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Taiwan Economic and Political Miracle; Lessons for Oil Exporting Countries in the Middle East 1. Introduction 2. The Role of International Trade 2-1. US – Taiwan Economic Relations 2-2. Japan – Taiwan Trade 2-3. China – Taiwan Economic Relations 3. The Role of State 3-1. Import Substitution (in 1950s) 3-2. Export Promotion (since 1960s) 3-2-1. Export Processing Zones (EPZ) 3-2-2. Shift to Capital-Intensive Industries (since 1970s) 4. The Role of Private Sector 4-1. The Share of ICT1 in Taiwan Economic Success 4-2. Small and Medium Size Enterprises 5. Poverty Combatting Policies in Taiwan 5-1. Land Reform 5-2. Cash Transfer and Health Insurance 5-3. Raising Inequality Since 2000s 6. Political Transformation 7. Lessons from Taiwan’s Success for the Middle East Oil Exporters 8. Concluding Remarks References 1. Introduction Taiwan is a relatively small island with a population of about 23.5 million, yet it plays a leading role in the international high-tech industry. Taiwan that was a backward and poor country in the early 1950s, changed significantly in the past four decades and got the ranking of 22nd country in the world regarding GDP per capita (about USD 25,000 in 2018) richer than the European Union member state Portugal (about USD 23,200 in 2018) with especially a very competitive information technology sector. The economic development of Taiwan was one of the remarkable transformations after the Second 1 Information and Communications Technology 1 World War. Taiwan, like Japan raised from the grossest poverty, and entered into the world international markets for advanced technology products. Various important factors contributed in creating a successful transition from a backward agricultural economy to a country based on high tech industries in Taiwan. Supportive foreign aid, good opportunities to get access to international markets for modern technologies and exports of its products, sound economic policies implemented by a competent state, and creative small and medium sized firms have played vital roles in Taiwan’s economic success. This paper investigates the major causes of Taiwan’s success story. The paper is consisted of 8 parts. Part 2, after the introduction, examines the importance of Taiwan economic and political relations with US, Japan and China, as well as investment of overseas Chinese in the economic development of the Island. Part 3 is allocated to the role of government in Taiwan economic changes to show whether Taiwan has been a laissez faire model. Part 4 studies the role of private sector in Taiwan’s economic transformation. In this part the share of large, small and medium size enterprises is investigated. Unlike South Korea that the contribution of large companies was significant during the process of economic transition, in Taiwan small and medium sized firms have a great impact in the Island’s economy, especially in the initial stage of development. In part 5 income inequality and poverty in Taiwan is studied to explain the most important policies to combat poverty and to establish a relatively fair distribution of income. Part 6 studies about the roots and consequences of political changes in Taiwan; how a military government transformed into to a modern democracy and what is the effect of the political transformation on Taiwan’s economic development. Part 7 presents lessons from the Taiwan successful experience for the Middle East oil exporting countries. In the last section conclusion is presented. 2. The Role of International Trade, Foreign Investment and Loans Initial conditions have a g r e a t i m p a c t on the evolving trajectories over time. The initial conditions of an economic system affect the subsequent growth, trend, and the structural change of the economy. Economic systems that are initially bound up in unproductive constraints can very well become mired in such impediments, even with the passage of decades. By contrast, countries which are 2 the recipients of timely aid can pursue a new and successful path towards economic development. In the late 1940s, Taiwan was an underdeveloped, poor and agricultural country. More than 75 percent of the population lived in rural areas; and 60 percent of the labor force worked in the agricultural sector, and produced 36 percent of gross domestic product of the country. In 1952, per capita income of Taiwanese was USD 42.9 (Chang 1974). In such a dire situation saving and investment to stimulate growth and structural change was impossible. Foreign aid for stimulating the economy in the initial stage of economic development was vital. Generous aids and access to international markets to import new technologies and needed materials and to export domestic products had a significant effect on Taiwan’s economic development (Fei 1992). In 1950s, Taiwan became an attractive place for foreign investment from Japan, the US and overseas