SYP

Answer ONE of the following three questions in four sentences or less. 

What does Looney reveal about Taiwan’s developmental state that is not a focus of Amsden’s account?

How would Chang and/or Amsden respond to idea that neoliberal principles promote economic development?

Referencing at least one reading, explain whether you think other states should emulate South Korea and/or Taiwan’s economic development model.  

PROLOGUE

Mozambique’s economic miracle
How to escape poverty

Mozambique Takes on the Big Boys
Nuts and volts

June 28th 2061 | MAPUTO
From The Economist print edition
Tres Estrelas announces a new breakthrough in fuel cell
technology

In a carefully staged event to coincide with the country’s independence day on
June 25th, Maputo-based Tres Estrelas, the largest African business group outside
South Africa, unveiled a breakthrough technology for mass production of hydrogen
fuel cells. ‘When our new plant goes into production in the autumn of 2063, ’ Mr
Armando Nhumaio, the ebullient chairman of the company announced, ‘we will be
able to take on the big boys from Japan and the USA by offering consumers much
better value for money.’ Analysts agree that the new technology from Tres Estrelas
means hydrogen fuel is set to replace alcohol as the main source of power for
automobiles. ‘This is bound to pose a serious challenge to the leading alcohol fuel
producers, like Petrobras of Brazil and Alconas of Malaysia, ’ says Nelson Mbeki-
Malan, the head of the prestigious Energy Economics Research Institute at the
University of Western Cape, South Africa.

Tres Estrelas has made its own rocket-fuelled journey from humble beginnings.
The company started out exporting cashew nuts in 1968, seven years before
Mozambique’s independence from the Portuguese. It then did well by diversifying into
textiles and sugar refining. Subsequently, it made a bolder move into electronics, first
as a subcontractor for the Korean electronics giant, Samsung, and later as an
independent producer. But an announcement in 2030 that hydrogen fuel cell
production was to be its next venture generated considerable scepticism. ‘Everyone
thought we were crazy, ’ says Mr Nhumaio. ‘The fuel cell division bled money for 17
years. Luckily, in those days, we did not have many outside shareholders requiring
instant results.We persisted in our belief that building a world-class firm requires a
long period of preparation.’

The company’s rise symbolizes the economic miracle that is modern Mozambique.
In 1995, three years after the end of its bloody 16-year civil war, Mozambique had a
per capita income of only $80 and was literally the poorest economy in the world. With
deep political divisions, rampant corruption and a sorry 33% literacy rate, its
prospects ranged from dire to grim. In 2000, eight years after the end of the civil war,
the average Mozambican still earned only $210 a year, just over half that of the
average Ghanaian, who was earning $350. However, since then, Mozambique’s
economic miracle has transformed it into one of the richest economies in Africa and a
solid upper-middle-income country. With a bit of luck and sweat, it may even be able
to join the ranks of the advanced economies in the next two or three decades.

‘We will not rest on our laurels, ’ says Mr Nhumaio, whose roguish grin is reported
to hide a steely determination.‘This is a tough industry where technology changes
fast. Product life-cycles are short and no one can expect to last long as the market
leader based on only one innovation. Competitors may appear on the horizon out of

nowhere any day.’ After all, his company has just sprung a nasty surprise on the
Americans and the Japanese. Might a relatively unknown fuel cell manufacturer
somewhere in Nigeria decide that, if Tres Estrelas was able to move from the darkest
shadows to the top of the tree, then perhaps it could too?

Mozambique may or may not succeed in living up to my fantasy.
But what would your reaction have been, had you been told in 1961,
a century before the Mozambican dream, that South Korea would, in
40 years’ time, be one of the world’s leading exporters of mobile
phones, a strictly science-fiction product at that time? Hydrogen fuel
cells do at least exist today.

In 1961, eight years after the end of its fratricidal war with North
Korea, South Korea’s yearly income stood at $82 per person. The
average Korean earned less than half the average Ghanaian citizen
($179).1 The Korean War – which, incidentally, started on June 25,
Mozambique’s independence day – was one of the bloodiest in
human history, claiming four million lives in just over three years
(1950–3). Half of South Korea’s manufacturing base and more than
75% of its railways were destroyed in the conflict. The country had
shown some organizational ability by managing to raise its literacy
ratio to 71% by 1961 from the paltry 22% level it had inherited in
1945 from its Japanese colonial masters, who had ruled Korea since
1910. But it was widely considered a basket case of developmental
failure. A 1950s internal report from USAID – the main US
government aid agency then, as now – called Korea a ‘bottomless
pit’. At the time, the country’s main exports were tungsten, fish and
other primary commodities.

As for Samsung, * now one of the world’s leading exporters of
mobile phones, semiconductors and computers, the company
started out as an exporter of fish, vegetables and fruit in 1938, seven
years before Korea’s independence from Japanese colonial rule.
Until the 1970s, its main lines of business were sugar refining and
textiles that it had set up in the mid-1950s.2 When it moved into the
semiconductor industry by acquiring a 50% stake in Korea
Semiconductor in 1974, no one took it seriously. After all, Samsung
did not even manufacture colour TV sets until 1977. When it
declared its intention, in 1983, to take on the big boys of the
semiconductor industry from the US and Japan by designing its own
chips, few were convinced.

Korea, one of the poorest places in the world, was the sorry
country I was born into on October 7 1963. Today I am a citizen of
one of the wealthier, if not wealthiest, countries in the world. During
my lifetime, per capita income in Korea has grown something like 14
times, in purchasing power terms. It took the UK over two centuries
(between the late 18th century and today) and the US around one
and half centuries (the 1860s to the present day) to achieve the
same result.3 The material progress I have seen in my 40-odd years
is as though I had started life as a British pensioner born when
George III was on the throne or as an American grandfather born
while Abraham Lincoln was president.

The house I was born and lived in until I was six was in what was
then the north-western edge of Seoul, Korea’s capital city. It was one
of the small (two-bedroom) but modern homes that the government
built with foreign aid in a programme to upgrade the country’s
dilapidated housing stock. It was made with cement bricks and was
poorly heated, so it was rather cold in winter – the temperature in
Korea’s winter can sink to 15 or even 20 degrees below zero. There
was no flushing toilet, of course: that was only for the very rich.

Yet my family had some great luxuries that many others lacked,
thanks to my father, an elite civil servant in the Finance Ministry who
had diligently saved his scholarship money while studying at Harvard
for a year. We owned a black-and-white TV set, which exerted a
magnetic pull on our neighbours. One family friend, an up-and-
coming young dentist at St Mary’s, one of the biggest hospitals in the
country, somehow used to find the time to visit us whenever there
was a big sports match on TV – ostensibly for reasons totally
unrelated to the match. In today’s Korea, he would be contemplating
upgrading the second family TV in the bedroom to a plasma screen.
A cousin of mine who had just moved from my father’s native city of
Kwangju to Seoul came to visit on one occasion and quizzed my
mother about the strange white cabinet in the living room. It was our
refrigerator (the kitchen being too small to accommodate it).My wife,
Hee-Jeong, born in Kwangju in 1966, tells me that her neighbours
would regularly ‘deposit’ their precious meat in the refrigerator of her
mother, the wife of a prosperous doctor, as if she were the manager
of an exclusive Swiss private bank.

A small cement-brick house with a black-and-white TV and a
refrigerator may not sound much, but it was a dream come true for
my parents’ generation, who had lived through the most turbulent
and deprived times: Japanese colonial rule (1910–45), the Second
World War, the division of the country into North and South Korea
(1948) and the Korean War. Whenever I and my sister, Yonhee, and
brother, Hasok, complained about food, my mother would tell us how
spoilt we were. She would remind us that, when they were our age,
people of her generation would count themselves lucky if they had
an egg. Many families could not afford them; even those who could
reserved them for fathers and working older brothers. She used to
recall her heartbreak when her little brother, starving during the
Korean War at the age of five, said that he would feel better if he
could only hold a rice bowl in his hands, even if it was empty. For his
part, my father, a man with a healthy appetite who loves his beef,
had to survive as a secondary school student during the Korean War
on little more than rice, black-market margarine from the US army,
soy sauce and chilli paste. At the age of ten, he had to watch
helplessly as his seven-year-old younger brother died of dysentery, a
killer disease then that is all but unknown in Korea today.

Years later, in 2003, when I was on leave from Cambridge and
staying in Korea, I was showing my friend and mentor, Joseph
Stiglitz, the Nobel Laureate economist, around the National Museum
in Seoul. We came across an exhibition of beautiful black-and-white
photographs showing people going about their business in Seoul’s
middle-class neighbourhoods during the late 1950s and the early
1960s. It was exactly how I remembered my childhood. Standing
behind me and Joe were two young women in their early twenties.
One screamed, ‘How can that be Korea? It looks like Vietnam!’
There was less than 20 years’ age gap between us, but scenes that
were familiar to me were totally alien to her. I turned to Joe and told
him how ‘privileged’ I was as a development economist to have lived
through such a change. I felt like an historian of mediaeval England
who has actually witnessed the Battle of Hastings or an astronomer
who has voyaged back in time to the Big Bang.

Our next family house, where I lived between 1969 and 1981, at
the height of Korean economic miracle, not only had a flushing toilet

but also boasted a central heating system. The boiler, unfortunately,
caught fire soon after we moved in and almost burned the house
down. I don’t tell you this in complaint; we were lucky to have one –
most houses were heated with coal briquettes, which killed
thousands of people every winter with carbon monoxide poisoning.
But the story does offer an insight into the state of Korean
technology in that far-off, yet really so recent, era.

In 1970 I started primary school. It was a second-rate private
school that had 65 children in each class. We were very proud
because the state school next door had 90 children per class.Years
later, in a seminar at Cambridge, a speaker said that because of
budget cuts imposed by the International Monetary Fund (more on
this later), the average number of pupils per classroom in several
African countries rose from 30-something to 40-something in the
1980s. Then it hit me just how bad things had been in the Korean
schools of my childhood.When I was in primary school, the poshest
school in the country had 40 children in a class, and everyone
wondered, ‘how do they do that?’ State schools in some rapidly
expanding urban areas were stretched to the limit, with up to 100
pupils per class and teachers running double, sometimes triple,
shifts. Given the conditions, it was little wonder that education
involved beating the children liberally and teaching everything by
rote. The method has obvious drawbacks, but at least Korea has
managed to provide at least six years’ education to virtually every
child since the 1960s.

In 1972, when I was in Year 3 (US third grade), my school
playground suddenly became a campsite for soldiers. They were
there to pre-empt any student demonstrations against the martial law
being imposed by the president of the country, (former) General Park
Chung-Hee. Thankfully, they were not there to take on me and my
friends. We Korean kids may be known for our academic precocity,
but constitutional politics were frankly a little bit beyond us nine-year-
olds.My primary school was attached to a university, whose
rebellious students were the soldiers’ target. Indeed, Korean
university students were the nation’s conscience throughout the
political dark age of the military dictatorship and they also played the
leading role in putting an end to it in 1987.

After he had come to power in a military coup in 1961, General
Park turned ‘civilian’ and won three successive elections. His
electoral victories were propelled by his success in launching the
country’s economic ‘miracle’ through his Five Year Plans for
Economic Development. But the victories were also ensured by
election rigging and political dirty tricks. His third and supposedly
final term as president was due to end in 1974, but Park just could
not let go.Halfway through his third term, he staged what Latin
Americans call an ‘auto-coup’. This involved dissolving the
parliament and establishing a rigged electoral system to guarantee
him the presidency for life. His excuse was that the country could ill
afford the chaos of democracy. It had to defend itself against North
Korean communism, the people were told, and accelerate its
economic development. His proclaimed goal of raising the country’s
per capita income to 1, 000 US dollars by 1981 was considered
overly ambitious, bordering on delusional.

President Park launched the ambitious Heavy and Chemical
Industrialization (HCI) programme in 1973. The first steel mill and the
first modern shipyard went into production, and the first locally
designed cars (made mostly from imported parts) rolled off the
production lines. New firms were set up in electronics, machinery,
chemicals and other advanced industries. During this period, the
country’s per capita income grew phenomenally by more than five
times, in US dollar terms, between 1972 and 1979. Park’s apparently
delusional goal of $1, 000 per capita income by 1981 was actually
achieved four years ahead of schedule. Exports grew even faster,
increasing nine times, in US dollar terms, between 1972 and 1979.4

The country’s obsession with economic development was fully
reflected in our education. We learned that it was our patriotic duty to
report anyone seen smoking foreign cigarettes. The country needed
to use every bit of the foreign exchange earned from its exports in
order to import machines and other inputs to develop better
industries. Valuable foreign currencies were really the blood and
sweat of our ‘industrial soldiers’ fighting the export war in the
country’s factories. Those squandering them on frivolous things, like
illegal foreign cigarettes, were ‘traitors’. I don’t believe any of my
friends actually went as far as reporting such ‘acts of treason’. But it

did feed the gossip mill when kids saw foreign cigarettes in a friend’s
house. The friend’s father – it was almost invariably men who
smoked – would be darkly commented on as an unpatriotic and
therefore immoral, if not exactly criminal, individual.

Spending foreign exchange on anything not essential for industrial
development was prohibited or strongly discouraged through import
bans, high tariffs and excise taxes (which were called luxury
consumption taxes). ‘Luxury’ items included even relatively simple
things, like small cars, whisky or cookies. I remember the minor
national euphoria when a consignment of Danish cookies was
imported under special government permission in the late 1970s. For
the same reason, foreign travel was banned unless you had explicit
government permission to do business or study abroad. As a result,
despite having quite a few relatives living in the US, I had never
been outside Korea until I travelled to Cambridge at the age of 23 to
start as a graduate student there in 1986.

This is not to say that no one smoked foreign cigarettes or ate illicit
cookies. A considerable quantity of illegal and semi-legal foreign
goods was in circulation. There was some smuggling, especially
from Japan, but most of the goods involved were things brought in –
illegally or semi-legally – from the numerous American army bases in
the country. Those American soldiers who fought in the Korean War
may still remember malnourished Korean children running after them
begging for chewing gum or chocolates.Even in the Korea of the
1970s, American army goods were still considered luxuries.
Increasingly affluent middle class families could afford to buy M&M
chocolates and Tang juice powders from shops and itinerant pedlars.
Less affluent people might go to restaurants that served boodae
chige, literally ‘army base stew’. This was a cheaper version of the
classic Korean stew, kimchee chige, using kimchee (cabbages
pickled in garlic and chilli) but substituting the other key ingredient,
pork belly, with cheaper meats, like surplus bacon, sausages and
spam smuggled out of American army bases.

I longed for the chance to sample the tins of spam, corned beef,
chocolates, biscuits and countless other things whose names I did
not even know, from the boxes of the American Army’s ‘C Ration’
(the canned and dried food ration for the battlefield). A maternal

uncle, who was a general in the Korean army, used to accumulate
supplies during joint field exercises with his American colleagues
and gave them to me as an occasional treat. American soldiers
cursed the wretched quality of their field rations. For me they were
like a Fortnum & Mason picnic hamper. But, then, I was living in a
country where vanilla ice cream had so little vanilla in it that I thought
vanilla meant ‘no flavour’, until I learnt English in secondary school.
If that was the case with a well-fed upper-middle-class child like me,
you can imagine what it must have been like for the rest.

When I went to secondary school, my father gave me a Casio
electronic calculator, a gift beyond my wildest dreams. Then it was
probably worth half a month’s wages for a garment factory worker,
and was a huge expense even for my father, who spared nothing on
our education. Some 20 years later, a combination of rapid
development in electronics technologies and the rise in Korea’s living
standards meant that electronic calculators were so abundant that
they were given out as free gifts in department stores. Many of them
ended up as toys for toddlers (no, I don’t believe this is why Korean
kids are good at maths!).

Korea’s economic ‘miracle’ was not, of course, without its dark
sides. Many girls from poor families in the countryside were forced to
find a job as soon as they left primary school at the age of 12 – to
‘get rid of an extra mouth’ and to earn money so that at least one
brother could receive higher education.Many ended up as
housemaids in urban middle-class families, working for room and
board and, if they were lucky, a tiny amount of pocket money. The
other girls, and the less fortunate boys, were exploited in factories
where conditions were reminiscent of 19th-century ‘dark satanic
mills’ or today’s sweatshops in China. In the textile and garment
industries, which were the main export industries, workers often
worked 12 hours or more in very hazardous and unhealthy
conditions for low pay. Some factories refused to serve soup in the
canteen, lest the workers should require an extra toilet break that
might wipe out their wafer-thin profit margins. Conditions were better
in the newly emerging heavy industries – cars, steel, chemicals,
machinery and so on – but, overall, Korean workers, with their

average 53–4 hour working week, put in longer hours than just about
anyone else in the world at the time.

Urban slums emerged. Because they were usually up in the low
mountains that comprise a great deal of the Korean landscape, they
were nicknamed ‘Moon Neighbourhoods’, after a popular TV sitcom
series of the 1970s. Families of five or six would be squashed into a
tiny room and hundreds of people would share one toilet and a
single standpipe for running water. Many of these slums would
ultimately be cleared forcefully by the police and the residents
dumped in far-flung neighbourhoods, with even worse sanitation and
poorer road access, to make way for new apartment blocks for the
ever-growing middle class. If the poor could not get out of the new
slums fast enough (though getting out of the slums was at least
possible, given the rapid growth of the economy and the creation of
new jobs), the urban sprawl would catch up with them and see them
rounded up once again and dumped in an even more remote place.
Some people ended up scavenging in the city’s main rubbish dump,
Nanji Island. Few people outside Korea were aware that the beautiful
public parks surrounding the impressive Seoul Football Stadium they
saw during the 2002 World Cup were built literally on top of the old
rubbish dump on the island (which nowadays has an ultra-modern
eco-friendly methane-burning power station, which taps into the
organic material dumped there).

In October 1979, when I was still a secondary school student,
President Park was unexpectedly assassinated by the chief of his
own Intelligence Service, amid mounting popular discontent with his
dictatorship and the economic turmoil following the Second Oil
Shock. A brief ‘Spring of Seoul’ followed, with hopes of democracy
welling up. But it was brutally ended by the next military government
of General Chun Doo-Hwan, which seized power after the two-week
armed popular uprising that was crushed in the Kwangju Massacre
of May 1980.

Despite this grave political setback, by the early 1980s, Korea had
become a solid middle-income country, on a par with Ecuador,
Mauritius and Costa Rica. But it was still far removed from the
prosperous nation we know today. One of the slang expressions
common among us high-school students was ‘I’ve been to Hong

Kong’, which meant ‘I have had an experience out of this world’.
Even today, Hong Kong is still considerably richer than Korea, but
the expression reflects the fact that, in the 1960s or the 1970s, Hong
Kong’s per capita income was three to four times greater than my
country’s.

When I went to university in 1982, I became interested in the issue
of intellectual property rights, something that is even more hotly
debated today. By that time, Korea had become competent enough
to copy advanced products and rich enough to want the finer things
in life (music, fashion goods, books). But it was still not sophisticated
enough to come up with original ideas and to develop and own
international patents, copyrights and trademarks.

Today, Korea is one of the most ‘inventive’ nations in the world – it
ranks among the top five nations in terms of the number of patents
granted annually by the US Patent Office. But until the mid-1980s it
lived on ‘reverse engineering’. My friends would buy ‘copy’
computers that were made by small workshops, which would take
apart IBM machines, copy the parts, and put them together. It was
the same with trademarks. At the time, the country was one of the
‘pirate capitals’ of the world, churning out fake Nike shoes and Louis
Vuitton bags in huge quantities. Those who had more delicate
consciences would settle for near-counterfeits. There were shoes
that looked like Nike but were called Nice, or shoes that had the Nike
swoosh but with an extra prong. Counterfeit goods were rarely sold
as the genuine article. Those who bought them were perfectly aware
that they were buying fakes; the point was to make a fashion
statement, rather than to mislead. Copyrighted items were treated in
the same way. Today, Korea exports a large and increasing quantity
of copyrighted materials (movies, TV soaps, popular songs), but at
the time imported music (LP records) or films (videos) were so
expensive that few people could afford the real thing.We grew up
listening to pirate rock’n’ roll records, which we called ‘tempura shop
records’, because their sound quality was so bad it sounded as if
someone was deep-frying in the background. As for foreign books,
they were still beyond the means of most students. Coming from a
well-off family that was willing to invest in education, I did have some
imported books. But most of my books in English were pirated. I

could never have entered and survived Cambridge without those
illegal books.

By the time I was finishing my graduate studies at Cambridge in
the late 1980s, Korea had become a solid upper-middle-income
country. The surest proof of this was that European countries
stopped demanding that Koreans get an entry visa. Most of us by
then had no reason to want to emigrate illegally anyway. In 1996, the
country even joined the OECD (Organisation for Economic Co-
operation and Development) – the club of the rich countries – and
declared itself to have ‘arrived’, although that euphoria was badly
deflated by the financial crisis that engulfed Korea in 1997. Since
that financial crisis, the country has not been doing as well by its own
high standards, mainly because it has over-enthusiastically
embraced the ‘free market rules’ model. But that is a story for later.

Whatever its recent problems have been, Korea’s economic
growth and the resulting social transformation over the last four and
a half decades have been truly spectacular. It has gone from being
one of the poorest countries in the world to a country on a par with
Portugal and Slovenia in terms of per capita income.5 A country
whose main exports included tungsten ore, fish and wigs made with
human hair has become a high-tech powerhouse, exporting stylish
mobile phones and flat-screen TVs coveted all over the world. Better
nutrition and health care mean that a child born in Korea today can
expect to live 24 years longer than someone born in the early 1960s
(77 years instead of 53 years). Instead of 78 babies out of 1, 000,
only five babies will die within a year of birth, breaking far fewer
parents’ hearts. In terms of these life-chance indicators, Korea’s
progress is as if Haiti had turned into Switzerland.6 How has this
‘miracle’ been possible?

