Shiau Chyuan-jenq, “Taiwan Weiquan Tizhi Zhuanxingzhong de Guojia Jiguan yu Minjian Shehui” (State and Society in Taiwan’s Authoritarian Transition)

Shiau Chyuan-jenq’s (蕭全政) account of Taiwan’s democratization places emphasis on the effects changes in the international environment had on a KMT regime that maintained it was the only legitimate representative of China. He argues that in the process of democratization, Taiwan not only had to abandon authoritarianism (去威權化), it also had to end the continuing Chinese civil war (去內戰化). (pp. 63-65)

During the Cold War, Taiwan was incorporated into the Western capitalist camp. Support from the United States not only allowed the authoritarian regime to consolidate itself on Taiwan, but also facilitated economic “take-off” during the 1960s. Domestically, the “one-China” principle was enshrined as the dominant ideology and the basis on which parts of the constitution were suspended pending national recovery. Internationally, it provided the rationale for the government’s continued claim to the mainland. (pp. 68-69) However, from Nixon’s proclamation of the Guam doctrine in 1969, the ROC’s international position began to gradually worsen.
After taking over as premier in 1972, Chiang Ching-kuo made adjustments to the ROC’s foreign policy in response to increasing international isolation and economic problems caused by the 1973 oil crisis, in particular pushing forward foreign policies focusing on economics rather than politics (以經濟替代政治), and pursuing the internationalization of the Taiwan question. Domestically, he made efforts to push more Taiwanese into important positions. Although Chiang’s reforms were very effective on the economic level, the failed to solve the fundamental political issue of Taiwan’s worsening diplomatic isolation. (pp. 69-71)

Because of Taiwan’s international isolation and the effects of protectionism in the United States, pressure for reform from society grew. In the second half of the 1970s, opposition journal proliferated and protests against the regime became more common. In particular, Chiang’s neo-mercantilist policies stressed economic growth at the expense of workers, farmers, consumers, and other social groups, who swelled the ranks of protesters during the 1980s. Faced with pressure on trade with the West, a rising NTD, the outflow of capital, and political instability, Taiwanese business demanded removal of foreign exchange controls, a lifting on restrictions on investing abroad, and an opening of trade with socialist countries. Demands from the business community for greater political participation also rose. In response Chiang tried to strengthen “flexible diplomacy” (彈性外交) and push forward economic liberalization. However, he did not alter the basic “one China” principle. (pp. 71-74)

The gap between an elite dominated by a party, political, military, educational, and media elite dominated by waishengren and the rest of society was becoming increasingly unsustainable. At the same time, Taiwan’s international isolation made travel difficult and investment abroad more risky. Taiwan’s position was damaged by its exclusion from international organizations. The series of liberalizing reforms in the period before Chiang Ching-kuo’s death, including the ending of martial law and allowing travel to the mainland to visit family members, together with an increasingly assertive DPP stance towards Taiwanese sovereignty, further weakened the “one China” principle and paved the way for Lee Teng-hui’s at least tacit recognition of the Beijing regime. (pp. 74-77) Taiwan then embarked on a process of constitutional reform culminating in the symbolic first presidential election by universal suffrage in 1986. (pp. 77-79)

However the question of why liberal reforms turned into an eventual abandonment of the “one China” principle and democratization remains. For Shiau the answer can be found in the failure of the Chiang Ching-kuo reforms to solve the question of Taiwan’s international isolation and ensure regime legitimacy. The emergence of a new wave of American protectionism in the 1980s, together with the collapse of the Berlin Wall in 1989 and the end of the Cold War further worsened the international environment for the ROC, leading to even more pressure for change from below. Overall, Taiwan’s authoritarian system of government must be understood in the international context in which it emerged. When the international system changed, pressure for reform grew and Taiwan embarked on a process of democratization.

Edwin A. Winckler, “Institutionalism and Participation on Taiwan, From Hard to Soft Authoritarianism”, China Quarterly 99: pp. 481-499 (2001)

Winckler’s “Institutionalism and Participation on Taiwan, From Hard to Soft Authoritarianism” focuses on political transition in Taiwan in the first half of the 1980s. He characterizes the KMT regime as “gerontocratic-authoritarian”, arguing that this regime was undergoing a generational succession from a waishengren to benshengren leadership, and systemic transition from “hard” to “soft” authoritarianism. “Hard” authoritarianism meant mainlander technocratic rule under a one-man dictatorship. The primary function of elections was to co-opt local elites, and the regime was secured through extra-constitutional security police. Soft authoritarianism implies joint waishengren/ benshengren collective party rule, and while the primacy of the party is maintained, more open and competitive elections are allowed. Soft authoritarianism is better adapted to absorbing new social forces created by Taiwan’s rapid economic growth and modernization, and reduces the need of the party to resort to direct repression to secure its rule. (pp. 482-483) Responding to criticism that his “hard” and “soft” authoritarianism model forced a dualistic understanding of regime type, in a later essay Winckler clarifies his approach identifying varying mixes of “hard” and “soft” elements (see “Regime Type and Regime Change on Taiwan: Some Conceptual Issues and Comparative Implications”).

Winckler argues that authoritarian transition is carried out through three types of relationships: institutionalisation and participation, external and internal relations, and formal and informal arrangements. Of these, institutionalism and participation is the most important. According to Huntington, during a process of social change, maintenance of political power requires the balancing the capability of state institutions and the volume of mass political mobilization (political participation). In fact, the demand for political participation has probably grown less than the “participation crisis” would expect as economic growth has strengthen regime legitimacy and absorbed the energies of the masses. Taiwan’s political leadership have also proved good at adapting political institutions to absorb and selectively suppress demand from society. The relationship between participation and political development is also constrained by Taiwan’s global economic and geopolitical position as well as Taiwan’s Chinese cultural heritage. Winckler argues that “Taiwan is an extraordinarily conservative regime; it is also an extraordinarily successful one.” In the early 1980s the KMT regime was far from collapse, and Chiang Ching-kuo’s reforms in fact led to its rejuvenation. (pp. 483-485)

The formal system combines Leninist (the party), presidential (The “Temporary Provisions”), and parliamentary (the 1947 constitution) elements. Informally, these arrangements can be grouped into three “sectors”: legitimation, security, and development. (p. 485)

The three key leadership positions are the KMT chairman, president, and premier. The party chairman is the most important position, and is normally filled by the president. However, the succession of Chiang Ching-kuo to the presidency reveals the flexibility of the system. The Leader can manipulate institutions to concentrate or disperse power. (pp. 485-488)

The core of the legitimation sector is the ruling party. The sector upholds state values such as nationalism, anti-communism, and developmentalism. The single most important post within the party is sectary-general (秘書長), responsible for managing the flow of issues and proposals to the Leader. The core of state power is the web of internal and external security agencies. Both military and police are professionally separate from domestic politics and subordinated to civilian leadership. The developmental sector is the web of government agencies that manage the economy. Like other countries, the main tension is between more investment orientated organizations and revenue orientated organizations. (pp. 488-491)

Winckler argues that informal processes of group incorporation and individual participation are probably more important to Taiwan’s political stability than formal elections. Each institutional sector contains mass organizations that incorporate particular social groups (for example the China Youth Corps and the Women’s Association), partly representing their interests but also pre-empting the development of alternative groups. Although these mass organizations may constrain mass participation as much as they facilitate it, at least they provide a channel for communication between the ordinary citizen and the state. In addition, people have contacts within the political and economic establishment deriving from personal networks. They are therefore more likely to pursue their individual interests by private means rather than collective lobbying. Elections also pose a dilemma for the party. On the one hand, to maintain its core “one China” ideology and placate powerful elite mainlanders, it must maintain strong mainlander representation. On the other hand, it also needs to meet demands for greater political participation from Taiwanese. The response of the government was to the formal institutions intact, but slowly allow a degree of informal liberalization. (pp. 492-496)

Kung I-chun, “‘Wailai Zhengquan’ yu Bentu Shehui – Gaizao Hou Guomindang Zhengquan Shehui Jichu de Xingcheng” (“Outsider Regime” and Native Society: The Formation of the KMT Regime’s Social Basis Following Internal Party Reorganization”) (1998)

Kung I-chun’s (龔宜君) study of the formation of the KMT’s social basis tries to move beyond approaches which emphasise the autonomy of the state. Instead she argues that state autonomy is not given, and that to understand the development of the KMT’s social basis in the period after the party reorganization we need to look at the interaction between state and society. By shifting the focus from an autonomous state onto society, Kung also shows how the relationship between the state and society was radically different across different sectors. (pp. 1-17)

Kung offers the following points as a basis for her analysis.
(1) The survival of the modern state is dependent on carrying out the following functions within society: protection, extraction, and production.
(2) The organs of the modern state aim for direct control and penetration of society to avoid power and political objectives becoming distorted by agents at the local level.
(3) The state, within its specific historical context, does not face a uniform society. (pp. 17-19)

The KMT regime was a Leninist party state. The party operated cells in both government organs and military divisions. The government maintained control over the economy through ownership of public enterprises, which in 1949 accounted for 72.5% of total industrial production. The also government used economic planning and controls to exert its dominance. (pp. 20-24)

Kung offers the following propositions:
(1) The émigré party-state regime showed uneven control and penetration of society.
(2) The varying ability of the regime to penetrate different parts of society is closely related the particular characteristics of the party-state regime. Penetration of mainlander groups was much more effective than that of native Taiwanese.
(3) The varying penetration capabilities of special party branches and regional party branches is reflected in the formation of the party’s social base and state-society relations. (pp. 30-34)

Having suffered defeat on the mainland and facing major economic and political problems on Taiwan, the party undertook a major reorganization. Some of the economic and political issues included political instability in Taiwan, international isolation, runaway inflation, a shortage of foreign exchange, and insufficient production. The regime’s major policy directions were as follows: Leninist party-state, the Temporary Provisions and martial law, maintain vast military, obtain US aid, large public sector and state economic planning, and import-substitution industrialization. (pp. 37-42)

The KMT reorganization broke the powerful factions from the mainland period. At the start of the reorganization, Chiang Kai-shek froze the Party Central Committee (中央黨部) which was under control of Chen Lifu (陳立夫) and brother Chen Guofu’s (陳果夫) CC clique. The 16 member Central Reform Committee (中央改造委員會) under his personal control became the highest decision making body in the party, taking over the functions of the unwieldy 460 member Central Committee. All 16 members of the Central Reform Committee had close personal relations with Chiang Kai-shek. Important figures from the mainland period including Yan Xishan (閻錫山), He Yingqin (何應欽), Sun Ke (孫科), and Bai Chongxi (白崇禧) were excluded from power. The aim was to create a unified system of central control centred on the Chiang family. Reorganization was completed at all levels of the party, overseen by committees in local and special party branches. (pp. 43-45)

One of the key objectives of reorganization was to penetrate local society. After 228, the party was in a weak position with its original 52200 members in Taiwan reduced to only 25000. Attracting more party members was regarded as vital. The party was essentially divided into 3 levels. The party centre was responsible for formulating policy and issuing orders, the provincial/county level acted as a supervisor, and the district level formed cells which undertook party work. The district party branch (區黨部) was divided into a number of sub-branches (區分部) At the lowest level, members were divided into party small groups (小組). The structure basically copied the party’s 1924 reorganization. The main difference was that small groups became much more important, ensuring that members remained active in the party, and working as cells to penetrate society. (pp. 46-48) Leninist party organization called for the formation of party branches at the workplace which could then penetrate every aspect of a worker’s life. However, because Taiwan was still a mainly agricultural society, there was also a need to form party branches in each district. In fact special party branches were not only formed at the workplace, but were also based on distinct groups within society – for example the “Intellectual Youth Branch” (知識青年黨部). (pp. 48-55) By 1952, the party had created a comprehensive network of party branches and small groups. However, district party branches had much more difficulty attracting members – around 60% of members belonged to special branches. In addition, party membership was still dominated by mainlanders who made up around 70% of the total. (pp. 55-70)

In the third, fourth and fifth chapters, Kung discusses how the special party branches acted as an “organizational weapon” for the Leninist KMT. The party penetrated every aspect of the lives of special branch party members. In order to ensure the loyalty of the membership of party special branches to the regime, and prevent them from joining forces with local factions, many important party members were “isolated” from wider society.

