America was clearly dominant in terms of the volume of economic investment in Cold War Taiwan.

From 1951 to 1985, 43% of “non overseas Chinese” investment came from the United States, 28% from Japan, 13% from Europe, and 16% from other countries. In fact, the island was a “battleground of intense competition between US and Japanese industry.” According to Walden Bello and Stephanie Rosenfeld in their book, Dragons in Distress: Asia’s Miracle Economies in Crisis.

To offset the flood of cheap Japanese imports, particularly in electronics, to the U.S. market, many U.S. firms relocated their assembly operations to Taiwan and other third world countries . . . As quotas were placed on Japanese imports and U.S. firms threatened to gain a competitive edge by relocating to Taiwan, Japanese firms sought to regain advantage by moving their own assembly operations to Taiwan . . . The Japanese government encouraged the migration, in line with its policy of moving polluting, labor-intensive, and low-technology firms overseas and reserving the home islands for high-tech, higher-value-added industries. Thus Taiwan ‘functioned as a receptacle for declining Japanese industries in Japan’s global strategy to restructure its industry.

American investors on Taiwan were generally large transnational corporations.

American investors on Taiwan were generally large transnational corporations which set up wholly owned subsidiaries to cut costs on goods targeted at the US market.

These large firms, sometimes through joint ventures and licensing agreements, had visions of penetrating Taiwan’s domestic market as well as of exporting to the US and other countries.

Taipei also provided for the needs of the foreign diplomatic community and the American military.

At first, the US group included resident military and civilian advisers and their families. By the mid-1960s, however, the group expanded to include soldiers on rest and recreation from Vietnam.

Subsequent export expansion on the island is well documented.

In the early 1960s, transnational corporations were of two sorts.

In the early 1960s, transnational corporations were of two sorts, those that were manufacturing enterprises and those that were buying groups. Both played a large role in Taipei’s economic development.

Manufacturing enterprises were involved in the process of production as well as exportation, including the marketing of goods abroad. While the complete production process was sometimes located in underdeveloped countries, another model centered only on the production of components or assembly operations. This form was dominant in Taipei’s case.

In contrast, international buying groups left production to domestic entrepreneurs or firms but made purchases from them on a contractual basis, later selling the goods they purchased to overseas markets. These domestic entrepreneurs were in the vanguard.

Small and medium sized businesses (SMEs) became central to Taipei’s continued economic growth.

These domestic entrepreneurs were in the vanguard, establishing small and medium sized businesses (SMEs) that became central to Taipei’s continued economic growth.The entrepreneurs themselves were Taiwanese rather than Mainlanders and they later became active in politics, funding and supporting the move toward democratization in the 1980s.

For more information on Taiwan’s economic development, check out our earlier posts:

Economy in Taiwan 1959-1979

Economy in Taiwan 1959-1979 (Part II)

The American Role in Taiwan

The American role in Taiwan was central since there was a division among the Nationalist leadership as to the advisability of undertaking radical measures which were perceived by some to pose danger to the KMT state.

Regarding the impetus for reform, Ian Little says that in Taiwan pressure from the US Agency for International Development was one of the “clearest cases in economic history of cause and effect.”

. . . the Americans threatened a reduction in aid should the government not adopt the package, but offered a $20-30 million carrot for prompt implementation.

There were rumors that Chiang Kai-shek thought that being an AID recipient was undesirable, leading to claims that “he supported the reforms because they would enable Taiwan to get off the dole and become self-sufficient.”

The strategy was successful.

Overall growth between 1960 and 1977 averaged 9 to 10 percent per year, and real wages in manufacturing more than doubled. Urbanization also expanded.

Manufacturing Establishments

At first many of the manufacturing establishments were located in the rapidly urbanizing peripheral areas of Taipei. These locales became the destination for many migrants looking for non-agricultural employment.

Eventually, the infrastructure developed in association with the military in the 1950s and 1960s, successful land reform, and American recommendations for the dispersal of labor-intensive manufacturing facilities meant that employment opportunities were not confined to Taipei.

Export Processing Zones

One of the most successful methods of promoting exports was the establishment of export processing zones outside of the city.

By 1972 two of thes zones — Kaohsiung and Taichung (established in 1965 and 1969 respectively) — employed about 58,000 workers, about half of whom worked in electronics.

These zones were especially attractive to the joint enterprises backed by foreign investors that relied, primarily, on unskilled labor.

