The economic development of Taiwan: an historical sketch

Prior to 1945, Taiwan had been colonised by Japan for fifty years as a strategic base to enlarge its influence in South-East Asia. This colonisation resulted in an unintended consequence: industrial production exceeded agricultural production in 1939 for the first time, and left an effective administrative apparatus for state mobilisation of economic resources. After Japanese colonisation ended, the ruling Kuomintang (KMT) initiated plans to develop light industry (shoes, clothes, garments) in 1958 (Amsden, Reference Amsden, Evans, Rueschemeyer and Skocpol1985). Like its counterparts among the Asian tigers, Taiwan combined export-oriented and import-substitution strategies to promote economic development under the influence of national security concerns in the context of the Cold War. Taiwan benefited economically from the liberalisation of the international economy during the 1970s, with reforms pushed by the US in East Asia to prevent the spread of the Communism in the region. This change in the international economic environment was accompanied by the ‘recycling’ of Japan's low-value, labour-intensive industries to other low-wage and disciplined labour countries (Selden, Reference Selden, Katzenstein and Shiraishi1997: 369), and Taiwan seized the opportunity to expand its EOI into areas vacated by Japan.

As many studies have indicated, industrialisation in Taiwan (and also South Korea) was marked by both massive exports of manufactures and by growing imports of intermediate goods and machinery. This model of economic development, shared by South Korea, was quite different to that of Japan. As Inoue (Reference Inoue2001) points out, Japan had to develop an import-substitution strategy before the war because industrial production had been virtually monopolised by the advanced economies. In contrast, the NICs were facilitated with a favourable opportunity structure to initiate an export-oriented industrialisation strategy because of a new labour division between South and North: the NICs became integrated into the world market and became the ‘workshop’ of the advanced economies during this era (Inoue, Reference Inoue2001). This stage could be thought of as the ‘golden age’ of Taiwan's development after the war, as rapid economic growth accompanied by full employment brought a huge increase in disposable income per household. Some scholars even argued at this stage that the development of Taiwan was a model of growth with equity (Fei et al., Reference Fei, Ranis and Kuo1979).

Although growth continued, Taiwan's traditional industries began to reach a turning point in the late 1970s as they faced intense pressure to move into high-value-added industries when labour-intensive industries such as garments, toys and shoes began to move to low-wage locations such as China and South-East Asia and the pollution record of traditional industries (cement, petrochemicals) came under attack. As a result, large traditional industrial groups such as steel, petrochemicals, cement and paper manufactures were forced to look for a way to diversify their product (Cheng, Reference Cheng, Gereffi and Wyman1990; Haggard, Reference Haggard1990). Simultaneously, trade dependence on the US resulted in some loss of control over future strategy (Haggard, Reference Haggard1990). For example, the US pushed Taiwan to accelerate its pace of economic liberalisation from 1984 and so the average nominal tariff rate was greatly reduced from more than 30 per cent in 1984 to 11.6 per cent in 1988. The Plaza Accord in 1985 liberalised currency fluctuation with a great impact on the regional economy in East Asia (Haggard, Reference Haggard1990; Haggard and Kaufman, Reference Haggard and Kaufman2008). Together, rapid technological change, rising labour costs, the pressure of liberalisation and currency fluctuation created intense pressure that re-shaped the industrial structure of Taiwan (Huang, Reference Huang, Hwang, Wang and Huang2010; Tsai, Reference Tsai, Hwang, Wang and Huang2010). The state issued a Six-Year Plan (1976 to 1981) that emphasised value-added components of products (Haggard, Reference Haggard1990: 142) triggering a change in direction. High-technology-intensive products as a proportion of total exports increased from 18.3 per cent in 1982 to 42.1 per cent in 1999, while labour-intensive products decreased from 47.2 per cent to 35.4 per cent (DGBAS, 2000). In terms of growth rates, the high-tech industry increased by 131 per cent from 1986 to 1993, with Taiwan an acknowledged world leader in the production of semiconductors, PC computers, digital cameras and scanners by the late 1990s (Wang, Reference Wang2001).