The special party branch (特種黨部) was organized organized within the military. The Huang Fuxing (黃復興) party branch was organized for military veterans. Soldiers and their dependants lived within separate communities (眷村). The party was therefore able to exercise of a dominant position over soldiers, retired soldiers and their dependants. A majority of retired soldiers were allocated jobs by the regime after leaving the army. It used this position to mobilize support for the regime, which also translated into the so-called “iron votes” (鐵票) at election time. Overall, in 1967 around 430,000 people lived in the dependants villages. Another 80,000 retired soldiers had been allocated work by the party. So a total of approximately 515,000 people lived in communities isolated from Taiwanese society, making up around 28.6% of the total waisheng community in Taiwan. (pp. 71-99)

Public enterprises had a monopoly position in the key sectors of the economy. The party attempted to penetrate workers in public enterprises in order to: (1) Consolidate its control over the allocation of economic resources; (2) Control labour in key industries. Through party control of unions, workers could be mobilized. Because the party branches in public enterprises had control over work units and the career prospects of individual workers, its mobilization at election time was particularly effective. (pp. 101-115)

The party used its Intellectual Youth Branch to school campuses to ensure they did not become the basis for opposition activity and co-opt teachers and students into the party. The China Youth Corps (救國團) controlled military training at schools, and organized various recreation activities, and well as more politically orientated events. Although the corps was officially a state organization, in reality it was run under party direction. (pp. 117-130)

In their attempts to penetrate society and consolidate the power of the centre, the regime faced resistance in peripheral areas. The party established district branches and used agents (benshengren outside their home area, waishengren who spoke Taiwanese) to carry out party work. The party attempted to attempted to link political (政), economic (經), educational (文), and party (黨) structures under one single body (四位一體制). Small groups at the village and township level acted as the party core at the local level. However, the result did not meet expectations. The reason was that agents at the local level were starved of resources and unable to use to party’s power effectively at the local level. The party was forced to rely on unreliable local factions. Agricultural associations were also controlled by local factions and non-farmers. Even after reorganization, agricultural associations remained under control of local factions. (pp. 133-164)

Local elites were wary of outsiders (from different areas or the mainland), meaning that party agents had great difficulty penetrating local society. Because district party branches and special party branches were separated, the former was unable to use the resources of the latter for party mobilization. The party small groups were expected to undertake party work at the local level, but they lacked either the decision making ability, supervisory power, or economic resources to carry out their work effectively. (pp. 165-183)

The party tried to use “service stations” (服務站) in the local community to gain support and consolidate the position of district parties. However, the mobilization capabilities of the service stations proved limited. Many people did not separate state institutions at the local level and the party-run service stations. Even when the service station was able to help individuals, this did not necessarily translate into party support. However, the service stations did allow party workers to come into daily contact with individuals at the local level and enable the party the more effectively monitor local society. (pp. 185-200)

The special party branches were able to directly penetrate their target groups and form patron-client relationships. However, district branches relied on local factions to form linkages with local society. The local factions of course often distorted or simply ignored the preferences of the party.

The mobilization capabilities of the KMT was a key reason for its electoral advantage. It used its organizational resources to control local factions. Kung calculates that the KMT could mobilize an average of 28.7% of votes in elections (13.3% from special party branches and 15.4% from district party branches). Therefore the state was able to select the winning faction at the local level and thereby control the power of factions. From a survey of three elections for provincial assemblymen, Kung finds a close relationship between percentage of votes obtained and number of seats won on the one hand, and mobilization of special party branches on the other. She finds no such relationship with district party branches. (pp. 201-212)

In conclusion, Kung suggests some links between the 1950s and 1990s:
1. The social basis of the special party branches had not dissipated by the 1990s and was still able to mobilize votes. Because of the separation of the waisheng community in terms of geography, profession, and organization, their sense of solidarity and opposition to Taiwan independence remained strong. However the Huang Fuxing votes drifted to the New Party during the 1990s.
2. The party centre and local factions had both conflictual and cooperative relations. These relationships defined local politics in Taiwan for 40 years.
3. Democratization and Taiwanization was the result of contradictions within the party. The entry of factions into the party complicated the patron-client model. By the 1980s, the state was unable to use its resources to control an emerging civil society. (pp. 221-227)

Alice H. Amsden, “Taiwan’s Economic History: A Case of Etatism and a Challenge to Dependency Theory”, Modern China, Vol. 5, No. 3 (pp. 341-379)

Amsden argues that “the state in Taiwan has acted as a key agent in the process of capital accumulation: not because it has kept aloof from it, but because it has very much dominated it.” Taiwan therefore presents a challenge to dependency theory: “[i]t is both more integrated in world capitalism than other poor market economies and more developed.” By “developed”, Amsden means that full employment has emerged and capital accumulation proceeds on the basis of both relative and absolute value extraction, with emphasis on the former. That is capital accumulation proceeds on the basis of technological innovation and greater efficiency in addition to longer worker hours and more intensive effort. Amsden argues that “dependency theory is unable to come to grips with the Taiwan paradox because it employs a methodology which elevates imperialism to the primary analytical category.” Specifically, “etatism and a land reform mediated the effects of imperialism to advantage.” (pp. 341-343)

From the start, the Japanese developed Taiwan as an agricultural appendage to complement Japan. A dual-crop (rice and sugar) economy emerged. The Japanese applied a “scientific” approach to farming, backed by an elaborate network of agricultural associations, under the aegis of the government and rich landlords, which provided services to the peasants such as extension education, the cooperative purchase of fertilizers and warehousing.Where persuasion failed, the police were used to force modern techniques onto farmers. This extensive network of agricultural associations was maintained by the nationalist government. In the 1930s, the government moved to develop an industrial base in Taiwan. After the construction of hydroelectric plants in 1934, chemical and metallurgical sectors emerged. As traffic of goods between Taiwan and Japan was disrupted, Taiwan began to manufacture a number of goods that were previously imported. However, the scale of industrialization was limited. Japan had invested significantly in education too late to provide the trained manpower required. Many industrial projects remained on the drawing board when the war ended. (pp. 343-348)

Scale of the land reform: by 1973 almost 80% of the agricultural population was owner-cultivators and another 10% was part-owners. Only 6% of rural income accrued to landlords and money lenders. In 1970, 90% of all farms in Taiwan had a size of two hectares or less. The fast growth of agriculture and transfer of agricultural resources to the towns were neither the outcome of free market forces nor the automatic results of technological improvements (the Green Revolution), but reflected the structure of ownership in the countryside and state management of every conceivable economic activity. In Taiwan the benefits of the Green Revolution have been distributed very widely, allowing for greater agricultural efficiency. This was because the land reforms removed the power landlord social classes in the village. The state was able to directly penetrate rural society (backed by agricultural associations, police force, and distribution of fertilizer) and allow a squeeze on agriculture and transfer of surplus to industry. (pp. 348-357) The squeeze on agricultural was reflected in highly unfavourable terms of trade with industry (see Lee, below). It is significant that while rural living standards rose substantially, most of the games in farm household income have come from non-farm sources. (pp. 357-360)

Small farms can help maximise production because labour costs are valued differently by self-employed peasants than by capitalist farmers. Self-employed peasants may be expected to engage in “self-exploitation” to maximize production per hectare. However, even before the implementation of advanced technology that requires larger landholdings, small-peasant farming faces two problems: (1) It is generally unproductive because it is unscientific; (2) Peasant production frustrates the extraction of a surplus by the state because at low levels of per capita income the peasant consumers his incremental output rather than markets it (an argument popularized by Stalin). In Taiwan the state managed to overcome both problems. The second problem resolved itself as raised per capita income forced the peasantry to part with its crop to obtain fertilizer and socially necessary items for consumption. The government also preserved an agrarian structure of small-peasant holdings by providing credit and stabilizing prices (preventing indebted small-holders being reduced to the status of tenant). Basically, the nationalist government appropriated the surplus value produced by the peasantry for an increasingly dominant industrial capitalist class who were in close alliance with the state. Agricultural exports also reduced the strain on balance of payments (the trade balance was negative until 1969, and became negative again in 1974, 1975, and 1977). (pp. 360-363)

Growth rates went up after liberalization of foreign trade apparently vindicating free trade theory. However, Amsden stresses three points: (1) Liberalization was not the restoration of a pure “market economy”; (2) Growth rates were quite high before liberalization, and the cumulative effects of developments in agriculture under import substitution under heavy protection cannot be minimized; (3) Taiwan’s export boom coincided with a favourable international situation. (pp. 363-367) Public enterprise also played a crucial role, initially to consolidate the power of the mainlander bureaucracy, and more recently to allow the state leverage against foreign capital. (pp. 367-371)

Taiwan’s economy was considered to be the most open to foreign trade of all Third World countries. Therefore, the Taiwan case is a counterexample to the use by dependency theorists of the primary categories of foreign trade and investment as explanations of persistent poverty. Trade and foreign investment is mediated by class and productive relations in the periphery. (p. 372) However, Taiwan is also a “special case” due to the scientific advances made by agriculture during the Japanese era and the subsequent success of the 1953 land reform. Also while there is doubt about how effective U.S. aid was economically (much aid went to the military and infrastructure investment projects based on faulty criteria), it certainly consolidated the authority of the regime. (pp. 373-374) A problem for Taiwan in the future is labour shortage – by the early 1970s agriculture and small-scale farming which both use labour intensively were suffering from lack of labour. To overcome the labour shortages in agriculture, the government has encouraged mechanization. However, the existing structure of land ownership was a serous obstacle to this. Small-scale industry is likely to be the victim of competitive imports or foreign investment. The demise of the small farmer or small manufacturer is may cause a reversal of the improved household distribution of income since the early 1960s. (pp. 374-376)

Thomas B. Gold, “State and Society in the Taiwan Miracle” (1986)

