Taiwans Political Economy: Meeting challenges, Pursuing Progress 9781626375024

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Taiwan’s Political Economy

TAIWAN’S POLITICAL ECONOMY Meeting Challenges, Pursuing Progress Cal Clark Alexander C. Tan

b o u l d e r l o n d o n

Published in the United States of America in 2012 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 www.rienner.com and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU © 2012 by Lynne Rienner Publishers, Inc. All rights reserved

Library of Congress Cataloging-in-Publication Data Clark, Cal, 1945– Taiwan’s political economy : meeting challenges, pursuing progress / Cal Clark, Alexander C. Tan. p. cm. Includes bibliographical references and index. ISBN 978-1-58826-806-8 (hardcover : alk. paper) 1. Taiwan—Economic policy—21st century. 2. Taiwan— Economic conditions—21st century. 3. Taiwan—Politics and government. I. Tan, Alexander C. II. Title. HC430.5.C537 2012 330.95124'9—dc23 2011023761 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1992. 5 4 3 2 1

We lovingly dedicate this book to our wives, Janet Clark and Jessie Chu, and to our children, Evelyn Benavides, Joshua Chu-Tan, Julian Chu-Tan, Ellen Clark, and Emily Federico

Contents

List of Tables and Figures

ix

1 The Taiwan Paradox

1

2 The Economic Miracle

9

3 The Democratic Transition

41

4 The Limitations of Export-led Growth

73

5 Some Perils of Democratization

109

6 The Polarization of Politics

133

7 Confronting the Costs of Success

157

References Index About the Book

163 187 203

vii

Tables and Figures

Tables

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 4.1 4.2 4.3 4.4

Real Annual Economic Growth, 1952–1962 Indicators of Economic Performance, 1952 and 1962 Real Annual Economic Growth, 1962–1972 Indicators of Economic Performance, 1962 and 1973 Real Annual Economic Growth, 1974–1987 Indicators of Economic Performance, 1973 and 1987 Indicators of the Improved Standard of Living Real Annual Economic Growth, 1988–2000 Indicators of Economic Performance, 1987 and 2000 The State’s Role in Taiwan’s Economic Transformations Pacts in Taiwan’s Democratic Transition Party Roles Probable Impact of Party System on Party Functions History of the Party System in Taiwan Electoral Support of Major Parties Taiwan’s Party System, Late 1990s Major Issues During Taiwan’s Democratic Transition Attitudes in the 1990s Toward the Ultimate Goal for Cross-strait Relations Contrasting Implications Drawn from Product Cycle Theory Real Annual Economic Growth Indicators of Economic Performance Indicators of Industrial Concentration ix

12 13 15 15 20 21 25 26 27 35 48 53 54 56 57 60 61 64 79 82 83 85

x

4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 5.1 6.1 6.2 6.3 6.4 6.5 6.6 6.7

Tables and Figures

Taiwan’s Exports to China Imbalances in Cross-strait Trade Taiwan Investment in China Approved by the Ministry of Economic Affairs Taiwanese Approved Investment in China by Industry, 1991–2008 Social Communications Across the Taiwan Strait Effects of Major Events on Cross-strait Communications Taiwanese Views About Restrictions on Cross-strait Economic Changes Taiwanese Views About the Economic Cooperation Framework Agreement, July 2010 Taiwanese Perceptions of Chinese Hostility During the Ma Ying-jeou Administration Major Finance Laws Passed at the Turn of the Century Ethnic Identification of Taiwan’s Citizens Ethnic Identification of Mainlanders Preference for Taiwan’s International Status Taiwanese Views About the Pace of Cross-strait Interactions Electoral Support of Major Parties Voter Support for Pan-Blue Versus Pan-Green Parties in Legislative Yuan Elections Political Efficacy Levels Among Taiwanese Voters

97 98 100 101 102 104 105 106 107 128 145 146 147 148 148 152 154

Figures

2.1 3.1 3.2 3.3 4.1 4.2 4.3 4.4

Structural Transformations in Taiwan’s Economy Major Events in Taiwan’s Democratic Transition How Democratization Moderated the National Identity and Cross-strait Relations Issues The Dynamics of How Democratization Produced Money Politics The Virtuous Cycle of Productivity Growth Changes in the Leading Economic Activities and the S-Curve of Productivity and GDP Growth Growing Economic Integration Between Taiwan and Southern Coastal China in the Early and Mid-1990s The Battle over Sovereignty Between China and Taiwan

39 46 66 68 77 78 93 95

Tables and Figures

5.1 5.2 5.3 6.1 7.1 7.2

How Two Political Institutional Legacies Proved Dysfunctional During Taiwan’s Democratization Government Structure of the Republic of China Rounds of Constitutional Reform in Democratic Taiwan Model of How Authoritarianism and Democratization Both Contributed to Political Polarization on National Identity Costs of Success for the State’s Economic Role How the Institutional Legacies of Taiwan’s Development Created Costs of Success

xi

110 114 118 141 159 160

1 The Taiwan Paradox

The evolution of the political economy of the Republic of China on

Taiwan (ROC) appears rather paradoxical. From the 1960s through the 1980s, the country went through a series of economic transformations that have been called an “economic miracle.” This was followed by a successful democratic transition from the late 1980s to the mid-1990s that might be considered a “political miracle” in view of the country’s long era of authoritarian rule. In the early 1990s, therefore, Taiwan could be considered a success story and a model for developing nations. Yet rather than living happily ever after its economic and political transformation, the ROC has been confronted by a series of challenges over the past two decades. Economically, Taiwan advanced quite rapidly from domestic light industry in the 1950s to an export boom based on these manufactured goods in the 1960s and early 1970s to substantial industrial upgrading into the heavy and high-tech industries from the late 1970s through the early 1990s. Moreover, the fruits of economic development were widely shared as poverty and income inequality were reduced substantially, creating a record of “growth with equity” (Chan and Clark, 1992; Galenson, 1979; Gold, 1986; Wade, 1990). In the political realm, while development had clearly been retarded by the authoritarian Kuomintang (KMT) regime for much of the postwar era, Taiwan went through a remarkably smooth and consensual democratic transition between the mid-1980s and mid-1990s (Chao and Myers, 1998; T. J. Cheng and Haggard, 1992; Y. H. Chu, 1992; Copper, 1997; Fell, 2005; Rigger, 1999b; Tien, 1989, 1996a). Yet despite these remarkable successes, Taiwan was soon to enter troubled waters marked by growing conflict with and threat from the People’s Republic of China (PRC), fears about the hollowing out of its 1

2

Taiwan’s Political Economy

previously vaunted economy, and vicious polarization and gridlock in its domestic politics (Clark, 2006). As is normal in the industrialization process (Kuznets, 1976; Rostow, 1960; Schumpeter, 1950), many of the country’s traditional industries have been forced to move offshore, especially to China, in search of low-cost labor (S. A. Y. Lin, 2002; Y. S. Wu, 1995). Furthermore, the economy is increasingly being squeezed between developing nations that are taking over Taiwan’s old industries and the most developed economies in the world that provide stiff competition in emerging sectors (J. Wong, 2010). Moreover, the growing economic integration with China creates the threat of dependence on a political rival that is trying to quash the very existence of Taiwan (Kastner, 2009). Politically, the nation’s new democratic polity has been marked by hyperpartisanship and never-ending vicious political and personal battles that have brought policy gridlock, the politicization of economic policymaking, and scandal after scandal (Clark, 2006; Tan, 2008). We argue here that many of the challenges facing Taiwan in the early twenty-first century derive from unanticipated and unintended costs of its previous successes. In particular, what worked to promote successful economic and political development at one point in time later became counterproductive in the changed circumstances created by Taiwan’s rapid developmental trajectory. In the economic realm, for instance, small and medium enterprises (SMEs) were a dynamic driving force in Taiwan’s industrial upgrading from the 1950s through the 1980s (Lam and Lee, 1992; Myers, 1984; V. W. C. Wang, 1995; R. I. Wu and Huang, 2003). But by the 1990s, the characteristics that had made SMEs so successful in the past were undercutting their ability to contribute to the ROC’s future growth (J. Wong, 2010; R. I. Wu and Huang, 2003). Politically, democratization ended authoritarian abuses (Rigger, 1999b) and forced the major political parties to be much more responsive to popular desires, which led, for example, to the creation of what is now considered one of the best health care systems in the world (J. Wong, 2004). In contrast, democratization has also made effective decisionmaking more difficult by politicizing economic and financial policy (Tan, 2008) and polarizing the polity on ethnic identity (Clark, 2006; W. C. Lee, 2005). Yet the ongoing challenges that Taiwan faces should not obscure the nation’s major accomplishments. Its hard-won democracy can now be considered consolidated and legitimate; certainly, no mean accomplishment. For example, election results and power transitions are widely accepted, and the political repression and abuses of the authoritarian era are now unthinkable. In the economic realm, Taiwan has become a fairly

The Taiwan Paradox

3

prosperous society, decent levels of growth have been maintained, and China has not been able to gain much leverage from the growing economic integration across the Taiwan Strait. Ironically, therefore, Taiwan is now being confronted by the costs of success of its previous development pattern. That is, the very institutions and strategies that worked in the past have become counterproductive in the present. This calls to mind Mancur Olson’s (1982) theory of The Rise and Decline of Nations that argued political stability, which is generally seen as a prerequisite for economic development, can become dysfunctional over time because it is associated with the rise of powerful interest groups that use their political clout to distort the economy in the pursuit of their own vested interests. For Taiwan, such a theoretical perspective has decidedly mixed implications. On the one hand, it suggests that the ROC’s current confrontation with its “costs of success” might well have been inevitable. On the other, the fact that the situation is far from entirely bleak should remind us of the nation’s half-century of flexibility and success in the face of developmental challenges.

Plan of the Book

We begin this book about the evolving political economy of Taiwan with two chapters on economic and political development in the Republic of China. In these chapters, we provide an overview of the country’s political economy and show how its developmental history and past achievements have created the current costs of success with which it now must deal. In the next three chapters, we discuss three different types of challenges that are now confronting Taiwan: first, the economic situation; second, the problems created by the nation’s political institutions; and, third, how what appear to be perverse political strategies by the two major political parties have produced vicious polarization and policy gridlock, although there are some recent signs that the political climate may be moderating. Finally, we seek to draw a balance sheet for the contemporary political economy and conclude that, despite the costs of past successes, Taiwan continues to progress through an eclecticism beyond orthodoxies. In Chapter 2, we analyze Taiwan’s economic miracle. Between the late 1950s and early 1990s, Taiwan’s economy went through a series of economic transformations from primarily agricultural to export-based light industry, to heavy industry, to high-tech industries and some advanced

4

Taiwan’s Political Economy

services. These transformations were fairly rapid and occurred with what, in retrospect, was surprising ease. They also represented a complex interaction between the state and the private business sector, which was politically important because the government was dominated by mainlanders (i.e., those who came to Taiwan with Chiang Kai-shek in the late 1940s) while the business sector was dominated by Taiwanese (i.e., longtime Chinese residents whose ancestors mostly came to Taiwan before the Japanese colonial period). The state clearly played a key role in promoting the country’s economic transitions, but it just as clearly did not engage in the highly interventionist industrial policies of such developmental states as Japan and South Korea. Indeed, through the 1980s, the core of Taiwan’s export bonanza came from SMEs that had few direct ties to the regime. In the chapter, we describe the first four principal stages of Taiwan’s economic transformation (we discuss the fifth in Chapter 4), present two case studies to provide more detail and nuance to the analysis, and adduce a model of the role of the state in the country’s economic development. In Chapter 3, we discuss the surprisingly easy democratic transition. Industrialization sooner or later creates a more educated middle class that demands political participation and reform (Jackman, 1975; Lipset, 1959; Neubauer, 1967). From this perspective, democratization in Taiwan seems to have been delayed quite significantly by Chiang Kai-shek’s authoritarian Kuomintang Party since the democratic transition did not really commence until the late 1980s. Yet once it started, it proceeded smoothly and fairly quickly. As with the economic transition, divergent groups deserve credit for Taiwan’s successful democratization. In particular, both reformers within the ruling KMT and political opponents of the regime, who formed the Democratic Progressive Party (DPP), helped push political reform forward, creating a broad base for a democracy. We begin the chapter with a brief summary of the authoritarian era, then conceptualize Taiwan’s democratization in terms of a series of formal and informal political pacts, describe the evolving nature of the country’s party system, and discuss how the major issues have helped to structure political competition. In Chapter 4, we consider whether Taiwan is evolving toward an increasingly boxed-in economy. The ROC was one of the pioneers of rapid development in the third world after World War II. This had both advantages and disadvantages. On the one hand, there were few models for its development strategy in the late 1950s and 1960s, which made its reliance on export-led growth somewhat problematic. On the other, once globalization

The Taiwan Paradox

5

and the international product cycle began to push important industries out of the developed world, Taiwan was well situated to take advantage of these economic opportunities. Conversely, Taiwan’s very economic success over the past half-century has progressively narrowed these opportunities and boxed in its economy. Taiwan’s growing prosperity has now almost entirely priced it out of the low-cost labor niche in the world economy, promoting the loss of considerable parts of its industry to competitors that followed it up the international product cycle. Much of this loss has been to China, with whom its economy has become increasingly integrated, thereby creating a potentially worrisome dependence on an emerging superpower that threatens Taiwan. Moreover, as the gap between Taiwan and the leading industrial (or now, more accurately, postindustrial) nations narrows, Taiwan’s ability to compete with them is put under increasing stress. For example, through at least the 1980s, SMEs were the core of Taiwan’s dynamic export economy. Yet SMEs have had a particularly hard time upgrading past a certain stage in the development process, and their decline is almost certainly linked to the growing inequality and social strains in Taiwan. We begin the chapter with a theoretical conceptualization of the normal pattern of economic development and apply this model to explain both Taiwan’s rapid development through the late 1980s and its decelerating growth since then. We then illustrate the argument that Taiwan’s recent economic challenges are at least partially the result of its past successes by two case studies that evaluate the extent to which the ROC’s economy is being boxed in by the changing role of its SMEs and the growing economic integration across the Taiwan Strait. In Chapter 5, we argue that serious problems have arisen because of some perils of democracy. Taiwan’s political institutions, which were inherited from the authoritarian era, have hampered democratic politics and created such undesirable effects as a policy gridlock that undermines the government’s ability to respond effectively to the changing economic and international environment. There are two distinct reasons for this. First, institutional authority remains blurred because the supreme leaders of the past (Presidents Chiang Kai-shek and Chiang Ching-kuo) were generally unconcerned with institutional niceties so that there was little interest in working out constitutional anomalies. For example, it is somewhat unclear in the democratic era whether the president or the premier controls the executive and whether the premier and the cabinet should be considered subordinate to either (or both) the president and the Legislative Yuan. Second, Taiwan has had a long tradition of patronage politics, but

6

Taiwan’s Political Economy

economic policy had been kept fairly well insulated from it. In the democratic era, however, this separation broke down because of politicians’ need for more funds to remain politically competitive and because of the unwillingness of either the KMT or DPP to fight corruption with any enthusiasm. Thus, economic policy became increasingly politicized, which undercuts state capacity to promote development. In the chapter, we discuss the overall institutional imbroglio and then provide a detailed illustrative case study of the politicization of the financial sector. In Chapter 6, we examine the polarization from perverse political strategies in Taiwan politics. Over the past decade, political competition in the ROC has become quite vicious and personal, making the accommodation that is necessary for normal policymaking difficult to achieve. Again, this reflects the authoritarian era where the development of democratic norms about respect for differing political perspectives was actively repressed and retarded. However, several other factors appear to contribute to a type of politics that, to rephrase Thomas Hobbes’s (1962: 11) famous description, is nasty, brutish, and never-ending. Once the two major parties (the KMT and DPP) became fairly evenly balanced at the end of the 1990s, both evidently came to the conclusion that their best campaign strategy was to appeal to their most committed base constituencies. This has resulted in much more polarization at the elite level than among the general citizenry on very central issues such as national identity and relations with China. Consequently, the legitimacy of almost any policy initiative that is even tangentially related to national identity comes under strident challenge and other important issues are often ignored. Overall the rancid political environment makes any type of policymaking, including economic, difficult in general, leading to gridlock and institutional stasis. In the chapter, we describe the eruption of partisan polarization in Taiwan and examine several possible interpretations about why it occurred. We then analyze public opinion data to show the discontinuity between the elites and general citizenry on national identity and cross-strait relations issues. In the conclusion, we propose several explanations for why the major parties in Taiwan have seemingly acted somewhat irrationally in view of the distribution of public opinion. In Chapter 7 on eclecticism beyond orthodoxies, we seek to provide a balance sheet of how Taiwan has responded to its costs of success. Taiwan is certainly facing a wide variety of current challenges. Yet this should not obscure the many things of which the country can be justly proud. It has a consolidated democracy, a prosperous society, and a still

The Taiwan Paradox

7

dynamic economy; it is a country that is fairly stable by international standards; and it has a half-century of responding innovatively and flexibly to serious challenges both internal and external. Despite significant economic and political stress and turmoil, therefore, Taiwan appears to be confronting its costs of success in at least a moderately competent manner. We begin the chapter by providing a model of the costs of success that Taiwan is now facing, then summarize the factors that suggest a continuing resilience despite these challenges, and conclude with the argument that Taiwan’s economic and political development derives from a flexibility stemming from the nation’s eclecticism beyond orthodoxies.

2 The Economic Miracle

Taiwan’s rapid industrialization from the 1950s through the 1990s

has often been called an economic miracle. The nation successfully navigated several fundamental structural transformations of its economy, and a poor agricultural society became a fairly prosperous industrial and even postindustrial society over just a relatively few decades. Yet in the past decade or so, Taiwan’s economic growth has slowed appreciably, and the best strategy for meeting its current economic challenge has become ambiguous and highly controversial politically. It also is widely acknowledged that the state played a leading role in Taiwan’s rapid development, although there is significant disagreement about the exact nature of the government’s role. Consequently, an examination of Taiwan’s economy should be of interest to those concerned about what does and what does not work in promoting development. Five periods of major structural transformations can be discerned during Taiwan’s rapid development. The first occurred during the 1950s when the ROC commenced its transformation from agriculture as domestic light industry developed rapidly. Second, the 1960s and the early 1970s witnessed an impressive export boom for light industry and assembly products that revolutionized the economy and set off significant social changes as well. From the mid-1970s to the mid-1980s, another substantial industrial upgrading into heavy industry and high-tech production initiated a third structural transformation. A fourth transformation of economic maturation occurred over the next decade that encompassed for the first time both important economic gains and losses. On the one hand, the country benefited from the strong development of its high-tech industry and the emergence of a middle-class society. But on the other 9

10

Taiwan’s Political Economy

hand, its mature industries increasingly had to move offshore, primarily to China. Finally, the period since the mid-1990s has been one of increasing economic challenges and the loss of mature industries has, if anything, accelerated. Taiwan has responded by trying to break into the most advanced industrial sectors such as biotechnology (Clark, 1989, 2009). In this chapter, we provide an overview of Taiwan’s successful economic development through the 1990s. We begin with four sections that summarize the first four structural transformations of the national economy. We then present two case studies of industrial development to provide more detail and nuance about the nature of the ROC’s political economy. In the next section, we conceptualize the role of the state in promoting economic growth in Taiwan. Finally, we consider the overall nature of the Taiwan development model.

The Transformation from Agriculture

When Chiang Kai-shek and his Kuomintang regime evacuated to Taiwan after losing the Chinese Civil War in 1949, they faced a poor and war-ravaged economy that was primarily agricultural in nature. To promote economic development and reconstruction, the KMT administration first developed a radical land reform program and then quickly imposed restrictions to promote import substitution in light industry. Both of these efforts turned out to be highly successful. In addition, the government instituted universal primary education that greatly increased the country’s human capital and contributed considerably to its subsequent developmental efforts. The land reform program had three components: (1) a rent reduction of 37.5% in 1949; (2) a series of sales of public farmland targeted at their current cultivators between 1948 and 1958; and (3) the capstone 1953 Land-to-the-Tiller Act, which forced landlords to sell their agricultural land over about three hectares to the government that then resold it back to the tenants. The radical change in land tenure was complemented and supported by an aggressive program of agricultural extension directed by the Sino-American Joint Commission on Rural Reconstruction (JCRR). The JCRR created an extensive set of farmers’ associations that promoted new technologies, created marketing and credit cooperatives, and participated in agricultural planning. The government also made a substantial financial commitment to agricultural modernization so that, during the 1950s, agricultural investment accounted for about a

The Economic Miracle

11

fifth of total national investment and averaged a real (i.e., inflationadjusted) growth rate of 14% a year (S. P. S. Ho, 1978; Koo, 1968; Yager, 1988). Overall, therefore, land reform created a nation of smallholders with greater individual incentive to innovate and produce, and government programs generated more investment, local involvement, and technological innovation. It is impossible to separate the effects of these two factors on agriculture since they were interrelated and complementary. Together, though, they affected rural life and Taiwan’s economy considerably. Land reform produced major income gains for the former tenants that equaled 44% of their total income in 1959 (S. P. S. Ho, 1978: 169), agricultural production grew by 4.6% annually during the 1950s, and agriculture supplied the bulk of Taiwan’s exports for most of the 1950s (Gallin, 1966; S. P. S. Ho, 1978; Thorbecke, 1979; Yang, 1970). More broadly and indirectly, agriculture generated a considerable surplus that was used to finance industrialization. The principal outflow from agriculture was caused by the “hidden rice tax” that resulted from the government’s acquiring a large share of the rice crop at depressed prices while selling fertilizer to the farmers at inflated ones. Ironically, it was fairly similar to policies pursued by colonial Japan (1895–1945), with the one fundamental difference being that Japan siphoned these resources off to the colonial center while Taiwan used them as a major source of financing for its industrialization in the 1950s (S. W. Y. Kuo, 1983; T. H. Lee, 1971). The government also quickly moved to promote the production of industrial goods that were being imported. Consequently, tariffs on these goods were substantially raised; import quotas for specific goods, especially luxury items, were imposed; and the foreign exchange rate was manipulated to discourage imports. This import-substitution program had a major impact on Taiwan’s industrial structure. First, it provided the primary stimulus for substantial industrial growth. Second, the country was able to expand its industrial base from food processing to other light industries (e.g., textiles, footwear, bicycles, rubber and leather goods, and chemicals). Third, most of these new industries were labor intensive and, thus, in line with the country’s comparative advantage. Aggregate data suggest that this policy was quite successful. For example, although growth rates fluctuated widely, industrial production grew by a strong rate of 11.5% per year between 1952 and 1959 (Galenson, 1979; S. P. S. Ho, 1978; C. Y. Lin, 1973). Another important policy initiative for promoting the economic advancement of the citizenry was in the field of education. Taiwan instituted

12

Taiwan’s Political Economy

compulsory primary education in the 1950s that was expanded from six to nine years in 1968. Beyond the compulsory education, opportunities for secondary and higher education were also vastly expanded. The regime’s considerable investment in education produced several salutary results. In particular, the literate and increasingly well-educated population both formed a reservoir of human capital that could contribute to labor-intensive industrialization as both workers and entrepreneurs and allowed individuals to benefit from industrialization in terms of rapid socioeconomic mobility (T. E. Chen, 1981; P. H. Huang, 1984; Wei, 1973). In terms of aggregate indicators, Taiwan’s economic performance was quite good during this import-substitution stage. As shown in Table 2.1, real economic growth was 12% in 1952 and just over 9% in 1953 and 1954. It then declined over the next eight years, but never fell below 5.5%. For the full 1952–1962 period, growth averaged a robust 7.9%. Table 2.2 compares the economic conditions in 1952 and 1962. Because of the rapid growth, gross national product (GNP) per capita was almost one and one-half times greater in 1962 than 1953 in New Taiwan dollars, although fluctuating exchange rates caused it to stagnate at just under $170 in terms of US dollars. Import substitution clearly stimulated manufacturing as its share of gross domestic product (GDP) rose by 50% from 11% to 17%, although the country remained agricultural since that sector’s share of employment declined only slightly from 56% to 50%. The new industries also began to export some of their products by the end of this period as the share of industrial goods in Taiwan’s exports

Table 2.1 Real Annual Economic Growth, 1952–1962 (percentage)

1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962

12.1 9.3 9.6 8.1 5.5 7.3 6.6 7.7 6.5 6.8 7.9

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 1987 (Taipei: Council for Economic Planning and Development, 1987), p. 1.

13

The Economic Miracle Table 2.2 Indicators of Economic Performance, 1952 and 1962

GNP per capita NT$ US$ Agriculture (% employment) Manufacturing (% GDP) Exports (% GDP) Trade balance (% GDP) Industrial exports (% GDP) Savings (% GDP) Investment (% GDP) Foreign investment (% total investment) Government expenditures (% GDP) Income ratio richest to poorest fifths of population

1952

1962

2,591a 167a 56 11 9 –6 8 9 15 1 21 20.5

6,046 161 50 17 11 –5 50 12 18 2 21 11.6

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 1987 (Taipei: Council for Economic Planning and Development, 1987). Note: a. 1953 figures.

skyrocketed from 14% in 1958 to 50% in 1962. Overall, though, the export sector remained fairly small at about 10% of GDP, and Taiwan ran a chronic trade deficit of about 5% of GDP. The savings rate, which increased from 9% to 12% of GDP over this period, was fairly good for such a poor country. The investment rate was half again as high due to a substantial inflow of foreign aid from the United States (Jacoby, 1966), although direct investment by foreign corporations was fairly marginal at 1% to 2% of GDP. Throughout this period, government spending remained stable at about a fifth of GDP as the administration pursued conservative fiscal policies as part of its successful anti-inflation policy (S. W. Y. Kuo, 1983). Finally, primarily because of the land reform program, Taiwan was quite successful in bringing down its initially high level of income inequality as the ratio of the incomes of the richest to the poorest fifths of the population was almost cut in half as it dropped from 20.5 to 11.6.

