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complaints from foreign investors about the high local content and export requirements demanded by the authorities.198
Between the 1960s and 1980s, Taiwanese private companies such as Yue-loong Automobile Manufacturing Corporation (now Yulon Motors), Liu Ho Motors, Hua-Tung Car Manufacturing Co., China Motor Corporation, and Hotai Motor Corporation, entered joint ventures with Nissan, Ford, General Motors/Hino, Mitsubishi Motors, and Toyota, respectively. These companies developed an expertise and a strong local network with small and medium enterprises dedicated to the production of auto-parts, mainly due to the 60%
local components requirements imposed by the Nationalist government. Most of the cars produced locally and being exported were under those foreign brands, and only some of them, mainly Yulon (under the label Luxgen) and CMC, have continued to produce passenger vehicles with their own brands for the domestic market.199 Nonetheless, despite not having internationally famous brands, such as those from Japan and South Korea, when compared to other countries, the auto-parts industry in Taiwan continues to be considered as one of the most competitive in the world.
3.5. Deepening the Independent Approach:
The promotion of technology-intensive industries
The decade of the 1980s represented a shift in emphasis in the economic policymaking process in Taiwan. The difficulties faced during the 1970s, due to the international energy crises and an increasing diplomatic isolation, deepened in 1979 with the establishment of official ties between the United States and the People’s Republic of China, leading the Nationalist authorities in the island to look for diverse approaches to sustain the rapid economic growth experienced in previous decades. Realizing about the threats of losing its
198 Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, op. cit., 45.
199 Edward Cunningham, Teresa Lynch, & Eric Thun, “A Tale of Two Sectors: Diverging Paths in Taiwan’s Automotive Industry,” in Suzanne Berger, & Richard K. Lester (eds.), Global Taiwan: Building Competitive Strengths in a New International Economy. (Armonk, NY: M.E. Sharpe, 2005), 97-136; Francisco Veloso, José Soto Romero, & Alice H. Amsden, “A Comparative Assessment of the Development of the Auto Parts Industry in Taiwan and Mexico: Policy Implications for Thailand,” MIT Working Paper. (Cambridge, MA:
Massachusetts Institute of Technology IPC, 1998).
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competitiveness in well-established labor intensive industries, to other developing economies with lower wages and larger consumer markets, and looking at the mixed results derived from the promotion of heavy industry, the Taiwan bureaucrats decided to focus their energies in the development of a domestic technology-intensive industrial sector.200
The government, increasingly dominated by a newer generation of economists, which views differed from those of the previous generation of engineers and technicians in charge of the economic planning, saw the need to upgrade the existing industrial base, to depend less on unskilled labor and giving more importance to technology. Once Chiang Ching-kuo was made head of state, after the death of his father, strategic positions were filled by individuals sharing those ideals. Li Kuo-t’ing (K.T. Li), former Finance Minister, was made Chairman of the Coordinating Committee for the Application of Science and Technology, a position similar to a Minister without portfolio, to coordinate the different policies regarding technological upgrading and investments in R&D across the island. Similarly, Sun Yu-hsuan, former Minister of Economic Affairs, was made Premier, sponsoring, together with Li, the creation of the Industrial Technology Research Institute (ITRI), and of the First National Conference for Science and Technology in 1978.201
The accomplishments of the export-led growth strategies in the previous decades, meant the government had more than enough resources to the promotion of the technology intensive industries. After starting assembling basic electronic goods, such as vacuum tube radios, the domestic firms continued upgrading their products, but relied mostly in copying foreign patterns and designs, in what is known as reversal engineering. Concerned with the need to upgrade the industry, in 1976 the government-based Electronic Research and Service Organization reached a technology transfer agreement with RCA, setting up a prototype factory for wafer fabrication. Three years later, the United Microelectronics Corporation (UMC) was born, receiving 40% of its investment from government sources.202 The state role
200 See Yuan-li Wu, Becoming and Industrialized Nation: ROC’s Development on Taiwan. (New York: Praeger, 1985).
201 J. Megan Greene, The Origins of the Developmental State in Taiwan: Science Policy and the Quest for Modernization. (Cambridge, MA: Harvard University Press, 2008), 117-140; Kuo-Ting Li, The Experience of Dynamic Economic Growth on Taiwan. (Taipei: Mei Ya Publications, 1976); Kuo-Ting. 1988. Economic Transformation of Taiwan, ROC. (London: Shepheard-Walwyn, Ltd., 1988), 224-233.