Gold starts with two questions: (1) How did Taiwan attain and sustain such high economic growth rates; (2) How did Taiwan maintain political and social stability in the course of its economic takeoff.
One group examines the role of the state in creating a favourable climate for the private sector and foreign investors. By bringing the state in as an indispensable actor, it goes one step beyond neoclassical approaches. However, within this group writers attach varying importance to the role of state intervention. Examples include Lin and Amsden. However, this approach does not delve further and ask how structures and institutions that maintained Taiwan’s economic growth were formed, maintained, and have evolved (Wade also addressed this weakness). Another group situated Taiwan in global economic and political structures, first the Japanese empire and then post-war U.S. hegemony. The state is dependent on external capital and technology, and ruthlessly exploits its own people. An example is Liu. Few scholars have examined the reasons behind Taiwan’s social stability. Gold does not think either martial law and the internal security apparatus on the one hand, or economic growth and relatively equitable distribution of income on the other hand, can explain this adequately. (pp. 3-11) Instead, Gold suggests a “comprehensive approach”. He uses a “historical-structural” method derived from Fernando Cardoso and Enzo Faletto’s influential “Dependency and Development in Latin America.” This method starts from the situation of dependency but does not rule out development. Taiwan began its development dependent on external factors for capital, capital goods, technology, and trade. But before the 1980s, the situation had changed. Most capital for investment was from domestic savings, the state coffers were overflowing with foreign exchange, and Taiwan was exporting its own capital goods, technologies, and plants to less developed countries. (pp. 11-17)

The next two chapters describe Japanese rule and the “chaotic interregnum” between the end of the Pacific War and the central government’s retreat to Taiwan in 1949. In 1949, Chiang recognized that to consolidate its position on Taiwan, the KMT would need to be “fundamentally cleansed” and the Taiwanese people given some incentive to support it. Reform was partly accomplished by self-selection, many of the most notoriously corrupt figures in the KMT did not go to Taiwan, including Chiang’s brothers-in-law H. H. Kung (孔祥熙) and T.V. Soong (宋子文), as well as intelligence chief Chen Li-fu (陳立夫). In August 1950, Chiang Kai-shek acting as Party Zongcai (總裁) disolved the Central Executive Committee (中央執行委員會) and established a Central Reform Committee (中央改造委員會) charged with overseeing party reorganization. The KMT’s Seventh National Congress elected a new Central Committee in October 1952 signalling the end of reform. The party organization and penetration of society is discussed by Kung I-chun (above). (pp. 58-59) Although the KMT established a civilian government, and kept the military under control, a network of quasi-military security agencies played a crucial role in maintaining KMT rule and suppressing dissent. (pp. 59-64)

Taiwan offers a classic case of elite-led revolutionary transformation from above. The party was insulated from society, and could use its enormous bureaucracy, military network, industrial assets confiscated from the Japanese, as well as U.S. aid to lead the transformation. There was also no viable opposition to the KMT. The old intellectual and political elites were liquidated between 1947 and 1949. There was no indigenous capitalist or financial class to challenge the regime economically. The peasantry was not mobilized. After 1950 the regime adopted a corporatist approach to create a social base in the local society. A vital part of this was land reform. (pp. 64-67) Chastened by defeat on the mainland, political leaders (notably Chiang Kai-shek and Chen Cheng) gave substantial scope to western advisers in economic policy. In fact Gold goes as far to argue that the Americans, through AID, had de-facto veto power through their control of the Nationalists economic lifeline. In the first few years, aid mostly went to commodity imports, helping supply basic necessities and ease inflationary pressure. The character of aid changed to fostering economic development, although it was still justified in military terms. The KMT dominated most industry, but under pressure from the US and at the prompting of K.Y. Yin and other more pro-private sector bureaucrats, it promoted capitalism in certain key sectors such as rice and flour milling. Access to US AID allotments allowed high profits to be made with minimal risk. Initially it was mainly mainland capitalists with strong bureaucratic connections who benefited. However, domestic capital slowly emerged, supported by both the government and AID. The result was a textile boom. By the end of the 1950s, net industrial production had doubled. (pp. 64-72)

In the 1960s, Latin American countries moved to vertically integrate their economies by encouraging domestic production of intermediate and capital goods. However, the KMT regime responded very differently to the saturation of the import substitution market. Instead of deepening import substitution, it instead orientated its economy towards exports. Reforms were supported by the Americans and important regime figures such as Chen Cheng and K.Y. Yin, as well as the president himself. Americans actually threatened the withdrawal of aid if reforms were not undertaken, but offered a $20-30 million dollar incentive for prompt implementation. (pp. 76-78) Taiwan’s allure as a site for FDI emerged with the expansion of world trade at the end of the 1960s, as well as cheap competition from Japan which forced U.S. manufactures to look for cheaper labour overseas. American investors were generally large TNCs targeted at exports. Japanese investors were in contrast typically small and medium sized companies who aimed at local markets as well as exports. The government developed an electronics industry by soliciting foreign investment. Although investors (especially Japanese) constantly evaded local content requirement, a new class of Taiwanese entrepreneurs emerged based on various forms of cooperation with foreign investors, perhaps most notably Lin Ting-sheng (林挺生) of Tatung (大同). In short, Gold emphasizes the role of the state: “Taiwan did not develop a laissez-faire, free-market economy; the state retained multiple controls and only granted what seemed like free market activities within strict bounds. There was a lot more going on than ‘getting the prices right.’” (pp. 78-87)

In conclusion, Taiwan’s shift to export orientation grew out of an economic crisis – the exhaustion of the first stage of import substitution – but occurred before this crisis took on political dimensions. Taiwan still lacked the capital, foreign exchange , global credit, technology, internal market, or labour shortage to justify a costly second stage of import substitution. As a result it moved to liberalize and internationalize its economy. The state’s role became more closely associated with fine tuning the investment climate than any aspirations of recovering the mainland – “Nonetheless, though continued ownership of upstream enterprises and banks, its array of official and discretionary incentives and sanctions, its control of import and export licences and foreign exchange, and its power to protect selected local industrial sectors, the state maintained a major role in guiding economic activity.” (pp. 95-96)

The final chapter discusses the re-emergence of a developmental state in the 1970s in response to economic dislocations caused by the first oil crisis, and Taiwan’s increasing isolation on the international stage. It then looks at the rise of the opposition following the Zhongli Incident (中壢事件) of 1977. The economic threat in the 1970s was spearheaded by the oil crisis, and the subsequent hike in commodity prices. Taiwan was also hit by increasing protectionism in its main markets. A labour shortage and doubling of wages between 1976-1980 sent to price of Taiwan exports up further. To reduce Taiwan’s vulnerability to the global economy, the regime embarked on a strategy which aimed to vertically integrate and deepen industry. Politically, it moved to replace political ties with economic ones. The six year plan between 1976 and 1981 emphasised capital and technology-intensive industry, notably steel and petrochemicals. The state also pushed forward the Ten Major Development Projects (十大建設), which compromised 20% of the state’s investment for 1975 and 1976. While some of the projects were infrastructural, others were intended as public enterprises for profit. For example the projects included an integrated steel mill, which became a virtually 100% government enterprise after private investors pulled out. Using this state-of-the-art technology, the China Steel Cooperation under the leadership of Chao Yao-tung (趙耀東) became one of the world’s most profitable steel companies. In 1977 the government established the Council for Economic Planning and Development (CEPD) (經濟建設委員會) under the leadership of Yu Kuo-hwa (俞國華) recentralizing power over macro planning, setting priorities, coordination, and evaluation. The CEPD shifted the emphasis towards more technology-intensive and energy efficient industries. Other measures the state took to survive in the 1970s:
(1) Increase self-sufficiency in food.
(2) Reduce dependence on imported energy
(3) Improve defence capabilities
(4) Reduce trade dependence on United States and Japan
(5) Win loyalty of overseas Chinese
(6) Engage in as many foreign alliances as possible (pp. 97-110)

The final section is a narrative of Taiwan’s the surge of political activity in the late 1970s. This is better dealt with elsewhere.

K.Y. Yin, “Wo Dui Taiwan Jingji De Kanfa” (My Views on Taiwan’s Economy) (1963)

初編
K.Y. Yin (尹仲容) was the key architect of Taiwan’s post-war economic success. This collection of essays sets out his views on Taiwan’s economy. Yin believes the three main aims of economic policy should be: (1) balance the budget; (2) improve the balance of payments situation; and (3) provide full employment. To these three, a fourth objective of raising social welfare can be added. However, these objectives can often prove contradictory. For example, balancing the budget might require reductions in government expenditure, increasing unemployment. Yin believes that the only way to achieve the above objectives is to increase production. This can be achieved by: (1) Using existing production facilities and surplus labour force; (2) Increase capital, from either domestic sources (increased savings, taxes, using surplus labour, increase currency in circulation. (pp. 2-3)

Next, Yin looks at some of the debates surrounding economic policy. He advocates the following measures: (1) complete basic survey and statistical work; (2) choice between public and private enterprise should depend on the sector; (3) industry should take priority over agriculture; (4) the choice between trade and self-sufficiency should be made on the basis of the actual situation; (5) protect forestry, develop fisheries; (6) develop the maritime industry. Yin seems to favour greater liberalization in principle, but because Taiwan’s economy is an wartime situation.
Overall, Yin argues that the actual policies chosen should fit the circumstances at the time. (pp. 5-6)

Paper 3: “Looking at Taiwan’s Current Economic Situation Through Currency Reform”

The reform in June 1949 introduced the New Taiwan Dollar. The four elements of the reform were as follows: (1) limits the amount of currency issued; (2) adequate currency reserves; (3) value expressed in US dollars; (4) exchangeable with gold. However, the amount of currency issued ended up exceeding all limits. Exchangeability with gold was also ended. In 1951 the buying and selling of gold was forbidden. At the same time a multiple exchange rate introduced, abandoning the policy of expressing the value of the NT dollar in U.S. dollars. (p. 20)

Currency issues – Expectation of future value of currency important factor in inflation. Although currency issues increased, the existence of a limit forced the government to make savings. This increased confidence and reduced inflation. (pp. 21-22)
Gold savings – The aim was reduce inflation by withdrawing NT dollars from circulation. This system was adjusted a number of times. For example in July 1950 gold deposits were converted into”patriotic” savings bonds (愛國公債). In December the government ended convertibility with gold.
Foreign exchange and exchange rate – In April 1951 a foreign exchange verification system (外匯審核制度) introduced. (pp. 22-23)
The government introduced the following exchange rates:
(1) Basic official exchange rate (基本官價匯率) 1:10.3. Used for imports of essential inputs, exports from public enterprises (losses subsidized by the government)
(2) Export exchange rate (出口匯率) 1:14.5. Subsidized exports for private enterprises.
(3) Import exchange rate (進口匯率) 1:15.6. Exchange rate difference equivalent to customs tariff. (pp. 23-24)
Risk that strong imorts and weak exports could import inflation. Also obvious risk of speculators exploiting difference in exchange rate. (pp. 24-27)

Factors that stabilized the NT$:
Increased income: Increased production, improved exports
Savings: Limits on consumer expenditure, savings in government expenditure. (p. 27)

續編

Paper 18: “On Economic Development”