The Export Boom

While the import-substitution strategy of promoting economic development was quite successful during the 1950s, it began running out of steam

14

Taiwan’s Political Economy

in the early 1960s as the market became saturated with locally produced light industrial goods. The government, hence, faced a choice among three broad economic strategies. It could continue its current policies and hope that the economic situation did not deteriorate; or it could attempt to implement second-stage import substitution in the heavy industries, as advocated by the UN Economic Commission for Latin America (Prebisch, 1950); or it could open its economy in the hopes of becoming internationally competitive in its current labor-intensive industries and of promoting development through the export of these products. This strategic decision was a momentous one, and Taiwan’s economic miracle resulted from making the right choice. The technocrats in Taiwan’s government reached the conclusion that the third strategy was the best one and formed an alliance with US advisers to the government in support of this drastic policy reorientation. The advocates of export-led growth faced daunting opposition. First, this was certainly a risky choice. There was no guarantee that Taiwan would succeed; indeed, at that time there were few developing countries that had selected this route. Thus, many cautious leaders feared that opening the domestic market would be disastrous because the island’s light industries could not become internationally competitive. Second, the dismantling of internal economic controls challenged the vested interests of a substantial number of government and party officials as well as the state corporations that still played a major role in the economy. Third, the military strongly advocated the development of heavy industry to help defense procurement. Despite this strong opposition, the reformers were able to win the backing of President Chiang Kai-shek for moving on to a new transformation of the ROC’s economy (Gold, 1986; S. P. S. Ho, 1987). The ROC, therefore, adopted several major policies promoting exports and domestic investment and industrialization. This new policy package provided a variety of incentives for exporting. Exchange rates were made more realistic (e.g., the overvalued New Taiwan dollar was depreciated), which reduced the costs of exports making them more competitive and profitable. In addition, cheap credit and rebates on imported components were made available to exporters, trade associations were formed to promote and subsidize exporting, and the establishment of export processing zones (EPZs) stimulated assembly operations by Taiwan’s low-cost labor for export. Domestically, tax reform and decreased regulation stimulated the creation and expansion of private enterprises, and foreign investment was encouraged rather than restricted. Concomitantly, the protectionist trade system was substantially liberal-

15

The Economic Miracle

ized since most export industries needed to import various components. For example, tariffs were cut considerably (Galenson, 1979; Haggard, 1990; S. P. S. Ho, 1978; K. T. Li, 1988; C. Y. Lin, 1973). This new economic strategy turned out to be phenomenally successful, as shown by the data in Table 2.3 on annual growth for 1962– 1973 and in Table 2.4 that compares economic indicators in 1962 and 1973. For seven of these eleven years, economic growth was in double digits; and it never fell below 9%. For the entire period, real growth

Table 2.3 Real Annual Economic Growth, 1962–1972 (percentage)

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972

9.4 12.3 11.0 9.0 10.6 9.1 9.0 11.3 12.9 13.3 12.8

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 1987 (Taipei: Council for Economic Planning and Development, 1987), p. 1.

Table 2.4 Indicators of Economic Performance, 1962 and 1973

GNP per capita (US$) Agriculture (% employment) Manufacturing (% GDP) Exports (% GDP) Trade balance (% GDP) Industrial exports (% GDP) Savings (% GDP) Investment (% GDP) Foreign investment (% total investment) Government expenditures (% GDP) Income ratio richest to poorest fifths of population

1962

1973

178 50 17 11 –5 50 12 18 2 21 11.6

695 31 36 42 6 85 35 29 8 23 4.4

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 1987 (Taipei: Council for Economic Planning and Development, 1987).

16

Taiwan’s Political Economy

averaged a strong 11% per year. GNP per capita jumped approximately fourfold in US dollar terms from $178 to $695. This spectacular growth was also associated with a much sharper transformation of the overall economy than during the preceding period of import substitution. Manufacturing’s share of GDP more than doubled from 17% in 1962 to 36% in 1973, demonstrating that the nation had become fairly industrialized. In contrast, agriculture’s share of employment fell by 38% from 50% to 31%. Clearly, in just twelve years, Taiwan had become a significantly different economy. The export-led nature of this growth and structural transformation is certainly indicated by the aggregate data in Table 2.4. Exports as a percentage of GDP jumped almost fourfold from 11% in 1962 to 42% in 1973. This reflected a spectacular growth in the real value of exports from 15% a year through 1968 to over 30% for 1969–1972 (Schive, 1987). Moreover, Taiwan’s trade balance was reversed from a deficit equal to 5% of GDP in 1962 to a surplus of 6% of GDP in 1973, a significant increase in trade performance. Industrial goods came to dominate Taiwan’s exports as their share in the total jumped from 50% to 85%. The nature of these industrial exports was also upgraded in line with the advance of Taiwan’s leading industries from food processing to textiles to electronics, heavy chemicals, and machinery. However, most exports were based on labor-intensive production since even the late industries among them (e.g., electronics and machinery) primarily involved assembly work (S. P. S. Ho, 1978; S. W. Y. Kuo and Fei, 1985; Schive, 1987). More fundamentally, sophisticated econometric analysis found that exports had the leading role in explaining economic growth in Taiwan during the 1960s and 1970s, in contrast to the predominant role of import substitution in the early 1950s and the expansion of domestic demand for 1954–1961. In particular, exports accounted for an escalating share of the expansion of national output from the early 1960s through the mid1970s: 35% for 1961–1966, 46% for 1966–1971, and an almost stunning 68% for 1971–1976 (S. W. Y. Kuo and Fei, 1985: 68). It is highly appropriate, therefore, to term this period Taiwan’s “export boom.” A principal reason for the ROC’s industrial transformation and growth was its good record in terms of savings and investment. Between 1962 and 1973, the ratio of savings to GDP almost tripled from 12% to 35%, bringing the investment rate from 18% to 29% despite the ending of US foreign aid. This remarkable record for savings and investment derived from a variety of factors. In terms of government policy, the tax structure rewarded savings, and many incentives were provided for both

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17

domestic and foreign investment. More indirectly, the government used its control of the banking sector to provide attractive interest rates, and the low social welfare net made saving for old age almost mandatory. In addition, the expansion of financial markets made the channeling of savings to businesses easier and the profit rate in manufacturing skyrocketed from 9% in the early 1950s to 34% in the late 1960s, creating substantial resources for reinvestment (S. W. Y. Kuo and Fei, 1985; Myers, 1986). Furthermore, these data on domestic investment in Taiwan call attention to another important facet of this period—the vital, but limited, role of foreign direct investment (FDI). There were two prongs to the ROC’s strategy: (1) attracting foreign investment for assembly operations in export processing zones and (2) encouraging domestic businesses to export. Certainly, foreign firms were extremely important in several rapidly expanding export industries such as electronics. Yet while the share of FDI in total investment quadrupled from 2% to 8% of total investment between 1962 and 1973, this was still only a fairly marginal share of overall business creation and expansion (Ranis and Schive, 1985). Indeed, the country reaped the benefits from its previous human capital creation, as many Taiwanese entrepreneurs were able to establish firms even in the industries that foreign multinationals brought to the island. For example, local managers went to work in foreign companies, learned the business and production techniques, and then started their own businesses (Greenhalgh, 1988a; Lam and Clark, 1994; Lam and Lee, 1992). Rapid economic growth in Taiwan had a profound effect on improving living standards and reducing socioeconomic inequality for the population at large. In particular, the ROC differed markedly from the normal developmental pattern that initially produces increased inequality in wealth and leads to greater equality only over extended periods of time (Ahluwalia, 1976; Chan, 1987; Kuznets, 1955). In Taiwan, in contrast, income inequality dropped sharply in the 1950s, primarily due to land reform. It also dropped precipitously during the export boom as the ratio of the income of the richest fifth of the population to that of the poorest fifth fell from 11.6 in 1962 to 4.4 in 1973, a level that is quite low even by the standards of the developed world. This was not the result of government welfare programs, which remained almost nonexistent (e.g., there was almost no change in the size of government during this period). Rather, rapid industrialization produced a tight labor market and rising real wages that averaged 5.5% annual growth between 1960 and 1972 (Fei, Ranis, and Kuo, 1979; Greenhalgh, 1988b).

18

Taiwan’s Political Economy

Industrial Upgrading

The high growth of the export boom era ended abruptly because of a broader crisis in the global economy caused by the explosion of energy prices in 1973–1974. The government acted decisively in the face of the crisis and the country recovered its economic dynamism quite quickly. This recovery became part of a new economic transformation that included two distinct types of industrial upgrading. One component of the greatly expanding heavy industry was sponsored by the state as a response to the oil crisis. The other, however, was the result of a more informal movement into high-tech production by Taiwan’s small and medium enterprises, although they did receive some significant support from the government. The Arab oil embargo and the accompanying escalation of energy prices in 1973–1974 shook the economies of most countries in the developed and the developing worlds. Taiwan certainly appeared to be a prime candidate for economic devastation. It imported almost all of its energy products and, as a highly trade-dependent economy, it was vulnerable to global inflation and instability in international markets for its manufactured products. This vulnerability was felt almost immediately. The export surge ended right away as the value of exports fell by over 6% a year in 1974 and 1975, causing their share of GDP to decline from 42% to 35% between 1973 and 1975. This caused the overall rate of economic growth to plummet from 12.8% in 1973 to 1.1% in 1974 and 4.3% in 1975, and Taiwan’s trade balance dropped from a surplus of 6% of GDP in 1973 to a deficit of 10% of GDP in 1974. Moreover, the domestic inflation rate jumped sixfold from 8% in 1973 to 48% in 1974 and foreign investment that had averaged increases of 20% annually for the previous decade dropped by 40% in 1974–1975, which cut its share of total investment from 8.0% to 2.5% (Council for Economic Planning and Development, 1987). The KMT regime was sensitive to inflation because raging inflation in China was widely perceived to have been a major reason for its loss in the Chinese Civil War. Indeed, it had been effective in taming inflation in Taiwan in the early 1950s (S. W. Y. Kuo, 1983; K. T. Li, 1988). Thus, the government quickly responded to the explosion of oil prices with stabilization measures. Interest rates were raised sharply and a strongly conservative fiscal policy was imposed as government spending dropped from 23% to 18% of GDP between 1973 and 1974. The government also tried to control inflation by managing price increases through the monopolies

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exercised by such state corporations as the China Petroleum Corporation and the Taiwan Power Company. These measures, along with the stabilization of global energy prices, proved highly successful in bringing inflation under control as it fell precipitously from 48% in 1974 to 5% in 1975, which also allowed government spending to return to its precrisis level (S. W. Y. Kuo, 1983). The government also decided to accelerate Taiwan’s development of heavy industry. The primary vehicle for this was ramping up the Ten Major Development Projects in heavy industry (steel, petrochemicals, shipbuilding, and nuclear energy) and infrastructure that had been started a few years earlier. This provided a countercyclical stimulus to the economy, created more incentives for upgrading labor-intensive production, and reduced transportation and supply bottlenecks (K. T. Li, 1988; Ranis, 1979). In a structural sense, the expanding heavy industries were somewhat diverse. Some like steel were led by state corporations (e.g., China Steel that became the third most efficient producer in the world in the 1990s) while others like petrochemicals involved a complex set of large domestic firms (e.g., Formosa Plastics), foreign multinationals, and state corporations. This strategy soon bore fruit as, for example, heavy industry grew at an annual rate of 12.2% during 1977–1986 compared to 7.8% for light industry (Gold, 1986; Haggard, 1990; Noble, 1998; Schive, 1987; Y. L. Wu, 1985). The other prong in Taiwan’s industrial upgrading during the 1970s and 1980s was based on a much more bottom-up rather than top-down approach in that it was primarily initiated by the sector of small and medium enterprises which, in general, only had tenuous ties with the government. SMEs had been the central driving force in the export boom of light industry, and they played a surprisingly large role in the economy through the mid-1980s when they still accounted for almost one-half of manufacturing production and two-thirds of total exports (K. J. Fields, 1995; Hu and Schive, 1998; C. T. Kuo, 1995; Lam and Clark, 1994; Myers, 1984; R. I. Wu and Huang, 2003). SMEs pursued highly entrepreneurial strategies of extreme flexibility in filling orders, attention to quality and design, audacious bidding, participation in complex networks of subcontractors, and only partial observance of government regulations. They also demonstrated a remarkable capacity to innovate and upgrade (e.g., from the textile and shoe industries in the 1960s to low-tech electronics assembly in the early 1970s). By the late 1970s, some were venturing into high-tech electronics and scientists, especially some returning from the United States, became involved in the industry as well (Greenhalgh,

20

Taiwan’s Political Economy

1988a; C. T. Kuo, 1995; Lam and Clark, 1994; Lam and Lee, 1992; V. W. C. Wang, 1995; R. I. Wu and Huang, 2003). While private firms dominated the emerging high-tech industries, the government assumed an important facilitating role as government research laboratories developed and commercialized the new technologies and the state invested heavily in the Hsinchu Science-Based Industrial Park that brought together government laboratories and high-tech firms (Amsden and Chu, 2003; Breznitz, 2007; Greene, 2008; Mathews and Cho, 2000; V. W. C. Wang, 1995). Aggregate data show that Taiwan’s economic performance was generally quite good for this period of 1974 to 1987. Unlike the two earlier eras, however, there was significant volatility. As shown in Table 2.5, the period began with two bad years, but the economy roared back during 1976–1978 with double-digit growth of 13.9%, 10.1%, and 13.9% in these three years. The second escalation of oil prices in 1979–1980 dampened growth again, although the impact was far less severe with the growth rate declining more slowly to a low of 3.5% in 1982. The recovery in the United States that started in the summer of 1983 reopened Taiwan’s major export markets. The ROC’s economy revved up quickly again, recording double digit growth for three of the four years between 1984 and 1987. Overall, economic growth averaged 8% a year over this

Table 2.5 Real Annual Economic Growth, 1974–1987 (percentage)

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987

1.1 4.3 13.9 10.1 13.9 8.5 7.4 5.7 3.5 8.3 10.7 5.0 11.5 12.7

Sources: Council for Economic Planning and Development, Taiwan Statistical Data Book, 1987 (Taipei: Council for Economic Planning and Development, 1987), p. 1; Council for Economic Planning and Development, Taiwan Statistical Data Book, 2009 (Taipei: Council for Economic Planning and Development, 2009), p. 17.

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The Economic Miracle

period, despite the two downturns. As shown in Table 2.6, GNP per capita leaped almost eightfold during this period from US$695 to $5,397 (though a good part of this gain reflected global inflation). The export-led nature of growth in the late 1970s and 1980s is clearly evident. Exports grew much faster than the overall economy as their share of GDP jumped from 42% in 1973 to 52% in 1987, and their content became almost totally industrial as industrial goods increased from 85% to 94% of total exports. Even more spectacularly, Taiwan’s trade surplus burgeoned from 6% to 18% of GDP between 1973 and 1987. The structural transformation of Taiwan’s economy also continued apace. Most prominently, agriculture’s share of employment was cut in half from 31% to 15% between 1973 and 1987. There was little change in manufacturing’s share of GDP, 36% in 1973 and 37% in 1987, but this hid a peaking of 44% in the early 1980s that was followed by a significant decline as the country started an overall transition toward the tertiary (service) economy that is the hallmark of a developed nation. This transition can also be seen in the data on savings and investment. While the savings rate remained high in the 30% to 35% range, investment dropped by a third from 29% of GDP in 1973 to 20% in 1987 as Taiwan became a net exporter of capital when some of its least sophisticated producers moved offshore to lower-wage countries. In addition, the government provided incentives for foreign investment in the high-tech Table 2.6 Indicators of Economic Performance, 1973 and 1987

GNP per capita (US$) Agriculture (% employment) Manufacturing (% GDP) Exports (% GDP) Trade balance (% GDP) Industrial exports (% GDP) Savings (% GDP) Investment (% GDP) Foreign investment (% total investment) Government expenditures (% GDP) Income ratio richest to poorest fifths of population

1973

1987

695 31 36 42 6 85 35 29 8 23 4.4

5,397 15 37 52 18 94 34 20 7 21 4.5

Sources: Council for Economic Planning and Development, Taiwan Statistical Data Book, 1987 (Taipei: Council for Economic Planning and Development, 1987); Council for Economic Planning and Development, Taiwan Statistical Data Book, 2009 (Taipei: Council for Economic Planning and Development, 2009).

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Taiwan’s Political Economy

industries, which proved effective (Simon, 1988). As a result, FDI jumped from 3% to 7% of total investment between 1982 and 1987, which was still fairly marginal for overall economic activity. Income inequality also followed a curvilinear path as the income inequality ratio reached a low point of 4.2 in the late 1970s before rising slightly to 4.5 in 1987, reflecting a declining agricultural sector (S. M. Huang, 1981; Yager, 1988) and the beginning of the loss of labor-intensive production that decreased the demand for unskilled and semiskilled workers (Y. P. Chu and Tsaur, 1984; G. S. Fields, 1992). Yet the administration did not change its conservative social welfare spending, as the government spending share of GDP actually decreased marginally from 23% to 21% between 1973 and 1987.

Economic Maturation

Unlike the first three periods, which began with major policy changes or an economic crisis, the divisions between the start and the end of the fourth period are somewhat ambiguous. We use 1988 as the start of the period because it was the year that double-digit growth ended in the ROC, and we use 2000 as the end point because the following year saw the bursting of the global high-tech bubble, which sharply challenged Taiwan’s previous success of industrial upgrading in this area. Economic maturation brought two major structural transformations. The first was a massive movement of the country’s traditional industries offshore, primarily to China, which created a “mainland revolution” in Taiwan’s economic orientation. Second, Taiwan’s rapid movement into such high-tech sectors as computers and semiconductors was quite impressive. In addition, a middle-class society had emerged by the beginning of this period, but Taiwan’s growth with equity seemingly came under challenge during the 1990s. Taiwan’s growing prosperity had driven up wages to the point that it began to lose competitiveness in labor-intensive production by the 1980s. In addition, the New Taiwan dollar appreciated considerably in the late 1980s due to pressure from the United States, which was increasingly concerned by its huge trade deficit with the ROC. Consequently, many of Taiwan’s businesses increasingly moved offshore in the late 1980s and early 1990s in a fairly normal part of economic maturity. Changed conditions in both Taiwan and the People’s Republic of China combined to funnel much of this investment outflow and the trade that it

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generated into China. After four decades of almost complete isolation due to the Cold War hostilities between Taipei and Beijing, Taiwan opened the door for cross-strait interactions when it allowed indirect trade through third countries in 1984 and then considerably enhanced the opportunity for indirect trade with and investment in mainland China over the rest of the decade (T. J. Cheng and Chang, 2003; Clark, 2007; Kastner, 2009). For its part, China was just switching its strategy for industrial development from inward looking to outward looking. In particular, the PRC embarked on an economic reorientation with a coastal development strategy aimed at attracting the light and labor-intensive industries that were being priced out of Hong Kong and Taiwan and at using them to emulate the export-led industrialization of the East Asian capitalist nations, thereby creating a strong complementarity between the Taiwanese and Chinese economies (Kastner, 2009; Leng, 1996; S. A. Y. Lin, 2002; Naughton, 1993, 1997; Y. S. Wu, 1995). Investment in China by Taiwan businesspeople was negligible until the late 1980s, but then took off rapidly. Official data almost certainly understate the amount of this investment since many Taiwanese firms sought to evade continuing restrictions. Still, even the cross-strait investment flows reported to the ROC government (e.g., $43 billion during the 1990s) are impressive. The nature of Taiwan’s foreign investment became more large-scale and sophisticated, as well. Taiwan investors moved from joint ventures to solely owned enterprises and began to build and supply their own factories. Growing trade was accompanied (in fact, stimulated) by a fairly massive flow of outward FDI. This is because Taiwan companies on the mainland imported machinery and more sophisticated components from Taiwan for the production (primarily assembly) of goods being exported to third markets. Thus, this investment produced a huge surge in exports from Taiwan to China, which more than tripled from 5% to 17% of the ROC’s total exports between 1989 and 2000. The structure of these ventures was also upgraded from simple assembly to upstream heavy and more capital-intensive or high-tech production. In particular, by the mid- to late 1990s, the mix of Taiwan investment in the PRC began to shift from predominantly small business in labor-intensive exports to much larger businesses seeking to penetrate the Chinese market in heavy industry (e.g., Formosa Plastics) and consumer goods (e.g., President Enterprises). Thus, by the end of the decade, Taiwanese businesses were making a major contribution to the upgrading of China’s economy. For example, at the beginning of the twentyfirst century, it was estimated that nearly 75% of China’s information

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Taiwan’s Political Economy

technology exports came from factories owned by Taiwanese (Bolt, 2001; C. Y. Cheng, 1999; Kastner, 2009; C. T. Kuo, 1995; Leng, 1996; S. A. Y. Lin, 2002; Naughton, 1997). The loss of basic industries is almost inevitable during industrial development, as implied by Joseph Schumpeter’s (1950) concept of creative destruction. That is, new industries emerge, but old ones are lost. The key question for Taiwan in its era of economic maturation, therefore, was whether it could develop new, more advanced industries to replace its traditional labor-intensive, low-wage products. The answer turned out to be a resounding yes as the country developed an internationally competitive high-tech industry and moved into advanced services in a relatively short time (Amsden and Chu, 2003; Berger and Lester, 2005; Mathews and Cho, 2000; Noble, 1998; V. W. C. Wang, 1995; J. Wong, 2010). This certainly constituted another stage of industrial upgrading that utilized and, in fact, relied on the nation’s stock of human capital. It also created more sophisticated and higher-paying jobs than had been the staple of the previous stages of development. The centerpiece of Taiwan’s high-tech revolution was the electronics industry, which evolved quite rapidly from low-tech assembly to hightech success in just a couple of decades, with the developments of each successive stage creating a foundation for the subsequent upgrading. Alice Amsden and Wan-wen Chu (2003) termed these the television, calculator, and notebook computer eras. For example, Taiwan made extremely rapid progress in semiconductor technology to reach the world frontier in the early 1990s and ranked fourth in the world in semiconductor production by the mid-1990s. Most strikingly, this was primarily the result of the domestic industry, according to Amsden and Chu: “The declining role of foreign direct investment after the television age in the development of the electronics industry is striking. In the electronic appliance industry, foreign investment was pervasive. By contrast, in the computer industry, it had all but disappeared by the early 1990s” (2003: 62). Taiwan’s high-tech revolution, therefore, represented a triumph of indigenous development. The relationship between the government and Taiwanese businesses varied considerably within the high-tech sector. Private companies dominated computers and software while the state had to play a much larger role in semiconductors, especially in providing basic research and development (Amsden and Chu, 2003; Berger and Lester, 2005; Breznitz, 2007; Mathews and Cho, 2000; V. W. C. Wang, 1995). By the beginning of this period in the late 1980s, a middle-class society was clearly emerging in Taiwan spurred by the cumulative effects

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The Economic Miracle

of the educational system and by the growing number of business and professional jobs (Hsiao, 1991; W. L. Li, 1984; Tsai, 1987). As Shirley Kuo showed with the data in Table 2.7, this was accompanied by sustained improvements in the country’s quality of life (1985: 23). During the three and one-half decades between the early 1950s and the mid1980s, the crude death rate was more than cut in half; life expectancy increased from age 59 to age 72, a level that was only slightly below that in the developed world; the quantity and quality of diets increased considerably; the living space available per person quadrupled; the houses equipped with electricity rose threefold from 33% to 99%; the literacy rate doubled from 45% to 90%; education through junior high school became nearly universal; and the use of automobiles, motorcycles, and telephones skyrocketed. Furthermore, Taiwan went through the demographic transition to a low fertility rate that normally accompanies industrialization

Table 2.7 Indicators of the Improved Standard of Living

Health Crude death rate (per 1,000 pop.) Life expectancy (years) Calories consumed per capita Protein consumed per capita Housing Living space per capita (sq. meters) Homes with electric lighting (%) Homes with piped water (%) Housing investment (% GNP) Education Literacy rate (%) Children aged 6–11 in school (%) Children aged 12–14 in school (%) Youth aged 15–17 in school (%) Youth aged 18–21 in school (%) Transportation and communications Automobiles (per 1,000 pop.) Motorcycles (per 1,000 pop.) Telephones (per 1,000 pop.) Pieces of mail per capita

Early 1950s

1983

9.9 59 2,078 49

4.9 72 2,720 77

4.6 33.3 14.4 1.9

17.5 99.7 77.6 3.4

45.0 78.6 48.3 28.3 11.3

90.0 99.8 90.1 63.8 25.9

1 0.2 4 7

57 298 259 62

Source: S. W. Y. Kuo, “The Taiwan Economy on Transition,” paper presented at the Conference on the Prospects for the Economy of Taiwan, Republic of China, in the 1980s, National Central University, Chung-li, Taiwan, 1985, p. 23.

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and urbanization; by the early 1990s, its population growth rate had fallen to only about 1%. Yet despite these gains, Taiwan’s economic maturation put its record growth with equity at risk (Greenhalgh, 1988b; S. W. Y. Kuo, Ranis, and Fei, 1981). The earlier decline of agriculture and the offshore exodus of its labor-intensive industries that began to accelerate in the late 1980s hit the poorest and least skilled segments of the population, who had always faced marginalization in Taiwan, especially hard (Gates, 1979, 1987). Consequently, the ratio of the income of the richest fifth of the population to that of the poorest fifth jumped dramatically from 4.5 in 1987 to 5.5 in 2000 (see Table 2.9). This was especially troubling because of Taiwan’s history of low support for social welfare policies, reflecting the Confucian tradition of family responsibility for caring for its members. The competitive push from the democratization of the early 1990s (see Chapter 3) brought some increase in social support programs. By far, the most important and spectacular was in the field of health care. Taiwan enacted universal health care in 1995, successfully resisted retrenchment in the late 1990s when its high costs became apparent, and is now widely regarded as having one of the best health care systems in the world (J. Wong, 2004). Still, social welfare support remains fairly limited in Taiwan (W. I. Lin and Chou, 2007). As economies mature, their growth rates almost inevitably decline (Rostow, 1960). Table 2.8 shows that this was the case for Taiwan. After

Table 2.8 Real Annual Economic Growth, 1988–2000 (percentage)

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

8.0 8.0 8.5 7.6 7.9 6.9 7.4 6.5 6.3 6.6 4.6 5.8 5.8

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 2009 (Taipei: Council for Economic Planning and Development, 2009), p. 17.

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The Economic Miracle

1987, the country never again had double-digit growth. During the period of economic maturation, furthermore, growth declined over time from 8.1% in 1988–1990, 7.4% in 1991–1994, 6.5% in 1995–1997, and 5.4% in 1998–2000. Overall, growth averaged a more than respectable 6.9% for the full period, and GNP per capita nearly tripled from US$5,397 to $14,721 over these thirteen years (see Table 2.9), bringing Taiwan to the level of the poorer Western European countries. While not as dramatic as in some of the earlier eras, major changes occurred in Taiwan’s economic structure over this period. Agricultural employment continued its decline to a fairly marginal 8% in 2000. What stands out in Table 2.9, though, is the sharp drop in manufacturing’s contribution to GDP from 37% in 1987 to 24% in 2000 as services became the dominant form of economic activity (Amsden and Chu, 2003), which generally occurs in developed nations. The burgeoning tertiary economy also brought a small drop in exports, which remained almost entirely industrial, from 52% to 47% of GDP, and the huge export surplus of the late 1980s was cut to 3% of GDP in 2000. Still, the country remained export dependent and exports continued to play a key role in promoting Taiwan’s economic dynamism (Chow, 2002). Savings fell from 34% to 26% of GDP, but the investment rate actually grew somewhat to 23%, reflecting the growth of the capital-intensive high-tech industry. FDI increased somewhat from 7% to 10% of total investment, with the service sector being especially attractive to foreign multinationals (Amsden and

Table 2.9 Indicators of Economic Performance, 1987 and 2000

GNP per capita (US$) Agriculture (% employment) Manufacturing (% GDP) Exports (% GDP) Trade balance (% GDP) Industrial exports (% GDP) Savings (% GDP) Investment (% GDP) Foreign investment (% total investment) Government expenditures (% GDP) Income ratio richest to poorest fifths of population

1987

2000

5,397 15 37 52 18 94 34 20 7 21 4.5

14,721 8 24 47 3 99 26 23 10 21 5.5

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 2009 (Taipei: Council for Economic Planning and Development, 2009).