202 J. Megan Greene, op. cit., 135; Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, op. cit., 60-61.
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in creating this company, was to develop and disseminate integrated circuit technology, used for the production of telephones, cameras, fax machines, timers, and other advanced goods.
Many small and medium enterprises benefited from this policy, making them attractive for other multinational corporations, mainly Japanese and American, who started partnering with some of them, making them suppliers of parts and intermediate goods. That same year, the Ministry of Economic Affairs and a myriad of private entrepreneurs created a common fund, used for the establishment of the nongovernmental Institution for Information Industry.203 The mission of this organization was to generate conscience about the importance of technology development among private firms and government offices, particularly encouraging the domestic creation of software.
In tune with these policies, the National Science Council, led by Hsu Hsin-hsiu, endorsed the creation of a National Science Park, in Hsinchu, to replicate the experience of Silicon Valley in California. The Hsinchu Park was designed to be a high technology export processing zone, offering numerous incentives to foreign and domestic companies to set up factories producing electronic goods, mainly computers, peripherals, and integrated circuits.
In its first fifteen years of operation, the park managed to attract 155 companies, with an invested capital of more than US$ 2.5 billion, dominated by domestic firms.204 Located close to prestigious higher education institutions, such as Tsinghua University and Chiao-tung University, the idea was not only for the establishment of manufacturing plants, but also of design houses and research labs to innovate on those fields. As a result, the park attracted many skilled professionals, not only from Taiwan, but also those who had studied abroad and were interested in coming back home to take advantage of the incentives offered by those policies.
Similar to the characteristic elaborated by Alice Amsden, regarding the independent approach to industrialization and responses to the challenges posed by globalization,205 the government in Taiwan understood the need to lead the effort to promote the development of technology-intensive industries, and continued raising the public investments in R&D and
203 P.K. Chiang, “The Role of the Government in a Knowledge-based Economy,” in Tain-Jy Chen & Joseph S.
Lee (eds.), The New Knowledge Economy of Taiwan. (Cheltenham, UK: Edward Elgar, 2004), 45-81.
204 Thomas Gold, op. cit., 102-103; J. Megan Greene, op. cit., 145-146; Yuan-li Wu, op. cit., 41-42.
205 Alice Amsden, The Rise of the Rest: Challenges to the West from the Late-Industrializing Economies. (New York: Oxford University Press, 2001): 251-283.
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targeting certain sectors and firms for the allocation of subsidies or the delivery of special treatment. In a large effort to increase the economies of scale, and make the industry highly competitive, the government became the majority shareholder of the Taiwan Semiconductor Manufacturing Company (TSMC), under the direction of Chang Chung-mou (Morris Chang), which began operations in 1987, and attracted many private investors, mainly local firms (27%), and a 25% of the initial investment from Philips, the large multinational corporation.
The construction of such complex facilities, with state of the art technology, required large sums of money which medium-sized companies, as those found in Taiwan, could not find by themselves. Hence, the government invested almost half of the US$ 22 billion required for the establishment of TSMC. However, the large efforts paid off, and the company soon became profitable, attracting many young and experience talents to join its ranks. During its first decade of existence, more than 800 engineers were working for TSMC.206 The corporation was managed as a private firm, despite been mostly owned by the state, and did not take too much time to place itself in the highest positions of the high technology designing and manufacturing companies in East Asia.
The interest of the government in the diffusion of this kind of technology, making it easily available to domestic manufactures, was a great opportunity for investors who aimed to expand their operations or explore the possibilities to produce their own brands of electronic goods. The success of TSMC and the expansion of the Hsinchu Park, motivated the creation of large-scale firms who began designing, manufacturing, and exporting computers and cellphones under their companies’ names.207 Famous brands, such as Acer, Pegasus (later transformed into the separate entities Pegatron and Asus), BenQ, and HTC, became international competitors in those goods markets, taking advantage of the domestic highly developed semiconductors industry. Similarly, Foxconn developed a business model based on its extensive network of suppliers, manufacturing electronic products for large multinational corporations, internationalizing their operations during the 1990s, and having
206 Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, op. cit., 62-67; Shelley Rigger, Why Taiwan Matters:
Small Island, Global Powerhouse. (Lanham, MD: Rowman & Littlefield Publishers, 2011), 56.
207 Dan Breznitz, “Innovation and the Limits of State Power: Integrated Circuit Design and Software in Taiwan,”
in Suzanne Berger & Richard K. Lester (eds.), Global Taiwan: Building Competitive Strengths in a New International Economy. (Armonk: M.E. Sharpe, 2005), 194-226; Shin-Horng Chen, “Knowledge Intensification in Taiwan’s IT Industry,” Tain-Jy Chen & Joseph S. Lee (eds.), The New Knowledge Economy of Taiwan. (Cheltenham, UK: Edward Elgar, 2004), 228-255.
