Foreign factors in Taiwan's economic transformation

Abstract

This paper aims to explore the foreign influences on Taiwan's economic transformation over the past 40 years. While exports have always been important in sustaining Taiwan's economic growth, the driving force behind exports has changed from inward investment to outward investment. The analysis carried out is from an international political economy perspective and takes a historical overview. It argues that the US, Japan and China pursued economic policies based on their own economic interests. These foreign governments’ economic policies together with their entrepreneurs’ business interests are the more important variables for shaping Taiwan's economic structure. During the 1960s, without the US's financial guarantees for American MNCs and security guarantees for the island, the KMT's foreign investment promotion policy would not have been as successful as it was when Taiwan faced a military threat from China. The US and Japanese economic policies changed, and since the 1970s competition between their businesses in the world market has integrated Taiwan into a regional production network. Subsequent to the Sino-US rapprochement, the US gradually opened up its market towards China. With America's rising trade barriers against Taiwanese-made products, Taiwanese entrepreneurs found profits by investing in China. Even though the Taiwanese Government tried hard to pull back the mounting outward investment in China, it was unable to achieve it. In contrast to the traditional point of view, this paper offers insights into the economic interaction between first the US and Japan and later between the US and China that resulted in Taiwan's economic transformation.

Keywords:

• Taiwan's economic transformation
• foreign direct investment
• outward investment
• production relationship
• economic policy

JEL classification:

• O19

Notes

1. Three laws had been enacted in order to provide suitable incentives and to attract foreign capital. These were the ‘Statute for Investment by Foreign Nationals’, enacted on 14 July 1954, and amended on 14 December 1959; the ‘Statute for Investment by Overseas Chinese’, enacted on 19 January 1955, and amended on 26 March 1960; and the ‘Statute for Encouragement of Investment’, enacted on 10 September 1960, and amended on 4 January 1965. For certain KMT officials, the economic liberalization policies, including measures favourable to foreign investors, were dangerous to their leadership, as they signified the reduction of state control in Taiwan's economy. Though there was some opposition from the KMT due to their interest in the import-substitution policy, the opposition broke in 1958 as the Americans threatened to reduce the financial aid to Taiwan (Jacoby 1966 and Gold 1986).

2. US aid played a crucial role in Taiwan's post-war development and its subsequent trade dependence on the US. Instead of developing the economy, the aid was used as a way to consolidate Taiwan's defensive capacity against the Communist China.

3. For example, export of goods and services contributed around 53% of Taiwan's GDP growth in 1978. After 1980, the role of the exporting sectors became even more essential to Taiwan's GDP growth. From 1979 to 1989, around 35% to 48% of Taiwan's export was towards the American market. See Taiwan Statistical Data Book 2005 Table 3-10a, p. 63, and Table 11-9f, p. 223.

4. As mentioned by Douglas H. Paal, Director of the Taipei office, American Institute in Taiwan, ‘While these concerns (Taiwan's economic overdependence on mainland) should not be dismissed, these issues need to be seen in the broader context of global interdependence. Cross-Strait trade is not occurring in a vacuum and both sides are connected to world trade’. Douglas H. Paal, at the Brookings-FICS conference ‘Taipei-Washington-Beijing Relations after the Presidential Election’ in May 23, 2004. Available from: http://www.brookings.edu/fp/cnaps/events/paal20040523.pdf [accessed 28 November 2008].