For most economists, the answer is a very simple one. Korea has
succeeded because it has followed the dictates of the free market. It
has embraced the principles of sound money (low inflation), small
government, private enterprise, free trade and friendliness towards
foreign investment. The view is known as neo-liberal economics.

Neo-liberal economics is an updated version of the liberal
economics of the 18th-century economist Adam Smith and his
followers. It first emerged in the 1960s and has been the dominant

economic view since the 1980s. Liberal economists of the 18th and
the 19th centuries believed that unlimited competition in the free
market was the best way to organise an economy, because it forces
everyone to perform with maximum efficiency. Government
intervention was judged harmful because it reduces competitive
pressure by restricting the entry of the potential competitors, whether
through import controls or the creation of monopolies.Neo-liberal
economists support certain things that the old liberals did not – most
notably certain forms of monopoly (such as patents or the central
bank’s monopoly over the issue of bank notes) and political
democracy. But in general they share the old liberals’ enthusiasm for
the free market.And despite a few ‘tweaks’ in the wake of a whole
series of disappointing results of neo-liberal policies applied to
developing nations during the past quarter of a century, the core
neo-liberal agenda of deregulation, privatization and opening up of
international trade and investment has remained the same since the
1980s.

In relation to the developing countries, the neo-liberal agenda has
been pushed by an alliance of rich country governments led by the
US and mediated by the ‘Unholy Trinity’ of international economic
organizations that they largely control – the International Monetary
Fund (IMF), the World Bank and the World Trade Organisation
(WTO). The rich governments use their aid budgets and access to
their home markets as carrots to induce the developing countries to
adopt neo-liberal policies. This is sometimes to benefit specific firms
that lobby, but usually to create an environment in the developing
country concerned that is friendly to foreign goods and investment in
general. The IMF and the World Bank play their part by attaching to
their loans the condition that the recipient countries adopt neo-liberal
policies. The WTO contributes by making trading rules that favour
free trade in areas where the rich countries are stronger but not
where they are weak (e.g., agriculture or textiles). These
governments and international organizations are supported by an
army of ideologues. Some of these people are highly trained
academics who should know the limits of their free-market
economics but tend to ignore them when it comes to giving policy
advice (as happened especially when they advised the former

communist economies in the 1990s). Together, these various bodies
and individuals form a powerful propaganda machine, a financial-
intellectual complex backed by money and power.

This neo-liberal establishment would have us believe that, during
its miracle years between the 1960s and the 1980s, Korea pursued a
neo-liberal economic development strategy.7 The reality, however,
was very different indeed. What Korea actually did during these
decades was to nurture certain new industries, selected by the
government in consultation with the private sector, through tariff
protection, subsidies and other forms of government support (e.g.,
overseas marketing information services provided by the state export
agency) until they ‘grew up’ enough to withstand international
competition. The government owned all the banks, so it could direct
the life blood of business – credit. Some big projects were
undertaken directly by state-owned enterprises – the steel maker,
POSCO, being the best example – although the country had a
pragmatic, rather than ideological, attitude to the issue of state
ownership. If private enterprises worked well, that was fine; if they
did not invest in important areas, the government had no qualms
about setting up state-owned enterprises (SOEs); and if some
private enterprises were mismanaged, the government often took
them over, restructured them, and usually (but not always) sold them
off again.

The Korean government also had absolute control over scarce
foreign exchange (violation of foreign exchange controls could be
punished with the death penalty). When combined with a carefully
designed list of priorities in the use of foreign exchange, it ensured
that hard-earned foreign currencies were used for importing vital
machinery and industrial inputs. The Korean government heavily
controlled foreign investment as well, welcoming it with open arms in
certain sectors while shutting it out completely in others, according to
the evolving national development plan. It also had a lax attitude
towards foreign patents, encouraging ‘reverse engineering’ and
overlooking ‘pirating’ of patented products.

The popular impression of Korea as a free-trade economy was
created by its export success. But export success does not require
free trade, as Japan and China have also shown. Korean exports in

the earlier period – things like simple garments and cheap
electronics – were all means to earn the hard currencies needed to
pay for the advanced technologies and expensive machines that
were necessary for the new, more difficult industries, which were
protected through tariffs and subsidies. At the same time, tariff
protection and subsidies were not there to shield industries from
international competition forever, but to give them the time to absorb
new technologies and establish new organizational capabilities until
they could compete in the world market.

The Korean economic miracle was the result of a clever and
pragmatic mixture of market incentives and state direction. The
Korean government did not vanquish the market as the communist
states did. However, it did not have blind faith in the free market
either. While it took markets seriously, the Korean strategy
recognized that they often need to be corrected through policy
intervention.

Now, if it was only Korea that became rich through such ‘heretical’
policies, the free-market gurus might be able to dismiss it as merely
the exception that proves the rule. However, Korea is no exception.
As I shall show later, practically all of today’s developed countries,
including Britain and the US, the supposed homes of the free market
and free trade, have become rich on the basis of policy recipes that
go against the orthodoxy of neo-liberal economics.

Today’s rich countries used protection and subsidies, while
discriminating against foreign investors – all anathema to today’s
economic orthodoxy and now severely restricted by multilateral
treaties, like the WTO Agreements, and proscribed by aid donors
and international financial organizations (notably the IMF and the
World Bank). There are a few countries that did not use much
protection, such as the Netherlands and (until the First World War)
Switzerland. But they deviated from the orthodoxy in other ways,
such as their refusal to protect patents. The records of today’s rich
countries on policies regarding foreign investment, state-owned
enterprises, macroeconomic management and political institutions
also show significant deviations from today’s orthodoxy regarding
these matters.

Why then don’t the rich countries recommend to today’s
developing countries the strategies that served them so well? Why
do they instead hand out a fiction about the history of capitalism, and
a bad one at that?

In 1841, a German economist, Friedrich List, criticized Britain for
preaching free trade to other countries, while having achieved its
economic supremacy through high tariffs and extensive subsidies.
He accused the British of ‘kicking away the ladder’ that they had
climbed to reach the world’s top economic position: ‘[i]t is a very
common clever device that when anyone has attained the summit of
greatness, he kicks away the ladder by which he has climbed up, in
order to deprive others of the means of climbing up after him [italics
added]’.8

Today, there are certainly some people in the rich countries who
preach free market and free trade to the poor countries in order to
capture larger shares of the latter’s markets and to pre-empt the
emergence of possible competitors. They are saying ‘do as we say,
not as we did’ and act as ‘Bad Samaritans’, taking advantage of
others who are in trouble.* But what is more worrying is that many of
today’s Bad Samaritans do not even realize that they are hurting the
developing countries with their policies. The history of capitalism has
been so totally re-written that many people in the rich world do not
perceive the historical double standards involved in recommending
free trade and free market to developing countries.

I am not suggesting that there is a sinister secret committee
somewhere that systematically air-brushes undesirable people out of
photographs and re-writes historical accounts. However, history is
written by the victors and it is human nature to re-interpret the past
from the point of view of the present. As a result, the rich countries
have, over time, gradually, if often sub-consciously, re-written their
own histories to make them more consistent with how they see
themselves today, rather than as they really were – in much the
same way that today people write about Renaissance ‘Italy’ (a
country that did not exist until 1871) or include the French-speaking
Scandinavians (Norman conqueror kings) in the list of ‘English’ kings
and queens.

The result is that many Bad Samaritans are recommending free-
trade, free-market policies to the poor countries in the honest but
mistaken belief that those are the routes their own countries took in
the past to become rich. But they are in fact making the lives of
those whom they are trying to help more difficult. Sometimes these
Bad Samaritans may be more of a problem than those knowingly
engaged in ‘kicking away the ladder’, because self-righteousness is
often more stubborn than self-interest.

So how do we dissuade the Bad Samaritans from hurting the poor
countries, whatever their intentions are? What else should they do
instead? This book offers some answers through a mix of history,
analysis of the world today, some future predictions and suggestions
for change.

The place to start is with a true history of capitalism and
globalization, which I examine in the next two chapters (chapters 1
and 2). In these chapters, I will show how many things that the
reader may have accepted as ‘historical facts’ are either wrong or
partial truths. Britain and the US are not the homes of free trade; in
fact, for a long time they were the most protectionist countries in the
world. Not all countries have succeeded through protection and
subsidies, but few have done so without them. For developing
countries, free trade has rarely been a matter of choice; it was often
an imposition from outside, sometimes even through military power.
Most of them did very poorly under free trade; they did much better
when they used protection and subsidies. The best-performing
economies have been those that opened up their economies
selectively and gradually. Neo-liberal free-trade free-market policy
claims to sacrifice equity for growth, but in fact it achieves neither;
growth has slowed down in the past two and a half decades when
markets were freed and borders opened.

In the main chapters of the book that follow the historical chapters
(chapters 3 to 9), I deploy a mixture of economic theory, history and
contemporary evidence to turn much of the conventional wisdom
about development on its head.

• Free trade reduces freedom of choice for poor countries.
• Keeping foreign companies out may be good for them in

the long run.

• Investing in a company that is going to make a loss for 17
years may be an excellent proposition.

• Some of the world’s best firms are owned and run by the
state.

• ‘Borrowing’ ideas from more productive foreigners is
essential for economic development.

• Low inflation and government prudence may be harmful
for economic development.

• Corruption exists because there is too much, not too little,
market.

• Free market and democracy are not natural partners.
• Countries are poor not because their people are lazy; their

people are ‘lazy’ because they are poor.
Like this opening chapter, the closing chapter of the book opens

with an alternative ‘future history’ – but this time a very bleak one.
The scenario is deliberately pessimistic, but it is firmly rooted in
reality, showing how close we are to such a future, should we
continue with the neo-liberal policies propagated by the Bad
Samaritans. In the rest of the chapter, I present some key principles,
distilled from the detailed policy alternatives that I discuss throughout
the book, which should guide our action if we are to enable
developing countries to advance their economies. Despite its bleak
scenario, the chapter – and therefore the book – closes with a note
of optimism, explaining why I believe most Bad Samaritans can be
changed and really made to help developing countries improve their
economic situations.

* Samsung in Korean means Three Stars, as does my fictitious
Mozambican firm, Tres Estrelas. The last sentence in my imaginary
2061 Economist piece is based on a real Economist article about
Samsung, ‘As good as it gets?’ (January 13 2005), whose final
sentence reads: ‘Might a relatively unknown electronics
manufacturer somewhere in China decide that, if Samsung was able
to move from the darkest shadows to the top of the tree, then
perhaps it could too?’ The 17 years during which the fuel cell division
of my fictitious Mozambican firm lost money is the same investment
period during which the electronics division of Nokia, founded in
1960, lost money.

* The original story is that of the ‘Good Samaritan’ from the Bible.
In that parable, a man who was robbed by highwaymen was helped
by a ‘Good Samaritan’, despite the fact that the Samaritans were
stereotyped as being callous and not above taking advantage of the
others in trouble.

3. The State and Taiwan’s Economic
Development

Alice H. Amsden

Two features of Taiwan’s post-World War II history are striking. First, it is
one of the few nonsocialist economies since Japan to rise from the grossest
poverty and to enter the world of the “developed.”1 Second, the state in
Taiwan has played a leading role in the process of capital accumulation. It
has positioned itself to prevail on key economic parameters such as the
size of the surplus extracted from agriculture and the rate of profit in in-
dustry. To understand Taiwan’s economic growth, therefore, it is neces-
sary to understand its potent state.

The challenge of understanding the role of the state in Taiwan’s eco-
nomic development is increased by the fact that the state’s initial aims were
so clearly military and geopolitical rather than economic. When

Taiwan

was occupied by the vanquished Nationalist government in 1949, the
Guomindang was obsessed with one objective: military buildup in order to
retake the Mainland. As Edwin Winckler bluntly put it, “The Jiang Jie-Shi
forces, if they had had their own way, wouldn’t have spent one penny on
economic development.”2 Given that militarism and economic develop-
ment must to some extent operate at cross-purposes, competing for the
same scarce resources, Taiwan’s success must seem somewhat paradoxi-
cal.

If the role of the state is critical to economic development, why should
an economy under the heel of the military end up with a “good claim to be
ranked as the most successful of the developing countries”?3 One of the
obvious factors mitigating the negative consequences of militarism in the
Taiwan case was American aid, which diminished the extent of resource
competition. I shall try to show, however, that this was not the only, or
necessarily even the most important, factor in allowing economic growth
to arise out of militarism. Rather, I shall argue that the reality of economic
development itself both seduced the military away from its initial orienta-
tion and changed its position within the state apparatus, which then freed
up the process of capital accumulation still further.

The State and Taiwan’s Economic Development 79

Although the Guomindang state in Taiwan’s “economic miracle” is our
central focus, it is necessary to take into account other factors that favored
the island’s economic development after World War II. One of the most
important of these is the legacy of the Japanese colonial period. We shall
begin, then, with a discussion of the colonial period and from there look at
the Guomindang state itself, its role in agriculture and industry, and its
gradual transformation from a state in which the preeminence of military
aims was overwhelming to one in which military aims came to coexist with
an evermore absorbing interest in economic growth.

The Colonial Heritage4

It is a misconception that the Taiwan miracle commenced with the export
of labor-intensive manufactures and a reduction of government manage-
ment of trade and monetary matters in the decade of the 1960s. Taiwan
already enjoyed a relatively fast rising real gross domestic product (GDP)
in the 1950s (Table 3.1). Agriculture was then the dominant sector, and the
economic regime in industry, as in many other underdeveloped countries,
was one of protection of infant industries. Growth was also rapid during
the years of Japanese domination (1895-1945). Excluding the war years of
1941-45, the per capita income of the agricultural sector almost doubled in
half a century. This is a rather impressive figure given that the population
rose by approximately 43%.5

The economy that the Japanese fashioned in Taiwan was achieved by
means of deliberate planning and government ownership of major re-
sources (in partnership with private Japanese capitalists). The dominance
of the Japanese colonial administration in Taiwan’s economy mirrored the
dominant role of the Meiji government in Japan proper, which distin-
guished it in important respects from the colonial offices of England and
France.6 The Jiang Jie-Shi forces benefited enormously from their inheri-
tance of Japanese state monopolies, and the whole interventionist ap-
proach taken by the Japanese to the development of an occupied territory
was not lost to the Guomindang.

From the start, Taiwan was regarded as an agricultural appendage to be
developed as a complement to Japan. A two-crop economy (sugar and rice)
was encouraged much in the classical imperial pattern. But one aspect that
sets Taiwan’s colonial experience apart from the rest is that primary pro-
duction was not confined to a foreign enclave with limited spillover on
subsistence agriculture. Many farmers with access to arable land produced
rice for market to meet the ever-escalating needs of Japanese consumers.
Although sugarcane is frequently cultivated on large plantations in some
Third World countries, in Taiwan it was grown by small owner-operators
and tenants as well as on large land tracts owned by Japanese sugar man-
ufacturers. Thus, agriculture in Taiwan was quickly and generally com-
mercialized.7

Table 3.1. Indicators of Taiwan’s Economic Performance-Average Annual Growth Rates

Consumer Wholesale
Gross Per prices in prices in

Popu- national capita Agricultural Industrial Transportation & Taiwan Taiwan
Period lation product GNP production production communications area area Exports Imports

1953-62
1963-72
1973-80

3.5
2.9
1.9

7.5
10.

8

8.7

4.1
8.1
6.6

4.8
4.0
2.4

11.7
18.6
11.9

10.4

15.7
19.0

8.7
2.9
12.4

7.6
1.8
12.0

19.5
29.9
25.0

17.0

23.5

27.7

Note: Growth rates in the third through seventh columns are in real terms.
Source: Taiwan Statistical Data Book (Taibei: Council for Economic Planning and Development, 1981).

The State and Taiwan’s Economic Development 81

The Japanese remodeled the archaic “three-tier” tenancy system, expro-
priating the “great” landlords and making the second tier of tenant land-
lords the legal owners of the land and directly responsible for taxes. A flat
tax on land replaced a proportional tax on output, giving landlords incen-
tive to squeeze more production out of the tenants below them. Ground
rents remained very high (commonly 50% or more), but the new structure
allowed greater scope for the assimilation of new farming practices. The
peasants who produced, on rented land, 65-70% of Taiwan’s total crop8

applied new seed strains and other technological advances proffered by
state-supported research agencies. Thus, the colonial state set in motion
the application of science to farming, which characterizes the rural econ-
omy of Taiwan today.9

An elaborate network of agricultural associations, under the aegis of the
government and rich landlords, provided peasants with extension educa-
tion, the cooperative purchase of fertilizers, warehousing, and other ser-
vices. When persuasion failed, the police were employed to force modern
techniques onto rural communities that resisted change.10 The experience
that small tenants gained in experimenting with new seed strains and their
familiarization with scientific farming would also prove to be of immense
usefulness to the later land reform efforts of the Chinese Nationalists. The
extensive network of agricultural associations that the Japanese introduced
was created to facilitate police surveillance and control over the local pop-
ulation. Today, these associations persist and are an important element in
the government’s management of agriculture.

In the 1930s, Japan reshaped its policy of transforming Taiwan into a
source of food supply for the home market. The shift in policy can be
understood only in the context of Japan’s increasing militarism and expan-
sionism in the Pacific. Belatedly and frantically, Japan sought to refashion
Taiwan as an industrial adjunct to its own war preparations and ambitions
in Southeast Asia and South China.

From a few industries with strong locational advantages before 1930 (e.g.,
sugar and cement), industry in Taiwan expanded in the 1930s to include
the beginnings of chemical and metallurgical sectors, and as World War II
cut off the flow of duty-free goods, some import substitution began. Japa-
nese hopes of building Taiwan into an industrial bridgehead to Southeast
Asia and South China, however, never materialized.11 The policy was in
effect for too short a time before it was halted by World War II. Although
the last-minute efforts to construct transport and harbor facilities suited to
military and industrial needs proved highly beneficial in postwar years,
many projects remained on the drawing board when war erupted.

Thus, economic growth in Taiwan under Japanese rule went about as far
as it could go, given the internal contradictions of imperialism. Growth
included a rise in per capita income; indeed, the welfare of Taiwanese
peasants in the first half of the twentieth century may have exceeded that
of Japanese peasants – according to such welfare indices as type of wearing

82 Alice H. Amsden

apparel, housing, local bank deposits, and the like.12 The most enduring
legacy of the Japanese occupation, however, was less the betterment of
living standards than a relatively well educated population and the build-
ing of a foundation for subsequent development. Whereas much of the
gain in per capita income was lost as a consequence of war and an influx
of Mainlanders following the Communist victory in China (and was not
regained until the 1950s and 1960s), a relatively high level of literacy and
the economic structure implanted by the Japanese survived. The major les-
son of the Japanese interlude, however, was that to exploit the economic
potential of Taiwan required much more than a reliance on inexorable mar-
ket forces. It required deliberate state policies, something that the invading
force from the Mainland seemed very unlikely to be able to provide.

The Nature of the Guomindang State

The state that took over Taiwan from the Japanese was a highly militaristic
bureaucracy dominated by a single leader, Jiang Jie-Shi. On this there is
much agreement. But the internal structure of the state, the relative power
of different groups within it, and even the extent to which it was a real
bureaucracy in the positive Weberian sense are open to debate. The ab-
sence of descriptive material that would allow one to characterize the Tai-
wan state with confidence is well summed up by Winckler as follows:

The basic nature of the political system remains . If the island has been
a military and political client of the United States, we know little about the inter-
national and inter-bureaucratic workings of the relationship. . . . If the island has
been a dictatorship ruled by Chiang Kai-Shek [Jiang Jie-Shi] and his son . . . we
do not have political biographies of either for their Taiwanese periods. . . . If the
island has been a police state dominated by military interests, we lack institutional
descriptions and political history of its internal and external security agencies. . . .
If the island has been successful in managing its economic development, we do not
have a political account of the persons, agencies, and interests involved. If the
island has been ruled by the Kuomintang [Guomindang], we know little more about
the party’s politics and administration than its own glossy brochures tell us. . . .
Finally, we need to know the relative weights of setting, personality, security, eco-
nomics, and ideology, and how these elements fit together.13

Despite the accuracy of Winckler’s laments, those who would try to ex-
amine the state’s role have, of course, no choice but to sift through the
available evidence and make the inferences that seem the most reasonable.
The problem we are presently interested in exploring is the relationship
between militarism and economic development. Hence, we are interested
in the Taiwan state’s military and technocratic dimensions. Concerning
the latter, one view holds that Taiwan’s new rulers were a competent
group. Another view, rooted in an earlier historical period, is far less
flattering. A quote from Simon Kuznets provides a summary of the posi-
tive view:

The State and Taiwan’s Economic Development 83

The governing group were largely newcomers to the island and had no substantial
interest roots, no clear affiliation with any of the various Taiwanese interest groups.
. . . They could, therefore, act as independent arbitrators attempting to achieve a
long-term consensus and calling for sacrifices by some groups for the benefit of all.
If we assume that there was substantial agreement among the decision-making
groups and the larger groups that were being served, both islanders and mainland-
ers; that the historical and cultural community among all groups was an adequate
basis for consensus; and that the decision-making groups had enough experience and hu-
man capital for generating the required decisions promptly and efficiently, we can argue
that this combination of the islanders and the mainlanders was favorable for a poor,
developing country like Taiwan [italics added].14

As Barbara Tuchman relates, a more sour impression of the “experience
and human capital” of the Guomindang (KMT) was held by Joe Stilwell,
U.S. general of the Pacific theater, who had the displeasure of dealing with
Jiang Jie-Shi before and during World War II:

By keeping rivals off balance through a technique of “fear and favor/’ in Stil-
weirs phrase, [Jiang Jie-Shi] appeared strong and indispensable but he did not
know how to make a government. Though long on experience, his mind was nar-
row and his education limited. His most serious handicap was the lack of compe-
tent government servants. He never allowed a really able man to reach an impor-
tant post lest he become too strong. Because he made loyalty rather than ability the
criterion of service, he was surrounded by mediocrities. His brother-in-law, . . .
who as vice-president of the Executive Yuan headed the civil government and usu-
ally served as Finance Minister, was described by [the] representative of the Bank
of England in China as having “the mentality of a child of 12. If I were to record his
conversations with me about banking and play it back, nobody would ever take
[J]iang’s government seriously again.”15

History, however, does not necessarily repeat itself, and it has been con-
tended that old dogs do learn new tricks:

[J]iang’s authority as a leader derived not only from his skill at political maneuver,
but also from his selection of able officials for key positions. He was far more effec-
tive in this respect in Taiwan than he had been on the mainland, where a glaring
weakness of the Nationalist government was his tendency to value loyalty above
ability. Loyalty was important in Taiwan, too. . . . His military and civilian officials
in Taiwan, therefore, had to be loyal, but many were also able.16

The U.S. Aid Mission to Taiwan, moreover, needed competent technocrats
with whom to work, and the mission used its clout to shield the technoc-
racy and to help it compete politically.17

Thus, we can speak of the existence fairly early on of an economic tech-
nocracy in Taiwan – albeit an embryonic one – and not make fools of our-
selves, for the technocrats need not be equated with the rascals they once
were in prewar Mainland China.

