in the mid-1970s (see Table 7).

The Ten Basic Construction Projects, also known as the

Ten Big Projects, is a good example of this inward-looking psychological orientation and presents itself as a good case for studying calculations of the KMT leaders in response to 240

changing internal and external factors.

The Ten Big Projects were drafted by the government in

1974 and completed in the late 1970s. These projects

included a new international airport, a north-south west- coast freeway, two new seaports, an electrified double­ tracked west-coast railway system, an integrated steel mill, a giant shipyard, a nuclear power plant, a new Naphtha cracking plant for the state-run Chinese Petroleum Company, and an expansion of the productive capacity of existing petrochemical companies. Chiang Ching-kuo was largely responsible for the approval of these projects and pushed for their completion.

When Chiang first proposed these ambitious construction projects, the international and domestic environments were still very favorable to Taiwan's economy. Taiwan's producers and exporters, most of them were SMEs, were vigorously utilizing the expanding international market. As employment, export, and investment rose rapidly, more income was generated for the people too. This added to the high national savings discussed earlier, thereby helping finance new capital investment.

In addition the amount of money available for undertaking the projects, inflation had been kept low. With

1966 as 100, the wholesale price index of 586 items was just over 103 in 1970, 104 in 1971, and 109 in 1972. As to the retail price index, it was 117.53 in 1970, 120.54 in 1971 241

and 126.39 in 1972 (Liu, 1974a: 9).

However, beginning in 1971, due to the series of

diplomatic setbacks and worldwide inflation caused by the

oil crisis, the cost of every contemplated infrastructure

project doubled and in some cases increased by more than 5

times. Thus, there were a lot of objections to them. The

most heard criticisms of the projects were that Taiwan could

not afford them; that they would worsen Taiwan's foreign

exchange position; that they would provoke labor shortages

to the detriment of the private sector, and that they would

raise inflation since in 1974 the wholesale and retail prices increased by more than 60 percent.

However, Chiang Ching-kuo's determination to have the projects done was based on subtle political and economic calculations. As Taiwan's diplomatic isolation and the

threat from Communist China to liberalize the island

increased, the government had to prepare for a threat of an economic blockade. Thus, the completion of those projects would modernize Taiwan's defense capabilities and achieve self-reliance, should it have to "go it alone."

As far as economic considerations are concerned, to upgrade the country's infrastructure was one important part of the Ten Big Projects. The Taiwan government had avoided grandiose projects through the 1960s to assure more investment for the productive economy. After a period of rapid export-led economic growth, the economy's 242

infrastructure was in need of expansion. In 1973, when

Premier Chiang Ching-kuo ordered a study of the plans for

the Ten Basic Construction Projects, the economic growth

rate was 12.3 percent. When an economy was growing rapidly,

the infrastructure must expand too; otherwise, the economy

would bottleneck.

Ming-che Yang (1974a: 10) described the insufficient

infrastructure right before the commencement of the projects

as follows:

‘Moving into the 1970s and with developed status coming within view, the Republic of China's island province found itself running out of transportation, communi­ cations and basic industry to supply the needs of productive industry. Ports were crowded to a point of near paralysis. Land transport couldn't move goods fast enough. Power generation was growing more slowly than demand. Steel-making capability was insufficient to supply burgeoning heavy industry. Textile factories found themselves at the mercy of foreign makers of petro­ chemical intermediates."

Thus, Taiwan's economic infrastructure needed updating in

order to facilitate foreign trade programs and to provide

the necessary basis for an expanding domestic economy. If

it were delayed, argued Chiang Ching-kuo, the opportunity

would be missed. He claimed that the projects would "usher us into a developed country." (Durdin, 1975: 112).

Other problems such as rising labor costs, worldwide

economic recessions, growing international protectionism and

competition in foreign trade made it rational to pursue a 243

new strategy supporting further economic transformation to

such capital-intensive industries as petrochemicals, steel,

and nonferrous metallurgy. So doing could reduce the dangers of excessive dependence on fluctuations in the world

economy. From the items of the projects, we can see that in

addition to infrastructure-building, the Ten Big Projects were an expansion of heavy industry. The completion of the projects would reduce the need to import capital goods which

accounted for 31.7 percent of Taiwan's imports in 1975

(Bellows, 1976: 603).

Also, the 1973-74 oil crisis hit Taiwan's economy hard.

Being dependent on imported fuels, Taiwan was hurt by the sharp increases in oil prices. In 1972, crude oil imports totalled US$ 171 million, and decreased to $98 million in

1973. However, in 1974, they rose to an enormous $715 million. In 1976, it amounted to $1.05 billion (Gold, 1981:

278). Thus, government officials were determined not to be too dependent on any one energy source in the future and tried to diversify energy sources and turn to nuclear power.

Some of the Ten Big Projects were designed to improve the investment climate. In some projects, especially petrochemicals, MNCs were heavily involved, and these ventures are a type of triple alliance. There was a practical need to enlist help from chemical and oil global corporations because the petrochemical industry is among those industries which involve constantly changing technology and are controlled by a few multinationals. In these ventures, in addition to American MNCs, partners of those joint ventures include the Taiwan state and private enterprises closely associated with the bureaucratic elite.

For example, Chinese Petroleum Corporation, a state-owned company, and the semi-official Central Investment Holding

Company have a joint venture with Amoco Chemicals

Corporation of Indiana and Standard Oil Corporation.

Products of this type of joint ventures are basically intermediate goods, and they are for exports as well as for the use of domestic downstream firms, which are the preserve of private enterprises and aim at exports too. This strategy of industrialization was called the second phase of import- and export-substitution because import-substitution in this sense is basically export-oriented, designed to reduce costs of inputs needed by domestic export industries, inputs which would otherwise have to be imported.

Some of those state-participating joint ventures in heavy industries were already established in the 1960s. The reasons for strengthening this type of joint ventures in the

Ten Basic Construction Projects were both political and economic. Politically, in the midst of a series of diplomatic setbacks and uncertainty, the willingness of global enterprises to invest in Taiwan would show their support for the regime and increase people's confidence. 245

In terms of economic rationales, there are three.

Fi-rst, when the country was turning inward, joint ventures of this sort would help stimulate innovation and initiate structural change, especially when the government took the

lead. Second, according to Chen (1981), those industries are lucrative. In 1979, Taiwan supplied 70 percent of the

Asian market for synthetic fiber and yarn, thus, it is quite profitable to produce petrochemical intermediates. Third, these investments had both forward and backward linkages, thereby benefiting the economy as a whole.

It is very important to note that the Taiwan government preferred to set up joint ventures with American firms at this stage, even though it might not be the best choice.

The reason for this was related to Taiwan's declining

international status, increasing military vulnerability in the 1970s, huge trade surplus with the U.S., and big trade deficit with Japan. More discussion and examples will be presented shortly in the discussion of current trade and international investment policies in Taiwan.

In sum, in this period, the government's legitimacy was based on its ability to promote economic growth due to its diplomatic weakness. The Ten Big Projects were launched to keep Taiwan's economy in high gear to sustain employment, trade, and foreign investment. Indeed, the value of these projects was not simply that they greatly improved Taiwan's productive system but also that the government purposely 246 used them to stimulate new economic growth. The island's economy has benefited greatly from the completion of the projects. The high growth rate and high levels of employment in the late 1970s and early 1980s tell us that sound and well-planned government projects, even in the midst of a world wide recession, can succeed. In fact, the

Ten Big Projects had so many economic and political utilities that the government decided to continue a set of projects, called the Twelve New Development Projects, to further strengthen the foundations of the economy and maintain balanced socio-economic development.

When the projects were adopted, the estimated costs of the projects was $6,421 million. Financing was from the

American Export-Import Bank, private American and European banks, the government of Saudi Arabia, overseas suppliers, and domestic sources. At the beginning of the projects the

Export-Import Bank had already offered a loan of $500 million and two American banks loaned $300 million for the projects (Bellows, 1976; 602). In the midst of a series of diplomatic setbacks and political uncertainty, this high level of financial commitment from official and private foreign sources showed foreign confidence in the island's political stability and economic prosperity, and it indirectly increased the confidence of the people on the island. 247

T±ade and International layaatment Eg.liQ.ig j :

A. Trade Policies:

International trade and investment have been important

in the development of Taiwan's economy since the outward-

looking development strategy has been pursued. In 1952, when the inward-looking import-substitution strategy was pursued, Taiwan's total foreign trade was only US$303 million. However, after decades of export-led growth, it was increased to US$11,254 billion in 1975 and US$39.5 billion in 1980 (Bellows, 1976; 598-599; Li and Yeh, 1982:

17). Moreover, more than 50 percent of Taiwan's GNP goes toward international commerce. Between 1952 and 1980, exports grew 170-fold, compared with the 105-fold increase in imports (Li and Yeh, 1982: 17). Taiwan became a foreign trade surplus country in 1971 and thereafter, except for the period of 1974-75 oil crisis. Naturally, Taiwan is classified as a country with a high trade dependency. The following table can illustrate this situation. 248

Table 8

Trade Dependency Ratio of Taiwan, 1952-1985 (%)

Year Value of Exports/GNP Value of Imports/GNP TDR (1) (2) (i)+(2:

1952 8.07 14.21 22.28 1953 8.65 13.84 22.49 1954 6.50 14.90 21.40 1955 8.28 12.62 20.90 1956 9.05 15.95 25.00 1957 9.59 14.74 24.33 1958 10.32 16.76 27.08 1959 12.49 20.82 33.31 1960 11.30 18.86 30.16 1961 13.81 20.95 34.76 1962 13.48 18.85 32.33 1963 17.80 18.95 36.75 1964 19.45 18.69 38.14 1965 18.73 21.75 40.48 1966 21.22 20.94 42.16 1967 21.75 23.81 45.56 1968 23.93 26.79 50.72 1969 26.34 27.06 53.40 1970 29.72 29.77 59.49 1971 35 .00 32.52 67.52 1972 41.77 35.48 77.25 1973 46.82 41.48 88.30 1974 43.70 51.52 95.22 1975 39.50 42.82 82.32 1976 47.62 45.43 93.05 1977 49.49 44.46 93.95 1978 53. 18 46.46 99.64 1979 53.88 52.98 106.86 1980 53.80 55. 16 108.96 1981 53.67 51.39 105.06 1982 52.19 46.36 98.55 1983 54.86 46.30 101.16 1984 58.83 46.35 105.18 1985 54 . 54 41.93 96.47

Source: Taiwan Statistical Data Book, 1985. CEPD, J une 1985, 249

The reasons for Taiwan's heavy dependence on foreign trade are summarised by Kubek (1987, 100) as follows:

'The land area of Taiwan is small, only one-sixth the size of Fukien province and a tenth that of California. Moreover, the Island is mountainous, and its arable soil lies in narrow strips along the coasts. Except for forests and fisheries, it has few natural resources; deposits of coal, iron, and petroleum are negligible and of inferior quality. In any country thin in resources and with a small home market, external trade must necessarily be a prime mover of the economy."

Since Taiwan is a country heavily dependent on external trade, it has been maintaining an elaborate apparatus of trade management. In the early stages of economic development, the goals of the trade apparatus were to earn and save foreign exchange and protect indigenous businessmen. In the current period, the goals have shifted to improving Taiwan's technological and supply capacity, to increasing government revenues, and to substituting trade for diplomatic relations.

Two major trade problems are selected for the discussion of current trade policies in Taiwan. The first trade problem facing Taiwan is commodity concentration. In

1952, agricultural products and processed agricultural products accounted for 95 percent of all exports. At that time, rice and sugar were the two main commodities for exports, accounting for 80 percent of the exports. The composition of Taiwan's foreign trade has undergone changes. 250

In 1975, industrial products accounted for 83.6 percent of

the exports, whereas agricultural products accounted for

only 5.6 percent and processed agricultural products 10.8 percent of the exports (Bellows, 1976: 598-599). Out of the

exported industrial products, textiles and consumer

electronic products claim about half of Taiwan's total

exports.

Over the past decade, developed countries, beset by

slow growth and high unemployment rate, have increased the

trade protection they provide to industries such as

textiles, electrical goods, shoes, and many other products against imports from NICs like Taiwan. On the other hand,

Taiwan's manufactured goods for export are still mostly

light consumer goods. These labor-intensive, low- technology, and low value-added products are easily restricted by quotas or competition. Facing the problem of shrinking export markets and other difficulties, such as rising energy and labor costs, increasing competition from other developing countries, and the N.T. dollar's appreciation, Taiwanese exporters have a harder time than they had in the 1950s and 1960s.

Due to this, the government encourages manufacturers to diversify their products in order to maintain their levels of profitability. One of the successful examples is Far

Eastern Textile (FET), Taiwan's biggest textile manufacturer and exporter. 95 percent of the company's production was 251

concentrated on polyester and cotton yarn and fabric. The

company has tried to cut this number to 65 percent to make

room for manufacturing non-textiles products, such as tire

cord, plastic packaging, plastic bottles and injection mould plastics. FET has also set up joint ventures with foreign

firms for producing higher technology industrial products.

For instance, a plan is made to set up a joint venture with

Lurgi of West Germany to make pollution control equipment.

FET also tries to expand its involvement in service-related

industries, such as department stores, banking, and real- estate projects (Moore, 1989b: 71).

The second major trade problem that Taiwan faces is the concentration of trade markets in two countries -- the U.S. and Japan. In the last chapter, I argued that Taiwan's unique relationships with the U.S. and Japan were quite conducive to its export expansion. For most of the years since the early 1960s, around 55 to 60 percent of trade has been with these two countries (Wade, 1988: 62). However, due to this overconcentration, Taiwan now runs a huge trade surplus with the U.S. and a big trade deficit with Japan.

The U.S. is Taiwan's largest export market, whereas Japan is its most important source of imported materials. Trade problems among countries usually bring about potential political conflicts. Indeed, the trade conflict with the

U.S. has gradually become a political problem, and the trade deficit with Japan has resulted in the call for nationalism 252

("use national products"), which is also a political force

influencing the trade policy in Taiwan. Thus, how to maintain a balance of trade with the U.S. and Japan becomes one of the main concerns of political leaders in Taiwan.

While domestic pressures have forced most of the political changes in Taiwan, foreign pressure, mostly from the U.S. government, has been a key catalyst for recent economic reform towards a more open economy. For years, the

U.S. took in about 50 percent of Taiwan's total exports, but

Taiwan did not open its domestic market. Instead, it imposed restrictions on imports, thereby enlarging the trade imbalance between the two countries. As the trade imbalance swelled in Taiwan's favor, the U.S. has started to press

Taiwan to cut tariffs and non-tariff barriers on imports, to liberalize the financial system, to increase purchases of

American goods, to give priority to U.S. products for large projects, and to revalue Taiwan's currency.