The majority of the workers were young females who received wages below the average for all manufacturing in Taiwan.

The establishment of the zones, the rapid expansion of  industry  in other areas, and the subsequent period of unprecedented economic prosperity led to rapid urbanization both in the growth of large cities and the emergence of smaller ones.

Be sure to read Part I of Economy in Taiwan: 1959-1979.

Other posts on economic development in Taiwan include:

US Investment in Cold War Taiwan

As the 1950s drew to a close, the economy in Taiwan was on the brink of tremendous change.

The technocrats in Taipei’s economic bureaucracy were gaining the upper hand in their association with the military, largely because of changing dynamics in the relationship between the United States and the Nationalist regime.

Taipei’s fate was still situated squarely in the battle against communism in Asia. However, at US urging, the battlefield was shifting from one dominated by military strategy to one dominated by economics.

Economic reform was undertaken at America’s insistence in 1960-61, and soon American multinational firms arrived in Taipei.

By the mid 1950s, American advisers felt that the economy in Taiwan was poised to enter a period of sustained, rapid development.

American advisers felt that Taipei’s economy had recovered from its post World War II instability. While the US Congress still considered assistance to the island “defense support,” in 1958 it began to provide aid geared toward the stimulation of economic development.

From 1958 through 1961, US advisers and the KMT government worked out a package of reforms designed to speed economic growth and “push Taiwan toward ‘graduation’ from foreign aid.”

In 1960, the Agency for International Development (AID) made clear its intention of phasing its Taiwan program out of existence.

During this period, economic policy shifted from an emphasis on inward looking import substitution to outward looking export promotion. In large part this was due to pressure from American officials who argued that the government regulation and control associated with import substitution made the economy inefficient, slowing economic development.

Many of the existing regulations were restrictions that had been established to deal with the threat of war and the impact of inflation. They had not been re-evaluated as the dangers subsided.

At US urging, in 1959, the government began removing controls and promoting new programs to encourage the exports which were now thought to be critical to the success of Taiwan’s industrialization efforts.

A Nineteen Point Program of Economic and Financial Reform liberalized controls on trade and industry, promoted overseas marketing, and created a business climate that would stimulate local and foreign investment. It also lessened military expenditures.

For more information on Taiwan’s economic development, check out these posts:

US Investment in Cold War Taiwan

Economy in Taiwan 1959-1979 (Part II)

During the 1950s, American economic assistance to the KMT regime equaled about 6% of Taiwan’s GNP and nearly 40% of its gross investment.

Military aid was even more substantial.

By 1957, 10,000 Americans were present in Taiwan in “an official capacity,” most of them in the capital city, Taipei.

America, the world’s most powerful nation, located the fate of KMT Taiwan squarely within the larger context of the global anti-communist crusade. Taiwan became “Free China” . . . . American military might shielded the island from Communist invasion. American financial and commodity assistance insulated the island’s economy from external forces.

In some ways the Americans treated Taiwan as they treated the Japanese.

As in Japan, the Americans sent in a battery of civil and military advisers to assist in the necessary rebuilding of the decimated structure along new lines. As in Japan, the locals governed, but the Americans constituted enough of a shadow government to influence a wide range of political and economic decisions made by the Chinese.

American influence was most pronounced after 1954 when the US undertook to assist Taiwan militarily against renewed communist aggression.

The Americans helped stabilize the economy, the society, and the Nationalist government.

In 1954, a communist threat to the islands of Quemoy and Matsu was successfully countered, demonstrating Taiwan’s defensive strength. The assault contributed to the signing of a Treaty of Mutual Defense between the US and Taiwan.

US influence actually ensured the survival of the regime throughout the 1950s because of the confidence that such support gave local and foreign investors.

US aid helped finance land reform, including the cost of US advisers, and was an important channel for technology transfer.

Technical assistance to make better military uniforms helped the textile industry, and technical assistance on radar and avionics helped the electronics industry.

More importantly, though, American subsidies allowed Taiwan to maintain a large military (absorbing roughly 10% of GNP) while simultaneously embarking on a path of economic development.

The US also assisted Taiwan in its efforts to get in on the ground floor of the corporate movement toward global manufacturing whereby American firms cut costs by relocating production to cheaper labor sites.

Still, US support and influence could not solve all of Taipei’s problems.

Taipei remained in a state of wartime readiness.