It was common belief that the fast economic growth of Hong Kong, Germany, and Pueto Rico was due to an improved investment climate caused by economic liberalization and currency reform. However, Yin argues that this explanation over-simplifies the issue.
1. Hong Kong and India were both ruled by the British. Why is Hong Kong’s development much more impressive than India’s? Why has Hong Kong only managed to industrialize recently despite having liberal economic policies in place for many years?
2. During the 1930s Germany’s economic power grew rapidly despite (or because) it had a system of state economic domination.
3. Puerto Rico has been ruled by the U.S. since 1898. However, it is only since 1952 when it achieved self-government that it has attracted significant investment from the U.S. The classical explanation would be that it has improved its investment climate. However, this favourable investment climate did not fit the classical model or equal treatment for investors. Instead the Puerto Rican government gave certain groups of investors special treatment and investment incentives. (pp. 169-170)

Yin outlines two models for economic development: the “evolutionary way” and “revolutionary way”. The evolutionary model of economic development is based on a cultural, social, political, and economic environment that is conducive to development. An example is 18th and 19th century England. Although there may be foreign influences on economic development, the driving force is domestic. The role of the government is passive. In the revolutionary approach, the positive conditions for economic development do not exist. An example is Meiji Japan. Foreign influence is needed to improve the social and political enviroment and institutions. The government takes a strong interventionist role in the economy to develop institutions conducive to economic growth. (pp. 170-171)

Using the example of Puerto Rico, Yin argues that backward countries need strong government intervention to secure economic growth. In particular, the government can use subsidies and incentives as a way of attracting foreign investment. Investment attracted to Puerto Rico by 10 years of tax exemptions actually remained in the territory after the exemptions expired. Taiwan can use this example to improve its investment climate. But sustained economic development also requires improvement at the cultural, social, and political level.

Chen Cheng, “Land Reform in Taiwan” (1961)

This book is an outline of the land reform programme by its main architect, Chen Cheng (陳誠).
The four aspects of land reform discussed are as follows:
1. Rent reduction on cultivated land
2. Sale of public land
3. Implementation of the “land-to-the-tiller” programme
4. Reclamation and full utilization of cultivated land (p. 15)

The “land-to-the-tiller” (耕者有其田) ideal was to be realized in stages. The first stage was the rent reduction. Enforcement of rent reduction began in April 1949 and was completed in September. The essential items in the rent reduction legislation were: (1) reducing rental rates to a maximum of 37.5% of the total annual yield of the principal (三七五減租); (2) protecting tenant’s rights by requiring that all contracts be written and that the lease period be at least 6 years; (3) respecting landlord’s rights and interests by providing provision for termination of tenancy for rent arrears exceeding two years. (pp. 22-23)

The authority to execute rent reduction was vested in the Land Bureau of the Department of Civil Affairs (民政廳地政局) at the provincial level and in the county and municipal governments at their level. A number of supervisory and guidance agencies were also established to supplement government efforts. (pp. 23-26) Farm lease contracts were in a form uniformly prescribed by the government and signed in triplicate, with one copy kept by the district or town office. (p. 26-27) Inspection and checking was carried out through checking of written records along with interviews and meetings. (pp. 28-29)

In fact, there were more tenancy problems after the implementation of the rent reduction. One problem was that in implementing the rent reduction, the government relied on old information on land categories and grades as a basis for the assessment of total annual yield. Therefore, in 1950 the government undertook a regional readjustment of the categories and grades of those lands that had been registered. Where appropriate, farm lease contacts were revised. (pp. 29-32) In some cases, landlords tried to exhort from tenants a promise to terminate leases. This land was then typically re-let at black market rates. (pp. 32-33) Other disputes involved rent payment. In June 1952 Farm Tenancy Committees (耕地租佃委員會) were established at the county, municipal, district, and township level to effect conciliation in tenancy disputes before they went into the judicial system. (pp. 33-35)

The government also provided that the incumbent tiller of leased land had prior right to purchase. However, this frequently caused disputes. For example, when offering his land for sale, the landlord might purposely raise its price and compel the tenant to purchase at that price. The government introduced a number of mechanisms to deal with such disputes. (pp. 35-38) Collection of security deposits was also a prevalent practice. The government had to put in place measures to deal with disputes regarding the conversion of old currency to new currency and refunding of security deposits. (pp. 38-39) The other problems listed by Chen are: inheritance of tenancy rights and sharing of separate lease contracts; problems of farmhouses and their sites; problem of water reservoirs and fish ponds; and problem of tea plantations and fish ponds. To deal with these issues, the government issued a number of supplementary regulations. (pp. 39-42) The increasing role of the government in every detail of rural life is apparent.

The achievements of rent reduction are as follows: (1) increase in farm production and of farmers’ income; (2) betterment of tenant farmers’ livelihood; (3) decline in the value of farm land; (4) increasing number of tenant farmers buying land; (5) promotion of rural stability. The final point is crucial. The KMT recognized that one of the reasons for defeat on the mainland was the failure to implement land reform. This provided the opportunity to “Communist agitators” to infiltrate villages and mobilize the peasantry. (pp. 42-47)

The next chapter discusses the sale of public farm lands. A survey in 1952 by the Land Bureau of the Taiwan Provincial government revealed 181,490 jia of public lands, constituting 21% of all farmland on Taiwan. Dry land made up 55.5% and paddy 45.5%. Most public land was in the south (58.3% in the seven counties and municipalities south of Yunlin. Most of these lands were “farmed” by Japanese veterans, retired officials, the local gentry, and big industrial companies, which subleased them to tenant farmers for actual cultivation. These relations were very exploitative. The “farmers-general” paid about 30% of total annual produce in rent to the Japanese state, which then subleased them to farmers for actual cultivation. (pp. 47-51) In 1947, the government promulgated the “Regulations Governing the Lease of Public Land in Taiwan Province”. According to these regulations, all public farmland should be leased to cooperative farms except small pieces of land unsuitable for cooperative farming which should be leased to small farmers. A total of 58.9% of all public farmlands were leased in this way. However, the remaining 41.1% was
“retained by the various public enterprises an owner-operated farms for the supply of raw materials and by government organs or vocational schools for agricultural demonstration and experimentation, and the growth of seedlings.” (pp. 52-53)

The leasing of public lands did not produce the anticipated results, and the number of collective farms fell short of target. As a result, it was decided in 1948 that public land would be sold to farmers. The scheme was implemented in 1951 with the successful completion of the rent reduction programme. The aims of the sale of public land are listed as (1) promotion of owner-farmers; (2) reform of the land system; and (3) increase of land use. (pp. 55-56) The sale price of public lands was 2.5 times the total annual yield of the main crop to be paid in 10 annual instalments without interest. (p. 59) Payment for paddy was to be made in rice, but for dry land payment was made in cash according to the official rate for sweet potatoes at the time. (pp. 59-62) A total of 6 sales of public land took place between 1948 and 1958. Some land was struck off the list for sales due to poor quality. A total of 71,666 jia was sold to farmers, but this constituted only 39.5% of public land. Sales of public land peaked in 1951. (pp. 63-65)

The land-to-the-tiller program was carried out according to the following 3 principles: (1) help tenant farmers acquire land without increasing their financial burden; (2) protect the interests of landlords; (3) convert landholdings into industrial holdings. (pp. 66-68)

The programme was implemented in the following stages.
(1) General landownership classification: The General Landownership Classification (地籍總歸戶) began in January 1951 with the technical assistance and financial support of the Sino-American Joint Commission on Rural Reconstruction.
(2) Enactment of the Land-to-the-Tiller Act: The name of the bill was changed from “Establishment of Owner-Farmers in Taiwan” (台灣省扶植自耕農條例草案) to Sun’s “Land-to-the-Tiller” to give ideological legitimacy. On 20 January 1953 the bill was passed by the Legislative Yuan. In addition to the 3 principles above, the bill had a number of other important features. First, the process of purchase and resale was to be carried out by the government. The landlord and tenant had no direct contact with each other. Second, the bill provided that “educational and philanthropic enterprises undertakings and public and private enterprises depend on farmland as a source of revenue or as a basis for their operations.” These lands were to be exempted from compulsory purchase. This was particularly significant for public enterprises which could retain large holdings so as to guarantee supply of raw material.
(3) On-the-Spot Rechecking: Began on 16 March 1953 and lasted around a month. Formed essential part of subsequent decisions on compulsory purchase of land and resale to cultivators.
(4) Purchase and Resale of Farmland: Began on 1 May 1953
(5) Compensation for Landlords and Collection of the Land Price: Compensation 70% in land bonds in kind, 30% in shares in public enterprises. Land bonds were in rice bonds and sweet potato bonds. Rice bonds were mostly paid in rice with the exception of a small part that was converted into cash. Sweet potato bonds were paid in cash. The bonds were to paid in equal instalments over a period of 10 years. The shares in public enterprises are discussed extensively by Liu (see below). Collection of the purchase price took place in 20 equal instalments over 10 years beginning in July 1953.
(6) Preservation and extension of the achievements of the land-to-the-tiller programme.
(pp. 68-81)

Results of the land-to-the-tiller programme are listed as follows:
(1) Realization of the all-farm-land-owned-by-farmers ideal: As a result of successive reforms, 70% of the 360,736 jia of public and private leased farmland has been transferred to private ownership of tenant farmers.
(2) Increase in agricultural production and improvement of farmers’ living conditions: Due to greater production incentives, improvements in land use, and increased use of farm implements and agricultural equipment. The net income of the farmer-purchaser increased by 50% from 1952 to 1959. Improvements in living conditions can be seen from payments for food, clothings, dwellings, travel, education, and entertainment as well as the number of children attending school.
(3) Elevation of social status: Shown by increases in the number of public office holders from farm families.
(4) Prevention of communist penetration and strengthening of political appeal: Chen notes that the large amount of rice in government hands following the implementation of the land-to-the-tiller programme has made an important contribution to a stable social and political order. (pp. 81-91)

The penultimate chapter looks at the development and utilization of farm land. Chen points out that nearly all barren land in Taiwan had already been brought under cultivation. Increasing arable land could only be increased by levelling mountains or reclaiming coastal lands. Chen sees promise in the latter. There is also the possibility of greater usage of arable land. For example, mountainous areas could be used for animal husbandry. (pp. 92-97) Fuller utilization of existing farmland could be achieved through water conservation, land re-plotting and consolidation, mechanized farming, scientific farming (use of chemical fertilizers, pest control, variety improvement), and promotion of “self-governing spirit among farmers” (through farmers’ associations and irrigation associations). (pp. 97-111)

The last chapter compares land reform in Taiwan with the Chinese mainland. This serves more of a propaganda purpose.