Nevertheless, the development-oriented technocracy was overshad-

84 Alice H. Amsden

owed in the early postwar period by the military. Most of the Nationalist
cliques of the prewar period had disintegrated with the Communist vic-
tory, save one: the Whampoa military cadets. Studies of the Taiwan state
in the early and late 1960s discuss the power plays centered around the
then security administrator (Jiang Jie-Shi’s son). For the purposes of un-
derstanding the policy orientation of the Taiwan state in the immediate
postwar period, however, it is sufficient to note a consensus in the litera-
ture about Jiang Jie-Shi’s unchallenged political supremacy and the fact
that he, “more than any other person . . . was responsible for asserting
and perpetuating the concept of mainland recovery. . . . He insisted on
tighter authoritarian controls and a greater diversion of resources to mili-
tary and security purposes.”1 8

On the basis of this admittedly sketchy picture of the Guomindang state
apparatus, the possibilities of the state serving as an effective instrument
of economic development would seem bleak. Yet from the beginning of its
reign, the Guomindang bureaucracy embarked on a set of policies that,
though they appear to have been chosen for political as much as, or more
than, for economic reasons, were crucial to the island’s eventual economic
growth. Nowhere is this more evident than in agriculture.

Agriculture

When the Guomindang regime arrived on Taiwan, agriculture was by far
the most important sector economically. Its share of GDP was twice that of
industry, and it accounted for 90% of exports. It was, in addition, impor-
tant politically. The potential threat of an impoverished peasantry had been
driven home to the Nationalists on the Mainland, and they were concerned
with restructuring agriculture accordingly. From the beginning, Guomin-
dang policy toward agriculture had two races. On the one hand, state ac-
tion was the key to increasing agricultural output. On the other hand, ag-
riculture was consistently squeezed to provide the surplus necessary to
finance the growth of other sectors. The cornerstone of both sides of state
policy was the land reform initiated in 1949 and completed in 1953.

Agriculture was reformed in three stages. First, farm rent was limited to
a maximum of 37.5% of the total main crop yield. Second, public land for-
merly owned by Japanese nationals was distributed on easy terms, with
preference given to the tenant claimants. Third, landlords were obliged to
divest themselves of their holdings above a minimal size and to sell out to
their tenants under the Land-to-the-Tiller Act.19 This end to landlordism
and the creation of a class of small holders was the inspiration of Dr. Sun
Yat-Sen. The Guomindang’s Land-to-the-Tiller Program amounted to sheer
rhetoric in China during the 1930s and 1940s because would-be expropri-
ated landlords were stalwarts of the Nationalists. In Taiwan, by contrast,
the Mainlander government was under no obligation to the rural Tai-

The State and Taiwan’s Economic Development 85

wanese elite. Although both were of Chinese origin, they were as different
ethnically and socially as the French and the Americans. Landlords were
given land bonds in kind and stocks in public enterprise in exchange for
the compulsory divestiture of their holdings. Some landlords profited from
their stock ownership and became successful industrialists. Others went
into bankruptcy.20 The landlord class, however, sank into social oblivion,
as the great landlord class had done half a century earlier.

Thus, almost overnight the countryside in Taiwan ceased to be op-
pressed by a small class of large landlords and became characterized by a
large number of owner-operators with extremely small holdings. By 1973,
almost 80% of the agricultural population consisted of owner-cultivators
and another tenth of part owners.21 Only 6% of farm income accrued to
landlords and money lenders.22 This undoubtedly underscores the fact that
income distribution (by household) in Taiwan is far less inequitable than
in most other Third World countries and is more like the pattern in ad-
vanced capitalist countries, which is not to say, however, that income dis-
tribution is equitable.23

The years 1953-68 witnessed annual growth rates in agricultural output
that were impressive by any standard. Equally impressive was the spill-
over effect on industry, for however tight the squeeze on agriculture under
Japanese rule, it was even tighter under the Jiang Jie-Shi administration.
Whereas net real capital outflow from agriculture had increased at a rate of
3.8% annually between 1911 and 1940, it rose on average by 10% annually
between 1951 and I960.24 Fast growth and a transfer of agricultural re-
sources to the towns, however, were neither the outcome of free market
forces nor the automatic result of purely technical phenomena – the green
revolution. Rather, they reflected the structure of ownership in the coun-
tryside and state management of almost every conceivable economic activ-
ity.

It is well known that in developing countries there have been substantial
gains in income among the few (i.e., the bigger farmers) when the new
technology associated with the green revolution has been introduced. By
contrast, the green revolution in Taiwan has transformed the life of almost
every peasant. Furthermore, such an extensive application of science ap-
pears to hinge on government control over capital accumulation. The state
distributes resources equally among all peasants, as the market mechanism
might not do. Hence, there have been large gains among the many. A
small class of big landowners has not yet resurfaced (nor, consequently,
has a potentially cohesive source of opposition to the state). It is, then, a
defining characteristic of Taiwan’s agriculture that a multiplicity of small
peasant proprietors exists in conformity with the bourgeois model of indi-
vidualistic family farming, whereas directing this drama is a highly cen-
tralized government bureaucracy.

This point was recognized by two anthropologists in a study of rice farm-
ing in three Taiwan villages:

86 Alice H. Amsden

In this small island with its geographically mobile population, the arm of the state
reaches down to virtually every farmer – outside the mountainous regions. This is
a basic social and administrative characteristic of agriculture in Taiwan that has
been long in the making.

As a result of [land tenure reforms], the rural landlord social class in the villages
disappeared. The power of the state could reach then direct to every villager. The
tenants of the past pay land tax now to the state and water fees to the government
directly.25

In 1965, government agencies or related credit institutions supplied 65% of
all agricultural loans. Before land reform, private moneylenders accounted
for 82% of credit.26 With respect to such activities as agricultural education
and marketing, the government exerts its control through the elaborate
network of agricultural associations laid down by the Japanese.27

The state monopoly on fertilizers was perhaps the most important ele-
ment both in stimulating production and in extracting the surplus from
agriculture. The positive effects of the fertilizer monopoly on the peasantry
are well summarized by Falcon:

It permitted all farmers to obtain the key modern input. It provided a source of
credit that was an alternative to rural moneylenders. And it reduced price risks to
farmers. (Widespread emphasis on risk-reduction is evident in Taiwan’s agricul-
tural policies and seems to be one of its important lessons.)28

At the same time the fertilizer monopoly was the key to extracting surplus
from agriculture. Fertilizer was bartered for rice, and the barter ratio was
highly unfavorable to farmers. The price that Taiwanese farmers paid for
100 kilograms of ammonium sulfate in 1964-65 was higher by almost 40%
than the price that Japanese, Dutch, Belgian, American, or Indian farmers
paid.29

Other mechanisms were also used to transfer real net surplus out of
agriculture: land taxes, compulsory rice purchases by the government, loan
repayments, and repayment for land resold to tenants under the Land-to-
the-Tiller Program. (See Table 3.3 for a comparison of the tax burden of
farm and nonfarm families.) All such collections were made in kind. All
amounted to “hidden rice taxes/’ because the government’s purchase prices
were considerably lower than implicit market prices. The government’s
gains through rice collection were enormous. The hidden rice tax exceeded
total income tax revenue every year before 1963.30

Three classic problems typically prevent small peasant production from
becoming a solid basis for capital accumulation. First, peasant production
is generally unproductive because it is unscientific. Second (according to
an argument popularized by Stalin in defense of collectivization), peasant
production frustrates the extraction of a surplus by the state because, at a
low level of per capita income, farmers are said to consume their incremen-
tal output rather than market it (i.e., they may be more resistant to exploi-
tation). In land-scarce Taiwan, the Guomindang state managed to over-

The State and Taiwan’s Economic Development 87

come both of these problems. State provision of educational and scientific
infrastructure helped to resolve the first problem. The second problem re-
solved itself as scientific agriculture raised per capita income and forced
the peasantry to part with its crop in order to obtain fertilizer and socially
necessary items of consumption.

The third problem historically encountered in peasant production is de-
scribed by Hla Myint. When peasants become full-time producers for the
market,

[they] cease to be self-financing and have to borrow from the chief source available
to them – the money-lenders who charge them high rates of interest. With their
ignorance of the rapidly changing market conditions, they tend to get heavily into
debt, and where land is alienable, they lose their land in default of loans and get
reduced to the status of tenants.31

Economic history in Taiwan, by contrast, saw the state effectively preserve
an agrarian structure of small peasant holdings by stabilizing prices and by
making credit generally available (i.e., simulating a perfect credit market
by having no market at all). The Jiang Jie-Shi government also dispensed
with foreign middlemen, who typically exercise monopoly power in rural
areas of other economies, by itself buying cash crops cheaply from the
peasantry and selling them at high prices.32

Thus, a self-exploitative peasantry, working long hours to maximize pro-
duction per hectare, and a superexploitative state, ticking along effectively
to exact the fruits of the peasantry’s labor, operated hand in hand in Tai-
wan to great advantage until the late 1960s.

The only question that remains is, to whose advantage in particular? For
Taiwan is not a classless entity, and the state acted in the interests of an
elite when it squeezed the countryside. Unfortunately, whereas a volumi-
nous amount of statistical information is available about Taiwan, very little
class analysis has been published. Clearly, however, the historical roots of
the Guomindang’s etatisme and its class affiliations are traceable not only
to Japanese colonialism, but also to events on the Mainland. We may hy-
pothesize that the system of “bureaucratic capitalism” of late imperial China,
with its total interpenetration of public and private interests, was trans-
planted into Taiwan, along with the Mainlanders. Although historical con-
ditions were unpropitious for economic development under bureaucratic
capitalism in China, they were favorable in Taiwan. The 1953 land reform
and subsequent agricultural development breathed new life into the
Guomindang apparatus, and the bureaucratic capitalism of the Guomin-
dang regime sustained the life of the reform and small-scale farming.

In summary, agriculture in Taiwan gave industrial capital a labor force,
a surplus, and foreign exchange. Even during the immediate postwar years
of economic chaos and a world record rate of population growth, agricul-
ture managed to produce a food supply sufficient to meet minimum do-
mestic consumption requirements as well as a residual for export.33 Good

88 Alice H. Amsden

rice harvests have been a major factor behind Taiwan’s stunning price (and
real wage) stability. The foreign exchange saved as a result of high produc-
tivity in agriculture has been equally important.34 Agriculture also man-
aged to provide an important source of demand for Taiwan’s industrial
output, particularly chemicals and tools, and a mass market for consump-
tion goods. The agrarian structure provided a degree of political stability
sufficient to draw the most timid of foreign firms to the island. Agriculture
has even been sufficiently productive to set a floor on industrial wages.
Factory women who returned home to the farm during the sharp depres-
sion of 1974-75 subsequently refused to return to wage employment at
prevailing rates.35 A labor shortage symbolizes Taiwan’s introduction to
the problems of capitalist development rather than underdevelopment, and
it is to industrialization that attention is now turned.

Industrialization

Taiwan’s industrialization has often been falsely characterized as exhibit-
ing the efficacy of a “laissez faire” strategy. It has been argued that Tai-
wan’s success is due to the fact that it, unlike most Third World countries,
resisted the temptations of infant industry protection. A study published
by the Organization for Economic Cooperation and Development (OECD)
in 1970, comparing industrialization in Brazil, Mexico, Argentina, India,
Pakistan, the Philippines, and Taiwan, made a start toward dispelling this
illusion.36 The study showed that a regime of import substitution preceded
the export of labor-intensive manufactures in Taiwan. Nor was infant in-
dustry protection a trivial episode in Taiwan’s economic history. The pro-
tection afforded to sales on the home market in 1966, the year under ex-
amination in the OECD report, far exceeded that which prevailed in Mexico,
a country reputed to be highly protectionist.37

In the period from 1956 to 1961, the government introduced a package
of reforms to reorient the Taiwan economy toward export-led growth.
Monetary and fiscal policies were redesigned, the exchange rate was de-
valued and unified, inflation was brought under control, and exports were
made highly profitable. These changes have earned the title “liberaliza-
tion” and have been responsible for Taiwan’s reputation for successful de-
velopment with sound formulas. Nevertheless, what is not appreciated is
that protection in Taiwan of key import substitutes never appears to have
abated.38 Whereas exporters were allowed to import their inputs duty free
after “liberalization,” critical second-stage import-substitute items con-
tinue to be shielded from foreign competition. These include intermediate
inputs, consumer durables, and transportation equipment. Although ma-
chinery has received little tariff protection, it has not yet needed much.
The level of sophistication of Taiwan machinery has been such that the
competitive niche it occupies is different from that of American or Euro-
pean equipment. Indicative of the spirit of Taiwan’s tariff system is the fact

The State and Taiwan’s Economic Developme 89

that machinery is technically freely importable – but, in the case of machin-
ery that is locally available, only by machinery users and not distributors
and except in the case of a handful of countries, which just happen to be
those that constitute a genuine threat to local machinery builders, such as
Japan and South Korea. Still another indication of the protectionist procliv-
ities of the Taiwan government is the fact that most import tariffs are re-
dundant, that is, higher than necessary.39 This is the case despite the vig-
orous efforts of the liberalization lobby, to be discussed shortly, to wipe
the tariff slate clean.

Buried in a dense amount of data in a World Bank study on the virtues
of export-led growth is the revelation that governments in Third World
countries not only have begun to subsidize exports, but have also contin-
ued to protect import substitutes, Taiwan being no exception.40 Thus, av-
erage net effective subsidy rates for the manufacturing sector were 38% in
Argentina, 10% in Colombia, 7% in Israel, – 1 1 % in Korea, —4% in Sin-
gapore, and 10% in Taiwan; such rates in Taiwan not only are relatively
high by this reckoning, but also show the traditional pattern of escalation
as one moves from lower to higher levels of transformation. Thus, not only
in Taiwan, but also in other semiindustrialized countries, higher levels of
transformation (read second-generation import substitutes) have far higher
average net effective subsidy rates than those just reported. Quantitative
import controls have also played an important role in the protection of
manufacturing industries.41

Inward-oriented growth in Taiwan was introduced in 1949 partly by de-
fault (traditional agricultural exports no longer found protected or prefer-
ential markets in Japan and China) and partly by design (it was politically
expedient to aid the class of small capitalists that had acquired a portion of
the old Japanese facilities). Small enterprises were in serious trouble by
1949 as a result of the loss of the Mainland market and the reappearance of
competitive Japanese goods.42 Import, foreign exchange, and licensing
controls were introduced by the government to salvage small establish-
ments from extinction and to ease the critical balance of payments situa-
tion.

Inward-oriented growth in Taiwan’s small domestic market, however,
soon stalled. Although it conferred high profits to some, it conferred infla-
tion, monopoly, excess capacity, a reliance on American donations of hard
currency, and corruption to all. It was only after manufacturing had made
a fair start, however, that the Taiwan government hesitantly charted a new
course in the direction of export-led growth. Two points are worth stress-
ing in this regard. First, “liberalization” should in no way be interpreted
as a restoration in Taiwan of a “market economy.” Government manage-
ment of capital accumulation has continued, as evidenced, if by nothing
else, by tariff protection. Second, although economists have viewed a re-
gime of export-led growth as one that is more in keeping with liberal eco-
nomic principles, the Taiwan government has not been guided by any the-
oretical orthodoxy to turn a profit. A civil servant writes:

90 Alice H. Amsden

Unorganized production and export often led to excessive production and cut-
throat competition in foreign markets, which inevitably cause a sharp decline in
price, deterioration in quality, and finally loss of the export market. To combat
these shortcomings, the government has encouraged unified and joint marketing
of exports in foreign markets through limitation of production by means of export
quotas, improvement of quality, and unified quotation of export prices.43

Cartels, in whatever variation, have been encouraged by the government
and, at one time or another, have covered most of Taiwan’s major exports:
textiles, canned mushrooms and asparagus, rubber, steel, paper products,
and cement.44 The government has tried to get the marketing of all exports
into Taiwanese hands because both bureaucrats and businesspersons alike
are sensitive to the inroads in overseas marketing made by large Japanese
trading companies; this is in spite of the efficacy of these trading compa-
nies and the lackluster track record of those of Taiwan.

At issue is not merely the quibble that the government of Taiwan has
intervened far more in the Taiwan economy than liberal economists who
champion export-led growth acknowledge. The point, rather, is that the
government of Taiwan has never been guided by free-market principles as
such; so to attribute Taiwan’s success to a commitment to such principles,
whether in theory or in practice, is misleading. What has obsessed the
Guomindang state since its defeat in China is economic stability. In the
words of K. T. Li, one of the chief architects of government policy, “During
the 1950s . . . the overriding economic consideration was stability.”45 And
in the 1970s:

Everything possible is done to maintain price stability, even if it requires being
less mindful of the growth rate. Our large governmental sector employs numerous
military personnel, civil servants, and teachers, and any price increase affects these
persons with particular severity

46

And again:

I wish to emphasize . . . that we do not seek unduly rapid growth, but prefer a
steady, moderate expansion in directions which will be of greatest benefit to our
nation.47

To achieve stability, the government of Taiwan appears to have thought it
prudent sometimes to shield the economy as much as possible from market
forces and at other times to use them, but never to embrace them as a rule
of thumb out of conviction.

Foreign Aid, Foreign Capital, and State Enterprises

Flows of U.S. aid in the 1950s and 1960s and, more recently, flows of for-
eign direct investment played a critical role in capital formation in Taiwan.
These flows, particularly the initial deluge of U.S. aid, obviously had im-
plications for policies and politics in addition to providing capital. The

The State and Taiwan’s Economic Development

91

magnitude of the aid cannot be denied. In 1955, when aid reached its peak,
it amounted to over half of gross investment, and it was not until 1964 that
it fell below 20%.48 Politically, aid was critically important: It kept the state
in power by helping to bring inflation down from 3400% in 1949 to 9% in
195349 by means of the arrival of large quanties of both consumer goods
and producer goods at a desperate moment.

In terms of long-run economic growth, the impact of aid was minor.50

Most aid went for military purposes and the remainder for infrastructure
broadly defined. (From this perspective, aid to Taiwan was a success by
U.S. standards, for the goals of providing aid tend to be the buildup of
infrastructure and the buttress of political stability.) Thus, the effects of aid
may be said to have been felt in perpetuity only in terms of a multiplication
of civil engineering projects and know-how and improvements in the ad-
ministrative capability of the Taiwan technocracy. The extent to which Tai-
wan’s turn to export-led growth can be attributed to U.S. pressures is dif-
ficult to say: Now, all parties concerned are eager to take credit for it. All
that is certain is that freer trade and freer enterprise (including freer foreign
enterprise) were preached by the American Aid Mission. In view of the
preferences of its major benefactor, the extent to which the Guomindang
government persisted in its “etatisme” is all the more impressive. To ap-
preciate this fully, we must focus on public sector production as well as on
policy making.

In 1952, as much as 57% of total industrial production (value added at
1966 prices) and 56.7% of manufacturing output were accounted for by
public corporations (Table 3.2). Since then, the government has repeatedly
been under pressure either to freeze or to reduce the size of its holdings.
Partly under the persuasion of U.S. Agency for International Develop-
ment, majority or 100% equity in four public corporations (one highly prof-
itable, two others distinctly less so) was transferred to landlords in 1954 as
partial compensation for confiscations carried out under the 1953 land re-
form. There has also been sporadic pressure for denationalization from
local capitalists, who want less crowding out in credit markets or who want
a greater share of the action in lucrative state enterprises (in 1982, however,
fourteen of fifteen state enterprises were in the red).51 Finally, there has
been pressure from what may be termed the liberalization lobby to reduce
both tariff protection and the scope of public corporations.