Evaluated by some indicators, the economic performance of Taiwan was quite impressive over the latter part of the twentieth century. Economic growth rates averaged 9.14 per cent in the 1960s, 10.24 per cent in the 1970s, 8.14 per cent in the 1980s and 6.14 per cent in the 1990s (Wang, Reference Wang2001: 7). By 2000, the level of exports was about 3.06 times higher than in 1986, and imports 4.76 times higher than 1986. Taiwan's share of world trade ranked in the top 15 in the world and trade openness was very high (Ministry of Finance, 2001), while Taiwan's gold and foreign exchange reserves were second only to those held by Japan.Footnote ¹ In short, Taiwan had profited from integration into the world market in the latter part of the twentieth century.

Welfare in the authoritarian era

How, then, did this fit with the development of welfare in Taiwan? While, by the mid-1990s social programmes in Taiwan had broadened to cover most of the population, particularly after the implementation of National Health Insurance (NHI) in 1995, the Taiwanese welfare system had evolved in a rather fragmented manner, with sporadic coverage for much of the preceding period. Indeed, fragmented structure was a key characteristic. Before the implementation of NHI, for example, the public health insurance system was differentiated into fourteen sub-systems, covering just 52 per cent of the population. The old age security system was (and remains) highly segmented. In fact, Taiwan's welfare system under the authoritarian regime was at its core an exclusive system: the most socially vulnerable groups were not covered by the statutory welfare system. These systems were also complex and resulted in many problems, most notably serious inequalities between those who were included and those who were excluded from the social security system (Lue, Reference Lue1999). This clearly reflected the choices of policy makers, who instead of offering a programme based on universal citizenship, targeted support towards the most economically productive segments of the population. In short, social policy was subordinated to the imperative of economic development, but still stood as complementary to economic policy (Holliday, Reference Holliday2000; Haggard and Kaufman, Reference Haggard and Kaufman2008). Deyo (Reference Deyo, Applebaum and Henderson1992) argues that this model operated effectively and contributed to the implementation of EOI for the East Asian NICs countries more generally.

This model of welfare was a product of the context of Taiwan in the latter half of the twentieth century. Defeated by the Communist Party in mainland China in 1949, the KMT under the leadership of Chiang Kai-Shek fled to Taiwan and established a military bureaucratic regime. As early as 1950, the first social insurance scheme, the Labour Insurance, was implemented in Taiwan. Considering the difficult political situation of the KMT after the failure of civil war with the communists, it is not surprising that social programmes were established quickly, acting in part as a political instrument to gather the loyalty of the people. From the 1960s, however, rapid economic growth changed the outlook of the KMT from a military bureaucracy into a development-oriented state apparatus (Amsden, Reference Amsden, Evans, Rueschemeyer and Skocpol1985). To accomplish its EOI strategy, the state dampened labour costs and the welfare system was seen as disadvantageous to competitiveness in the world market. Consequently, little attention was paid to the development of the welfare system with the exception of provision that might boost the export strategy (for example, education). Gough (Reference Gough2000: 16) characterises this residual welfare system as ‘productivist welfare capitalism’, whereby ‘social expenditures were small but relatively well targeted on basic education and health as part of a strategy of nation-building, legitimation and productive investment’.

While the small states in Europe developed consensual democracy and, particularly, democratic corporatism to respond the challenges of their small state economies (Katzenstein, Reference Katzenstein1985), most East Asian countries, facing the same problem of consensus-building and unitary action, instead took the route of building an authoritarian regime (Inoue, Reference Inoue2001: 7–9). Taiwan had an authoritarian one-party system until the mid-1980s, dominated by the KMT, and it enjoyed relative autonomy in pursuing the goal of rapid economic development. The state also controlled trade unions through state–corporatistic institutional arrangements, with protest and political organisation prohibited under martial law in the name of preventing the spread of communism. The level of wages was regulated publicly to serve the goal of low labour costs. These measures, taken together, were regarded as providing favourable conditions to attract foreign investment: the supply of cheap and disciplined workers with appropriate skills. Such a model was maintained by the authoritarian regime, not just by force as some welfare programmes were designed to win the political support of the people and to keep the costs of labour down while protecting the subsistence of workers. In the long run, legitimation of this strategy was based on the performance of the economy, rising living standards and thus, to a degree, the reduction of poverty. Taiwan then entered a period of dual transformation: economic restructuring due to intensified globalisation pressures and democratisation triggered by the emergence of organised political oppositions (Tsai, Reference Tsai2001; Wong, Reference Wong2004: 74; Haggard and Kaufman, Reference Haggard and Kaufman2008; Fields, Reference Fields, Walter and Zhang2012). Both forces created a new context for Taiwan's welfare system in the 1990s.