In response to the above mentioned U.S. demands, the government has set up three policy guidelines in dealing with foreign trade in general and its huge trade surplus with the U.S. in particular. They are liberalization, pluralism, and internationalization. On the part of liberalization, changes have been made in the area of trade restrictions. The changes are mostly done on import controls. Protection in Taiwan is selective, for some sectors the average level of effective protection is low. 253

but for some industries and products which are of special

importance for the economy's future growth, protection is

high. In 1988, the average nominal tariff rate was 12.57

percent in Taiwan, while the average effective tariff rate

was 5.66 percent (Lo, 1990: 3). These rates are higher than

the standard of most developed countries.

Other kinds of trade-distorting practices in Taiwan

include the classification of import restrictions and import

licensing, restrictions on import areas, and restrictions on qualification of importers. Imports are classified into prohibited, controlled, and permissible. The import of

luxury goods and goods with security concerns are highly

controlled by the government. The import of wine and

tobacco were controlled until the government opened its markets in 1986. As to permissible imports, while certain

items are permitted to import without import license, some are subject to import licensing.

Even for those "permissible" goods, the government

imposes origin or agency restrictions on where imported

items can come from and who can import them. An example of the origin restriction is the importation of garments.

Before 1980, they could only be imported from the U.S. or

European countries, thereby excluding Japan or Hong Kong.

As to the practice of agency restriction, certain kinds of permissible goods can only be imported by state-owned trading organizations or specifically approved 254 manufacturers. For example, crude oil is permissible, but only the Chinese Petroleum Corporation can import it (Wade,

1988: 49-50).

Restrictions on agricultural trade is one type of trade-distorting practice commonly found in both developed and developing countries. The current average nominal tariff rate on agricultural imports in Taiwan is 26 percent, and some other imported agricultural goods which are considered crucial for agricultural policy are subject to higher tariff rates, up to 50 percent (Lo, 1990; 6). In addition to the tariff barrier, non-tariff barriers for imported agricultural products include area restrictions, quantitative restrictions, and others.

In dealing with the U.S. pressure for reducing tariff and non-tariff barriers, a task force in the Council for

Economic Planning and Development has planned the following time table to reduce tariffs and open up Taiwan's domestic market to American goods. 255

Table 9

Time Table, planned by the Council for Economic Planning and Development, to Reduce Tariffs

1988 1989 1990 1991 1992

Average a . Overall Nominal Rates 12.57 10.25 9.17 8.80 7.00 Tariff Rates b . Agricultural 25.99 24.21 23.25 21.32 19.82 products

c . Industrial 10.20 8.03 7.03 6.02 5.02 Products

Average Effective 5 . 66 4 . 70 4.30 3.90 3.50 Tariff Rates

Source; Changfa L o . "Liberalization of ROC Foreign Trade Policy and Its Implications for US-ROC Trade Relations." Paper prepared for conference on "U.S. - R.O.C. Relations Since ■’979; Reviews and Prospects" Institute of American Culture, Academia Sinica, Taipei, Taiwan, January 4-6, 1990. 256

Another type of trade-distorting practices in Taiwan is the wide-spread copyright piracy. Indeed, manufacturers in

Taiwan are notorious for their ability to counterfeit foreign toys, computer software, designer watches and other designs or brands without permission. This has created a bad image for the country as the leading producer of counterfeit consumer goods. The country is now under great international pressure, especially from the U.S., to reduce rampant counterfeiting. According to a 1986 U.S. government report, U.S. companies in the computer, publishing, and recording and music industries lost US$ 750 million in sales a year due to copyright infringement in Taiwan (Moore,

1989c: 50). Since 1983, the Taiwan government has revoked the export licenses of companies found to be producing counterfeits. Statistics have shown the success of this crackdown. According to U.S. Customs, more than 50 percent of all counterfeit goods brought into the U.S. were made in

Taiwan in 1982, but this decreased to 20 percent in 1983, and to a little over 2 percent by 1984 (Brody, 1986: 27).

To relax import and export controls is not an easy task as activism in all areas of society has broken through the past condition of a stable society. In effect, the Taiwan government has encountered strong pressure from domestic industries and private sectors in the course of the implementation of its trade policy. One example is the impact of liberalized agricultural imports on domestic 257 producers. When Taiwan started to open up its domestic market to American fruit, poultry, peanuts, and animal viscera, the lower prices for domestic agricultural products resulted in anti-American demonstrations by the fruits producers and chicken cultivators on March 16, 1988. This case shows that the government is facing a difficult balancing act of trying to satisfy the demands of the U.S. while also protecting the local industrialists' and farmers' interests.

There have been many debates among economic and political technocrats in Taiwan on the impact of adopting low tariffs and eliminating limitations of imports on domestic industries. Economists and officials who are in favor of freer trade practices express their concern that high tariff walls and import controls have actually impeded the rational development of the infant industries in Taiwan.

They usually cite the automobile industry as an example.

Taiwan's six existing vehicle makers mainly assemble vehicles under license from foreign car companies. After years of stiff import protection, the automobile industry still depends on foreign technology and inputs and charges high prices for their cars. Before tariffs on imported cars can be significantly reduced, consumers in Taiwan would have to continue to face the unhappy choice of either buying an overpriced domestic car or purchasing a very expensive imported one. 258

The auto industry has been made a "strategic" industry,

badly in need of modernization. There are many proposals

made to increase competition in the auto industry and to upgrade auto manufacturing and many supplier industries,

such as glass, steel, and plastics. The first attempt was

to invite Toyota Motor Corp. to establish automobile

assembly plant in Taiwan. However, this plan was cancelled

in 1984 after more than two years of negotiations for political as well as economic reasons. First, distrust of the Japanese still exists. Many policy-makers in Taiwan still have bitter memories of the Sino-Japanese war on the

Mainland and of Japanese colonial rule on Taiwan. Second, based on past experience, skeptics wonder just how much of the critical technology the Japanese are willing to offer.

Third, there were objections from the owners of car companies who argue that as the auto market presently exists, it is overcrowded. Taiwan may have a very difficult time trying to break into a world market plagued by slow growth when even American and Japanese auto makers are faced with increased competition. They were also afraid that the new competition could lead to mergers or even the demise of some existing car companies.

The final and most important reason for the demise of the venture, however, was disagreements between the two parties during the course of bargaining. The biggest disagreement was over how much of the planned venture’s 259

output will be exported. Out of the planned output of

300,000 cars a year, the Taiwan government insisted that

half of them for export. However, Toyota said that figure was only a target, not a commitment.

Since the cancellation of the Toyota project, the

Taiwanese government has announced plans to liberalize the

import policy and attract other foreign companies to invest

in auto projects. In 1986, in order to gradually reduce 35 years of government protection and to force Taiwan's six auto makers to improve their cars, the government launched a cut in auto-import tariffs, to 30 percent from 65 percent over six years.

Due to a more open local auto market in Taiwan and the government's long-held hopes of raising domestic manufacturers' technological levels as well as encouraging exports, more joint ventures with foreign car makers were approved after the collapse of the Toyota plan. The Toyota

Motor Corp. returned and set up a new car-and-truck venture.

Ford Motor Co. increased its investment in its Taiwanese subsidiary. Ford Lie Ho Motor Co. Nissan Motor Co. also bought a 25 percent interest in Yue Loong Motor Co.,

Taiwan's largest domestic car maker.

To achieve the goal of economic liberalization,

Taiwan's central bank has also allowed its closely controlled New Taiwan dollar to rise about 57.5 percent between 1985 and July 1989 (Wang, 1989: 32). This policy 260

move has already made Taiwan's exports more expensive and

damaged their the competitiveness. Exports grew only 13

percent in 1988, compared to 34.5 percent in 1937. The

strong currency, plus a tight labor market and rising wages,

has forced many of Taiwan's exporters to move production

elsewhere in Asia, even discreetly to China. (More on this

will be discussed shortly.)

With regard to the principle of pluralism in guiding

new trade policies, the Taiwan government encourages domestic industries to join the international competition.

On the other hand, Taiwan is increasing purchases of

American goods and giving priority to U.S. products for

large projects in order to narrow the trade deficit. To

achieve this goal, preferential treatment in loans and taxes

are offered by the government to the top 300 importers of

U.S. products (Tsao, 1990; 7). Moreover, Taiwan has sent 15

"buy American" trade missions to the U.S. since 1978. In

May, 1989, the Taiwan government announced that five more groups will be sent to the U.S. to purchase goods worth

US$1.5 billion (Wang, 1989: 32). A large portion of goods purchased by those trade missions is agricultural products.

Now, Taiwan is the fourth-largest foreign market for U.S. agricultural goods (Moore, 1989a: 73).

Another example of the government's "buy American" policy is the Taipei subway system. Bidding on rail cars

and signalling equipment is restricted to the more costly 261

and inferior system provided by U.S. suppliers. One major

foreign supplier excluded from bidding is Japan, whose

subway makers would offer a more competitive price and

better quality system but who has a huge trade surplus with

Taiwan. Thus, although the exclusive preference for U.S.

companies can help balance Taiwan's trade surplus with the

U.S., critics are worried about the costs and quality of the

subway system because U.S. companies were no longer in the

forefront of subway car design (Moore, 1988).

In addition to this "buy American" plan, the high per

capita income in Taiwan has also stimulated the Taiwanese to buy more foreign goods. Due to rapid economic growth and appreciation of New Taiwan dollar, Taiwan has achieved a per capita income of over US$6,000 from just under US$5,000 in

1987. The increased level of income has brought about growing consumerism and demand for foreign goods. In 1986,

Taiwan purchased an average of $270 of U.S. goods per person while America bought only about $80 per person of Taiwanese goods (Sease 1987a, 10).

In addition to the above measures taken to relax trade tensions between Taiwan and Washington, Taiwan's government and private sector trade experts also urge Taiwan traders to reduce their dependency on the U.S. and to diversify their sales markets. To achieve this goal, they suggest that

Taiwan's current economic structure be upgraded and that firms strengthen themselves first. However, there are 262

several features of Taiwan's current economic structure which hamper an immediate realization of the policy. Most

of them are related to the large number of SMEs in the

economy.

In the last chapter, I have argued that Taiwan's SMEs

have made important contributions to the country's economic success. As time goes by, however, the existence of massive

SMEs has become a minus to the economy. First, the employee

turnover rate among Taiwan's workers has been high since the beginning of export-oriented industrialization. After having learned enough skills, employees will leave and set up their own firms, which then become the competitors of the original firm. The turnover rate in Taiwan showed a fluctuation of 5 to 250 percent in 1969 as compared to 5 to

20 percent in Argentina and Brazil and 2 to 8 percent in

India and the Philippines (Negandhi, 1969: 34). With regard to average time in a single job, it is 20 years in Japan, 12 years in the United States, and only 5 years in Taiwan (Chen

1989, 98). This high turnover rate stands in the way of the government's plans to attract Overseas Chinese and foreign

investments in technology-intensive industries because they are less inclined to hire and train local managers and technicians.

Second, due to the large number of export-oriented

SMEs, there is a lot of competition among them. Highly competitive markets with easy entry and departure enable 263

SMEs to produce similar goods and services. Firms like to

copy those they perceive as the new pace-setters, so no one can hide his success long enough to accumulate the profits

to expand. One good thing about this is the rapid technological diffusion. However, the negative effects are a fragmentation of capital and a proliferation of small- scale enterprises whose unit costs are high. It also reduces the profits small firms earn and prevents the upgrading of the industrial structure in Taiwan.

Third, as I have shown, Taiwan has been relatively strong in manufacturing but weak in marketing its own products. This is partly due to the fact that more than 95 percent of local firms are of small and medium size.

Japanese and foreign trading companies have taken on this role and have helped Taiwan's SMEs exploit their relatively small-scale production advantage. Although this has helped

Taiwan's economy considerably, such export-oriented SMEs are restricted to labor-intensive industries and their potential export business is generally dominated by foreign trading companies, thereby restraining SMEs from promoting their marketing capability and upgrading their technology.

The role of Japanese trading companies in Taiwan's exports has been very important. It was estimated that they controlled about 50 percent of Taiwan's exports (Huang,

1986: 189). The Japanese tend to use their status as major customers to force local firms into buying their capital 264

goods. The dominance of Japanese trading companies has

resulted in two negative impacts on Taiwan's economy. One

is the continued trade deficit with Japan. The other is the

continued control of most of the export business and

production technology by Japanese trading companies. As

already shown in the discussion of the Toyota assembly

plant, although the government officials were appreciated

the help from Japanese MNCs in marketing Taiwan's goods

abroad and in transferring labor-intensive technology, they

also resented the control of high-tech by Japanese firms and

the control over Taiwan's foreign trade by Japanese trading

companies.

The government is aware of the power of foreign trading

companies and the cost of a fragmented exporting sector and

is trying to fix the problem by encouraging the

establishment of large trading companies. However, it is

not an easy job; SMEs in Taiwan are far from being

independent from those giant companies. Moreover,

competition and jealousies among local firms are always in

the way whenever such a proposal is made.

Due to the increasing costs of SMEs to the economy, many people in Taiwan have started to advocate government

intervention in setting up incentive measures to encourage

the development of big trading companies and a program to support strategic industries. Otherwise, such enterprises may lose confidence in their ability to compete in world 265 markets, and will form an opposition force against the

liberalization and internationalization policies. Others are more afraid of further government control and argue that the main problem is due to the inefficiency of the financial

institutions. Thus, for them an improvement of the function of the financial market is the remedy, not government

intervention. Those people warn the government to implement economic liberalization measures in a step-by-step way.

However, one advantage of this fragmented economic structure is that as pressing domestic problems, such as growing labor unrest, rising labor costs, growing environmental movement, and currency appreciation, occur,

SMEs can shift their production abroad easier than large firms. Indeed, it is the large firms that have been hit hardest by current labor unrest. As a result, most observers believe that Taiwan will have an easier solution to those difficulties than other Asian NICs, such as South

Korea, due to the fact that Taiwan has a tight labor market and a flexible, entrepreneurial economy (Clifford and Moore,

1989) .

Indeed, as far as overseas investment is concerned, several Taiwanese electronics manufacturers have set up plants in the U.S. to assemble color TV sets and other consumer electronic products. Although overseas investment thus far has been concentrated in the U.S., many ventures have been set up in Southeast Asia, the Middle East, South 266

Africa, Central America and the Caribbean, Europe, and even

China. More on this subject will be discussed in the

following section on current international investment policies in Taiwan.

Trading with countries other than the U.S. and Japan

have been vigorously promoted. In fact, the political need

of widening trade contacts and international investment is

one of the important concerns of KMT leaders. The political utility in doing so is to assure the people

residing on the island as to the security of the country.

Internationally, it can help convince foreign governments and groups that useful purposes are served if Taiwan maintains its sovereignty and continues to prosper.

Trade with Europe is a good example. In Europe, Taiwan

is diplomatically recognized only by the Vatican. Thus, the policy of promoting trade contacts with European countries

is seen as a way to build its "substantive relations." As a matter of fact, Taiwan's economic liberalization has made

European traders aware oi the increasing importance of the

Taiwan market. While trade with Europe is still a small percentage of Taiwan's total foreign trade, it is growing.