Yet the government has resisted divestment, in the tenacious tradition
of Sun Yat Sen, whose criticisms of monopoly capitalism became integral
to Guomindang ideology.52 By the early 1980s, the share of the public sec-
tor in manufacturing production had fallen to less than 20%. Nevertheless,
the government remains dominant in such fields as heavy machinery, steel,
aluminum, shipbuilding, petroleum, synthetics, fertilizers, engineering, and,
recently, semiconductors. Almost every bank in Taiwan is also wholly or
partially owned by the state (foreign banks were not allowed to establish
operations until 1969). The lending activities of all financial institutions have

92 Alice H. Amsden

Table 3.2. Selected Indicators in Taiwan’s Industrial Sector, 1952-80

Indicator

Industrial output index (1952 = 100)
Share of industry in NDPfl
Share of industry in total employmentb

Share of public ownership in total
industrial production

Share of industrial products in total ex-
ports

Selected shares in industrial production
Mining
Food processing
Textiles
Chemicals, petroleum, rubber, and

nonmetallic products
Metal products, machinery, and

electrical machinery

1952

100

18

9

57

8

1962

303
26

(25)

46

51

1951

10.2
18.4
18.4

10.4

5.6

1975

2,010
39
36

19

84

1971

3.5
7.2

20.8

22.3

17.3

1980

4,108
46
42

18
91
1980

1.9
10.1
11.2

19.1

20.1

Note: Industry includes mining, manufacturing, construction, and utilities.
“Net domestic product; all shares are expressed as percentages.
bThe figure for 1952 is from Gustav Ranis (see note 49); the figure in parentheses is
for 1967. Beginning with 1967, figures are averages per 1,000 workers.
Source: Taiwan Statistical Data Book (Taibei: Council for Economic Planning and De-
velopment, 1981); National Income of the Republic of China (Taibei: Directorate General
of Budgets, Accounts, and Statistics, 1981).

been under strict state supervision.53 Thus, if the government in Taiwan
does not quite “control the commanding heights/’ it goes a long way to-
ward doing so.

The government has been slow to divest itself of its holdings for two
basic reasons. From the beginning, public enterprise has served to consol-
idate the power of the Mainlander bureaucracy. In recent years, public
enterprise has also allowed the Guomindang to buttress its own power vis-
a-vis foreign capital. One of the fundamental consequences of public en-
terprise has been the control by the state rather than by multinationals of
key sectors in the economy. This is not to belittle the power of the multi-
nations, nor to suggest the absence of an organic solidarity between the
productive activities of the state and foreign investors. Recently, in the case
of automobiles, they have tried to ally to form a nucleus of expansion. But
the state has held its own in several crucial respects. The government did
not abandon its traditionally conservative attitude toward foreign invest-
ment until the export boom of the late 1960s had gotten underway. Only
then did foreign firms begin arriving in Taiwan in significant numbers.

By 1971, overseas Chinese and other foreign investments amounted to

The State and Taiwan’s Economic Development 93

roughly one-seventh of total registered capital (about the same as in Bra-
zil), although statistics on foreign investment are problematic.54 Foreign
investments, however, have been concentrated in electronics, chemicals,
and textiles destined for export. Foreign investments have not mush-
roomed with the government’s turn to heavy industry. According to one
account, between 1973 and 1980, foreign firms were responsible for as much
as half of total investment and as much as 20% of total exports in the elec-
tronics sector, but they were responsible for only 10% of total investment
in manufacturing.55 Finally, Taiwan has not become highly indebted to in-
ternational banks to finance its heavy industry. As discussed shortly, a
relatively low reliance on foreign credit is due to a high domestic propens-
ity to save. Moreover, although Taiwan has been a sizable international
borrower by the standards of less developed countries, its international
debt service/export ratio is very low – ranging between 5 and 10% – as a
consequence of its very rapid growth of exports.56

The Jiang Jie-Shi government, therefore, cannot be said to have deliv-
ered Taiwan into foreign hands, either by letting foreign banks dominate
credit or by letting foreign firms dominate manufacturing. Nor can the gov-
ernment be said to have been overwhelmed by its own technocracy (mostly
American-educated), which has lobbied for lower tariffs and a privatization
of state enterprises. The voice of the military has remained audible even as
its visibility within the state apparatus has diminished (e.g., in the 1950s,
an army general served as economics minister). The voice has remained
audible to the extent that it appears to speak for continued state control of
the economy for purposes of defense and social order, much as in the old
Guomindang tradition.

This contrasts with the behavior of another military in another small de-
veloping country with a highly educated population: Chile. Here, the mil-
itary did buy the economic liberalism of its technocracy, closed the doors
to state enterprise and opened them to foreign imports and investments –
with disastrous effect.57 The point is that there is no necessary association
between militarism and economic nationalism, although in Taiwan, the
relationship is positive.

The public sector in Taiwan is also still very important as far as capital
formation is concerned. Although the state’s share of gross domestic in-
vestment has fallen from a high of 62% in 1958, it still amounted in 1980 to
as much as 50%.58 State spending has gone largely to finance ten major
development projects in infrastructure, integrated steel, shipbuilding, and
petrochemicals, which contributes to the fact that manufacturing in Taiwan
has progressed in breadth (the percentage of manufacturing in GDP) and
in depth (the percentage of “sophisticated” products and processes in total
manufacturing output). Whereas in 1952 agriculture accounted for 36% of
net total domestic product and manufacturing for only a tenth, agriculture
now accounts for only 9% and manufacturing for more than a third.59 By
1980, 42% of all workers (15 and over) were engaged in the industrial sector

94 Alice H. Amsden

(Table 3.2). There has also been a decline in the absolute number of work-
ers in the agricultural labor force since the early 1970s. In historical per-
spective, this is highly significant. In the United States, absolute declines
in the farm population did not begin until the 1930s.60

Nor has manufacturing been confined to “wigs and wallets,” as myth
once held. In the course of six “plan periods,” which incidentally can be
described, at most, only as “indicative,” important structural changes have
occurred within manufacturing. Textiles and food processing were the
leading sectors during the first two plan periods (1953-56 and 1957-60).61

During the second plan period, however, the relative contribution of non-
durable consumer goods, particularly food processing, declined, whereas
that of intermediate goods (cement and paper) expanded. Chemicals (fer-
tilizer, soda ash, plastics, and pharmaceuticals) assumed major importance
during the third plan period (1961-64). Capital and the production of du-
rable goods (electrical and nonelectrical machinery, such as radios and sewing
machines, and transport equipment, such as bicycles and ships) as well as
petroleum products grew enormously during the fourth and fifth plan pe-
riods (1965-68 and 1969-72). The seventh plan period (1976-81) saw large
increases in heavy industry. These structural shifts are evident in Table 3.2,
although they are not to be exaggerated. The percentage of so-called light
industry in manufacturing output was still 48% in 1977, down, however,
from 54% in 1970 and 60% in I960.62

Exploiting the World Market

The nineteen-point reform program introduced by the government be-
tween 1956 and 1961 made exporting highly profitable. Not only were ex-
porters wined on tax and credit subsidies; they were also dined on tariff
reductions from prewar China heights. This allowed them to take advan-
tage simultaneously of advanced levels of world productivity for their in-
puts and exotic Taiwan wage levels for their outputs. In what follows, we
discuss the supply-side factors that permitted Taiwan to profit from the
world market, directing attention to the role of the state.

Taiwan exports (90% of them manufactures) are highly competitive in
world markets for reasons of low costs and rising productivity. There ap-
pears to have been a substantial fall in Taiwan’s wage costs per unit of
output relative to those of competitors in the period spanning 1954-71,
although there is a great deal of uncertainty about the figures.63 After the
energy crisis in 1973, when the dust had settled, Taiwan could still be seen
to have a cost advantage due to lower wage rates, by comparison not only
with Japan, but also with South Korea, Hong Kong, and Singapore. Inter-
national wage comparisons are difficult to make because of exchange-rate
distortions and international variations in data collection. Nevertheless, es-
timates of industrywide trade associations tend to corroborate the infor-
mation contained in Table 3.3; to wit, wages in Taiwan are a good deal
lower in all job categories than wages in competitor countries.

Table 3.3. Comparative Wages and Salaries, Midyear 1978 (Mean Monthly Salarya in U.S. Dollars)

Professional
group

Industrial engineer
Mechanical engineer
Electrical engineer
Accountant
General manager
Production manager
Section chief
Executive secretary
Typist
Junior clerk
Foreman
Skilled worker
Semiskilled worker
Unskilled worker
Tool maker
Cleaning worker

Taiwan

358
407
322
482

1,051
729
461
435
184
150
369
167
115
93

245
120

South
Korea

639
587
509
930

1,192
1,049

889
590
318
344
493
318
311
146
330
208

Hong
Kong

618
627
590
904

2,389
1,203
1,015

729
245
258
425
255
189
158
303
170

Singapore

821
710
803
923

2,097
1,215

518
503
211
198
413
206
133
102
210
108

Philippines

190
191
203
189
809
498
219
175
73

114
198
81
70
52
64
59

Thailand

437
460
492
498

1,784
669
392
425
153
135
203

86
76
51

135
77

Indonesia

752
786
299
733

1,513
851
439
496
214
173
241
137
96
65

482
53

Malaysia

552
677
762
949

2,672
1,050

786
404
133
180
390
181
129
84

304
82

Japan

1,587
1,244
1,025
1,521
3,413
2,488
1,587
1,360

756
785

1,500
1,161

942
698
665
550

Federal
Republic of
Germany

2,884
2,884
2,884
1,923
5,495
3,745
3,222
1,465
1,099
1,190
1,328
1,282
1,145

915
1,465

824

flIn addition to the monthly base salary, most companies pay regular bonuses ranging from 1 to 12 months of the salary, varying by
company and by country. In order to make the monthly base salary information meaningful in terms of actual cost, this survey has
increased the monthly base salary to include any bonuses paid. However, extraordinary bonuses, commission payments, etc., have not
been included.
Source: International Business Review, Hong Kong as cited and adapted by Anton Galli, Economic Facts and Trends (London: Verlag Weltforum
for the Institut fur Wirtschaftsforschung, 1980).

96 Alice H. Amsden

Table 3.4. Long-Run Changes in Industrial
and Labor Costs (Annual Rate of Change)

Real wages
Money wages
Labor productivity”
Unit labor cost

1954-61

2.5
11.4
4.2
7.2

Wages,

1961-73

6.3
9.7

10.8
-1.2

Productivity,

1973-75

5.2
29.5
6.0

23.5

Note: Data are expressed as percentages.
flThe first column is for the years 1953-61.
Source: Adapted from Lundberg (note 64).

Apart from the noise of exchange-rate distortions, wage levels remain
relatively low because the rate of increase in wages has been modest. What
is more, the movement of wages in relation to labor productivity has been
favorable for unit labor costs. In both regards, one detects the arm of the
state. Labor unions are virtually nonexistent and strikes are prohibited,
because Taiwan is still technically at war. One key to the advance in pro-
ductivity is the enormous emphasis placed on public education, financed
by a tax system that is highly regressive.

Table 3.4 presents data on changes in real and nominal wages, labor
productivity, and unit labor costs, which constitute the most proximate
causes of Taiwan’s export success, as well as its extraordinary price stabil-
ity.64 By comparison with other countries, including South Korea, Taiwan’s
rate of real wage increase has been low, particularly if one juxtaposes it
against the rate of change of per capita income, which may be taken as a
proxy for demand conditions in the labor market.65 Also striking is the
rapid rise in labor productivity and the fall in unit labor costs in the critical
period from 1961 to 1973.

The rapid rise in labor productivity has not been autonomous and may
be understood as emerging out of the cumulative process of fast growth
itself. As growth has accelerated, throughput time has decreased, profita-
bility has risen, and investments have skyrocketed in foreign technology
(both embodied in machinery imports and disembodied in the form of ser-
vices). The scale of production has mounted and, with it, specialization and
the division of labor; and, finally, the time required for the accumulation
of experience has been telescoped, opportunities to use such experience to
improve process and product have multiplied, and firm-level increments
in productivity have been realized.66

That Taiwan has assimilated foreign technology as effectively as it has in
no small part harks to its highly educated population. It was thought to be
the most educated in all of Asia, with the exception of Japan, when the
Japanese occupation of Taiwan ended after World War II. High invest-
ments in education continued thereafter, increasingly in the technical fields.

The State and Taiwan’s Economic Development 97

By the early 1970s, Taiwan had more engineers per 1,000 persons engaged
in manufacturing than all other developing countries for which data are
available, with the exception of Singapore.67 Since then, investments in
education have soared in tandem with the rate of growth of output; the
number of engineering students studying abroad almost doubled between
1975 and 1976, and the number of engineering students studying in Tai-
wan doubled between 1968-69 and 1972-73 and then doubled again be-
tween 1973 and 1982-83.68 Taiwan trains 50% more engineers in propor-
tion to its population than the United States.69

Although there has been no shortage of profitable investment outlets for
Taiwan firms to exploit, the opposite has been true of savings. Over the
years, however, as a proportion of gross national product (GNP), savings
have risen phenomenally. This has spared Taiwan the mutilation of over-
extended international indebtedness, as discussed earlier. Savings as a per-
centage of national income were less than 5% in 1952, 6.5% in 1962, 26.8%
in 1972, and almost one-third a decade later.70 The composition of savings
has also altered. The share of foreign savings has nose-dived, from around
40% in 1952-60, the heyday of U.S. aid, to a negative percentage in the
period since 1972, whereas the shares of both public and private domestic
savings have risen.71

According to Lundberg,72 the phenomenal rise in the savings ratio can
to a considerable extent be explained by the high and increasing share of
gross profits in national income. As for the government, it has been able
to save as much as it has, despite a fivefold increase in real expenditures,
by holding back on certain allocations and by raising revenues. On the
payments side, the proportion allocated to defense expenditures – the larg-
est single item in the government budget – has been halved, and social,
health, and pension payments have been kept remarkably low by Western
standards. On the revenue side, the tax structure in Taiwan has remained
regressive. Initially, agriculture provided a massive investment fund for
industry. Now, tax receipts accrue largely from commodities; income and
corporate taxation is either negligible or evaded. In short, a “favorable cli-
mate for capital formation exists in Taiwan, with a minimum concern for
the distribution of income and wealth.”73

A few remarks on the relationship between the Nationalist government
and Taiwan firms are in order, lest it be thought that the interests of capital
have been served by the state unstintingly. Taiwan’s ability, by compari-
son with, say, a Latin American country, to situate its economy in the lap
of the international market has rested in part on the clout that the state has
used against private producers. Because the governance of private produc-
ers is nowhere clearly defined, capital everywhere imagines incursions into
its domain by the state, but it is understandable why such complaints are
so vocal in Taiwan.

We have already noted how “the arm of the state reaches down to vir-
tually every farmer.”74 Similarly, “the government is deeply involved in all

98 Alice H. Amsden

aspects of industry.”75 Even after most import and foreign exchange con-
trols were lifted, the government exercised its will through the myriad li-
censes necessary for a firm to operate; the requirement of prior approval
for foreign loans and technology agreements; public ownership of the
banking system, which held interest rates much higher than in most Third
World countries; vagueness in tax laws such that politically uncooperative
firms could be threatened with audits; and so on. All businesspersons agree
that they could be put out of business at the caprice of the state in a matter
of months. Whereas a large percentage of output in, say, South Korea is
realized by giant conglomerates, Taiwan is still a land of small farmers and
firms.76 Recently, government policy has shifted toward the encourage-
ment of consolidation in agriculture and merger in industry. Not only has
this policy met resistance by the parties concerned; one might also imagine
the government’s ambivalence toward it, for small entities tend to be less
threatening and more tractable than large ones.

Rentiers and capitalists alike in Taiwan have, in the past, experienced
the dismembering or disabling effects of state power: The former were ex-
propriated by a land reform, and the latter succumbed to the liberalization
reforms that ushered in export-led growth. When a government charts a
new economic course, entrenched interests are threatened. In the case of a
turn to export-led growth, class conflict is stirred up by devaluation and
deflation. A liberalization of imports hurts import-substituting firms and
the banks that are financing them. When these are foreign, they can bring
extraeconomic power to bear against new policy directives. These conse-
quences of the turn to export-led growth were relatively mild in Taiwan.
For one thing, the economy was both far less industrialized and far less
inflationary than, say, some of the Latin American economies, so that fewer
entrenched interests were upset. The state also controlled many sectors
that would otherwise have been hurt, and foreign firms and foreign banks
were absent. Nevertheless, private domestic firms that were not satisfied
with the sweeteners of export subsidies and protection for second-genera-
tion import substitutes were swept away. In short, Taiwan was better able
to turn to the international market than other poor countries because the
balance of power between the state and both labor and capital was weighted
far more to the state’s advantage.

To a certain degree Taiwan enjoyed an edge over other developing coun-
tries in its export effort because of historical and geopolitical specificities:
Taiwan’s careful study of its erstwhile colonizer enabled it to absorb the
Japanese economic experience and to appreciate that export-led growth
was a viable strategy. In addition, the way was paved for the acceptance
of Taiwan products in the U.S. market first by Japanese exports and then
by those of U.S. multinationals, which had chosen Taiwan as an export
platform after U.S. aid had secured it for democracy. Clearly, however,
these explanations of Taiwan’s ability to exploit the international market –
whereas most developing countries appear instead to have been exploited

The State and Taiwan’s Economic Development 99

by it – are dwarfed by those explanations that focus on the forceful manip-
ulation of Taiwan’s political economy by the state.

Economic Growth and the Changing Nature of the State

The initial puzzle of the role of the Taiwan state was not just a question of
magnitude. In terms of scope, Taiwan is simply a particularly striking ex-
ample of the positive association between state intervention and the accel-
eration of economic growth that is now generally accepted to prevail in
cases of Third World capitalist development.77 What made Taiwan partic-
ularly interesting was that the state was so effective despite the clear prior-
ity the military placed on defense over development and the clear domi-
nance of the military within the state apparatus. The discussion so far has
not resolved this puzzle. On the contrary, the turn to export-led growth
seems to make the relation between apparent military dominance of the
state and successful economic policy even more perplexing.

The important role of public enterprises, like the early economic self-
sufficiency promoted by the state, is quite consistent with what can be
presumed to be the interests of the military. Import-substitution industrial-
ization, low reliance on foreign investors, and a focus on greater output of
basic foodstuffs would all square with the military’s presumed preference
for autarky. Export-led growth, on the other hand, appears to contradict
the policies the military could be expected to favor. Why should a regime
fanatically committed to national security tolerate a policy change that made
the Taiwan economy highly vulnerable to foreign supply and demand as
well as more dependent on foreign-owned firms?

The answer to this question is complex. First, it must be emphasized that
the increased reliance on international markets and capital that character-
ized the civilian economy did not extend to defense production. The mili-
tary ran its own production facilities, supplied with basic inputs by state
enterprises. In addition to state enterprises, there are many special-status
companies that obtain favors and/or incentives from the state. Among these
are the enterprises owned or invested in by the Guomindang or by the
Vocational Assistance Committee for Retired Soldiers, a complex of more
than forty firms reputed to be the largest single enterprise on the island.78

By the 1960s, military arsenals produced much of the equipment and less
sophisticated weaponry and ammunition needed by the armed forces. In
1969, a loan was made to Taiwan to build a factory to co-produce military
helicopters (with Bell Helicopter Co.). By that year, Taiwan was producing
M-14 rifles, machine guns, artillery shells, mortars, and other defense ma-
terials.79 Soon, another small step toward self-sufficiency was taken with
the initiation of an agreement with Northrop Aircraft Co. to co-produce F-
5E fighter planes.80 This mushrooming military economy may have made
the generals less concerned with the diminishing autarky of the civilian
sector.

100 Alice H. Amsden

Export-led growth, then, was consistent with the maintenance, and even
expansion, of previous levels of autarky in the sectors that were most crit-
ical for warfare. Nevertheless, there is abundant evidence, beginning at the
time of Taiwan’s turn to export-led growth, that the influence of the mili-
tary over economic affairs began to wane. For instance, the government
began to support family planning, whereas it was once deterred by the
insistence of party elders that such a policy would reduce the number of
soldiers available for retaking the Mainland.81 Taiwan ceased being self-
sufficient in basic foodstuffs because it was more profitable to specialize in
cash crops for export. Defense spending as a percentage of GNP and of
government expenditures also fell (until recently). In 1960, when export-
led growth was just getting underway, military expenditure as a per-
centage of GNP was roughly 13% and, as a percentage of government
expenditure, 65%.82 By 1978, these figures had fallen to 8 and 34%,
respectively.83

Part of the answer to the apparent contradiction between the turn to
export-led growth and the military’s interests is that these interests were
no longer reflected in state policy as monolithically as they had been in the
period immediately following the takeover of Taiwan. And even if the mil-
itary had held complete sway, it would have had little option other than to
turn to export-led growth. Given the exhaustion of import-substitution in-
dustrialization and foreign reserves, the continued pursuit of increased au-
tarky would have been economically suicidal, although reliance should not
be placed on the functionalist argument that because a decision was eco-
nomically necessary the military would endorse it even at the expense of
its own geopolitical ends.