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Chu, 2003). Finally, despite the increase in social welfare commitment noted by Joseph Wong (2004), government spending stayed fairly constant at a little over a fifth of GDP. In the preceding discussion, we have provided a broad and somewhat abstract overview of Taiwan’s economic development. In the next two sections, in contrast, we present two more detailed case studies of specific industrial developments to show the actual dynamics of rapid development in the ROC. Both illustrate the remarkable entrepreneurship of Taiwanese businesses and the complex and complementary roles and relationships between the state and the private sector.

Plastics: The Dynamics of Entrepreneurship

The beginning of the plastics industry as part of Taiwan’s import-substitution effort has something of a comic opera air. The government, acting on the 1953 recommendation of a US consulting firm, tried to start up this industry. But even with considerable state subsidies, local businesspeople saw little future for what was to become an important industry within little more than a decade. As T. J. Cheng describes the situation: “With the aid funds, the state built several plastics plants, protected the market, and advertised them for transfer, but it found no buyers for the plants. The state was compelled to plead for takeover by promising all sorts of lucrative support. Meanwhile new entrants were not prohibited” (1990: 152). Wang Yung-ching, a small businessman who had run rice and lumber businesses in a far from spectacular fashion, then walked into this situation by offering to purchase a polyvinyl chloride (PVC) plant that the government had built with US aid, allegedly for another entrepreneur who then decided that he did not want it. Initially, the Ministry of Economic Affairs (MOEA) was not interested in Wang, allegedly because of his lack of experience in the industry. However, Wang found a more influential partner and lobbyist to plead his case, and MOEA presumably became more concerned about what to do with the plant as time passed. Ultimately, therefore, Wang became the owner (presumably a proud one) of a PVC plant. He then began production, but quickly ran into a major problem. He could not sell the PVC that he made. There was even a time when his relatives and employees were taking unsold pellets to their homes to store (K. J. Fields, 1995; C. T. Kuo, 1998). If the story ended here, the result would be a case study in industrial de-finance. That is, an international consulting company sold a credulous

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third world government a bill of goods that cost it the consulting fee and the state investment in an uneconomical factory. The government then recouped some of its losses by talking an incompetent businessman out of his small stock of capital, thereby decreasing the nation’s already low level of capital. The analogy of Chiang Kai-shek’s forcing Shanghai industrialists to buy government bonds that everyone knew were worthless in the 1930s leaps to mind (Coble, 1980). However, the story does not end here because the missing ingredient of entrepreneurship came into play. Wang had faith that the second half of the twentieth century would be the age of plastics. The only problem, he probably reasoned, was that his fellow Taiwan businesspeople did not realize that cheap and readily marketable products could be fashioned from plastic. Unfortunately, they tend to be the practical sort who believe their eyes, not theoretical marketing analyses. It was here that Wang’s entrepreneurial abilities came into play. Rather than bemoaning his fate and going into bankruptcy, he decided to show potential customers what could be done with plastic by building a small plastics molding factory to produce goods that could be sold first on the domestic and later on international markets (e.g., dolls and dishes, rain boots and toy reindeer, tubes and tables). To build this plant, though, Wang had to enter the curb market and convince his relatives and employees to put up some of their own property as collateral, indicating the importance of the informal sector for financing even what started out as a state project. The rest, as they say, is history. Wang both diversified and created a demand for PVC among copycat entrepreneurs. But then, about twenty years later in the late 1970s, a new problem arose about Wang’s capital stock. The government, as governments are wont to do to small businesspeople, demanded that Wang pay more taxes. Luckily for Wang, his small business ventures centered on Formosa Plastics made a minor contribution to Taiwan’s economy, estimated at roughly 5% of total GDP. Thus, when Wang said that he was considering withdrawing all the assets under his control from the state-owned banking system, the government decided that his taxes were in order (K. J. Fields, 1995). A decade later in the late 1980s, Wang faced another investment problem. He wished to build a naphtha cracking plant in a small village that protested so loudly about potential chemical waste that it blocked the plant. Wang then turned up across the Taiwan Strait in the PRC— where it was then technically illegal for him to be—and offered to build a $17 billion petrochemical complex in Fujian Province. This unsettled the ROC authorities. Rather than arresting Wang, however, the premier

30

Taiwan’s Political Economy

visited the village that opposed the naphtha cracker and talked them into withdrawing their opposition in return for government compensation for the risks the plant would create. Wang then cited his patriotic duties to the ROC and withdrew his offer to the PRC (much to the relief of the Chinese leadership that was queasy about such intrusions of capitalism in the aftermath of Tiananmen Square, if rumor is to be believed). Wang’s patriotism seemed finite, however. In 1993, he had proposals for $7 billion complexes in both Taiwan and China and used the threat of canceling them as a means to get more concessions from both governments—infrastructure construction and environmental regulation relief in Taiwan and permission for domestic sales in China (K. J. Fields, 1995; Liu, 1993; Pun, 1992). This case, then, shows the complex nature of development in Taiwan. It began with a combination of state and private investment. It avoided imminent failure, however, not because of either state policy or abstract market logic, but because of Wang’s entrepreneurial vision and ability. When successful, Wang thereby created an escalating financial base for him and Formosa Plastics that made them, first, independent of the government and, then, seemingly gave them significant leverage over even the regime of a medium-sized industrial nation. This case also shows the difficulty in resolving the debate over whether Taiwan possesses a developmental state. While the regime clearly targeted the plastics industry and built the PVC plant that started Wang on the road to Fortune 500 status, it is difficult to agree with the interpretation that this represents successful state tutelage and leadership in industrial policy (Gold, 1986; Wade, 1990). The government had little to do with the development of the Formosa Plastics empire and Wang’s power vis-à-vis the government shifted so radically.

Technology Transfer and Taiwan Singer

The second case that we sketch summarizes the investment of the Singer Sewing Machine Company in Taiwan and how it revolutionized this industry in the ROC. At the beginning of the 1960s, Singer gave Taiwan serious consideration as a site for offshore production whose output would be targeted at markets in developing countries. At that time, the sewing machine industry in Taiwan consisted of approximately 250 firms assembling sewing machines and providing parts for the assemblers. All were small and family owned. The quality of the parts and production

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31

was fairly low, and there was no standardization of parts despite the efforts of the largest producer (China Sewing Machine Company, which later changed its name to Lihtzer) to promote standardization. From the mid1950s through the early 1960s, total production averaged 50,000 to 60,000 sewing machines a year; and, during 1962–1963, only 1.7% of domestic production was exported with imports being five times the number and fifteen times the value of exports (Amsden and Chu, 2003; Schive, 1990). The domestic industry protested vigorously when Singer applied for permission to set up a plant in Taiwan, arguing that there was already a problem of excess capacity and that Singer, with its much more advanced technology, marketing techniques, and brand name recognition would drive many (if not most) of the local firms out of business. Given the small-scale nature of the companies in the sewing machine industry, they probably did not possess much political clout, but the government was also sensitive to problems of denationalization given China’s humiliating experience with foreign capital in the nineteenth and early twentieth centuries. Thus, as a condition for approving Singer’s application, the government imposed several important conditions to help the indigenous industry: an 80% local content requirement within a year of commencing operations, technical assistance to local suppliers so that they could meet Singer’s technical standards, a commitment to export a considerable amount of the output, and the provision of its own locally made parts to other assemblers at reasonable prices. Singer accepted these conditions and set up a fully owned subsidiary in 1963 with an initial investment of $800,000 (Schive, 1990). Taiwan Singer began production in 1964 and moved fairly quickly to meet the government’s requirements. In terms of local content, the goal of 80% was met in three years rather than one, but the progress was spectacular nonetheless, from 0% in 1964 to 50% in 1965, 75% in 1967, and 80% in 1968. To achieve this, Taiwan Singer provided extensive technical assistance to its local suppliers in terms of furnishing them with blueprints; providing training and technology transfer in production, quality control, and factory management; and standardizing parts. These activities gave a tremendous boost to the local parts industry. For example, by the late 1960s, Singer was doing business with 140 out of about 225 supplier firms in Taiwan and had rendered some type of technical assistance to each one of them. In terms of selling parts to other manufacturers of sewing machines, by 1970 Taiwan Singer was making shuttle bodies and bobbin cases in Taiwan and selling them to other assemblers at 20% below import prices.

32

Taiwan’s Political Economy

Singer’s impact on the sewing machine industry did not end with its own production and direct relations with suppliers and purchasers of its parts, however. Rather, the dynamics of small and medium enterprises in Taiwan meant that almost the entire local industry benefited by upgrading itself to become competitive on international markets. Because Taiwan Singer did not establish exclusive ties with these small suppliers, the Chinese assemblers were able to take advantage of their higher-quality products and standardized parts to upgrade their own production, making them competitive on international markets almost immediately. In fact, the largest domestic company, China Sewing Machine Company, provided working capital for some of the parts producers to help them to expand their operations. In addition, other local manufacturers soon learned how to produce many of the parts that Taiwan Singer had originally produced itself and sold to local assemblers. It turned out that Singer and the Chinese manufacturers were more complementary than competitive. In foreign markets, Taiwan Singer’s output was directed at markets in developing countries where these sewing machines were regarded as the top of the line while locally made sewing machines were primarily exported to developed countries as cheap goods. In Taiwan, in contrast, the Singer brand name commanded premium prices so that Taiwan Singer and the local producers each developed different market niches (Amsden and Chu, 2003; Schive, 1990). The Singer investment in Taiwan set off a tremendous surge in production and exports involving both foreign and domestic firms. Total production of sewing machines leaped from 48,000 in 1963 to 91,000 in 1964, 125,000 in 1966, 360,000 in 1968, 629,000 in 1970, 1.2 million in 1973, 2 million in 1978, and almost 3 million in 1984. This explosive growth was fueled almost entirely by exports as the proportion of production (by volume) sold abroad leaped from 1.7% in 1962–1963 to 6% in 1964, 60% in 1966, 80% in 1968, and 90% or more almost every year after 1971. Clearly, industrial upgrading to international competitiveness had occurred almost instantaneously. Furthermore, while Taiwan Singer per se played a major role at the beginning of this process (in 1965, it made a fifth of the sewing machines produced in Taiwan and dominated foreign trade in this area, accounting for 50% of exports by volume and 95% by value), domestic firms soon dominated both the domestic and export markets. For example, after 1968, Taiwan Singer’s share of production and export volume dropped to 10%; and Lihtzer exported three times the number of finished sewing machines as Taiwan Singer, although Taiwan Singer’s considerable advantage in

The Economic Miracle

33

producing value added is indicated by the fact that its share of export value remained nearly twice its share of export volume. Even given this advantage, it is clear that Singer’s investment in Taiwan served as a catalyst for upgrading Taiwanese firms and making them internationally competitive, rather than denationalizing the backward industry that existed there. In fact, by the early 1980s, several aggressive local firms had moved technologically ahead of Taiwan Singer in some areas because Taiwan Singer’s market strategy of selling exclusively to third world markets provided little incentive for upgrading (Amsden and Chu, 2003; Schive, 1990). In sum, this case shows another complex type of industrial development. The initial infusion of capital was a straightforward investment decision by a foreign corporation subject to approval by the ROC government whose domestic content requirements forced a considerable amount of technology transfer from Taiwan Singer, first, to its suppliers and, a little later, to other indigenous sewing machine producers through the sale of its own locally made parts. However, the spread effect from Taiwan Singer’s presence in Taiwan that led to a considerable upgrading of the entire domestic industry could occur only because a large number of SMEs possessed the human capital to assimilate the new technologies and to pursue highly entrepreneurial business strategies. Government policy played an important, if indirect, role in creating such a positive developmental outcome. Government regulations forced Taiwan Singer to do business with numerous local companies, and the government’s past education policy had created the human capital that permitted these companies to turn this into an opportunity for substantial upgrading.

The Role of the State in Taiwan’s Development

East Asia stood out for the rapid development of its nations during the latter part of the twentieth century. Governments throughout the region played a highly visible role in promoting this economic growth and transformation, leading to the theory of the East Asian developmental state (Amsden, 1989; Johnson, 1982; Okimoto, 1989; Wade, 1990; Woo, 1991), consistent with the theory that government leadership is needed to help late developers overcome their market disadvantages in the global economy (Evans, Rueschemeyer, and Skocpol, 1985; Gerschenkron, 1962). Yet the state’s economic role varied considerably among these nations (Clark and Chan, 1998). In particular, the Taiwan government’s economic involvement was significantly less direct and intrusive than in such classic developmental

34

Taiwan’s Political Economy

states as Japan and South Korea (Chan and Clark, 1992); and, by the 1990s, the stereotype of government’s leading role in even the strong developmental states was coming under challenge (Friedman, 1988; C. I. Moon, 1988; C. I. Moon and Prasad, 1994). Hence, in this section, we build on the analysis earlier in the chapter to conceptualize and evaluate the state’s economic role in Taiwan’s economic miracle. State economic activities can be conceptualized or ranked according to the directness of what government does. One end of the spectrum would be specific governmental actions such as the production of goods by public corporations, the channeling of investment funds from state financial institutions to specific corporations, or public education for the development of human capital. At the other end of the spectrum, the state simply creates conditions conducive for private economic activities such as imposing tariffs that allow local firms to be competitive in new industries for the domestic market or enforcing the rule of law that businesses need to operate safely. In between these two extremes, finally, are situations in which the government acts in partnership with leading private interests such as relationships between large corporations and governments that long existed in Japan (Johnson, 1982; Okimoto, 1989) and South Korea (Amsden, 1989; Woo, 1991). Table 2.10 summarizes the state’s role in each of these stages of development. Because there were few instances of partnerships between large corporations and the government in Taiwan, only the two categories of direct governmental activities and the indirect provision of an environment conducive for development are included in our analysis. During the first stage of transition from agriculture in the 1950s, there were two major economic policies that brought significant progress to the country: land reform and import-substitution industrialization. In addition, mass education created human capital, and the government substantially increased its economic leadership capability by bringing skilled technocrats into the top levels of the regime (S. P. S. Ho, 1978, 1987; C. Y. Lin, 1973). As Table 2.10 shows, this involved some important direct and strong state actions: repressing the opposition to development by the rural gentry in line with Peter Evans’s conclusion that state power is generally necessary to overcome elite resistance to developmental change, providing mass education through public schools and creating a skilled governmental technocracy (1985, 1995). Still, the major contribution to industrialization was the indirect creation of a conducive context for private economic activities through land reform, import-substitution policies, and the development of human capital. The case study of Wang and Formosa Plas-

Table 2.10 The State’s Role in Taiwan’s Economic Transformations

Transition from agriculture Land reform Import substitution Technocratic government Mass education Export boom

Industrial upgrading Heavy industry High tech Economic maturation High tech Economic ties with PRC

Direct Activities

Create Conducive Context

Repress opponents (rural gentry) — Skilled technocrats Public schools

Small-scale agriculture by owners more productive Light industry for domestic market by small firms — Human capital creation

Repress opponents (military and some business) Technocratic lead in transformation

General incentives help small firms become globally competitive Continuing impact of education

Led by state Start of R&D

— Good business environment for small flexible firms; continuing impact of education

Enhanced R&D and commercialization Hostility with PRC leads state to limit links

Good business environment for small flexible firms; continuing impact of education —

35

Note: “—” indicates no major instances.

36

Taiwan’s Political Economy

tics, for example, showed the strong limits that existed on state economic activity even when the government was attempting to implement an activist industrial policy. During the export boom of the 1960s and early 1970s, the state again assumed both direct and indirect roles that were vital for assuring the success of this transformation. This period of export-led growth was possible only because of the radical and, for that time, highly visionary economic policy package designed by Taiwan’s technocrats to encourage production for international markets. Moreover, the top political leaders supported the technocrats’ policies against significant opposition from powerful elite segments. However, the state’s primary role was providing a conducive environment for exporting. The new policies provided strong incentives for exporting, but Taiwan’s industries became internationally competitive only because of the skills and hard work of its entrepreneurs and workers, as illustrated by the case study of how Taiwan Singer stimulated the rapid expansion of the domestic production of sewing machines. The human capital creation of the country’s educational policies, in turn, explains why the Taiwanese were able to take such advantage of this economic opportunity. The stage of industrial upgrading from the mid-1970s through the mid-1980s involved two somewhat disparate economic transformations. First, there was a state-led push into heavy industry; and, second, the small-scale business sector began to upgrade its production techniques into such fields as advanced electronics. As noted in Table 2.10, the state played very different roles in these two types of industrial upgrading. The push into heavy industry was led by state corporations while private companies dominated the high-tech sector. Overall, however, this represented a substantial expansion in the direct role of the state in the national economy, as direct governmental activities were at the center of this third transformation in Taiwan’s economy. State corporations became much more important in key industries, and government research institutes began to develop and commercialize new technologies that were then transferred to private firms. Yet the creation of a conducive economic environment was also important for the takeoff of the high-tech industry. In particular, small and medium enterprises were able to operate well in Taiwan despite their lack of contacts with the government, and the success of Taiwan’s human capital policies was a prerequisite for moving into high tech. The fourth stage of economic maturation commenced in the late 1980s and ended at the turn of the century with the momentary collapse of global high-tech industry. Unlike the first three stages, the economic picture was at least a little mixed. Somewhat surprisingly perhaps, Taiwan

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37

emerged as a major player in the global high-tech industry. In contrast, the country’s loss of competitiveness in its basic labor-intensive industries accelerated, leading to their movement offshore to countries at lower levels of development, especially the PRC. These changes had mixed implications for the efficacy of Taiwan’s developmental state. Initially, the state’s role in promoting the rapidly emerging high-tech industries was enhanced as government-funded research institutes expanded and as the Hsinchu Science-Based Industrial Park integrated these institutes with the high-tech firms that brought the products and technologies they developed to market (Greene, 2008). However, hostility between Taiwan and the PRC severely limited what the Taipei government could do with regard to the movement of mature industries across the Taiwan Strait. Consequently, the state had little involvement in this aspect of the country’s structural transformation (Kastner, 2009). Overall, the ROC government has clearly made a variety of important contributions to Taiwan’s economic miracle over the past sixty years, in large part because it created a skilled and sophisticated technocracy that was committed to promoting development as far back as the 1950s. Yet just as clearly the scope of activities of even this developmental state remained limited. Probably the greatest contribution of the government was the indirect one of creating a context that facilitated private business activities, including changing these policies every decade or so to push Taiwan up the international product cycle. In contrast, direct economic activities were much more important in some stages (the beginning of industrialization and the later promotion of heavy industry) than others. Finally, the last stage in Table 2.10 suggests that the government’s economic policymaking was coming under stress by the 1990s in both of the transitions involved in economic maturation. The growing economic integration with China put Taiwan’s diplomatic status at risk, making it impossible to manage this process effectively (Kastner, 2009). And Taiwan’s attempt to compete in the most advanced industries and technologies in the world, such as biotechnology, became more problematic because basic research, development, and commercialization have such long and uncertain gestation periods that it is hard to devise government policies to promote industrial upgrading (J. Wong, 2010).

The Taiwan Development Model

Taiwan’s economic miracle produced rapid growth and four successful structural transformations during the second half of the twentieth century.

38

Taiwan’s Political Economy

To summarize and help understand the nature of Taiwan’s development model, Figure 2.1 conceptualizes each of the four economic transformations that occurred during this period in terms of two principal components. The first contains the major economic and political changes that defined the transformation such as land reform in the 1950s and the explosion of the high-tech industry during the 1990s. The second then includes the major resources that were created in each period. Figure 2.1 provides an overview of the four economic stages discussed in this chapter. At each stage, significant economic change occurred that resulted in the creation of major new societal resources. These resources, in turn, formed the basis for the upgrading of the island’s political economy in the next stage. During the transformation from agriculture, the government created a skilled technocracy that formulated the plans and policies that promoted the subsequent transformations; the export boom created a highly entrepreneurial class in the small and medium business sector that was, perhaps surprisingly, able to upgrade into new industries in the two subsequent periods; and industrial upgrading produced advanced capabilities in several heavy industries and a qualitative jump in human capital as a middle-class society emerged in Taiwan. In contrast, the picture on resource creation was much more mixed (and arguably negative) during the economic maturation period as increased capabilities in high-tech industries were counterbalanced by growing constraints on the state’s economic policymaking. The observance of this recurring pattern, however, should not be taken to mean that Taiwan has followed an explicit grand design since the early 1950s. For example, there is no evidence and almost no reason to suppose that the architects of Taiwan’s land reform and import-substitution industrialization even dreamed of the country becoming internationally competitive in manufacturing. And the ROC’s rapid industrial upgrading was almost certainly far beyond the wildest dreams of the advocates of its initial export promotion strategy. Rather, Taiwan’s development appears to be much more open ended with the resources created at one stage permitting more sophisticated responses when subsequent economic challenges arose, which made the absence of clear-cut resource creation in the 1990s all the more threatening.

39 Figure 2.1 Structural Transformations in Taiwan’s Economy

Transformation from agriculture, 1950s Basic transformations • Land reform • Import substitution in light industry • Mass elementary education • Co-optation of technocrats into top policymaking positions Resource creation • Productive capabilities in agriculture and light industry • Human capital (basic education) • Technocratic ability of government Export boom, 1960s to early 1970s Basic transformations • Export-stimulating liberalization Resource creation • Entrepreneurial skills of small business in light industry • Continuing expansion of basic human capital Industrial upgrading, 1970s to late 1980s Basic transformations • Heavy industry led by state corporations • Beginning of high tech Resource creation • Productive capabilities in heavy industry • Entrepreneurial upgrading to more sophisticated products • Qualitative jump in human capital (middle-class dynamism) Economic maturation, late 1980s to 2000 Basic transformations • Some upgrading into more sophisticated high tech • Growing economic integration with China Resource creation/loss • Some improvement in high-tech area • Some constraints on state’s economic policymaking emerge

3 The Democratic Transition

Political development in the Republic of China followed a far dif-

ferent pattern than the continuous and cumulative development of the economy that was described in Chapter 2. In the political realm in contrast, the Kuomintang regime maintained a harsh authoritarian regime for several decades after it came to Taiwan in the late 1940s. Only in the late 1970s and early 1980s did it seem to evolve from hard authoritarianism to soft authoritarianism (Winckler, 1984). Given Taiwan’s rapid industrialization, this is at least a little surprising. Higher levels of economic development are generally associated with democratization, in large part because industrialization creates an educated middle class that demands political liberalization (Jackman, 1975; Lipset, 1959; Neubauer, 1967). Thus, democratization in Taiwan appears to have been significantly delayed. Yet once the democratic transition commenced in the late 1980s, it proceeded smoothly and relatively quickly as a series of informal pacts produced a fully democratic polity within a decade, creating what at least a few observers considered to be a political miracle to go along with the earlier economic one. We begin this chapter with a brief discussion of the authoritarian era, emphasizing the contrast between the government’s substantial repression and a few institutional elements that promoted later democratization. We then conceptualize the ROC’s democratic transition as a series of informal pacts. Next, we reflect on the implications of the party system and, then, the primary political issues for democratization in Taiwan. Finally, we consider how the issue structure in Taiwan politics promoted the country’s democratic transition, but also created several potential challenges for its democratic stability in the future. 41

42

Taiwan’s Political Economy

The Authoritarian Era

Political development encompasses two broad dimensions relating to democratization and “institutionalization” for effective policymaking (Pye, 1966). Chiang Kai-shek’s Republic of China on the Chinese mainland (1928–1949) was not considered successful on either dimension (Botjer, 1979; Eastman, 1974; Sheridan, 1975). The general stereotype, although somewhat overly simplified, is that the ROC on Taiwan had effective institutionalization coupled with a lack of democratization from the 1950s through the late 1980s (Clark, 1989). Yet despite the strong authoritarianism that existed for nearly four decades of Taiwan’s postwar history, the regime also contained several features that ultimately helped to facilitate its democratic transition. The authoritarian government that was imposed on Taiwan after World War II was structured around the ROC’s 1947 constitution, which on paper should have created a democracy. Unfortunately, the constitution’s liberal edifice was undercut by several important factors. First, it created a strong president who could dominate the government, and Chiang Kai-shek used his political clout to do so. Second, the extraconstitutional fact that the ROC had an essentially one-party system meant that many of the democratic elements in the constitution were curtailed in practice. Third, the constitution contained an emergency clause that could restrict or override constitutional provisions. This was invoked in 1948 due to the Chinese Civil War with the adoption of the Temporary Provisions Effective During the Period of Communist Rebellion, which remained in force until 1991 and were used to justify martial law from 1949 to 1987 (Ch’ien, 1950; Copper, 1979; Winckler, 1984). Two central aspects of the political system clearly made real democracy impossible. The first was how the major national-level elective bodies, most importantly the Legislative Yuan (parliament) and National Assembly (which elected the president and amended the constitution), were constituted. Initially, their members were chosen for three-year terms in nationwide elections in China and Taiwan in 1947 and 1948. With the Communist victory in the Chinese Civil War, it was impossible to hold new elections in almost all these constituencies. The Kuomintang refused to restructure these bodies, claiming that to do so would be incompatible with its claim to be the legitimate government of all China (including Taiwan). Even though new seats were given to Taiwan starting in 1969, the senior legislators elected in the late 1940s continued to hold large majorities until they were finally forced to retire in 1991, meaning

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43

that new elections could not unseat the Kuomintang. The KMT also benefited from the prohibition against the founding of new political parties, although opposition candidates could run as independents. Clearly, Taiwan was not a democracy because Kuomintang rule was guaranteed by law (Clough, 1978; Copper, 1979; Gold, 1986; Winckler, 1984, 1988). The nature of authoritarian rule on Taiwan, furthermore, created a bitter legacy of ethnic hostility and tensions that reverberates in the nation’s politics even today. Since the evacuation of the Chiang Kai-shek regime to Taiwan in 1949 at the end of the Chinese Civil War, the island has suffered from a clear ethnic cleavage between the mainlanders who came with him (about 15% of the population) and the long-time residents of Taiwan or islanders who also were almost all ethnically Han Chinese. The mainlanders dominated the government and imposed a harsh and repressive rule termed the “white terror.” Although Republican troops were welcomed as liberators when the island reverted to China after fifty years of Japanese colonialism at the end of World War II, the KMT tended to view the Taiwanese as collaborators with the hated Japanese and, thus, justified corrupt, brutal, and exploitative policies. Tensions finally exploded in a popular uprising on February 28, 1947. While a compromise between the military governor and Taiwanese leaders seemed to settle the crisis, KMT troops invaded the island in mid-March, killing at least 10,000 to 20,000 Taiwanese and singling out the intelligentsia and leadership class for slaughter (Lai, Myers, and Wei, 1991; Phillips, 2003). The Kuomintang quickly developed an extensive security apparatus and engaged in substantial censorship against suspected supporters of both the Chinese Communist Party and Taiwanese nationalism as well as those who pushed for democracy too ardently or who tried to establish links between mainlander reformers and islander politicians. For example, Lei Chen was arrested in 1960 for trying to organize an opposition party; and Peng Ming-min suffered a similar fate in 1964 for writing pamphlets advocating the overthrow of the KMT (Clough, 1978; Mendel, 1970). More broadly, after the implementation of the Chinese cultural renaissance movement in the 1960s the China-centric regime denigrated and discriminated against local culture and dialects by, for example, treating the Mandarin dialect as the official language of government and education, leading to ongoing resentments among the islanders (Appleton, 1976; R. L. Cheng, 1994; W. C. Lee, 2005; Lynch, 2004; Makeham and Hsiau, 2005; Tu, 1998). Despite the very real repression that existed during the authoritarian era, Taiwan’s political system possessed several important characteristics

44

Taiwan’s Political Economy

that pushed it toward political reform and democracy. First, the constitution set up democratic institutions, even though it permitted them to be ignored. Furthermore, the Kuomintang’s own ideology, Sun Yat-sen’s Three Principles of the People (San Min Chu I) of nationalism, tutelary democracy, and people’s livelihood, committed it (at least in theory) to progressive policies and eventual democracy. Thus, the continuing authoritarianism was increasingly incompatible with the regime’s own proclaimed ideals (Bedeski, 1981; C. Y. Cheng, 1989; Gregor, 1981; Myers, 1987; Wilbur, 1976). Second, the government quickly instituted competitive elections for local governments and for the Provincial Assembly (which was for just Taiwan Province rather than the national government of all China). While these elections did not really involve interparty competition, there was vigorous competition among pre-existing local factions who were absorbed into the KMT. Indeed, these elections allowed the national government and party to play the local factions off against each other, thereby solidifying central power (Bosco, 1994; Lerman, 1978; Rigger, 1999b). A few opposition candidates did run as independents and won important posts, such as the mayor of Taipei. By the late 1970s, there was a significant opposition that worked together, despite the prohibition against new parties, in a loose coalition called the Tangwai, or “those outside the party” (Domes, 1981; Gold, 1986; Rigger, 1999b). Thus, by the 1980s, a strong foundation existed for creating an electoral democracy. Third, ethnic relations and status were more complex than would have been expected from the mainlander domination of the KMT. As described in Chapter 2, Taiwan’s rapid economic development was based on private companies, with small and medium enterprises playing a leading role. Islanders dominated this sector and, consequently, were the primary beneficiaries of the economic miracle. They gradually began to assume a significant political role in economic initiatives and in acting as a link between the central government and the general citizenry. In addition, islanders dominated local politics because it was almost impossible for mainlanders to win elections, although local governments were fairly inconsequential, and they were the beneficiaries of the regime’s farmers’ associations, which became highly political (Bosco, 1994; M. T. Chen, 1996; Cole, 1967; Domes, 1981; Gates, 1981; F. Wang, 1994; Winckler, 1988). Beginning in the 1970s, the Kuomintang adopted a series of reforms under the leadership of Chiang Ching-kuo, Chiang Kai-shek’s son, who became premier in 1972, KMT chairman after his father’s death in 1975,

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45

and president in 1978. These reforms embraced three principal dimensions. First, younger and more professional leaders were brought into top government and party posts; second, there was more emphasis on popular participation in Taiwan’s politics; and, third, Chiang Ching-kuo promoted a “Taiwanization” of first middle-level and then top-level political positions (Clough, 1978; Domes, 1981; Nathan and Ho, 1993; Winckler, 1981, 1988). This reform movement was somewhat cyclical, as there were periodic crackdowns and retrenchment, most seriously after a 1979 Human Rights Day demonstration in Kaohsiung which led to stiff prison sentences for eight Tangwai leaders (Domes, 1981; Gold, 1986). Still, the country seemed to be moving toward a democratic transition.