Trade with European countries totaled 13 percent of Taiwan's entire foreign trade in the beginning of the 1980s. Of this, trade with West Germany exceeded $1.4 billion and trade with the UK exceeded $700 million (Gregor, Chang &

Zimmerman, 1981: 78). However, capturing a share in the 267

European market is expected to become increasingly difficult

because of a unification of the import barriers of the

European Economic Community's 12 member nations that will be undertaken in 1992.

The Taiwan government has also overcome some

ideological and political barriers and has removed

restrictions on trade with Eastern Europe. In November,

1979, the ban on direct trade with five East European

countries -- East Germany, Poland, Yugoslavia, Hungary and

Czechoslovakia -- was lifted. In 1988, economic and trade authorities in Taiwan decided to lift a ban on direct trade with Cuba, Vietnam, Laos, and Cambodia. Although trade with

China and the Soviet Union is still prohibited, underground deals are going on, without too much intervention from the government.

It should be noted chat the political implications of the two-way trade between Taiwan and these communist countries in the place of political confrontation with

Communist China is significant as Mainland China sees that even other Communist countries are willing to do business with a newly flexible Taiwan.

Indirect trade between Taiwan and Mainland China, passing through Hong Kong and Singapore, has increased sharply in the last two years. The Taiwan government had

long time regarded trade relations with Mainland China as illegal. However, due to the fact that Mainland China is a 268

potentially important market for Taiwan which wants to

reduce its dependence on the U.S. and pressure from local

businessmen, political constraints on indirect trade between

Taiwan and Mainland China began to thaw in 1986. In 1967,

there was a dramatic increase in trade between Taiwan and

Mainland China. This came about largely due to Taiwan's decision to ease customs inspections for goods imported from

the Mainland. This decision mainly effected 27 items which now constitute about 20 percent of Mainland exports to

Taiwan (Cheng, 1987: 90).

When discussing the problem of trade imbalance with the

U.S., there is a fact that should not be ignored. As James

Klein, the president of General Instrument Corp.'s Taiwanese subsidiary, correctly pointed out that although the U.S. trade deficit with Taiwan is large, the most advanced technical products that Taiwan exports to the U.S. market are the results of U.S. capital invested in Taiwan. Sears,

K mart, J.C. Penny, General Electric, International Business

Machines, Mattel, Schwinn, Wilson Sporting Goods, General

Instrument, etc. are among those responsible for America's trade deficit with Taiwan. The reasons for this are presented here.

As I discussed in the last chapter, the distribution of

U.S. investment in Taiwan was very uneven. 85.4 percent of the total U.S. direct investment in Taiwan between 1952 and

1983 was concentrated in manufacturing. Among investment of 269

manufacturing industries, electronics and electric appliance

accounted for 52 percent. The majority of the electronics

and electric appliance output is exported. The following

chart shows products of the top U.S. companies exporting

from Taiwan (Sease 1987b: 10):

Name Products

General Electric Black and white TVs, color TV components

Texas Instruments Integrated circuits

Digital Equipment Terminals, printers, personal computers

General Instrument Television components

Atari Video computer systems, home computers

Wang Laboratories Computer products

AOC International Color televisions

Capetronic Home audio-video systems

TRW Electrical components

Unlike Japanese companies in the U.S. market which view

American companies mostly as competitors and try to design

their own products and control their own marketing, very few

Taiwanese companies export proprietary products to the U.S.

American firms come to Taiwan to operate their own Taiwanese

factories solely to ship products back home. Therefore, I

agree with Klein that Taiwan should not be solely

responsible for the huge trade deficit. Steve Craven, the 270 chief commercial officer for the American Institute in

Taiwan, once stated that "American companies have been the engine of growth in Taiwan. We shouldn't be blaming Taiwan for what we're doing to ourselves." (Sease 1987b, 1)

Tain-jy Chen (1990) also agrees that U.S. multinational firms in Taiwan and the demonstration effect they have created should be responsible for the trade imbalance between Taiwan and the U.S. He states (1990: 2-3):

'Using Taiwan as a base for offshore sourcing, U.S. subsidiaries in Taiwan are inclined to export a large proportion of their outputs back to the U.S. market. This practice has had a beneficial effect for Taiwan in the past by bringing in foreign exchange to alleviate Taiwan's current account deficit. In recent years, however, the subsidiaries' inclination to export has helped enlarged the trade surplus with the U.S.... Further­ more, U.S. subsidiaries also have produced a demonstration effect which has persuaded the indigenous firms to cater their products to U.S. demand. The result is an over­ dependency of Taiwan's exports on the U.S. market,..."

While the U.S. is Taiwan's largest export market, Japan is the largest supplier of Taiwan's imports and also is

Taiwan's second most important trading partner. Taiwan has had a trade deficit with Japan every year since 1956, and it has been bothering Taiwan's political leaders ever since.

One opportunity for them to deal seriously with the problem was the severance of Japan-Taiwan diplomatic relations in

1972. One year before Taiwan's diplomatic relations with

Japan were broken off, trade with Japan totaled US$1,034 271 million, and about two-thirds of the total amount of trade went toward the purchase of machinery, iron and steel, and manufactures and processed raw materials from Japan (Yang,

1972: 21). The feeling of being "betrayed" and the growing

trade imbalance between the two countries forced political

leaders in Taiwan to call for an economic detachment from

Japan. Premier Chiang Ching-kuo in his administrative report to the Legislative Yuan on September 29, 1972 said that

"the problem involving Japan is giving us opportunity to terminate the manipulation or monopolization of our economy by another country and prompting us to free ourselves from overreliance on foreign capital or technology. This is therefore a good chance for us to build up self-reliance and inde­ pendence . "

The call for reducing Taiwan's dependence on Japan for the provision of raw mateials and machinery was also a reaction to the wartime memories. Although Taiwan's wartime memory of Japan is not as severe as Korea's or other

Southeast Asian countries' memories of Japanese colonization, every now and then, when Taiwan's trade deficit with Japan is high, or when there is political tension between the two countries, people in Taiwan will blame on Japanese economic imperialism.

Since the early 1970s many measures have been adopted to reduce the trade deficit with Japan. First, the government decided to pursue a secondary import-substitution strategy, hoping that Taiwan's dependency on Japan for the provision of intermediate capital goods would be reduced,

thereby reducing the trade deficit with Japan. The "Ten Big

Projects” was a good example of this development strategy.

Second, in many cases, the need to reduce the trade deficit with Japan is connected to the need to reduce the trade surplus with the United States. The Taiwan government encourages importers to place orders with American firms or firms from other countries, even though Japanese goods might be less expensive and of higher quality. Also, the government decided to license certain imports from Japan and favor importation from the U.S. and Europe. For instance, in 1974, the Board of Foreign Trade under the Ministry of

Economic Affairs imposed restrictions on 700 Japanese goods, and, in 1975, decided to limit the sources of 104 "non- essentials" to the U.S. and European countries (Bellows,

1976: 604).

The policy calling for reducing trade relations with

Japan, however, did not produce the significant results that political leaders would like to see. In 1974, Taiwan's trade deficit with Japan amounted to $1,336 billion, just

$20 million less than Taiwan's total trade deficit (Bellows,

1976: 604). One important reason behind this was that when the call for an economic detachment from Japan was made, the

"Ten Big Projects" were being undertaken and the needed materials and production tools for industrial production 273 such as transportation equipment, electrical machinery,

chemicals, and farm equipment were mainly imported from

Japan. However, towards the end of the 1970s, some success of the policy was seen. Exports to Japan were 24.03 percent of Taiwan's total exports in 1966, but only 13.96 percent in

1979. Imports from Japan were 40.40 percent of Taiwan's total imports in 1966 and 30.88 percent in 1979 (Yu, 1981:

633).

There are many factors contributing to the difficulties in reducing Taiwan's trade deficit with Japan. First, different stages of economic development in Japan and Taiwan have contributed to the trade imbalance. Thus, the compositions of exports to and imports from Japan are different. Of the three categories of foreign trade: consumer goods, materials, and capital goods, materials imported from Japan accounted for 50 percent, capital goods for 42 percent, and consumer goods for 8 percent between

1966 and 1979. Of the total exports to Japan in the same period, consumer goods accounted for 64 percent, materials for 30 percent, and capital goods for 6 percent (Yu, 1981:

635).

Second, Japanese commodities in Taiwan are very competitive. Taiwanese businessmen are inclined to purchase materials and capital goods from Japan not only because of their being inexpensive but also because of the convenience in delivery, better service after sales, and adaptability in 274 use. According to a survey by the China External Trade

Development Council, more than 75 percent of 300 Taiwanese

companies reported that they would switch from Japanese suppliers to U.S. suppliers if the American companies offered better prices, quality, and service. In the same

survey, about 23 percent of the Taiwanese companies said

that they would not consider buying from American companies due to joint ventures with Japanese concerns, the unavailability of parts in the U.S. and Taiwan's proximity

to Japan (The Wall Street J ournal 1987, 29). Thus, the government's policy to encourage diversification of the sources of raw materials and capital goods has not had much effect. For the businessmen in Taiwan, it is irrational to forego these purchases if quality is competitive and prices are lower.

Third, like any other country's exports to Japan, products exported from Taiwan are subject to many restrictions imposed by the Japanese government, such as high tariff rates, strict examination, and rationing.

Fourth, it is generally harder for the Taiwanese to penetrate the Japanese market than for the Japanese firms to enter Taiwan's market. Taiwan's businessmen do not seem to be very familiar with the Japanese market and consumer tastes and have fewer marketing skills. On the contrary, with strong market networks and managerial experiences,

Japanese firms are better equipped to sell goods to Third 275

World countries.

B. International Investment Policies;

As I have discussed in the last chapter, although the

total amount of direct foreign investment in Taiwan was never large, it has made many political and economic contributions to Taiwan. In this period, foreign participation in Taiwan's economy is continuously needed for both political and economic reasons. Politically, continued foreign investment is an important symbol, manifesting political commitment, support, and confidence by private foreign groups. The endorsement by foreign investors can not only boost the confidence of native investors, but help spread information about Taiwan all over the world, thereby contributing to raising Taiwan's international recognition.

In effect, the political commitment from foreign

investors is not only crucial to the future political survival of Taiwan, but part of the pragmatic strategy of economic growth, espeoially when investment from indigenous

Taiwanese businessmen has been low for the past decade due to the short life-cycle of products, uncertainty about the market, problems with Taiwan's financial system, and the political concerns of Taiwan's security problem. The eruption of the Cathay scandal in 1982 and its impact on the economy is a good example to illustrate this argument. As I mentioned in the last chapter, Taiwan's banks are very conservative in lending money to SMEs. On the other

hand, there is an increasing need for SMEs to expand and

finance their enterprises in order to enter new phases of

higher value added output and counter greater international

competitiveness. According to the central bank, in 1983

liabilities of private enterprises in Taiwan were twice

their equity. Therefore, in addition to the family and social networks, SMEs have to rely heavily on borrowing in unorganized and underground money markets to raise funds.

One type of underground financial deal is that

industrial companies accept deposits from employees and other members of the public. In exchange, the companies pay depositors interest rates two or three times the official

levels. However, structural problems in the financial system not visible during periods of rapid growth are now being exposed.

The Cathay Group is a Tsai-family-controlled group.

Cathay Plastics, one company in the Cathay empire, had relied heavily on deposits from the public. The troubles started with Tsai Chen-chou, who financed his plastics empire with millions of dollars in improper loans from the

Tenth Credit Cooperative (which was also operated by Tsai

Chen-chou) and the public. The crisis spread to his older half-brother, Tsai Chen-nan, who was forced to hand over

Cathay Trust to the government. This was regarded as a 277

major financial crisis and resulted in the resignations of

both the Economics and Finance Ministers. Several other

Finance Ministry officials were also found responsible for

the trouble of the Tenth Credit.

The scandal damaged people's belief that the economy

was sound and that the government was corruption-free. It

damaged confidence in Taiwan's financial system and created

a political storm. The incident caused loud calls for

financial changes. One of the concerns was over the matter

of whether owners of industrial corporations should be

allowed to run financial institutions. The government was

trying to make laws to separate financial institutions from

industrial concerns. Proposed revisions of the banking law

would introduce stricter regulations against such insider dealings.

However, even if the proposals are put into effect, the

barriers to the implementation of these proposals are usually more political than economic. Skeptics wonder how much will be done since several families who control

financial institutions also wield political clout. For

instance, Tsai Chen-chou was in charge of both troubled

Cathay Plastics and Tenth Credit and was a member of the

legislative Yuan.

The other consequence of the scandal was that the government started to tighten credit by banks, thereby

reducing further domestic investment. For instance, due to 278 the incident, investments decreased from nearly 30 percent

in the early 1980s to 23 percent in 1984, and was below 20 percent through the first half of 1985 (Chang, 1986: 112).

Thus, on some occasions, like the Cathay Plastics incident, the presence of foreign investment can have political utility for assuring indigenous investors on the island.

As far as the economic utility of foreign investment is concerned, direct foreign investment of this period has different economic utility from those of the earlier foreign

investments. In the export-promotion period, foreign exchange earnings, employment generation, labor-intensive technology, and export promotions were the main foci. Since the mid-1970s, emphasis has been shifted to advanced technology, management skills, and marketing networks.

Market knowledge and marketing skills are necessary skills for exploiting export markets. However, these two skills seem to be relatively scarce resources in Taiwan as well as in other developing countries. As I have discussed, export-oriented SMEs in Taiwan are restricted to labor- intensive industries and their potential export business is generally dominated by foreign trading companies. The advantage of foreign firms in exporting manufactured goods can be attributed to their greater ability in international markets. Compared to domestic firms, foreign subsidiaries usually have greater access to market information, distribution channels, and international marketing skills. 279

Therefore, foreign subsidiaries tend to export relatively

more than domestic firms. Before SMEs can learn these

skills themselves or big indigenous trading companies can be

formed, the presence of foreign investors in Taiwan is

helpful in this respect.

Another economic utility of MNCs at this stage of

development is technology needed to upgrade Taiwan's

economic structure. In response to the intensified

competition in the international market, the Taiwan

government has started to promote high technology

engineering industries, such as metal manufacturing,

electrical and non-electrical machinery, and precision

engineering products since the late 1970s. These

industries have high knowledge- and skill-intensity, high

value-added, high income elasticity, and strong forward and

backward linkages.

To achieve this goal, the government adopted a strategy

of inward-looking growth of knowledge-intensive industries.

A new type of industrial zone, the science-based industry park, was established in December 1980 in Hsin-chu. The park is a deliberate attempt to create a Taiwanese version

of California's Silicon Valley.

As Bob Johnstone (1988: 70) points out, the park serves

three main roles. The first is to provide jobs for

returning Taiwan expatriates. Secondly, it provides the

opportunity for local entrepreneurs to begin their own 280

companies. Finally, and most importantly, the park provides

a base for Taiwan's shift from labor- to knowledge-intensive production. The government sees the park as a catalyst for

high-technology development, bringing together foreign firms with local research and development organizations and the

local private sector. Just as the export processing zones

sparked Taiwan's growth spurt in the last period of development, political and economic leaders are hoping that

the Hsin-chu Park will serve the same function for the 1980s

and 1990s.

