The Taiwan Model
What Conditions Have Led Taiwan to Succeed Against All Odds?
JULY 01, 1998 by HUGH MACAULAY
Filed Under : Property Rights, Free Markets, Poverty, Labor Unions, Democracy
Hugh Macaulay was Alumni Professor of Economics Emeritus at Clemson University. He was a visiting professor at National Taiwan University in Taipei from August 1984 to July 1985.
People at all times in the past and everywhere on earth today have wanted to enjoy economic growth and prosperity, as well as political and personal freedom. Unfortunately, as Milton Friedman has observed, our existence has been more often one of stagnation and poverty, considerable political control, and little personal freedom. The desire for the good life and the reality of the bad describe conditions faced by most people on the planet both then and now. Why have we failed so miserably?
Economists have noted that free markets and protected property rights allow people to reach these economic goals, while many political philosophers have called for democracy and limited government to produce the latter aims. Considering the universal lack of these sought-after conditions, the arguments have not been persuasive, or at least have not persuaded those in power.
If we seek empirical evidence of policies and plans that have led to these desired results, the United States springs readily to mind. But its success is often attributed to its natural resources, its defensive moats of two oceans, and a well-educated population of immigrants. Is there not another convincing example, a smaller country with conditions like those in many poorer nations to serve as a model, one whose policies can be easily duplicated? I offer the Republic of China on Taiwan, usually called Taiwan, as a shining country on a hill.
If this description is correct, why have not others beaten a path to its door, eager to learn and duplicate its accomplishments? Taiwan is an international pariah. It is not a member of the United Nations or of most other international bodies. It has formal diplomatic relations with only 29 of the very smallest countries. Its accomplishments are not recorded in most of the international collections of statistics. Its successes are largely unknown and unsung.
We will detail first why Taiwan was unlikely to succeed. It faced almost every conceivable condition that has led other countries to explain away their failures. Next we examine its record of successes, levels achieved by few countries anywhere or at any time. We then look at conditions that produced this outstanding record, conditions ridiculed and rejected by most countries. We conclude with lessons for other countries, both those called emerging and those that are fully advanced. There is much to be learned.
Barriers to Economic Growth
Countries that are described as less developed countries (LDCs), or emerging countries whose output is rising slowly or is perhaps stagnant or even falling, seem always to have an excuse for their sad condition. Something beyond their control explains their plight. This unfortunate situation, which they have inherited from God, nature, or other malevolent humans is offered as a reason for failure. Taiwan, however, has inherited nearly all of these problems and still succeeded. The barriers include:
Colonial Status. Countries in Africa and Southeast Asia, and particularly India, cite their sad earlier fate as a colony of some other nation bent on exploiting their resources and population. This massive drain has left the former colonies prostrate and exhausted and unable to recover and prosper. But Taiwan was a Japanese colony from 1895 to 1945, and the Japanese were never noted for kindness or beneficence to their colonies. The Japanese did construct some roads, railroads, a few factories, and port facilities, which provided a small base on which the Chinese could later build. Other colonial powers, however, left similar assets, which were most often wastefully used or abandoned.
Natural Resources, These help explain the success of the United States, Australia, Kuwait, South Africa, and a few other nations, but most poor countries tell us how they were deprived of these blessings. How can a nation grow when it has no inheritance of natural-resource wealth? Taiwan has some coal, inefficient to mine, and some recently discovered natural gas, but no significant oil, iron ore, or minerals, and little tillable land. It is hard to make something out of nothing. But Taiwan has done so.
Overpopulation. India and China give this as the principal reason they have remained poor. Since Malthus, most who have written on the topic have cited the overbearing nature of the population problem. Taiwan is a small island, less than half the area of South Carolina, with a population of about 21 million, which makes it the second-most densely populated nation on earth, behind only Bangladesh. Further, 62 percent of the island is mountainous, with over 60 peaks above 10,000 feet, so that its people live in an area the size of Connecticut. If overpopulation produces poverty, Taiwan should be the poorest nation on earth.
Immigration. Closely related to population is immigration. Hong Kong was unable to absorb fleeing Vietnamese and forcibly repatriated some of them. The United States complains of illegal immigrants, and often of even the legal ones. England has long voiced concern over immigrants from the Commonwealth. But in 1949 some two million Nationalists from the mainland came to join the six million residents of Taiwan, a 33 percent increase in population in two years. Many residents of the United States find our annual immigration rate of less than 1 percent a heavy burden, lowering our average wage rate and reducing our per capita GDP. Taiwan took its burden of immigrants and proved them to be a great blessing.