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an important presence all over the world.208 The Taiwanese experience also contrasted with that of South Korea, which government also pursued a strategy of encouraging technology-intensive goods exports, but did it through the strengthening of large conglomerates, controlled by family clans, known as chaebols. Nonetheless, during those years, both countries continued presenting incredibly high growth rates (Figure 3.2).
Figure 3.2. GDP Evolution of East Asian Developmental States, 1980-2000
Source: Maddison Historical GDP Data, World Economics.
Those years also presented numerous changes in the domestic politics, with a more vocal middle class and organized civil society demanding more liberty and rights from the state, eventually leading to a democratization process during the final years of the government of Chiang Ching-kuo. After decades of an effective White Terror, it became harder for the Nationalist regime to repress dissidents and opposition leaders, and after decades of allowing independent candidates to run for office, known as dangwai, particularly in minor local elections, a growing number of political figures became more opposed to the
208 Pun Ngai, & Jenny Chan, “Global Capital, the State, and Chinese Workers: The Foxconn Experience,” in Modern China, 38 (2012), 383-410.
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
MILLION USD-1990
YEAR
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South Korea Taiwan
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policies pursued by the KMT.209 Similarly, after the US foreign policy became more concerned with the promotion of human rights under President James Carter, and despite the break in official diplomatic relations, the government of the ROC in Taiwan became a target of criticism from Western media and scholars, regarding the political situation in the island, especially after harsh repression from state forces during popular mobilizations demanding free elections, in Zhongli in 1977, and Kaohsiung in 1979.210 Following foreign and domestic pressures, the KMT took steps towards political liberalization, starting with a Taiwanization of the party, meaning a larger participation of ethnically Taiwanese, and a decreasing role of mainlanders within the top positions in the government.
Minor political reforms were being elaborated in the mid-1980s, and in 1986 the first real opposition party was allowed to be formed under the name of Democratic Progressive Party (DPP). The party was formed with dangwai candidates from previous local elections, and other groups, many of them sharing the idea of achieving Taiwan’s independence through democratic means. Nonetheless, the Nationalist government was clear in its condition not to tolerate political parties and organizations that promoted the cause of independence, considering them as traitors to the ROC.211 Hence, the DPP had to moderate its tone, and started moving to the center, regarding this sensitive issue, as a way to increase its electoral base and having a larger voice during the democratization process of the country.
One year later, martial law was officially lifted, after 40 years of implementation, and Taiwanese-born Lee Teng-hui replaced Chiang Ching-kuo as President of the ROC after the latter’s death in 1988. Lee would prove skillful in the introduction of further political reforms, achieving direct-vote presidential elections in 1996, and terminating other institutions that were previously preserved to maintain the image of the ROC being the legitimate government of all of China.
The way Lee handled democratic transition after the death of Chiang Ching-kuo created many challenging responses from the PRC, but also opportunities for cooperation.
Economic cooperation was led by Taiwanese entrepreneurs interested in taking advantage of the chances of profit offered by economic reforms in the mainland, promoted by Deng
209 J. Bruce Jacobs, “Political Opposition and Taiwan’s Political Future,” in Australian Journal of Chinese Affairs, 6 (July 1981), 21-40.
210 Hung-Mao Tien, op. cit., 95-98.
211 Chien-chao Hung, op. cit., 387-392.
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Xiaoping. The government in Taiwan was mostly reactive to those interactions, knowing it would be impossible to continue banning all contact between people and businesses across the strait. 212 The success of Taiwanese enterprises after years of state policies aimed to create growth and industrialization, also made it harder for the government to impose strict rules on all the companies investing in the mainland, after they became aware of the opportunities of growth offered in the PRC, and their advantages before other competitors, due to a common language and shared culture with the people in the mainland.213 However, the government in Taiwan was not willing to give up on its intervening power in the economy, and despite those critical junctures, it decided to continue certain policies to encourage more strategic investments and increase the competitiveness of certain local industries.
Since the late 1970s, economists with a more neoliberal view started occupying higher positions in the policy-making institutions, particularly those related to the monetary policy.