Chinese. As Table 1 indicates the investment of overseas Chinese were very important in 1950s, but its importance declined in the 1960s when Taiwan got a huge amount of loans for new investment, especially from US. Table 1. Taiwan’s Foreign Investment and Loan USD 1000 Overseas Foreign Loan for Total Chinese Investors Investment 1956 2,243 1,998 1,653 5,894 1957 1,246 48 …… 1,294 1958 2,147 36 1,214 3,397 1959 1,492 98 8,457 10,047 1960 922 493 2,831 4,246 1961 3,498 1,923 2,296 7,717 1962 2,894 4,134 14,253 21,281 Source: Chan 2000 For example, in 1957 Chinese overseas investment in Taiwan consisted more than 96 percent of total foreign investment and loans to the country. This ratio declined to 13.6 percent of the total inflow in 1961, when 67 percent of the foreign money was provided by foreign loans, which was mainly supplied by the US government (Chan 2000). Although FDI represented a relatively small share of capital formation, it played an important role in Taiwan’s early exports takeoff. Between 1960 and 1973, exports (as a 3 percentage of GDP) quadrupled, whereas FDI’s share of fixed capital formation tripled. FDI and foreign trade served as an important conduit for technology transfer and economic development (Ranis and Chi 1985) 2-1. US – Taiwan Economic Relations Taiwan benefited greatly from its economic, social, and political conditions at the end of World War II. Similar to South Korea and West Germany, Taiwan was on the frontline of the fight against international communism. The supply of US financial and technical aid to Taiwan gave the initial stimulus for industrial development (Jacoby 1966). Different American institutions were responsible for supporting Taiwan economic and social development in different times for various goals with comprehensive and thoughtful aid program. In the early 1950s, the Nationalist government main objective was to retake the mainland, so to cover military expenditures was more important than economic development for KMT government. But US advisors insisted that economic development must be in focus to create legitimacy for the Nationalist government in Taiwan (Maguire 1998). In the early 1950s, with the influx of nearly 1.5 million refugees from the mainland, there was a significant problem of maintaining basic needs for the rapidly raising population. Taiwan faced with hyperinflation and economic depression. So US Aid, in the form of commodity imports, helped to moderate the inflation and to stabilize the economy. US Congress decided the aid to be renewable each year. Thus, Taiwan needed to show improvement t o g e t the aid for the following year. The major aim of providing aid step by step was to encourage Taiwan to get ready for financial independence to US aid (Chiang 2014). Between the years 1951-1965 US assistance was about USD 4 billion; close to one quarter of this aid was gained during 1951-1954 in the initial period of economic change. All military expenditures were covered by the US. Considering huge military costs and the economic chaos at that time, there would be no economic development in Taiwan without financial injection from the US (Cullather 1996). In the early 1950s, The USAID Mission supported Taiwan to implement infra- structure projects. USAID hired an engineering company (J.G. White Engineering Corporation of New York) to consult on technical matters concerned with proposed 4 aid projects. This engineering firm reviewed and evaluated the economic and technical feasibility of projects for the USAID Mission to Taiwan and it also consulted the Taiwanese government. The USAID Mission was also involved in planning, coordination, and review of economic and monetary policies, agricultural and industrial projects, and the utilization of US aid for the purpose of stabilization of Taiwan’s economy. The Sino-American Joint Commission for Rural Reconstruction (JCRR) was another organization that had played a vital role in the land reform in Taiwan. “JCRR” is viewed by many experts as the most effective US development assistance institution (Wang 1997 ). During 1956-60, US aid was allocated for larger and more lasting investments in the Taiwan’s government projects, such as large scale public works and industrial plants. A c c o r d i n g l y , i mports of capital and raw materials surged as a percentage of total imports and the share of imports of consumer goods decreased. The main objective of US aid to Taiwan was to create a “showcase of a free market economy” in the Island and suggested economic reforms such as liberalized exchange controls, and the sale of government enterprises to private companies, Kuomintang (KMT) government accepted the proposed reforms (Tsai 1999). It is worth noting that in 1950s and 1960s major military hardware was supplied by the US that reduced considerably the burden of military expenditure off the government shoulder.

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