Illiteracy. An educated populace is necessary for a country to prosper, and illiteracy characterizes poor countries. But when the Japanese left Taiwan, they left a population they had not tried to educate. Even in 1952, after the Nationalists had arrived on Taiwan, 41 percent of the population was illiterate, 43 percent had completed only primary school, and just 9 percent had finished high school. Many other countries were cowed by such conditions; but not Taiwan. By 1994 only 6 percent were illiterate and 63 percent had completed high school. In 1952 only 13 Taiwan students were doing graduate work, but by 1996 there were 42,000. Compare these results with those in any countries in Africa or Latin Amen ca.
National Defense Expenditures. Will Durant observes that the natural state of mankind’s existence is war. This means that all nations must spend resources on national defense, which diverts activities from investment and consumption. So, many countries attribute their poverty to their need to defend what little they have. Even so wealthy a nation as the United States has in recent decades explained its slow rate of growth as a result of large expenditures on national defense. Taiwan, with its 21 million people, lies 150 miles from Mainland China with its 1,250 million who loudly proclaim their intention to bring Taiwan back into the fold. Taiwan’s defense expenditures are not published but are estimated to run from 10 to 20 percent of GDP, and every physically able young man must spend at least one year serving in the military, depriving the nation of his productive activity. We in the United States spend 3 percent today and have not spent more than 7 percent since 1972. Taiwan has managed to produce both guns and butter.
Foreign Aid. Many nations argue they cannot prosper without the help of foreign aid. Yasir Arafat makes this a condition for the success of his new Palestinian political unit. While Taiwan was a beneficiary of U.S. foreign aid after World War 11, this aid was discontinued in 1968. Taiwan has prospered without foreign gifts.
Diplomatic Ostracism. Since 1979, when the United States recognized the People’s Republic of China, the Republic of China on Taiwan has been expelled from the formal community of nations. This is a deterrent to trade, but the inventive people on Taiwan have found ways to circumvent this barrier.
This is a formidable array of difficulties, adverse conditions, and reasons for failure. Many a country has used just one of these to explain its poverty and stagnation. Taiwan has had all of them and has still amassed a record that places it at the top of all nations. One immediate lesson is that these explanations are not valid reasons for failure but only weak excuses with no foundation. The excuses are the emperor’s new clothes, and Taiwan is the little boy stating, quietly, the truth about the impressive robes.
If citizens of a country are to enjoy a good standard of living, the economy of the country must grow–rapidly if it starts from a low base. Taiwan has done just that. From 1952 to 1992, a period from the arrival of the Nationalists on Taiwan to this decade, the annual growth rate in real GDP was 8.7 percent. For the United States during the same period, it was 3.2 percent. The power of a compounded rate of growth is often poorly understood, but these figures should help put the concept in perspective. Taiwan’s real GDP grew 27-fold; in the United States it grew less than fourfold.
Dozens of other countries were simultaneously stagnating, or suffering a decline in output.
Of course, some of this growth could be due to an increase in population, for more people mean more goods. When we adjust these figures to per capita terms, we find real income grew at 6.4 percent per year in Taiwan, a twelvefold increase. The average per capita GDP for an American today is about $30,000. If we enjoyed the growth rate of Taiwan, in 40 years the average American would have $360,000. Instead, U.S. per capita growth in real terms has been at 2 percent per year, a twofold increase over the 40 years. And in the last 20 years to 1990, the growth rate has fallen to 0.9 percent, which would take 75 years to double output per person. Rates of growth such as those in Taiwan can produce miracles-hence, the common phrase “the Taiwan Miracle.”
It could be that this growth in output per person is due to workers laboring increasingly longer hours. We find, however, that the number of hours worked per person per month in manufacturing fell from 223 in 1975 to 202 in 1990, a 9 percent decline. More goods with less work is an achievement we all seek.
Half of the “Misery Index,” made popular by the late Senator Hubert Humphrey, is the unemployment rate. Never in the 40 years we are considering did it reach 3 percent in Taiwan. After 1954 it never reached 2 percent, and in eight of these years it was less than I percent. In no year did the lowest U.S. rate fall as low as the highest Taiwan rate. There is little misery in these figures.