Political Pacts in Taiwan’s Democratic Transition

In the popular image at the time, Taiwan’s democratization probably appeared to have been a fairly raucous process, at least in comparison to the stable and peaceful authoritarianism that preceded it. The most salient result of the loosening of authoritarian control in the mid- to late 1980s was the rapid burgeoning of street demonstrations. A more active legislature was marked by frequent fisticuffs, which often received prominent treatment by CNN. The growing salience of the national identity issue in the island’s politics following the relaxation of the enforcement of sedition laws, moreover, raised the temperature of political debate considerably (Clark, 1989; Hood, 1997; Sutter, 1988; Wachman, 1994). From another perspective, though, democratization in Taiwan appears to have been much calmer and more consensual. Figure 3.1, for example, conceptualizes Taiwan’s democratization as a process that has gone through three principal stages: 1. Removing authoritarian institutions that prevented a majority of the electorate from directly selecting the government; 2. Exercising popular sovereignty by the citizenry; and 3. Attempting to create a stable democratic polity by defining the general terms of political competition. When looking at the key events in this evolution, what is striking is that they seem to have resulted, not from a conflictual showdown between different political forces, but from the emergence of a wide-sweeping consensus across the political spectrum about what the ROC’s next political

46

Taiwan’s Political Economy

Figure 3.1 Major Events in Taiwan’s Democratic Transition

• Removing authoritarian institutions September 1986: DPP forms in defiance of martial law; Chiang Ching-kuo intervenes to prevent criminal prosecution July 1987: Emergency decree undergirding martial law lifted January 1988: Restrictions on press and demonstrations liberalized January 1988: Chiang Ching-kuo dies; Lee Teng-hui becomes president January 1989: New law on civic organizations May 1990: Massive demonstrations against National Assembly; Lee promises further political reforms July 1990: National Affairs Conference develops consensus on completing democratization April 1991: National Assembly terminates temporary provisions effective during the period of Communist rebellion • Exercising popular sovereignty December 1991: First full-scale election for National Assembly December 1992: First full-scale election for Legislative Yuan December 1994: First popular election for governor of Taiwan Province and mayors of Taipei and Kaohsiung March 1996: First direct election of president; Lee wins reelection handily March 2000: DPP’s Chen Shui-bian elected president in three-way race • Creating a stable democratic polity August 1993: New Party formed from KMT dissidents February 1995: President Lee apologizes for 228 Incident June 1995: President Lee visits Cornell University; PRC responds with harassment aimed at 1995–1996 elections December 1995: KMT majority in Legislative Yuan elections so thin that a near hung parliament results December 1996: National Development Conference reaches tripartisan consensus on cross-strait relations while KMT and DPP agree on constitutional reform strengthening presidency and downgrading provincial government

steps should be. Thus, a series of at least implicit agreements or pacts among the leading political parties and factions helped push the processes of political liberalization forward, in line with general theories that such pacts are the key to most democratic transitions during the third wave of democratization (Casper and Taylor, 1996; Huntington, 1991; O’Donnell, Schmitter, and Whitehead, 1986).

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47

Table 3.1, therefore, outlines four such pacts among the leading political forces in Taiwan that were associated with the founding of the opposition Democratic Progressive Party in 1986, the National Affairs Conference (NAC) in 1990, and the National Development Conference (NDC) in 1996. The first is generally considered to have marked the beginning of the democratic transition in the Republic of China. The second represented a critical step toward full democratization when the NAC reached a consensus among broad segments of the political elite, including the opposition DPP, on such controversial issues as the retirement of senior legislators that allowed the new president Lee Teng-hui and reformers within the KMT to overcome the opposition of the KMT old guard. The last two were agreements that were reached at the NDC concerning cross-strait relations and constitutional reform. The former was a surprising all-party consensus on probably the most contentious issue in Taiwan politics while the latter resulted from a KMT-DPP alliance against the minor New Party. Taiwan’s democratic transition was set off in 1986 when President Chiang Ching-kuo evidently resolved to push the ruling Kuomintang Party to accept democratization while the opposition Tangwai decided to challenge the martial law restrictions on the ROC’s constitution that prevented democratic practices—in particular, the ban on organizing new political parties. Chiang Ching-kuo also directed the KMT to open negotiations with the Tangwai, with the apparent goal of allowing the opposition to operate a research and campaign aid organization, but not a full-fledged political party in the upcoming 1986 elections. These negotiations failed, though, as KMT conservatives believed that this was going too far while the Tangwai leaders did not want to be perceived as a tame opposition. The opposition then seemingly threw down the gauntlet to the regime when it declared the formation of the Democratic Progressive Party on September 28 at a meeting that had been called to slate candidates. A political crisis appeared imminent as the Ministry of Justice filed charges against the DPP for violating martial law restrictions, but President Chiang Ching-kuo defused it by announcing that martial law would be ended and that new political parties could be formed as long as they supported the constitution and renounced both Communism and Taiwan independence. The DPP then held a congress in early November (despite renewed government warnings that it would be illegal) that adopted a party charter and program advocating self-determination and readmittance to the United Nations for Taiwan in vague enough language to stop just short of a direct challenge to the regime. The legitimization

Table 3.1 Pacts in Taiwan’s Democratic Transition

Event

Pact

Political Logic

Results

DPP formed illegally in 1986

Government does not react when new party declared in defiance of martial law

Chiang Ching-kuo forces KMT old guard to accept logic of democratization

Fairly rapid democratic transition commenced

National Affairs Conference

Consensus on final steps for democracy

Lee Teng-hui uses public forum to overcome opposition within KMT

Cross-cutting cleavages on national identity, social welfare, and corruption ensure enough success and ambiguity in elections so all parties support democracy

National Development Conference 1

Consensus on cross-strait relations

Threat from PRC and voter support for status quo de-escalates issue

Space created for small parties with polar positions

National Development Conference 2

KMT and DPP agree on strengthening presidency and downgrading provincial government

Shared interests of Lee and DPP chair Hsu Hsin-liang; ability to force party unity in National Development Conference and National Assembly shows pressures for two-party system

Juxtaposition with cross-strait consensus indicates cross-cutting cleavages in polity

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of a formal opposition party was clearly a major step forward toward democratization. As shown in Figure 3.1, this was followed during the late 1980s by a series of steps removing authoritarian institutions such as lifting martial law in 1987 and loosening restrictions on the press, freedom of speech, and political demonstrations in 1988 and 1989 (T. J. Cheng, 1989; Y. S. Chou and Nathan, 1987; Y. H. Chu, 1992; Copper, 1988; Domes, 1989; Nathan and Ho, 1993; Sutter, 1988; Tien, 1989). Change was also afoot within the Kuomintang. Chiang Ching-kuo died in January 1988 and was succeeded by Vice President Lee Teng-hui as president and, after some political infighting, as KMT chairman as well. Lee was an islander and a technocrat with a PhD from Cornell University. The top levels of the government and party soon became divided between Lee’s mainstream faction that tried to implement rapid political liberalization and the anti-mainstream faction that was powerful enough to hold up most major change, which created something of a stalemate in Taiwan politics at the turn of the decade. Almost certainly, the key event that permitted the final steps of Taiwan’s democratization to be taken was an “elite settlement” between the dominant faction of the ruling party and the opposition, which was worked out at the National Affairs Conference that President Lee called in the summer of 1990 in response to massive student demonstrations. The NAC brought together representatives of diverse parts of the country’s political spectrum in an unprecedented forum that created the consensus necessary to break the gridlock over issues that held back full democratization; in particular, the continuance in office of the senior legislators. Much to the surprise of many (if not most) observers, the NAC turned out to be quite a success. The debate was spirited, but serious (unlike the raucous battles in many of the island’s legislative arenas), and the conference produced a consensus on how to move political reform in Taiwan forward that was soon turned into official policy and constitutional change (Chao and Myers, 1998; T. J. Cheng and Haggard, 1992; Y. H. Chu, 1992; Higley, Huang, and Lin, 1998; Hood, 1997; Moody, 1992; Wachman, 1994; J. J. Wu, 1995). The last major authoritarian institution fell in April 1991 when the Temporary Provisions Effective During the Period of Communist Rebellion were revoked. The first half of the 1990s witnessed the expansion of exercising popular sovereignty (see Figure 3.1) as the first direct elections were held for the National Assembly in 1991, the Legislative Yuan in 1992, the provincial governor and mayors of Taipei and Kaohsiung in 1994, and finally the ROC president in 1996. Even more dramatically, the DPP’s Chen Shui-bian won the 2000

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presidential election in a three-way contest that resulted when the loser for the KMT nomination ran as an independent. Democracy had arrived! Taiwan’s successful democratic transition did not come without severe challenges. Domestically, there was the potential that democracy could unleash uncontrollable ethnic conflict. Such polarization did not occur, but the polity did move toward gridlock after the New Party was formed by anti-mainstream KMT dissidents, and the 1995 elections reduced the KMT to a narrow parliamentary majority. Internationally, the generally relaxed relations with China that had existed since the early 1980s collapsed when China literally “went ballistic” after Lee visited his alma mater Cornell University in June 1995 with a series of war games and missile tests in 1995–1996. These were clearly aimed at intimidating Taiwanese voters in the presidential election of 1996 against voting for President Lee. The presidential election included three major candidates. The KMT nominated Lee; the DPP selected former political prisoner Peng Ming-min who was seen as a supporter of Taiwan independence as its candidate; and anti-mainstream Lin Yang-kang who wanted to improve relations with China ran as an independent. Despite or perhaps because of the Chinese intimidation, Lee won handily with 54% of the vote to 21% for Peng and 15% for Lin (T. J. Cheng, 1997; Tien, 1996b). Following his reelection, President Lee called a National Development Conference for December of that year, evidently hoping to replicate the NAC’s ability to overcome political gridlock, which now seemed quite dangerous in view of the threat from the PRC. One outcome of the NDC that was truly astounding was the three-party consensus that emerged in the area of cross-strait relations, given the extreme divisiveness of this issue and its major salience within Taiwan. What evidently occurred was that the Chinese attempt at military intimidation brought home the point that “politics ends at the water’s edge.” For the New Party and remnants of the KMT old guard, the popular antagonism that Chinese militarism aroused precluded advocating unification except as a long-term objective. For the DPP, the battering that their presidential candidate took at the polls for his pro-independence stance suggested that association with Taiwan independence was just as hazardous for a politician’s or party’s viability. Consequently, the agreed on positions concerning cross-strait relations generally reflected support for President Lee’s pragmatic diplomacy of regarding Taiwan as a sovereign state and of aggressively seeking to upgrade Taiwan’s international status while paying verbal allegiance to the One China principle and to unification as a goal for the indefinite future (Cabestan, 1998; C. M. Chao, 2002). Even when the New Party

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walked out of the NDP in protest over the majority’s decisions concerning constitutional change, it indicated that it would support the consensus on cross-strait relations (as well as the consensus that had been reached on socioeconomic development). The actions on constitutional reform represented another pact, but one with a value more open to question. Just before the NDC opened, President Lee and the Kuomintang unilaterally made two major proposals for constitutional change—increasing the powers of the presidency vis-à-vis the Legislative Yuan and downgrading the provincial government—that circumvented the careful process of cooperation and consensus building on which the conference had been based. Lee had an obvious interest in strengthening the presidency and probably hoped to prevent the provincial governor from becoming a rival to the president (as well as undercutting Governor James Soong as a rival to Vice President Lien Chan within the KMT). These proposed changes also fit the DPP’s agenda nicely because abolishing the provincial government was consistent with renouncing ties to China and because the DPP felt that it had a decent chance of winning the presidency in 2000. Conversely, the New Party decried downgrading the provincial government as promoting Taiwan independence and had a vested interest in Taiwan’s adopting a parliamentary system in which its small legislative delegation might play a key balancing role (T. J. Cheng, 1997; Higley, Huang, and Lin, 1998; Robinson, 1997). The democratic development of the Republic of China, therefore, rested on a series of consensuses or pacts about how the political system should be arranged. The first, in 1986, was a tacit consensus in the sense that no formal agreement was ever made. Still, both the government and the opposition clearly reached an understanding about how the game of politics would be played during the first stages of Taiwan’s democratic transition. In contrast, the following three pacts contained explicit agreements. The National Affairs Conference, though, was less important for its explicit agreements than for the momentum it created toward the final decisions about how the democratic polity in Taiwan would be structured. Finally, the two pacts that emerged from the National Development Conference were designed to end the dangerous party and factional conflict over national identity and cross-strait relations and to reorganize the political system to make it more effective (although it is rather questionable how well the second purpose was served). In each case, therefore, the pact or elite settlement allowed a seeming gridlock to be broken as a reforming leadership used an extraconstitutional forum to overcome minority resistance to changing the status quo. In the

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first two cases, Chiang Ching-kuo and Lee Teng-hui, respectively, expanded participation in decisionmaking from only the KMT to include broader forces in society, especially the political opposition, thereby tipping the balance against the veto that the KMT old guard tried to exercise over political change. The National Development Conference, for its part, offered a forum in which the major parties could deescalate their conflicts over national identity and relations with the PRC, which all evidently saw as counterproductive but irresolvable within the normal process of legislative politics. In contrast, a good case might be made that the pact on presidential and provincial powers was needlessly divisive without particularly furthering the country’s political development since it seemingly represented an attempt to tip the system in a highly partisan manner reflecting the interests of the dominant factions in the KMT and DPP. Rather than bringing political instability or governmental gridlock, therefore, democracy in Taiwan allowed popular participation without destroying the ability of the political processes to function, as Samuel Huntington (1968) feared could well happen in a developing nation. This “good” outcome resulted from the fact that the major political forces in Taiwan were seemingly more committed to democracy than to maximizing their own power so that they were willing and able to reach the required pacts at critical junctures. More broadly, the various parties and factions showed that they could do business with one another in a positive fashion, cooperating in some areas while slugging away at one another in others in a complex pattern where there were seemingly no permanent allies or enemies. For example, during 1996–1997 the KMT and DPP aligned with each other in the NDC and National Assembly to push constitutional reform down the throats of the New Party and significant factions within their own organizations; the DPP and the New Party, along with some dissident KMT legislators, united to prevent President Lee from retaining Lien Chan as premier; and a pro-business coalition with members from all three parties (Premier Vincent Siew was a cofounder) united to pass key economic bills in the deadlocked Legislative Yuan (T. J. Cheng, 1997; Robinson, 1997). This is the hallmark of effective democratic politics and, thus, represented a significant step forward in Taiwan’s democratization.

The Evolution of the Party System in Taiwan

Political parties are normally assumed to play a vital role for democracies both by linking their governments to the citizenry and by forming

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political organizations that are strong and skillful enough for effective governance. Table 3.2 summarizes the principal activities involved in these two functions. Certainly, parties are central to linking government and society via political representation and democratic accountability. Competing parties, according to democratic theory, aggregate disparate issues into policy packages to organize and simplify political choice for the electorate. Over time, citizens observe the effects of the winning party’s policy package and either reward or punish it at the next election. Thus, the nature of the party system is critical for several fundamental functions of democracy: (1) ensuring that free and fair competition among contending political forces occurs; (2) organizing debate on major issues to provide adequate interest representation; (3) structuring the ongoing chaos of political events to create a fairly stable and meaningful pattern; and, as a consequence of the first three, (4) ensuring that government is representative of and responsive to the broader society. A second important function of parties is governing—that is, making and implementing public policies for a society and preserving political stability (Mair, 1997; Powell, 1982; Sartori, 1976).

Table 3.2 Party Roles

Function Link society to political elites Representation

Organize political choice

Hold parties accountable through elections Effective performance Governing Political stability

Definition

Polity Emphasis Developed democracies

Seek to achieve policy-relevant views of groups in society (constituencies) Develop policy packages combining the issue positions of disparate constituencies Allow public to rate parties on their performance Developing nations Formulate and implement public policies efficiently Maintain law and order, protect property rights, minimize fears that political change might alter the economic and social orders

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Especially in new and fragile democracies like Taiwan, problems may arise because the characteristics of parties and party systems that seem best suited for some of these objectives ironically undercut others. In particular, there appear to be almost inevitable trade-offs among such central objectives as accountability, representation, and stability. This can be seen, for instance, in Table 3.3 which ranks the four most common types of democratic party systems conceptualized by Giovanni Sartori (1976) in terms of these three desiderata. Sartori classified party systems on two criteria: (1) how many parties exist (one dominant party, two competitive parties, or three or more significant parties); and (2) whether the ideological differences among the parties are moderate or highly ideologically polarized. Assuming that few dominant one-party or competitive two-party systems will be ideologically polarized, therefore, produces the four types of systems included in Table 3.3 (incidentally, Sartori uses slightly different terminology). As can easily be seen from this table, good things (i.e., accountability, representation, and stability) do not appear to go together. Representation will probably be best in multiparty systems, but good representation is achieved at the cost of accountability and, especially when these systems are polarized, stability. Conversely, one-party dominant systems are the most stable, but representation and accountability will almost inevitably suffer in them. Finally, competitive twoparty systems probably do the best job of balancing accountability and stability, but given the incentives for the two major parties to emphasize catchall appeals, the interests of significant minorities may well be lost in the shuffle. Table 3.3 Probable Impact of Party System on Party Functions

Type of Party System

Stability

Representation

Accountability

One-party dominant

Highly stable

Minority constituencies Low can be frozen out of system

Competitive two-party

Stable

Tendency to be catchall parties, rather than representatives of specific constituencies

High

Multiparty moderate

Stable

More representative of individual constituencies

Probably low (coalitions)

Multiparty polarized

Unstable

More representative of individual constituencies

Low (fear of conflict)

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In sum, the nature of the party system in a developing nation, such as Taiwan, can play a vital part in determining the success or failure of a democratic transition. In Taiwan’s case, the state of the polity at the beginning of the democratic transition was not particularly auspicious for the creation of a strong and effective party system. Institutionally, there was some foundation for the evolution of a dominant one-party system, like Japan’s or India’s. One party had dominated the authoritarian era and the electoral system, in which voters had a single nontransferable vote in multiseat districts, was seen as conducive to a factionated large ruling party. Yet this type of party system was neither necessarily normatively desirable nor preordained by the country’s political dynamics. In terms of desirability, the problems that such a system creates for representation and accountability (see Table 3.3) were precisely the reasons that caused many of Taiwan’s citizens to agitate for democracy. In terms of practicality, ethnic cleavages were seen as fairly strong in Taiwan (Gold, 1986; Wachman, 1994), and the electoral system ensured representation for any sizable minority, suggesting that political dynamics might sunder the society. The degree of democratization and the nature of the party system have certainly varied dramatically in Taiwan over the postwar era, beginning with a highly dictatorial party state after the KMT evacuated to Taiwan in 1949 that was transformed to a competitive democracy by the mid-1990s. Table 3.4 provides an overview of this evolution of Taiwan’s party system, dividing it roughly into four stages. The first two decades of the Republic of China on Taiwan were essentially a Kuomintang dictatorship. In the second stage, the assumption of the premiership by Chiang Ching-kuo in 1972 led to a transition to soft authoritarian one-party rule. The formation of the opposition Democratic Progressive Party during 1986 in defiance of martial law is widely used to mark the beginning of the ROC’s democratic transition in the third stage. And, in the fourth stage, the varying results of the elections of 1995, 1996, and 1997 suggest that a democratic consolidation had occurred on the island (Chao and Myers, 1998; Clark, 1989; Rigger, 1999b; Winckler, 1984). Each of these four stages is characterized by a different configuration of parties and, obviously, by a different degree of party competition. For the first two periods, the Kuomintang was the one dominant or ruling party, although the Tangwai became a significant quasi-party during the period of soft authoritarianism. The successful formation of the Democratic Progressive Party began the democratic transition. Once new political parties became legal in the democratic transition, numerous ones

Table 3.4 History of the Party System in Taiwan

Party System

Transition Event

Time Period

Configuration of Parties

KMT dictatorship

KMT evacuates to Taiwan

1950s–1960s

KMT total hegemony

Authoritarian, one-party rule

Chiang Ching-kuo becomes premier

1972–1985

KMT dominant, some competition from Tangwai

Democratic transition

DPP formed in defiance of martial law

1986–1996

Growing competition between KMT and DPP; KMT slips to under 55% of vote

Democratic consolidation

Growing loss of effective KMT control over legislature and major cities and counties without crisis; DPP wins 2000 presidential election

1997–2000

With New Party, three-way competition means KMT control not guaranteed

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were founded in the late 1980s and early 1990s, but only the KMT and DPP could gain significant support, suggesting that the ROC was developing a two-party system. A significant third party finally emerged in 1993 when the New Party split off from the Kuomintang. It was composed of younger mainlanders from the anti-mainstream faction who championed a somewhat strange combination of domestic political reform and a more pro-China policy. Finally, the democratic consolidation saw a movement back toward a two-party system that was challenged by the dramatic 2000 presidential elections. The data on election results in Table 3.5, for example, demonstrate that 1986 clearly marked the beginning of a decided decline in the Kuomintang’s domination of Taiwan’s electoral politics. Up through the mid1980s, the KMT received two-thirds or more of the vote in most elections

Table 3.5 Electoral Support of Major Parties (percentage)

Election 1980 Legislative Yuan 1980 National Assembly 1981 Magistrates and mayors 1983 Legislative Yuan 1985 Magistrates and mayors 1986 Legislative Yuan 1986 National Assembly 1989 Legislative Yuan 1989 Magistrates and mayors 1991 National Assembly 1992 Legislative Yuan 1993 Magistrates and mayors 1994 Provincial governor 1995 Legislative Yuan 1996 President 1996 National Assembly 1997 Magistrates and mayors 1998 Legislative Yuan 2000 President

KMT 72 66 57 69 61 67 64 59 56 71 53 47 56 46 54 50 42 46 23b

DPP/Tangwai New Party 13 — 23 19 13 25 24 29 30 24 31 41 39 33 21 30 43 30 39

— — — — — — — — — — — 3 4 13 15a 14 2 7 1

Source: C. Clark, “Democratization and the Evolving Nature of Parties, Issues, and Constituencies in the ROC,” in Peter C. Y. Chow, ed., Taiwan’s Modernization in Global Perspective (Westport, CT: Praeger, 2002), p. 142. Notes: “—” indicates New Party not yet formed and missing data for DPP/Tangwai. a. Votes for Lin Yang-kang, an independent closely associated with the New Party. b. KMT defector James Soong, who ran as an independent, received 37% of the vote.

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while the opposition Tangwai averaged significantly under a fifth. In the 1986 elections for Legislative Yuan and National Assembly, which occurred three months after the DPP declared itself an opposition party, the KMT won about its normal share of the vote, but the DPP increased its support to a quarter of the electorate. Three years later, the KMT margin was cut to under two to one (about 58% to 30%) for the first time in Taiwan’s history. When the New Party split off from the KMT in 1993, the ruling party’s electoral edge eroded further and, by the mid-1990s, each party had carved out a fairly stable share of the electorate. The Kuomintang continued to win every major national election before the 1997 elections for local government magistrates (chief executives) and mayors, but its plurality or majority support slipped to the less than totally comfortable 47% to 53% range. The Democratic Progressive Party, in contrast, surged ahead as the major opposition party, generally garnering 30%–40% of the vote and winning a significant number of local executive posts (e.g., the mayor of Taipei and the magistrate or chief executive of Taipei County) even before 1997. In addition, the New Party won close to 15% in national elections during the mid-1990s with its support being concentrated in the Taipei area, although its intraparty battles and pitiful showing in local elections outside Taipei raised some danger signals about its electoral effectiveness (Chao and Myers, 1998; Copper, 1997, 2009; Rigger, 1999b; Tien, 1996b). Both the 1995 elections for Legislative Yuan and the 1996 elections for National Assembly produced KMT majorities that were too small to give the party effective control of these bodies. In the Legislative Yuan, the Kuomintang ended up with a razor-thin majority: 85 of 164 seats versus 54 for the DPP and 21 for the New Party. In fact, when Legislator Vincent Siew was appointed premier in August 1997, the number of KMT seats fell to less than half the absolute number (81). The KMT won a more solid majority of 55% of the National Assembly seats in 1996. However, since an extraordinary majority was needed to pass the constitutional amendments with which the National Assembly dealt, this meant that the KMT needed significant support from opposition party members to do anything. Given that this politically ambiguous situation did not raise any challenges to Taiwan’s democracy, there is a good case to be made for considering the 1995–1996 elections as marking the consolidation of Taiwan’s democracy. This case was strengthened with the routine acceptance of the 1997 elections for the chief executives of counties and cities when the DPP narrowly outpolled the KMT in the popular vote (43% to 42%), but won double the number of contests—12 to 6 with three victories by independents (T. J. Cheng, 1997; Tien, 1996a).