More understanding is gained, however, by a closer examination of the
changing relationship over time of economic and geopolitical factors. On
the one hand, the dream of retaking the Mainland grew dimmer as the
Communist regime there proved its durability. The repossession of China
“had begun as a fierce resolve; it became an aspiration, then a myth, then
a liturgy.”84 At the same time, it became less clear that Taiwan could rely
simply on its anti-Communist credentials to ensure support from its major
ally, the United States. From this perspective, increased reliance on foreign
investment, which went along with export-led growth, might be seen to
be as valuable in securing powerful political allies as in reaping economic
benefits.85

The key to the changing logic of Taiwan’s international position, how-
ever, was bread and butter. Taiwan, as well as Communist China, was
proving itself to be a viable economic entity, as evidenced by its control
over inflation and its fast growth. The economic viability of Taiwan meant
that the population of Mainlanders as a social collectivity no longer needed
to retake China to enrich itself. This was all the more true when it became
clearer in the 1960s that economic gains in Taiwan were being realized not
on the ephemeral basis of plunder, as they had been between 1945 and

The State and Taiwan’s Economic Development 101

1949, or of buying cheap and selling dear, as they had been to some extent
during the earliest years of import-substitution industrialization, but rather
on the sustained basis of capital accumulation. I think that this, more than
anything else, is what underlay the military’s acceptance of export-led growth
and its exit from the center of the stage of Taiwan’s political economy.

In the last analysis, despite the continued power of the military within
the state, Taiwan provides an interesting commentary on Engels’s classic
dictum that when “the internal public force of a country stands in opposi-
tion to its economic development. . . . [ijnexorably and without exception,
the economic evolution has forced its way through/’

86 Engels’s concern
was with the open contest between an economically reactionary elite’s at-
tempt to maintain its rule by political means and the transformative power
of economic change. Taiwan does not exactly fit this description, but one
can observe in Taiwan the powerful effect of economic change on the ori-
entation of political force. The military was not overcome by the emergence
of successful capitalist development, but it does seem that it found the
expanding opportunities such development offered to be more attractive
then the shrinking ones that were promised by a continued fixation on
geopolitical struggle.

Taiwan, then, is more than a case in which the essential contribution of
state intervention to economic development can be observed. It is a case
that demonstrates the reciprocal interaction between the structure of the
state apparatus and the process of economic growth. The Taiwan state,
which appeared on its arrival from the Mainland to be an unlikely instru-
ment for the promotion of development, proved to be a most effective one.
At the same time, changes in the nature of the state itself appear to have
been an important by-product of economic development. The state, in short,
can be said both to have transformed Taiwan’s economic structure and to
have been transformed by it.

Notes

1. By “developed” is meant a fully employed economy wherein output rises not
merely because inputs of land, labor, and capital rise, but also because produc-
tivity rises.

2. Edwin A. Winckler, Remarks to a conference on Taiwan (Columbia University,
1982).

3. I. M. D. Little, “An Economic Reconnaissance,” in Economic Growth and Struc-
tural Change in Taiwan: The Postwar Experience of the ROC, ed. Walter Galenson
(Ithaca, N. Y.: Cornell University Press, 1979), pp. 448-507.

4. The sections of this chapter on Taiwan’s colonial heritage and agriculture bor-
row heavily from Alice H. Amsden, “Taiwan’s Economic History: A Case of
Etatisme and a Challenge to Dependency Theory,” Modern China, July 1979:
341-79.

5. A. Y. C. Koo, The Role of Land Reform in Economic Development (New York: Prae-
ger, 1968).

102 Alice H. Amsden

6. H. Y. Chang and R. H. Myers, “Japanese Colonial Development Policy in Tai-
wan, 1895-1906: A Case of Bureaucratic Entrepreneurship,” Journal of Asian
Studies 22 (1963): 433-49; S. P. S. Ho, ‘The Development of Japanese Colonial
Government in Taiwan, 1895-1945,” in Government and Economic Development,
ed. Gustav Ranis (New Haven, Conn.: Yale University Press, 1971), pp. 287-
327.

7. R. H. Myers, “The Commercialization of Agriculture in Modern China,” in
Economic Organization in Chinese Society, ed. W. E. Willmott (Stanford, Calif.:
Stanford University Press, 1972), pp. 173-91.

8. A. J. Gradanzev, Formosa Today (New York: Institute for Pacific Relations, 1942).
9. S. P. S. Ho, “Agricultural Transformation under Colonialism: The Case of Tai-

wan,” Journal of Economic History 28 (1968): 313-40; R. H. Myers and A. Ching,
“Agricultural Development in Taiwan under Japanese Colonial Rule,” Journal
of Asian Studies 23 (1964): 555-70; R. P. Christensen, Taiwan’s Agricultural Devel-
opment, prepared for the Department of Agriculture, Economic Research Stud-
ies, Foreign Agricultural Economic Report no. 39 (Washington, D.C.: U. S.
Government Printing Office, 1968); S. C. Hsieh and T. H. Lee, Agricultural De-
velopment and Its Contributions to Economic Growth in Taiwan: Input-Output and
Productivity Analysis of Taiwan Agricultural Development, Chinese-American Joint
Commission on Rural Reconstruction, Economic Digest Series, no. 17, Taibei,
1966. Teng-Hui Lee, Inter-sectional Capital Flows in the Development of Taiwan:
1895-1960 (Ithaca, N. Y.: Cornell University Press, 1971).

10. Myers and Ching, “Agricultural Development in Taiwan.”
11. Ho, “Development of Japanese Colonial Government.”
12. T. Ouchi, “Agricultural Depression and Japanese Villages,” The Developing

Economies 5 (1967): 597-627.
13. Edwin A. Winckler, “National, Regional, and Local Politics,” in The Anthropol-

ogy of Taiwanese Society, ed. Emily A. Ahem and Hill Gates (Stanford, Calif.:
Stanford University Press, 1981), pp. 13-37.

14. Simon Kuznets, “Growth and Structural Shifts,” in Economic Growth and Struc-
tural Change in Taiwan, ed. Galenson, pp. 15-131.

15. Barbara W. Tuchman, Stilwell and the American Experience in China, 1911-1945
(New York: Bantam Books, 1974).

16. Ralph N. Clough, Island China (Cambridge: Harvard University Press, 1978).
17. N. Jacoby, U.S. Aid to Taiwan (New York: Praeger, 1966).
18. Clough, Island China.
19. See Christensen, Taiwan’s Agricultural Development.
20. Koo, Role of Land Reform.
21. Taiwan Agricultural Yearbook (Taibei: Department of Agriculture and Forestry,

Provincial Government, 1974).
22. Lee, Inter-sectional Capital Flows.
23. John C. H. Fei, Gustav Ranis, and Shirley W. Y. Kno^-Growth with Equity:

The Taiwan Case (New York: Oxford University Press for the World Bank,
1979).

24. Lee, Inter-sectional Capital Flows, p. 28.
25. Sung Hsing Wang and R. Apthorpe, Rice Farming in Taiwan: Three Village Stud-

ies, monograph ser. B, no. 5 (Taibei: Academia Sinica, 1974), pp. 10-11.
26. Christensen, Taiwan’s Agricultural Development.
27. A cruder form of state power with a purpose altogether unrelated to economic

The State and Taiwan’s Economic Development 103

planning was also remarked upon by Wang and Apthorpe (Rice Farming in
Taiwan):

At least for as long as relations between island and continental China continue in their
present form, presumably a justification will be found for continuing a form of reliance
on the kind of police methods which have now become part and parcel of everyday life.
The Minister of the Interior in the Nationalist government used very often in 1971, for
instance, to the astonishment of persons familiar with a very different tradition, to speak
of the policeman as the most important resource person of all for community develop-
ment in the island. Villagers, too, speak of the intimacy of police participation in parts of
their daily life (p. 10).

28. W. P. Falcon, “Key Issues in Taiwan’s Agricultural Development/’ Industry of
Free China 41(4) (1974): 2-7.

29. Christensen, Taiwan’s Agricultural Development.
30. Shirley W. Y. Kuo, “Income Distribution by Size in Taiwan Area: Changes and

Causes,” Industry of Free China 45, nos. 1-3 (1976): 9-38, 9-21, 20-34, respec-
tively. It is interesting that, in spite of the high degree of commercialization of
Taiwanese agriculture, the government placed minimal reliance on market forces
to extract a surplus from the countryside. Rice collections were made in kind,
and rice was bartered for fertilizer. Indicative of the government’s avoidance of
the market mechanism were its attempts (albeit unsuccessful) to barter rice not
only for fertilizer but also for cotton cloth, bicycles, soybean cakes, and the like.
See Kuo, “Income Distribution.”

31. Hla Myint, The Economics of the Developing Countries (New York: Praeger, 1964),
p. 48.

32. T. H. Shen, “A New Agricultural Policy,” in Agriculture’s Place in the Strategy of
Development: The Taiwan Experience, ed. T. H. Shen (Taibei: Joint Commission
on Rural Reconstruction, 1974), pp. 38-58.

33. Hsieh and Lee, “Agricultural Development.”
34. Even after the export of labor-intensive manufactures got underway, Taiwan

ran a trade deficit. The trade balance remained negative until 1969. It became
negative again in 1974 and 1975 (Taiwan Statistical Data Book [Taibei: Council for
Economic Planning and Development, 1981]). This is a consequence of the fact
that per capita income has been growing rapidly and so, too, have imports,
especially since 1973 (see Table 3.1). Much exporting also relies on imported
inputs. Had Taiwan’s agriculture not been so productive, the strain on the
balance of payments would have been greater.

35. Free China Review (Taibei, March 1976).
36. I. M. D. Little, T. Scitovsky, and M. Scott, Industry and Trade in Some Developing

Countries (London: Oxford University Press, 1970).
37. The OECD’s study of industrialization in seven developing countries compared

effective rates of protection and found them to be lowest in Mexico and next
lowest in Taiwan (the effective rate of protection measures the percentage by
which import restrictions make it possible for the price of the value added in
production to exceed what it would be in their absence). The study cautions,
however, that, although “the average levels of protection for all manufacturing
industry . . . in Taiwan were moderate . . . these moderate levels were due to
zero or negative protection for exporting, while protection given to production
for sale on the home market was much higher than in Mexico” (Little, Scitov-
sky, and Scott, Industry and Trade).

104 Alice H. Amsden

38. Maurice Scott, “Foreign Trade/7 in Economic Growth and Structural Change in
Taiwan, ed. Galenson, pp. 308-83.

39. Teng-Hui Lee and Kuo-shu Liang, “Taiwan/’ in Development Strategies in Semi-
industrial Economies, ed. Bela Balassa (Baltimore, Md.: Johns Hopkins Press,
1982), pp. 310-50.

40. Balassa, ed., Development Strategies.
41. Robert Wade, “Dirigisme Taiwan-Style,” IDS Bulletin 15 (2) (April 1984): 65-70

(Institute of Development Studies, Sussex, England).
42. Ching-Yuan Lin, Industrialization in Taiwan, 1946-1972: Trade and Import Substi-

tution Policies for Developing Countries (New York: Praeger, 1973).
43. H. D. Fong, “Taiwan’s Industry, with Special Reference to Policies and Con-

trol,” Journal ofNanyang University 11 (1968).
44. Mo-Huan Hsing, Taiwan and the Philippines: Industry and Trade Relations (Lon-

don: Oxford University Press, 1971).
45. K. T. Li, My Views on Taiwan’s Economic Development: A Collection of Essays from

1975-1980 (Taibei, 1980), p. 10.
46. Ibid., p. 15.
47. Ibid., p. 3.
48. See Little, “An Economic Reconnaissance.”
49. Gustav Ranis, “Industrial Development,” in Economic Growth and Structural Change

in Taiwan, ed. Galenson, pp. 206-62.
50. Economists of various ideologies have debated the economic importance of U.S.

aid. Economic nationalists, advocates of export-led growth, and advocates of
Third World self-reliance all tend to disparage the consequences of aid, though
their reasons are very different (see Scott, “Foreign Trade,” for a discussion of
different views, including his own). In contrast, Jacoby, U.S. Aid to Taiwan,
author of the most thorough study of aid to Taiwan, argues that without it per
capita income would have stagnated, assuming no cutback in military outlays.
Sifting through these debates and with the hindsight of history, I tend to agree
with the disparagers.

51. Specifics of the relationship between the Taiwan state and Taiwan business-
persons are still something of a mystery, but see Robert Silin, Leadership and
Values: The Organization of Large-Scale Taiwanese Enterprises (Cambridge: Harvard
University Press, 1976), who also discusses managerial practices in Taiwan.
There can be no doubt that these have also played an important role in the
development process.

52. P. M. A. Linebarger, The Political Doctrines of Sun Yat-Sen (Baltimore, Md.: Johns
Hopkins Press, 1937).

53. Hsing, Taiwan and the Philippines.
54. “Manufacturing (Taiwan Area),” in Industrial and Commercial Census of Taiwan

and Fukien, vol. 3, Table 16 (Taibei, 1971). E. L. Bacha, “Issues and Evidence on
Recent Brazilian Economic Growth,” World Development 6 (1977): 46-47.

55. This information was compiled by Professor Chi Shive of Taiwan National Uni-
versity and cited by The Economist, July 31, 1982, pp. 1-14.

56. Morgan Guarantee Trust, World Financial Markets (New York, June 1982).
57. Alejandro Foxley, Neoliberal Experiments in Latin America (Berkeley: University

of California Press, 1983); see also Alfred Stepan, Chapter 10, this volume.
58. Taiwan Statistical Data Book (1981).
59. Ibid.
60. S. Lebergott, “Labor Force and Employment, 1800-1960,” in Output, Employ-

The State and Taiwan’s Economic Development 105

merit and Productivity in the U.S. after 1800, vol. 30 of Studies in Income and Wealth
(National Bureau of Economic Research, Conference on Research on Income
and Wealth, New York, 1966), pp. 126-31.

61. The analysis of early industrialization that follows is based on Teng-Hui Lee,
“Development of Industry,” in Agriculture’s Place in the Strategy of Development,
ed. Shen, pp. 66-70, and on Industrial and Commercial Census of Taiwan and Fu-
kien (1971).

62. Li, My Views on Taiwan’s Economic Development.
63. Scott, “Foreign Trade.”
64. The rate of inflation in Taiwan was 12.3% between 1952 and 1961 and an un-

believable 2.9% between 1962 and 1972. This compares with 33.9 and 13.6%,
respectively, for Korea in the same periods; see Erik Lundberg, “Fiscal and
Monetary Policies,” in Economic Growth and Structural Change in Taiwan, Galen-
son, pp. 263-307. Taiwan’s price performance, however, has deteriorated since
the energy crisis. The GNP deflator was 32.3% in 1974 alone and averaged
10.4% for the period 1971-81. Economists have been unable to explain this
deterioration except as a general consequence of both demand pull and cost
push factors (Shirley W. Y. Kuo, The Taiwan Economy in Transition [Boulder,
Colo.: Westview Press, 1983]).

65. Richard Webb, “Wage Policy and Income Distribution in Developing Coun-
tries,” in Income Distribution in the Less-Developed Countries, ed. by Charles R.
Frank, Jr., and Richard C. Webb (Washington, D.C.: Brookings Institution, 1977),
pp. 215-58.

66. Alice H. Amsden, “The Division of Labor Is Limited by the Rate of Growth of
the Market: The Taiwan Machine Tool Industry Revisited” (Harvard Univer-
sity, Graduate School of Business Administration, 1983, Mimeographed).

67. Manuel Zymelman, Occupational Structures of Industries (Washington, D.C.: In-
ternational Bank for Reconstruction and Development, 1980).

68. Taiwan Statistical Data Book (1983).
69. The Economist, July 31, 1982, pp. 1-14.
70. Gross capital formation has also risen, from 15.4% of GDP in 1952 to 36.3% in

1980. The last figure is something of a world record; see Council for Economic
Planning and Development, Taiwan Statistical Data Book (1981).

71. Taiwan Statistical Data Book (1982).
72. Lundberg, “Fiscal and Monetary Policies.”
73. Ibid., p. 300.
74. Wang and Apthorpe, Rice Farming in Taiwan, pp. 10-11.
75. Silin, Leadership and Values, p. 18.
76. For information on the structure of Korean industry, see L. P. Jones and II.

SaKong, Government, Business, and Entrepreneurship in Economic Development: The
Korean Case (Cambridge: Council on East Asian Studies, Harvard University
Press, 1980); for information on both Korea and Taiwan, see S. P. S. Ho, “Small-
Scale Enterprise in Taiwan,” Staff Working Paper no. 384 (Washington, D.C.:
World Bank, 1980).

77. See Rueschemeyer and Evans, Chapter 2, this volume.
78. Silin, Leadership and Values.
79. Clough, Island China.
80. Stockholm International Peace Research Institute, World Armaments and Disar-

mament Yearbook (London: Taylor & Frances, various years).
81. Clough, Island China.

106 Alice H. Amsden

82. Ho, “Development of Japanese Colonial Government/’
83. United States Arms Control and Disarmament Agency, World Military Expen-

ditures and Arms Transfers, 1969-78 (Washington, D.C.: U.S. Government Print-
ing Office, 1980).

84. Brian Crozier, The Man Who Lost China (New York: Scribner, 1976).
85. Denis Fred Simon, ‘Taiwan, Technology Transfer and Trans-Nationalism: The

Political Management of Dependency” (Ph.D. diss., University of California,
Berkeley, 1980).

86. Frederick Engels, Anti-Duhring (New York: International Publishers, 1939), pp.
202-203.

Chapter Title: RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s

Book Title: Mobilizing for Development

Book Subtitle: The Modernization of Rural East Asia

Book Author(s): Kristen E. Looney

Published by: Cornell University Press

Stable URL: https://www.jstor.org/stable/10.7591/j.ctvq2w06w.9

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https://www.jstor.org/stable/10.7591/j.ctvq2w06w.9

49

2

RURAL DEVELOPMENT IN
TAIWAN, 1950s–1970s

In Taiwan, the defeated Kuomintang regime (KMT or Chinese Nationalist Party)

sought to regain control of mainland China by transforming the island into a

model province that would legitimize its right to rule. Knowing that the Chi-

nese Communist Party (CCP) had established its rural base in large part through

redistributive land reform, the KMT carried out a comprehensive land reform

program in the early 1950s, which led to the creation of a smallholder farm econ-

omy with extremely low levels of inequality. In addition to land reform, the KMT

built up a rural extension system to provide technical education and production

inputs to farmers. These institutions resulted in nearly two decades of accelerated

growth. According to Taiwan’s former president Lee Teng-hui, who is perhaps the

only agricultural economist to ever become a head of state, agriculture played a

textbook role in Taiwan’s development. It met the domestic demand for food,

accounted for a substantial share of exports, and provided capital and labor for

industrialization. 1 As one of the first countries in the post–World War II period

to achieve industrialized nation status, Taiwan stands out as an exemplary case

of successful

development.

Taiwan’s rapid transition from a poor, agricultural society to a wealthy,

industrialized nation has received much scholarly attention. Robert Wade’s

research, for example, reveals how the government of Taiwan, like Japan, was

able to effectively “govern the market” and promote development through well-

formulated institutions and industrial policy. 2 While industrial policy is central

to many accounts of East Asian development, the role of rural policy has been

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50 CHAPTER TWO

less emphasized. Moreover, among the scholars who have written about Taiwan’s

rural sector, there is a tendency to focus narrowly on production and present

an instrumentalist view of agriculture. Consistent with Lee Teng-hui’s assess-

ment, the implication is that agriculture’s value lies in how much it contributed

to industrialization.

In this chapter, I explain Taiwan’s impressive record of rural development as

an important end in itself. First, I describe patterns of change in agricultural
production, rural living standards, and the village environment. I show that

uneven progress across these different areas—the fact that growth in production

was greater and occurred earlier than improvements in the other areas—can be

attributed to the siphoning of rural economic gains for urban-industrial devel-

opment. Second, I link these outcomes with rural institutional arrangements,

asserting that while farmers benefited from favorable initial conditions, US sup-

port, and land reform, the more crucial factor behind Taiwan’s success was the

quality of its farmers’ organizations. The Taiwan Farmers’ Association (FA or

FAs) ensured that growth in agricultural production was achieved throughout

the countryside instead of being concentrated in a few places. It was also the

main actor behind policy changes that would advance the broader interests of

small farmers. I contend that the FAs’ power derived from somewhat contradic-

tory attributes: linkage with the state and autonomy from it. The remainder of

the chapter sheds light on what happened after the government’s urban-biased

policies were reversed in the 1970s. I examine Taiwan’s Community Develop-

ment Campaign and argue that the combination of appropriate goals, central

control over local authorities, and rural participation led to several positive out-

comes. Although the campaign did little to strengthen production or the rela-

tive income position of farmers (government pricing policies had a more direct

impact), it did have a major effect on improving village infrastructure, sanitation,

and housing.

This case study illustrates the conditions under which farmers’ organiza-

tions and campaigns are more likely to promote development. To be clear, very

few countries in the world have achieved the same level of success for the same

reasons, which makes Taiwan something of an outlier but also an interesting

case theoretically. In contrast with much of the peasant politics literature, which

focuses on the negative effects of state intervention and the informal founda-

tions of peasant resistance, Taiwan is an example of how small farmers can be

actively involved in development through formal organizations with close ties

to the state. 3 Related to this point, the FAs’ power can only be understood in the

larger political context of postwar Taiwan. Although the KMT was in some ways

more Leninist and repressive than it had been on the mainland, it allowed local

elections to take place for the entire martial law period (1950–1987). 4 After 1969,

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 51

elections were expanded to include a few seats in the parliament, and this open-

ing gave the FAs, which had been holding their own elections for over a decade,

an opportunity to influence policy. 5 Without the associations and their ability

to organize voters, it is unlikely that Taiwan’s national politicians would have

been as responsive to rural issues. Urban-biased policies would have remained

in place longer, and change would have been initiated only after rural conditions

had reached a point of crisis. In short, the FAs were Leninist transmission belt

organizations that actually incorporated farmers’ interests. 6 And while Taiwan’s

circumstances were unique, a general lesson is that bottom-up policy change is

possible in competitive authoritarian regimes. 7

The way the government responded is also significant. Of the three cases,

Taiwan perhaps most closely conforms to the expectations of the developmental

state model. Yet even there, at a time when the regime was becoming more tech-

nocratic and institutionalized, mass mobilization was used to accomplish state

goals. Chiang Ching-kuo, Chiang Kai-shek’s son and successor, could easily have

been mistaken for a mainland politician in this 1972 address to Taiwan’s farmers:

“Presently, as a result of the country’s industrialization, numerous difficulties

have befallen the agricultural sector. Although this may be an unavoidable part

of the economic development process, the government must take responsibility

for resolving these problems and improve your working and living conditions.

