By the time the KMT arrived in Taipei in 1949, the economic situation was disastrous. The city’s industry and infrastructure had suffered serious damage as a result of Allied bombings during World War II. In fact:
It was reported that on VJ Day in 1945 when Taiwan was retroceded to the Republic of China, about three-fourths of industrial productive capacity and two-thirds of power-generating capacity were destroyed, over one-half of the existing rails, bridges, station facilities, and rolling stock were incapacitated, and only one-fourth of the highways remained serviceable for motor vehicles, while harbors were largely ruined and blocked by sunken ships. As a result, agricultural output dropped to 45 per cent and industrial output to less than one-third of their respective pre-war peaks.
Agricultural production — which had been tied totally to Japan — continued to fall in the postwar period.
Between 1945 and 1949 products had been shipped to mainland China but, when the mainland was lost, the external market for Taiwan’s agricultural produce was lost also.
By 1946, Taiwan’s agricultural production was at the 1920 level.
Meanwhile, the rate of industrial production in 1945-46 declined to one-half the peak attained during the colonial period.
The arrival of the KMT in 1949, and the ensuing suspension of American assistance and military support, exacerbated Taipei’s existing economic disarray.
The city was directly affected in several ways.
- First, a huge jump in spending for public administration and defense increased the severity of already existing budget deficits associated with prior heavy military spending in support of the Nationalist war effort.
- Second, concurrent with the large influx of mainlanders, inflation soared to 3,400 per cent by the end of 1949, reflecting shortages in critical necessities.
The Taipei wholesale price index rose 260 per cent in 1946, 360 per cent in 1947, 520 per cent in 1948, and 3,500 per cent in 1949.
- Third, the government (determined to avoid the kinds of problems which the peasantry had caused on the mainland) embarked on an ambitious program of land reform which immediately impacted the population of the city.
Together, the creation of service type jobs connected with the arrival of the Nationalist government in Taipei and the successful implementation of land reform spurred internal migration from the countryside to the capital.
In contrast to the city’s stable prewar demographics, by 1956, fully 33.6 per cent of the residents of Taipei were rural-urban migrants.
In fact, between 1949 and 1961, the proportion of the population in cities of 50,000 and over increased from 25 per cent to 41 per cent of the island’s total population.
The floundering government was rescued by President Truman’s response to the invasion of South Korea in June 1950.
When war broke out the Seventh Fleet took up position between Taiwan and the mainland, solidifying the integration of Taiwan, Japan, and the world economy.
The action was critical to the future economic stability of Asia because (as the Japanese economy began to revive in 1948-1950) US occupation forces were struggling to determine
how a prewar political economy that got raw materials and labor from the Northeast Asian periphery could survive in the postwar world without a hinterland?
As for Taiwan
its geographic proximity to Southeast Asia and South China made it ‘a natural location for processing certain raw materials brought in from, and for producing some manufactured goods for export to, these areas.’
A linkage was cemented between the economies of Taiwan and Japan as “the Korean War effectively drew the lines of the ‘grand area’ in East Asia.”
In the wake of the North Korean invasion, a large infusion of US economic and military aid flowed into Taipei, diminishing internal competition for domestic assets and transforming the capital into a strategic arsenal.
Between 1951 and 1961, US economic aid amounted to about 37 per cent of total domestic investment.
While the value of the military aid is hard to assess, if one assumes that because of fears of invasion from Mainland China that Taiwan would have built up the military with its own resources, then the military aid made it possible for more government resources to be devoted to economic development than would have been possible otherwise.
Top government officials in Taiwan spoke of two goals.
- The first was of retaking the mainland by defeating the communists militarily and unifying China.
- The second was of ‘catching up’ with the advanced countries.
Both goals were linked to national security and served to strengthen the military.
Neither goal was possible without some sort of outside assistance.
The Korean War brought economic and military aid on an unheard-of-scale, allowing Chiang’s regime to have both “guns and butter.’
The continued militarizaiton of Taipei was a by-product.
[…] the emphasis on state-led, import-substituting, defense-related, heavy industrial growth dominated Taiwan’s economy until the late 1950s. After this time, however, the US exerted more leverage, pressuring the regime […]