There are two very different impressions for the East Asian island nation of Taiwan. The more contemporary one is that of a high tech powerhouse, a critical node in the global supply chain, especially the crucial expertise of Taiwan’s star company the Taiwan Semiconductor Manufacturing Company.

The other impression is an older image from the last century, made up of bicycles, TVs and other cheap goods that are Made In Taiwan. Even Buzz Lightyear from the movie Toy Story proudly displays his “MIT” credentials, a sign of how Taiwan struggled and found its place in the process of globalization.

In 2021, Taiwan’s per capita GDP surpassed $30,000, a milestone achieved by only a few nations since the end of World War II (apart from oil-producing countries). This achievement places Taiwan among the rare economies that have successfully surpassed the “middle-income trap” where developing nations struggle to sustain industrial growth, resulting in economic stagnation following an initial surge. Since the 1950s, Taiwan has continued a remarkable economic growth trajectory spanning seven decades to the present day. Currently, Taiwan boasts numerous key economic indicators that surpass those of Japan and South Korea, making it one of the most successful examples of capitalism on the planet.

Although Taiwan is commonly described as the “Island of Miracles,” it’s ironic that its residents, living in the present moment, often fail to appreciate this fortune and long-term achievement. Renowned economist Wu Tsung-min, former director of the Central Bank of Taiwan, wrote Four Hundred Years of Taiwan’s Economy to delve into the historical circumstances surrounding this tiny island’s integration into the global market. The book adheres to meticulous and rigorous economic argumentation while engaging in conversations around anthropological, political, and other social science research. It is substantial without being cumbersome, making it a captivating economic history read even for general readers.

 

Cover of the book《Four Hundred Years of Taiwan’s Economy》. Image sourced from eslit.com.

 

The basis of Taiwan’s economy

 

In fact, centuries ago, Taiwan was merely a blip on colonial maps. When the Dutch East India Company arrived, it was able to exchange just 15 bolts of cloth to purchase land from the indigenous people and establish trading posts and forts.

At this time, the lush island of Formosa was still home to a significant population of Formosan sika deer. Beyond the valuable deer antlers and hides, Western colonizers coveted this land for its crucial geographical location bridging the ocean and the continent. Pepper purchased from Indonesia had to pass through Taiwan before being sold to China; conversely, raw silk imported from China required repackaging in Taiwan before being transported to Japan.

Due to Taiwan’s pivotal location as a trading hub, major powers of the 17th century such as Spain, China, the Netherlands, and Japan all had their eyes on this island. A substantial influx of Han Chinese migrants from China crossed the seas to establish colonies, leading to the depletion of deer populations. The advancement of sophisticated agricultural society rapidly encroached upon the island’s nomadic gathering settlements. The ancestral lands of the indigenous peoples were seized by cunning “civilized” new settlers.

By the late 19th century, the First Sino-Japanese War broke out, and Taiwan officially became a Japanese territory. Wu reminds readers that unlike the backwardness of China’s declining feudal dynasties, Japan’s ambitious militarism introduced a “modern” governance model – meticulous population surveys, land rights assessments, drainage systems, public health initiatives, and the extensive construction of railways across the entire island.

Of course, the Japanese authorities were “attentive” in pursuit of their own economic interests. During that period, Japan urgently needed sugarcane from the south to support its sugar industry and ample rice to feed the emerging labor force. Therefore, given Taiwan’s warm climate and rich resources, it became imperative for the island to consistently provide sugar and rice without fail.

Economists do not evaluate “economic realms” from a moral perspective. Although “Four Hundred Years of Taiwan’s Economy” acknowledges that Japan’s “development” of Taiwan is driven by colonialist motives, the statistical data is objective and neutral. When comparing the stagnant production under Chinese rule in Taiwan, we have to recognize Japan’s “contributions,” including continuous declines in mortality rates, rising land prices, and the first-ever significant growth in GDP, etc.

The book further argues from population statistics that Japan’s sugar industry capitalism even achieved “gender liberation.” In the past, influenced by patriarchal ideology, a significant proportion of female infants in rural Taiwan were killed due to the inability to continue the family surname, resulting in statistically significant gender differences. However, as sugarcane enterprises aggressively acquired sugarcane fields and rapidly grew the sugarcane cultivation business, the male-to-female birth ratio in rural areas gradually returned to a natural state. This is because harvesting cash crops requires a large labor force, and daughters are also required to participate in agricultural production. Therefore, the situation of abandoning or killing female infants has significantly decreased. Also, they are also not required to undergo foot binding during their growth process (since the Song Dynasty, Chinese Han people have bound women’s feet to hinder their development for aesthetic purposes), as otherwise they would not be able to engage in agricultural labor.

 

Challenging the role of the (authoritarian) state

 

This book seems to suggest a controversial argument: a capitalist economy driven by market mechanisms, regardless of whether it is built by colonialist motivations, is sufficient to foster overall “progress” in society.