Perspective investors are promised a five-year exemption from tax and rental, tax ceilings, tax credits for stockholders, low-interest loans, and no tariffs on imported components for finished products intended for export. In terms of capital needed to establish an enterprise in the park, an investor needs to invest no more than 26 percent of his own capital because, with requests by the investor, the government can invest up to 49 percent of the capital in that particular enterprise. Also, investor's patents and know-how can be counted as high as 25 percent of total equity (Wu, 1985: 42).

Moreover, the park's administration offers many services for firms in the park such as the availability of a highly trained labor pool, repair, maintenance, marketing, consulting, and so on. It also assists its tenants with problems such as bureaucratic red tape and problems with 281

regulations. Another added attraction of the Hsin-chu

Science-based Industry Park is the fact that it is located

near Tsinghua and Chiaotung Universities, two of Taiwan's

best educational institutions in science and technology and

that Hsin-chu itself is the home of the Industrial

Technology Research Institute, a collection of large guasi-

governmental laboratories.

The initial result of this policy was an inflow of

foreign and domestic investment. From the establishment of

the park to the end of 1982, 42 firms were approved for

investing there. Four firms out of the 42 either dropped

the investment or moved out of the Park. For 1981-82, the

remaining 38 firms had total investments valued at about

US$37 million (Wu, 1985: 49). 56 percent of the capital

invested was represented by wholly Chinese-owned

enterprises, while wholly U.S.-owned firms such as Wang

Laboratories and Qume accounted for 11 percent. The

remaining 33 percent was represented by joint enterprises

involving firms originating from different countries or

areas such as Chinese, American, British, Singapore, and

Hong Kong investors (Wu, 1985: 49). Some people address the

Hsin-chu Science-based industrial park as a "magnet for

technology companies."

In addition to building the science-based industrial park for attracting advanced foreign technology, more

technical cooperation with Japan and the U.S. is promoted. 282

Taiwan has more technical cooperation with Japan than with

other countries, even though the amount of Japanese

investment is not as big as that of the U.S. From 1966 to

1972, technical cooperation with Japan accounted for 79 percent of all technical cooperation with foreign countries,

63 percent in 1973-79. Technical cooperation with Japan decreased sharply from 1970 through 1972 when Japanese

investors were encouraged to invest in China (Yu, 1981:

638).

Most cases of technical cooperation with Japan were focused on labor-intensive industries. It is not deniable that Japan made important contribution in transferring

labor-intensive technology to Taiwan. However, it also makes upgrading Taiwan's industrial structure and technological capabilities more difficult because technological dependency has hampered local R & D . Thus, although Taiwanese SMEs are appreciated the help from

Japanese MNCs in marketing their goods abroad, they also resent the control of high-tech by Japanese firms and the control over Taiwan's foreign trade by Japanese trading companies.

Compared to current Japanese direct investment, there are more visible cases in Taiwan which show that the pattern of U.S. direct investment has gradually shifted to a more technology-intensive and service-related type. Under the current policy to upgrade Taiwan's economy, the major 283 benefit of U.S. investment in recent years is not job

creation, but rathef an acceleration of industrial

restructuring. Although electronics and chemicals still

remain the two leading sectors of U.S. investment in Taiwan,

the pattern of American investment has gradually shifted

from labor-intensive industries to technology-intensive and service-related industries as the Taiwan economy progresses

and the wage rate rises. In the electronics industry, simple, labor-intensive offshore assembly operations are being replaced by manufacturing of semiconductors and other microelectronic hardware. In the service industry, in 1988,

it claimed for 32.2 percent of total U.S. investment projects approved by!the Taiwan government. If we include the banking and insurance industries which the U.S. has

managed to ask Taiwan I to relax restrictions on, the ratio would be even higher (Chen, 1990: 8).

What is then the favorable conditions in Taiwan which continue to attract ' foreign investors in the midst of political uncertainty created by the diplomatic void? Many factors are involved hëre. According to the survey issued by the Business Environment Risk Index, Taiwan's risk-index ranking is ninth among forty-eight countries when factors

like political stability, attitudes toward foreign

investors, degree of nationalization, administrative efficiency, financial structure, communications, availability of long or short-term loans, and the overall 284

economic situation are taken into consideration (Kubek 1987,

99).

Tain-jy Chen (1990) singles out the supply of high-

quality human capital as the main factor for U.S.

multinational firms' remaining the most active foreign

investors in Taiwan after the Taiwan-U.S. diplomatic ties

were broken. He states that as Taiwan's investment climate

and development strategy have changed and the U.S.

comparative advantage has shifted into technology-intensive

and service-related industries, "recent investment from the

U.S. is characterised by a marriage of American technology

and Taiwanese human capital, distinctively different from

the traditional bond between American physical capital and

Taiwanese raw labor." (Chen, 1990; 3-4)

It should be noted that new political and economic utilities of direct foreign investment in this period have

resulted in a crucial change in the bargaining relations

between the Taiwan government and foreign investors. From

previous discussions I have shown that foreign investors

were largely excluded from the import-substitution strategy.

Since the expert-promotion period foreign investment has been very welcomed on the island, and the government has been very much in control of the type and operation of

foreign firms. However, in this period of development, political demands for foreign investment as a sign of the

viability of the regime and as a substitute for formal 285 diplomatie ties have lowered the bargaining power of the

Taiwan government vis-a-vis foreign investors, especially giant multinational corporations. The example of the Hua

Tung venture can illustrate this argument.

The Hua Tung joint venture was one between General

Motors Corp. and several Taiwanese concerns to produce

trucks. There were both political and economic goals in

inviting General Motors Corp. to this venture. The military and political problems occurring in the 1970s were the two major forces driving the Hua Tung project. During the 1970s

the diplomatic and military situation facing Taiwan grew

increasingly grave, especially in the late 1970s when the

U.S. severed its relationship with Taiwan. Political

leaders in Taiwan were anxious to improve commercial relations with the U.S. to calm the anxieties of the people at home and to keep foreign investors interested in Taiwan's

independent status. Also, in order to strengthen its military capacity, the country needed the technology to build up a self-sufficient military-industrial complex.

Under this circumstance, the KMT leaders were eager to have

a giant American corporation invest in Taiwan almost at any

cost.

Economic calculations involved in this venture were

also very important. As I mentioned earlier, the government

had long wanted to upgrade the motor industry. The building

of a heavy truck plant would help expand and improve the 286

automotive spare parts industry. Also, at this time, there was an increasing domestic demand for trucks because one part of the Ten Basic Construction Projects, the island-long

highway was completed, and, in 1978, the government planned

to start a set of 12 more projects, including three east-

west highways. Thus, a joint venture of building trucks was

expected to reduce imports and meet the domestic demand.

Another economic reason was to reduce the trade surplus with the U.S. At that time, Taiwan already had a huge trade surplus with the U.S. This trade conflict had gradually evolved into a political issue between the two countries.

In order to ease the trade conflict and to give American companies a stake in Taiwan's economy, the candidates for the partner in the joint venture were exclusively targeted

to American firms. Thus, like most major projects, Japanese firms were purposely excluded from considerations because of the need to reduce the trade surplus with the U.S. and trade deficit with Japan. In this particular venture, European firms were also excluded because they were very concerned with reactions from Mainland China and because Taiwan was

less interested in them. Noble (1987: 688) stated that "by

limiting the list of applicants for political reasons Taiwan drastically reduced its ability to utilize oligopolistic competition among MNCs by playing off one potential investor against another."

The main negotiator representing Taiwan was Lay Ying, 287

former vice-commander of the Taiwan garrison Command. What

he was concerned with was how to carry out the orders from

the top KMT leader, not economic efficiency. Also, Chiang

Ching-kuo was very supportive to the venture; therefore, potential opposition to the Hua Tung project was frozen.

Lay Ying concluded an agreement with GM, which was quite disadvantageous to Taiwan because it promised government protection from Japanese imports, and in case of failing to give Hua Tung adequate protection from imports, GM could pull out its investment plus interest calculated at 1.5 percent over the current New York rate (Noble, 1987: 692).

Based on this clause, GM reportedly had threatened to withdraw its investment unless the government continued

indefinitely its ban on similar Japanese-made trucks and buses. Moreover, the price of the new trucks were 25 percent higher than European imports and 85 percent higher than Japanese imports (Noble, 1987: 697-698).

What brought an end to this quite inefficient and disadvantageous venture was a change in the top bureaucratic leadership, the criticisms from economists, and a change in the security situation of the country. The new Minister of

Economic Affairs, Chao Yao-tung, is famous for his entrepreneurial and efficiency-oriented management style.

As the security situation of Taiwan eased and the magnitude of Hua Tung's competitive disadvantage became clear, he and other modern technocrats brought an end to the project. 288

The other aspect of Taiwan's new international

investment policy is to encourage Taiwan's manufacturers to

invest abroad. The following discussion will show that the

promotion of outward investment is not only part of Taiwan's

technology-intensive industrial development program, but

also part of the nation's "all-out diplomacy."

In Taiwan, overseas investment had been discouraged for

many years as part of the government's policy to consolidate

the nation's resources. Restraint was imposed out of fear

that Taiwan's businessmen would use foreign investment to

ferry their personal fortunes out of the country. However,

as certain economic and political situations inside and

outside Taiwan underwent changes, economic planners started

to think that foreign investment would be the most effective

solution for the country's problems, such as rising foreign

reserves, diplomatic setbacks, rising energy and labor

costs, growing environmental concerns, and shrinking export

markets.

In the past few years, Taiwan's outward investment grew

at a rapid rate, 80.5 percent in 1987 and 113 percent in

1988. John C.I. Ni, the Director General of the Industrial

Development and Investment Center of Taiwan's Ministry of

Economic Affairs, pointed out in an interview that the purposes of Taiwan's overseas investment are to "grasp

technology, acquire raw materials, establish sales channels,

and lower costs." (Hsiao, 1989, 43) At present, most 289

investments from Taiwan are made in manufacturing

industries, construction and construction materials, and

textiles; however, increasing investments are made in the development of mineral fuel and agricultural raw materials.

Such investments will offer Taiwan greater assurance of

continuity of supplies and access to raw materials and markets at lower costs. In addition to these purposes, the needs to utilize foreign energy supplies for production and

to counteract protectionism in Western markets also explain

the growing interest of Taiwan manufacturers to set up

factoiies overseas.

Another important factor behind Taiwanese manufacturers' turning to foreign plants is the growing concerns of people in Taiwan about environmental problems produced by some industries. The best example is the protest faced by Formosa Plastics Group, Taiwan's leading

industrial conglomerate. Originally, the Formosa Plastics

intended to expand their investment and build new plants on the island; however, protest from the people about the potential environmental problem has forced the Formosa

Plastics Group to seek investment sites abroad. Also, large firms like Formosa Plastics have been hit hard by labor unrest at home. A $128 million joint venture in Point

Comfort, Texas, to produce intermediate petrochemical products that will be used in its plastics operations has been established. 290

Another factor behind the government's new attitude

toward overseas investment is its desire to expand Taiwan's

overseas contacts. As I have discussed, as part of the

"all-out diplomacy," Taiwan has sought to develop more non­ government ties in economic and cultural fields by any possible way. Indeed, in a high tide of investment in both directions, Taiwan has shown unprecedented vitality. Taiwan

has established trade relations with some 150 countries or

regions of the world, and relations with countries and areas which were forbidden before are being relaxed.

Taiwan's trade with Western Europe has been growing rapidly since the beginning of 1980s. With increased trade relations with Western Europe, it is also becoming a target for Taiwanese investors. In order to circumvent post-1992

EEC import barriers and to stimulate European trade, government officials have encouraged Taiwanese businessmen to invest in EEC member nations. Electronics manufacturers from Taiwan are moving there to set up operations. For example, seven companies have branch agencies in West

Germany, and four companies have invested in Holland.

In addition to Western countries, Taiwanese manufacturers have heavily invested in Southeast Asia,

Central and South America, and even in the Mainland.

Thailand is the most popular target country in Southeast

Asia among Taiwanese investors. About 300 to 400 projects, totaling about US$1 billion, are located in that country 291

(Far Eastern Economic Review. March 16, 1989: 88).

Direct trade and investment in the Mainland are still prohibited, but facing pressure from domestic enterprises,

the government has conditionally allowed Taiwanese

enterprises to indirectly invest in Mainland China.

Reportedly, there are 100 to 200 businesses invested in by

Taiwanese already operating on the Mainland. The Taiwan government can not publicly approve investment in Mainland

China because so doing would mean abandoning the principle of rejecting all contact with the "rebel" regime in Peking.

The current official position toward this trend is perceived as "no position," according to Frederick Chien, the chairman of the Council for Economic Planning and Development (Far

Eastern Economic Review, March 16, 1989: 88).

The Second Land Reform:

After export-led industrialisation had asserted itself firmly, a fundamental structural transformation of Taiwan's economy occurred. By the early 1970s agriculture was no

longer playing a significant role in the process of growth.

In many ways, the industrial sector has replaced agriculture as the leading activity in the economy, and the role of agriculture in Taiwan's economic development has shifted from that of a supporting sector providing important resources to the rest of the economy to that of a dependent and protected sector. A few statistics can illustrate a 292

sense of these agricultural problems.

First, despite an average growth rate in agricultural

production of about 3.6 percent per year, the quantitative

importance of agriculture has declined due to very rapid

industrial growth. Industry's share of GNP increased from

32.3% in the 1950s to 50.9% in the 1970s, and agriculture's

share declined from 27.8 % in the 1950s to 8.4% in the

1980s.

Second, in 1952, agricultural products accounted for

about 92 percent of Taiwan's exports, while industrial products accounted for only 8 percent. But, in 1982,

agricultural products just accounted for 8 percent of

exports (Thompson, 1984: 558). Also, while Taiwan's overall

trade surplus has recorded US$10.9 billion in 1988, there was a net agricultural trade deficit of US$2.15 billion in

the same year (Moore, 1989a: 73).

Third, the size of the agricultural population has declined in both relative and absolute terms. The percentage

of the agricultural population in Taiwan was 52.4 percent in

1952; 42.9 percent in 1969; and only 26.4 percent in 1982

(Thompson, 1984: 558).

Fourth, the role played by the agricultural sector in earning foreign exchange has ceased in this period. Since

the late 1960s Taiwan has become a growing market for agricultural raw materials and foodstuffs. In 1970, import values of crop products were $188.4 million and export 293 values were $ 50.8 million, resulting in a trade deficit of

$137.6 million (Department of Statistics, October 1972:

Table 12).

Fifth, as I discussed in previous chapters, in the early years of development, income inequality decreased more for rural than for urban households because of the 1949-531

land reform program and growing access to non-agricultural jobs for farmers. However, as Taiwan's economy experienced rapid growth, the labor shortage and wages for non-farm workers rose sharply. Wages in the manufacturing sector, I measured in local currency, increased by 157 percent between

1979 and 1988 (Chen, 1990: 2). Therefore, success in' industrialisation and the tendency for non-agricultural income to increase faster than agricultural income have created political pressure from the agricultural sector.

