The US exerted tremendous influence over Cold War Taipei’s economy.

As Bruce Cummings notes:

Often it was difficult to know if natives or Americans were writing the plans and policies.

Importantly, the US encouraged the Nationalist leaders to give up their ambition of taking over the mainland by force and to concentrate instead on making Taiwan a model of peace and prosperity so that the population of China would rise up against their communist rulers.

The United States exercised leverage over Taiwan’s economic and security policy in the following three areas:

• by creating  an environment for private sector growth
• by pressuring for a liberalized economic policy
• by urging the regime to curb military spending.

So far as private sector growth is concerned, the American Agency for International Development (AID) — with its commitment to the development of private enterprise — used its influence to improve the private sector climate in Taiwan. As one observer states:

. . . without AID’s influence and active intervention, the private sector would not have become Taiwan’s foremost source of economic growth.

Nevertheless, the US provided little direct assistance to private enterprises. Instead, it funded government projects with large external spread effects, and the associated spillover to public enterprises helped increase the productivity of private industry.

For example, American aid amounted to 74% of the investment in Taiwan’s infrastructure between 1950 and 1965.

American advisers also pressured the Taipei government to liberalize economic controls.

The US used economic support as a carrot and a stick by promising to increase the level of assistance if the government undertook favorable actions.

When the Americans threatened to reduce aid unless the KMT accelerated economic development, a 19-Point Program of  Economic and Financial Reform was implemented which set the stage for export-led growth while, at the same time, emphasizing the maintenance and expansion of the sectors most critical for warfare.

Reform efforts were rewarded by a 1969 loan to build a factory to co-produce military helicopters with the Bell Helicopter Company.

AID also pressured Taipei to reduce military expenditures, but with little success. The Nationalist government continued to enlarge the military budget and to focus on the goal of retaking the mainland. Still:

Taiwan depended heavily on American economic and military assistance during the period from 1950 through the late 1960s, and this dependence reduced its autonomy in policy making. Clearly, during this period, Taiwan resembled a client state more than a capitalist or corporate one.

While Taiwan increasingly assumed the characteristics of a client state, Taipei continued to be affected by factors associated with the 1949 mainlander migration.

American resources were critically important to Taipei’s early Cold War economic and military restructuring.

Over the period 1949-1967, total US assistance amounted to $4.2 billion.

Per capita, Taiwan received US $425 for each civilian over the 1949-1967 timeframe.

During this period, Taiwan’s army of 600,000 soldiers was one of the world’s largest, again on a per capita basis.

US monetary disbursements provided needed foreign exchange and, importantly, since most assistance was allocated for military purposes, domestic expenditures to support the country’s heavy military burden were greatly reduced. This enabled the government to focus its indigenous resources on inflation control, capital formation, and economic development.

Other Cold War support was also forthcoming.

Taiwan became the largest recipient of  major arms in the Far East.

Deliveries included $0.5 billion in grants from excess weapons stocks.

In sum, virtually every idea and implementation formula devised for the distribution of US military assistance was applied in the Taiwan case, and the level of aid is unique by international standards.

It is impossible to discount the role that US aid played in the economic stabilization of Taipei’s economy.

When large-scale American aid to the island resumed in 1950, Taipei’s economy was on the verge of collapse and inflation was high.

Economic assistance was targeted to meet short-term requirements by supplying much need commodities and petroleum. Aid was designed to provide relief, ease inflation, and permit the repair of essential industrial machinery. Its goal was to alleviate economic distress

so that military forces would not have to be diverted from defense of Taiwan against a possible Communist assault.

US military assistance reduced the government’s need to shift resources from economic to military uses.

Overall, American economic aid obligations averaged about $100 million a year during the 1951-1965 period, contrasting with roughly $165 million a year for military aid furnished during the same period.

Of the total economic aid given to Taiwan over the 15 year period 1951-1965, almost two-thirds was related to the maintenance of the armed forces.

This assistance was considered economic aid rather than part of the Military Assistance Program since the funds were used to replace money diverted from the economy to keep military strength at a certain level. This included financing the import of commodities on a continuing basis, military construction, and provisions and material directly consumed by the armed forces.

US aid played a major role in building dual use infrastructure, freeing local currency for developmental purposes and “defraying military support costs which would otherwise have diverted from capital formation.”

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.

American interest in Taipei was relatively limited at the conclusion of World War II. Instead the US was preoccupied with mainland China where the communists, under the leadership of Mao Tse-tung, controlled one-fifth of the territory (over 105 million people).

The Truman administration supported the opposing Nationalist Chinese regime of Chiang Kai-shek and wanted it to stay in power to replace war-ravaged Japan as the stabilizing force in the region. Chiang, however, was steadily losing influence due, in large part, to corruption which led to the eventual squandering of over a billion dollars in US aid.

The erosion of support for Chiang was worrisome.

Truman and Roosevelt had long been concerned about the possible emergence of a communist China, and Stalin had been convinced to deal with Chiang in return for territorial concessions, a relationship that was formalized in a Treaty of Friendship and Alliance  signed in 1945.