Robert Wade, “Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization” (1990/2004)

Wade’s study approaches the debate between neoclassical and interventionist approaches to economic development. Neoclassical approaches tend to argue that success of the five Asian NICs (Japan, Taiwan, Korea, Hong Kong, and Singapore) is either attributable to their reliance on free markets and minimal state intervention (the free market (FM) approach), or government intervention which corrects distortions caused by other policies and institutions and therefore simulates a free market (the simulated market (SM) approach). Another body of literature has emphasized the role of the state in directing the economy, perhaps most famously Chalmers Johnson’s study of Japan’s MITI (Ministry of International Trade and Industry). Building on the theory of the developmental state, Johnson proposed the governed market (GM) approach. This approach argues that the superiority of East Asian economic performance is due to: (1) very high levels of productive investment, making for fast transfer of newer technologies into actual production; (2) more investment in certain key industries that would have occurred in the absence of government intervention; and (3) exposure of many industries to foreign competition, in foreign markets if not at home. The proximate causes are in themselves the result of government policies. Governments used incentives, controls, and mechanisms to spread risk to guide – or govern – market processes of resource allocation. These policies have been permitted or supported by a certain kind of organization of the state and private sector. (pp. 22-29)

The neoclassical explanation agues that Taiwan’s success is the result of the coming together of four key conditions around 1958-62: a virtual free trade regime for exporters and a lowering of protection more generally; a free labour market; high interest rates; and conservative government budgeting. Important liberalizing measures taken after 1958 were exchange rate reform, reduces tariffs and import controls, export promotion, and incentives for foreign investment (see also Lin, below). The high cost of credit actually favoured exporters, which are typically more labour intensive than non-exporters. On the other hand, it may also put them at a disadvantage when compared to their competitors. This is why the government’s export scheme which gave preference to short term export loans was important.
Wade in fact argues that Taiwan “seems to meet the neo-classical growth conditions well.” However, “other evidence suggests that the government has been intervening for decades, often quite aggressively, to alter the trade and industrial profile of the economy in ways that it judges to be desirable.” (pp. 52-72)

Wade argues that the state has been doing more than the neoclassical explanation recognized to increase supply responsiveness and steer the direction of economic growth. During the 1950s the government used trade and exchange rate policies to control external competition. The government also laid the basis for the production of plastics, artificial fibres, cement, glass, plywood, fertilizer, and in particular textiles. In 1963 industrial production exceeded agricultural production for the first time. Upstream industries were either run by the government or handed over to selected private entrepreneurs. Taiwan also used a series of four-year plans the guide development. The Second Four Year Plan worked on the assumption that “capital shortage is a major difficulty in economic development”, and hence, “the government should positively undertake to guide and help private investments so that they do not flow into enterprises which have a surplus productivity and stagnant market.” (pp. 73-82)

The U.S also played a vital role. Over the 1950s, economic aid equalled around 6% of GNP and nearly 40% of gross investment. Military aid was even larger. The U.S supplied 35% to 45% of Taiwan’s imports, and took 5% to 10% of its exports. Aid has the following benefits:
(1) Proving food and rehabilitation investment goods at critical moment.
(2) Increase confidence of foreign investors
(3) Dampen inflation and protect income distribution
(4) Technology transfer
(5) Strengthened planning function of the state
(6) Allowed Taiwan to maintain a large military (absorbing around 10% of GNP) while still growing quite fast
(7) Strengthen the role of the private sector (the first plastics plant in 1957 was a key battle as many conservatives wanted to make it a public enterprise)
(8) Reduce discrimination in favour of mainlanders (for example in the import licences for cotton)
(9) Ease transition to more liberal economic policies in late 1950s and early 1960s. (pp. 82-84)

Wade thinks that import substitution made an important contribution to Taiwan’s growth before the trade reforms. Equally important, the state did not disappear once the liberalizing reforms were in place. In fact, the state played an important directive role in the move into heavy and skill intensive industry in the mid-1970s. During the second half on the 1970s (and earlier in sectors such as synthetic fibres, electronic goods, as well as some heavy and chemical manufacturing sectors) there was a wave of secondary import substitution of intermediate and capital goods. In 1961, Philips of Holland opened a factory in Taiwan marking the beginning of a corporate strategy that became known as global manufacturing. (pp. 84-96)

In the 1970s the economy was falling victim to its own success. Cheap exports lead to rising protectionist calls in the United States. World prices for non-oil commodities were rising, a situation not helped by the effective devaluation of the NT$ in 1971 and 1973. Then between 1973 and 1974 world oil prices quadrupled. The government responded with the Sixth Four-Year Plan, which while renewing the emphasis on export orientation, also signalled state support for advances in petrochemicals, electrical machinery, precision machine tools, computer equipment and so on. The role of public enterprises expanded through the 1970s, not only in infrastructure, but also in the heavy and chemical sectors. To control inflation, the government adopted a high risk strategy of raising interest rates. In the 1973, the government intensified its R&D efforts by establishing the Industrial Technology Research Institute (ITRT) (工業技術研究院). In 1980 the Hsinchu Science Park opened, enabling collaboration between foreign and domestic high-tech firms and ITRT laboratories. (pp. 96-99)

In conclusion, evidence that in some sectors, the state led the market comes from:
(1) trends in heavy and chemical industries during the 1960s and 1970s which showed fast growth before changes in comparative advantage (for example, before the end of the labour surplus in 1968)
(2) the history of state involvement in particular sectors which suggests that the state acted in anticipation of changes in comparative advantage.
In many sectors, such as fuels, chemicals, mining, metals, fertilizer, and food processing, public enterprises have played the leading role. Even in sectors where public enterprises did not dominate, such as textiles and plastics, the state led private producers during the early years. Functional (as opposed to sectoral) industrial policies were also pursued, for example in the 1950s and 1960s the government tried to encourage industrialists to improve products and production methods, and then in the 1960s it also promoted the use of computers in industry. (pp. 108-112)

Although Taiwan is a very open economy, Taiwan’s openness and outward orientation have not been based on free trade but on government intervention. Wade also finds that in 1969, there was a substantial amount of bias in Taiwan’s trade and industrial policies. (pp. 115-117) He also suggests that the 1958-62 reforms were not as thoroughgoing as they are popularly believed to be. For example, neither tariffs nor quantitative restrictions fell much during the 1960s. Between 1970 and 1974, many “controlled” items were shifted onto the permitted list. However, the tariff rate on many items was increased in compensation. (pp. 119-126) In fact, substantial impediments to imports remained in place until the 1980s. Taiwan basically has a “cascading” structure of protection, with higher protection on final goods than on raw materials. (pp. 136-137) Finally, the government maintained foreign currency controls. Prior to 1987 all foreign exchange transactions had to be backed by trade contracts or accounted for by evidence of invisible transactions. (pp. 138-139)

Exports were encouraged by various incentive schemes during the 1960s and 1970s, but these schemes were slowly scaled back as foreign exchange reserves mounted. Wade lists the incentives as follows:
(1) Export-processing zones
(2) Non-tariff barriers – An exporter could only buy imported items on the “controlled” list if the price of the domestic substitute is more than 10% higher than the C.I.F. price. During the 1970s and 1980s, exporters faced fewer restrictions.
(3) Export tax incentives
(4) Export credit
(5) Export cartels
(6) Export quality inspection – To protect the image of Taiwanese goods
(7) Export marketing – In 1970 the government established the China External Trade Development Council (中華民國對外貿易發展協會) to deal with this area.
(8) Export awards
(9) Exchange rate – In the mid-1980s the undervaluation of the NT$ was estimated at around 25%.

The government also carefully managed foreign direct investment. Wade argues that “foreign investment proposals have been evaluated in terms of how much they open new markets, build new exports, transfer technology, intensify input-output links, make Taiwan more valuable to multinationals as a foreign investment site and as a source for important components, and enhance Taiwan’s international political support.” In the 1970s the government became more selective about which firms to allow into Taiwan. Foreign investment in labour intensive production was discouraged, and firms faced export requirements and/or local content requirements. The government also uses the approval mechanism as a form of hidden protection by promising investors an ample domestic market. (pp. 148-157)

Within the domestic economy, the government has influenced the amount and composition of investment. The banking system was publicly owned and tightly regulated. Hence the curb market provided an important marginal source of finance for firms or households that could not access bank credit. (pp. 158-165) There is also some evidence that lending by banks has corresponded fairly closely with government sectoral targets. (pp. 165-172) Advocates of the neoclassical position point to government restraint in spending as a key factor behind Taiwan’s success. However, Wade finds that government spending actually increased as a percentage of GNP (at current prices) from 20% in 1963 to 23% in 1973. Taiwan has relied heavily on indirect taxes, especially customs revenue. (pp. 172-175)
Public enterprises also played an important part of the economy throughout the period of export orientated growth. Public enterprises were typically among the largest firms in their sectors. They were concentrated in the “commanding heights of the economy” – the upstream sectors. This has given the government leverage of downstream producers. For example, the government indirect leverage on synthetic fibre and textile producers through the China Petroleum Cooperation. In fact the scope of public enterprise expanded over the 1970s. China Steel and China Shipbuilding, both created in the 1970s, are almost entirely state owned. (pp. 175-182)

The Statute for the Encouragement of Investment (獎勵投資條例) first promulgated in the 1960s (and revised several times since) is one of the principal tools for steering private investment. Taiwan used experience of Puerto Rico in drawing up this statute. The scheme combines two approaches. One is to target incentives at a wide range of industries, but only make incentives available to a few firms who meet sufficiently high performance standards. The other is to target the incentives on a narrow range of “strategic” industries, but to make incentives available to a wide range of firms within these industries. (pp. 182-185) The government has also tried to restrict the entry of unsuitable new firms. Although industrial licensing of new plants was ended in the late 1950s, approval for plant and equipment imports for new plants was required. (pp. 185-186) Industrial reorganization programs (for example to promote mergers or encourage greater specialization) have been attempted only selectively. (pp. 186-187) The government used a range of criteria to select “winners” that would receive support and encouragement. This was easier in the past when Taiwan was backward and there were examples to follow (for example Taiwan followed Japan’s lead in textiles). (pp. 187-190)

Governing the market requires an effective economic bureaucracy. The most important bodies for industrial and trade policy are the cabinet, the Council for Economic Planning and Development (CEPD) (行政院經濟建設委員會) and the Industrial Development Bureau (IDB)　(經濟部工業局). (pp. 194-196) For economics issues, an informal group within the cabinet has decisive influence. Because the CEPD is an advisory group to the cabinet and outside the normal machinery of government, it can pay salaries higher than the civil service norm and attract talent without making people go through the usual civil service examination. However, the CEPD has been primarily reactive a has never obtained the status of Japan’s MITI or the French Planning Commission. (pp. 196-201) The role of the IBD is to turn CEPD’s broad guidance into detained sectoral working plans. However, the IPD has often been too preoccupied with routine work to act as a serious policy formulating body. It has also been one of the main proponents of protection within the government, whereas the CEPD has been one of the main opponents- a split which parallels that between economists and engineers. (pp. 201-208) The CEPD and IBD both inherited their form of organization from the National Resources Commission (NRC) (國家資源委員會), which was abolished in 1952. During the mainland period the NRC was a technocratic civil service relatively insulated from the rest of government. The central bank was also powerful because it enjoyed significant autonomy (so it could deal with inflation effectively). Before 1980 it was legally only responsible to the president. The change in 1980 altered this rule but not the substance. (pp. 208-209) The Ministry of Finance (MOF) (財政部) is responsible for monetary and fiscal policies, as well as tax collection. However, because it is not responsible for budgeting, it has less power than its counterparts in other countries. Budgeting is carried out by the Directorate General of Budget, Accounts, and Statistics (DGBAS) (行政院主計處).