Four Hundred Years of Taiwan’s Economy clearly aims to challenge the prevalent economic historical narrative in Taiwan. In the past, particularly in the latter half of the 20th century, the “Taiwan Economic Miracle” has been consistently promoted by authoritarian political parties, such as the Chinese Nationalist Party (KMT) to legitimize their rule. Following World War II, Japan relinquished its rule of Taiwan, and the right-wing KMT retreated to Taiwan in 1949 after its defeat by the Chinese Communist Party, marking the onset of nearly half a century of authoritarian governance.

For the KMT regime, they believe in, and instill, the following concepts through mandatory education: after World War II, the KMT government that took over Taiwan was committed to implementing land reform, investing in infrastructure, and carrying out “import substitution” policies to support local industries. All of these efforts ultimately laid the foundation for the so-called “Taiwan Economic Miracle” and its magnificent achievements. In contrast, the previous Japanese colonizers ruthlessly exploited Taiwan’s agriculture and made no contributions to social well-being.

Four Hundred Years of Taiwan’s Economy evidently holds some skepticism towards the aforementioned “party-state economic historical perspective” based on its economic expertise. First, from a modern economic viewpoint, the period of Taiwan under Japanese rule laid the foundation for the future “market economy” through multifaceted institutional reforms. Even Taiwan’s sugarcane farmers benefited from the colonial government’s protectionism, earning considerable profits by exporting to Japan despite competing with cheaper sugarcane from Southeast Asia.

Second, both before and after the Chinese Civil War, Taiwan experienced economic collapse due to overspending on the military. The KMT government took control of all major industries from the Japanese colonial era, leading to market failure and exacerbating severe inflation. The greatest tragedy in Taiwan’s history, the 228 Massacre, also can be attributed to the economic collapse — state monopolies and rationing systems led to extreme shortages of goods, ultimately resulting in widespread discontent and large-scale riots. The KMT army exploited this as a pretext to unleash a bloody massacre that killed and injured tens of thousands of Taiwanese civilians.

In the wake of this economic collapse in the 1950s, the economy slowly returned to normal, with prices stabilizing and staple industries gradually expanding. This “economic stabilization” was mainly unrelated to the authoritarian government’s economic policies—just before the KMT regime was on the brink of collapse, the Korean War broke out suddenly, prompting the United States to provide substantial economic and military aid to Taiwan. The American aid restored confidence in the Taiwanese currency, and the presence of the US fleet in the Taiwan Strait helped alleviate the military deficit that was dragging down the government amidst the ongoing civil war between the KMT and the Communists.

Four Hundred Years of Taiwan’s Economy suggests that after the 1970s, Taiwan, which had recently been predominantly an agricultural society, saw sustained progress in industries such as textiles, electronics, and clothing manufacturing, all possibly unrelated to state control. Historically, many Taiwanese believed that, regardless of the government’s merits or demerits, the authoritarian regime provided stable social order and forward-thinking policy backing. These factors played an important role in the enormous profits generated in industries ranging from OEM and electronic components to semiconductor manufacturing.

However, the book points out two major counterpoints: firstly, the USnot only provided material support, but also sent economic experts to advise the Taiwanese government. As a result, the KMT regime ceased currency manipulation, thereby fostering an economic environment where private enterprises could grow freely. The US insistence on “returning to market mechanisms” likely played a significant role in driving Taiwan’s economic development.

The second point is that despite the Taiwanese government’s implementation of protectionism and its policy of supporting specific industries, from a macro perspective, industries such as textiles, electronics, and clothing in the 1970s were able to excel in global competition mainly because the first-world countries outsourced their manufacturing. Additionally, Taiwan possessed certain comparative advantages – low wages, a welcoming attitude towards foreign firms, and a young workforce fueled by population growth.

In other words, the Taiwanese government, which believes in state intervention, cannot go against market trends. For example, although the automotive industry received ample government support, it ultimately failed to thrive. On the contrary, with regards to the electronics industry, from component manufacturing and computer production to advanced chip processing, Taiwanese companies seized opportunities for advancement. They gradually shifted from labor-intensive to technology- and capital-intensive processes.  Tge entrepreneurs deserve credit of course, but the right market positioning and professional expertise also played a big part. As a result, a well-functioning market facilitated abundant production capacity, rather than depending on government intervention to overcome obstacles and forcefully generate economic gains.

 

Conclusion

 

Four Hundred Years of Taiwan’s Economy” explores Taiwan’s “economic development” over the past four centuries from the perspective of institutional factors. It underscores that a robust market relies on mechanisms rather than the overconfident practice of “state intervention,” akin to drawing the target around launched arrows. It’s undeniable that Taiwan’s wealth accumulation owes much to historical serendipity. Reflecting on the economic principles, this history offers a valuable lesson: the right institutions promote economic exchange activities to foster prosperity and happiness. “Economic miracles” should evoke humility rather than pride. Let’s return what belongs to the economy back to the economy. Perhaps this is the small revelation the “Taiwan experience” can offer to modern society.

(Feature photo by MagicTV on Pixabay)

Postdoctoral Researcher at Center for International Taiwan Studies, National Taiwan Normal University
A writer who enjoys writing book reviews, passionate about the humanities and social sciences, popular culture, and concerned with various injustices and harsh realities.
Yun-Hung Lin