Farmers feel left out of Taiwan's economic boom. Other signs of agricultural degradation are the less intensive farming and poorer return to be obtained from agriculture.

According to Thompson (1984: 558-559), the multiple cropping index has decreased from 189.7 in 1964 to 154.9 in 1982.

As a result of these changes in rural Taiwan, an increasingly number of farmers has lost confidence in 1 agriculture. According to a survey, conducted by Chun-chieh

Huang and Cheng-hung Liao in 1984, 59.3 percent of 450 farming households interviewed considered farming to be a profession with no hope (Huang and Liao, 1989: 53). 294

However, according to Thompson (1984: 559), agricultural degradation does not necessarily lead to rural degradation in Taiwan. Due to the widespread

industrialization in rural areas, many farm households are able to benefit from opportunities to increase their income.

Family farms now obtain only 33 percent of their income from farming, and with industrialization spreading out to the rural sector, nine out of ten farm households work part-time

(Myers, 1984: 520). The increased employment opportunity in non-agricultural activities for farmers not only helps increase rural income, but also makes the distribution of income among urban and rural households more equal. So, a large scale of complaint from farmers does not exist.

However, the decline of the rural electoral support for

KMT candidates in the 1970s and 1980s has alarmed the KMT elite. According to Copper's observation of Taiwan's

December 1980 election, KMT candidates did better in larger cities, while independent or non-party candidates did much better in the south and the rural areas of Taiwan (1981:

1037). As a result, the KMT leaders have tried to reverse the deterioration in agriculture by launching the Second

Land Reform. However, as will be shown, the government's efforts to bring about a better balance between the industrial and agricultural sectors do not produce expected results because the trend toward industrialization was irreversible. 295

The essence of the second land reform is land-

consolidation and mechanization. In Taiwan, after the 1949-

53 land reform, land holdings became very fractionalized.

Each farm household owns an average farm area of 1.03

hectares. In order to increase the size of farm production units and agricultural productivity, the government has

tried to increase the size of agricultural productive units

by separating farm ownership from farm operation and has

started to offer low-cost loans to encourage certain farm

families to buy neighboring land. Programs such as joint

operations, joint management, and contract farming have been sponsored, and specialized production areas have been promoted too (Gregor, Chang, & Zimmerman, 1981: 66-67).

In addition to the concern of increasing agricultural productivity, mechanization in the rural areas is also

applied to solve the labor shortage problem by allowing the continued migration of labor to the expanding industrial sector. A long-term labor shortage has developed since the

late 1960s and early 1970s due to rapid growth of labor-

intensive export-oriented industries such as electronics and

textiles. Even during the worldwide recession of 1974 and

1975, when world demand for Taiwan's exports declined, the

labor shortage problem was still there. It is very

interesting to note that the situation at that time was more of a situation with an acute manpower shortage and labor surplus existing side-by-side. The rising of the 296 unemployment rate in the mid-1970s was largely confined to job-seekers who were high school, vocational school, and university graduates in the field of social science. Heads of households were generally unaffected. According to Frank

J. Young (1976), unemployment among young people was caused by poor coordination between manpower needs and the educational system. He (1976: 724) stated:

"Since 1981...the eight-fold increase in social science enrollments in universities has far outstripped increases in all other fields. In the mid 1970s, almost 57% of university students are in social science and humanities fields, while only 29.6% are in areas such as engineering and natural sciences which impart skills immediately useful for economic deve­ lopment and construction."

With a view to dealing with problems in the labor market, the government began to work out plans for better coordination of educational and economic policies in order to provide sufficient manpower with appropriate skills to

transform the economy. Also, to encourage companies to automate, increase productivity, and upgrade products, the government has asked banks to give preference in loans to

SMEs for buying machinery (Hartley, 1976: 26).

Another solution to the labor shortage problem is to have less people produce more on fewer but larger farms so

that more manpower could be released from the mechanized farm. The Taiwan government estimates that by the year 2000 there should be only about 610,000 people engaging in 297 agricultural activities and producing about 3 percent of

GNP. Through the Second Land Reform the government is expecting to create 80,000 modern farms equipped with machines and advanced technology to supply Taiwan's future agricultural demands.

The implementation of the reform thus far has not been successful. One main reason is the switch of approaches to agriculture. As we have understood from discussions in the previous periods, the origins of high state intervention in agriculture in Taiwan lie in political and economic considerations. A large part of the agricultural surplus was accrued by the government in the form of non-voluntary savings measures, such as the rice-fertilizer barter system and the hidden rice tax system, discussed in chapter III.

Active government intervention through agricultural institutions has also helped provide the political foundations for the KMT government by extending its political and security networks into the rural areas.

Nevertheless, due to what has happened in the process of

Taiwan's development, this statist approach in agriculture has gradually been replaced by the pluralist approach. As far as the second land reform is concerned, we will see that the government has not been willing to use any kind of coercive measures.

According to Moore (1988), this approach switch is caused by the gradual liberalization of the political system 298

and structural economic changes. Intolerance of any dissent

and the exclusion of the native Taiwanese population from

political power has given way to a degree of tolerance of

dissent and to the increasing incorporation of Taiwanese

into the policy-making process. Chiang Ching-kuo had

consciously tried to build up support among the rural

Taiwanese and to recruit Taiwanese politicians representing

farming interests into the central policy-making circle during his rule. One of the most prominent examples is the present President, Lee Teng-hui, a specialist in agricultural economics. Public debates on agricultural policies are relatively vocal too. Some politicians have

started to criticise the agriculture policy publicly and represent agricultural interests.

In addition to the political openness, several structural changes within the agricultural sector help to

explain the emergence of pluralism in the government- agriculture relationship. Rural Taiwan has undergone

obvious changes from homogeneity to heterogeneity.

Agriculture has become more diversified and complex. As far as changes in rural organisations are concerned, as Taiwan's economy expands and socioeconomic transformation takes place, high level political participation at the provincial and local levels has resulted in the proliferation and differentiation of interest groups and an expansion in the number and background of agricultural organizations' 299 membership. With a more complicated agricultural

environment, there are increasing political risks in using

the old, coercive approach. This constitutes one of the

reasons for the shift from statism to pluralism in the

relationship between the state and the agricultural economy

and population since the 1970s.

Also, accompanying the decline of traditional agricultural exports, there was the emergence of new export- oriented agricultural goods, such as canned mushrooms and asparagus spears. These food-processing industries were part of the process of decentralized industrialization discussed in the last chapter and the government's plan to encourage the diversification of agricultural products.

Also, livestock and horticultural products have replaced grains as the main products in agriculture.

The two notable examples of the government's initiative to encourage the diversification of agricultural products are presented here. The government started to encourage and protect the growers of mushrooms and asparagus in the mid-

1960s in response to the growing demand in the overseas markets and the lucrative enterprises. In order to make these new export crops more competitive in the international market, the government is highly involved in the production process. To protect the growers of these new crops, forward contract prices are determined by collective bargaining between the farmers and the processors, subject to 300

government approval. Processors are not allowed to collect

mushrooms from non-contract growers or at prices lower than

the negotiated forward contract price (Tang and Liang,

1973). These measures help reduce price uncertainty. In

addition to the assurance of price stability for the crops,

the government provides technical assistance for the growers

and market information, export inspections, and quality

control for the processors.

Agricultural production is also becoming more capital-

intensive and commercialized. New inputs such as agro­

chemicals, machinery and animal feed have taken the place of

land, labor, and fertilizers. Private commercial agencies providing new input to the rural areas offer farmers alternatives to dependence on inputs supplied by state agencies. Since those products need rapid and careful post­ harvest handling, processing, and marketing, the marketing and processing of livestock and horticultural products require more flexible private traders than state agencies.

In short, farmers have more alternatives now. It has become possible for the farmers to respond to the squeezing of agriculture in a macroeconomic policy.

Examples of the government's less coercive approach to agriculture are many. It set up the Accelerated Rural

Development Program to increase public expenditures on rural

infrastructure, credit, and marketing. Fertilizer prices were reduced in 1970 and again in 1971. Rural taxes were 301 also reduced in 1971. In 1972 the rice-fertiliser barter scheme was abolished. The government has also started to intervene in agricultural prices in order to stabilize the markets for some agricultural products, such as rice, sugar, tobacco, soybeans, corn, wine grapes, and milk.

The example of guaranteed prices for rice production and its impact are discussed here. The government started to implement price guarantees in 1974, one year after a rice shortage. Actually, the program had two purposes. The first was to ensure that Taiwan became self-sufficient in rice. The second was to meet the need of increasing farmers' incomes to a level closer to that of non-farm workers whose wages were rising sharply during Taiwan's rapid industrialization in the 1960s and 1970s.

However, as things turned out, this policy caused a major problrm -- the overproduction of rice. There are two main reasons behind this situation. First, the overproduction of rice is clearly caused by farmers who continue to produce rice which the government must buy from the market in order to stabilize farm income. The second reason is that as Taiwanese become more affluent, many are switching to a more Western diet. Lower rice consumption forces the government to encourage people vigorously to consume more rice. Due to the surplus of rice, the government pays rice farmers (in kind) the cash equivalent of US$370 to US$506 per hectare not to grow rice. According 302

to Myers (1984: 521), the government spends millions of dollars per year to subsidize the agricultural sector.

To mitigate the problem of oversupply of rice, the government tried to export it at a sharply reduced price.

This action not only caused some countries, like the U.S.,

to complain about Taiwan's dumping rice on the world market,

but also lost profits. According to the statistics of 1983,

Taiwan lost $400 on every metric ton sold in the world market (Shao, 1983, 11). Lin Shih-tung, an official at the government's council for agricultural planning and development, admitted that the price supports for rice

farmers have become a "disastrous problem" because the subsidy money is from the taxpayer's pocket (Shao, 1983,

11).

Obviously, the opportunity cost of heavy protection given to the agricultural sector is high. Now, the government is pushing farmers to switch to other crops and

is contemplating restrictions on the rice subsidies, but most farm analysts say that there is little the government can do in the short run to alleviate oversupply of rice.

There are reasons for this. First, for rice farmers, even

though the price of rice in the free market is less than the cost of production, it is still the easiest, cheapest, and most familiar crop to grow. Second, although the cost of supporting the farm sector is high, government officials think that the farm support policy is a necessary evil. Yu- 303

hsin Kao, deputy director of economic planning at the

Council of Agriculture, comments that "'...agricultural is a different kind of industry. We have to have some kind of security in our food production.'" (Moore, 1989a: 73)

Finally, as farmers become more vocal and better organized in seeking support from opposition forces, political leaders in Taiwan are wary of the potential for

the farm sector to become a social and political liability.

Thus, it would be politically unfeasible for the government to do away with the subsidies.

In addition to the less coercive approach, the organizational and administrative problems in the implementation process further impede a successful result of the reform. For example, the measures of land-consolidation face many difficulties. Land holdings in Taiwan are very fractionalized. This situation is further worsened by a population increase. As farming households separate into small units, it makes mechanization on those small farms difficult and complicates the implementation of the second land reform. This is one of the unexpected consequences of the 1949-53 land reform and one of its limitations. Second, due to the policy of decentralized industrialization and the government's plan to consolidate farms, farmers anticipate the prices of their lands will escalate, and are, therefore, naturally reluctant to sell their lands. Third, for the majority of farmers, land is still "the cult of ancestor 304 worship" (Myers, 1984: 521) and a source of security, so farmers wish to retain their land.

Under the U.S. pressure, Taiwan has permitted imports of some American agricultural products. It has resulted in

lower prices for domestic agricultural products and in violent protests organised by some left-wing politicians and radical farmers. As the process of current trade

liberalisation proceeds, more farmers' interests will be negatively affected. Also, as local farmers are now much more aware of their interests and become increasingly vocal in their demands for continued protection, more complaints will surface. Thus, how to protect farmers' interests while responding to external pressures to open Taiwan's domestic market to reduce trade conflicts becomes a decisive problem for the Taiwan government.

Conclusion :

People who are critical of the government in Taiwan make accusations about its undemocratic and rigid political system. The most commonly heard criticisms concerning politics in Taiwan are two. First, there has been little political change in Taiwan during the past four decades.

Second, the government is inflexible because it is full of and controlled by old men. The discussion of this chapter certainly has dispelled these myths.

Taiwan has undergone further political change since 305

1986. This political revolution has been from the top down,

and Chiang Ching-kuo deserves a great deal of credit for the

change. He lifted martial law, allowed the establishment

of an opposition party, ended the ban on visits to Mainland

China, and relaxed the controls over newspapers.

Economically, he relaxed currency controls and pushed ahead with serious tariff reform to open the economy to imports.

Judging from what has happened since the late 1970s and early 1980s, it seems political pluralism is inevitable in

Taiwan. As Lucian W . Pye argues in his book -- Asian Power and Politics. -- Taiwan is possibly the best example of the general theory that economic progress should bring in its wake political democracy and the emergence of pluralism, which will effectively undercut the foundations of the authoritarian rule.

After looking back at Taiwan's economic development, it is time for looking forward to its future destiny. The first economic problem is that there are too many inefficient small farms that continue to resist mechanisation and produce rice which the government must purchase at a higher price, thereby increasing the government's burden. Second, there are far too many small- and medium-sized enterprises in the economy. Although they are very flexible and have made a considerable contribution to Taiwan's economic success, they become an obstacle to advancing the economic structure. 306

Third, Taiwan is still heavily dependent on imported

oil. As a country with heavy reliance on foreign energy

supplies for production, many insecurities exist outside the

control of the government. Fourth, the effects of the

capital-intensive and technology-intensive development

strategy are still not entirely clear. More importantly,

Taiwan's economy is facing increasing foreign pressure, mostly from the U.S. government, and domestic political and social constraints on growth. Those domestic constraints

include growing labor militancy, disaffected farmers, rising environmental concerns, higher wages, rising land prices and shortage of space for industrial use. The government thus faces a difficult balancing act of trying to satisfy the growing demands of the populace while also continuing to pursue economic growth.

After martial law was lifted three years ago, political tension and other economy-related social disorder have made everyone concerned too. Some of these problems are new, and the government has no experience in dealing with them. If not properly handled, they could seriously impede further economic growth. The environmental movement is a good example of this. The rapid increase in living standards in

Taiwan and the rise of an assertive middle class have resulted in an increased emphasis on the quality of life.

Therefore, a consensus based on public understanding must be reached on potential conflicts between the requirements of 307 economic growth and the protection of environment.

Moreover, the ongoing expansion of political participation, especially through mass protest movements, has made the government bureaucracy impotent in implementing controversial economic policies and has caused a certain degree of social disorder. Some of those political and economy-related problems have no clear legal basis for solution. For instance, after the stock market was opened up in the mid 1980s, the "get-rich-quick" attitude among the populace has made the stock market like a "gambling" market.

