The Economic History of Taiwan

Kelly Olds, National Taiwan University

Geography

Taiwan is a sub-tropical island, roughly 180 miles long, located less than 100 miles offshore of China’s Fujian province. Most of the island is covered with rugged mountains that rise to over 13,000 feet. These mountains rise directly out of the ocean along the eastern shore facing the Pacific so that this shore, and the central parts of the island are sparsely populated. Throughout its history, most of Taiwan’s people have lived on the Western Coastal Plain that faces China. This plain is crossed by east-west rivers, which occasionally bring floods of water down from the mountains creating broad boulder strewn flood plains. Until modern times, these rivers have made north-south travel costly and limited the island’s economic integration. The most important river is the Chuo Shuei-Hsi (between present-day Changhua and Yunlin counties), which has been an important economic and cultural divide.

Aboriginal Economy

Little is known about Taiwan prior to the seventeenth-century. When the Dutch came to the island in 1622, they found a population of roughly 70,000 Austronesian aborigines, at least 1,000 Chinese and a smaller number of Japanese. The aborigine women practiced subsistence agriculture while aborigine men harvested deer for export. The Chinese and Japanese population was primarily male and transient. Some of the Chinese were fishermen who congregated at the mouths of Taiwanese rivers but most Chinese and Japanese were merchants. Chinese merchants usually lived in aborigine villages and acted as middlemen, exporting deerskins, primarily to Japan, and importing salt and various manufactures. The harbor alongside which the Dutch built their first fort (in present-day Tainan City) was already an established place of rendezvous for Chinese and Japanese trade when the Dutch arrived.

Taiwan under the Dutch and Koxinga

The Dutch took control of most of Taiwan in a series of campaigns that lasted from the mid-1630s to the mid-1640s. The Dutch taxed the deerskin trade, hired aborigine men as soldiers and tried to introduce new forms of agriculture, but otherwise interfered little with the aborigine economy. The Tainan harbor grew in importance as an international entrepot. The most important change in the economy was an influx of about 35,000 Chinese to the island. These Chinese developed land, mainly in southern Taiwan, and specialized in growing rice and sugar. Sugar became Taiwan’s primary export. One of the most important Chinese investors in the Taiwanese economy was the leader of the Chinese community in Dutch Batavia (on Java) and during this period the Chinese economy on Taiwan bore a marked resemblance to the Batavian economy.

Koxinga, a Chinese-Japanese sea lord, drove the Dutch off the island in 1661. Under the rule of Koxinga and his heirs (1661-1683), Chinese settlement continued to spread in southern Taiwan. On the one hand, Chinese civilians made the crossing to flee the chaos that accompanied the Ming-Qing transition. On the other hand, Koxinga and his heirs brought over soldiers who were required to clear land and farm when they were not being used in wars. The Chinese population probably rose to about 120,000. Taiwan’s exports changed little, but the Tainan harbor lost importance as a center of international trade, as much of this trade now passed through Xiamen (Amoy), a port across the strait in Fujian that was also under the control of Koxinga and his heirs.

Taiwan under Qing Rule

The Qing dynasty defeated Koxinga’s grandson and took control of Taiwan in 1683. Taiwan remained part of the Chinese empire until it ceded the island to Japan in 1895. The Qing government originally saw control of Taiwan as an economic burden that had to be borne in order to keep the island out of the hand of pirates. In the first year of occupation, the Qing government shipped as many Chinese residents as possible back to the mainland. The island lost perhaps one-third of its Chinese population. Travel to Taiwan by all but male migrant workers was illegal until 1732 and this prohibition was reinstated off-and-on until it was finally permanently rescinded in 1788. However, the island’s Chinese population grew about two percent per year in the century following the Qing takeover. Both illegal immigration and natural increase were important components of this growth. The Qing government feared the expense of Chinese-aborigine confrontations and tried futilely to restrain Chinese settlement and keep the populations apart. Chinese pioneers, however, were constantly pushing the bounds of Chinese settlement northward and eastward and the aborigines were forced to adapt. Some groups permanently leased their land to Chinese settlers. Others learned Chinese farming skills and eventually assimilated or else moved toward the mountains where they continued hunting, learned to raise cattle or served as Qing soldiers. Due to the lack of Chinese women, intermarriage was also common.