Welfare and the dynamics of democratisation

The productivist welfare system signifies that social policy is subordinated to economic policy, and the degree of decommodification is comparatively low by international standards. Social policy is treated as an instrument for economic growth and capital accumulation because it improves the quality of human capital. Considering the key function of welfare in promoting political stability for the authoritarian regime, the target groups of state provision are normally narrowed to core workers in strategically key industries, public services and the military. This description fitted the Taiwanese case well, but following the process of democratisation in the late 1980s, the rules of the game changed. Whereas the political imperative under the authoritarian regime was for economic growth, the capacity for responding to the demands of the electorate became the focus under partisan competition. This offered an opportunity for welfare expansion. This process of welfare expansion might be expected to show the following characteristics. Firstly, welfare expenditures might be expected to increase in order to fulfil the welfare requirements of the electorate, normally middle-to-low income groups that were previously excluded from state welfare systems (Haggard and Kaufman, Reference Haggard and Kaufman2008). Secondly, an expansion of coverage to encompass the less advantaged groups, such as atypical workers and unskilled workers, might be expected. A question remains, however, as to what extent and in which way these less advantaged groups are to be included into the public welfare system.

The 1990s indeed saw the Taiwanese government institutionalise many welfare programmes and expand their coverage (Table 1). A rapid rise in welfare expenditure in 1995 resulted from the implementation of the NHI, the most important welfare policy for Taiwan in the 1990s. Table 1 shows that the social insurance system has been the preferred mechanism for provision, reinforcing the productive links of welfare by tying welfare rights to employment status. Where the welfare system is directed towards the disadvantaged, benefits have been mostly delivered in kind, and because of strict eligibility rules, those who are eligible to receive social assistance benefits account for only 1.35 per cent of the population in 2011 (Ministry of The Interior, 2012). The underdeveloped social assistance system has therefore been severely criticised by the public for its strictness and failure to offer a basic economic safety net for the poor (Sun, Reference Sun2000). Indeed, despite the expansion of key welfare programmes in terms of personal income distribution, income inequality in Taiwan has risen in recent decades. The earnings ratio of the lowest 20 per cent to the highest 20 per cent of families (the D5/D1) has widened from 4.21 in 1981 to 6.12 in 2011 (DGBAS, 2012). To what extent this trend is related to globalisation demands further investigation, but that the existing social assistance system in Taiwan does not offer a basic protective function during rapid economic reconstruction seems less open to dispute.

Table 1 Central Government's Social Welfare Expenditure's Structure in Taiwan

Unit: Million NT＄, (%).

Source: Compiled from Directorate General of Budget, Accounting and Statistics, Budget of Central Government, various years, Taipei: Executive Yuan.

