Rapid Industrialization led by a Strong Developmental State
GDP Growth Rate
These changes were aimed to safeguard monetary stability, end the foreign currency black market, promote exports and limit the growth of imports. That exchange rate would remain in place until 1970, indicating its original aim was successful (Table 3.1).
Table 3.1. Macroeconomic indicators of Taiwan during its first ISI Phase, 1952-1965
Year
Source: Data obtained from the ROC National Statistics Service, 2017.
On the other hand, the Nineteen-Point Program was drafted as a response to the different calls made by American officials dealing with Taiwan, right after the signing of the Mutual Defense Agreement of 1954. The US representatives were interested in the economic development of the island, as a way to ensure its self-sustainability and eventually could increase its defense expenses and stop relying exclusively on American aid. Similarly, they
182 John C.H. Fei, Gustav Ranis, & Shirley W.Y. Kuo, op. cit., 28-30; Stephan Haggard, & Tun-jen Cheng,
“State and Foreign Capital in the East Asian NICs,” in Frederic C. Deyo (ed.), The Political Economy of the New Asian Industrialism. (Ithaca, NY: Cornell University Press, 1987), 114-117; Shirley W.Y. Kuo, The Taiwan Economy in Transition. (Boulder, CO: Westview Press, 1983), 300-302.
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expected Chiang Kai-shek could modify his emphasis in recovering the mainland, to focus more on economic growth and social welfare within Formosa. The crises in Jinmen and Mazu islands, in 1954 and 1958, made the Americans to opt for a prudent approach to avoid a war with the Communist Chinese, hence asking for refrainment from the Nationalist leader as well. The allied advisors suggested a larger role of the private sector, and privatization of state companies as a way to increase the investment rates, while trying to preserve macroeconomic stability. The Nationalist officials thought the country was not ready to abandon state intervention, and limited their commitment to liberalization, while keeping the banking sector under state control.183 However, they agreed to advance the cause of private enterprises and the maintenance of fiscal discipline, and recognized the need to promote exports as a reaction to the inevitable saturation of the domestic market.
3.4.3. The move to an export-led growth and the experiments of heavy industrialization Once the Nationalist government made clear its commitment to liberalization was not a pragmatic one, instead of blindly following the recommendations made by foreign observers, the American representatives accepted this approach to continue their alliance, and observed optimistically the growth of export manufacturing industries. This situation moved them to announce an end of the USAID Program in the ROC by 1965, in place since 1950, acknowledging the promising future of the local economy, and encouraging the Nationalist government to continue promoting exports as a way to increase its foreign reserves and compensate for the loss of American aid.184 The bilateral cooperation continued however for a few more years under different forms.
Nonetheless, this announcement provoked a rapid reaction from the economic officials, who designed a series of policies to boost exports during the 1960s. These measures consisted in import tax rebates, offering firms a chance to have some tax returns on certain imports that were going to be use for the production of final goods that were to be exported. The bureaucrats identified strategic industries, and set clear standards for these rebates as a way to avoid tax evasion and confusion among companies.185 At the same time, the government
183 Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, op. cit., 17-24.
184 Stephan Haggard, & Tun-jen Cheng, op. cit., 86-88; Jichang Zhao, Meiyuan de yunyong (The Use of American Aid, in Chinese). (Taipei: Lianjing, 1985).
185 Ching-yuan Lin, op. cit, Chapter 5.
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encouraged banks, mainly state-controlled entities, to offer low-interest loans to public and private enterprises who were interested in expanding their production capacity for exports.
In line with this idea, they also implemented the Statute for Encouraging Investment in 1960, providing laws and norms changing previous regulations, such as those concerning the conversion of farmlands into industrial lands, to make export-related activities easier, and stimulating a modernization of factories, a merging of companies, and an increase in quality through the development of R&D and the absorption of foreign technologies.186 This first phase of export-oriented growth also coincided with that of South Korea, making successful stories of those countries and a source of inspiration for other emerging economies seeking to insert themselves into global trade (Figure 1).
The CPB also designed the Statute for Export Processing Zones (EPZ), leading to the establishment of the first EPZ in Kaohsiung Harbor, in 1965, where the authorities offered large facilities and fiscal incentives for producers who installed their operations in the area, and exported all of the goods produced there. The initial zone was a big success, making the government to create a second and third EPZs in 1971, in Tantze and Nantze, at the central and southern parts of the island. In the first two decades of operations, the EPZs attracted around 272 companies, mostly domestic and joint ventures with foreign corporations, in labor intensive industries, employing tens of thousands of people (around 49,000 in 1971, and reaching more than 90,000 by 1987).187 The quality of the produced goods and the value-added increased over the years, particularly when the authorities promoted the development of more knowledge-based industries.
The experience and success of this policy made it inevitable to extend it beyond the EPZ, eventually converting the whole island into an enormous export processing zone.