Policy is not formed entirely in the government. Taiwan has a large establishment of universities, research institutes, and consultancy firms that are heavily involved in policy formulation. Foreign advisers were important in the Science and Technology Advisory Group (行政院科技顧問組), which established to oversee the National Science and Technology Program under the leadership of K.T. Li (李國鼎). (pp. 211-217) Economic policy is dominated by only a handful of people. Most recruitment to the economic bureaucracy is through highly competitive examination. Most ministers and senior officials with responsibility for economic affairs have backgrounds in engineering. (pp. 217-224)

Overall, Wade thinks that the intergovernmental organization of policy making has the following advantages:
(1) Agencies responsible for industrial policy making (CEPD and IPD) are at the heart of government and have significant power.
(2) The scope of the IDP allows authority to be matched with responsibility since it includes both planning and implementation of industrial policy.
(3) Top-decision makers in industrial policy generally reach their position after long experience in several agencies and public enterprises during reach they build strong working relations with colleagues. This helps overcome problems of horizontal communication. Also these agencies are able to recruit from the best university graduates.
(4) The high degree of centralization of decision-making within each economic hierarchy helps coherence. (pp. 224-228)

The next chapter looks at Taiwan’s “authoritarian corporatist” political system. Very limited scope for popular preferences in the selection of rulers goes with tight restrictions on interest groups. The state sanctions a small number of interest groups and gives them a monopoly on representation. The model fits some aspects of Chalmers Johnson’s developmental state. However civil society is kept more weakly organized than Johnson’s soft authoritarianism. Because civil society is weak, politicians are less important as a “safety valve” than in Johnson’s model. (pp. 253-255)

Because state-licensed interest groups have very little autonomy, the central bureaucracy is unusually well protected. In terms of Chalmers Johnson’s model, Taiwan meets the “bureaucratic autonomy” but fails to meet the “public-private cooperation” condition. Private sector representatives are little involved in policy making. However, there is a strong policy network that links central government economic bureaus to public enterprises, banks, universities, foreign multinationals operating in Taiwan, and some “special status” private firms connected to the party, economic ministries, or military. (pp. 294-297) The collusion between party officials and private enterprises that Liu Chin-ching discusses extensively appeared to weaken after the 1960s. (p. 287)

The first of the two concluding chapters reviews Taiwan’s experience and brings in comparisons with Japan and Korea. Although there is evidence that fits the FM/SM as well as the GM theory from all three countries, Wade convincingly shows how government intervention went far beyond the limits of “good” neoclassical intervention. (p. 342) The second concluding chapter is more speculative, attempting to draw out some lessons from the East Asian development experience.

Lin Ching-yuan, “Industrialization in Taiwan, 1946-72: Trade and Import Substitution Policies for Developing Countries” (1973)

Lin Ching-yuan (林景源) argues that Taiwan’s experience of development was “distinctive” because “the initial stage of import-substituting industrialization and the subsequent saturation of domestic markets by ‘easy’ manufacturers were followed by a thorough reorientation of policy incentives to encourage the export of manufactures and industrial efficiency.” (p. 3)

The open system of the colonial period was centred on exports to Japan. However, after the war Japan was suffering from serious balance of payments difficulties, and could no longer afford large amounts of Taiwanese imports. Also, because of the severance of the colonial relationship between Japan and Taiwan, Japan no longer had any reason to favour Taiwanese imports over those from the Philippines, Thailand, and other South-East Asian countries. Under these circumstances, “a system of stringent foreign-exchange and import controls soon became a concious policy instrument for infant industry promotion and protection.” Domestic producers were given strong incentives to produce import substitutes. Reinvestment in traditional agricultural activity was discouraged by the loss of export markets, land reform, price controls on domestic rice, and unfavourable domestic terms of trade. (pp. 3-4)

However, by the mid-1950s Taiwan was already facing a saturation of its domestic market. In the meantime, the adverse balance of payments situation persisted. In response, the government reorientated the economy towards exports. First, the overvaluation of the currency was corrected. Second, the government took a number of measures to reduce incentives to sell at home and increase incentives to sell abroad. During the 1960s, exports other than rice and sugar increased at an annual compound rate of 32%. Because Taiwan was more successful at diversifying its export portfolio (non-food light manufacturing, heavy manufacturing) it achieved greater stability than Latin American countries who remained vulnerable to the vagaries of export fluctuations. (pp. 4-7)

In the import substitution model, the primary export sector is taxed in order to subsidize the new manufacturing sector. However, the export sector is rarely taxed directly. Instead, a host of incentives (licensing and pricing schemes) are introduced that favour the new manufacturing sector over the primary export sector. The new manufacturing sector is given incentives such as the exclusion of foreign competition, the allocation of foreign exchange, bank credits, and essential inputs at preferential rates. Traditional export activity is discouraged by unfavourable foreign exchange rates and domestic terms of trade vis-a-vis the new industrial sector. However, because of an undeveloped tax system and small organized financial sector, it is difficult to contain central government financing of budget deficits. The expansion of demand pressures, together with shortages of many essential goods, makes inflationary pressures inevitable. Inflationary pressures and expanded import needs make it extremely difficult to maintain an exchange rate equilibrium. In response, most countries try to regulate the allocation of foreign exchange through exchange and import controls and a system of multiple exchange rates. (pp. 8-9)

The second chapter looks at the problems of the Taiwan economy in the late 1940s. It begins with an overview of the Japanese colonial period and an assessment of Japan’s legacy on Taiwan. Lin thinks the main contribution of the Japanese was to sweep away traditional/feudal elements in Taiwanese society, and provide improvements in education and infrastructure necessary for developing a modern economy. (pp. 22-27)

After the war, Taiwan’s traditional position with the Chinese mainland was reversed. Owing to war devastation, the mainland now provided a ready market for Taiwanese manufactured goods. In May 1946, numerous Japanese enterprises were consolidated into 22 large public enterprises. However, on the political side the misrule of Chen Yi (陳儀) led to political stability and the bloody repression of 228. On the economic side, heavy deficit financing for reconstruction and the worsening political and military situation (and consequent inflation) on the mainland led to rapid inflation in Taiwan. Industrial and agricultural production did not recover their pre-war levels until 1950. If we include spot promissory notes issued with large dominations as currency substitutes, the amount of currency and currency substitutes issued by the Bank of Taiwan expanded 602 times between October 1945 and June 15, 1949. (pp. 27-29)
Reasons for expansion of currency issues:
(1) Deficit financing of public enterprises, government and military needs.
(2) Compulsory purchase of gold, silver, and foreign exchange after abortive currency reform on mainland (in which gold yuan replaced fabi )
(3) Fixed exchange rate with mainland. This was only adjusted with time-lag to purchasing power parity which was changing in favour of Taiwan. Encouraged flows of speculative capital into Taiwan and flow of goods out of Taiwan. Deteriorating situation on mainland also contributed to flow of funds into Taiwan which was far more than total currency in circulation.
(4) Imbalance in demand for many basic goods due to release of pent-up wartime demand. (pp. 29-33)

After the fall of Shanghai on 25 May 1949, Taiwan’s economic relations with the mainland were cut off. Governor Chen Cheng (陳誠) introduced a number of measures aimed at stabilizing Taiwan’s economy. On 15 June 1949 the New Taiwan Dollar (NT$) was introduced. The government attempted to bolster confidence in the new currency by introduction of a time deposit redeemable in gold and liberal approval of foreign exchange applications. However these measures proved to impractical. The gold scheme was plagued by profiteering, which was only ended in June 1950 with the issuance of “patriotic” bonds to depositors. In the meantime, the wide divergence between the official and unofficial exchange rate led to a huge rise in the number of import foreign exchange applications, exhausting the reserves of the BOT. In December 1950 the acceptance of gold under the savings scheme was ended, and in April 1951 the government made private transactions of gold and foreign exchange illegal. Clearly, achieving free convertibility into gold would be an impossible task. Fortunately, the growth of money supply slowed down during 1951-52 despite continued expansion of bank credit to public enterprises. This was made possible by the arrival of US aid (which provided essential imports and absorbed cash balances into a “counterpart fund”) and some improvements in tax collection. The other important factor was the successful introduction of the preferential interest saving deposit (PID) at rates higher than the offsetting price rises. More fundamentally, the gradual recovery in the supply of goods and services, deceleration of growth in the money supply, and physical separation from the mainland are the basic factors leading to the contraction of the inflationary cycle between 1951 and 1953. (pp. 33-38)

Chapter 3 discusses policy incentives for the period of inward-orientated growth. Despite Taiwan’s limited domestic market, the loss of export markets in China and Japan and sizeable import deficits forced an inward-orientated policy. In April 1951 the government introduced a substantial devaluation of the NT$ and multiple exchange rates for import payments and exchange receipts. Imports of goods by the public sector, and of plant equipment and important raw materials were given a lower “official” exchange rate. Imports of other goods (including many official consumer goods) were given a higher rate. Exports of public enterprises were given a lower rate and those of private enterprises a higher rate. Under this system, exports from the public sector (sugar, rice, salt) subsidized import-substituting industries in the same sector (chemicals, chemical fertilizers, and petroleum). Because of windfall profits from the wide divergence between the official and market exchange rate, entrepreneurs rushed into the import-substituting sector. This caused considerable difficulties for the government due the flood of import applications and limited amount of foreign exchange. The government responded by tightening rules for import eligibility. (pp. 43-47)

A system of import controls became the major instrument of infant industry and promotion in Taiwan. For balance of payments reasons or to protect infant industries, an increasing number of goods were placed under import controls. Import controls created a substantial widening of the price differentials between import substitutes and the C.I.F price of comparable imports. (pp. 47-50)

The price of farm produce was depressed in the post-war period (rice was under price controls, world sugar prices were depressed except for the short-lived boom in 1952-53), while the price of farm inputs and daily essentials was relatively high. Such a decline in the relative income position of agriculture might not have been sustainable without the land reform programme which distributed income to former tenant farmers. Compensation for landlords appears to have been far from fair and equitable, and although some former landlords got involved in the industrial sector, that sector was dominated by capital from conventional import-export businesses. (pp. 50-58)

Chapter 4 looks at the economic situation in the mid-1950s and the ensuing policy changes. By 1954 domestic production had increased to an estimated 77% of domestic consumption. However, there were still wide variations between sectors. Despite the rehabilitation of Japanese-built factories, the import ratio of many producer goods such as chemicals, metal, and machinery was very high. More successful import substitution occurred in the consumer sector. (pp. 65-66)

The economy in the 1950s faced a number of serious difficulties.
(1) Slow down in increases in manufacturing input due to small domestic market and technological limitations, increasing competition for domestic consumers depresses prices.
(2) Persistent balance of payments difficulties. Inflow of private capital and loans was mostly insignificant. The gap was plugged with U.S. aid -without aid elimination of trade deficit through reducing import demand and floating exchange rates would have caused an adverse impact on economic stability. Slow growth and sharp fluctuations in earnings from Taiwan’s traditional exports. (pp. 66-74)