We have therefore decided to accelerate rural construction by mobilizing all gov-

ernment agencies and the power of the masses to help push forward this new

campaign.” 8 As this chapter demonstrates, the KMT’s rural policies were both

technocratic and mobilizational, and it was the combined effects of institutions

and campaigns that contributed to Taiwan’s success.

Changes in Taiwanese Rural
Sector Development
The transformation of agriculture in postwar Taiwan occurred in stages: recov-

ery (1945–1951), accelerated growth (1952–1967), and agricultural adjust-

ment (1968–present). This section broadly describes rural sector change in

the 1950s–1970s, the most significant decades for industrialization and rural

development.

Taiwan’s economic recovery from World War II was complicated by a major

and violent political transition from Japanese to Chinese Nationalist rule. After

fifty years of colonial governance (1895–1945), Taiwan was formally retroceded

to the Republic of China (ROC) on October 25, 1945. The Taiwanese, who ini-

tially celebrated the restoration of Chinese power, soon became disillusioned

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52 CHAPTER TWO

by government corruption, their exclusion from politics, and worsening eco-

nomic conditions. Inflation, as measured by the Taipei wholesale price index,

skyrocketed from 260 percent in 1946 to 3,500 percent in 1949. 9 Rising ten-

sions between Taiwanese and mainlanders erupted in February 1947, when

protests against police violence in Taipei escalated into an island-wide uprising

against the KMT. The government responded by dispatching troops to round

up and execute an estimated twenty thousand Taiwanese, including most of the

intellectual and social elite. The uprising and its brutal suppression, known as

the 2–28 Incident, badly damaged the KMT’s legitimacy, but it also strength-

ened the regime’s tenuous hold on the territory by silencing dissent. On

December 9, 1949, as the CCP emerged victorious from the Chinese Civil

War, Chiang Kai-shek relocated the ROC capital to Taipei, and by 1952 about

two million refugees (including half a million troops) from the mainland had

arrived in Taiwan. 10

The KMT’s immediate goals were to feed the army and the civilian popula-

tion, stabilize prices, and speed up the process of industrialization. In the 1950s,

more than half of Taiwan’s population lived in rural areas (about 4.7 million

out of 9.3 million people), and despite severe infrastructural damage from war,

agriculture was the largest and strongest sector of the economy. 11 It was also

the main source of exports and therefore a critical sector for earning foreign

currency, which could be used to finance industrialization. Major export crops

included rice, sugar, tea, fruits, vegetables, and citronella oil. 12 These circum-

stances pointed to an obvious policy agenda: to accomplish its goals, the KMT

would have to develop agriculture. And by all accounts, it succeeded.

Agricultural production was restored to prewar levels by 1951 and then

entered a fifteen-year period of accelerated growth, averaging 4.6 percent annu-

ally. Overall, between 1952 and 1967, staple crop production increased 82 percent,

and livestock production increased 186 percent. Output of fruits and vegetables

increased 476 percent and 107 percent, respectively, providing the basis for a

large-scale food-processing industry. Agricultural exports grew 128 percent and

constituted the majority of total exports until 1966, at which point the relative

decline of agriculture had become apparent. Yet even as Taiwan confronted the

problem of agricultural adjustment, the sector still performed strongly, averaging

3.2 percent annual growth between 1968 and 1979. 13

Most economists agree that Taiwan’s industrial takeoff would not have been

possible without the resources supplied by agriculture. From 1951 to 1955, the

net outflow of capital from agriculture constituted 75 percent of domestic capital

formation, and it remained a key source of capital until about 1970, when the

terms of trade shifted in favor of agriculture, meaning more money flowed into

the sector than left it. 14 With respect to labor, migration from the countryside

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 53

did not occur on a massive scale, but the transfer of surplus labor nonetheless

accounted for about 47 percent of the increase in the nonagricultural workforce

in the 1950–1960s. 15

It is remarkable that Taiwan was able to generate a rural surplus given the

constraints on agriculture, namely limited land resources and a high population

density. Taiwan’s topography consists mainly of rugged mountains and foothills

that are unsuitable for agriculture. Less than one-third of its land is arable, and

most of that land was brought under cultivation during the colonial era. In the

postwar period, Taiwan’s cultivated land area remained nearly constant, expand-

ing only slightly from 23 to 26 percent between 1945 and 1975. Despite these

limited resources, the rural population grew by about 65 percent during the same

period, from 3.4 to 5.6 million. 16 According to Samuel Ho, agricultural growth

was accomplished through the widespread adoption of intercropping (i.e., plant-

ing a second crop between the rows of the first crop before the latter is harvested),

mechanization, and the intensive use of chemical inputs such as fertilizers, insec-

ticides, and fungicides. His research shows that the contributions of land and

labor were insignificant compared to increases in working capital or chemical

inputs, which accounted for nearly 60 percent of all gains in production between

1951 and 1970. 17

The government used several mechanisms to extract the surplus from pro-

ducers, including monopoly control over the sale of fertilizers and compulsory

rice purchases. Under the rice-fertilizer barter system (1948–1972), Taiwanese

farmers were paid only 70 percent of world market prices for rice and were forced

to pay about 40 percent more for fertilizer than Japanese, Dutch, American, or

Indian farmers. 18 Such price distortions, also known as price twists or price scis-

sors, had a negative effect on farm incomes, which increased slightly after land

reform and then remained constant until the barter system was phased out.

In fact, virtually all gains in rural incomes during this period can be traced to the

rise of off-farm employment opportunities. 19

Rural living standards and the village environment improved at a slower pace

than agricultural production. Besides unfavorable pricing policies, another prob-

lem facing rural households was the declining size of Taiwan’s farms. Although

land reform drastically reduced tenancy rates and created a more equal society,

it also resulted in very small landholdings, made even smaller by the postwar

population boom. In 1952, the average farm size was 1.29 hectares (3.19 acres);

by 1976, it was only 1.06 hectares (2.62 acres). 20 Significantly, about 42 percent

of farmers actually cultivated less than 0.5 hectares (1.24 acres), an amount too

small to support a typical family. 21 If it were not for Taiwan’s decentralized pat-

tern of industrialization, which started under the Japanese with the development

of the food-processing sector, rural households probably would have struggled

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54 CHAPTER TWO

to survive. Unlike South Korea, where industry was concentrated in the cities,

Taiwanese farmers could engage in part-time farming and supplement their

incomes with factory work. 22

Despite the rise of part-time farming and the diversification of incomes, most

rural households perceived that their overall welfare was slow to improve. In 1964,

sociologist Martin M. C. Yang conducted a survey of rural living conditions in Tai-

wan, collecting data on nutrition, water, housing, clothing, transportation, com-

munication, and health care for a sample of 3,075 households. To assess the impact

of land reform on different types of households, the survey targeted six groups:

former tenants, tenants, original owner-cultivators, hired farm laborers, former

landlords, and nonfarmers. With the exception of former tenants and nonfarm-

ers, the majority of households from all other groups reported no improvement

or even a deterioration of living conditions since land reform. In addition, over 38

percent of former tenants reported no improvement in living conditions, a sur-

prising finding given that they had the most to gain from land reform. Yang asserts

that cultural modesty, rising expectations, and population growth explain some of

the dissatisfaction, as rural families incurred more debts related to an increase in

marriages, new home construction, and education costs. Consumption patterns

in some of the specific areas surveyed also reveal a story of gradual progress rather

than decline. 23 While these explanations for the gap between perceived and actual

living conditions are reasonable, one thing the analysis fails to mention is how

economic policy during that time was designed to exploit agriculture.

Aside from the hidden taxes on rice and fertilizer just mentioned, several other

measures also suggest that urban bias was a problem in Taiwan. For example,

data on the intersectoral terms of trade, calculated as the prices received for farm

products divided by the prices paid for nonagricultural commodities and ser-

vices, show that conditions were unfavorable toward farmers until about 1975. 24

Similarly, the nominal and relative rates of assistance for agriculture (the NRA

and RRA) were negative in Taiwan until about 1970, meaning that domestic farm

product prices were well below international market prices and that government

assistance to agriculture was far less than its assistance to industry. 25 Lastly, the

distribution of gross fixed capital formation reflects how government investment

was strongly skewed toward industry: while agriculture’s share declined from

25 to 8 percent between 1951 and 1973, industry’s share increased from 45 to 67

percent during the same period. 26

As a result of this policy environment, farmers did not benefit as much as

they should have from the gains in agricultural production, and the rural-urban

income gap widened. The average rural household already earned 25 percent

less than the average urban household in 1953. By 1968, the difference was

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 55

TABLE 3. Agricultural and Industrial Sector Change in Taiwan, 1952–1981

YEAR 1952 1957 1962 1967 1972 1977 1981

Population

Total population (millions) 8.1 9.7 11.5 13.3 15.3 16.8 18.1

Rural population (millions) 4.3 4.8 5.5 5.9 5.9 5.6 5.0

Share of rural population in total

population (%)
53.1 49.5 47.8 44.4 38.6 33.3 27.6

GDP1

Share of agriculture in GDP (%) 35.9 31.7 29.2 23.8 14.1 12.5 8.7

Share of industry in GDP (%) 18.0 23.9 25.7 30.8 40.4 43.7 44.5

Exports

Share of agricultural exports in total

exports (%)
91.9 87.4 49.5 38.4 16.7 12.5 7.8

Share of industrial exports in total

exports (%)
8.1 12.6 50.5 61.6 83.3 87.5 92.2

Employment

Share of agricultural workers in

economically active population (%)
61.0 58.2 55.3 49.4 39.9 33.8 28.0

Share of industrial workers in

economically active population (%)
9.3 10.4 11.5 14.6 19.8 26.5 31.2

42 percent. 27 It was also in the late 1960s that Taiwan entered its agricultural

adjustment phase. The primary sector’s share of GDP, exports, and employ-

ment all dropped significantly, and the rate of out-migration increased. 28 Table 3

provides a snapshot of Taiwan’s structural economic transformation in the

1950s–1970s and shows that by 1981 Taiwan had emerged as an industrialized

country. What is unfortunately not revealed by this kind of macroeconomic data

is that the 1970s was a good decade for farmers.

Following the passage of the Accelerated Rural Development Program (ARDP)

in 1972, the rice-fertilizer barter system was abolished. This was a watershed

event, marking a shift in government policy from squeezing the rural sector to

protecting it. The nominal rate of protection for agricultural products increased

AVERAGE ANNUAL GROWTH RATES 1953–1962 1963–1972 1973–1981

GDP growth rate (%) 7.4 11.0 7.4

Agricultural production growth rate (%) 4.8 4.0 2.1

Industrial production growth rate (%) 11.7 18.6 11.0

Source: Taiwan Statistical Data Book 1982, 4, 8–9, 21, 34, 57, 60, 77, 189.

1 GDP data based on constant 1976 market prices. Agriculture includes the farming, forestry, fishery, and livestock
sectors. Industry includes the manufacturing, mining, and public utilities sectors.

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56 CHAPTER TWO

rapidly in the 1970s, eventually reaching 52 percent in 1980 (14 percentage points

higher than the average for Western European countries that year). 29 The rural-

urban income gap, though it did not disappear, narrowed to 29 percent by 1983. 30

Because of their improved income position, many rural households were able to

purchase modern appliances, such as televisions, washing machines, refrigera-

tors, and telephones. 31

The government also launched the Community Development Campaign to

upgrade the village environment. Some progress was made in this area during

the 1950s–1960s, but only on a limited, experimental basis. Local programs were

scaled up to a national campaign in the 1970s, with dramatic effect. Millions of

people benefited from housing renovation projects, including the installation of

toilets, showers, and drainage pipes, as well as the paving of rural roads, the con-

struction of rice drying areas, and the implementation of community sanitation

programs, to name just a few of the campaign’s achievements.

The rest of the chapter explains how Taiwan realized these various outcomes.

It analyzes the institutions that facilitated rural development, examines the polit-

ical logic behind the adoption of pro-rural policies, and discusses why the Com-

munity Development Campaign was ultimately successful.

Rural Institutions and the Farmers’ Associations
In the 1950s, Taiwan’s rural economy was transformed from one dominated

by tenant farming to one of owner-cultivators with secure private property

rights to land. This system of smallholder farming, combined with the Farm-

ers’ Associations and the extension services they provided, led to impressive

gains in agricultural production. The importance of land reform in shaping

these institutions is undeniable. It reduced tenancy and equalized the distribu-

tion of landholdings, which allowed Taiwan to avoid the problem of bimodal

development—a dichotomy between wealthy, large-scale commercial farm-

ers on the one hand, and poor, small-scale subsistence farmers on the other.

Even more crucial than land reform, however, was the quality of the Farm-

ers’ Associations themselves. The FAs possessed both linkage and autonomy,

which enabled farmers to meaningfully participate in the rural policy process.

In terms of linkage, they had an encompassing membership base, strong ties to

the village community, and close connections with higher levels of the state. In

terms of autonomy, their leaders were professional farmers, who were elected

by association members, and they had a certain degree of financial and manage-

rial independence from the state. Because of these qualities, the FAs facilitated

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 57

extensive, long-term agricultural development, and they eventually succeeded

at lobbying the government for pro-rural policies that led to gains in other areas
besides production. But before getting into how the FAs functioned and why

they were so effective, it is necessary to address the influence of external actors

on Taiwan’s rural development.

Japan and the United States

Most scholars agree that Japanese colonialism had an overall positive impact on

Taiwan’s economic development. As explained in the previous chapter, Japan

invested in modern systems of transport, taxation, finance, education, and

administration. It controlled the most lucrative parts of the economy (the sugar

industry) and extracted heavily from the rural sector, but it did not conform to

the normal colonial pattern of neglecting agriculture. Because of Taiwan’s sub-

tropical climate, which allowed for the cultivation of several crops a year, it was

designated as a base for agriculture that would supply Japan’s domestic market

with cheap food. In Tun-jen Cheng’s words, “Japan took a high cost and high

yield approach to colonizing Taiwan, pursuing extensive programs for economic

growth before exploiting the proceeds.” 32 A major component of this high-cost

approach was the creation of state and community-based rural extension organi-

zations. Although their operations were disrupted during the war, the KMT was

able to quickly draw from these preexisting resources in setting up the Farmers’

Associations.

Historical accounts of the FAs usually begin in the year 1900, when a group of

tenant farmers in Sanxia Township, Taipei County, founded a formal association

for mutual protection and assistance. By 1908, there were sixteen such organiza-

tions, which the colonial government promptly co-opted in order to facilitate

agricultural development and resource extraction. Interestingly, the Sanxia Fam-

ers’ Association Gazetteer challenges the common narrative that the association

first emerged in opposition to colonial rule, providing evidence that despite anti-

Japanese sentiment in the area, its purpose was to work with authorities to stabi-

lize food production and maintain social order. 33 If this account is accurate, then

co-optation was probably not difficult, a point supported by the proliferation of

state-controlled farmers’ organizations during this period. Eventually, all orga-

nizations related to irrigation, credit, and specific farm products were merged

into a single organization, the Taiwan Agricultural Association. It consisted of

one provincial-level association, eight county-level associations, more than three

hundred township-level associations, and nearly five thousand village-level agri-

cultural practice societies. The governor-general of Taiwan (the sotokufu ) served

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58 CHAPTER TWO

as executive director of the provincial association, and Japanese officials were

likewise in charge of the local associations. The size of this institution was second

only to the government: by the early 1930s, it employed about forty thousand

people. 34

Through this system, the colonial government orchestrated a green revolution

in Taiwan. Irrigated farmland expanded from 32 to 64 percent of total cultivated

land, which meant that farmers who previously engaged in dry farming (the cul-

tivation of wheat, soybeans, sorghum, sweet potatoes, etc.) switched to primarily

growing rice. 35 Japan also simplified Taiwan’s land tenure system by buying out

large absentee landlords with government bonds and conferring property rights

on smaller, cultivating landlords. Under pressure to meet regular tax payments,

this new landlord class worked with colonial authorities and the agricultural

associations to stimulate production by promoting new seed varieties, fertiliz-

ers, and cultivation techniques among their tenants. 36 The spread of chemical

fertilizers and ponlai rice, in particular, helped to raise the average rice yield by

45 percent. 37

As a result of these innovations, agricultural output climbed from 2.9 percent

annual growth in the 1910s to 5.1 percent in the 1920s. It then slowed down a

bit to 3.5 percent in the 1930s. 38 By comparison, agricultural output in Japan

grew 2 percent annually between 1900 and 1920, and only 0.9 percent annu-

ally between 1920 and 1935. 39 Both the colonial state and farmers benefited

from these changes. About 16 percent of Japan’s total rice supply and more than

80 percent of its sugar supply came from Taiwan. 40 And while Taiwanese sources

tend to emphasize the poverty and insecurity inherent in the prewar tenancy

system, there are some reports that Taiwanese farmers may have enjoyed a higher

standard of living than Japanese farmers in terms of housing, clothing, bank

deposits, and other indices. 41 The ample availability of credit and technical ser-

vices led many Taiwanese farmers to express, once the war was over, that they

were better off under Japan, a sentiment that surely influenced the KMT’s deci-

sion to rehabilitate the associations. 42

Another key legacy of Japan was the development of Taiwan’s rural indus-

tries. In 1930, the food-processing sector, which was geographically dispersed,

accounted for 64 percent of all registered factories, 55 percent of factory employ-

ment, and 76 percent of total factory production. Additionally, as Japan became

more involved in World War II, it moved several of its factories to Taiwan for

security purposes. These included shipbuilding, oil refining, pulp, basic met-

als, textiles, and fertilizers. So, while Taiwan was still predominantly rural at the

end of the colonial period, it nonetheless had a foundation for future industri-

alization. 43 Importantly, the continued development of industry after the war,

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 59

especially food processing and light industry, helped to mitigate the negative

effects of the KMT’s developmental squeeze on agriculture by generating alter-

native sources of rural income. In 1958, more than 95 percent of rural incomes in

Taiwan derived from farming; by 1979, about 85 percent derived from nonfarm

sources. 44 The growth of rural industry, of course, did not prevent the issue of

depressed farm incomes from becoming politically contentious in the late 1960s,

but it did perhaps delay bottom-up demands for policy change.

As for the United States, its main contribution to Taiwanese rural develop-

ment was to offer aid and policy advice to the KMT. In total, between 1949

and 1968 (the entire aid period), Taiwan received nearly US$4.2 billion in aid,

of which approximately $2.4 billion went to the military and $1.8 billion to

economic assistance. Within the budget for economic assistance, Public Law

480 food aid amounted to about $387 million, a small sum compared to South

Korea’s $1.7 billion in food aid. 45 Despite the negative effects of food aid on

development—in Taiwan, US imports depressed the production of wheat, cot-

ton, and soybeans—Hsin-huang Michael Hsiao suggests that US aid to agricul-

ture was the most productive part of the whole aid program. Less than a quarter

of all economic aid went to agriculture, but it financed nearly two-thirds of

domestic capital formation in that sector. The Sino-American Joint Commis-

sion on Rural Reconstruction (JCRR) also operated on a relatively small budget,

funding over six thousand projects with $366 million in grants and loans. 46

The commission was originally made up of two Americans and three Chi-

nese members. After the commission moved from mainland China to Taiwan in

1949, a number of leadership changes occurred, and the proportion of Chinese

among the general staff increased, but there was always at least one American

commissioner. 47 One theme that emerges from the oral histories of JCRR leaders

is that the commission’s success was related to its being run by technical experts

who were not beholden to the American or Taiwanese governments, and it could

directly cooperate with any public or private institution. 48 The JCRR was there-

fore more isolated from political pressure than an ordinary government agency.

Yet, at the same time, it had access to central officials and participated in the

drafting of several important policies, most notably land reform and the reorga-

nization of the FAs.

Land Reform

When the Nationalists first arrived in Taiwan, tenant farming was the dominant

form of agriculture. In 1949, only 36 percent of farm families were owner-

cultivators. About 25 percent were part owners, part tenants, and 39 percent

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60 CHAPTER TWO

were full tenants. Population growth, exaggerated by the sudden influx of

mainland refugees, had the effect of raising rents and reducing farm acreage

to the point of threatening tenants’ basic subsistence. Farm rents, typically

50 percent of the value of the main crop, had climbed to 70–75 percent during

the political transition period. It was in this context that Wolf Ladejinsky, a US

Department of Agriculture official, made the following observation about the

countryside (the year was 1949): “Of all the farmyards I have seen in the Far

East, Southeast Asia, and in the Middle East, that of the average Taiwanese ten-

ant is among the worst, both in appearance and in equipment. Tenants’ huts,

so-called barnyards, equipment, and livestock, as well as their health point to

nothing but poverty.” 49 Ladejinsky had been invited by the JCRR to offer advice

on land reform, a policy that he had just overseen in Japan. The recommenda-

tions, which the KMT took seriously and implemented, included the formation

of democratically elected landlord-tenant committees to carry out the policy

and a gradual progression of reforms, from rent reduction to the redistribution

of public and private lands.

