Transforming Taiwan’s Economic Structure in the 20th Century

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Table of Contents

Introduction
Colonization Development
Regime Transition and ISI
Liberalization, democratization and Asia’s Financial Crisis
Conclusion
Work Cited

Introduction

Between the colonization of Taiwan in 1895, and the Asian financial crisis of 1997-1998, Taiwan has transformed economically in a major way. The financial crisis in Asia was caused by the shortage of foreign exchange, underdeveloped financial sectors, the role and use of IMF funds, and the effects of this crisis on the rest of the world.

In Taiwan, the dollar was being forced downward as a result of this crisis; this forced the government to sell its foreign exchange reserves. This reaction caused the stunted economic growth and more problems in the financial and banking sectors.

The economy of Taiwan gradually transformed from an agrarian based economy when they were under the Japanese empire to industrialization, and later into information technology.

Taiwan followed USA and Japan closely in the innovation of information technology products. Several structural changes took place in the three successive regimes (nationalist, authoritarian and democratic) such as sector composition and ownership pattern.

The Taiwan state has been involved in rigorous activities towards economic modernization. The state has focused on agricultural development, which has helped Taiwan to have excesses in taxes.

The Taiwan regime (KMT) allowed experts to establish industrialization strategies. Industrialization has been of great help to Taiwan by shaping the industrial structure and encouraging investment. Thus, the challenge of globalization and Asian financial crisis did not affect Taiwan.

The transformation of Taiwan economy has taken place in different phases such as, the era of colonization between 1895 and 1941 and its effect on economic development, the effect of regime changes on the economy and the effect of democratization, globalization and Asian financial crisis on the economic development of Taiwan (Tun-jen 20).

Colonization Development

Western countries had colonies in Asia such as Malaysia, Vietnam and Indonesia; However, Japan was main colonial power in Asia. In success and wealth, Korea and Taiwan are among the leaders in Asia and the World. These two countries were both colonized by Japan, and they share unique qualities as colonies of Japan.

Korea and Taiwan have developed quickly in economic growth and democratization more than other countries in Asia. The Japan colonies had different experiences as compared to the Western colonies; furthermore the legacies left the countries with different states of democracy.

Taiwan was Japan’s first colony, and its colonization was as a result of Japan’s need of economic prosperity and income from Taiwan. The introduction of industrialization by the Japanese helped coax the economy of Taiwan.

In the first colonial decade, the Japanese undertook projects such as improvement of transportation which led to economic development. They also carried out analysis and review of land registers, and this led to an increase in tax revenue collection, property rights were made clear and made land transactions easier (Tun-Jen 21).

In the second decade, the Japanese introduced sporadic analysis and review of population, land and natural resources. This helped improve the labour supply and management system. In the third and fourth decades, the Japanese installed irrigation and power plants which improved agricultural productivity and industrialization.

Education and sanitation was improved by the Japanese colonial power in Taiwan. The level of literacy in Taiwan improved tremendously between 1905 and 1935. Financial institutions and agricultural parastatals were founded to improve agricultural production and trade. Introduction of banks and co-operatives into the rural areas transformed the economic structure of Taiwan.

The Japanese concentrated on agricultural expansion and improvement of farming technology with an aim of promoting the agrarian economy. Agricultural production increased tremendously in Taiwan making it a base for production of both agricultural and industrial goods. Sugar and rice were the major exports from Taiwan to Japan, and fertilizer and textile were imported from Japan (Tun-Jen 23).

The Japanese practiced taxation and tenant ownership of sugar plantation in the rural areas of Taiwan. This led to transformation of economy in the rural areas of Taiwan. Industrial development improved rapidly in the rural areas as a result of the use of new technology on the sugar and rice plantations.

The Japanese also allowed the Taiwanese to form corporations without any interference from the Japanese. The colonial power improved education and encouraged small and medium sized enterprises (SMEs) because they thought it was means to transforming Taiwanese primitive economy into modern, functional economy.

Heavy investment in industry and infrastructure by the Japanese led to socio-economic development in Taiwan (Tun-Jen 24).

Regime Transition and ISI

Taiwan had a longer colonial period than Korea, and it was not disrupted by external powers or civil war after decolonization. KMT Regime received political power from the former empire. Japanese intellectuals who were left behind helped the Taiwan state to strengthen trade and investment projects.

With the developments of the colonial power in place, the KMT regime had it easy because they had to restore the industry and infrastructure. The legacy they had inherited was destroyed during the civil war immediately after take over from Japan (Tun-Jen 24).