Also, the inefficiency in the financial system and too much floating capital around in Taiwan has promoted the growth of underground investment firms. These social disorders and political incidents, plus the increasing cost of the labor force, may further reduce the level of investment from indigenous businessmen and drive foreign investors away to other developing countries.

Obviously, the kind of institutionalization which has so far been realized in Taiwan is no longer adequate as the country is experiencing rapid political and economic changes. In the pursuit of further economic growth, political stability, and social harmony, the KMT leaders must pay attention to the process of institutionalization and formulate sound rules and comprehensive guidance for the changing society.

With a view to dealing with these problems, the Taiwan 308

authorities continue to implement the economic policy of

liberalization and internationalization, and systemization.

Liberalization and internationalization call for the

reduction of government intervention in private economic

activities and the removal of protection provided to many

industries, but they are not to be pursued without

condition. Yao-tung Chao, a prominent economic technocrat

and a major advocate of the policy, once explained that

(1985: 3)

"From the theoretical point of view, liberalization and internationalization are nothing more than the upholding of the market mechanism so as to give full play to market forces in effecting resource allocation. But the market mechanism has its imperfections. And a reasonable measure of government intervention is called for in the form of rules and guidelines, which are the very essence of systemization or the guided market economy advocated under the Principle of the People's Livelihood."

From this statement, we can see that the current economic drive is to reduce, not eliminate, government intervention and that institutionalization, especially in the legal system, must be pursued at the same time as the whole society is undergoing changes. CHAPTER VI

CONCLUSION

In this dissertation, I have studied nine important development policies in Taiwan. They are the 1949-53 land reform, the anti-inflation policy, and the import- substitution policy in the import-substitution period; the

1958-60 economic reform, the establishment of export processing zones (EPZs), and the decentralized industrialization policy in the export-promotion period; the

Ten Basic Construction Projects, trade and international investment policies, and the second land reform in the secondary import- and export-substitution period.

From the discussion thus far, we understand that "the

Taiwan miracle" has not been a miracle in the literal sense because the word "miracle" does not really describe the dedicated, hard-working leaders and people and the hardships and difficulties they have struggled to overcome. In fact, this study has shown that Taiwan's success required hard work, shrewd planning, and good leadership.

In current literature on Third World countries' economic development, both Asian and Latin American NlCs are mostly studied by scholars from both the neo-classical school and the dependency school. 1 believe that every

309 310

country has its own historical heritage, resource endowment,

and socio-economic conditions which bring about different

results of economic development, even though similar

national development strategies have been pursued. In order

to make this study of the Taiwan case more useful, in this

concluding chapter, I will address more explicitly factors

which answer the general question of why Taiwan's post-war

economic development is so successful and two specific questions of why the ISI strategy in Taiwan encountered less problems than countries in Latin America and why the major policy transition from ISI to EPI went so smoothly in

Taiwan.

Taiwan has indeed been very fortunate in its economic development. I will argue in this chapter that the quality

of leadership is the most important factor which made

Taiwan's economic development proceed more smoothly than that of other Third World countries. In addition to this, some "special factors," such as the unique colonial

experience, the outbreak of the Korean war, the concessional aid from the U.S. between 1950 and 1964, substantial discriminatory state intervention, the expanding global economy of the 1950s and 1960s, and the relative autonomy of the Taiwan government vis-a-vis the rest of the society, are factors which made Taiwan's economic development turn out the way it did. 311

Taiwan's experience shows that development can occur within international market relationships when the less developed country possesses competent political and economic leaders committed to economic development. In

Taiwan's case, these leaders make practical plans and development strategies which reflect Taiwan's comparative advantage over time and in response to internal and external environmental changes.

In each of the policies discussed, I have proved two arguments. First, the making of correct development strategies and policies was the major factor in Taiwan's economic success. Second, the formulation and

implementation of these strategies and policies were products of informed and careful political and economic calculations of the policy-makers in Taiwan. Thus, the miracle of Taiwan's success is man-made, and Taiwan's post­ war economic success owes a great deal to political leaders and economic architects.

This dissertation has presented very prominent examples including Chen Cheng, who was once Governor of the Taiwan province. Premier, and Vice President, and the man who initiated the 1949-53 land reform. S.C. Tsiang and T.C.

Liu, two prominent economists, advocated a high interest rate policy to bring hyperinflation down and were among those who recommended economic reform in the late 1950s and early 1960s. K.T. Li, who is recognized as the architect of 312

Taiwan's economic success and served as the Minister of

Economic Affairs and later as Minister of Finance, supported

the establishment of the export processing zones. Yin Chung- jung called for an increase in the role of private businesses. Chiang Ching-kuo advocated the Ten Basic

Construction Projects when he served the country as Premier.

Y.T. Chao called for liberalization, internationalization

and systemization when he was the Minister of Economic

Affairs.

Taiwan is not unique in the possession of a group of

highly qualified and experienced technocrats. In fact,

technocrats in government are becoming increasingly prominent in some Third World countries. However, economic

technocrats in Taiwan have four distinguishing features which explain their competence in having jobs well done.

These four features are the great economic and political authority and autonomy enjoyed by modern technocrats, the

high level of coherence, the placement of social interests over personal interests, and skillful political responsiveness.

One important event which set forward some of these features was the party reform, launched in 1950. In mid-

1949 Chiang Kai-shek initiated a party reform, but he could not put it into practice until August 1950 in Taiwan. The major foci of the reform were eliminating factional groups,

removing corrupt elements in the party, and tightening party 313 discipline. During the KMT-Communist civil war, the KMT had

already been notorious for factional competition. Factions

within the KMT were many, but the most notable ones were the

conservative group which controlled the party's organization

apparatus, the liberal Political Science group, and the

Whampoa group which was made up of military officers who had graduated from the Whampoa Academy. For Chiang Kai-shek,

the competition and power struggle among those groups was

one of the main reasons for the defeat of the Nationalist

forces on the Mainland. As a result, in order to avoid the party's past mistakes, Chiang emphasized the nature of the

KMT as being a "revolutionary democratic party." This meant policy decisions would be discussed within the party, and once a decision had been made, every member obeyed it. The

1950 party reform was important for Taiwan's economic development in the following two ways. First, although the characteristic of a "revolutionary democratic party" was stressed, Chiang downplayed the party role and relied more on modern technocrats for important economic policy decisions. Second, Chiang also reduced the military's

influence in the country's economic affairs.

One variable that characterizes Asian NICs is that economic technocrats have firm, consistent support from top political leaders to implement economic policies. In the

Taiwan case, the political leaders gave greater freedom over

Taiwan's economy to Western-trained experts. However, Chiang 314 still had absolute political power. He concentrated on defining and integrating the basic national policy goals, and he made sure that the overall economic policy was in accord with the basic national goals.

One of the early examples of increasing the influence and authority of modern technocrats in Taiwan was the KMT leaders' trust in two economists, S. C. Tsiang and T. C.

Liu, who advocated very high interest rates to bring inflation under control. Also, as I have argued, modern technocrats have been heavily involved in shaping and implementing Taiwan's 1958-60 economic reform. T.C. Liu and

S.C. Tsiang, who were educated in the West and worked for the IMF at that time, were among the first to recommend the

1958-60 economic reform. They suggested that the government abandon the import-substitution policy and pursue a policy of devaluation of Taiwan's currency, coupled with trade liberalization.

In addition to the thrust of economic power into the hands of modern technocrats, the downplaying of the military's influence in economic affairs was the other important move Chiang made regarding his personnel which contributed greatly to Taiwan's economic success. The initial KMT national leadership was composed of the top political and military figures who had retreated from the

Mainland with Chiang Kai-shek. However, as Taiwan's society became more industrialized, the key decision of the 315

initially strongly military regime was to encourage economic development and structural change and to give substantial political power to the economic technocrats. Thus, economic technocrats in Taiwan had unusual power because of political

leaders' encouragement.

The passing from the scene of many of the top military men in the government and the KMT was critical to Taiwan's economic development. In the export-promotion period, "the recovery of Mainland China from Communist control" was still the official priority of the KMT. As a result of this policy priority, the military always had the first claim on the productive resources of Taiwan. However, even though

Chiang Kai-shek, Chen Cheng, and other leaders had military backgrounds, they were willing to reduce the level of influence of the more security and ideology-oriented military and party men. This shows that there was a conscious effort by the top leaders to develop Taiwan's resources for economic development rather than to create a war-oriented economy.

It should be noted in passing that though Chiang Kai- shek never gave up, as time passed, he did change his approach to counteract the Communists on the Mainland, moving from a purely military confrontation to a political and psychological struggle. This change was reflected in his famous slogan of "thirty percent military action and seventy percent political struggle." 316

In the history of Taiwan's post-war economic development, however, we can see some cases of strong military influence in the policy making process, especially when there are potential military and political problems

threatening the survival of the country. The voice of the military has remained audible even as its visibility in the government has diminished. One example discussed earlier in this dissertation is the Hua Tung joint venture. One of the prime concerns of establishing the joint venture was the political need to attract giant American MNCs to calm the anxieties of the people on the island and the economic need to build a self-sufficient military-industrial complex.

However, as perceived political and military vulnerability decreased, modern technocrats rose to power again and brought an end to the disadvantageous venture.

In addition to the influence of the 1950 party reform, another factor which made modern technocrats in Taiwan powerful and autonomous from the society is the Japanese legacy of a strong state vis-a-vis the society and the fact that the KMT regime was not bound to local interests. This is quite different from some bureaucratic-authoritarian regimes in Latin America in which powerful groups in the society had already existed when the government came to power. More on this comparison will be offered shortly.

It is interesting to note that almost all economic technocrats in Taiwan's early stages of development were not 317 economic or business majors; most of them studied natural science. Engineers often outranked economists among top policy makers. However, it is certain that they all had experience in holding public positions in the Nationalist government on the Mainland and were well-educated.

The educational and career background of the personnel of the Taiwan Production Board, which was established in May

1949 to stabilize Taiwan's economy provides a good example.

"Except for one who went to a normal school, 17 graduated from universities and colleges. Fifteen of them studied abroad.... Six out of 15 had Ph.D. degrees with three from the U.S., two from Germany, and one from England. As for specialties, twelve majored in engineering and science, four in economics and finance, one in political economy." (Hsu,

1987: 263)

However, the widespread education system in post-war

Taiwan has contributed to the further development of a new technocratic group. Taiwan's leaders believe that in achieving the goal of economic growth, natural resources are not as important as manpower and that the promotion of educational opportunities is the best way to improve the quality of manpower. According to professor Wen Lang Li

(1984: 462), the prevalence of educational opportunities in a society is viewed as an indispensable component of the development process. 318

The widespread education system is basically due to the

Taiwan government's policy, not much to the Japanese legacy. According to Gregorj Chang, and Zimmerman (1981:

68-87), the Japanese provision of pritrtary education for the

Taiwanese during their occupation wds not as widespread as what people think. The cblonial government adopted a restrictive education policy until the late 1920s. It did reverse its educational policy when it felt the need to assimilate the Taiwanese, but education was still the privilege of a select few. Before the Nationalist government took over Taiwan, the percentage receiving a high school education did not improve significantly, and 55 percent of its population was illiterate at the time the

Nationalist government took over the island from the

Japanese. However, since 1950 the level of education among

Taiwan's young people grew rapidly. By the time Taiwan had recovered from a war-ravaged econbmy and started its development, the illiteracy ratfe for people over six years old had been reduced to 42.1 percent. Thus, it is clear that it did not give Taiwan much of an advantage. It was the KMT government that decreased the illiteracy rate from

42.8 percent in 1952 to 6.4 perdent in 1985 (Wang, 1987).

25 percent of Taiwan's pebple between the ages of 18 and 21 are enrolled in institutions of higher education

(Kubek 1987, 96). Between 1946 and 1986, the number of universities and colleges in Taiwan increased from 4 to 105, 319

from 215 to 1,039 for middle schools, and from 1,130 to

2,459 for primary schools (Wei, 1988: 6). Many college graduates go abroad for graduate studies. For a time there was the serious problem of a "brain drain" of professional people choosing to work abroad. However, as a result of the government's efforts, many people with high-tech knowledge and experience, mostly from the United States, are returning to the country. As I have discussed, some of them have become the core of political and economic reformists in

Taiwan.

The process of civilianization and Taiwanization in the

KMT and the government and the increased participation of young, educated members and technological specialists since the early 1970s have also broadened the career background of modern technocrats. However, paradoxically, the ongoing political liberalization in Taiwan has forced modern technocrats who had enjoyed so much autonomy and power in formulating and implementing development policies in the previous periods to share power with politicians who found their way into national politics through the electoral process.

Another source of influential positions modern technocrats had was their connection to the Council on U.S.

Aid (CUSA). As I mentioned in chapter IV, many development- minded technocrats were recruited by the CUSA. With years of training in CUSA, those people became members of the 320

remarkably technocratic cast and were able to influence

political leaders to pursue economic policies and reforms

which have accounted for Taiwan's economic growth for the

past 40 years.

The second feature we can summarize from previous

discussions of policies pursued in Taiwan is the high level

of coherence among political and economic leaders. The

sources of the leadership consensus are many. The first one

is Dr. Sun's Three Principles of the People. One impact of

the 1950 party reform on later economic development was the determination of the top party leaders to carry on Dr. Sun's

ideas and to make Taiwan the basis for rebuilding a free

China. Deeply shaken by its defeat on the Mainland, the KMT

leaders reflected that the basic reason behind this failure

was that the party had never seriously enacted Dr. Sun's

ideas on the Mainland. Therefore, Sun's teachings, coupled

with anti-communist ideology, has been a strong impulse for political and economic reform in Taiwan thereafter and has

been used as the basis for legitimizing the regime and providing cohesion among top leaders.

Although there is more practical and less ideological

concerns in the policy-making process as the need to

substitute economic performance for formal diplomatic ties becomes urgent, this political ideology and attitude of most

of the top leaders in Taiwan has not changed for decades. 321

The second source of the leadership consensus was from

Chiang Kai-shek. The diminishing influence of rival political factions and the general fear of a Communist attack made Chiang a rallying point for unification. Hung- chao Tai (1970: 429) pointed out that Chiang's charismatic and paternalistic quality of leadership "furnished the basis of unity among the high echelons of the party and the government." Although factional conflicts were minimized since the party reform, the cultivation of clique networks can hardly be prohibited. Thus, with his supreme authority,

Chiang Kai-shek might oversee the network building and try to maintain balance among these cliques. Also, since the party reform, no open factional activities were allowed, thereby making it more difficult for network-builders to mobilize their supporters and challenge the leader.

The third source of leadership consensus is related to the common mentality among the KMT leaders that Taiwan was their last chance and their only hope to survive. So, there was a high degree of unity among the state elites in order to defend their common interest in maintaining their political dominance by resisting military threats from the

PRC and the internal demand for participation from the

Taiwanese.