Problems arose over whether Mao’s or Chiang’s army would control Manchuria, and the crisis became even more complicated when Russian armies moved into the area to disarm the Japanese, lingering to carry out “‘scientific looting’ of industrial machinery for the rebuilding of Russian industry.”

Fifty thousand American soldiers were dispatched to assist Chiang, bringing the total number of Americans in China to 100,000.

The large number of troops was necessary because — as General of the Army George Marshall said:

the administration was determined to avert the tragic consequences of a divided China and of a probable Russian resumption of power in Manchuria, the combined effect of this resulting in the defeat or loss of the major purpose of our war in the Pacific.

Mao’s forces were increasingly successful and, by late 1946, American troops were being pressured to abandon China.

Leaving only a small aid program in place, Truman pulled out.

While many Americans felt that more support could save Chiang, the chief of the American advisory group on site reported in 1948 that the

military debacles in my opinion can all be attributed to the world’s worst leadership and many other morale destroying factors that lead to a complete loss of will to fight.

By February 1949 the Nationalists had lost nearly half their troops, mostly by defection.

Eighty percent of the American equipment given Chiang had fallen into communist hands.

The US ended all assistance, acknowledging that the outcome of civil war in China was beyond the control of the government of the United States.  Still, many disagreed with the Truman administration’s assessment.

Senator Taft of Ohio, for example

charged in the Senate that the State Department had ‘been guided by a left-wing group who obviously have wanted to get rid of Chiang and were willing at least to turn China over to the Communists for that purpose.’

Secretary of State Acheson responded to the accusation in a speech given on January 12, 1950, titled Crisis in China — An Examination of United States Policy. He observed that many charged American bungling since

No one in his right mind could believe that the Nationalist regime had been overthrown by superior military force. Chiang Kai-shek had emerged from the war as the leader of the Chinese people, opposed by only one faction, the ragged, ill-equipped, small Communist force in the hills. Chiang controlled the greatest military power of any ruler in Chinese history, supported and given economic backing by the United States.

He went on to say that, although Chiang had been forced to abandon his capital in Nanking in April 1949,

To attribute this to inadequate foreign support . . . was to miscalculate entirely what had been going on in China and the nature of the forces involved. The almost inexhaustible patience of the Chinese people had ended. They had not overthrown the government. There was nothing to overthrow. They had simply ignored it. The Communists were not the creators of this situation, this revolutionary spirit, but had mounted it and ridden to victory and power.

Japan’s assimilationist policies created conditions which would later reinforce divisions between Chinese of local Taiwanese ancestry and more recent arrivals from the mainland. While all Chinese were, in fact, migrants, distinctions became quite meaningful.

Many of  Taipei’s residents were naturalized as Japanese, adopting Japanese names, acquiring Japanese style clothing, observing Japanese religious rites, and eating Japanese food. Thus, those Chinese who migrated before 1949 (and who were subject to Japanese rule)  have long been referred to as local, while those who migrated later are referred to as mainlanders.

During the colonial period there were never more than 6.2 percent mainlanders in Taipei’s population and they were concentrated in two occupational groups, merchants and laborers. After World War II this percentage became much larger and the mainlanders became concentrated (residentially) in the areas formerly populated by the Japanese. By this time the original aborigine population had almost disappeared, counting only 0.02 percent of Taipei’s total in 1956.

In the 1930s, as Japan prepared for war, that nation also “largely withdrew from the world system and pursued, with its colonies, a self-reliant, go-it-alone path to development that not only generated remarkably high industrial growth rates but changed the face of Northeast Asia.”

Investment in heavy industry multiplied and hundreds of small factories produced chemicals, metals, aluminum, and refined oil in support of Japan’s war effort.

Subsequently, urban growth became more rapid and, by 1940, Tainan, Keelung, and Kaohsiung had joined Taipei as cities with over 100,000 residents. Moreover, the proportion of the island’s population living in cities had doubled.

At the end of  World War II, the number of municipalities had increased from the seven identified in the 1930 census to eleven, five of which were designated as large cities and subdivided into districts called chu. Six were small cities or shih.

Taipei, a large city, was comprised of ten chu which have been collectively referred to as Old Taipei or the Original  City. This core included Sungshan, Ta-an, Kuting, Shuangyuan, Lungshan, Chengchung, Chiencheng, Yenping, Tatong, and Chungsan.

These districts would soon reflect Cold War realities in terms of their demographic make-up and industrial specialization.

Many of those writing about Taiwan today, particularly those focused on political economy, tend to highlight positive aspects of the Japanese colonial legacy, noting that by the end of Japanese rule the Taiwanese were among the ‘most advanced populations’ in East Asia.

Those adopting this approach argue that the policies of the Japanese colonial government left an important base for future industrialization, including factories, transportation, an electrical infrastructure, and a literate population. They stress that the Nationalist (KMT) government did not need to start the industrialization and economic modernization process from scratch.