The city was governed by a militarized regime whose policies ensured that society was militarized also.

Martial law mandated that all constitutional guarantees of liberty were abrogated. Mass meetings, strikes, and demonstrations were prohibited. In fact, any gathering of more than two people was illegal unless first registered with the police.

Native Taiwanese were excluded from the top levels of the military, the police, and the party.

Taiwan, as a whole, was obsessed with the goal of retaking the mainland.

Defense accounted for around 70% of total central government expenditure throughout the 1950s.

The military was quite privileged with the generals creating their own relatively closed production systems based on public enterprises and special status ‘private’ firms.

The fact that the regime had lost a war to communism assured it of US support.

Nevertheless, following the 1958 Taiwan Straits crisis, it became clear that United States support of Taiwan was strictly limited to defense of the island.

The regime was forced to acknowledge that the possibility of retaking mainland China by military means was increasingly remote.

Under subtle pressure by the US (and in return for continued US assistance), the leadership undertook economic reforms between 1958 and 1961 which reoriented the economy toward export markets. These actions solidified the state sector and encouraged private entrepreneurship. In return, the US provided the world’s largest market for Taiwan’s exports with preferred terms and conditions of access.

The quasi-Leninist state and the United States, united in the fight against communism, had reached an accommodation that would allow Taipei to benefit from an “economic miracle” that would transform the capital of “Free China” into a capitalist Cold War City.

Public enterprises — linked to the KMT Party and the military — were particularly important in Taipei’s post WWII development.

Public enterprises accounted for a larger proportion of total investment in Taiwan than in 80% to 90% of other noncommunist countries. According to Robert Wade:

Their continued role owes much to the importance attached to public enterprises by Sun Yat-sen, coupled with the Nationalist government’s need to represent itself as the institutional custodian of Sun Yat-sen’s thought. But the continuity with the mainland period is still more striking. Taiwan’s public enterprises are concentrated in the same sectors as the National Resource Commission’s enterprises before 1949, especially in petroleum, steel, shipbuilding, heavy machinery, and engineering.

State-owned enterprises (SOEs) were integrally related to the on-going militarization of Taiwan.

SOEs allowed state control over strategic materials, aided military-related industrial upgrading and development, provided economic security for regime supporters — especially retired soldiers,  created a training base for the state economic bureaucracy which increasingly focused on economic warfare, and extended the arms of the state through linkages with defense associated satellite suppliers and downstream firms. Importantly, they were also able to deter multinational control of Taiwan’s political economy.

Some SOEs were agencies of government organizations.

Examples include the Directorate General of Posts, Directorate General of Telecommunications, and the Ret-Ser Engineering Agency. However, most were government entities like the China Steel and China Shipbuilding corporations.

Six SOEs were controlled by Taipei city.

Thirty-five SOEs were governed by the Vocational Assistance Commission for Retired Servicemen (VACRS), a large holding company belonging to the military.

The VACRS was formally established in 1954 after it became clear that dumping military retirees (primarily mainlanders) on Taipei’s weak civilian economy was having disastrous effects.

A US grant of $42 million in 1955 facilitated the creation of the VACRS and, in time, it became the largest conglomerate on the island, with well over 100,000 workers employed in a complex of more than 40 firms.

The most important of the VACRS group was the Retired Serviceman’s Engineering Agency (RSEA or Ret-Ser).

RSEA began in 1956 as a small engineering company and, from the outset, it focused on military associated infrastructure projects.

Initial funding for RSEA came from $750,000 in US disbursements. The group’s first president was an army colonel on loan to VACRS.

Ret-Ser projects included the Taichung Harbor, Suao Harbor, North-South Freeway, Northern Link Railway, China Shipyard, China Steel Mill, Nuclear Power Plant, the widening of the Eastern Railroad Line, Kaoshiung Cross-Harbor Tunnel, Ming Hu Pumping Storage Power Generation Project, Feitsui Reservoir, Chung Cheng Memorial Hall, National Theater and Concert Hall, Veterans General Hospital Renovation Project, long tunnels of the South Link Railroad, No. 3 Chien An Construction, the Taipei Underground Railway and New Taipei Railway Station, and Wu Ku Model Factory Building Projects.

Not all ventures were located in Taipei, but those that were changed the physical appearance of the city and created the infrastructure needed to satisfy both military and economic demands.

The military itself was directly involved in the state’s management of the economy.