Individual entrepreneurs or land companies usually organized Chinese pioneering enterprises. These people obtained land from aborigines or the government, recruited settlers, supplied loans to the settlers and sometimes invested in irrigation projects. Large land developers often lived in the village during the early years but moved to a city after the village was established. They remained responsible for paying the land tax and they received “large rents” from the settlers amounting to 10-15 percent of the expected harvest. However, they did not retain control of land usage or have any say in land sales or rental. The “large rents” were, in effect, a tax paid to a tax farmer who shared this revenue with the government. The payers of the large rents were the true owners who controlled the land. These people often chose to rent out their property to tenants who did the actual farming and paid a “small rent” of about 50 percent of the expected harvest.

Chinese pioneers made extensive use of written contracts but government enforcement of contracts was minimal. In the pioneers’ homeland across the strait, protecting property and enforcing agreements was usually a function of the lineage. Being part of a strong lineage was crucial to economic success and violent struggles among lineages were a problem endemic to south China. Taiwanese settlers had crossed the strait as individuals or in small groups and lacked strong lineages. Like other Chinese immigrants throughout the world, they created numerous voluntary associations based on one’s place of residence, occupation, place of origin, surname, etc. These organizations substituted for lineages in protecting property and enforcing contracts, and violent conflict among these associations over land and water rights was frequent. Due to property rights problems, land sales contracts often included the signature of not only the owner, but also his family and neighbors agreeing to the transfer. The difficulty of seizing collateral led to the common use of “conditional sales” as a means of borrowing money. Under the terms of a conditional sale, the lender immediately took control of the borrower’s property and retained the right to the property’s production in lieu of rent until the borrower paid back the loan. Since the borrower could wait an indefinite period of time before repaying the loan, this led to an awkward situation in which the person who controlled the land did not have permanent ownership and had no incentive to invest in land improvements.

Taiwan prospered during a sugar boom in the early eighteenth century, but afterwards its sugar industry had a difficult time keeping up with advances in foreign production. Until the Japanese occupation in 1895, Taiwan’s sugar farms and sugar mills remained small-scale operations. The sugar industry was centered in the south of the island and throughout the nineteenth century, the southern population showed little growth and may have declined. By the end of the nineteenth century, the south of the island was poorer than the north of the island and its population was shorter in stature and had a lower life expectancy. The north of the island was better suited to rice production and the northern economy seems to have grown robustly. As the Chinese population moved into the foothills of the northern mountains in the mid-nineteenth century, they began growing tea, which added to the north’s economic vitality and became the island’s leading export during the last quarter of the nineteenth century. The tea industry’s most successful product was oolong tea produced primarily for the U.S. market.

During the last years of the Qing dynasty’s rule in Taiwan, Taiwan was made a full province of China and some attempts were made to modernize the island by carrying out a land survey and building infrastructure. Taiwan’s first railroad was constructed linking several cities in the north.

Taiwan under Japanese Rule

The Japanese gained control of Taiwan in 1895 after the Sino-Japanese War. After several years of suppressing both Chinese resistance and banditry, the Japanese began to modernize the island’s economy. A railroad was constructed running the length of the island and modern roads and bridges were built. A modern land survey was carried out. Large rents were eliminated and those receiving these rents were compensated with bonds. Ownership of approximately twenty percent of the land could not be established to Japanese satisfaction and was confiscated. Much of this land was given to Japanese conglomerates that wanted land for sugarcane. Several banks were established and reorganized irrigation districts began borrowing money to make improvements. Since many Japanese soldiers had died of disease, improving the island’s sanitation and disease environment was also a top priority.