Still, according to Robert Wade, it is important to recognize the more repressive aspects of Japanese rule whereby:

The whole population was divided into units of ten households in turn grouped into units of ten, their elected Taiwan leaders closely supervised by Japanese police. The colonial government insured that the natives developed no formal organizations beyond locally based kinship or residential groups . . . They prevented any significant concentrations of wealth in Taiwanese hands. They also kept Taiwanese out of senior management positions in large-scale commercial and governmental organizations. So by 1945 the populace had much experience of an alien military and police presence intruding into many areas of social life, while it lacked experience of managing large-scale organizations and self-rule.

Japanese forces on Taiwan surrendered on October 25, 1945, and most Japanese residents were repatriated soon after.

The city was left reeling from the tight Japanese administrative structure which had penetrated all facets of daily life.

Taipei had long been militarized, although, unlike both Havana and Isfahan, it had encountered little exposure to either of the two emerging superpowers. This situation was soon to change due to the outcome of the Chinese civil war which would combine with the Japanese colonial legacy (and later  the outbreak of war in Korea) to mold the emergence of a new Taipei.

While Taipei’s militarization in the early postwar period was related to the arrival of the KMT military government from the Chinese mainland, by 1959 the capital was, indeed, a Cold War city.  It remained so until the US established a formal diplomatic relationship with the People’s Republic of China on January 1, 1979.

During this period, the US had direct influence over almost every aspect of the city’s social and political development.  Moreover, the legacy of the relationship dictated that Taipei would remain a strong champion of US grand strategy even after Taiwan was marginalized diplomatically.

The city is now fully integrated into the capitalist world economy.

Since the lifting of martial law in 1987, Taipei has transitioned to democracy, holding  its first mayoral elections in thirty years in 1994.

The growth of social movements and civil society at the grassroots level ensures continuing and spirited competition between the demands of global and local forces.

In the context of globalization, the city is now striving for third-tier world city status and is conflicted about the military stereotype which continues to fashion its identity.

Problems with the communist Chinese on the mainland persist in  provoking security concerns. Consequently, unlike most other cities, the terms communist and non-communist remain internally meaningful.  The capital remains mired in ideological rhetoric–as well as pragmatic concerns–relating to the Cold War conception of reality.

At the local level, the public has become increasingly vocal about the lack of political will to regulate land use and engage in pollution abatement, issues related to the rapid economic growth advocated by US advisers.  Consequently, according to Tu Weiming, post Cold War Taipei

…reflects a struggle between modern democratic tendencies and traditional authoritarian dispositions, between influences from abroad and nationalistic self-assertion, and between adaptation to international geopolitical forces and indigenous habits of the heart.

Photograph by Sherwin Photography.

From 1950 to the present, Taipei, the capital city of Taiwan, has symbolized both the military and economic aspects of American ‘grand strategy’.

[As regards the US, we’re defining grand strategy as an integration of military and economic objectives in the war against communism. The military component of  grand strategy was concerned with repelling the Soviet threat to territory.  The economic component was concentrated on protecting America’s desire for open markets.  At first, the two prongs could be separated.  By the end of the Eisenhower administration, however, the two were intertwined.  Soon, grand strategy evolved into liberal grand strategy as the US became more explicit in its drive to foster democracy and capitalism abroad.]

Described as a strategic arsenal by General Douglas MacArthur, Taipei reflects US Cold War determination to militarily contain the Soviet Union and the Chinese communists.

Economically, despite governance by an entrenched ‘quasi-Leninist’ regime, the city represents American capitalism and its resolve to protect the market strength and viability of Japan.

Later, as American grand strategy became more explicitly associated with the tenets of neoliberalism, Taipei entered a period of political change marked by constitutional reform, institution building, and a growing civil society, finally emerging by the 1994 mayoral election as a bellwether city for democracy in all of China.  In the process, Taipei evolved from a backwater colonial city to a regional financial and investment center in northeast Asia.

During the early Cold War period, the US injected $2.5 billion in military resources into Taiwan.  Most of the assistance consisted of planes, ships, ordnance, and other military hardware having no direct civilian value.  However, some dual use activity did occur involving the construction of airfields, roads, telecommunications facilities, and training programs.  Over time, spillover from this type of investment–in conjunction with the regime’s explicit militarization of the city’s society and institutions–permanently altered the urban fabric of Taipei.

Urbanization  intensified as inflows of US capital assistance strengthened the city’s infrastructure, with the US Congress defining the purpose of Taiwan’s Defense Support broadly, permitting its use as an “instrument of development.”

Projects impacting the urban environment included the Taiwan Power Company’s quadrupling of electrical generation which made possible the expansion of industry in and around Taipei.  The capital’s increased power capability was complemented, in turn, by the provision of essential financing for Taipei’s transport system, including the building of MacArthur Highway which linked the capital to the city of Keelung at the northern tip of the island.

A succession of similar projects eventually spurred the growth of an urban corridor in the western region of the country, so much so that Thomas Gold reported that “the island’s western strip from Keelung to Kaoshiung has now become an endless sprawl of distressing, often freakishly ugly high-rise apartment blocks and factories crammed almost on top of each other.”

The corridor, dominated by Taipei, has been shaped by population movements and manufacturing plants facilitated by American advisers and American dollars.  Moreover, much of the expansion has been related to satisfying defense-associated requirements.

Photograph by Robby Tendean.