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The nature of Taiwan’s party system at the turn of the century was at least a little ambiguous or indeterminate. The data in Table 3.5 indicate that Taiwan had reached a two and one-half party system in the mid1990s with the emergence of the New Party. The KMT and DPP were competing on increasingly even terms, with the former usually winning 45%–55% of the vote while the latter averaged 35%–45% at the polls. The New Party, in contrast, was clearly much less popular than the two major parties, but it seemingly appealed to a stable 15% of the electorate. Given the KMT’s (or potentially the DPP’s) inability to achieve more than a tenuous majority in either the Legislative Yuan or the National Assembly, this gave the New Party significant leverage in Taiwan’s parliamentary politics. However, in the last few elections of the 1990s, the New Party’s share of the vote plummeted to well under 10%. Consequently, the ROC appeared to be moving toward competitive two-party politics. The dramatic 2000 presidential election marked a watershed in the democratic development of the Republic of China. First, it certainly underlined the competitive nature of Taiwan’s politics and party system. When Lee Teng-hui’s rival James Soong was denied the KMT’s nomination, he ran as an independent. During the three months’ run-up to the election, the three major candidates (Chen Shui-bian of the DPP, Lien Chan of the KMT, and Soong) ran neck and neck with each one garnering 20%–25% in almost every poll. Second, Chen’s victory with 39.3% of the vote (versus 36.8% for Soong and only 23.1% for the KMT’s standard bearer Lien) brought the end of fifty years of Kuomintang rule, thereby demonstrating the consolidation of Taiwan’s democratization beyond all doubt. Third, the immediate results of the election suggested a move away from, rather than toward, the model of two-party competition. Soong established his own party, the People First Party (PFP) and, after a disappointed Lien forced Lee Teng-hui out as KMT chairman, he left the party and became the godfather (but not the official leader) of the Taiwan Solidarity Union (TSU). Since both the PFP and TSU appeared to have significant support in the electorate, a multiparty system appeared to be emerging (Clark, 2000a; Copper, 2000). Table 3.6 suggests that the nature of party system in Taiwan possessed rather mixed implications as the nation consolidated its democracy in the late 1990s. This table evaluates the party system in terms of the three desirable characteristics of stability, representativeness, and accountability. The 2000 elections certainly proved that the party system provided accountability since the electorate was quite willing to turn the ruling party out of power. In contrast, the stability of the party system itself was

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Table 3.6 Taiwan’s Party System, Late 1990s

Type of party system

Moving from temporary multiparty toward competitive two-party

Stability

Not very stable since the KMT split in the 2000 presidential election indicated the potential for a much different party system

Representativeness

Movement toward two catchall parties indicated that some constituencies might have problems getting their views represented

Accountability

DPP presidential victory in 2000 certainly demonstrated that voters could hold incumbents accountable by changing governments

certainly questionable since the effective number of parties jumped around at short intervals. The representativeness of the system, or more accurately its limitations, had mixed implications for Taiwan’s polity. On the one hand, as the KMT and DPP seemed to be moving toward being catchall parties, there was certainly the danger that significant constituencies would be ignored. On the other, this situation would mitigate the dangerous and destructive polarization on such an issue as national identity.

Issues in Taiwan Politics

One of the most important functions of a democracy is to facilitate popular influence over decisions concerning the major issues facing a society. Table 3.7, therefore, presents an overview of the central issues in Taiwan’s politics during its democratic transition and early democratic consolidation in the late 1980s and 1990s. The first issue is democratization itself, which dominated the political agenda in the ROC from the early 1970s through the late 1980s. Second, the question of national identity or ethnic justice has long been seen as perhaps the overriding concern in the polity, even when the direct expression of the issue was repressed by martial law (Wachman, 1994). Third, corruption or what has been called “black and gold politics” became a significant and potentially divisive issue during the 1990s. Finally, while social welfare policy has been less contentious on Taiwan than in most developed nations, significant party differences did emerge here during the 1990s.

Table 3.7 Major Issues During Taiwan’s Democratic Transition

Late 1980s

Early 1990s

Late 1990s

Democracy

KMT old guard trying to hold back reforms pushed by DPP and KMT reformers

Largely achieved

Moot

National identity and ethnic justice

Growing DPP challenge to KMT One China policy

Polarization between pro-independence DPP and pro-unification KMT evolves when President Lee Teng-hui and mainstream KMT take middle stance

Cross-party consensus on New Taiwanese identity and status quo in cross-strait relations

Black and gold politics

Fairly marginal on political agenda

KMT seen as most tainted; growing power of local factions because of KMT’s need for votes they control

Difference among parties narrow; President Lee’s crackdown on corruption while DPP and New Party less clean

Social welfare policy

Specific issues pushed by social movements

DPP takes lead in pushing for expansion of welfare state

KMT co-opts popular DPP policies, blurring differences among parties

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Taiwan’s Political Economy

For several decades from the early 1970s through the early 1990s, the issue of democratization itself almost certainly formed the central cleavage in Taiwan’s politics. When authoritarian controls began loosening in the 1970s, therefore, an accelerating push for democratization commenced. The Tangwai and even significant segments of the KMT became ardent advocates of democratization in the late 1970s and early 1980s, and the growing role of elections to legitimize the KMT’s rule resulted in an increasing number of electoral politicians within the ruling party developing a personal stake in further democratization. By the time of the democratic transition in the late 1980s, hence, democratization was visibly supported by almost all elements along the country’s political spectrum except the KMT old guard who were powerful within the party and state hierarchies and the military, but who had little popular support. The final steps in democratization (e.g., the forced retirement of the senior legislators in 1991), then, were taken with strong support across almost the whole political spectrum. Consequently, the DPP and much of the KMT could legitimately claim credit for this impressive political success (Chao and Myers, 1998; Y. H. Chu, 1992; Higley, Huang, and Lin, 1998; Hood, 1997; J. J. Wu, 1995). However, the rapid democratic transition created an ironic problem for the reformers. Their very success in achieving the nation’s one-time top policy goal made the issue moot. For most DPP supporters at least, up to the early 1990s democratization was strongly intertwined with the issue of ethnic justice and national identity. The inability of a majority of the ROC’s current citizens to select their rulers allowed the government to be dominated by mainlanders who were seen by many islanders as treating the Taiwanese (who are also Han Chinese) as second-class citizens in their own land. Taiwan’s democratization, therefore, was widely expected to unleash Taiwanese nationalism on two interlinked, but distinct, issues: (1) rejection of the mainlander-dominated political regime; and (2) growing hostility toward and the absolute rejection of China’s claim to sovereignty over Taiwan, which was ironically at least tacitly supported by the Kuomintang’s policy of mainland recovery (Gold, 1986; Makeham and Hsiau, 2005; Rigger, 1999b, 2001; Tu, 1998; Wachman, 1994). As the 1990s opened, both the DPP and KMT seemingly placed opposing bets on how the citizens of Taiwan, who were being increasingly empowered by the country’s democratization, would respond to this issue. The DPP bet that the end of authoritarian controls would permit islander resentments to be expressed, winning over voters to the DPP as the champion of Taiwanese nationalism. For example, the DPP added support for

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Taiwan independence to its charter in 1991. Conversely, the KMT bet that the satisfaction of the general population with the prosperity created by Taiwan’s economic miracle would make them supportive of the political status quo both domestically and in cross-strait relations with China. Thus, the Kuomintang continued to adhere to its version of the One China principle that the ROC represented the legitimate government of all China. A little thought, though, would have suggested that neither of these bets was particularly well placed. On the one hand, the KMT’s strong performance at the polls in the late 1980s and early 1990s demonstrated that the DPP’s assumption that it could ride to power on a wave of Taiwanese nationalism was quite dubious. On the other hand, the KMT ignored signs of growing resentment against the treatment of the Taiwanese culture and language of the large majority of the population as second class. It also failed to realize that democratization would make the maintenance of unrealistic official myths untenable and that clinging to them would hurt the party in the eyes of the general population. In such a situation of two less than desirable alternatives, therefore, the potential opened up for a creative policy entrepreneur to transcend the existing policy debate. President Lee Teng-hui responded to this opportunity with what appeared to be inspired statesmanship on the national identity question. As Lee consolidated his power, he not so subtly pushed the KMT’s position on cross-strait relations in a new direction. Lee, in fact, managed to straddle the national identity issue quite astutely, implicitly portraying himself as a moderate between the pro-independence DPP and the pro-unification anti-mainstream KMT and, after 1993, the New Party. While retaining a commitment to unification with China in the indefinite future, he aggressively began to pursue the pragmatic diplomacy of trying to upgrade Taiwan’s international status. For example, in 1993 he co-opted a popular issue from the DPP by launching a campaign to join the United Nations, which the KMT had strongly opposed up to then (Cabestan, 1998; C. M. Chao, 2002; Lasater, 2000; Sutter and Johnson, 1994). Furthermore, the victory of Lee’s mainstream faction clearly promoted the Taiwanization of the party—which made it hard to blame it for the repression of the old Kuomintang. Consistent with the view that the old Kuomintang had been rejected, he formally apologized in 1995 for the February 28 massacre of thousands of Taiwanese by Nationalist troops (Chao and Myers, 1998; Hood, 1997). For its part, the DPP began to moderate its position on Taiwan independence in the early 1990s after the inclusion of a pro-independence

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plank in the party charter cost it significantly at the polls in 1991. Subsequently, the DPP downplayed without renouncing Taiwan independence and continued its erosion of the KMT majority. In particular, the Chinese military threats during the 1996 presidential elections and the woeful showing of the pro-independence DPP candidate evidently convinced most of its leaders that Taiwan independence was simply unfeasible. Consequently, the DPP began to downplay independence without ever formally renouncing it. For example, some (but far from all) DPP leaders began to argue that Taiwan already was an independent country so there was no need for a formal declaration of independence. Indeed, several groups defected from the DPP because of this moderation on the national identity issue and formed the electorally inconsequential Taiwan Independence Party (Fell, 2005; Rigger, 2001; T. Y. Wang, 2000). Initially, many feared that democratization would provoke a destructive polarization over national identity. Actually, through the 1990s, the dynamics of democracy had the opposite effect of moderating ethnic tensions. As it turned out, strong association with either unification or independence was a loser at the polls because most citizens feared that both would threaten Taiwan’s social, economic, and political stability and achievements. For example, as shown in Table 3.8, during the second half of the 1990s more Taiwanese favored the ambiguous and somewhat ridiculous diplomatic status quo (51% in 1995 and 43% in 1999) than supported either independence or unification. And only an eighth or less of the citizenry took either extreme position, although advocacy of independence did jump from 15% to 28% over this five-year period. Consequently, Taiwan’s parties, especially the two major ones, came

Table 3.8 Attitudes in the 1990s Toward the Ultimate Goal for Cross-strait Relations (percentage)

January 1995 Extreme independence Moderate independence Status quo Moderate unification Extreme unification

6.6 8.6 51.1 20.7 12.9

January 1999 12.9 14.8 43.5 17.4 11.4

Source: J. F. S. Hsieh, “Whither the Kuomintang?” in B. J. Dickson and C. M. Chao, eds., Assessing Lee Teng-hui’s Legacy in Taiwan’s Politics: Democratic Consolidation and External Relations. Armonk, NY: M. E. Sharpe, 2002), p. 116.

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under significant pressure to take moderate positions on national identity (Hsieh, 2002a, 2002b; C. L. Lin, 2001; T. Y. Wang, 2000). Thus, the public seemed to have come to a consensus that might be summarized by two not entirely consistent policy prescriptions: (1) maintain complete autonomy from the PRC, including upgrading Taiwan’s status in world affairs; and (2) avoid picking fights with China, including not directly challenging the PRC’s sovereignty claims over Taiwan. This consensus, hence, explains the trend over time shown in Figure 3.2 for the KMT, DPP, and New Party to move toward moderate policies on national identity and cross-strait relations as the 1990s progressed, as electoral factions were able to suppress the demands of more ideological factions in both major parties somewhat (Fell, 2005). The result on the right side of the figure was a series of events that would have been considered quite remarkable just a few years earlier. First, in terms of national identity, Lee Teng-hui’s concept of a “New Taiwanese” identity that was open to both islanders and mainlanders proved to be popular (M. J. Brown, 2004). Second, as we discussed above, the National Development Conference of 1996 produced a consensus among the DPP, KMT, and New Party on the previously highly contentious issue of cross-strait relations. Finally, this growing moderation on national identity and crossstrait relations carried over into the extremely competitive presidential campaign of 2000. Although the three major candidates certainly criticized each other (and, especially, caricatures of each other), they all really advocated the moderate position of toning down hostilities with Beijing while strongly protecting Taiwan’s sovereignty (Clark, 2000a). A third issue that became salient in the 1990s was the growing problem of political corruption. This came to be called black and gold politics—black signifying gangsters and gold rich businessmen. Under the KMT authoritarian regime, corruption and crime had remained fairly limited at what might be termed first world rather than third world levels. Democratization unfortunately unleashed burgeoning corruption. The declining powers of the police state made illegal activities, including political corruption, much safer. The key stimulus, though, probably came from several unfortunate side effects that democratization itself had on the political processes. First, politics and campaigning became extremely expensive, forcing politicians to become dependent on contributions from well-heeled businesspeople. Second, the growing power of legislatures gave small groups of politicians the power to bestow favors such as government contracts. For example, complaints were raised that legislators set up their own companies and used their new “power of the

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Figure 3.2 How Democratization Moderated the National Identity and Cross-strait Relations Issues

DPP Trashing at polls in 1991 leads to some moderation

Huge Peng Ming-min loss in 1996 and Chinese threats convince most DPP leaders that independence is impossible

KMT Lee Teng-hui victory leads to commitment to eventual unification coupled with aggressive pragmatic diplomacy

Taiwanization of KMT reduces islander resentment

New Party Prounification after 1993 break with KMT

Chinese threats during 1995–1996 Taiwan Strait crisis make supporting unification untenable

Taiwan Independence Party defection helps moderate image

Growing consensus among parties and in society on national identity and crossstrait relations 1. “New Taiwanese” identity 2. Consensus on cross-strait relations at 1996 NDC 3. Candidate moderation and similar stances on cross-strait relations in 2000 presidential elections

purse” to influence bidding on government contracts as well as using connections with organized crime to intimidate legitimate competitors from bidding (C. H. Chang, 1996; Y. H. Chu, 1994a; C. T. Kuo, 1998). Third, Taiwan began a huge program of infrastructure expansion in the early 1990s that created lucrative opportunities for those with political connections. Fourth, when Lee Teng-hui and his young Turks challenged

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the KMT old guard, they turned to the support of rich businesspeople and local patronage-oriented political factions as a counterweight to the bureaucratic power wielded by their conservative rivals in the party and the government. In addition, the Kuomintang ran a wide variety of businesses; and many of them shared in the bonanza of rapid economic development, giving the party large amounts of Taiwan’s version of political soft money (Bosco, 1994; M. T. Chen, 1996; F. Wang, 1994). Finally, Taiwan’s dynamic economy produced substantial resources to grease the wheels of political corruption in general. A good illustration of black and gold politics and its links to the struggle between the mainstream and anti-mainstream factions during the democratic transition is provided by the case of Weng Ta-ming and his Hualong Conglomerate (Ong Daming and Weng Ta-ming are alternate romanizations of the same name): The leader of the Hualong Conglomerate, Ong Daming, sponsored the Democracy Foundation for his friend Guan Zhong, who was a political rival of President Li [Lee Teng-hui]. The government then investigated the business transactions of the Hualong Conglomerate and sent a few managers to jail, causing the Conglomerate’s stock prices to tumble. In revenge, legislators sponsored by the Hualong Conglomerate initiated a congressional investigation of the Evergreen Conglomerate, which was a loyal supporter of President Li. Three Ministers of Transportation lost their jobs as a result. Ong finally decided to run in a legislative election and was elected, thus sparing himself a criminal conviction by the government. After the election, the stock prices of the Hualong Conglomerate skyrocketed. (C. T. Kuo, 1998: 93) For instance, the founder of the Hualong Group, Weng Ta-ming who is himself a legislator, financially supports twenty “Hualong Brand” legislators, as they are called, and controls the Finance Committee of the Legislative Yuan. Because of Weng’s influence, any legislation or reform that does not benefit large-scale entrepreneurs (such as the reimplementation of a stock-related capital gains tax) either will not pass or will be subjected to massive revision, with the final result greatly deviating from the original intention of the legislation. Weng has even used his political influence and financial power to control or manage the prices of shares of some corporations through speculative activity in the stock market. . . . In the recent Ham-Hu scandal, Weng’s chief assistant, Ms. Lee Hsiao-fen, speculated in shares of the Hua-Kou company and added more than six billion NT dollars to Weng’s treasury. Due to loopholes in the Security Transactions Act, Weng will not be found guilty for his misconduct. Especially ridiculous is that when the scandal was uncovered, all the Hualong Brand legislators—mostly KMT members but also some members of the DPP and New Party as well—

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went to Weng’s house to protect their benefactor from being examined by personnel from the Bureau of Investment. (C. H. Chang, 1996: 94)

Black and gold politics developed, therefore, because of the unfortunate confluence of demand-side and supply-side relationships between businesspeople and politicians, especially legislators, as shown in Figure 3.3. The demand side of the equation is easy to understand. The growing importance of elections and legislators in Taiwan’s politics made campaigns extremely expensive, which greatly increased the political power of those who controlled wealth, especially the business community. The principal reason why many businesspeople were willing to make these political investments almost certainly was that democratization had greatly changed the supply, as well as the demand, side of the government-business nexus in the sense that politicians could supply much more valuable rewards. The burgeoning political corruption offended general public sensibilities in three major areas. First, many contracts for public projects became highly politicized with contracts going to politicians’ companies, which, in many instances, had ties to organized crime. Needless to say, quality suffered greatly and public cynicism about government projects rose. Second, several prominent business leaders and conglomerates blatantly used political connections and legislative positions to help their corporations and influence the stock market, leading to a seemingly endless series of major scandals in the early and mid-1990s. Finally, local political factions, which had always been patronage oriented, became increasingly blatant and tied to organized crime. For example, during one crackdown in the mid-1990s, it was estimated that almost a third of those recently elected to local government councils had Mafia connections.

Figure 3.3 The Dynamics of How Democratization Produced Money Politics

Demand side of democracy

Greater political competition

Elections far more expensive

Money politics

Supply side of democracy

Greater power for assemblies

Use of veto power to extract payoffs from government

Money politics

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Throughout the 1990s, black and gold politics did not gain much salience in partisan clashes, despite public disgruntlement and even outrage. The KMT was widely blamed for being the largest practitioner of the corrupt arts. For example, throughout the 1990s, Taiwanese were more likely to describe the KMT as corrupt than the DPP by approximately two-to-one margins (Fell, 2005: 61). The DPP did take the lead in attacking corruption, but its ideological factions were much more concerned with the national identity issue. Over time, moreover, the other parties clearly became tainted as well and, in the mid-1990s, President Lee and the central KMT organization launched a credible anticorruption drive, in part to discredit their rivals within the party such as James Soong (Bosco, 1994; C. H. Chang, 1996; Y. H. Chu, 1994a; Fell, 2005; C. T. Kuo, 1998; Winn, 1994). A fourth set of issues concerned protecting the welfare of the citizenry. While governmental action in this area has been less contentious in Taiwan than in most developed nations, significant party differences did emerge during the 1990s. During the authoritarian era, Taiwan’s social welfare programs were quite modest, and the government also repressed the labor movement to help the island maintain its niche in the global economy as a source of low-cost industrial goods (Y. H. Chu, 1994b; W. I. Lin and Chou, 2007; J. Wong, 2004). Likewise, environmentalism was certainly sacrificed to the demands of industrialization (D. W. Chen, 1994; Williams, 1994). Consequently, the DPP took some interest in criticizing the regime on these issues and, in fact, Yun-han Chu and Tse-min Lin (1996) argue that the DPP’s appeal on these issues contributed considerably to its electoral success in the early and mid-1990s. Yet the opposition party’s principal interest in the national identity question limited the aggressiveness of its policy thrusts in these areas. Instead, independent social movements, such as environmental groups and farmers’ and women’s associations (but perhaps surprisingly not labor unions), took the lead in bringing these issues to the national agenda during the 1980s (D. W. Chen, 1994; Y. H. Chu, 1994b; Hsiao, 1991). Furthermore, once social welfare policies such as medical insurance were developed, they created strong bureaucratic and popular constituencies that cut across party lines and resisted efforts at retrenchment. Furthermore, the Kuomintang moved to take reformist positions on most of these issues once the popularity of the positions espoused by the social movements and the DPP was established and as the more liberal mainstream faction marginalized the KMT’s old guard. Thus, by the end of the 1990s, social welfare poli-

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cies seemingly had fairly little play in Taiwan politics (Cheng and Schive, 1997; Clark, 2002; Fell, 2005; J. Wong, 2004). Dafydd Fell (2005) provides a good theoretical model of issue evolution and party competition during Taiwan’s first democratic decade. The two major parties were polarized at the beginning of the 1990s, but converged quite significantly for several reasons. First, the general political dynamics described in this section generally promoted moderation. Second, both the DPP and KMT had electoral and ideological factions so that the growing importance of elections for party competition gave more power to moderates. Third, there was a pattern in which the DPP put issues on the agenda (e.g., rejoining the United Nations or social welfare reform) and the KMT tried to steal them, not always successfully, if they proved popular. Finally, the parties stressed different issues. Taken together, these factors created cross-cutting cleavages that blunted the sharp edges of political conflict.

Taiwan’s Democratic Transition: The Issue Structure as Facilitator and Potential Challenger

Taiwan’s democratic transition was surprisingly smooth and successful. A central reason for this was that the major players in Taiwan’s political arena (with the exception of the Kuomintang old guard) accepted the democratic rules of the game with surprising speed for a country with no history or tradition of democracy. Yun-han Chu and Tse-min Lin (1996) suggest an intriguing explanation for this in terms of issue cleavages in the ROC. First, the countervailing implications of the national identity question noted above created a much more competitive party system in which victory became somewhat problematic, thereby spawning new issues that cut across both the national identity and traditional party cleavages. The KMT and Lee were seen as the least threatening on the national identity issue, but Lee’s periodic contretemps with the PRC undercut the KMT advantage on this issue. The mainstream faction of the KMT gained popularity for its role in promoting democratic reforms, but lost it from its association with black and gold politics. The DPP benefited from its support for expanding the social welfare state to ameliorate growing inequality. And the New Party’s association with clean government was extremely popular. Consequently, the major parties and factions were able to win enough in elections to give themselves a stake in the system. Additionally, day-to-day politics in legislative bodies evolved (despite

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the well-publicized fist fights) into bargaining relationships in which some “odd couples” emerged periodically in temporary alliances. For example, the DPP tacitly supported the mainstream Kuomintang in pushing Premier Hau Pei-tsun out of office in 1993 but, after his retirement ended the presence of mainlander conservatives in the top leadership, the DPP and mainstream KMT became strong rivals for islander support. The issue structure of Taiwan politics, therefore, appeared to have created a strong foundation for democratic stability by the late 1990s. Paradoxically, however, the nature of issue cleavages (in particular, the general consensus on all four of the issues we discussed in the previous section) also suggested the potential for some challenges to the operations of the party system. This can be conceptualized in terms of the two major functions of a party system included in Table 3.2: (1) linking society to the political elites; and (2) promoting effective governmental performance. In terms of linking citizens to their government, the seeming consensus on the central issues in Taiwan possessed the strong potential to blur rather than clarify policy choices, thereby making it more difficult to hold parties accountable for their actions and positions. In addition, this consensus meant that significant constituencies with strong feelings on such issues as national identity and social welfare had difficulty in getting their views about public policy represented or put on the political agenda. In terms of promoting effective government, the fact that black and gold politics did not become a major partisan issue had the ironic effect that no party pushed very strongly to clean up the growing political corruption on the island. This, in turn, threatened the state’s capacity for effective policymaking because of political interference with the executive bureaucracy (Clark, 2000b; Tan, 2008). Finally, in terms of party competition itself, the seeming consensus on most issues (even the highly emotional debate on national identity) created a problem for the competition among the major political parties since it made it hard for the parties to distinguish themselves and mobilize their voters, which gave them a strong incentive to arouse more divisive political cleavages.

4 The Limitations of Export-led Growth

From the perspective of the mid-1980s or even the mid-1990s, the

designation of Taiwan as an economic miracle appears to be fully justified. Over the past decade and a half, however, the country’s economic performance has fallen far short of the miraculous. There were sharp recessions in 2001 and 2008–2009 and, even in good years, growth was markedly lower than during earlier eras. In this chapter, we argue that these economic strains result from an increasingly boxed-in economy in which previous opportunities for rapid growth have been curtailed. Ironically, several of Taiwan’s past accomplishments are now contributing to its boxed-in economy. We begin the chapter with a discussion of the basic sequence of economic development to create a template for evaluating economic development in the ROC. Next, we discuss the nation’s economic performance over the first decade of the twenty-first century in view of these theoretical expectations. We then present case studies of two major features of the boxed-in economy: (1) the changing role and performance of small and medium enterprises and (2) Taiwan’s growing integration with the economy of the PRC. Finally, we consider Taiwan’s economic strengths and limitations at its current stage of economic development. Theorizing about international politics and economics has come to recognize the importance of basic ideas or concepts about how the world works economically for policy formation and for the success of national economies (Goldstein and Keohane, 1993; Hall, 1989; Nau, 1990). Thus, it makes sense to briefly review the basic ideas underlying our concepts of national economic development and international competitiveness. To a good degree, we can probably still say that both these ideas and several conundrums that they raise were all in Adam Smith’s The Wealth 73

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of Nations. Adam Smith (1975) started with the commonsense notion that the quality of life in a community or nation can improve only if its total production increases. He then went on with the argument that two key factors can lead to considerable increases in what a society can produce. First, new technology or machinery can greatly increase output; and, second, specialization in a division of labor permits much greater productivity, as illustrated by what today would be considered a humble pin factory. Consequently, if free markets prevail (anyone can buy or sell whatever they please at whatever price they negotiate), an invisible hand will promote economic development through market competition. When a particular good is in short supply, the public will bid up the price, thereby providing incentives for expanded production. Conversely, an oversupply drives prices down. The competitive push for greater profits provides strong incentives for technological and organizational innovations that will increase productivity and total production. No wonder that economic historian Robert Heilbronner termed this model “the wonderful world of Adam Smith” (1980).Yet the very idea of economic competition itself raises two problems that are by no means easy to resolve. First, if markets are not free or competitive (in the sense that no buyer or seller possesses enough market power to affect prices unilaterally), they will probably not work in the assumed manner for the quite understandable reason that those who possess market power will use it to distort markets and reap monopoly rents. The Wealth of Nations itself contains warnings against the collusion that is likely to arise when butchers, bakers, or candlestick makers gather for even social occasions (Muller, 1993). In Smith’s day of the late eighteenth century, most producers were quite small, and most businesses required fairly little capital, so that problems of monopoly (control of a market by a single producer) or oligopoly (control of a market by a few producers) appeared more tractable than after the Industrial Revolution spawned giant corporations. In the contemporary situation of huge corporations and extremely high entry barriers to many industries, liberals often argue that government should be used as what John Kenneth Galbraith (1978) termed a countervailing power to businesses big enough to distort markets. Yet, conservatives are quick to counter with the argument that government is an even more powerful monopoly that generally uses its power to distort markets for political purposes. This ideological debate over government intervention in the economy becomes much shriller in the realm of social policy, which is also linked to a broader debate over the nature or definition of “development.”