The fourth factor contributing to the leadership consensus in Taiwan was the relative weakness of opposition forces. As I have discussed, in both import-substitution 322 and export-promotion periods, rapid economic development was not accompanied by large-scale political reforms. The rural sector was quite content after the 1949-53 land reform and the spread of industrialization all over the island. The labor force enjoyed a higher level of income and was well- controlled. The business community was busy cultivating their KMT connections and utilizing the booming international market.

Moreover, although local self-government was implemented in 1950, political participation for the majority of people in Taiwan during the 1950s and 1960s was limited. National politics was dominated by Mainlanders. Due to this delay in political development, the dominance of the KMT and the absence of a counter-elite reduced intra-elite conflicts over development strategies and policies.

The third feature of Taiwan's modern technocrats is their placement of public interests over private interests.

Unlike economic technocrats in other Third World countries, the power to oversee Taiwan's development strategies and policies is not used to maximize their personal power and material gains. Actually, in addition to the whole country that experiences economic advancement, certain societal strata, such as businessmen and native Taiwanese, also increase their economic power as well as their political power. 323

The majority of Taiwanese enjoy economic prosperity without suffering from corruption. Political power, in many countries, means personal economic interests, but "political power" and "personal interests" are made separate in Taiwan.

Political corruption has been well-controlled due to the strong leadership to push through a thorough anti-corruption campaign.

The fourth feature of Taiwan's economic policy-makers

is their skillful political management in adjusting functionally to both internal and external problems.

Polities in Taiwan are in a sense concerned with the logistics of survival. Thus, one major responsibility put on the political and economic leaders is to fight for the country's continued viability. There are many examples I can draw from previous discussions to show their skillful political management and policy innovations which have been based on anticipated problems and conflicts, rather than being purely ideologically motivated.

The effective use of American aid in the early stages of development is the first example of this kind. In chapter III, I showed that in extremely precarious internal and external environments, the KMT leaders' capacity to utilize U.S. aid productively and to make appropriate economic policies to stabilize Taiwan's economy was crucial for the early success in maintaining social and political stability and economic growth. 324

Compared to other Third World countries, the

Nationalist government's experience with foreign aid is uniquely positive. U.S. economic aid was used primarily for the encouragement of production rather than for relief or social welfare. Most of the aid was channeled into the public enterprises and projects, leaving private enterprise to develop on its own initiative. This proved to be a wise decision since it left open private investments to concentrate upon those labor-intensive industries in which

Taiwan had the greatest advantage in international trade and to avoid capital-intensive industries which would have been futile to pursue at that time.

The 1949-53 land reform was another example of the KMT leaders' skillful political management in exploiting political utilities and avoiding the political liabilities of land reform. Land reform reflected not only the KMT's commitment to solve rural problems, but also it's calculation that such reform would gain political legitimacy. In contrast to that in Mainland China, the entire process of land reform in Taiwan was made gradually and peacefully. During the reform process, opposition from landowners was minimized, and the influence of the landlords in the policy-making process was downplayed. Landlords were compensated with stocks and bonds in four major public corporations. Some former landlords succeeded in pursuing their interests in the industrial sector. 325

For the peasants, "37.5 Percent Rent Reduction" greatly

reduced the tenants' rent burden and allowed them a greater share of their production. The programs of "Sale of Public

Land" and "Land to the Tiller" enabled farmers to own their

land. Although there were some non-voluntary savings measures and tax policies directed toward the peasants for extracting agricultural surplus, the important fact was that tenants started to own the land they tilled, and many benefits were provided to farm families to supplement the

increasing income that attended the process. By and large, after the completion of land reform, both landlords and peasants had a great incentive to use their resources efficiently because of the new opportunities available to them.

Another example of skillful political management of the

KMT leaders is its system-maintaining capabilities under the changed social and economic circumstances. The implementation of local self-government presents itself as a good example. As I have discussed, since the day the KMT retreated to Taiwan, it needed to find new bases to enlist popular acceptance of its rule. The implementation of Land

Reform and Local Self-rule at the early stage of development could be seen as two major attempts by the KMT leaders to gain political support and create identification of the population with the government. 326

In Taiwan, Local Self-Rule was implemented in the early 1950s. Provincial elections have been held since then. The political utility of Local-self rule was very

important. It has not only provided an outlet for political dissent, but also presented the basic political participation for those who were interested in politics.

However, for the first two decades in Taiwan's election politics, there was virtually no organized opposition forces

in local elections because no one was allowed to form new political parties. In order to maintain the upper hand of the KMT in various local elections, the KMT leaders set up some political arrangements which impeded any organized opposition force. For example, except for the two minor parties -- the Young China Party and the China Democratic

Socialist Party, no one was allowed to form new political parties. Also, through agricultural institutions, such as

FAs, the KMT indirectly controlled the candidates and ensured that pro-KMT candidates could be elected.

The KMT leaders have also learned to cope with increasingly legitimized opposition forces. Elections for the three central parliamentary bodies were open in 1969. In order to ensure firm control in those national institutions, the KMT leaders made a law that the additional representatives have to face re-election; however, those senior representatives elected more than four decades ago do not have to run for re-election. As the political 327

atmosphere became liberalized in the late 1970s and 1980s,

the actual representativeness of these senior parliamentarians has come into question. Many people in

Taiwan argue that the existing senior parliamentarians cannot claim to represent the interests and opinions of the people residing on the island, and they should retire voluntarily. In the meantime, as opposition voices get

louder, the KMT leaders started to realize that their

legitimacy to rule will be negatively influenced if the nation's three central parliamentary bodies are not rejuvenated. However, the questions of how and when to complete the process of rejuvenating the three aging central elective bodies have brought about many stormy debates.

Recruiting more Taiwanese and young, well-educated people into important positions in the government and the

KMT also presents itself as a good example of the KMT's system-maintaining capability. The KMT leaders had probably perceived that the Taiwanese were not well represented in the central government. Also, as diplomatic isolation undermined the government's credibility both at home and abroad, the support of the majority of the people in Taiwan was needed.

The state's successful management of the overall development of local enterprises was also well-planned.

When the KMT retreated to Taiwan, there was a division in the economic bureaucracy between those who urged state 328 dominance of the economy and those who were pro-private

sector. In the early 1950s, a strong state role was preferred. But, from the late 1950s on, to adhere to US pressure for the expansion of private industries, the private enterprises came to the forefront.

In the early stage, many local private capitalists came

to exist and develop in certain key sectors, such as cotton,

textiles, and flour milling (Gold, 1986: 70). In the later process of economic development, these local enterprises were protected from the MNCs, and the state also served the

interests of local enterprises by constantly improving the

investment climate. Later economic development in Taiwan has proved that the leaders' wisdom, will, and capability to combine elements of government intervention and free economy was one of the main factors in explaining the country's economic success. And, the free enterprise system has not only rewarded the hardworking and the enterprising, but also helped cultivate many pro-KMT businessmen for meeting the need of national development.

One point needs to be emphasized is that businessmen

in Taiwan were purposely kept fragmented from the beginning so that the government could control them easily. However, some medium-sized firms have developed into large-scale firms as the economy expanded. As 1 have shown, the government began to pay greater attention to the view of the business community. Some entrepreneurs in charge of these 329 enterprises began to be recruited into the KMT party and the government. Also, as Taiwan’s businessmen become more

international and Taiwan's international status becomes worse, the Taiwan government depends on local capitalists, not so much for their political support as for their economic performance. Under "all-out diplomacy," the capitalists provide an important link with the international economic community.

Also, due to the KMT's skillful utilization of its power in linking the international and domestic factors in pursuing its goals-- political stability and economic growth, Taiwan's labor force had been kept weak and compliant. The increase in workers' standards of living, widespread industrialization, the large number of females employed in the industrial sector, and the political controls established earlier sufficed to maintain labor discipline in the period of export-oriented industrialization. However, the mechanism of maintaining labor peace has gradually shifted to effective enterprise- level controls with less state intervention. Moreover, since martial law was lifted in 1986, labor strikes and movements are allowed. Indeed, labor unrest has forced some domestic firms to move their plants abroad.

Another example of showing the great flexibility and skills of the KMT leaders in responding to domestic development bottlenecks and international constraints is the 330 management of the country's external relations. Taiwan had

suffered a series of diplomatic setbacks since October,

1971, when the Nationalists were excluded from the United

Nations. However, due to the political leaders' efficient and flexible policy choices, diplomatic isolation did not

crush Taiwan. At first, in response to domestic criticism

about the government's "one China policy" and the urgent need to restore the government's authority after a series of diplomatic setbacks, the government changed its diplomatic strategy and tactics, but not its basic policy. "All-out diplomacy" was necessary to establish "substantive relations" with countries without diplomatic ties and to separate politics form non-political substantive relations

in foreign affairs. More recently, as this policy evolves, more young elements in the KMT have started to advocate

"elastic diplomacy" which calls for the development of official relations with some countries which have diplomatic relations with Communist China.

Although these foreign policies are very unorthodox, they have worked quite well to serve Taiwan's interests.

Taiwan's economic performance and its trade relations with some 150 countries or regions of the world have somewhat

lessened the anxiety of the people of Taiwan over the fact that Taiwan today maintains official diplomatic relations with only a small number of countries. Similarly, Taiwan has been able to realize its political and diplomatic 331 objectives by utilizing its economic potential and growing economic relations with countries with whom no formal diplomatic ties exist.

In all, the quality of leadership in Taiwan, as compared to that in other Third World countries, has generally given it enormous advantage in achieving shared growth. However, there are some other "special factors" which can also explain why similar development strategies pursued in Taiwan and Latin American NICs (e.g. the ISI policy) produced different results. For comparison, the following discussions will mainly look at the import- substitution strategy pursued in Taiwan and in Latin America and the transition from ISI to the export-promotion development strategy.

Latin American countries originally pursued an outward- oriented development strategy. However, the two world wars and the Great Depression cut Latin American countries off from the exports of the industrialized nations because the nations at war were unable to supply industrial goods and earnings from exporting primary goods fell. Also, the vulnerability of their exports on the world market reflected what Raul Prebisch labelled a decline of Latin America's terms of trade and, thus, a chronic structural balance of payments crisis. An inward-oriented development path was suggested to political leaders in Latin America on the assumption that this would lessen the demand for imports and 332 help the balance of payments.

The ISI strategy in Latin America involved two stages, beginning with the establishment of simple industries producing consumer goods, such as textiles and processed foodstuffs, and progressing to the creation of complex

industries, such as the manufacture of iron, steel, and machinery. Import-substitution policies, however, have caused the dominance of MNCs, extensive commercial borrowing, and economic crises, such as high inflation rates, low economic growth, an acute contraction of domestic investment, and other political and social distortions. In

Taiwan, most of these adverse results of ISI were fortunately avoided. Why is this the case?

The dependency theorist attributes these development problems to the dependency of underdeveloped countries on developed countries. However, if we review Taiwan's post­ war external relations, we can easily find elements that convinced us Taiwan has been dependent on foreign actors, although it has taken different forms. In the Japanese colonial period, it is more than true to describe a relatively high degree of economic dependency of Taiwan on

Japan. In the import-substitution period, due to its strategic assets, Taiwan received massive American support.

The form of dependency experienced by Taiwan in this period was both security dependence and aid dependence. However, the Taiwan experience shows us that dependency on foreign 333

sectors can be taken advantage of along the path of development.

Obviously, at this point, we need to examine more

factors which can explain the less problematic path of 131

in Taiwan than in Latin America. First of all, Taiwan's ISI was short, mild and involved only labor-intensive

industries. A strategy of broadening and deepening import- substitution did not occur until the early 1970s. Small- scale, labor-intensive, and import-substituting industries of the 1950s were less demanding on capital and skilled

labor and could be set up in a relatively short time. With the help of U.S. aid, the implementation of this strategy not only helped correct foreign exchange constraints and improve the balance of payments position, but also created employment opportunities.

Why was there a delay in "deepening" the import- substitution industrialization of the 1950s in Taiwan and why did the policy transition from ISI to EPI go more smoothly in Taiwan than in Latin America? There are several explanations. First, some natures of Taiwan's economy at that time, such as the relatively small size of the domestic market, the lack of natural resources, and the continuous pressure of surplus labor, indicated that a development strategy which could work to Taiwan's comparative advantage in exporting would be a better choice.

Second, in order to make Taiwan a showcase of capitalist 334 development, the U.S. put pressure on the Nationalist government to reduce protectionist measures and liberalize the economy. Third, a strategy of broadening and deepening import-substitution would have required production of capital- and skill-intensive products which would have increased costs for production. Without direct foreign investment being included in the early development process,

Taiwan was not in a position to broaden and deepen the import-substitution policy.

Due to the above reasons, unlike Latin American NICs which moved much further into the production of consumer durables, intermediate and capital goods, Taiwan shifted into an export-promotion pattern. The smooth transition from ISI to EPI in Taiwan suggests that the timing of a particular policy and development strategy is important and that a good policy innovation is one that does not arrive prematurely or too late. Later development proved that liberalized, externally oriented policies (e.g. the 1958-60 economic reform) allowed entrepreneurs to play a more active role in exploring domestic and foreign markets and allowed

Taiwan to take advantage of the favorable and booming world economy and its political and economic connections to the

U.S. and Japan. In sum, by keeping the primary import- substitution period of the 1950s relatively short and mild, the shift to an export-promotion strategy based on labor- intensive industries in the 1960s was less problematic. In 335

Latin America, in contrast, the duration of the ISI policy

has not only induced the penetration of MNCs, but has also entrenched protectionist interests.

One problem with "deepening" in Latin American NICs was that it involved implanting industries beyond the technological reach of local firms. With the capital, technology, and expertise for the capital-intensive kind of industrialization, MNCs quickly dominated new growth sectors, such as the automobile industry, in Latin American

NICs. Thus, the close dependency ties between the capitalist countries and the Latin American countries from previous stages of industrialization were not broken at all.

Industrialization there was primarily undertaken by MNCs, even though high tariffs, quotas, import licensing, and multiple exchange rates were used. The imported technology is usually capital-intensive and reflects the needs of MNCs more than the need of a labor-surplus, and capital-scarce countries in Latin America.

By the 1960s, the implementation of import-substitution industrialization and the deep involvement of MNCs in Latin

America had produced many economic, political, as well as social injustices, such as unemployment and underemployment, uneven income distribution, cultural alienation, political instability, and so on. The popular sector, including the working class and the lower middle class, was not only excluded from the industrialization 336 process, but also from the political process.

This leads many scholars, mainly from the dependency school, to argue that being unable to compete against MNCs, domestic Latin American firms are restricted both to secondary positions and the less profitable sectors.

Overall, there is no indigenous technological advance of economic significance. The dominant position of MNCs in the

industrialization process of Latin America is seen by the dependency theorists as one of the causes of underdevelopment in that region.

Another factor which explains why the ISI policy encountered fewer problems in Taiwan was the relative lateness of the influx of foreign investment in Taiwan.

Direct foreign investment was excluded in Taiwan in the import-substitution period because of the political, economic, and ideological reasons, discussed in chapter III.