Military involvement was considered necessary for purposes of defense and social stability, both of which were critical to the primary goal of retaking the mainland.

The military particularly favored the promotion of specific industries like electronics. According to Wade again:

Taiwan’s drive into heavy and electronics industries was not entirely innocent. The military wanted it, as well as the economic technocrats. The military ran its own production facilities, working closely with public enterprises or special status private firms. By the early 1960s Taiwan’s military-industrial complex was already capable of making much of the equipment and less sophisticated weaponry  needed by the armed forces.

The military’s emphasis on electronics was fortuitous.

At the start of the 1960s, US electronics firms began looking abroad for opportunities to relocate production to cheaper labor sites.

Taiwan’s government, with the assistance of US AID, aggressively sought out these American companies.

General Instruments was the first US corporation to begin production on the island.

By 1966, 24 US firms had entered into production agreements.

Military-led efforts resulted in industrialization and infrastructure projects which laid the groundwork for Taipei’s later economic development.

From the 1960s on, economic growth designed to make Taipei a model of socioeconomic progress became the overriding goal, supporting, but not supplanting, the military’s long-term objective of retaking the mainland.

From an American perspective, economic development — facilitated by US economic and military assistance — would demonstrate the superiority of free economic institutions as instruments of social progress and would replace the more military objective.

As we have seen, postcolonial Taipei was soon dominated by the Nationalist or Kuomingtang (KMT) regime brought over from the Chinese mainland.

The structure of the KMT had been established by its founder, Sun Yat-sen, in 1924.

Sun’s objective was to create a power behind the state which would implement what he called Three Principles of the People — nationalism, democracy, and the people’s livelihood (a moderate form of state capitalism).

As a Leninist Party, the KMT boasted a significant organizational capacity, a dominant ideology, and a deep penetration of society.

The Nationalists ruled Taipei’s politics for over 40 years due, in part, to the fact that Taiwan had little legacy of democracy.

Institutional diffusion during the colonial era came from an authoritarian, imperial Japan, rather than from a democratic Western power . . . . Taiwan was decolonized through a wholesale transfer of power and resources from a defeated colonial power to the KMT regime: this process took place without any political struggle . . . . postwar Taiwan did not inherit any democratic infrastructures.

Party organs controlled administrative units at various levels of government. They also controlled the military via a commissar system with “a hierarchy of political officers running parallel to the ordinary military hierarchy.”

Almost all senior military officers were also party members and many held high party office.

The KMT used mass organizations to mobilize support from large segments of the population and party cadres served as revolutionary vanguards.

Party cells penetrated the existing social organizations.

Unlike Leninist parties elsewhere, the KMT advocated democracy via tutelage instead of promoting the principle of proletarian dictatorship or the monopoly of power by a communist party.

The party was seen as a “charismatic party with a niche in  politics because of its leadership in the national revolution.”

This meant that it was “to shoulder the self-imposed historical mission of retaking mainland China and completing national construction.”

While national elections were suspended, the KMT did permit political participation at the local level.

This was important for it allowed Taipei to put on a democratic face, a stance which justified its membership in the Western political camp.

Nevertheless, all aspects of local elections were tightly controlled so as to contain the growth of political opposition which was regarded as a divisive force harmful to the national task of retaking mainland China.

On the other hand, even though the elections were a mechanism for the KMT to co-opt local elites, the subnational elections were also “competitive, real, and local interest-based, totally unlike those of a Leninist regime.”

The KMT regime distinguished itself from other Leninist entitities because it was embedded in a capitalist economy in which private ownership and market exchange were the norm.

The principle of “people’s livelihood” defended economic equality but did not specify a  preferred means of attaining it.

The rationale was used to justify the maintenance of state-owned enterprises (SOEs) as a safeguard against the private sector.

Many of these enterprises concentrated on major infrastructure projects which were valued in terms of both their economic benefit and their impact on military preparedness.

Most analyses of Cold War Taiwan cite the importance of the mainlander migration in 1949, emphasizing the managerial and entrepreneurial contributions of many of the exiles.

Mainlander Migration to Taiwan

The migration is usually presented as one of several factors that enabled Taiwan to embark on a development path marked most prominently by strong economic growth. Yet several of the policies ascribed to the migrants were already in place upon their arrival.

