San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Economic History and
Economy of Taiwan

The Economy of Taiwan


Taiwan is an elliptical island roughly 250 miles from north to south and 90 miles from east to west. The eastern coast is dominated by the Central Range (Chung-yang Shan-mo) of mountains. The western part of the island is a coastal plain where most of the agriculture and other economic activity takes place. The principal city of Taiwan is Taipei (Taibei) ["Tai-north"] located in the north with port facilities at Chi-lung (Keeling). In the south there are the major cities of Tainan ["Tai-south"] and Kao-hsiung. The climate is sub-tropical to tropical.


Taiwan was settled in prehistoric times by Malay-Polynesian people who still survive today as Taiwan Aborigines. Taiwan was known to Chinese people on the mainland from ancient times (c. 300 AD) but significant migration (from Fujien and Guangdong) did not occur until the early 1600's. This was after there had been attempts by the Portuguese to establish a colony (1590). The Spanish and Dutch were also trying to create colonies in the island at the same time that Chinese immigration into the island was taking place. The Dutch were expelled by Cheng Ch'eng-kung in 1661. During the same period the Ming Empire of China was being overthrown by Manchu invaders. Taiwan, under Cheng Ch'eng-kung remained loyal to the Ming dynasty. But in 1683, twenty years after the death of Cheng Ch'eng-kung, Taiwan fell under the control of the Manchu Ch'ing Empire.

In 1895 Taiwan was ceded to the Japanese Empire. During a few months of local opposition to Japanese occupation there existed a Republic of Taiwan. After suppressing the opposition of the Chinese population and defeating the resistance of the Taiwan Aborigines, Japan began developing Taiwan as a supplier of agricultural products, rice and sugar cane, for the Japanese Empire.

At the end of World War II Taiwan came under the control of the government of China, which at that time was the Nationalist Party government of Chiang Kai-shek. There was resentment at this authoritarian control and the political protest resulted in severe repression. On February 28, 1947 the government attempted to destroy the political opposition in Taiwan by killing about ten thousand of Taiwan's opposition leaders and imprisoning many more. This came to be known as the 2-28 Incident.

After the defeat of Nationalist forces by the Communists in 1949 the Nationalist government retreated to Taiwan with 600,000 soldiers and 2.5 million civilians. This minority totally dominated the government of Taiwan where the native population was about six million.

The initial economic strategy of the Guomindang (Nationalist Party) was import-substitution. This means that the government tried to have Taiwan produce all the products it consumed, particularly those it had to import. Although this strategy seems reasonable, in all the numerous cases where it has been tried it has failed. The problem is that the domestic producers are not able to produce the imported products as cheaply as they can be obtained from foreign sources. If domestic producers could produce competitively there would be no need for a government policy toward imports.

There are two approaches to implementing an import-substitution policy. In one the government imposes restrictions and tariffs on imports to enable domestic producers to survive against foreign competition. But this raises the price to domestic consumers, including domestic firms that may be using some imported products to produce other products. This would make domestic producers less competitive in international competition. The other strategy avoids increasing the price of the products which were imported by subsidizing the losses of the domestic producers. The problem with this strategy is that the funds for the subsidies have to come from somewhere. If the government finances the subsidies by taxing viable firms it may depress the healthy parts of the economy to promote unhealthy parts. In the long run this is clearly not a good policy.

In the case of Taiwan, the subsidies for the import-substitution industries came from U.S. economic aid. Around 1960 the U.S. government announced that its economic aid would be considerably reduced. The government in Taiwan then had to face the reality that import-substitution would not be feasible and that Taiwan would have to find industries that could export and earn foreign currency to pay for Taiwan's imports. This is the export-oriented strategy.

Taiwan's economy at that time was largely agriculturally oriented so some the first economic developments were related to Taiwan's agriculture. Taiwan grew sugar cane but the harvested cane was exported for processing into sugar elsewhere, such as in Japan. Taiwan then built sugar mills and began to export sugar rather than sugar cane. Taiwanese entrepreneurs learned there was a good export market for mushrooms and created a mushroom-growing industry.