Wong (Reference Wong2004) has suggested that the transition from authoritarian to democratic regimes in Taiwan and South Korea in the 1980s increased the capacity of civil society to mobilise support for the expansion of welfare policies, and Kwon (Reference Kwon2003) similarly identified how civil society formed advocacy coalitions to influence the process of welfare policy making. However, these perspectives struggle to explain why the expansion of the Taiwanese welfare system has been accompanied by continuing gaps in provision, and in particular why health insurance has become universal while pension provision has remained fragmented and social assistance rudimentary. The sporadic nature of class mobilisation may be a factor here, and how strong the role of workers and trade unions has been in Taiwan's welfare system after democratisation is open to debate. While compared to other East Asian countries, such as South Korea, Singapore and Japan, the membership of trade unions in Taiwan is relatively high (Council of Labor Affairs, 2012), although the fragmented structure of the unions, divided into occupational and industrial labour unions, weakens their power as does the model of industrial relations in Taiwan that is characterised by industrial peace (Wang, Reference Wang2001). While there have been notable gains in labour protection laws, such as a minimum wage, both the government and employers have used immigration policy to maintain downward pressure on wages, particularly in low wage sectors. In addition, Taiwan has experienced rising unemployment – while previously the unemployment rate was successfully kept below 2 per cent, since 2000 it has reached 4 per cent or even 5 per cent (Chen and Lue, Reference Chen and Lue2012), not least because of rising economic competition from China which has weakened the position of the unions.

Indeed, while the expansion of social programmes and expenditures has moved Taiwan away from the narrow productive welfare model, the continuing rise of the suffering index (unemployment and inflation rate) has revealed weaknesses in Taiwan's social security system, and the residual social security system has proved ineffective in absorbing the risks arising from structural changes in the economy. How far these weaknesses will be addressed in the future remains to be seen.

Concluding remarks

The social policy of East Asian countries has been traditionally oriented towards the formation of human capital and the maintenance of a qualified labour force in a productive social policy oriented towards enhancing the competitiveness of the national economy in the world market. This suggests an interesting tendency, whereby these countries seemingly take a different path for social policy compared to small states in Europe when they encounter the challenge of an increasingly globalised and highly unstable world market. Since the 1980s, however, social policy in Taiwan has been profoundly transformed as a consequence of economic globalisation on the one hand and domestic democratisation on the other. Since the 1990s, as expenditures have grown, social policy making in Taiwan has shifted emphasis from the productive model. How far this growth will continue, however, is likely to be contingent on three factors that will be decisive in determining the making of Taiwan's social policy in the future: limited governmental revenues, fiscal strain due to the debt problem and the steering capacity of the state in the context of minority governments.

Given the global recession, the government has limited financial resources with which to push the institutionalisation of social policy further forward. This is inter-related with a rising public debt issue. During the 1970s, the average Taiwanese government deficit was only 3.8 per cent of the governmental budget, but this reached an average of 18.9 per cent during the period 1991 to 1999. The government issued bonds or borrowings worth over $22 billion to finance the Six-Years State Construction Plan under the Prime Minister Po-Tsan Ho between 1991 and 1997, which was almost five times the government bond issuance in 1990 (Lai, 1999: 145; 147–8). In other words, one-quarter of government spending was financed by borrowing. Due to the high level of borrowing, debt payments constituted 6.2 per cent of central governmental expenditure in 1990 and peaked at 38.9 per cent in 2012. This has narrowed the scope for the government to issue more bonds to initiate more infrastructure programmes necessary for economic development and furthermore to satisfy the welfare needs in the process of globalisation and economic adjustment. Although borrowing has declined since 1998 due to a series of austerity measures, the financial structure remains a serious issue. Considering the condition of the public finances it seems unlikely that the government will expand welfare expenditure in the foreseeable future.

Lastly, social policy development is likely to be influenced by the changed governing capacity of the state apparatus after the democratisation, even under the absence of consensus building, which is considered as a significant institutional mechanism in promoting welfare state development in the European small states by Katzenstein (Reference Katzenstein1985). After democratisation, the political atmosphere between the DPP and the Pan-KMT has been confrontation-oriented, particularly since 2000. Compared to its European counterparts, the intermediated institutional mechanism between economic globalisation and social policy development is characterised by political competition between two dominant parties rather than consensus building. Political competition pushes social demands to the centre of the political agenda, forcing the two dominant parties to respond. As Katzenstein argued (Reference Katzenstein1985), economic globalisation and welfare state development are not automatically interrelated, but are mediated by politics, although in Taiwan the intermediated institutional mechanism is different from European small states. And this difference may be a critical factor in explaining different welfare arrangements between East Asian and European small states.