After decades of strong surveillance of the banking system, under a rigid government control, in July 1978 a flexible exchange rate system was adopted, abandoning the previous fixed rate, but still finding ways to peg the NT Dollar to the US Dollar, and influence the exchange rate as a way to ensure gain incentives and a competitive environment for domestic exporters (Table 3.3).214 Seven months later, the Central Bank created a foreign assets market, authorizing five public banks to trade on international currencies. Those moves were possible, mainly because of the successful strategies during the export-led growth period. The rapid expansion of exports led to continuous trade surpluses, that caused an accumulation of foreign reserves, which combined with a rise on domestic savings, strict capital controls, and a government dominance of the banking system, made the authorities confident enough in a gradual liberalization of its monetary policy.215
212 Shelley Rigger, op. cit., 120-123.
213 Yun-han Chu, “The Realignment of Business-Government Relations and Regime Transition in Taiwan,” in A. MacIntyre (ed.), Business and Government in Industrializing Asia. (Ithaca, NY: Cornell University Press, 1994), 113-141; Chi Schive & Tain-Jy Chen. 2004. “The Globalisation of Business in Taiwan,” in Tain-Jy Chen,
& Joseph S. Lee (eds.), The New Knowledge Economy of Taiwan, op. cit.,150-167.
214 Yun-han Chu, “State Structure and Economic Adjustment of the East Asian Newly Industrializing Countries,”
in International Organization, 43: 4 (December 1989), 647-672; Michael Roemer, & Chou Ji. 2001.
“Macroeconomic Policy,” in Li-min Hsueh, Chen-kuo Hsu, & Dwight H. Perkins, Industrialization and the State, op. cit., 121-123.
215 By the mid-1980s, Taiwan had a large surplus with the United States, and smaller surpluses with Hong Kong and mainland China; it had a considerable deficit with Japan, and a roughly balanced trade with Germany and other Western European countries. These trends have not changed much thirty years later, with Mainland China becoming the largest trading partner of Taiwan, and the US moving to a second place. However, surpluses with
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Table 3.3. Macroeconomic indicators of Taiwan during its first Technology-Intensive Goods Exports Phase, 1980-2000
Source: Data obtained from the ROC National Statistics Service, 2017.
Therefore, when Yu Kuo-hua was made head of the Central Bank and ROC Premier in 1984, he promoted a liberalizing program, seeking to decrease the huge trade surplus and avoid criticism from the US and other developed economies, by allowing more imports of intermediate goods, such as steel, through the dismantlement of non-tariff barriers, and the
both of those actors, and a smaller deficit with Japan are still visible in modern-day Taiwan’s foreign trade. See official data from the ROC Ministry of Economic Affairs, 2017.
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end of local content requirement for certain industries.216 Facing the wave of globalization and the international pressures to further liberalizing its economy, the government in Taiwan made announcements to give more space to market mechanisms, increase its international contacts and increase the public transparency. However, in practice, mercantilist policies remained in place in sectors considered strategic, including the technology-intensive industries, although in a more discrete way. Mainly due to those trends, Taiwan’s economy has continued relying heavily on foreign trade for its growth, and particularly on its exports to the rest of the world, that since its first years of export-oriented growth, have represented a high percentage of its GDP, giving the island a continues trade surplus during the past three of decades (Figure 3.3).
3.5.1. Taiwan’s independent approach in the 21st century
Despite democratization and globalization weakened the position of the developmental state in the economy, the government in Taiwan was still convinced of the utility of state planning in specific key sectors, particularly concerning the adverse international environment and the security threats coming from the other side of the Taiwan Strait. Even after the triumph of the DPP in the 2000 presidential election, the administration of Chen Shui-bian did not offer a big departure from the industrial policies carried by his predecessors. The state remained conscious of its capacity to influence industrial development, hence targeting new strategic industries, through the enlargement of the Hsinchu Industrial Park and the creation of more infrastructure to sustain the growth in exports. Other technology-intensive industries were identified as strategic, including biogenetic and pharmaceutical sectors, considered as high income generators.217 Nonetheless, it was clear that private businesses had a larger voice in the elaboration of those policies, and the difficult political landscape, with a society divided regarding its views on relations with the mainland, made it harder for state institutions to succeed in their goals, as they did in the first decades after their establishment in Taiwan.
216 Li-min Hshue, Chen-kuo Hsu, & Dwight H. Perkins, op. cit., 67-74.
217 Joseph Wong. “Re-Making the Developmental State in Taiwan: The Challenges of Biotechnology,” in International Political Science Review, 26:2 (April 2005), 169-191.
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Figure 3.3. Taiwan’s Exports and Imports as % of its GDP, 1952-2015
Figure 3.3. Taiwan’s Exports and Imports as % of its GDP, 1952-2015