Many economists explain low rates of unemployment by high rates of inflation. The Taiwan experience debunks this theory. Over the 1952-to-1992 period prices rose an average of 6.3 percent per year. This compares with a rise of only 4.4 percent in the United States. But Taiwan’s increases were concentrated in the early 1950s and during the two oil shocks; in one of these years prices rose 47 percent. In I I of the 40 years prices rose less than 3 percent, a level reached in the United States in only one year between 1968 and 1990. Taiwan has shown the world that stable prices are consistent with rapid growth.
Countries around the world have borrowed from others to invest and produce. The result has been little capital and much debt. Taiwan has not borrowed but saved and amassed foreign reserves of roughly $100 billion. Such wealth can assure future growth and wellbeing.
The benefits of this growth have been widely dispersed. Today 99 percent of Taiwanese households have color televisions and refrigerators. The figures for telephones and washing machines are 97 and 92 percent, respectively. When the Berlin Wall fell in 1989, fewer than 10 percent of East Germans had telephones-in what was the wealthiest of the Soviet-bloc countries.
A comparison of the Republic of China on Taiwan with the People’s Republic of China makes clear what Taiwan has accomplished. In 1950 when the Nationalists had just arrived on Taiwan, the per capita income on both Taiwan and the Mainland was $50 per year. By 1992, the figure for the Mainland had risen to about $500, while that for Taiwan was over $10,000. Here were two people with similar cultural backgrounds and accomplishments. The important difference was the social and economic systems adopted in each country. Could there be a clearer example of the superiority of political and economic freedoms?
Factors Promoting Economic Growth
Throughout the period we have examined, most economists who specialized in economic development argued that government should direct the economy to overcome market failures, protect infant industries, promote saving for capital investment, and direct those investments so the greatest social good would be realized. Although Taiwan followed some of those policies in its earliest days, after about 1957 it marched to a different drummer, one beating out the cadence of free markets and limited government.
Taxes take resources from productive individuals and transfer them to government, discouraging economic activity. The Republic of China collected only 14 percent of gross national product in taxes in 1960, while the United States was taking 25 percent. By 1990 the Republic’s take had risen to 20 percent and the United States’ to nearly 40 percent. Although the upward trend seems universal, Taiwan has left with its citizens more money and greater incentive to produce.
Modern nations have large welfare programs to succor those in need. The “social safety net” commands much attention. Taiwan has acted as though people can take better care of themselves and their friends and relatives than can government. Social-welfare expenditures have been less than I percent of GDP. Their welfare program has consisted of rapid growth, stable prices, low unemployment, and a wide distribution of consumer goods. Results count.
Most governments promote labor unions as a way to help working people. Taiwan has not promoted unions, and union power has been weak. A review of the figures above show how workers have gained more from markets than from unions.
Firms are born and they die. Each event is traumatic, and government aid is often sought to make the process easier. Taiwan has protected few of its infant industries; those it has assisted have remained dependent on government support. Dying firms have been allowed to close. A recent study shows this policy has promoted efficiency, growth, and a higher standard of living.
Early in the 1950s Taiwan undertook a land-reform program, but it differed from those in other countries. In Taiwan the land was bought, rather than taken, from its owners. It was then sold, rather than given, to its new owners, who had worked on these farms. Thus, property rights were respected, and responsibility was promoted. These actions established confidence in property rights and promoted business formation.
Finally, culture is always an important factor in the economic life of a people. The Confucian culture, with its emphasis on family, education, and work, is an invaluable characteristic, as is shown by the four Little Tigers, where it has been prominent, and by the Mainland, where it has been denigrated.
Political Freedom, Too
Writers such as Adam Smith, F. A. Hayek, Milton Friedman, and Julian Simon predicted that free markets and a respect for property rights would produce a prosperous society with political freedom. We have outlined the economic accomplishments above. The political system has moved from local elections to election of all members of the legislative yuan to popular election of the president. Residents of Taiwan have great freedom of religion, press, and political expression to go with their rapidly growing economy.
The theory and practice of freedom are found in Taiwan. All other nations have only to look, listen, and learn. If Taiwan can achieve these results, every nation on earth should be free and prosperous.