The KMT’s responsiveness stemmed from a few considerations. First, the

party was aware that its failed rural policies had cost it the mainland and could

possibly cost it Taiwan if the communists managed to infiltrate the island. Sec-

ond, the party’s ideology supported equal access to land resources, as detailed by

its founder Sun Yat-sen in his writings and speeches on the “people’s livelihood”

principle. The KMT’s experimentation with rent reduction in Zhejiang, Fujian,

Sichuan, and a few other places in the 1920s–1940s, though ultimately unsuc-

cessful, was partly motivated by this idea. 50 Third, President Truman himself put

direct pressure on Chiang Kai-shek to act on US recommendations, explicitly

linking agricultural improvement to national security. 51 Finally, unlike the situa-

tion in China, Chiang’s government had no previous ties to the landed classes in

Taiwan, and this autonomy from traditional power holders prevented opposition

to the reforms.

Land reform led to an immediate boost in household incomes and a signifi-

cant redistribution of land resources. The rent reduction program capped all

tenant rents at 37.5 percent of the value of the main crop (an amount intended

to achieve a 25 percent reduction in rent based on the assumption that it was

50 percent under normal circumstances). The next step was selling off public

lands formerly held by the colonial government and the Taiwan Sugar Cor-

poration. While these two policies were both successfully implemented, by

far the most consequential component of the whole land reform agenda was

the Land-to-the-Tiller program. It placed limits on the scale of ownership

(2.9 hectares or 7.2 acres) and strengthened tenant rights, yet its main effect

was to dramatically reduce the rate of tenancy. In 1953, the majority of Taiwan’s

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 61

farm households became owner-cultivators, thus laying the foundation for a

more equitable pattern of development (see table 4). 52 Former landlords were

compensated with commodity bonds and shares in government enterprises,

which turned out to be worth much less than the market value of their land,

but nevertheless ensured that some of their wealth was shifted to the industrial

sector. 53

As already suggested, however, land reform was not a panacea for the rural

economy. It resulted in extremely parcelized plots and an overall reduction

in farm size, such that it became practically impossible for families to survive

on farm income alone. Price distortions further stymied long-term growth in

incomes, and even the medium-term effect on living standards was questionable.

Bernard Gallin, in his classic study of a Taiwanese village, writes: “At the time of

the research (1958) at least, this [Land-to-the-Tiller] act in itself had not brought

about any noteworthy increase in the standard of living.” He explains that besides

landlords, two other groups were negatively affected. First, before the reforms,

tenants of the Taiwan Sugar Corporation’s holdings paid only 25 percent of the

TABLE 4. Extent and Impact of Land Reform in Taiwan

POLICY (A) 37.5% RENT
REDUCTION,
1949–1952

(B) SALE
OF PUBLIC

LAND,
1948–1958

(C) LAND-
TO-THE-TILLER

PROGRAM, 1953

TOTAL SHARE OF
CULTIVATED AREA
AND HOUSEHOLDS

AFFECTED BY
REDISTRIBUTION (B+C)

Share of cultivated area

affected (%)
29.2 8.1 16.4 24.5

Share of farm households

affected (%)
43.3 20 27.9 47.9

Total revised lease contracts: 377,364 (100%)

Total cultivated area affected by redistribution: 208,753 hectares (515,840 acres)

Total farm households affected by redistribution: 334,511

Total landlord households affected by redistribution: 106,049

YEAR 1949 1953 1965 1975

Share of owner-cultivators in total farm

households (%)
36 55 67 82

Share of part owners–part tenants in

total farm households (%)
25 24 21 9

Share of full tenants in total farm

households (%)
39 21 12 9

Source: Data for the upper half of the table come from Ho 1978, 163; M. Yang 1970, 81. For the lower half see
Taiwan Agricultural Statistics 1966, 9; Taiwan Agricultural Statistics 1977, 2.

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62 CHAPTER TWO

value of the main crop in rent. The reforms thus did not generate any substan-

tial savings for them, and given the taxes incurred as new owners and the rising

costs of production, many families saw their yearly expenses increase. Second,

jointly owned landholdings, which in his research site accounted for 62 percent

of all land resources, were expropriated in the same way as property belonging to

landlords. A single plot could have anywhere from two to hundreds of owners,

and many joint owners suffered losses because of minimal or no compensation. 54

These findings indicate that the results of Yang’s survey discussed earlier might in

fact reflect real dissatisfaction with post-reform conditions rather than cultural

modesty or rising expectations.

In short, the effects of land reform were mixed. Though in many ways it was

an incredible achievement, it was not sufficient for sustained rural development.

And while it reduced inequality within the countryside, it offered no solution to

the growing rural-urban gap. For these reasons, the Farmers’ Associations were

more important in the long run.

The Farmers’ Associations

After a few years of unsuccessful attempts to revitalize the Farmers’ Associations,

the KMT solicited help from the JCRR. The government tried, for example, to

create separate extension and credit associations, but in practice they performed

the same functions and wasted resources competing for membership. Coordi-

nation problems also emerged among different government agencies involved

in FA work. To resolve these problems, in 1949 the government reverted to the

Japanese model of having a single organization with branches at each level of

the administration, and it entrusted one department, the Provincial Department

of Agriculture and Forestry (PDAF), with all FA-related work. 55 Institutional

streamlining was not enough, however, to restore operations. As a result of the

war, over 50 percent of FA warehouses, fertilizer stations, and rice mills had been

destroyed, and nearly all association managers and technicians had returned to

Japan. Because of limited financial support from the ROC government, many

associations developed sizable debts, which further hindered their ability to

provide services. 56 The US entered into the picture in 1950, when JCRR con-

sultant Walfred A. Anderson published a report containing several suggestions

that remain the basis for FA organization today. The report’s main finding was

that nonfarmers (merchants, industrialists, urban workers, etc.) controlled the

majority of local associations, a point confirmed by KMT documents estimat-

ing the share of nonfarmer members to be as high as 80 percent in some places.

It advised that the FAs distinguish between associate and active members, with

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 63

the latter defined as those deriving most of their income from farming, and that

organizational control be given to active members. 57

Around the same time as land reform, the government carried out a massive

reorganization of the Farmers’ Associations. First, in August 1952, it passed the

“Provisional By-Law Governing the Improvement of Farmers’ Associations of

Different Levels in Taiwan.” In keeping with Anderson’s views, it defined regular

(i.e., active) members as those deriving 50 percent or more of their income from

farming and stated that only regular members could vote or stand for election

to the FA board of directors. Associate members were eligible for election to the

FA board of supervisors, a less powerful body in charge of internal audits, but

were not allowed to hold more than one-third of supervisor positions. 58 Next, the

PDAF and JCRR set about registering members, organizing elections, and training

officials. These efforts, which were completed between October 1953 and March

1954, produced impressive results—372,000 existing members were downgraded

to associate status; total membership at the township level expanded to about

590,000 households; and nearly 29,000 new officials were elected, of whom

95 percent were actual farmers. At the village level, the agricultural practice soci-

eties that had been active during the colonial era were revived (and renamed

small agricultural units or SAUs), and they quickly expanded their membership

base to over 720,000 households. By this measure, the FAs encompassed the

entire farm population. 59

The democratization of FA governance, together with land reform, solidified

the position of smallholders in the rural economy and had a profound impact

on development. Following some initial financial difficulties—caused by low

membership fees and the withdrawal of savings by nonfarmers who felt alien-

ated under the new system—revenues picked up as the associations took on

various functions and earned people’s trust. While skilled FA leaders were able to

convince nonfarmers to reinvest in the associations, a lot of revenue came from

regular member deposits and the collection of service fees. 60 Each township asso-

ciation was divided into four main departments: agricultural extension, credit,

insurance, and supply and marketing. Since this last department was responsible

for selling fertilizers and purchasing rice under the barter system, it is fair to say

that the FAs, similar to marketing boards in Africa, were used to impose hidden

taxes on agriculture. However, the associations were not purely extractive institu-

tions. They supplied critical inputs to farmers and, beginning in the 1970s, were

used to channel subsidies and other resources to the rural sector. Smallholder

control also meant that services were more accessible than is usually the case in

developing countries, where inputs are directed by the state to large farmers or

to specific geographic areas chosen for political reasons. 61 Survey data from the

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64 CHAPTER TWO

1950s confirms that FA services were very widely used. It also shows that farm-

ers were in regular contact with FA staff. In 1959, over 74 percent of households

surveyed by the JCRR reported receiving a home visit from an extension agent in

the past year (see table 5).

To summarize just a few of the FAs’ accomplishments: First, they spearheaded

an enormous outreach and research program. They distributed radios, news-

papers, and magazines to the village SAUs; set up thousands of farm discussion

groups, home economics clubs, and 4-H clubs; and provided assistance to a large

corps of agricultural researchers. 62 Samuel Ho writes: “In 1960 the number of

agricultural research workers per 100,000 people active in agriculture was 79

in Taiwan, 60 in Japan, and only 4.7 in Thailand, 1.6 in the Philippines, and

1.2 in India.” 63 Second, building on the prewar green revolution, they promoted

intercropping, mechanization, high-yield varieties of rice, and chemical inputs.

By the early 1970s, rice yields reached 3.5 tons per hectare, one of the highest

levels in the world. 64 Third, they created a comprehensive livestock improvement

program, equipped with the latest innovations in veterinary diagnostics, mass

vaccinations, and scientific breeding. 65 Fourth, FA credit departments greatly

alleviated the problems of rural capital shortages and high-interest money lend-

ing. Between 1949 and 1960, the amount of farm loans provided by the organized

money market increased from 17 to 57 percent. 66

The effectiveness of Taiwan’s rural organizations stemmed from two essen-

tial qualities: linkage and autonomy. With regard to linkage, I have already

TABLE 5. Percent Households Receiving FA Services in Taiwan, 1952–19591

YEAR 1952 1955 1959

Agricultural Extension Department

Obtained improved seeds 48.3 45.5 70.6

Obtained crop protection assistance 24.1 61.3 91.3

Obtained hog vaccinations 36.2 76.1 83.7

Received home visit from extension agent 27.6 46.1 74.2

Credit Department

Deposited savings 29.3 35 67.4

Obtained loans 46.6 57 75.6

Supply and Marketing Department

Purchased goods from the FA 36.2 72.8 90.1

Sold goods through the FA 15.5 29.8 53.6

Total households surveyed n=58 n=1200 n=1400

Share of households with FA membership 20.7 85.6 94.2

Source: Data compiled from JCRR surveys, available in Kuo 1984, 150–55.

1 Insurance departments were added in 1963, so those services are not listed.

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 65

explained how the FAs had an encompassing membership base and an orga-

nizational presence in all of Taiwan’s villages through the SAUs. As subsequent

chapters will show, this was simply not the case in South Korea or China. Still, it

would be a mistake to characterize the FAs as village organizations. They were,

more accurately, parastatal institutions with close ties to the villages. Though

technically separate from the government, they assumed responsibility for cer-

tain entrusted activities (maintaining the barter system, primarily) and were

involved in virtually all aspects of rural policy implementation. Drawing from

social and political theory, the FAs can be understood as having a corporatist

relationship with the state. They were hierarchically structured, with only one

association operating in a given territory. The provincial FA could dissolve any

poorly performing unit in the system, and each association’s program budget

had to be approved by the unit above it. Farmers were also forbidden from form-

ing alternative organizations. These rules were designed to facilitate top-down

supervision of the FAs and to prevent the growth of civil society organizations

that might challenge the state. In exchange for political loyalty, the FAs were

given access to key resources, such as funding and new technologies, and they

were granted limited representation in the Legislative Yuan. It seems that instead

of being put off by this structure, many farmers actually welcomed the supervi-

sion by higher-level authorities because it reassured them that programs would

be properly administered (for illustrations of the FAs’ structural features, see

the appendix). 67

Of course, institutional linkage with the state does not guarantee political

influence. Rather, the FAs’ ability to provide feedback, channel discontent, and

initiate change was a product of their autonomy. First of all, they were the only

(quasi-) public institution in postwar Taiwan that was not controlled by main-

landers. Even though mainlanders composed 40 percent of the provincial-level

FA staff, there was usually just one mainlander working for the local associa-

tions, a security agent in charge of guarding the granary and reporting on signs

of unrest to the government. 68 Second, with the exception of a few spots on

the board of supervisors, all FA leaders were professional farmers chosen by

members of their own communities. At the village level, direct elections were

held every four years for SAU leaders and township FA representatives. Above

the villages, the principle of indirect representation was employed: assemblies

of representatives would elect a board of directors, a board of supervisors, and

representatives to the next level in the system. Third, the FAs not only chose

their own leaders but also managed their own finances. Whatever funds they

received from the government or the JCRR usually came in the form of loans

instead of grants, and most revenues derived from their own commercial activi-

ties and services, not from government-entrusted activities. The FAs’ (albeit

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66 CHAPTER TWO

limited) independence from the state in terms of finances and leadership is yet

another way in which they differed from their counterparts in South Korea and

China. 69

FA elections were also highly contested, and despite some downsides such

as intervention on the part of local factions and the KMT, the overall effect of

elections was to increase farmers’ participation in politics and sense of owner-

ship over the associations. Joseph Bosco describes the FA system as “a semi-

governmental organization that controls much patronage, so its political offices

are sharply contested by local factions.” 70 Indeed, factions competed fiercely

for spots on the assembly of representatives and board of directors. The board

would elect a chairman, who in turn appointed a general manager. The chair-

man’s pick had to be approved by two-thirds of the board and could in theory be

a capable nonfarmer, although the main criterion for selection was loyalty to the

chairman. These individuals were in many ways as powerful as the head of the

township government. They determined FA staffing and distributed such items

as cash crop licenses, construction contracts, loans, and community develop-

ment funds.

To prevent local factions from gaining too much power, the KMT recruited

them to join the party. In 1954, during the first round of FA elections, tempo-

rary party organizations were created to recommend and enlist candidates. As a

result, the KMT captured the majority of leadership positions, setting a pattern

that continues through the present day (see table 6). 71 The regime also inter-

vened by limiting campaign activities to the ten days leading up to the election,

setting education and training requirements for general managers, and monitor-

ing association activities through its own security agents. 72 While none of these

measures necessarily eliminated clan-based corruption or the oppression of

minority factions, the combination of near-universal membership and central-

ized supervision of the FAs meant that local leaders were less likely to engage in

extreme forms of patronage. 73 In other words, the KMT superimposed its own

patron-client relationship on the FAs as a way of mitigating local capture by

dominant factions.

Moreover, factional and party interference did not detract from a general per-

ception among farmers that the FAs were their organizations. According to JCRR

survey data (the same used in table 5), the share of farmers who stated that “the

farmers own the FAs” increased from 1.7 percent in 1952, to 56.1 percent in 1955,

to 79.5 percent in 1959. The share of farmers who stated that “the chairman of

the FA board of directors is determined by election” also increased from 20.7 per-

cent in 1952, to 66.5 percent in 1955, to 80.2 percent in 1959. Farmers gave simi-

lar responses when asked about FA representatives. In addition to farmers’ sense

of ownership and control over the FAs, the survey data suggest that farmers were

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 67

TABLE 6. Extent of KMT Representation in Taiwan’s FAs (1954 FA Election Results)

(A) TOTAL
ELECTED

(B) KMT
CANDIDATES1

(C) KMT
RECRUITS2

SHARE OF KMT
MEMBERS AMONG

ELECTED FA OFFICIALS
(B + C) / A

Village SAUs

SAU head 4,875 1,939 1,642 73%

SAU vice-head 4,875 1,456 1,603 63%

Township FA representatives 16,916 6,421 4,141 62%

Township FAs

FA directors 3,805 2,193 862 80%

FA supervisors 1,086 617 22 59%

County FA representatives 1,349 782 351 84%

County FAs

FA directors 386 287 62 90%

FA supervisors 124 82 27 88%

Provincial FA representatives 89 69 0 78%

Provincial FA3

FA directors 33 33 0 100%

FA supervisors 10 10 0 100%

TOTAL 33,548 13,889 8,710 67%

Source: Central Committee of the Kuomintang 1954, 59–60.

1 Candidates who were members of the party before winning the election.

2 Candidates who joined the party after winning the election.

3 FA rules allowed for four representatives to the Legislative Yuan. Based on this data, it is reasonable to assume
that all of them were KMT members.

at least minimally engaged in FA activities: in 1959, about 82 percent of farmers

said they had attended a SAU meeting in the past year. 74 Yang’s survey in the mid-

1960s provides further evidence of a rich associational life in the countryside,

with most farmers reporting that they voluntarily and regularly participated in

local elections and community organizations. 75 In contrast, farmers in Korea did

not elect leaders to the cooperatives and considered them to be just another arm

of the government. 76

Political Competition and Policy Change

Since farmers’ regular electoral participation and engagement with the FAs

prevented them from one-sidedly serving the state, it is worth considering

why Taiwan’s authoritarian regime allowed them to function the way they did.

Clearly the United States, through the JCRR, was interested in promoting Amer-

ican democratic ideals, but the KMT’s calculation was probably much more

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68 CHAPTER TWO

practical. They needed the Taiwanese to run the FAs because fluency in local

dialects was critical for extension work. More importantly, elections were a way

to create buy-in from farmers who might otherwise be tempted to form a rival

(communist) political party or movement. Given Taiwan’s close proximity to

the mainland and the strength of local factions, the Nationalists decided it was

better to permit open political competition than to drive it underground and

risk losing control.

This same logic propelled the regime to expand the scope of local govern-

ment elections. Party leaders gradually realized they would not be returning to

the mainland, especially after China’s 1964 atomic bomb test, so the only way

to fill vacancies created by an aging political elite was to bring more Taiwanese

into politics. They also knew that repression alone was not a long-term solution

to governance. Regular elections for local government positions started as early

as the 1950s and then expanded in 1969 to include a few seats in the parlia-

ment (most notably, the Legislative Yuan). This change marked the beginning

of what Thomas Gold has called the “Taiwanization” of the political sphere.

In 1972, Hsieh Tung-min became the first Taiwanese to assume the post of pro-

vincial governor. Chiang Ching-kuo later selected Hsieh to be his vice president

in 1978, followed by Lee Teng-hui in 1984. These developments at the top were

the culmination of aggressive party recruiting efforts at the grassroots: by the

early 1970s, about 80 percent of the KMT’s 1.25 million members were Taiwan-

ese. 77 And within the FAs, recruitment was so successful that they functioned

as voter turnout machines for the KMT during local elections. 78 This dynamic

of political competition at the height of authoritarianism, within the Farmers’

Associations and in the political system more broadly, makes Taiwan very dif-

ferent from the other cases. Even those politicians with no background in agri-

culture grew to care about the countryside because of Taiwan’s highly organized

rural electorate and the political influence of FA leaders.

Locally, political elites frequently moved between the FAs and the govern-

ment during the course of their careers. As a typical example, Mr. Fan-Chiang’s

experience, recorded by Taiwanese scholar Huang Ta-chou, reveals how elec-

tions helped to build strong horizontal and vertical ties among local institu-

tions: Born in 1926, Fan-Chiang attended school from the age of nine to fifteen.

He was drafted into the Japanese military and served until the war ended in

1945, after which he returned to his village. Fan-Chiang was a skilled farmer and

was selected by his peers to be a small agricultural unit leader in 1949. In the

mid-1950s, he was elected to be a township FA representative and a member of

the board of directors. He was then elected to the county government assembly,

shortly after which he worked for the county party organization. Moving every

few years between the government and the Farmers’ Association, Fan-Chiang

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 69

eventually became a township FA general manger in 1970. Reading his story

and the recollections of others like him underscores the prestige associated with

rural work in Taiwan, and it shows that the status of the FAs was similar to

that of the government. Faced with various career options, many people chose

to work for the associations. And given their political connections, they were

uniquely positioned to provide feedback on rural policy. They also knew which

leaders were more inclined to support farmers and could mobilize voters to

back them. 79

At the national level, the FAs transmitted farmers’ grievances upward to

central officials. Their voice was strengthened by the JCRR, which regularly

conducted surveys of farmers and shared its findings with the government.

Also important was a group of agricultural advocates in the Provincial Assem-

bly and the Legislative Yuan. From existing content analysis of the meetings of

these bodies, it is clear that official discourse about the countryside changed

after 1969: the previous focus on agricultural production for the sake of gov-

ernment revenue shifted to greater concern for farmers’ welfare. The advo-

cates spoke about the shortcomings of land reform and painted a picture of

worsening poverty. As one Legislative Yuan representative explained in 1970:

“Agricultural policy is a problem that we have not resolved for many years.

After the 37.5 percent rent reduction and the Land-to-the-Tiller programs

were implemented, it seemed on the surface that farmers received many ben-

efits. Yet in reality, once the farmers obtained land, their production costs never

went down. After subtracting production costs, they have almost nothing left.

Farmers’ lives have therefore still not really improved . . . [they] are experienc-

ing extreme suffering.” Indeed, several politicians made passionate appeals to

eliminate extractive policies, arguing that people could no longer subsist on

farming and were abandoning it only to end up as slave-like workers, criminals,

and prostitutes. 80

In summary, the Farmers’ Associations could not enact policy change on their

own, but they did enable farmers to meaningfully participate in different stages

of the policy process: implementation, feedback, and eventually agenda setting.