Under the Japanese, Taiwan remained an agricultural economy. Although sugarcane continued to be grown mainly on family farms, sugar processing was modernized and sugar once again became Taiwan’s leading export. During the early years of modernization, native Taiwanese sugar refiners remained important but, largely due to government policy, Japanese refiners holding regional monopsony power came to control the industry. Taiwanese sugar remained uncompetitive on the international market, but was sold duty free within the protected Japanese market. Rice, also bound for the protected Japanese market, displaced tea to become the second major export crop. Altogether, almost half of Taiwan’s agricultural production was being exported in the 1930s. After 1935, the government began encouraging investment in non-agricultural industry on the island. The war that followed was a time of destruction and economic collapse.

Growth in Taiwan’s per-capita economic product during this colonial period roughly kept up with that of Japan. Population also grew quickly as health improved and death rates fell. The native Taiwanese population’s per-capita consumption grew about one percent per year, slower than the growth in consumption in Japan, but greater than the growth in China. Better property rights enforcement, population growth, transportation improvements and protected agricultural markets caused the value of land to increase quickly, but real wage rates increased little. Most Taiwanese farmers did own some land but since the poor were more dependent on wages, income inequality increased.

Taiwan Under Nationalist Rule

Taiwan’s economy recovered from the war slower than the Japanese economy. The Chinese Nationalist government took control of Taiwan in 1945 and lost control of their original territory on the mainland in 1949. The Japanese population, which had grown to over five percent of Taiwan’s population (and a much greater proportion of Taiwan’s urban population), was shipped to Japan and the new government confiscated Japanese property creating large public corporations. The late 1940s was a period of civil war in China, and Taiwan also experienced violence and hyperinflation. In 1949, soldiers and refugees from the mainland flooded onto the island increasing Taiwan’s population by about twenty percent. Mainlanders tended to settle in cities and were predominant in the public sector.

In the 1950s, Taiwan was dependent on American aid, which allowed its government to maintain a large military without overburdening the economy. Taiwan’s agricultural economy was left in shambles by the events of the 1940s. It had lost its protected Japanese markets and the low-interest-rate formal-sector loans to which even tenant farmers had access in the 1930s were no longer available. With American help, the government implemented a land reform program. This program (1) sold public land to tenant farmers, (2) limited rent to 37.5% of the expected harvest and (3) severely restricted the size of individual landholdings forcing landlords to sell most of their land to the government in exchange for stocks and bonds valued at 2.5 times the land’s annual expected harvest. This land was then redistributed. The land reform increased equality among the farm population and strengthened government control of the countryside. Its justice and effect on agricultural investment and productivity are still hotly debated.

High-speed growth accompanied by quick industrialization began in the late-1950s. Taiwan became known for its cheap manufactured exports produced by small enterprises bound together by flexible sub-contracting networks. Taiwan’s postwar industrialization is usually attributed to (1) the decline in land per capita, (2) the change in export markets and (3) government policy. Between 1940 and 1962, Taiwan’s population increased at an annual rate of slightly over three percent. This cut the amount of land per capita in half. Taiwan’s agricultural exports had been sold tariff-free at higher-than-world-market prices in pre-war Japan while Taiwan’s only important pre-war manufactured export, imitation panama hats, faced a 25% tariff in the U.S., their primary market. After the war, agricultural products generally faced the greatest trade barriers. As for government policy, Taiwan went through a period of import substitution policy in the 1950s, followed by promotion of manufactured exports in the 1960s and 1970s. Subsidies were available for certain manufactures under both regimes. During the import substitution regime, domestic manufactures were protected both by tariffs and multiple overvalued exchange rates. Under the later export promotion regime, export processing zones were set up in which privileges were extended to businesses which produced products which would not be sold domestically.

Historical research into the “Taiwanese miracle” has focused on government policy and its effects, but statistical data for the first few post-war decades is poor and the overall effect of the various government policies is unclear. During the 1960s and 1970s, real GDP grew about 10% (7% per capita) each year. Most of this growth can be explained by increases in factors of production. Savings rates began rising after the currency was stabilized and reached almost 30% by 1970. Meanwhile, primary education, in which 70% of Taiwanese children had participated under the Japanese, became universal, and students in higher education increased many-fold. Although recent research has emphasized the importance of factor growth in the Asian “miracle economies,” studies show that productivity also grew substantially in Taiwan.