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Traditionally, development was defined in primarily economic terms on the assumption that industrialization and the higher levels of productivity and income that it brought would translate into a better popular standard of living. Yet the extent to which this is true remains highly variable; for example, only a small class benefited from Brazil’s industrialization in the 1960s and 1970s while the benefits of industrialization were much more widely spread in the East Asian nations. Thus, development has been redefined to include the popular quality of life or the level of basic human needs as measured by literacy, life expectancy, and infant mortality at the international level (B. E. Moon, 1991; Morris, 1979). Even in advanced industrial societies, the harsh logic of market competition can toss aside a large number of people. Liberals argue that public social programs are necessary to take the edges off raw capitalism while conservatives contend that such programs siphon resources away from the productive economy. Whatever one’s sympathy in this argument, both sides implicitly assume a doleful trade-off between growth and equity—that is, that the pursuit of either of these goals can come only at the expense of the other. There is a second, much different problem in using the concept of economic competition because of its connotation of a struggle in which one side wins and another loses. This image is quite alluring to many Americans who like the analogy to war and athletics. Yet although specific firms and individuals certainly compete directly, Smith’s model of capitalism actually posits a mutual interdependence among firms, communities, and nations in which the productivity gains of one can be transferred to others in the form of either cheaper goods or technologies that can make others more productive. Thus, a division of labor can, but does not necessarily have to, be mutually beneficial. This brings us to the central idea of development as increasing productivity and the improved quality of life that greater production presumably brings. Conventional economics long argued that communities or nations should specialize in their comparative advantages that were determined by fairly permanent factor endowments such as land, labor, and capital. This implicitly assumes that most types of economic activity were created equal. However, it does not take much thought to realize that productivity gains are, for the most part, much greater in industry than in agriculture or in most service occupations. For instance, the classic example of comparative advantage was that British cloth should be traded for Portuguese wine. The industrial productivity perspective suggests, though, that this could mean that Great Britain would get rich while Portugal would stay poor, which is what happened

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for nearly two centuries. Beginning with the Industrial Revolution, hence, development was generally associated with industrialization. In fact, through World War II, the few countries that industrialized generally grew rich while the rest of the world remained mired in poverty. At the beginning of the nineteenth century, for example, the developed world was about twice as rich as other societies while in 1950 this gap had jumped fourfold to eight to one (Cohen, 1973). Indeed, industrialization seemingly created what Lester Thurow (1992) terms a “virtuous cycle.” In Thurow’s model, nations became rich and industrial during the nineteenth and twentieth centuries by possessing and utilizing some combination of four resources: (1) natural resources, which could be sold or used as industrial inputs; (2) new technologies; (3) investment capital to put the raw materials and new technologies to work; and (4) human capital in the form of skilled labor and entrepreneurs. This process became self-reinforcing because, as shown in Figure 4.1, the productivity growth associated with industrialization created more physical and human capital as well as generating new technologies. Development, in short, meant jumping on the escalator of industrialization. The nature of industrialization, of course, changed dramatically over the nineteenth and twentieth centuries in terms of what industry was the most advanced or the technological driver—first textiles; then iron and steel; then automobiles; and, most recently, high-tech and advanced services. Figure 4.2 shows an overview of how these changes in leading industries constitute an S-curve in terms of increases in productivity and GDP—the curve in Figure 4.2 is viewed, at least by economists, as looking like an S (Kuznets, 1976; Rostow, 1960). In traditional economies, productivity increases are relatively small, but productivity (and, consequently, GNP) growth take off once industrialization starts (Rostow, 1960). In terms of domestic policy, this model implies that governments need to give a higher priority to education and human capital development as their nation moves up the international product cycle because more and more jobs will require advanced education and skills. Unlike the purely virtuous cycle perspective in Figure 4.1, however, this model of industry sequencing suggests that development is neither smooth nor beneficial to all. First, new industries supplant old ones in what Joseph Schumpeter (1950) has called a process of creative destruction. While the creation of new industries generally brings higher productivity and greater prosperity, the destruction of old industries can devastate communities and people with particular skills. Second, the advantages of the most advanced industrial nations will eventually be un-

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The Limitations of Export-led Growth Figure 4.1 The Virtuous Cycle of Productivity Growth

Available capital

Mass education

Technological innovation

Working smart

Productivity growth

Larger profits

More capital

Higher wages

Learning by doing

New technologies

Lower prices

Expanded middle-class society

Greater educational accomplishments

dercut as they move beyond high-tech industry to the postindustrial society whose economy is dominated by the service sector where productivity gains come much more slowly than in manufacturing. The theory of the international product cycle explains how each of these industries in turn spread like a wave through the developed world. In essence, the “international product cycle” refers to the life cycle of a particular good or product. Generally, new products are developed and produced in the most advanced industrial nations because they involve the latest (and most expensive) technologies, are produced by capitalintensive processes, and require highly skilled production workers. Over time, however, the production of the item becomes more standardized and labor intensive. Consequently, as an industry (e.g., textiles and apparel) matures so that production becomes highly standardized and labor

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Figure 4.2 Changes in the Leading Economic Activities and the S-Curve of Productivity and GDP Growth

Postindustrial society

Services (harder to increase productivity; greater wage inequality) High tech Automobiles (mass production and consumption)

Industrial Revolution

Traditional economy Agriculture

Iron and steel Textiles

Commerce, handicrafts

Note: Line signifies rate of annual GNP and productivity growth.

intensive, the product cycle works to diffuse its production to countries that are not so technologically advanced but have lower labor costs and standards of living. Up through World War II, though, this process was generally confined to Western Europe, North America, and Japan (Gilpin, 2001; Vernon, 1966). While the nature of the international product cycle is widely acknowledged, its policy implications remain subject to a heated debate between devotees of laissez-faire and advocates of the activist state promotion of economic development, as summarized in Table 4.1. The free marketeers argue that private businesspeople can accumulate capital most efficiently and will respond to market signals and discipline out of sheer self-interest while government will almost inevitably use its sovereign power to distort markets for inefficient political purposes, thereby “killing the goose that lays the golden eggs” (Balassa, 1981; Krueger, 1978; von Mises, 1983). Statists, in contrast, argue that the barriers of entry to most industries are so great that new industries in a country can start only with

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Table 4.1 Contrasting Implications Drawn from Product Cycle Theory

Free Marketeers

Statists

Market signals when to move into new industries higher up product cycle

Market power freezes global division of labor

State intervention perverts market economy

State can exercise countervailing power to break barriers to development

State activities 1. Extract rents from productive firms 2. Bow to political pressure from business to permit monopoly rents

State activities 1. Mobilize financial resources 2. Protect infant industries 3. Subsidize and promote sunrise industries 4. Prevent dominant groups from holding back economic change 5. Bargain with foreign states and multinational corporations

Dangers 1. Exploited by use of others’ market power 2. Creates static global economic hierarchy

Dangers 1. State becomes predatory 2. Policy mistakes produce worse outcomes than markets

the aid of a strong state to (1) mobilize resources, (2) provide trade protection and subsidies to encourage new infant industries, (3) prevent dominant groups and classes from extracting rents and holding back change, and (4) bargain with and control external economic forces (Amsden, 1989; Evans, Rueschemeyer, and Skocpol, 1985; Gerschenkron, 1962; Johnson, 1982; Wade, 1990). Like the debate over growth versus equity noted above, this is a highly ideological issue. Yet, both sides cite evidence that suggests that the truth lies somewhere in between. On the one hand, all countries that have industrialized, including the purportedly laissez-faire United States, have done so with the government providing the types of support described as state activities of statists in Table 4.1 (Gilpin, 2001; Lake, 1988). On the other, such state strategies seem to work when they are market conforming and fail when they are market distorting in the ways described in the table as state activities of free marketeers (Amsden, 1989; Evans, 1995; Wade, 1990). Thus, the dangers of both free marketeerism (that some countries and economic sectors will fall victim to others’ market power) and statism (that state intervention will harm the economy) are certainly real.

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Finally, the world economy by the late twentieth century had undergone a fundamental transformation that is described by the broad rubric of “globalization.” Globalization has two intertwined dimensions. First, the transportation and communications revolutions of the second half of the past century have made it possible to ship goods, funds, and information around the world cheaply and quickly. Second, national borders have become much more porous to economic transactions as part of the US-led efforts at creating a free-trade global economy. Consequently, the advantages of possessing capital and raw materials have vanished, and the time that advanced technology can be solely exploited has also decreased radically (Thurow, 1992). Once capital and technology began to spread around the world rapidly, therefore, an ever accelerating diffusion of production commenced from the United States as the world’s leading economy. It diffused first to other industrialized countries and ultimately to nations with semiskilled low-cost labor, which explains third world industrialization and the growing competition faced by all mature economies. Moreover, the product cycle is dynamic in that those countries that succeed at the first level eventually price themselves out of this niche in the global economy. Growth leads to popular prosperity and rising real wages, thereby forcing them to capture the industries of countries higher up on the product cycle (Gilpin, 2001; Thurow, 1992).

Taiwan and the General Sequence of Development

The model of development summarized in the previous section appears to provide a good explanation for Taiwan’s economic miracle. Taiwan was among the first small group of developing nations to take advantage of the emerging era of postwar globalization to promote export-led industrialization. In line with the theory of the international product cycle, the ROC was able to export standardized manufactured products early in its development trajectory in the 1960s based on a comparative advantage in low-cost labor. It then quickly followed the pattern of industrial upgrading outlined in Figure 4.2 from light to heavy to high-tech industry. By the late 1980s, however, its economy had matured to such an extent that it was being pushed out of many of its basic industries and its high rate of growth began to decelerate quite noticeably. The Taiwan case also lends strong support to the theoretical argument that some economic activities are much more desirable than others. If the country had remained the agricultural economy that it was in the mid-1950s, for example, we would not be talking about the ROC’s economic miracle today.

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This success story raises the question of how Taiwan was able to surmount the two key challenges to the wonderful world of Adam Smith: (1) the use of market power to distort an economy; and (2) the ability to ensure that more desirable economic activities are pursued. Here, Taiwan’s experience indicates that the arguments of both the free marketeers and the statists shown in Table 4.1 have some validity. Taiwan could develop only because of a series of state interventions in the economy that promoted its restructuring into ever more desirable economic activities as the nation climbed upward along the international product cycle. Without land reform, agricultural productivity would have stagnated; without import-substitution controls, industrialization would have been retarded; without the export promotion program, businesses would have focused on a severely limited domestic market; without government investments in state corporations and infrastructure, heavy industry would have lagged; and without large-scale research and development (R&D) support, Taiwan’s impressive success in several high-tech industries would have been quite problematic. This litany of successful policy is certainly consistent with the statists’ arguments about the need to promote productive economic sectors. Yet the success of these policies can also be attributed to the limited nature of state intervention, giving support to the free marketeer perspective. Using the terminology of Table 2.10 in Chapter 2, the central thrust of most of the government’s promotion of Taiwan’s economic transition was the use of policy instruments to create a conducive environment for various economic activities. Thus, the state was not in a position to abuse its potential monopoly powers (Chao and Myers, 1998). Taiwan’s economic strategy, moreover, limited the problem of undue market power by domestic firms. After the 1950s, Taiwan’s firms had to compete in the global market to be successful, and the strong role of SMEs in the economy increased competitive pressures and reduced the threat of monopoly and oligopoly abuses. Effective but limited state intervention in Taiwan, therefore, solved the problems of long-term subordination in the global division of labor and of abuses of market power, thereby setting the country’s economic miracle into motion. The fact that the theoretical model in Figure 4.2 predicts a considerable reduction in economic growth for countries as they transition from industrial to information age economies raises the question of whether decelerating growth in Taiwan is a normal phenomenon that should not raise undue concern. The aggregate data on the nation’s economic performance during the first decade of this century is at least a little ambiguous, raising the image of whether to interpret a glass as half full or

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half empty. As shown in Table 4.2, there were two sharp recessions. In 2001, following the collapse of the global high-tech bubble, the ROC’s economy contracted by 2.2%, and the recession of 2008–2009 was probably worse because it lasted appreciably longer (Cooke, 2009; Gold, 2010). GDP fell by 1.9% in 2009 after an only minuscule positive growth of 0.1% in 2008. Overall, growth for 2001–2009 averaged only 2.8%, well less than half the rate for any of the preceding decades. Yet a more positive interpretation of these data can be made as well. Certainly, Taiwan was not to blame for either of these recessions, which resulted from speculative collapses in the most advanced industrial nations. Furthermore, the ROC bounced back fairly rapidly from its two pronounced recessions. After a disastrous 2001, economic growth jumped to 4.6% in 2002, and a similar recovery appeared to have begun in late 2009 (Rigger, 2010). For example, the growth rate jumped to 10.5% in 2010, the highest since 1987, and is projected to be 5% in 2011 (M. Chang, 2011). In addition, Taiwan’s average growth of 4.8% for the normal period of 2002 to 2007 was only slightly lower than for the late 1990s. A comparison of Taiwan’s leading economic indicators for 2000 and 2008 in Table 4.3 also suggests that fairly little deterioration occurred during this decade. GNP per capita rose significantly from US$14,721 to $17,576, indicating that Taiwan had entered the developed world. The decline of manufacturing slowed greatly as its share of GDP slipped only

Table 4.2 Real Annual Economic Growth (percentage)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

–2.2 4.6 3.5 6.2 4.2 4.8 5.7 0.1 –1.9 10.5 5.0a

Sources: Council for Economic Planning and Development, Taiwan Statistical Data Book, 2009 (Taipei: Council for Economic Planning and Development, 2009), p. 17; M. Chang, “DGBAS Unveils Taiwan’s Economic Report Card,” Taiwan Today, February 1, 2011, www.taiwantoday.tw. Note: a. Estimate.

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The Limitations of Export-led Growth Table 4.3 Indicators of Economic Performance

2000 GNP per capita (US$) Agriculture (% employment) Manufacturing (% GDP) Exports (% GDP) Trade balance (% GDP) Industrial exports (% GDP) Savings (% GDP) Investment (% GDP) Foreign investment (% total investment) Government expenditures (% GDP) Income ratio richest to poorest fifths of population

14,721 8 24 47 3 99 26 23 10 21 5.5

2008 17,576 5 22 65 4 99 27 21 10 21 6.0

Source: Council for Economic Planning and Development, Taiwan Statistical Data Book, 2009 (Taipei: Council for Economic Planning and Development, 2009).

marginally from 24% to 22%. Likewise, savings and investment remained fairly constant at just above and just below a quarter of GDP, respectively, and foreign sources continued to supply a tenth of total investment. There also was almost no change in the size of the government as total public spending constituted 21% of GDP in both 2000 and 2008. There were two significant changes over the decade, however. First and presumably positively, the role of exports in the economy rebounded after slipping slightly from 52% to 47% of GDP between 1987 and 2000. In contrast, exports grew steadily over the first decade of the new century reaching a high of 65% in 2008, demonstrating that Taiwan’s export machine was still in good working order. In contrast, the other change was clearly negative as inequality continued to rise. For example, the ratio of the incomes of the richest to the poorest fifths of the population increased from 5.5 to 6.0, the highest level since the 1960s (see Table 2.4 in Chapter 2). However, the views in Taiwan by 2006–2007, even before the global financial crisis erupted, were considerably less sanguine than the aggregate data suggest. In particular, there were fairly widespread perceptions of economic stress and decline. One reason for this was the reference group that most used to evaluate their country’s economic performance— the other East Asian “Little Dragons.” Compared to Hong Kong, Singapore, and South Korea, Taiwan’s economic growth rate and especially stock market performance were clearly lagging by the mid-2000s. The

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ROC’s confrontational and vicious politics also undercut the business environment and eroded a sense of stability in general. Moreover, the growing antagonism between President Chen Shui-bian and the PRC (see the section on economic relations with China below) provided a more specific reason for economic gloom as well. In particular, the continuing limits on doing business in China alienated the business community, both domestic and foreign (Y. H. Chu, 2007, 2008). One could also raise the question of whether or not Taiwan could take comfort in the fact that its decelerating growth of the past two decades was normal for mature economies. After all, by the early 1990s fears had arisen that the deindustrialization or hollowing out of global economic leaders the United States and Japan would lead to their decline (Alexander, 2002; Graham, 1992; Harrison and Bluestone, 1988). Such fears were exacerbated in Taiwan as even the country’s high-tech leaders, such as the Taiwan Semiconductor Manufacturing Corporation, had moved considerable parts of their production to China by the middle of the first decade of the twenty-first century (J. Wong, 2010). Furthermore, Taiwan would seem to be especially at a disadvantage in terms of movement along the international product cycle as shown in Figure 4.2. Similar to the United States and Japan, it has been pushed out of most basic and lower-end economic sectors. This means that its firms must compete with the world leaders in the most advanced sectors such as banking and biotechnology. For example, despite its excellent performance in computers and semiconductors, Taiwan has not done well in biotechnology (C. J. Chen and Yeh, 2005; J. Wong, 2010). Thus, Taiwan now seems to be being squeezed from both above and below, creating the image of an increasingly boxed-in economy. In the next two sections, we examine case studies of this phenomenon: the first concerns the changing competitiveness of the ROC’s SMEs and the second relates to the effects of the growing economic integration between Taiwan and China.

The Changing Competitiveness of Small and Medium Enterprises

SMEs provided the dynamism for Taiwan’s export boom from the 1960s through the 1980s. Their flexibility and entrepreneurship allowed them to take advantage of changing market conditions, and they proved to be surprisingly capable of upgrading to the production of advanced electronics goods (Greenhalgh, 1988a; Harrell, 1985; Hu and Schive, 1998;

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Lam, 1992; Lam and Clark, 1994; R. I. Wu and Huang, 2003). They were then able to take advantage of the growing integration across the Taiwan Strait during the 1990s by moving production to China (Naughton, 1997). However, over the past two decades, SMEs have become increasingly squeezed between low-cost producers from developing nations and much larger and more sophisticated corporations in the developed world (R. I. Wu and Huang, 2003). Moreover, because they are small and dispersed, their political influence in Taiwan is fairly limited, making it hard for them to obtain aid from the government. Consequently, Taiwan’s historical reliance on this sector as an engine for growth has created a cost of success in that the country’s rapid industrialization now limits the contribution that SMEs can make to the nation’s continued economic upgrading. To state that Taiwan’s economic miracle was made possible by the major contribution of Taiwan’s small and medium enterprises is certainly not an understatement. Taiwan’s SMEs comprised 99% of all types of Taiwanese companies in 1961; and, by 1997, SMEs still comprised 98% of all companies and enterprises. SMEs played a major role in Taiwan’s economy. During the late 1970s and early 1980s, for example, they constituted just under half of manufacturing production and over 80% of commercial sales (H. L. Wu, 1988). In terms of employment, SMEs employed 61% of all Taiwanese workers in 1976, and this percentage increased to 78% in 1997. As far as the share of exports is concerned, in 1981 SMEs accounted for 68% of all exports, though this figure dropped to a still high proportion of 49% in 1997 (R. I. Wu and Huang, 2003). Overall, for example, Taiwan’s industries were far less concentrated than South Korea’s, as indicated by the data in Table 4.4. For example, in 1983 the fifty largest business groups in Korea produced 94% of GNP while the ninety-six largest Taiwanese businesses accounted for only

Table 4.4 Indicators of Industrial Concentration

Five largest business groups (% GNP, 1983) Fifty largest business groups (% GNP, 1983a) Ten largest companies (% GDP, 1987)

Taiwan

South Korea

10.3 31.7 14.3

52.4 93.8 63.5

Sources: K. J. Fields, Enterprise and the State in South Korea and Taiwan (Ithaca: Cornell University Press, 1995), p. 6; S. G. Hong, “Paths of Glory: Semiconductor Leapfrogging in Taiwan and South Korea,” Pacific Focus 7, no. 1 (1992): 63. Note: a. Largest ninety-six firms for Taiwan.

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32% of GNP. More generally, Howard Pack concludes that “by international standards the typical size of firm in each sector is remarkably small” in the ROC (1992: 104). Clearly evident in these statistics are the critical role and significance of the SMEs to Taiwan’s march toward economic development. Interestingly, these agile and nimble SMEs were both a unique feature of Taiwan’s rapid industrialization and a consequence of Taiwan’s political history. By default or by design, the KMT’s fear of any challenge to its political dominance had given preference to an industrial structure that was relatively decentralized so as to inhibit the emergence of large, strong, and concentrated interest groups (Y. H. Chu, 1999; Tan, 2001). By co-opting local Taiwanese elites, effecting land reform, and later creating state-owned enterprises that dominated finance and heavy industry, the KMT (intentionally or not) encouraged the development of SMEs and was thereby able to develop social support for the regime (Y. H. Chu, 1999). A relatively stable social support base was also a consequence of the decline in the unemployment rate, increasing household incomes, and the rapid decline in income inequality—which were all unintended gains resulting from the proliferation of SMEs. The extent to which the proliferation and dynamism of SMEs reflected an explicit strategy by the regime is an open question, however. As argued above, Taiwan’s development policies created an environment in which the SMEs could flourish, but it is doubtful that government officials were explicitly aiming at the type of economy that evolved. SMEs in Taiwan pursue highly entrepreneurial strategies that Danny Lam (1992) has termed guerrilla capitalism. Guerrilla capitalism includes extreme flexibility in rapidly filling even small orders, attention to quality and design, audacious bidding, participation in complex networks of subcontracting, and only partial observation at best of government regulations and international laws such as those regarding intellectual property rights. SMEs have also demonstrated a remarkable capacity to innovate and upgrade their operations. Thus, while guerrilla capitalism took off in the textile and shoe industries in the 1960s, such entrepreneurs moved into low-tech electronics assembly in the 1970s. And some were able to upgrade into more sophisticated high-tech production in the 1980s (Greenhalgh, 1984, 1988a; C. T. Kuo, 1998; Lam, 1992; Lam and Lee, 1992; Skoggard, 1996; S. L. Wong, 1988). The success of SMEs is explained by several of their organizational characteristics. The use of an extensive network of subcontracting relationships among all competitors in an industry was a surprisingly common

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pattern in Taiwan. Therefore, although it is true that the winning contractor benefited the most from a lucrative foreign order, that firm was able in effect to have the slack capacity of the entire industry available to it through subcontracting. This prevalence of subcontracting networks was facilitated by the prevailing pattern of ownership because almost all firms in a particular industry owned each other’s shares. Subcontracting enhanced the efficiency of the market in two ways. First, it allowed the winning contractors to make above-normal profits through their knowledge of the local industry. Thus, they would normally subcontract to firms that had surplus capacity, which they would sell at marginal rather than full cost. Second, it kept other firms in business and allowed them to become more efficient through learning by doing. In other words, rather than a zero-sum game typical of the bidding process in the West, in Taiwanese business the winner took the most, but the loser also benefited from having less lucrative (but still profitable) subcontracting work. This process explains how a layer of small firms could circumvent the limitations that would normally be placed on them by undercapitalization and the inability to handle large orders. This intricate subcontracting network, therefore, made Taiwanese industry able to respond more as a unified organism rather than as discrete units. The network of subcontracting relationships extended into another pattern of industrial organization that also was unique to Taiwan. Whereas industries on the Western model typically consist of a factory with a collection of capital equipment collectively owned by one firm, Taiwan’s industry was dominated by a form of capital ownership where each piece of equipment was owned by one entrepreneur. Now, of course, there are serious disadvantages to such a form of ownership. For one, extensive quality control of goods that pass through so many independent subcontractors was almost impossible. Second, a manufacturer was always at the mercy of a bottleneck anywhere in the process. And, third, the chance of finding the ideal type of machinery for a particular job was remote because it is more than likely not available. But looking at it from the Taiwanese perspective, the system as a whole had immense flexibility. No one was stuck with a fixed investment in a specialized capital plant that might be idle much of the time as occurs in the typical modern Western factory (Greenhalgh, 1988a; C. T. Kuo, 1998; Lam, 1992; Myers, 1984; Silin, 1976). The dynamic of moving from textiles to electronics in the late 1960s and 1970s also involved applying the principles of guerrilla capitalism to acquiring technology transfers from the foreign multinational corporations

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(MNCs) that initially dominated Taiwan’s electronics industry, especially the export sector. Ironically, the drive for an indigenous industry was fueled by the rapid growth of MNC assemblers and component makers. As with any industry experiencing rapid growth, there was a large turnover of labor and management as new arrivals acquired skilled managers by hiring talent from established firms. Thus, every new entrant created more and more opportunities for both the trained local staff and the expatriate staff of the established firms. Naturally, wages and benefits for experienced and skilled managerial staff ratcheted upward with each new entrant. As experienced managers left established firms, more opportunities opened up for junior staff to move upward. This rapid turnover, in turn, quickly created a large number of highly trained managers who had extensive experience with a number of firms. The geographic proximity of the firms to each other made it all the easier for staff to move around. Furthermore, being a relatively small industry, friendships between managers were made rapidly and extensive networks of staff from ostensible competitors became commonplace. Local managers soon realized that, in fact, the MNC operations were not highly sophisticated. Managers who worked in assembly operations, hence, quickly saw there was little that was beyond their own capability to set up with relatively little capital. Naturally, many of them jumped at the opportunity and left their MNC employers to establish assembly operations on their own. Sometimes this was done entirely independently, sometimes in collaboration with a few colleagues, and other times with the support of large local conglomerates that wished to enter a new business. These new entrants then competed for subcontracts for subassembly from other firms. Over time, these relatively unsophisticated assemblers would learn to build more and more complex assemblies, then either learn or purchase designs from experienced designers, and ultimately begin to manufacture full assemblies for simple consumer electronics products like radios. Gradually, their sophistication improved enough to build tape recorders, record players, and other more sophisticated consumer electronics goods (C. T. Kuo, 1998; Lam, 1992; Schive, 1990; N. T. Wang, 1992). Furthermore, because the electronics components industry was characterized by a highly heterogeneous product mix and frequent spot shortages of specific components, Taiwanese entrepreneurs responded to this market environment with an ingenious form of doing business. They took their customary flexibility one step further. Entrepreneurs would constantly search for products with high margins that not only their own firm, but the industry, was capable of producing. Thus, if margins were good for one