Facing persistent balance of payments difficulties, cut-throat competition between domestic light manufacturers, a poor forecast for commodity exporters, and reductions in US aid, by 1958 there was a growing realization that fundamental reform would be needed. The exchange rate reform announced on 12 April 1958 reduced controls on foreign-exchange allocation and strengthened policy incentives for export activity. Multiple exchange rates were consolidated into two buying rates alongside two selling rates. Export goods handled by the public sector, and imports of fuels, fertilizer, and plant equipment, along with important raw materials were given a lower rate. In November, goods on a lower rate were brought up to the higher rate. The difference between the official rate and market rate became insignificant after July 1960, and in November 1963 the use of exchange certificates was ended and the unification of exchange rates completed. The elimination of multiple exchange rates and abolition of foreign exchange controls according to commodity eliminated excess foreign exchange demand arising from the discrepancy between the official rate and the market rate. (pp. 74-78)

The benefits of the exchange rate devaluation would have been lost if high inflation had not been contained. The government kept a tight lid on the expansion of credit by commercial banks in order to offset the inflationary effects of the exchange rate devaluation and rehabilitation work after a major typhoon in August 1959. When businesses collapsed under the weight of tight credit policies, private funds shifted from the business sector (who had previously borrowed from private individuals at high interest rates in the expectation of continuing high inflation) to bank deposits. This allowed an expansion of credits to exporters and a lowering of interest rates without leading to significant inflationary pressures. (pp. 78-82)

In February 1960 and with the encouragement of the U.S. aid mission, the government launched a 19-point development programme covering every major aspect of the country’s economic, fiscal, monetary, and trade policies. Of particular significance in later years were the decisions to improve the investment climate, liberalize administrative controls on industry and trade, and further strengthen export promotion efforts, all policies vigorously supported by K.Y. Yin (尹仲容). In the 1950s, incentives for productive activities included preferential allocation of foreign exchange, availability of U.S. aid and back loans at low interest rates. In the 1960s, a greater emphasis was placed on tax incentives. For example in 1960 the system of tax credits was extended with the promulgation of a statute to cover investment. Further tax incentives were introduced in 1965 when the investment law was revised. (pp. 82-87)

The government also liberalized discretionary controls. A number of revisions in the second half of the 1950s reduced tariff rates for many finished goods, but also increased tariffs for raw material inputs. Increased import duties for many important inputs (e.g. raw cotton, logs, sulphur, and crude oil) explains why the remission of taxes and duties became so important to the promotion of manufactured exports during the 1960s. (pp. 87-90) During the 1960s the conditions for import-restriction were also made more stringent. (pp. 90-95) Restrictions on establishing new manufacturing plants were also gradually loosened. (pp. 95-97)

Meanwhile, the government moved to strengthen export incentives. In August 1956, exporters of manufactured good were permitted to keep a portion of their foreign exchange earning for raw materials, or sell this entitlement on. After 1958, this entitlement was raised to 100% of export earnings for most items. The fact that entitlements could be sold on had the adverse effect of creating a plethora of effective exchange rates. In July 1970, transfer was banned, then in January 1971 the system for registering foreign exchange entitlement was abolished altogether. (pp. 97-100) A number of schemes for tax rebates and tax offsetting on exports was established. (pp. 100-103) After July 1957 exporters of manufactured goods were given preferential treatment through low cost export loans. (pp. 103-107) In July 1965, the first export-processing zone in Taiwan in Kaohsiung began to accept applications. Two more export processing zones, one in Kaohsiung and other in Taichung, followed. (pp. 107-108) Finally the government, at the same time as discouraging price fixing in the domestic market, helped manufacturers to set up sectoral associations or trade cooperation to regulate output and promote export sales. (pp. 108-110)

Chapter 6 looks at the basis for export growth. Export growth had a number of beneficial effects on the overall economy. First, it led to accelerated growth and improved industrial efficiency. Production for the much larger export market, for instance, helped firms achieve economies of scale. (pp. 118-123) Second, it led to an increased flow of foreign capital and improvement in trade balance. This enabled Taiwan to forego U.S. aid in July 1965 without too many negative repercussions. It also enabled it to build up strong foreign currency reserves. (pp. 123-124) Third, it led to an accelerated growth of national income and aggregate savings, as well as enhancing monetary stability. The improvement of the external balance, stability of domestic prices, narrowing of the gap between the official and market exchange rates, and the psychological effect of the collapse of debt-ridden private enterprises in 1960-61 lessened the attractiveness of hoarding U.S. dollars or gold. (pp. 124-128) Fourth, tax incentives have left a large amount of uncollected tax. There is a clear need to raise taxes to meet government expenditures in a non-inflationary manner. (pp. 128-131)

Of course, the direction of policy incentives cannot completely explain Taiwan’s successful export led growth. Foreign capital invested in Taiwan because of its comparative advantage in the production of labour intensive goods. Taiwan’s competitiveness was based on its “unlimited” supply of cheap labour from the agricultural sector, as well as the extension of primary and secondary education to the masses which made labour susceptible to industrial training and discipline. Entry of female workers into the market place was particularly significant. (pp. 131-154)

Liu Chin-ching trans. by Wang Hong-zen, Lin Jih-wen and Lee Ming-chun, “Taiwan Zhanhou Jingji Fenxi” (Analysis of Taiwan’s Post-War Economy) (1991)

Liu Chin-ching’s (劉進慶) study covers the period from 1945 to 1965. Liu is a committed radical, and this book is highly critical of what he calls Taiwan’s “semi-feudal” (半封建) post-War economy.

Following J.H. Boeke, Liu uses the dualistic economy as a framework. Essentially, a pre-capitalist indigenous system coexists with a highly developed foreign capitalist system. Because of the interaction between the two systems, although the old form may disintegrate, there is no complete transition to capitalism. However, we must also remember that the dualistic economy is only a framework, and that the precise nature of economic relations will vary across societies, and that between the two extremes there will be any number of intermediate forms of organization. (p. 1-7) The dualistic economy is essentially the same formulation as Tu uses to analyse the relationship between the modern and traditional sector in colonial Taiwan.

How can we understand post-War Taiwan using the dualistic economy framework? After the war, the state nationalized Japanese monopoly capital. Through public ownership, a “semi-feudal” system of “bureaucratic domination” (官僚支配) was established. At the same time, through land reform the government took over the old functions of the landlord class. On top of this were the coercive apparatus of a “semi-feudal” state. On the other hand, the traditional pattern of small-scale agriculture was retained and the peasants remained trapped in a system of feudal exploitation. In the post-War period, since Taiwan developed within the American and Japanese capitalist system, naturally private enterprise also emerged. Initially this enterprise was subordinated to the interests of public enterprise. However, eventually it went on to overtake public enterprise. The contradictory relationship between public and private enterprise is also one of the themes of this book. (pp. 7-10)

After the War, the KMT regime took over Japanese businesses. In 1945 a committee to deal with Japanese assets (接收委員會) was established. The committee first dealt with public enterprises under the control of the Governor General’s Office. In January the following year this committee established the “Japanese Property Liquidations Committee” (日產處理委員會) which dealt with the disposal of privately owned Japanese property. However, the transfer of the most important industries did not occur until the second half of 1946. All important industries were placed under public ownership- for example the Japanese sugar companies were merged into the state run Taiwan Sugar Company (a full list is given on pp. 26-27). (pp. 24-27) Monopoly Japanese capitalism was replaced by monopoly state capitalism, which in 1947 controlled 70% of production. (pp. 28-29)

In the period of reconstruction, public enterprises played the leading rule. Their capital of course came from the publicly owned banks. The problem was: where would the banks raise the capital from? The Bank of Taiwan (BOT) played the critical role, taking responsibility for issuing Taiwan Dollars and acting as the agent to the Central Bank (BOT was known as the “Bank’s Bank”). Only the BOT was allowed to lend to public enterprises. BOT loans to public enterprises were at levels far above savings. The difference was made up by issuing more money. This policy continued until 1951 (the New Taiwan Dollar had been introduced two years earlier in June 1949). Most loans went into manufacturing industries. Of course, issuing more money caused inflation. The Taiwan Dollar also suffered because its main reserve was the fabi (法幣). Another problem was government bonds. In order to meet bond payments as well as military expenditures, the government was forced to print increasing amounts of money. In theory, a recovery of production in public enterprises should quell inflation (since more goods are available). In fact the opposite happened. (pp. 28-35)

Inflation was led by rising prices charged by public enterprises (Liu gives the railways and electricity company as examples). In 1949, the large amount of refugees fleeing from the mainland caused inflation to rise again. In response, electricity and railway prices rose again. Liu argues that private enterprise was relatively insignificant and therefore not in a position to drive inflation. Rice was of course important but it was under strict price controls. Therefore, it was price rises in the public enterprises that brought inflation. The contradiction was of course that on the one hand the government was supposed to be controlling inflation, but on the other hand it was the public enterprises that were driving inflation. This was partly because their main function was to raise money for military expenditures (profits were diverted to the military), but also because the enabled bureaucrats to exploit surplus from the population. (pp. 35-39)

After the War, Taiwan’s economy was joined with mainland China once again. This led to spill over inflationary effects. After January 1948 the fabi and Taiwan dollar were put on a floating exchange rate, after which the fabi fell rapidly. This at least reduced the magnitude of the cognition. (p. 50) In summary, China’s inflation spread to China through imports of high price goods. Public enterprises raised prices in order to earn profit, which was then ploughed into the military, further impoverishing society. In addition, the price of agricultural products fell well behind that of manufactured imports (for example cotton). Wage rises also failed to keep up with rising prices. (pp. 57-58)

The cost of the civil war was essentially passed onto peasants and workers through high inflation. The government also carried out forced requisition of food as well as gold, silver, and foreign currency. Following retrocession, measures for requisition of grain were imported from the mainland. In October 1945 the “Temporary Grain Control Policy” (糧食管理臨時辦法) was promulgated, and in November the “Taiwan Grain Bureau” (台灣糧食局) was established. At the same time, cash payments for rent were replaced by payments in kind. (Liu thinks this was a very reactionary measure even though it was probably implemented in response to inflation). However, the government was still unable to secure adequate grain supplies. In 1947 it promulgated the “Taiwan Province Grain Purchase Policy” (台灣生收購糧食辦法) to institutionalize grain requisition. Forced requisition was carried out was to collect rice along with land tax; the other was to purchase rice of people with a surplus. The government also exchanged grain for fertilizer. Of course, the terms of trade were always unfavourable to the farmers. Requisition of grain from landlords may have been one of the factors behind 228. Forced requisition of gold, silver, and foreign currency took place in August 1948. Sellers received approximately the market rate, but this was at a time of relatively strict controls. The requisitioned gold, silver, and foreign currency formed a reserve for issuing more paper money, soon wiping out the earnings of the sellers. At the same time, the government clamped down on underground high interest lenders. (地下錢莊) Indigenous landlords and capitalists were left with nowhere to protect the value of their wealth. (pp. 58-64)