This lateness has had a great impact on the role of MNCs in

Taiwan's economy. By the early 1960s, some light industries, such as textiles, apparel, and other light manufacturing had already been established by indigenous entrepreneurs, and a sufficient technological capability in light industries had also been developed. They were the exact industries which

Taiwan's exports initially came from.

On the other hand, when direct foreign investment flowed in during the period of export-promotion, MNCs did oriented foreign investment did not pose a challenge to /\ 337 domestic firms because import-substituting investment was

largely limited to sectors not competing with local capital and was directed to sectors which were new to local enterprises. The prominent example is the electronics

industry. As I discussed, both U.S. and Japanese investment

in Taiwan was concentrated in the production of electronic and electric appliances, which involved highly labor-

intensive technology. Substantial employment and exports were generated by foreign firms in this industry. Also, because of the rapid growth of world trade, export-oriented foreign firms could coexist with indigenous exporters without displacing them.

With the MNC connection, export-led growth in Taiwan has strengthened local firms too. In the export-promotion period, foreign investors mainly transferred labor-intensive technology to the island which was appropriate for the situation at that time. The Taiwan government made efforts to link local enterprises with foreign investors through policies, such as direct exports, subcontracting and consignment work for MNCs, and joint ventures. In this way, the local enterprises could learn foreign production technology. Take the textile industry for example. Although it had a base in Taiwan and entrepreneurs with mainland experience, it strengthened its export capacity through accumulated experience improved by foreign introduced techniques and fashions (Gold, 1986). Before priority was 338 given to the "knowledge industry" since the beginning of

the 1980s, textile exports were at $5,228 million and topped

the export list in 1979 (Wu, 1985: 90). As I have repeatedly pointed out, due to the help from MNCs, the international orientation of Taiwanese businesses has given the country a

flexibility, efficiency, and adaptiveness that domestically oriented Latin American firms lack.

In short, unlike the dominant role played by MNCs in many Latin American countries, the presence of MNCs did not bring with them to Taiwan all the negative influences that dependency theorists claim. In Taiwan, the government did not have to rely heavily on foreign firms as a substitute for entrepreneurial weakness, whereas in Latin America, the choice of an industrial strategy of "deepening" necessarily entailed a large role for foreign and state-owned enterprises. Moreover, technology brought by MNCs into

Taiwan was not capital-intensive and, then, inappropriate.

On the contrary, it was labor-intensive which met Taiwan's comparative advantage and absorbed large amounts of labor when the economy was in the transition from agriculture to industry.

It should be noted that huge national savings in Taiwan helped finance its economic growth without relying heavily on foreign credits. In the 1950s, the level of aid to

Taiwan was above the average received by other developing countries, but since the 1960s, when Taiwan's economy took 339

off, the importance of aid has declined. Since 1962, net domestic savings increased sharply and replaced foreign aid

as the primary source of capital. Gross national savings

claimed 60 percent of gross domestic capital formation in

the 1950s, 85 percent in 1961-65, and 93 percent in 1966-70

(Ho, 1978: 239-240). Domestic savings helped finance domestic investment stimulated by the concurrent change of development policies from import-substitution to export-led policies. Among the domestic savings, the household sector plays a vital role in contributing to the capital needed for national development. In 1980, gross national savings accounted for 33.2 percent of GNP. The household sector was responsible for 38.2 percent of the total and 36.9 percent from private and public corporations (Wu, 1985: 54).

Domestic savings not only filled the gap left by foreign aid, but also became the main supplier to domestic capital formation. In the 1960s when US aid ended and in the early 1980s when Taiwan lost its representation on the

Boards of the International Monetary Fund and the World

Bank, Taiwan could still draw on the resources from its domestic savings and growing foreign loans and investment for financing development. So, unlike many Latin American countries which are greatly burdened with debts, there is no need to limit income or to borrow heavily to pay foreign debts in Taiwan. 340

Compared to South Korea's external debt, which totaled

US$43 billion, or 53 percent of its GNP, at the end of 1984,

Taiwan's total external debt was only US$12 billion, or 21 percent of its GNP (Myers, 1986: 41). In Latin America, the total external debt was about $18 billion in 1980, which

increased to $150 billion in 1980 and over $300 billion in

1983 (Sloan, 1984: 48-49). Among these countries, Mexico and Brazil have the largest foreign debt. International debt has to be repaid with interest, thereby aggravating the economic problems. For instance, by 1985, Mexico had an external debt of about $97 billion, and the annual interest payment on the debt was $13 billion (Salvatore, 1987:285).

The high indebtedness of Latin American NICs may lead to de­ industrialization, therefore threatening the long term viability of the industrial strategy being pursued.

Both ISI in Taiwan and Latin America used measures to restrict imports of manufactured goods in the form of tariffs, quotas and multiple exchange rates. However, the long duration of the ISI policy in Latin America entrenched more protectionist interests. Long overprotection of economies has resulted in a high price structure and has prevented many industries from being competitive in international markets. When Taiwan was trying to utilize the expanding world economy by shifting to more liberalized, externally oriented policies, Latin American firms were protected from internal and external competition. If that 341 firm was a MNC, than profits would be extracted out of the country and it would lead to a worsening balance of payments position. This is one of the dependency theorist's arguments that foreign investors export more capital from than they import to Third World countries. At this point, Latin

American countries need to have greater control of foreign firms and greater scrutiny over imports of technology

Another factor distinguishing Taiwan's development experience from that of Latin America's was the role played by the agricultural sector. In Taiwan, agriculture was highly related to the development of the industrial sector.

It is quite true that in the process of economic development, a growing agricultural sector can produce food for the expanding population, can increase the rural surplus for the new industrial sector, and can generate exports, thereby easing balance of payments problems. In the initial stage of development, the Taiwan government adopted a balanced strategy of joint agricultural and industrial growth. Under the slogan of "Developing Agriculture by

Virtue of Industry and Fostering Industry by Virtue of

Agriculture," there was a very close interaction between the agricultural and non-agricultural sectors.

To restore and strengthen the agricultural sector, a very successful land reform (e.g. 1949-53 land reform) was carried out in Taiwan. The reform increased agricultural productivity and rural income. Direct and hidden methods. 342 discussed in chapter III, were employed to extract various

surpluses from agriculture which made important contributions to later industrial development. It increased government revenue for subsidizing urbanization and

industrial activities. Agriculture also became the source of feeding the labor transferring to the industrial sector and the main earner of foreign exchange at that time, which

in turn helped Taiwan to finance the capital and raw material imports for promoting the industrial sector.

In Latin America, since the colonial period, agriculture has been dominated by large estates, or latifundios. Many

Latin American countries passed agrarian reform bills during the 1960s "in a defensive reaction to the growing militancy of peasants and in increasing fear on the part of urban elites of agrarian revolutions." (Sloan, 1984: 69) However, the vagueness of the agrarian reform laws, the lack of the leadership’s commitment to land reform, the inefficiency of government bureaucracies and agrarian reform institutions, and most importantly, the political power of the large

landowners have impeded the realization of land reform.

The agrarian reform laws during the 1960s had not resulted in significant land distribution to the peasants.

There are still many peasants without land, and the majority of farmers live at a subsistence level. Moreover, the ISI policy is biased against agriculture. The protection of local industry increased the prices of manufactured goods 343 relative to agricultural products in the domestic market, and the overvalued exchange rate reduced the domestic currency receipts for agricultural exports.

Therefore, agricultural productivity is low. In 1975, agricultural production was only 34 percent higher than it was when the land reform programs were started in the early

1960s. The growth rate of agricultural output increased by

3.4 percent between 1970 to 1980 and only 2.8 percent between 1977 and 1980 (Sloan, 1984: 33). The lack of agricultural productivity, coupled with a rapidly growing population, has forced the government to use scarce foreign exchange to import food, thereby worsening the balance of payments difficulties. In short, while Taiwan's agricultural sector made considerable contributions to the development of the industrial sector, agriculture in Latin

America acted as a drag on industrial and general economic development.

With regards to the latifundio system which dominated most Latin American countries for a long time, the KMT was quite lucky to be insulated from landlords' influence. In fact, unlike latin America in which landlords had great power and were the comprador class of metropolitan capital, postindependence Taiwan was characterized by the absence of any powerful landlords. The Japanese colonial government carried out land reform which simplified the ownership system by eliminating sub-tenancy and absentee landlords. 344

Thus, even though the landowner class itself did not

disappear, the large landlord class was seriously undermined before the Nationalists took over the island. The

successful land reform under the Nationalist government

further reduced the influence of landlords in the rural

community. By the end of the 1949-53 land reform programs,

the large landowner class disappeared and most of them diverted their interests to the expanding industrial sector.

Another factor which helped mitigate the potential pro y ems of the import-substitution strategy in Taiwan was

U.S. aid. During the import-substitution period of the

1950s, available resources for early economic development were from U.S. aid, the agricultural surplus, profits from

the government's own enterprises, and tax revenue from the private sector. In addition to the support of institutional

reforms and structural transformation, the importance of

U.S. aid was to ensure the political and economic survival

of the Nationalist government in the early years.

Politically, foreign aid increased the sense of confidence and security among Taiwan's political leaders in pursuing their domestic policies and enhanced the position of the government over the society. Economically, U.S. aid helped

implement the import-substitution strategy of the early

1950s in the following ways. Aid was efficiently utilized to fill the gap between domestic savings and capital requirements, to mitigate the problem of total current 345 deficits, to increase foreign exchange resources and sustain the import of necessary inputs for promoting import- substituting industries, and to develop agriculture and an

infrastructure. Thus, it is an indisputable fact that the close cooperation between Taiwan and the U.S. government in the 1950s was an essential element which set in motion

Taiwan's early economy.

As far as the very important policy transition from ISI to EPI is concerned, through the control of aid, the CUSA acted as a catalyst for liberalizing Taiwan's economy. It is commonly believed that dependency on foreign aid usually entails a certain degree of loss of national powers of decision-making. However, in chapter III, I have argued that although the Nationalist government in Taiwan was highly dependent on foreign aid at this time, its hand was not entirely empty. With some resources at hand, political leaders in Taiwan were able to gain autonomy and increase their ability to deal with the AID mission.

In Latin American countries, as ISI could not produce enough funds to finance their growing capital needs and to pay for sharply higher oil bills during the 1970s, some countries started to adopt more liberal policies in order to obtain the support of international lending organizations and foreign commercial banks. However, after 1979, the rising cost of borrowing money, and the slowdown in international trade and rising protectionism in developed 346 countries, created major barriers to increasing exports and preventing skyrocketing foreign debts. In fact, the debt crisis is threatening to impede development plans.

Here, again, the timing of Taiwan's opening up its economy in the 1960s was a critical element in explaining their economic success over past decades. As Taiwan was

liberalizing its economy, there were new openings in

international markets for Taiwan to exploit. Capitalists from the developed countries were eager to invest. Easy credit was available and interest rates were low. Also, there was easy access to western markets and little competition from other developing nations. However, due to the increasing protectionist sentiment in developed countries and keen competition among developing countries in the current world economy, those Latin American countries which adopt more liberal economic policies and which borrow heavily to finance advanced industrialization can not enjoy the booming world economic conditions as Taiwan did in the

1950s and 1960s.

Another factor explaining why the ISI strategy encountered more problems in Latin America than in Taiwan was the very minor and indirect role played by Latin

American governments in the economy. Although state intervention exists in both Latin America and Taiwan, the balance of power within the "triple alliance" of state, local capitalists, and MNCs differs between Taiwan and Latin 347

America. The state is leading the alliance in Taiwan, whereas with capital, technology, and expertise needed for

"deepening" in the advanced stage of ISI, the MNCs in the

Latin American case took the lead.

Many scholars are prepared to argue that the role of the state itself is one of the most important factors contributing to thV high growth rates and improved income distribution in Taiwan. Thomas Gold (1981) in his study of the relative strength among the state, the local capital, and the MNC in the Taiwan case, points out that although

Taiwan shares the same structural features of dependency as many Latin American countries, it has avoided the disasters that befell them. The dominant and active role played by the state is a very crucial attribute to this fact.

Indeed, as I have already shown, all major changes in

Taiwan's economy after World War II have been instigated by the government. The government has played an active role in making long-range and flexible plans to adjust to changes in

Taiwan's comparative advantages -- from natural-resource- based industries such as agricultural food processing, to labor-intensive industries, and then to the capital- and technology-intensive industries.

State autonomy, as I have shown in this dissertation, is crucial in accounting for turning points of the development process or explaining specific policy reforms.

Without autonomy or independence from the demands of 348 particular social groups, the pursuit of policies, such as

land reform, would be impossible. Political leaders in

Latin America are not so lucky because any new policy to

resolve the import-substitution problems would have to

consider the global interest of the MNCs and the self-

interests of the elite groups allied with foreign investors.

On the contrary, the government in Taiwan is relatively

autonomous to the society due to the fact that it was a

"foreign regime" and the fact that it was a "hard"

authoritarian regime.

Also, the relative weakness of labor and leftist force gave the KMT leaders more freedom in pursuing the desired development strategy. As I have illustrated, unlike Latin

American countries, Taiwan did not experience populist mobilization in the early stages of development. Political quiescence of the labor force in Taiwan was partly due to the strict enforcement of labor law and partly due to the

lack of well-developed labor organizations. Moreover, the

import-substitution policy had promoted the formation of a

local industrial bourgeoisie who depended heavily on the government for protection and development. Business organizations in the period of import-substitution were not politically active. Close relations between the business community and the government have prevented the private sector from openly seeking a greater political role as was the case in Brazil and Mexico, 349

Certainly, as we can see in the case of Taiwan, the

interests of the rural sector, the labor force, and the domestic bourgeoisie provide a limiting context within which governments act, especially when the government encounters serious defeats in the international political arena.

However, by doing well in the economic sphere, the Taiwan government has managed to achieve autonomy which allows it to influence the direction and composition of the country's economic activity. Various policies have been implemented to foster growth in conformity with the indicative plans put together by modern economic technocrats.

The final factor emphasized in this study which explains why economic development in most Third World countries is less successful than it is in Taiwan is the relatively modernized infrastructure. This infrastructure was created by the Japanese colonial government and improved by the Nationalists.

Taiwan and Latin American countries were forced to incorporate into the world capitalist system by colonial powers. Taiwan was taken over by Japan in 1895, and Latin

American countries were colonialized by Spain around the

16th century. In Latin America, the colonial legacy of

Spain and Portugal was an inefficient agriculture sector dominated by latifundia and corrupt bureaucracies.

While Japan basically exploited Taiwan's economy during the colonial period, it also created an infrastructure 350 consisting of an efficient agricultural base, transportation, port facilities, and most importantly, a literate population receptive to technological advance and change. One important legacy which facilitated the implementation of ISI in Taiwan's post-war economy was the take-over of major monopolies and public enterprises, such as tobacco, wine, camphor, liquor, railroads, telephones,

telegraph, electric power and sugar by the KMT from the

Japanese. In the ISI period, Taiwan basically was able to finance its investments with its own savings through these monopolies, public enterprises, and private savings.

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