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product, possibly because of a short-term shortage (e.g., low-power resistors), they would enter that market while the margin was high, knowing that they ultimately would not be the lowest cost supplier. By the time the market reached equilibrium, however, they had already made their profits and moved on to other products. An additional benefit of this pattern of guerrilla capitalism was that Taiwanese manufacturers have been able to stay one step ahead of protectionist measures (Hong, 1992; Lam, 1992). Finally, guerrilla capitalists generally operated quite independently from the state. This independence actually contributed to their flexibility and low costs. Thus, theoretical disadvantages of small size were again turned into practical advantages. The neglect of formal records, detailed written plans, and accounting allowed these small firms to play an effective cat-and-mouse game with the state’s tax collectors. In addition, few of the smaller firms bothered to obtain the myriad permits needed to start a business legally. Thus, they were able to evade most of the more burdensome regulations that strangled large firms (Lam, 1992). By the early 1980s, SMEs were already beginning to be challenged in global markets. While South Korea during the same period developed brand names like Samsung, Hyundai, and LG, Taiwan’s SMEs relied on original equipment manufacturing (i.e., producing products for other brand names under contract or subcontract) to be able to produce highvolume and high-demand export products. This particular mode of operation has continued to the present with original equipment manufacturing revenues accounting for a large proportion of total revenues even in large Taiwanese information technology and computer firms like Acer, Asus, and Foxcomm. From a high of a 70% share of total exports in 1982, SMEs’ share of Taiwan’s total exports declined to a respectable proportion of 49% in 1997 (R. I. Wu and Huang, 2003) and then to a much lower level of 28% by 2006 (Small and Medium Enterprises Administration, 2008). As Taiwan’s production costs increased (through the tightening of the labor market and rising labor costs), SMEs were pushed by the international product cycle to produce more capital-intensive goods. As manufacturers from developing countries in Southeast Asia and especially China entered the global market, Taiwan’s SMEs began to face stiffer challenges to be competitive and remain profitable. In the midst of the 1997 Asian financial crisis, the KMT government helped SMEs through the tough export and economic environment by adopting such measures as providing export guarantees, tax incentives, and assistance in financing. As the challenges of industrial restructuring continued beyond the late 1990s, the government became more cognizant of the challenges faced by SMEs and, in fact, incorporated an SME protection clause into

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the nation’s constitution (Small and Medium Enterprises Administration, 2008). At the same time, as public investment and tax incentives for R&D were being implemented, the government encouraged SMEs to upgrade and transform into knowledge-intensive industries. While many SMEs have been able to adjust structurally, the nature of Taiwan’s position in the international product cycle as well as the problem of economies of scale are now seriously undermining their viability. Taiwan’s industrial development has priced its companies out of laborintensive production to more sophisticated knowledge-intensive production such as information technology, computers, and software. At this stage of the product cycle, Taiwan’s SMEs are increasingly squeezed between the developing countries that can provide cheap manufacturing and the developed countries that produce technologically advanced products. With their limited resources and inability to capitalize on economies of scale, Taiwan’s SMEs are forced to move offshore to China (and, to a lesser extent, Southeast Asia), creating a growing and dangerous dependence on the PRC. Yet since SMEs are the largest employers in Taiwan and to a certain extent have contributed to the increase in household incomes and the equitable income distribution on the island, the offshore movement of this bedrock of Taiwan’s industrial structure not only is creating an industrial vacuuming effect on Taiwan, but also is resulting in stagnant incomes, relatively higher unemployment, and an increasing inequality of income distribution. Despite the recognition of the importance of SMEs and their historical contribution to Taiwan’s economic growth and development, there are several factors that hamstring SMEs’ ability to maintain their role and share in Taiwan’s economy. First, the very nature and structure of an SME limits its ability to easily transform itself. Since the inauguration of Chen Shui-bian in 2000, Taiwan’s economy has entered a rather challenging period in its path to economic development. From the year 2000 onward, Taiwan has been pushed to a phase in the international product cycle that requires massive investment, innovation, and R&D in knowledge-based industries such as information technology and biotechnology (J. Wong, 2010). Though the financial liquidity of SMEs, in general, remains at healthy levels, the amount of investment in infrastructure, R&D, and human resources required in this new form of a knowledgebased economy presents a difficult challenge to existing SMEs in Taiwan. As the 2008 White Paper on SMEs in Taiwan reports: “Because of their small size and limited resources, coupled with the mindset created

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by a long-standing focus on standardized, large-volume manufacturing, Taiwan’s SMEs are often reluctant to invest in R&D, and lack experience in this area. As a result, Taiwan’s SMEs have become less competitive compared with those of China and India” (Small and Medium Enterprises Administration, 2008: xiv). From this report, we can infer that the structure of SMEs has become a constraint that makes it difficult for them to meet the challenge of transforming themselves into knowledge-based industries. Still, while the traditional SMEs are under increasing pressure in Taiwan, there are some small enterprises based on advanced science, computer, and design skills that are assuming a leading role in the nation’s new industrial upgrading (Y. H. Wang, 2010). Second, the changing nature of Taiwan’s political economy has also constrained SMEs since democratization. With Taiwan’s democratic transition, SMEs have become one of many groups trying to influence government policy and the political parties. Consequently, the parties now have more groups to which they can appeal while groups have to vie for the attention of politicians. This puts the SMEs into a more plural and competitive interest group environment. Because the SMEs are organizationally dispersed and politically weak, it is hard for them to be influential. Indeed, the very rationale for encouraging the development of SMEs and the creation of large state-owned enterprises during the authoritarian era was to prevent business from becoming a counterweight to KMT rule. The democratization of the 1990s, however, has created a more plural and competitive policymaking environment in which larger, more organized, and more concentrated interest groups such as large business groups can thrive (Tan, 2008). The relative weakening of SMEs in Taiwan’s political economy can be evidenced from the government’s plan to promote an innovationoriented industrial policy in the areas of high-tech, biotechnology, information technology, and software (Small and Medium Enterprises Administration, 2008). While the official government position is to assist SMEs toward these high-value-added industries, the reality is that most SMEs (by their structure and resources) are simply not equipped to take advantage of these plans. The liberalization of the political decisionmaking environment both presents new opportunities for powerful interest groups to influence policy decisions and gives party politicians new avenues to cultivate political and social support. These new avenues and opportunities, while favorable to some, are not particularly helpful for dispersed and weaker interest groups such as SMEs.

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The Profits and Perils of Growing Economic Integration with China

As described in Chapter 2, one of the central features of Taiwan’s period of economic maturation (1988–2000) was a mainland revolution in its economic orientation. This brought both profits and perils as the twentyfirst century commenced. Obviously, economic activities in China must have been profitable to attract Taiwanese investment and trade. Yet a number of perils also accompanied the explosion of economic interactions across the Taiwan Strait. First, the rapid increase of Taiwanese investment in China (and elsewhere) raised fears that the hollowing out of the ROC’s economy would destroy its past progress and current prosperity, especially during the two recessions at the beginning of the twenty-first century. Second, the PRC stands out among developing countries that have been the recipients of the offshore movement of basic industries from the developed world in its ability to upgrade into fairly advanced economic sectors (Naughton, 2007). Consequently, the fact that Taiwanese industry is overwhelmingly moving to China, rather than to other countries with low-cost labor, represents a more severe threat to the continued viability of its domestic corporations, as indicated by the rapid movement of increasingly advanced semiconductor production across the Taiwan Strait noted above. Finally, the growing economic integration between China and Taiwan creates a unique threat and danger to Taipei because of Beijing’s claims of sovereignty over Taiwan (Chow, 2008; Clark, 2006, 2007; Tucker, 2005, 2009), making the ROC vulnerable to the PRC potentially using its economic dependence for leverage as Nazi Germany did in Eastern Europe during the 1930s (Hirschman, 1980). Figure 4.3 summarizes the dynamics of the initial mainland revolution in Taiwan’s economic linkages, which also imply that there were significant challenges to this growing economic integration by the late 1990s. As shown on the left side of the figure, the major push came from the growing complementarity of the two economies in the late 1980s and early 1990s as China began an export drive centered on the very industries that Taiwan was shedding in its economic maturation. Geographic proximity and a common culture and language reinforced this complementarity, thereby making China an extremely attractive base for Taiwanese firms. Furthermore, there also appeared to be an implicit (though unacknowledged) political compatibility between Taipei and Beijing. Taiwan’s government wanted to reassure China that President Lee’s pragmatic diplomacy was not leading to the final separation of the PRC and

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Figure 4.3 Growing Economic Integration Between Taiwan and Southern Coastal China in the Early and Mid-1990s

Economic complementarity ROC: Pressure to move standardized manufacturing PRC: Strategy of export-led growth in standardized manufactures

Cultural and language ties

Political compatibility ROC: Desire to placate PRC as informal ties with other nations expand PRC: Desire to expand linkages between China and Taiwan

Integrated production networks ROC: Design and sophisticated production PRC: Labor-intensive stages Rapidly growing trade, investment, and social communications

Social ties 1. Temple politics linking Taiwan and Fujian 2. Growing Taiwan settlements in China for business and retirement 3. Islanders, not mainlanders, take leading role in these trends

ROC while the Chinese government felt that growing economic interactions would draw Taiwan close to China, thereby promoting its ultimate goal of unification (Clark, 2007; Kastner, 2009; Y. S. Wu, 1995). The right side of Figure 4.3 summarizes some of the effects that increased economic interactions brought. First, the PRC and ROC went well beyond simple trade or the exchange of goods and services. Rather, Taiwan’s businesses set up integrated production networks across the strait in which different stages were conducted in the ROC and PRC such as the design and manufacture of advanced components in Taiwan and final assembly in China (Bolt, 2001; Y. H. Chu, 1999; Naughton, 1997; Y. S. Wu, 1995). This created what Gary Gereffi (1998) has called commodity chains. Second, the activities of Taiwanese firms led to a substantial

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migration of businesspeople to China in the 1990s, resulting in growing Taiwanese communities in many mainland cities with, for example, an estimated 500,000 ROC citizens living in Shanghai alone. This led some observers to comment on the growing Taiwanization of parts of China (Bolt, 2001; Clough, 1999). Increasing interactions across the Taiwan Strait, moreover, were not just limited to the economic sphere. A significant number of Taiwanese also rediscovered their roots in Fujian Province. For example, Murray Rubinstein (1995) describes the fascinating process of cross-strait temple politics in which temples in Taiwan adopted older ones in Fujian. The dynamics in Figure 4.3, therefore, suggest a self-reinforcing process of economic and social integration. However, all of the factors in this model did not remain constant. Indeed, the political compatibility of the first half of the 1990s was soon replaced by the series of crises and near crises depicted in Figure 4.4, with Beijing and Taipei taking turns in provoking a tit-for-tat cycle. China initiated the series of confrontations with its missile diplomacy of 1995–1996 in what appeared to be an overreaction to Lee Teng-hui’s visit to Cornell University, his alma mater, in the United States. Lee then provoked a new crisis in 1999 with his statement that special state-to-state relations existed between Beijing and Taipei. A year later, China threatened dire consequences if Chen Shuibian were elected president of Taiwan in 2000 and contemptuously ignored Chen’s conciliatory initiatives after his election. After two years, Chen took a much more aggressive stance toward China in the summer of 2002, declaring that there was “one country on each side” of the Taiwan Strait and strongly appealing to Taiwanese nationalism during the 2004 presidential and legislative elections in Taiwan. Finally, a fifth round emerged in 2005–2006. The PRC began the tit-for-tat exchange in 2005 by adopting an Anti-Secession Law that was clearly aimed at Taiwan, again raising tensions in the strait. Taiwan responded in kind the next year when Chen froze the country’s National Unification Council and Guidelines and concentrated on maintaining and strengthening his support among the DPP’s Deep Greens with a stress on Taiwanese nationalism in the face of growing scandals. Consequently, tensions in cross-strait relations remained high until the election in 2008 of the KMT’s Ma Yingjeou with his much more conciliatory policy toward China (Bush, 2004; Y. H. Chu, 2007; Gold, 2009; Tucker, 2009; Zhao, 1999). By the turn of the century, therefore, the virtuous cycle shown in Figure 4.3 had clearly ceased to function because the political compatibility of Beijing and Taipei in the early 1990s had been replaced by hos-

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Figure 4.4 The Battle over Sovereignty Between China and Taiwan

Round 1 • President Lee Teng-hui visits Cornell University in June 1995 • Beijing claims this represents Taiwan independence and retaliates with missile diplomacy during Taiwan Strait Crisis of 1995–1996 • Lee’s strong victory in 1996 election suggests China’s threats were counterproductive Round 2 • President Bill Clinton’s “Three No’s” in Shanghai in June 1998 support PRC’s position on sovereignty, raising fears in Taipei of pressures to make unacceptable concessions • President Lee announces theory of special state-to-state relations between Taiwan and China, provoking rage in China over his support for Taiwan independence • The United States first scolds Taiwan and then seeks to deter China from minor military retaliation Round 3 • Beijing threatens harsh consequences if a pro-independence candidate wins Taiwan’s 2000 presidential election • Chen Shui-bian of the DPP (the unnamed target of Chinese threats) narrowly wins • Chen conciliatory in pledging not to pursue independence (“Five No’s”) in inaugural address • China ignores Chen’s concessions and changes central demand from Chen’s not pursuing independence to accepting One China principle • China continues missile buildup that is seen as provocative and threatening by both Taiwan and the United States Round 4 • Chen switches policy with theory of one country on each side of Taiwan Strait in summer of 2002 • From late 2003 through 2004, Chen campaigns in presidential and legislative elections with strongly nationalistic appeal to his base constituency • China’s public reactions quite limited, but at times Beijing clearly communicates a growing sense of threat Round 5 • China’s Anti-Secession Law in March 2005 reignites tension in Taiwan Strait • Chen Shui-bian freezes National Unification Council and Guidelines in 2006 • Chen becomes highly nationalistic after growing scandals in 2006

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tility and a continuing series of confrontations. This certainly was not a good business environment since the political instability made long-term economic relationships increasingly risky. Consequently, the surge in economic interactions across the strait in the early and mid-1990s should have halted or, perhaps, become more volatile in response to the ups and downs in cross-strait political relations. Yet if anything, just the opposite occurred. In fact, by the turn of the new century, a new round of increasing economic interactions between Taiwan and China commenced as both trade and investment rose fairly consistently. This new spurt of economic interactions between Taiwan and China was driven by several factors sequentially. First, when Taiwan’s economy was growing robustly during 1999 and the first half of 2000, the high-tech component of cross-strait relations especially benefited (e.g., two-thirds of the new investment projects approved during 2000 involved the electronics industry). One major project in this area, a $6.4 billion joint venture for Shanghai semiconductor plants announced in May 2000, was certainly fraught with both symbolic and political significance since it involved the sons of Jiang Zemin, the PRC’s president, and Y. C. Wang, the head of the huge Formosa Plastics empire in Taiwan, indicating that those with the best reason to know believed that cross-strait relations would not blow up. Second, once the global recession in high-tech production hit Taiwan in the autumn of 2000, many domestically oriented businesses on the island tried to expand to the mainland to make up for the deteriorating economic situation in the ROC (Bolt, 2001; Cooke, 2006). Finally, as Taiwan’s economy picked up again after the 2001 recession, the initial logic of economic expansion reasserted itself. For example, two-thirds of Taiwan’s outward FDI in 2004 went to the mainland, with 45% of it in the electronics industry (Mainland Affairs Council, 2005: 31–32). This picture of renewed dynamism in interactions across the Taiwan Strait is confirmed by data on economic and social ties. Table 4.5 shows that trade between Taiwan and China skyrocketed during the first half of the 1990s. For example, Taiwanese exports to the PRC jumped four and one-half times from $4.4 billion to $19.4 billion between 1990 and 1995, rising from 7% to 17% of the ROC’s total exports. There was little change in this level over the second half of the decade, though, with small increases in 1996 and 1997 being followed by a drop in 1998 and corresponding recovery in 1999. The first decade in the new century witnessed another huge surge. Exports jumped from $21 billion in 1999 to $38 billion in 2003 to $74 billion in 2007 and again in 2008 as the global Great

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The Limitations of Export-led Growth Table 4.5 Taiwan’s Exports to China

Value of Exports (US$ billion) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010a

— — — — — — 4.4 7.5 10.5 14.0 16.0 19.4 20.7 22.5 19.8 21.3 25.0 25.6 31.5 38.3 48.9 56.3 63.3 74.2 74.0 62.1 77.8

Percentage of Taiwan’s Total Exports 1 3 2 2 4 5 7 10 13 16 17 17 18 18 18 17 16 20 23 25 27 28 28 30 29 30 31

Source: Mainland Affairs Council, Cross-Strait Economic Statistics Monthly, no. 216 (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2011), pp. 24 and 26. Notes: “—” indicates data not available. a. January through November only.

Recession commenced. The economic slowdown then produced a considerable drop in Taiwan’s exports to China, which fell to $62 billion in 2009. The economic revival on both sides of the strait quickly stimulated increased economic interactions again, though, as Taiwan’s exports to the PRC jumped to $78 billion for the first eleven months of 2010. In addition, by the second half of the decade (2007–2010), China took 30% of Taiwan’s exports, making it the ROC’s largest trading partner.

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Taiwan’s trade with China over the past two decades has been unbalanced in two distinct ways that have mixed implications for the ROC. First, as summarized in the top half of Table 4.6, Taiwan has enjoyed a huge trade surplus. That is, exports have exceeded imports by a large, though declining, extent that is generally considered advantageous. During the first half of the 1990s, this was in the range of 5 or 6 to 1 falling to 4 to 1 in 2000 and 2.4 to 1 in 2008. This resulted from the nature of the commodity chains across the strait in which advanced components were made in Taiwan and assembled in China and from import restrictions on Chinese goods. This also had a beneficial effect on Taiwan’s trade relations with the United States because the large trade surplus of the 1980s with it was increasingly transshipped through China, leading to a considerable drop in trade disputes and political friction. Second and more ominously, as China increasingly surpassed Taiwan in volume of trade, their common trade became much more important (at

Table 4.6 Imbalances in Cross-strait Trade

Balance of Trade

1990 1995 2000 2005 2008

Exports to PRC (US$ billion)

Imports from PRC (US$ billion)

Ratio of Exports to Imports

4.4 19.4 25.0 56.3 74.0

0.8 3.1 6.2 20.1 31.4

5.5 to 1 6.3 to 1 4.0 to 1 2.8 to 1 2.4 to 1

Importance of Exports from ROC to PRC for Both Countries

% of Taiwan’s Exports 1990 1995 2000 2005 2008

6.5 17.2 16.5 28.4 28.9

% of China’s Imports

Ratio of % ROC Exports to % PRC Imports

8.2 14.7 11.1 8.5 6.5

0.8 to 1 1.2 to 1 1.5 to 1 3.3 to 1 4.4 to 1

Source: Mainland Affairs Council, Cross-Strait Economic Statistics Monthly, no. 205 (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2010), pp. 23, 26, and 27.

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least statistically) for the ROC than for the PRC. This dramatic change can be seen in the bottom half of Table 4.6. In 1990, Taiwan actually still had more trade than China. Thus, the economic goods flowing westward across the strait constituted 8.2% of China’s imports and 6.5% of Taiwan’s exports. This made these changes slightly more important for China than for Taiwan as indicated by the ratio of the percentage of the ROC’s exports to the percentage of the PRC’s imports being 0.8 to 1. From the early 1990s on, in contrast, China’s export-led growth strategy meant that its total trade greatly outstripped Taiwan. Thus, the ratio quickly and increasingly turned to China’s favor, rising from 1.2 to 1 in 1995 to 4.4 to 1 in 2008. Taiwan’s exports to China had become much more important to the former than the latter over the first decade in the twenty-first century, suggesting that a classic pattern of trade dependence was being created (Hirschman, 1980). This helped generate substantial fears in Taiwan, especially in the DPP, that the growing economic links might be undercutting the country’s sovereignty (Gold, 2010; T. Y. Wang, 2009). The data on Taiwanese investment in China in Tables 4.6 and 4.7, which are based on investment projects approved by the ROC’s Ministry of Economic Affairs each year, are far less comprehensive than the trade figures for several reasons. First and most importantly, large amounts of capital were funneled through third countries to avoid Taiwan’s varying restrictions on investments in the mainland; second, projects approved in one year might take several more to be implemented or might fall through entirely; and, third, data for a few years (1993, 1997, 1998, 2002, and 2003) include projects from previous years that were registered late. Overall, it is almost universally assumed that these data understate actual investment by perhaps several orders of magnitude (Clark, 2007; Kastner, 2009). Yet in one important respect, the figures for investment in Table 4.7 parallel the trade data. Both show a huge jump about 2002 or 2003, a significant drop in 2009 as the Great Recession took hold, and a sharp revival in 2010. For example, approved investment jumped two and one-half times between 2001 and 2002 from $2.8 to $6.7 billion, dropped by a third in 2009 from $10.7 to $7.1 billion, but then jumped to its highest level ever in 2010 at $12.2 billion for January through November. The second column in Table 4.7 reports the average size of these investment projects. Here, the average project was fairly small during the 1990s and early 2000s in the $1 million to $3 million range. Beginning in the middle of the decade, though, average investment size leaped rapidly from $2 million in 2003 to $4.6 million in 2005, $16.6 million in

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Table 4.7 Taiwan Investment in China Approved by the Ministry of Economic Affairs

1991 1992 1993a 1994 1995 1996 1997a 1998a 1999 2000 2001 2002a 2003a 2004 2005 2006 2007 2008 2009 2010b

Total Amount (US$ billion)

Average Investment (US$ million)

0.2 0.2 1.1 1.0 1.1 1.2 4.3 2.0 1.3 2.6 2.8 6.7 7.7 6.9 6.0 7.6 10.0 10.7 7.1 12.2

0.73 0.94 0.90 1.03 2.23 3.21 0.50 1.58 2.57 3.10 2.35 2.16 1.99 3.46 4.63 7.01 10.01 16.63 12.11 15.72

Sources: Mainland Affairs Council, Cross-Strait Economic Statistics Monthly, no. 141 (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2004), p. 62; Mainland Affairs Council, Cross-Strait Economic Statistics Monthly, no. 216 (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2011), p. 28. Notes: a. Includes some projects from previous years that were registered in that year. b. January through November only.

2008, and $15.7 million in 2010, indicating more advanced and sophisticated projects. This also points to the growing stress on Taiwan’s SMEs as we discussed in the last section. Table 4.8 breaks down Taiwan’s total cumulative investment from 1991 through 2008 by industrial sector. Clearly, electronics was by far the most important area. Indeed, the three largest investment categories were electronic parts and components (16.4%), computers and electronic and optical products (15.7%), and electrical equipment manufacturing (9.4%), resulting in 41% of Taiwanese investment being in the key electronics sector. In addition, another 13% was in machinery and metals manufacturing,

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Table 4.8 Taiwanese Approved Investment in China by Industry, 1991–2008 (percentage)

Electronic parts and components manufacturing Computers, electronic, and optical products manufacturing Electrical equipment manufacturing Fabricated metal products manufacturing Plastic products manufacturing Chemical materials manufacturing Machinery and equipment manufacturing Nonmetallic mineral products manufacturing Wholesale and retail trade Basic metal manufacturing Food manufacturing Textile mills Other

16.4 15.7 9.4 6.1 5.1 4.3 4.2 4.2 3.4 2.8 2.6 2.5 23.3

Source: Mainland Affairs Council, Cross-Strait Economic Statistics Monthly, no. 205 (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2010), p. 30.

and 9% was in chemicals and plastics. Thus, while the first wave of Taiwanese entrepreneurs moving to the mainland was in small-scale light industry, by the early twenty-first century much of Taiwanese business in China was in advanced and sophisticated production. This might well have ameliorated the PRC’s economic leverage over Taiwan because of the vital contribution that these corporations made to leading Chinese industries. Indeed, China has not really tried to exert economic leverage over Taiwan, and even its hassling of pro-DPP businesspeople has been fairly limited and targeted (Kastner, 2009). The trend in social communications across the Taiwan Strait shown in Table 4.9 has been a little different from that for economic exchanges. During the 1990s, there was a sharp increase in social as well as economic interactions between Taiwan and China. The number of visits by Taiwan citizens to the PRC grew two and one-half times (0.9 million to 2.5 million) between 1990 and 1999. The number of telephone calls jumped three and one-half times (48 million to 178 million) between just 1993 and 1999, although the number of letters peaked at 19 million in 1994 and then started a steady decline presumably because of expanding telephone communications. By contrast, in the next decade, the expansion of social communications clearly lagged behind the dynamic growth in economic ties and did not experience the marked rebound of trade and investment in 2010. The number of visits grew steadily to 4.6 million in

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Table 4.9 Social Communications Across the Taiwan Strait (millions)

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010a

Visitors from Taiwan to China

Letters in Either Direction

0.4 0.5 0.9 0.9 1.3 1.5 1.4 1.5 1.7 2.1 2.2 2.5 3.1 3.6 3.7 2.7 3.7 4.1 4.4 4.6 4.4 4.5 4.8

— — — 15.2 16.8 17.7 19.1 17.6 18.0 16.3 14.7 13.4 14.0 12.6 16.3 16.8 16.2 16.2 12.5 11.6 10.2 8.8 7.3

Telephone Calls in Either Direction — — — — — 48.0 61.2 77.8 96.5 125.7 149.2 178.3 206.7 269.7 383.2 435.7 517.6 616.7 709.2 634.5 606.6 591.0 557.9

Sources: Mainland Affairs Council, Cross-Strait Economic Statistics Monthly, no. 141 (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2004), pp. 36–38; Mainland Affairs Council, Cross-Strait Economic Statistics Monthly, no. 216 (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2011), pp. 35–37. Note: “—” indicates data not available. a. January through November only.

2007 before dropping slightly to 4.4 million to 4.5 million in 2008 and 2009 and then growing again to 4.8 million for the first eleven months of 2010. Letters grew significantly in the first half of the decade, but then fell fairly sharply from just over 16 million in 2005 to just under 9 million in 2009 and 7.3 million for 2010 (not including December). Telephone calls followed a somewhat similar pattern with much more pronounced growth in the first half of the decade from 178 million in 1999 to 709 million in 2006 followed by a significant, but less drastic, decline to 591 million in 2009 and 558 million for January–November 2010.