Similarly, it became an important inspiration and object of study in other countries, including Mainland China, reflected in the reforms carried out by the Communist authorities since the end of the 1970s. As a result, Taiwanese manufactured exports in 1970, were twenty times the amount of those in 1960, and continued raising exponentially during the following
186 See Chi Schive, The Foreign Factor: The Multinational Corporation’s Contribution to the Economic Modernization of the Republic of China. (Stanford, CA: Hoover Institution Press, 1990).
187 Stephan Haggard & Tun-jen Cheng, op. cit., 91-92; Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, op.
cit., 27-30; Ramon H. Myers, “The Economic Transformation of the Republic of China in Taiwan,” in China Quarterly, 99:2 (September 1984), 517-520; Hung-Mao Tien, op. cit., 20.
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decades. In only two decades, the island went from exporting mainly rice, sugar, tea, and bananas, to exporting textiles (around 35%), and other manufactured goods, comprising consumer electronic goods, processed food, and plywood.188 As a result, economic growth remained high, multiplying exponentially the national income and the quality of life of its citizens (Table 3.2).
Table 3.2. Macroeconomic indicators of Taiwan during its First Export-Oriented Growth Phase, 1965-1980
Source: Data obtained from the ROC National Statistics Service, 2017.
According to the prevailing ideas of the time, following previous development experiences and seeing the incredible rise of the Soviet Union through a centrally-planned economy and an amazing industrial might, policy makers around the so-called Third World thought that to be considered a developed economy, a country needed to achieve the ultimate
188 Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, op. cit., 35.
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level of the industrial hierarchy, which for them was represented by heavy industry. Initially, the need to develop a heavy industry in Taiwan was motivated by the defense of the island facing the Communist threat from the mainland, and the aspirations to eventually recover the lost territories.189 However, once the American pressure to moderate those ambitions and the successful development of light and exporting industries took place in the country, the development of heavy industry was seen as complementary to the economic expansion of the ROC.
Being then considered strategic in nature, most of the heavy industry remained in the hands of the state. Besides, the state became one of the main promoters of the industry through the construction of the so-called Ten Major Development Projects, which consisted in large investments in infrastructure across the island. Those projects required numerous inputs to be acquired from the developing industries in the ROC.190 Therefore, after years of importing steel and producing minor amounts in domestic small-scale mills across the country, managed by private investors, the government decided to set up the China Steel Corporation in 1971, after the demand for steel increased rapidly during the previous decade.
The company was originally a joint venture between the Nationalist government (45%), the private sector (35%), and the foreign-owned First Steel of Austria (20%). However, during the construction of the first large-scale steel mill in Taiwan (1974-1977), the government had to cover most of the expenses and expansion investments, which eventually made the CSC a public enterprise. The company soon began outcompeting the small-scale producers, and the government offered extra protection from domestic and foreign competitors, hence converting the company into a virtual monopoly. Nonetheless, the officials were careful that the company offered high-quality products, and keep the domestic firms consuming CSC steel constantly supplied. The corporation resumed its rapid expansion during the mid-1980s, despite the liberalization of the industry, and remained highly competitive at the beginning
189 Victor D. Cha, “Defining Security in East Asia: History, Hotspots, and Horizon-Gazing,” in Eun Mee Kim (ed.), The Four Asian Tigers: Economic Development and the Global Political Economy. (Bingley: Emerald Group, 2007), 33-60; Tun-jen Cheng, “Political Regimes and Development Strategies: South Korea and Taiwan,” in Gary Gereffi & Donald L. Wyman (eds.), Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia. (Princeton, NJ: Princeton University Press, 1990), 139-178.
190 In the words of Tien: “These ten projects developed a north-south freeway, railroad electrification, a railway in northeastern Taiwan, a new international airport in Taoyuan, a nuclear power plant, an integrated still mill, a giant shipyard in Kaohsiung, petrochemical complexes, Taichung harbor, and Suao port”, Hung-Mao Tien, op. cit., 21.
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of the 21st century, although most of its production continued to be allocated in the domestic market.191
Figure 3.1. GDP Evolution of East Asian Developmental States, 1960-1980
Source: Maddison Historical GDP Data, World Economics.
Another successful story of heavy industry development was that of petrochemicals.
Having been established in the mainland, the China Petroleum Corporation moved to Taiwan and was in charge of the operations of the oil refinery in Kaohsiung and other related infrastructures previously built by the Japanese colonial regime. The government encouraged the gradual expansion of oil-refining capacity, aromatics, and fertilizers (both by the CPC and the Taiwan Fertilizer Corporation), but did not explore the production of upstream petrochemicals until the textile and plastic industries were growing exponentially and needed more sources of intermediate supplies to remain competitive. For strategic and economic reasons, the CPC built the first upstream naphtha cracking plant in 1968, producing ethylene to be allocated among the manmade fibers and plastic materials-making companies.192 In the
191 Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, op. cit., 39-41.
192 Ying-yi Tu, “The Petrochemical Industry,” in Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, Industrialization and the State: The Changing Role of the Taiwan Government in the Economy, 1945-1998.
(Newton, MA: Harvard University Press, 2001), 230.
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980
MILLION USD-1990
YEAR