The constituencies and political leaders they produced became increasingly pow-

erful over time, as the regime moved toward including more Taiwanese voices in

politics. The barter system, which for decades had required farmers to purchase

fertilizers using in-kind payments of rice at exploitative, nonmarket prices, was

finally abolished with passage of the Accelerated Rural Development Program in

1972. To be sure, there were other factors that affected the government’s decision,

such as the declining cost of agricultural protection. In fact, just a few years before

the ARDP was adopted, the government had already started to lower the prices of

fertilizers, pesticides, and farm machinery. Growing revenues from the industrial

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70 CHAPTER TWO

sector, along with rising urban incomes and changes in diet, also decreased the

government’s need for cheap rice and other kinds of rural taxes. 81 Without the

emergence of a pro-rural coalition, however, it is unlikely that economic fac-

tors alone would have caused a substantial shift in policy. I have made the case

that the FAs deserve credit for gains in production during the extractive phase

of agricultural policy and for setting in motion changes that would effectively

end that phase. Moreover, what most previous accounts of rural policy transi-

tion have failed to explain is that the government did not just end extraction—it

transformed the face of the countryside.

The Community Development Campaign
Origins

The Community Development Campaign was launched around the same time

as the ARDP. The latter represented a more typical agricultural adjustment pro-

gram, calling for reduced taxes, increased spending, low-interest credit, better

services, and scale agriculture. The government allocated at least 2 billion yuan to

the ARDP annually between 1973 and 1979. Though a small percentage of total

government spending (1–3 percent, depending on the year), it marked a decisive

break from the past. 82 As previously noted, because of the ARDP and supplemen-

tary measures like subsidies and import restrictions, the nominal and relative

rates of agricultural protection turned positive, and the rural-urban income gap

shrank considerably. By itself, however, the ARDP was regarded as an insufficient

solution to the rural problem. To achieve more immediate and visible results, the

government embraced mass mobilization.

The Community Development Campaign cannot be understood without

reference to past campaigns. In China, the Mass Education and Rural Recon-

struction Movements of the 1920s–1930s focused on improving rural condi-

tions through the development of autonomous village organizations. Led by

Y. C. James Yen, Liang Shuming, and other activist intellectuals, these move-

ments sought to provide an alternative to communism. Yen later served as a

commissioner for the JCRR and moved to Taiwan, where his ideas about grass-

roots community building influenced the top leadership. 83 The New Life Move-

ment was another campaign that took place in the 1930s–1940s to counter the

influence of communism. Some scholars view it as linked to global fascism,

whereas others emphasize that it was closely intertwined with state building and

civilian relief during the war period. Importantly, because Chiang Kai-shek and

Chiang Ching-kuo personally led the campaign, it provides a window into how

they thought about the countryside. The main objective was to create an orderly

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 71

and civilized society by using ideological education to reform the most basic

aspects of rural life: clothing, food, housing, and behavior. Although thousands

of New Life community organizations were established across the country, the

campaign’s momentum ultimately fizzled out because the communists proved

more capable of providing people with real economic and security benefits. 84

Taiwan’s countryside was similarly viewed as backward, but now the leadership

understood that any campaign to reform it needed to deliver tangible change to

be successful.

In 1955, the government launched the People’s Livelihood Construction Cam-

paign, which drew inspiration from Sun Yat-sen’s ideology. It stressed ensuring

equal access to land resources, sustaining high levels of production, and satisfying

villagers’ basic needs (as in the New Life Movement, these were defined as cloth-

ing, food, housing, transportation, education, and recreation). Taiwanese sources

state that the campaign was intended to pick up where land reform had left off,

and given the timing, it is possible the campaign was launched in response to

China’s collectivization drive. Even though farmers in Taiwan maintained con-

trol over their own land and production practices, laws on compulsory labor were

invoked to support village improvement projects. An earlier law requiring men

ages eighteen to fifty to take part in road building, irrigation, production, and

defense work was revised to incorporate more projects related to village infra-

structure. Campaign coordination committees were formed to bring together

leaders from government, schools, the police, and the FAs. In addition, the gov-

ernment initiated a formal competition among local jurisdictions to mobilize

labor and other resources. The policy lasted for ten years and affected less than

10 percent of all villages (there were 515 experimental sites in total), but its

impact was nonetheless significant. Several hundred miles of roads, irrigation

canals, and drainage pipes were added to existing infrastructure. Other improve-

ments included the construction of embankments, water towers, pumps, bridges,

rice drying areas, toilets, bathhouses, animal pens, compost houses, child-care

centers, and community centers. 85

The success of previous experiments, combined with international develop-

ment trends, eventually paved the way for a more comprehensive campaign. In

the 1960s, when the United Nations was supporting community development

programs worldwide, UN consultant Chang Hung-chun introduced the concept

to Taiwan. It quickly gained currency among officials who were eager to raise

their government’s status internationally, an issue that became even more press-

ing after Taiwan lost its UN seat to China in 1971. Local experiments were scaled

up and repackaged as community development in a series of national policy

documents that would serve as the foundation for the Community Develop-

ment Campaign—the People’s Livelihood Social Policy (1965), the Community

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72 CHAPTER TWO

Development Eight-Year Plan (1969), and the Community Development Ten-

Year Plan (1972). 86 The Chinese names of these policies are listed in table 7.

Taiwan also took notice of South Korea’s New Village Movement and modeled

certain aspects of its approach after what was happening there, such as training

village activists in order to change rural culture. 87

Taiwan’s bureaucracy, compared to that in Korea and China, was more inclined

to support rural development, and groups representing urban-industrial inter-

ests were not as strong politically. This difference had to do with historically close

ties between agriculture and industry and the fact that many local officials had

started their careers in the FAs. The dismantling of urban-biased policies was

consequently easier to execute. The bigger barrier to change, from the perspec-

tive of the leadership, was rural culture itself. They believed that land reform had

created a society that was simultaneously more egalitarian and more individual-

istic. And if rural backwardness stemmed from a lack of community spirit, then

a campaign would be more effective than a normal piece of legislation (like the

ARDP) at delivering spiritual and moral change. Mass mobilization would not

only advance the material well-being of the village, but it would foster a public

ethos as well.

On a deeper level, it is clear that the KMT’s favorable view of campaigns

was driven by competition with the Chinese communists and political insecu-

rity. Chiang Kai-shek had been fearful of an underground communist move-

ment since arriving in Taiwan and viewed the countryside through the lens of

his failures on the mainland. As virtually any rural policy document from that

period shows, the regime was fixated on the question of how it lost the Chinese

peasantry. Taiwan represented a second chance. The KMT studied the CCP and

sometimes borrowed directly from the communists’ tool kit, mimicking their

organization and style of policy implementation. 88 It successfully executed land

reform and penetrated the FAs. And yet it was never fully confident it could hold

on to their loyalty. By the late 1960s, farmers had become a powerful interest

group. They did not directly challenge Chiang’s authority, but reports of rural

decline and popular discontent deeply concerned him. Having experienced

some success with campaigns in the past, Chiang’s government had reason to
believe that this approach could deliver greater change than market forces alone

could produce. The campaign furthermore promised to transform rural cul-

ture and reassert state control over the countryside at a time when elections

were expanding. It was also an important moment for Chiang Ching-kuo, who

wanted to create a popular base of support as he prepared to take over from his

father. 89

In summary, campaigns were seen as a means of development and legitima-

tion. They could overcome barriers to change, accomplish concrete goals, and

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 73

engender loyalty among the population. The framework of community develop-

ment in particular was also a way of signaling to international actors that Taiwan

was progressive and open compared to China and that its leaders cared about

helping those left behind by industrialization. As one might expect, scholars criti-

cal of the campaign lament the state’s heavy involvement as running counter to

international norms about community development. 90 However, I would suggest

that if it is viewed as a state-led campaign, and not according to the ideals of com-

munity development per se, it was actually quite successful.

Goals and Implementation

The Community Development Campaign succeeded at producing policy com-

pliance and positive outcomes because its overarching goal was rural develop-

ment, rather than extraction, and because of the political-institutional context in

which it was implemented. Taiwan’s centralized political system and technocratic

leadership facilitated bureaucratic monitoring, and although the FAs were just

one of several groups responsible for campaign implementation, their strong

presence in the villages prior to the campaign helped to normalize rural partici-

pation in the policy process.

In terms of goals, the Community Development Eight-Year Plan (1969–1976)

described the policy as a “social movement” aimed at “eliminating dirt, disorder,

and poverty, increasing production and welfare, and promoting a new moral-

ity.” Accordingly, in this document and the revised ten-year plan (1969–1978),

specific projects were divided into three categories: basic infrastructure; pro-

duction and social welfare; and spiritual and moral construction. This last cat-

egory called for community organizations and activities that would promote

healthy living and a collective consciousness, for example the formation of Boy

Scout troops and Chinese musical orchestras. “Life basics” courses on civilized

TABLE 7. Community Development Policies in Taiwan, 1955–19811

CAMPAIGNS AND SUPPORTING POLICIES CHINESE NAME YEARS

People’s Livelihood Construction Campaign 1955–1965

Compulsory labor 1947

Community Development Campaign 1965–1981

People’s Livelihood Social Policy 1965

Community Development Eight-Year Plan 1969

Community Development Ten-Year Plan 1972

1 The ten-year-plan, which was supposed to conclude in 1978, was extended through the year 1981. Single years
indicate the first year that a policy became effective.

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74 CHAPTER TWO

behavior—standing in line, wearing clean clothes, eating at a table, etc.—were

also commonly conducted during the campaign. 91 By most accounts, these proj-

ects were less successful than those focused on infrastructure and production,

but the emotional appeal of making the community better was still a powerful

call to action.

The elimination of taxes and disbursement of grants further bolstered popu-

lar enthusiasm for the campaign, though not without local costs. Initially, the

government allocated 250,000 yuan to each community. This money covered

roughly half the cost of community development, and residents were expected

to provide matching funds to make up the difference. The poorest households

had to borrow money or donate more of their labor to meet this requirement. To

reduce their burden, the government later revised the policy. It assumed a greater

share of the cost for every site (about 52 percent of the total), with even higher

levels of support for poverty areas (about 84 percent). The ten-year plan also

mandated that poorer villages be developed first so as to prevent local govern-

ments from channeling funds to the easiest cases, namely those villages near the

township with a better baseline of development. 92

To facilitate local compliance, campaign coordination committees were

formed at the provincial, county, and township levels. The committees were

composed of leading officials from nearly every institution, including the

military and the police. They were charged with developing plans, disbursing

funds (primarily through the FAs), and overseeing implementation. During

the planning stage, village assemblies were held to solicit ideas from residents.

Villages were legally defined as an extension of the township government and

considered to be separate from communities, which were conceptualized as

autonomous, service-oriented units. But in practice, the functions of these

units overlapped.

The creation of communities gave rise to two changes in the local leader-

ship structure. First, some villages were merged together so that each community

was roughly the same size, about 350 households. When mergers did occur—the

eight-year plan organized all of Taiwan’s 6,215 villages into 4,893 communities—

leaders from different villages had to negotiate the location of community proj-

ects, a process that was undoubtedly contentious and subject to the influence of

local factions. In these cases, the campaign coordination committee was expected

to play the role of mediator. Second, a younger generation of activists gained

power through the establishment of community development councils. These

were elected bodies of roughly ten people representing a mix of traditional and

new elites. The empowerment of individuals in their twenties, thirties, and for-

ties, who otherwise might have considered leaving the countryside, added to the

campaign’s momentum.

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 75

The community development councils operated at the village (or commu-

nity) level. They were responsible for mobilizing residents and managing the

day-to-day activities of the campaign. They were also in charge of community

center operations and infrastructure maintenance. The village SAU leader and

township FA representatives usually held spots on the council and took the lead

on production-related projects. The township coordination committee fre-

quently dispatched officials to consult with council members and to check on

the campaign’s progress. In addition, the provincial government arranged for

outside inspection teams to evaluate and rank local governments based on the

quality of the communities in their jurisdiction. Places that performed better

were rewarded with media attention, medals, and other benefits. Taiwan’s small

size and centralized political system contributed to policy coherence among dif-

ferent levels of government. In conjunction with education and training, as well

as fiscal and administrative regulations, all these mechanisms—the campaign

coordination committees, community development councils, and competitive

evaluations—were used to exert central control over local authorities and increase

compliance. Stated differently, these policy tools effectively brought local actors

into an implementing coalition with the central government.

On the issues of rural participation and accountability to villagers, scholarly

assessments are mixed. Several ethnographic case studies assert that the commu-

nity development councils were weak. They point out that projects were mostly

passed down from the township and that the campaign relied on compulsory

labor. 93 Still other studies reach the opposite conclusion, showing that the coun-

cils crafted and adjusted development plans based on local needs and feedback.

They also claim that people were eager to contribute to projects that directly

benefited the village, which was not necessarily true of other compulsory labor

projects. 94 This discrepancy in the literature likely stems from real variation in

local campaign experiences.

Nevertheless, there are good reasons to believe that, on the whole, the cam-

paign was implemented in a relatively flexible and participatory manner. First,

the example of the FAs demonstrates that villagers regularly voted in elections

and treated them seriously. Council elections were probably treated the same

way, especially given the influx of new resources tied to community development.

There was an expectation that council members would advocate for villagers to

higher levels of the state, which was reinforced by villagers’ own ability to com-

municate with the FAs and outside inspection teams. Second, despite govern-

ment claims to the contrary, the countryside already had a rich associational

life. Besides the FAs, there were irrigation associations, credit cooperatives, labor

exchange groups, temple associations, and a myriad of groups organized around

lineage, neighborhood, gender, age, and profession. 95 These organizations surely

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76 CHAPTER TWO

had their own views on how to improve the community and wanted to see those

reflected in the campaign. So, even if the community development councils were

weak, there were still other groups that sought out partnerships with the govern-

ment and offered their contacts and resources in exchange for influence. Third,

in contrast to the other cases in this study, Taiwanese sources are filled with ref-

erences to Western examples of community development and translations of

phrases that evoke democratic norms of participation: civic organization, com-

munity action, inclusion of the poor in decision making, sense of belonging, and

felt needs, to name just a few. 96 Since the intended audience of these materials

was local officials and campaign activists, it seems the regime’s embrace of these

norms was not just about international posturing. It was also about a real com-

mitment to grassroots engagement.

Outcomes and Legacy

Whereas Taiwanese sources suggest that the campaign was transformative, it has

received almost no attention from Western scholars. 97 This is probably because

the campaign had only a moderate effect on the agricultural economy. While, on

the one hand, production-related infrastructure was successfully upgraded and

expanded, on the other hand, efforts to develop new rural sidelines and scale

up production fell flat. In fact, between 1960 and 1990, the share of households

with farms smaller than 1 hectare (2.47 acres) increased from about 67 percent

to 75 percent, and the share of households with farms larger than 3 hectares

(7.41 acres) decreased from 3.3 to 2.5 percent. 98 The difficulty of scaling up agri-

culture in Taiwan, as in the rest of East Asia, was a product not only of land

reform but also the FAs, which served to protect and entrench the position of

small farmers in Taiwanese society. 99

The Community Development Campaign’s greatest impact was to change the

village environment. It led to dramatic improvements in public infrastructure,

sanitation, and housing. Most if not all of Taiwan’s villages were affected, and the

sheer scope of the campaign in terms of the number of projects implemented

was impressive (see table 8). Official statistics also reveal an unevenness to proj-

ect implementation, meaning that different communities experienced different

kinds of change. Apart from variation in resources, which certainly existed across

communities, another explanation for this unevenness is that the campaign did

not impose a one-size-fits-all vision of modernity on the countryside. Villag-

ers had some degree of choice over which projects to implement, and there

were fewer negative outcomes as a result. For instance, older homes were pre-

served and renovated instead of torn down and rebuilt, so there was very little

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TABLE 8. Results of the Community Development Campaign in Taiwan, 1969–1981

Total number of communities 4,025

Total number of community residents 7,328,074 (about 1.3 million households)

Total cost of community development 6,082,449,911 yuan

Government expenditures 3,687,463,819 yuan (about 61%)

Community expenditures 2,394,986,092 yuan (about 39%)

Basic infrastructure projects

1. Water towers 9,274

2. Toilets 172,307

3. Showers 37,107

4. Drainage pipes 10,395,456 meters

5. Pathways 21,055,140 square meters

6. Parks 1,520

7. Playgrounds 913

8. Athletic fields 1,016

9. Activity centers 3,531

10. Home sanitation improvement 335,307 households

11. Township roads 71,023 kilometers

12. Village roads 57,132 kilometers

Production and social welfare projects

1. Rice drying areas 2,101,259 square meters

2. Animal pens 55,831

3. Compost houses 39,478

4. Technology training classes 3,898

5. Farm improvement stations 1,577

6. Child care centers 1,725

7. Agricultural cooperatives 122

8. Home renovation for the poor 20,262 households

9. Home construction for the poor 25,481 households

10. Employment assistance 33,405 people

11. Community production funds 1,063

12. Cooperative farms 49

Spiritual and moral construction projects

1. “Life basics” courses 12,706

2. Cultural and athletic activities 20,383

3. Recognizing good people/deeds 4,343

4. Elderly associations 1,909

5. Boy scout troops 389

6. Classes for mothers 2,945

7. Sports tournaments 494

Source: Taiwan Provincial Government Social Affairs Department, cited in Liu J. 1991, 69–72.

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78 CHAPTER TWO

displacement, and the government rather than villagers shouldered the majority

of campaign expenses. 100

After the more concrete, infrastructure-related goals were achieved, the cam-

paign began to lose steam and eventually petered out. By the late 1970s, the state

had retreated from playing an activist role in community affairs, and rural policy

had returned to normal. The agricultural bureaucracy resumed its regular work,

as did the leaders of other departments and institutions who had been mobilized

during the campaign. Although the state intended for the community develop-

ment councils to exist indefinitely, its withdrawal had the effect of demobilizing

them. These organizations, while composed of nonstate actors, had been created

and managed by the state. Their mission was to promote development, not to

advance a broader political agenda, and they rarely if ever acted independently.

Taiwan had a strong state, and the leadership knew that so long as rural con-

ditions were improving, there was little chance the community development

councils or any other organizations would present a challenge. The campaign

had served the purpose of stabilizing the countryside, and once Chiang Ching-

kuo had consolidated power, the state’s strategy shifted from mobilization to less

interventionist policy measures like subsidies.

Following Taiwan’s transition to democracy, President Lee Teng-hui

(1988–2000) resurrected the idea of community development. The new program

was different from the old in that it targeted urban areas and did not take the

form of a campaign. Still, one point of continuity was that the state supported

the creation of community development associations as an alternative to what

Lee saw as an overly bureaucratic approach to neighborhood governance. State-

sponsored activism or what Benjamin Read has called administrative grassroots

engagement—a process whereby the state creates, sponsors, and manages organi-

zations at the most local level—thus continued under democracy and represents

a long-standing feature of governance in Taiwan. 101

In conclusion, the use of campaigns to spur development stands out as being

quite different from the conventional wisdom. The developmental state model

as described by Wade and others is correct in its portrayal of Taiwan’s institu-

tions, but it does not fully account for what happened in the countryside. The

state did not “pick winners” and let the market do the rest. Instead, it launched

a modernization campaign to speed up the pace of rural transformation, a deci-

sion that had more in common with Maoism or Leninism than Japanese indus-

trial policy. At the same time, this portrait of the campaign as a top-down policy

with genuine societal participation makes the Taiwanese case diverge from a

purely Leninist system.

The Community Development Campaign succeeded at improving rural con-

ditions because it occurred in a particular context that prevented the campaign

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RURAL DEVELOPMENT IN TAIWAN, 1950s–1970s 79

from working against farmers’ interests. It was meticulously planned and imple-

mented by a technocratic bureaucracy operating in a highly centralized politi-

cal system. Frequent inspections and crosscutting coordination agencies stopped

government support from being diverted to other purposes. More importantly,

Taiwan’s strong rural organizations provided a critical check against campaign

excesses. The community development councils and the FAs, with their exten-

sive organizational reach and politically influential leadership, were crucial for

shaping local plans and generating mass participation. Without them, the use of

compulsory labor alone would have most likely failed to sustain the campaign.

While this case study has highlighted the interplay between institutions and

campaigns, perhaps the bigger lesson is that the Farmers’ Associations, in their

own right, were incredibly effective agents of development. The FAs exhibited an

unusual combination of linkage with the state and autonomy from it, with small

farmers occupying most of the leadership positions. Because of these qualities,

the FAs were able to achieve extensive, long-term gains in agriculture, and they

ushered in pro-rural reforms that fundamentally changed the state’s relationship

with the countryside and led to gains in other areas besides production. The

FAs today remain encompassing organizations (current membership is about

1.8 million), and they are still the key actors for implementing rural policy. Their

power has been reduced, however, by the continued decline of agriculture and,

arguably, by the democratization process itself, which led to the empowerment

of new social classes and new political parties (because of their close histori-

cal ties, the FAs remain largely supportive of the KMT). 102 A few studies have

also shown increased levels of corruption as the agricultural sector became more

heavily subsidized by the state. 103 Despite these changes, it is no exaggeration to

say that Taiwan’s Farmers’ Associations were the principal contributor to rural

development from the 1950s onward. This research thus confirms the view that

Taiwan represents a “farmers’ association approach” to development. 104 Through

the comparative analysis in the chapters that follow, it becomes even more obvi-

ous just how much these institutions mattered.

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