After the introduction of the Gold Yuan as the new currency in August 1948 along with the return to a fixed exchange rate, large amounts of Shanghai capital flowed into Taiwan. Large amounts of mainland capital followed escaping the chaotic situation on the mainland. Speculative capital also flowed in escaping restrictions on the mainland. In November, restrictions were removed and a floating exchange rate was reintroduced, and speculative capital moved back. However, at the same time regular capital continued to flow in escaping from the situation on the mainland. This capital quickly consolidated its position on Taiwan. (pp. 64-67)

The next section discusses land reform and the emergence of domestic capital. The main aim of land reform was to ensure regime stability. Essentially the state had an “antagonistic” relationship with the local landlord class, and a more “harmonious” relationship with the peasants. However, in carrying out land reform it could not completely ignore the interests of landlords. The actual process of land reform showed compromise with landlord interests. At the same time, landlords had to coexist with the KMT because of the communist threat. (pp. 71-74) Compromise between landlords (represented in the provincial assembly) and the government is shown in the passage of the “Land to the Tiler” (耕者有其田) act. Two areas of compromise were how much land landlords would be able to retain after reform and how they would be compensated. Interestingly, mainland landlords were also supporters of the interests of local landlords, since the act would have been applied on the mainland in the event of KMT return. 70% of compensation to landlords was paid in kind, and 30% was paid in shares in four public enterprises (concrete, paper, mining, and forestry). (pp. 74-80)

The transfer of the four public enterprises to landlords allowed the emergence of indigenous capitalism. Of course, the state would have preferred to give the landlords public enterprises “as few as possible in quantity, and as poor as possible in quality” so as to maintain the position of state monopoly capital. However, they also recognized the need to compromise with landlord interests. The landlords had demanded that 50% of compensation was paid in shares, but in the end only 30% was. In terms of the breakdown of the shares, mining and forestry were obvious candidates because they were dispersed operations not suitable for state operation. The paper industry did not have a promising future because it had lost the mainland market. The landlords also demanded the fertilizer and concrete companies, both which had a brighter future. In the end they were given only concrete. (pp. 80-84)

The next chapter discusses public enterprises. Unlike private enterprise, public enterprise is not mainly motivated by capital accumulation. Profits from public enterprise can be diverted elsewhere. Developing countries typically lack capital. They therefore use state capital to build up a self-sufficient economy (this may eventually lead to either capitalism or socialism). Essentially, private capital was subordinated to state capital in a hierarchical relationship. (pp. 93-97)

The KMT formed a “semi-feudal” militaristic ruling elite compromised of compradores, landlords, warlords, and other elements from the mainland. The “modern” constitution of 1947 was suspended by the “Temporary Provisions” in 1948. Chiang Kai-shek consolidated his power through a Confucian education system that placed the leader above either ideology or the state (領袖、主義、國家). In contrast to its subservient role in the West, state capital led development. Public enterprises were a means of state domination. (pp. 97-101)

The following two sections describe the role of the state in public enterprises and agriculture. Public enterprises were basically an exploitative mechanism for extracting surplus from farmers, workers, and society in general. In the post-War era, they controlled 50%-60% of capital. Exploitation was carried out through the enterprises monopoly position, and was a final source of financing for the state. US aid was a vital source of capital. Bureaucratism was rife, and many businesses ran at a loss. However, the largest public enterprises were a vital source of government revenue. The most profitable industries were sugar, fertilizer, oil, and electricity. (pp. 104-130)

On the farms, the state acted in the role of “landlord”. Surplus was extracted from the farmers in a number of ways. Like Lee, Liu also found that the rice for fertilizer programme was the most important source of rice requisition, accounting for 2/3 of the total. The KMT also continued the monopoly purchasing districts for sugar inherited from the Japanese. Around 85% of Taiwanese sugar was exported, and it was a vital export earner in the post-War years. In 1946, the government also decided to use the “sugar sharing system” (分糖制) to secure cane, with about 50% of production going to the sugar companies. This system in fact transferred risk onto the farmers. Only around 20% of cane was grown on company run plantations, the other 80% was contracted from farmers. Ad well as the “sugar sharing system”, sugar companies secured cane by making loans that were then paid back in kind (with cane) as well as purchasing from farmers. (pp. 140-162)

The labour surplus extracted from society ended up in government coffers. In order to maintain its claim to the mainland, the government had to maintain two layers of government (central and provincial). It also had to maintain a large military, although this was intended to secure its internal domination rather than attack the mainland. The central government spent around 60% of government revenues, with the balance spent at the provincial and local level. US aid was an important source of government revenue, accounting for an average of 10.6% of the total between 1952 and 1965. Other important sources of income included customs duties (19.4%), goods tax (11.5%), and government monopolies (16.2%). The largest single item of provincial government income was government monopolies, accounting for an average of 45.5% Taking central, provincial, and local government revenue together, we find that the main source of government income was indirect taxes on consumers. Taxes accounted for over 50% of total revenue. Other items in order of importance were profits from government monopolies, revenue from public enterprises, and government bonds and U.S. aid. Around 80% of central government expenditure went on the military, with a further 3% on foreign relations. As a result, most of the burden of domestic expenditure fell on the provincial and local governments. Still, defence expenditure made up an average of around 68% of all government spending. (p. 166-192)

The next chapter deals with private capital. In the Japanese era strong monopoly capital from Japan co-existed with weak indigenous capital. After the War, Japanese capital was nationalized, but basic framework was maintained. In this period, textile capital from the mainland also flowed into Taiwan. Textile capital remained privately run, but was given strong state support and protection (most of this capital was actual controlled by KMT officials). US aid also crucial in the development of the textile industry. The China Aid Act (1948) and Mutual Security Act (1951) pulled Taiwan into the American security orbit. In 1952, the door was opened to American investment with an agreement to protect investments and allow the repatriation of profits. However, Taiwan was still not seen as a suitable investment climate. Making Taiwan attractive to American capital would require liberalization of the Taiwanese economy. This of course threatened public enterprises. Much of the profits of public enterprises was illusory, created by bureaucratism and runaway inflation. Due to waste in public enterprises, developing private industry was unavoidable. In 1951 the ratio of public to private enterprise was 2:1, by 1955 it was 1:1. By the 1960s, private enterprise had reached a self-sufficient stage. Development of private capital can be divided into three stages: (1) 1949-1953- following introduction of New Taiwan Dollar and retreat of KMT to Taiwan, economic recovery, primitive accumulation centred on mainland textile capital; (2) 1953-1959- disposal of four public enterprises, 1958 depression, currency reform, 1959- opening for investment. Growth based on import substitution; (3) 1960-1965- efforts to attract foreign investment (particularly American, Japanese, and overseas Chinese capital). Rapid economic growth and expansion of foreign trade. (pp. 195-204)

The accumulation of textile capital was possible due to bureaucratic intervention (protectionism) and inflation. In 1949 the “Measures to Encourage the Textile Industry in Taiwan Province” (台灣省獎勵發展紡織也辦法) were established. By 1953 the industry had become self-sufficient. The textile industry also benefited from preferential access to foreign exchange and raw material (cloth) delivered through the US aid programme. However, this did not solve the problem of a lack of capital. To address this problem, the government implemented the a textile programme (代紡代織) in 1951. Basically, the government supplied raw material to the textile companies and then purchased the finished product back at a fixed price. This was then either exchanged with farmers for grain or sold in the market. Provided the textile companies already had machinery, the advantages for textile companies were obvious. They were given raw materials, profits from processing the raw materials, and a guaranteed market for the finished product. This system allowed a form of primitive accumulation that sacrificed the interests of consumers. (pp. 206-222)

The next section looks at the relatively stable period between 1955 and 1959. During this period, the importance of local capital grew on the basis of the stocks in the four large companies offered to landlords in compensation for requisitioned land. The rest of the compensation was made up of vouchers for payments of crop. Stocks in the four enterprises quickly became concentrated in a few hands as the market price fell, forming the basis for the emergence of local capital. Important industries controlled by local capital were pineapple canning and concrete (part of the public enterprises given in compensation). Concrete was given a monopoly position through government protection. Inefficient canning factories were forced out of the pineapple industry, and an oligopoly industry formed with government support. (pp. 225-254)

After 1959 revisions to the investment law, foreign capital flowed into Taiwan. In the 1950s, American involvement in Taiwan’s economy was directed through U.S. Aid. Japanese economic recovery was focused on exports, and its involvement in Taiwan was limited. During the 1960s there was a rapid change in the above pattern. American private investment replaced government investment. Japanese export surplus was reinvested overseas, including Taiwan. Foreign investors took advantage of Taiwan’s cheap labour and government incentives. Local and mainland capital gradually merged together in the face of the arrival of foreign capital. This “national capital”, however, found itself in a subordinated position. (pp. 251-275)

The final chapter discusses the linkages between capitalists and officials in both public and private enterprise. Business and officialdom routinely colluded (官商勾結), and officials were often also businessmen (既官且商). Party officials derived income (非分所得) from their control of state capital rather than any specialist knowledge or business expertise. Taiwan’s economy took on another kind of dualistic model: domestically it undertook semi-feudal style exploitation, internationally it was placed in a position of post-colonial dependence. The major contradiction in the model was between the two types of capital, bureaucratic (官) and business (商). Liu’s analysis of loans made by public banks shows that after 1959, publicly owned banks played an important role in providing capital to private enterprise, enabling these businesses to escape from the pressure of high interest loans from underground lenders. In the 1960s, BOT advanced significant amounts of credit and assistance to textile exporters.
Over time, the distinction between public and private capital was blurred. State capital became private capital under the control of the Chiang family or other KMT officials. (pp. 279-323)

Land reform didn’t change the essentially structure of the rural economy. The fact that peasants were expected to pay off the money for land gained under the reform over ten years tied them to their farms. Peasants were however forced from the countryside by debts or a lack of land. Farmers had to shoulder the cost of maintaining the large military apparatus. They also formed a cheap labour force for industry, guaranteeing the high profits of bureaucratic capital. (pp. 327-348) The final section discusses Taiwan’s economic reliance on the United States and Japan. When US aid was terminated, it was replaced by loans from the World Bank and other countries (mostly Japan). Liu sees the reliance of US aid and Japanese loans as a form of neo-colonialism. (p. 350-373)

Liu’s argument is summed up in the final paragraph. He argues that there was a conflict between public (semi-feudal) and private capital. The inevitable result was the merging of the two into “bureaucratic capital.” This bureaucratic-business (官商) capital was rather primitive (前期性) in form. The process of capital accumulation created a class of privileged officials and capitalists. At the same time, it created a system of capitalist reproduction centred on peasants, workers, and small proprietors. However, to the outside this capital was subservient to Japan and the United States. For this reason, the Taiwanese masses faced exploitation from Japanese and American monopoly capital, bureaucratic-business capital (compradores), and the KMT dictatorial apparatus. In this sense, Taiwan’s post-War development essentially followed the path of the Qing and Japanese periods. From to opium war until today, Taiwanese society has still not been liberated from from a semi-feudal colonial system. (pp. 373-374)