In spite of our ability to define Cold War Taiwan as a client state and to look at Taipei as a command and control center for the KMT government in its alliance with the United States, it is important to acknowledge the continuity between postwar economic planning on the mainland beginning in 1943 and economic planning on Taiwan in the early years of the Cold War.

In theory, at least, Nationalist industrial planning draws on the influence of Sun Yat-sen who emphasized the role of central state planning in creating ‘socialism’ in China.

According to this interpretation, during the mainland period, the Nationalists stressed Sun’s commitment to state-planned development of all basic heavy industries and infrastructure and they continued to follow this approach when they relocated to Taiwan.

In fact, many individuals who were originally assigned to Northeast China were sent instead to help restore production in Taiwan after economic prospects were diminished in Manchuria.

Historically, the Chinese focus on heavy industry and infrastructure intensified when Japan seized Manchuria in 1931.

Taiwan Relies on Central Planning

At this time, the Nationalists perceived themselves to be extremely vulnerable to external threat and they increasingly stressed the rapid growth of military-related state capitalism.

Chiang Kai-shek, the military leader who dominated the political scene came to accept this view.

Modern developmental bureaucracies were established to promote a scientifically controlled economy.

These organizations were modeled in some respects on the “apparent achievements of Soviet planning.”

It was believed that central planning was essential for national defense and that it would enable China to retain control over industrial and technological development instead of allowing the country’s economic resources to fall into foreign, provincial or private hands.

It was argued that:

If we can treat wartime plans for the postwar period as evidence of the anticipated direction of Chinese development under Nationalist rule, it becomes clear that the extension of government controls and the growth of the state industrial sector were intended to continue at an even greater pace in peacetime, and to affect areas of the economy that had been largely outside of government control before 1937, including light industry and foreign-owned enterprise.

Whether one talked . . . of  ‘following the socialist road,’ or of an economic policy that was . . . ‘close to socialism through not identical,’ there was a broad consensus among Chinese planners on postwar economic direction.

Postwar foreign investment was to be strictly regulated by Chinese planners.

As early as 1944-1945, US industrial and consulting firms were engaged to inspect industries in Manchuria, East China, and Taiwan.

At the same time, several thousand Chinese government engineers were sent to the US for advanced technical training.

Still, American interests did not (at least in the immediate postwar years) determine the Nationalist’s strategic course in industrial policy.

Nothing indicates more clearly the postwar direction of Chinese development than the fact that, despite enormous obstacles such as the onset of civil war, the Soviet industrial plunder of Manchuria, and open American disenchantment with Chinese state planning, Nationalist China maintained its strategic course in industrial policy, continued in the direction of increased economic control, and not only resisted American demands to ‘privatize’ Chinese industry but expanded the state sector and the planned economy at a rapid rate. By August 1947, the NRC’s industrial empire employed ca. 33,000 staff members and 230,000 workers (more than 500,000 if joint ventures are included), and accounted for 67.3% of China’s total industrial capital.

Heavy Industry is Dominant

Once the Nationalists had arrived on Cold War Taiwan, the emphasis on heavy industry and infrastructure was, of course, related to the need to recover and maintain sovereignty through military strength.

The highest priority continued to be defense-related industries which “were to be developed as quickly as possible, as state enterprises according to a planned economy.”

Economic plans made in 1946 — not the 1949 migration — assigned mid-level managers and engineers to 18 NRC-run state corporations and the NRC regional office on Taiwan.

These individuals were in place when the Kuomintang refugee regime arrived to stay in 1949, and provided an important portion of what the economist Simon Kuznets, a former NRC consultant, has called the ‘experience and human capital’ needed for Taiwan’s subsequent progress.

After 1950, the pre-1949 concept of leadership by economic bureaucracy grew stronger.

Planners from the pre-1949 bureaucracy, especially the NRC, formed the core of the Industrial Development Commission, which was founded under the Economic Stabilization Board, and has since become the most powerful policy-making bureau in the Ministry of Economic Affairs, responsible for detailed ‘guidance planning’ of industrial policy. NRC people have also dominated the leadership of the capital-level Council for Economic Planning and Development, which handles a range of economic forecasting and planning, and reviews public-sector investment. It is certainly part of the NRC legacy that until the 1970s, engineers, not economists, dominated these two bodies that together have been called, perhaps too dramatically, Taiwan’s ‘economic general staff.’

Personnel continuity from the mainland period meant that 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 to move away from its emphasis on heavy industry and toward the production of export-oriented products.