The KMT regime had inherited 94 heavy industries and 484 light industries. These heavy industries were immediately transformed into state enterprises, and the light industries were sold off in an auction. This helped in creating wealth for the state, thus improving the economy.

The economy improved as a result of either gold shipment from the mainland into Taiwan or financial aid from America. This point has not been clearly established yet, because American aid was given at a high interest rate. Technocrats coming in from countries such as Japan helped in formulating land reforms, restoring rural infrastructure and increasing agricultural productivity (Tun-Jen 25).

The new government needed more civil servants for their institutions such as schools and hospitals. Besides the labour expenses, the government had to incur defense expenses caused by KMT’s taking of the mainland. The KMT regime received foreign aid, which helped the state to redistribute land reforms and give property rights to land tillers (Tun-Jen 25).

Rice and sugar became the main export items in Taiwan with some being used in the internal market and some for the export market. This was done so as to stabilize prices and earn the state foreign exchange. The government used extraction of agricultural surplus to pay wages and use incentive to promote industries.

The government started exporting goods from the light industries, and this helped improve the economy of Taiwan. During this time market direction, ownership and industrial composition became transformed hence, improving the economy. Market opportunities were recognized by technocrats who encouraged people to venture into industrial entrepreneurship.

Import substitution industrialization (ISI) promoted the production of consumer goods that were not durable into the domestic market. This led to the slow growth of economic development and subsequently led to unemployment.

After persuasion from Chinese and American economist, the KMT regime decided to change the direction of the Taiwan economy by changing some policies. Some of the changes were evaluating the exchange rate, devaluing the currency and promoting export trade and investment of the private sector.

Therefore, the government increased industrial export; employed laborers made foreign earning the main source of capital for the economy (Tun-Jen 26).

The government used short-term export financing, tax incentives, import duty rebates and FDI (foreign direct investment) to promote exporting industries. It also set a development fund in 1973 with the aim of assisting investors and industries.

The state put in place tariff protection and import restriction policies to implement structures for high-end chemical products. The government also increased lending to SMEs and agricultural sectors had access to loan facilities (Tun-Jen 31).

In 1970’s, the industrial sector was not improving; thus the technocrats advised the government to upgrade the industrial production. Through state financial institutions, the government offered industries long-term loans to assist in the advancement process.

However, this policy did not work well in the automotive industries, but there were better results in industrial tools industries and computer sector.

The gaps between savings and investment and between export income and import demands were filled by foreign aid. Aid assisted in the improvement of food and textile industries in Taiwan at the same time it helped set up plastics, glass and cement industries.

Development of the private sector was facilitated by the availability of American aid and other factors. Since the regime concentrated on heavy industry, the light industry was developed by the private sector (Tun-Jen 28).

Liberalization, democratization and Asia’s Financial Crisis

In the 1980’s the Taiwanese economy was under pressure of liberalization as a result of its undervalued currency and the pile up of its foreign reserve which was affecting the local stock exchange and real estate markets.

Therefore, the government was forced to allow the Taiwanese dollar to appreciate about 35% against the US dollar and remove some restriction in its foreign exchange policy. At this time, tariffs were lowered and non-tariff barriers removed. However, democratization forces slowed down liberalization as some political forces blocked tariff reduction (Tun-Jen 34).

The various changes facing the Taiwan industries from all angles such as import competition, FDI inflow and export pressure caused the government to make radical changes.

Local entrepreneurs started making direct investment in foreign countries as a strategy to increase development. The local markets underwent transformation as a result of de-regulation and democratization.

Monopolies faced political democratization; hence the government de-regulated the organizations. As a result, foreign corporations were licensed to form domestic business groups and joint ventures domestically. Taiwan’s GDP and employment rate improved, the country became a capital exporter and SMEs became multinationals.

Conclusion

With the economic transformation and structural changes the government has in place its policies for management of the economy. The state endeavors to provide promising industries manpower, technological support and support traditional industries in designing their products. The government policies helped Taiwan to withstand the Asian financial crisis.

The government uses economic incentives and technological support to encourage industrialization. SMEs have been the basic means to development in Taiwan. Taiwan has chosen a simple approach to foreign capital which has helped it stand the test of time (Tun-Jen 39).

Work Cited

Tun-jen, Cheng. “Transforming Taiwan’s Economic Structure in the 20th Century.” The China Quarterly 165 (2001): 19-36 pp. Web.

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