Later Taiwan industrialization shifted to light manufacturing. During this phase the labor force for the new factories came from the surplus workers from agriculture, particularly young women. This meant that Taiwan industry could expand production with eager, hard-working employees and there was not much upward pressure on the wage rate. Still later Taiwan industrialization included heavy manufacturing, such as machines, and more recently electronics, such as computers. Generally Taiwan's economic growth involved smaller size firms than was the case in South Korea. In part, this stemmed from the business firms being in the hands of the native Taiwanese whereas the government was in the control of the Mainlanders. The larger size firms that did emerge in Taiwan are known as the Guanxi qiye.

Business Groups
Guanxi qiye
(gwon-shi chi-yeh)

Although generally Taiwan's businesses were smaller than those of South Korea there are some business associations resembling the zaibatsu of Japan and the chaebol of South Korea. They are less familiar to the American public than the South Korean and the Japanese firms. Here are the top ten guanxi qiye as of 1991.

Guanxi qiyeSales
Formosa Plastics$6.7$9.545,548Taiwanese
China Trust$3.2$12.214,008Taiwanese
Linden International$5.6$12.133,015Taiwanese
Shin Kong$3.5$7.330,950Taiwanese
Far Eastern$2.5$5.915,884Mainlander
Yue Loong Motor$2.6$1.910,693Mainlander
Yuen Foong Yu$1.5$6.25,781 
Overseas Trust$0.8$11.41,613Filipino
Source: Karl J. Fields, Enterprise and the State in Korea and Taiwan, Cornell University Press, 1995, p. 65.

Cathay Trust (Guotai)

The Cathay Trust was a business group that rose to prominence and then collapsed in scandal. The founder was Cai Wanchun, a poor Taiwanese peasant from southern Taiwan. As a youth of sixteen, during the Japanese occupation, he moved to Taipei and sold cosmetics for a Japanese company. In 1938 he bought a department store and later a factory for producing soy sauce. After the end of World War II he greatly expanded his business as the Japanese left Taiwan. By the 1950s Cai Wanchun and his bothers were operating a quanxi qiye. In 1977 Cai took over the Tenth Credit Cooperative Association of Taipei, the largest credit association in Taiwan, giving his group financial leverage.

By the end of the 1970s the Cathay business group was the largest of the quanxi qiye in terms of assets. It had 20,000 employees. But at the peak of success Cai Wanchun suffered a serious stroke. He divided the Cathay Group firms into five independent units and each of his two brothers were given control over one unit. Two of his four sons each were given control over a unit and the other two sons shared control of one unit. Initially control over the Tenth Cooperative Credit Association of Taipei went to the brother, Cai Wanlin, but after some difficulties with the Ministry of Finance he turned over control to Cai Zhenzhou, the oldest son of Cai Wanchun. The division of the Cathay Group is shown below:

Cai Family
to Cai Wanchun
New GroupMost important
Cai WanlinbrotherLinden International Cathay Life Insurance
Cathay Construction
Cai WancaibrotherFu BangForemost Land Developers
Cathay Insurance
Cai ZhenzhousonCathay Plastics Cathay Plastics
Tenth Credit Cooperative
Cai ZhennansonCathay Trust Cathay Investment & Trust
Lai Lai Sheraton
Cai Zhenxiang
Cai Zhenwei
sons Sunrise Sunrise Department Store
Lai Lai Shopping Mall

The son, Cai Zhenzhou, illegally turned the Tenth Credit Cooperative into a source of financing for his projects. In particular, Cathay Plastics was losing money because of the increased price of petroleum and petroleum products and needed substantial infusions of funds to keep from going bankrupt. This desperate attempt to save Cathay Plastics by milking the Tenth Credit Cooperative led to the scandal and collapse. Since Tenth Credit Cooperative could only loan to individuals Cai Zhenzhou induced some 700 Cathay Plastics employees to take out loans for his use. In some cases Cai Zhenzhou took out more loans in the name of these employees than they were aware of. The total of these illegal loans grew to $190 million in 1983. Cai Zhenzhou also raised funds by turning Cathay Plastics into something like a financial depository. Cathay Plastics offered high interest rates (as high as 30%) to depositors. When Cathay Plastics collapsed these depositors lost approximately $100 million. Cai Zhenzhou also raised funds by means of postdated checks. The amount of these postdated checks could have been as much as $125 million.

In 1985, after an audit revealed the extent of the irregularities and illegalities the government took control of Tenth Credit Cooperative Association. Some of the business groups under its control were forced to reorganize. An Economic Revitalization Committee was created.

More on Guanxi Qiye.

For the economic histories of other countries click here.

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