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Unlike economic exchanges, then, the Great Recession did not appear to have a major effect on social communications. Visits slipped by only a small amount, and the marked declines in letters and telephone calls began well before the recession. The growing permanent Taiwanese communities in China probably account for some of this decline in social communications at a time when economic interactions were still expanding robustly since Taiwanese in China may have felt less of a need to communicate back to Taiwan. In addition, the rapid expansion of e-mail almost certainly substituted for a substantial number of telephone calls and letters. One would certainly expect that cross-strait relations would respond to the major economic and political events that affected China and Taiwan over the past two decades. Table 4.10, for example, shows that economic problems did affect the flows between China and Taiwan adversely, as expected, but that this impact was quite variable. The biggest impact occurred during the Great Recession of 2008–2010 when Taiwan’s exports to China fell by 16% and approved investment in the PRC fell by 34% between 2008 and 2009 (see Tables 4.4 and 4.6). The Asian financial crisis of 1997–1998 (sometimes dubbed the “Asian flu”) led to a marked decline in new investment projects and an appreciable drop in trade, but evidently did not affect the level of social communications much. Taiwan’s 2001 recession sparked by the drop in world demand for high-tech products had, if anything, even less of an effect. Trade and investment, while not growing appreciably, stayed fairly constant. But the growth of social communications continued apace as the recession pushed more of Taiwan’s businesses to make the move to China and take advantage of the huge internal market there, rather than only using the PRC as an export platform (Bolt, 2001; Cooke, 2006). In contrast, the political crises shown in Table 4.10 had almost no discernible impact on the economic and social interactions between Taiwan and China. The Tiananmen Square massacre in 1989 hurt China’s relations with foreign investors from most nations, but trade, investment, and social communications from Taiwan actually continued their rapid growth in 1989–1990. Even the Taiwan Strait Crisis of 1995–1996, where Taiwan itself was the target of Chinese military intimidation, did little to disrupt economic and social interactions across the strait. Furthermore, the periodic political confrontations between Beijing and Taipei in the early twenty-first century did not put much, if any, of a damper on the renewed spurt in cross-strait economic flows and social communications. Finally, the rapprochement between Taiwan and China

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Table 4.10 Effects of Major Events on Cross-strait Communications

Event Economic crises 1997–1998 Asian flu

Taiwan’s recession of 2001 due to drop of global demand for high-tech products Great Recession of 2008–2010

Seeming Impact

Trade and investment fell appreciably; social communications continued to grow Trade and investment stayed constant and social communications continued to climb Sharp drop in trade and investment; social communications continued downward trend that had started earlier

Political confrontations 1989 Tiananmen Square massacre 1995–1996 Taiwan Strait Crisis

Trade, investment, and social communications continued to grow Both trade and investment growth stabilized, but did not really drop; growth in social communications continued 1999–2000 crisis after Lee Both trade and investment began to Teng-hui’s special state-to-state climb again after dip due to the Asian theory and Chen Shui-bian’s flu; social communications continued election to grow 2002–2008 growing Chinese Dynamism of cross-strait economic hostility toward Chen’s increased interactions, if anything, accelerated; appeals to Taiwanese nationalism social communications peaked in 2005–2006

Political rapprochement Ma Ying-jeou’s reconciliation with PRC after 2008 election as president

Trade and investment fell because of Great Recession; social communications continued their previous downward trend

that followed the victory of Ma Ying-jeou in the 2008 elections did not spur an immediate expansion of economic relations, almost certainly because of the effects of the Great Recession. Trade and investment flows did jump to all-time highs in 2010. However, the share of Taiwan’s exports going to China remained constant from the end of the Chen Shui-bian era (see Tables 4.4 and 4.6), indicating that no fundamental reorientation in Taiwan’s trade relations had occurred. Taken together, hence, these data certainly suggest that economic relations between China and Taiwan

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were much more responsive to economic than political factors, surprisingly so in the light of the series of heated confrontations that has marked cross-strait politics over the past decade and a half (Chan, 2009). Another vital question concerns whether this dynamic represents more of a threat or an opportunity for the ROC. At the abstract level this might appear to be something of an open question, unlike the clear problems facing SMEs that were discussed in the last section. The recent views of Taiwanese, for example, are decidedly mixed about economic relations with the PRC. Table 4.11 indicates a good deal of skepticism on the part of the general citizenry about their country’s economic ties with China late in the first decade of the twenty-first century. Polls conducted by the Election Study Center of National Chengchi University in April 2007 and December 2008 (T. Y. Wang, 2009: 9) asked whether restrictions on cross-strait economic exchanges should be tightened, loosened, or kept as is. At the time of the first poll when Chen Shui-bian was still president and the Great Recession had not yet erupted, a strong majority of 61% wanted tighter restrictions compared to 35% who wanted looser ones. This certainly suggests that cross-strait economic relations were seen much more as a threat than an opportunity. At the end of 2008, following Ma Ying-jeou’s election with his pledge to expand economic ties to the mainland and the eruption of the Great Recession, Taiwanese were even more supportive of clamping tighter regulations on economic relations with China rather than relaxing them by an overwhelming 71% to 26%, perhaps reflecting the massive popular demonstrations that occurred against the signing of an agreement to open the “three direct links” in economic relations with China (Gold, 2009). The image that Taiwan’s ties with China are boxing in its economy thus appeared to be fairly prevalent. Indeed, there is a considerable cleavage in Taiwan over cross-strait economic relations, with the KMT believing that expanding these ties is

Table 4.11 Taiwanese Views About Restrictions on Cross-strait Economic Changes (percentage)

Tighten Keep as is Loosen

April 2007

December 2008

61 4 35

71 3 26

Source: T. Y. Wang, “Cross-Strait Rapprochement, Domestic Politics, and the Future of the TRA,” paper presented at the Conference on Thirty Years After the Taiwan Relations Act, University of South Carolina, Columbia, 2009, p. 9.

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vital for Taiwan’s continued dynamism and the DPP arguing that they threaten the nation’s sovereignty and well-being (Chow, 2011; Gold, 2009, 2010). In 2009 and 2010, the central controversy in this regard was over the Ma administration’s attempt to negotiate an Economic Cooperation Framework Agreement (ECFA) with China. In the analysis of Thomas Gold: “While Taiwan business groups and the political elite were pushing ECFA, many people at the societal level pushed back. They argued that Ma was selling out Taiwan’s sovereignty and turning the economy over to the Mainland, just as they had feared from the start. They predicted an influx of cheap (and possibly tainted) Chinese goods as well as labor, all to the detriment of the island’s economy and society” (2010: 69). Given this wariness about economic ties to China at the end of 2008 and early 2009, one might have expected a good deal of suspicion about the ECFA free-trade agreement that was reached in June 2010. Yet despite strident DPP opposition, it appeared to be fairly popular. In a survey conducted by the Mainland Affairs Council (see Table 4.12), for example, people thought that ECFA would have a long-term positive, rather than negative, impact on Taiwan’s economy by the nearly three-to-one margin of 66% to 23%. Large majorities were also satisfied with the overall ECFA agreement (67%), its protection of intellectual property rights (81%), and the tariff reductions in it (69%). In terms of broader

Table 4.12 Taiwanese Views About the Economic Cooperation Framework Agreement (ECFA), July 2010 (percentage)

Long-term effect of ECFA

Negative

None

Positive

23

11

66

ECFA Intellectual property rights protection Tariff reductions

ECFA threatens sovereignty ECFA promotes more free-trade agreements

Dissatisfied

Satisfied

33 19 31

67 81 69

No

Yes

66 29

34 71

Source: Mainland Affairs Council, “Survey of Public Views on the Fifth ChiangChen Talks” (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2010).

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fears that ECFA might undercut Taiwan’s sovereignty, only 34% of the population thought so; and 71% believed that the signing of ECFA would help Taiwan negotiate free-trade agreements with other nations, which could enhance the country’s sovereignty status. Overall, therefore, Taiwanese views about economic ties with China do not appear to be set in concrete. Rather, they change in response to more pragmatic considerations. For example, the perhaps surprising support of ECFA might reflect increased Taiwanese confidence due to its good recovery from the Great Recession in 2010 (M. Chang, 2011) and the fact that the opening of the three links did not produce the dire consequences predicted by the DPP. Positive views about current interactions with China do not necessarily mean that Taiwanese citizens are entirely sanguine about the state and, more importantly, the future of cross-strait relations, as implied by the data in Table 4.13 on perceptions of Beijing’s hostility toward Taiwan. Near the end of Chen’s administration, which was marked by a series of confrontations with China (see Chapter 6), two-thirds of Taiwanese (67%) believed that the PRC was hostile toward the ROC. The Ma administration, in contrast, was much more conciliatory toward China, and an almost immediate relaxation in cross-strait tensions ensued (Copper, 2011). This resulted in a significant decrease in suspicion of China. For example, by August 2008 the proportion of Taiwanese perceiving hostility from Beijing dropped by a fifth from 67% to 53%. Strident DPP opposition to Ma’s agreement on the three links in the fall of 2008 (Copper, 2011; Gold, 2009) then produced a spike in antagonism toward Beijing as hostility perceptions jumped back up to 65% in October before beginning an

Table 4.13 Taiwanese Perceptions of Chinese Hostility During the Ma Ying-jeou Administration

Percentage Who Believe PRC Hostile to ROC Government December 2007 August 2008 October 2008 December 2008 December 2009 December 2010

67 53 65 49 40 52

Source: Mainland Affairs Council, “Beijing’s Hostility Toward ROC” (Taipei: Mainland Affairs Council, www.mac.gov.tw, 2011).

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almost immediate drop to 49% in December 2008 and 40% in December 2009. The next year brought a new jump of nearly a third to 52% in the belief that Beijing was hostile toward Taiwan’s government. While there were no major conflicts between Taipei and Beijing, Taiwan’s public evidently became more suspicious of China’s military expansion and continued strong efforts to limit the ROC’s international space (Tien and Tung, 2011). This general trepidation about the PRC, therefore, suggests continued worries that China may be boxing in Taiwan (see Chapter 6 for a more detailed discussion).

The Economic Challenge of the Early Twenty-First Century

Taiwan’s economic miracle of the 1950s through the 1980s is certainly coming under challenge as economic growth has slowed while inequality has increased. To probably a large extent, this is the inevitable result of the ROC’s current transformation from an industrial to an information age economy. Yet the country also faces particular problems that can be considered to be the costs of success of its past economic miracle. For example, its rapid ascent up the international product cycle has left it increasingly squeezed between industrializing developing countries and the most advanced economies in the world such as the United States and Japan. More particularly, its reliance on the dynamism of small and medium enterprises is turning into a disadvantage, and the growing economic integration with China has brought fears about the country’s economic and political future along with short-term profits and benefits. Despite these significant problems, however, Taiwan’s economic situation is far from dismal. It has made considerable progress in creating a high-tech economy, especially in the electronics field (J. Wong, 2010), which almost certainly reduces its economic asymmetries with China. Moreover, the ROC has demonstrated a surprising resilience in bouncing back from what many saw as horrendous recessions at the beginning and end of the first decade of the twenty-first century. For example, its surge of growth in 2010 shown in Table 4.2 was certainly impressive by any standard. This made it the country’s best year since the late 1980s. Especially considering Taiwan’s past economic dynamism, the nation must be given a fairly good chance of confronting and overcoming the costs of its past economic success.

5 Some Perils of Democratization

While somewhat delayed, Taiwan’s successful democratic transition

that we analyzed in Chapter 3 created a seeming political miracle to go with the nation’s earlier economic miracle. The lifting of martial law in 1987, the forced retirement of the senior legislators in 1991, and the first direct election of president in 1996 brought full democracy to the ROC. Then, the election of the Democratic Progressive Party’s Chen Shui-bian as president in 2000 showed that all was possible politically in the previously authoritarian Taiwan. Yet democracy, as desirable as it was, did not solve all of Taiwan’s political problems. For example, the development of a fairly even balance of political power between the Kuomintang and the DPP led to growing gridlock, partisan polarization, and increasing emphasis on the highly divisive national identity issue. And democratization may even have enhanced corruption by creating the need for huge campaign funds and by politicizing more aspects of policymaking. Institutionalist theory argues that fairly permanent economic structures and policymaking arrangements create institutions that shape future policymaking and economic performance to a considerable extent (March and Olsen, 1989; North, 1990; Riker, 1982). This perspective suggests that it might be valuable to look for the political institutions that evolved during Taiwan’s development that could have inhibited the country’s adaptability after the mid-1990s. Two such institutions stand out. First, Taiwan’s government had long been dominated by strong authoritarian leaders such as Chiang Kai-shek and his son Chiang Ching-kuo. While the movement to electoral democracy in the late 1980s and early 1990s went smoothly (Rigger, 1999b; Tien, 1996a), the give-and-take of normal democratic policymaking had not been established. Indeed, the 109

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institutional legacies from the past seemed to push the nation toward a fairly dysfunctional politics. Second, Taiwan’s electoral system of a single vote in multimember legislative districts also stimulated some of the less desirable characteristics of Taiwan’s democratic politics. Figure 5.1 shows the dynamics by which these two institutional legacies led to several untoward consequences. As indicated in the figure, the authoritarian tradition blurred governmental lines of authority and helped stimulate very personalistic politics. These factors, in turn, had several deleterious consequences for policymaking in Taiwan, such as never-ending conflict and gridlock, burgeoning corruption, and the politicization of supposedly technical policy realms like financial regulation. For its part, the election system of the single nontransferable vote (SNTV) contributed both to personalistic and patronage politics and to the election of extremist candidates who led the polarization of elite politics on the highly emotional issues of culture and identity. In the first part of this chapter, we discuss the institutional imbroglio created by the dynamics in Figure 5.1. Here, we examine how the authoritarian practice of strong leadership contradicted the ROC’s formal constitutional design and muddied the relationships among the country’s major political institutions, creating problems that still reverberate

Figure 5.1 How Two Political Institutional Legacies Proved Dysfunctional During Taiwan’s Democratization

Gridlock in policymaking Tradition of strong authoritarian leaders

Ambiguity and incoherence in government institutions

SNTV elections

Personalistic politics

Politicization of financial industry

Burgeoning corruption Appeals to extreme base constituencies

Growing centrality of cultural and identity politics

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through the governmental system. We also discuss the logic of the single nontransferable vote system to show how it created incentives for what turned out to be fairly counterproductive political behavior. We then present a case study of the politicization of the financial industry as an illustration of these problems. Finally, we briefly consider the strengths and weaknesses of Taiwan’s government in view of these perils of democracy.

Taiwan’s Institutional Imbroglio

It is widely assumed that a nation’s political and economic institutions shape public policy to a considerable extent (March and Olsen, 1989; North, 1990; Riker, 1982). John Fuh-sheng Hsieh (2006, 2009) has developed an interesting model of Taiwan’s institutional legacy based on the difference between presidential or parliamentary governmental systems and between elections systems with single-member districts or proportional representation. From this perspective, Taiwan’s current institutional imbroglio results from a combination of a complex and somewhat indeterminate constitutional system, a long-time election system that contained some perverse incentives, and its long era of authoritarian rule. Indeed, Hsieh concludes that “actual constitutional practice in Taiwan [is] . . . contrary to the constitutional arrangement on paper” (2006: 99). Originally, the government for the Republic of China on Taiwan was (and still essentially is) structured around the 1947 constitution, which was based on earlier constitutional and institutional developments in the interwar Republican period of China. This constitution created the institutions for a liberal democracy based on the five branches of government proposed by Sun Yat-sen, the founder of the Kuomintang, and on constitutional guarantees of civil rights and liberties. Thus, at the national level, there were five basic governmental organizations: the Executive Yuan, the Legislative Yuan, the Judicial Yuan, the Control Yuan, and the Examination Yuan. An indirectly elected president stood above these five branches and served as the top political official in the nation. Freedom of speech and other political rights were guaranteed, and universal suffrage and the secret ballot were mandated (Ch’ien, 1950; Copper, 1979; Winckler, 1984). The keystone of the ROC’s government was the president, who initially was indirectly elected for six-year terms by the National Assembly. The National Assembly itself was conceived as a major representative body that, in addition to selecting the president and vice president, was

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charged with adopting and amending the constitution. National Assembly members were elected by constituencies of 500,000 in China for six-year terms, and some representation was also given to occupational groups, racial minorities, and overseas Chinese (Barnett, 1963; Ch’ien, 1950). The president possessed important constitutional powers, but there were also significant limitations on them. He appointed the premier who headed the Executive Yuan and also had appointment powers for the Judicial and Examination Yuans. Moreover, the president became the focal point for several important decisionmaking bodies, such as the National Security Council that was founded by Chiang Kai-shek in 1967. The National Security Council has been generally composed of some of the top officials in the regime and seemingly has served as a “super cabinet” at many times. Constitutionally, however, the president did not really appear to be the chief executive. It was the premier who selected and presided over the cabinet and, at least on paper, the premier and the cabinet were responsible to the Legislative Yuan (Ch’ien, 1950; Gurtov, 1968; Hsieh, 2006). It is somewhat ambiguous, therefore, whether the ROC constitution created a presidential or cabinet system because the exact division of labor between the president and premier has been somewhat unclear and has depended on their personal power positions. In reality, except for the brief period after Chiang Kai-shek’s death when his vice president finished out his term, the president has always been preeminent. Still, presidents and premiers have not always been fully compatible. For example, President Lee Teng-hui and his mainstream faction of the KMT clearly had strong differences with Premier Hau Pei-tsun, a leader of the antimainstream KMT in the early 1990s. This led to a joke about why Taiwan was the most democratic nation in the world: “The United States has a President and people drive on the right; the United Kingdom has a Prime Minister and people drive on the left; while Taiwan has both a President and a Premier and people drive on both sides of the street.” The Legislative Yuan, Taiwan’s parliament, was a directly elected body that was constituted much like the National Assembly. Even during the long authoritarian era, it passed budgets and legislation and exercised oversight over the executive (e.g., the Executive and Legislative Yuans had vetoing and overriding powers fairly similar to those exercised by the president and Congress in the United States). In reality, the Legislative Yuan was fairly weak, and it is probably fair to describe it as a rubber stamp on major policies before the 1990s. Still, the Legislative Yuan held the important formal power of having to approve presidential appointments

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of premiers (Ch’ien, 1950; Hsieh, 2006). More informally, legislators did exercise considerable initiative in such important areas as amending legislation, constituent service, local development projects, and overseeing the executive in public interpellation sessions (B. E. Chou, Clark, and Clark, 1990).The other three major branches of government have been much less important, but still significant in Taiwanese politics. The Judicial Yuan, whose members were appointed by the president, interpreted the constitution and served as the supreme court for the ROC. The Control Yuan, whose members were initially elected indirectly by subnational governments (provinces in China), exercised oversight over other parts of the government. It held general auditing powers, had to consent to the appointments to the Judicial and Examination Yuans, and could censure and (with the approval of the National Assembly) impeach government officials. Finally, the Examination Yuan, which was also appointed by the president, oversaw the system of civil service examinations and served as a personnel agency for the government (Ch’ien, 1950). As originally established in China, the governmental structure was a federal one with three levels—national, provincial, and county. The retreat from the mainland left essentially one province (Taiwan) that encompassed almost all the territory governed by the ROC, with some offshore islands near China under military administration. The provincial administration was directed by a governor who was appointed by the president. There also was a directly elected Provincial Assembly, whose relationship to the provincial executive paralleled that between the Executive and Legislative Yuans. Legislative politics in the Provincial Assembly were much livelier than in the Legislative Yuan because the members were directly elected and because the issues that the assembly could deal with were not all that important (Lerman, 1978). In addition, the two largest cities in Taiwan, Taipei in 1967 and Kaohsiung in 1979, were made special municipalities under the Executive Yuan with structures fairly similar to the provincial government (including their mayors becoming appointive rather than elective). Figure 5.2 shows this basic governmental structure and the relationships among its various components. Solid arrows indicate the formal power to select and dashed arrows show check-and-balance relations. This diagram suggests three central characteristics of Taiwan’s politics during the authoritarian era of the 1950s through the 1980s. First, the electorate possessed substantial power in theory, but it was quite circumscribed in practice by two important factors: (1) the indirect election or selection of a large number of key leaders and bodies; and (2) the fact

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Figure 5.2 Government Structure of the Republic of China

President

National Security Council

Executive Judicial Yuan Yuan (premier and cabinet)

National Assembly

Legislative Yuan

Examination Yuan

Provincial governor

Control Yuan

Provincial Assembly

County and municipal governments

Electorate

Notes:

Indicates responsiblity for selection. Indicates checks-and-balances relationship.

that large majorities of the Legislative Yuan and National Assembly continued to be senior legislators elected in China in the late 1940s. Second, the large number of dotted lines has ambiguous implications. On the one hand, it could have promoted checks and balances among the various governmental institutions. On the other, there was certainly the potential for institutional incoherence, especially in the key set of relationships among the president, the premier and cabinet, and the Legislative Yuan. Third, the foundation certainly existed for a strong presidency, despite the ambiguity over whether the president could even be considered the chief executive. The formal constitutional structure for any country is, of course, subject to significant modification by informal political practices. This occurred to an extreme extent in authoritarian Taiwan. Not only were the constitution’s democratic intent and institutions subverted in the various ways discussed in Chapter 3, but the outline of the nation’s political

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bodies in Figure 5.2 completely ignores the central role of the ruling Kuomintang Party. The party’s institutions were greatly influenced by Soviet advisers in the 1920s and, once it came to power, it created something of a Leninist party state. Consequently, major decisions about policy and personnel were evidently approved, if not made, by the top party organizations rather than the official government (e.g., the KMT’s Central Standing Committee had to approve the premier’s cabinet choices). And the Executive Yuan was viewed as much more of a policy implementer than initiator. The party also had fairly extensive ties with society through such organizations as the China Youth Corps and farmers’ associations. The strong presidential leadership that has marked Taiwan’s politics was based to a large extent on control of the ruling party as both Chiang Kai-shek and Chiang Ching-kuo were strong leaders of the KMT through their presidencies (Bedeski, 1981; Clough, 1978; Copper, 1979; Tai, 1970). This continued in the democratic era, as Lee Teng-hui was chairman of the KMT throughout his presidency (1988–2000) and Chen Shui-bian and Ma Ying-jeou have been chairs of their respective parties for part of their terms. Despite this structure of a party state and a substantial amount of repression directed against those who challenged the regime, the KMT on Taiwan departed from the classic Leninist strategy in one vital respect. Rather than destroying all preexisting political and social groups, the regime tried to co-opt and manipulate them whenever possible. This resulted in the mainlander national elite playing local islander factions off against each other and retaining power by acting as the arbitrator among them. This also made elections for local governments and farmers’ associations real and often fiercely competitive, which had somewhat contradictory implications for Taiwan’s future political development. On the one hand, a significant basis or starting point was created for democratic expansion; on the other, these local bodies were strongly focused on political patronage that was often tied to corruption (Bosco, 1994; Clark, 1989; Rigger, 1999b; Tien, 1989). This turns attention to the somewhat rare type of election system that Taiwan imported from its former colonial master Japan. The two major types of election systems are single-member districts in which the person who gets the most votes wins and proportional representation in which a party wins the number of seats in a multimember district that is proportionate to its share of the vote. Taiwan’s system of what is called the single nontransferable vote combines elements of both systems. The candidates for legislative seats run in multimember districts as in propor-

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tional representation. However, each voter can cast only one ballot for a specific candidate (not a party) that cannot be transferred to a second or third alternative if the candidate does not win. The candidates are ranked according to the votes they receive, and the number elected is determined by the size of the district. For example, if a district has eight seats, the eight candidates with the highest number of votes are the winners. Consequently, in large districts, fairly small minorities can elect a representative (Hsieh, 2009). This system appears to have ambiguous implications for the party system. Single-member districts are usually considered to promote competitive two-party systems because minor party candidates are difficult to elect. As shown in Table 3.3 in Chapter 3, this promotes the ability of the citizenry to hold a government accountable, but makes the representation of some specific constituencies difficult because the catchall major parties must retain broad appeal. Conversely, a proportional representation system promotes a multiparty system that is good for representation, but can undermine accountability. The single nontransferable vote system promotes representation by individual legislators, but undermines representation by a party because candidates of the same party must compete against each other as well as against the representatives of other parties, which undercuts the cohesion and responsibility of the parties. As Hsieh explains this nicely: Since the vote shares of these two parties [the DPP and KMT] are, under normal circumstances, relatively fixed, it can be expected that candidates from the same party will compete against each other for the same pool of voters. In fact, this kind of intraparty competition is more often than not fiercer than competition between the two parties. As voters make their choices, they often first determine which party to vote for, and then pick one out of several candidates from that party. Since the platforms of these candidates are likely to be similar, voters need to rely upon other cues to make their choices, including personal connections, pork-barrel projects, or even vote buying. Elections may become very personalized. In addition, since each party, in general, wants all its candidates to win, and often needs to show impartiality among its own candidates, these candidates may have to turn to other sources of support to compete against their co-partisans. Factions, big businesses, or even gangsters may be dragged into the process. Corruption may thus sneak in. Moreover, because a candidate may need only a small portion of the vote in the district to get elected, he or she may choose to take extreme positions to attract the support of certain groups of voters. In this way, radicalization may become a constant feature of political life. (2009: 12)

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Thus, there seems to be a parallel between Taiwan’s constitutional and electoral systems. The constitutional system combined elements of both parliamentary and presidential governments in a somewhat incoherent system that was held together by authoritarian one-party rule. The election system was neither single-member district nor proportional representation and appeared to undercut the incentives that one or the other might have provided for establishing a particular type of party system. Democratization, as might well have been expected, exacerbated these problems. The incoherence and ambiguities of the constitutional system became increasingly apparent as competing political forces were given free rein to pursue conflicting interests and goals, and the growing importance of elections accentuated the dysfunctions of the single nontransferable vote system. In response to these problems, Taiwan has amended its constitution quite significantly over the past two decades during the democratic era. Yet the efficacy of these reforms for surmounting the institutional imbroglio facing the nation remains rather problematic. Extending the work of Jih-wen Lin (2002) for the 1990s, Shelley Rigger (2007) developed a model of four rounds of constitutional change in democratic Taiwan over the past two decades. Lin and Rigger differentiated two major initial motivations for constitutional reform. One was the ideological perspective on the existing constitution and the other concerned pragmatic power considerations. Ideologically, the DPP challenged the legitimacy of the old constitution, which the traditional KMT generally supported and, during the 1990s, President Lee Teng-hui and his mainstream KMT took an intermediate position with their goal of solidifying Taiwan’s sovereignty within the existing constitutional structure. After the turn of the century, according to Rigger, a new justification for constitutional reform emerged because of growing dissatisfaction with the dysfunctional operations of the country’s political institutions. Figure 5.3 summarizes these four rounds of constitutional change. The first round included constitutional amendments in 1991, 1992, 1994, and 1997. Rigger (2007) sees these as facilitating democratization and balancing the powers among Taiwan’s basic political institutions. The first three clearly were essential to establishing a democracy since they allowed the direct election of the Legislative Yuan, National Assembly, provincial governor, mayors of Taipei and Kaohsiung, and finally the president. Ideologically, these reforms conformed to the DPP critique of the old constitution, helped increase the power of the mainstream KMT and DPP, and were overwhelmingly supported by the general public. The

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Figure 5.3 Rounds of Constitutional Reform in Democratic Taiwan

Round 1 (1991–1997) • Goal: Facilitate democratization and rebalance powers among political institutions 1. Direct election of Legislative Yuan, National Assembly, provincial governor, special municipality mayors, and president; 2. More power to president (e.g., Legislative Yuan lost power to confirm premier); and 3. Phasing out of provincial government. Round 2 (1999–2000) • Goal: Define the role of the National Assembly 1. Initial attempt to extend terms draws major public backlash; but 2. Ultimately, powers downgraded substantially. Round 3 (2001–2005) • Goal: Make government more effective 1. Legislative Yuan cut in size; 2. New election system strengthening major parties; 3. National Assembly abolished; and 4. Changing constitution made much harder without broad-based support. Round 4 (2005–2007) • Clashing perspectives: Promote governmental efficiency vs. create new constitution (country) 1. Major DPP push ended with no proposal while KMT not interested in major constitutional change. Source: S. Rigger, “The Politics of Constitutional Reform in Taiwan,” paper presented at the Conference on Taiwan’s Democracy and Future: Economic and Political Challenges, Georgia State University, Atlanta, 2007.

1997 amendments, in contrast, focused on the relationships among governmental bodies. The power of the president was strengthened by removing the Legislative Yuan’s power to confirm the premier and the provincial government was drastically downsized. According to Rigger, this represented a trade-off between President Lee’s ambition to increase presidential power and the DPP’s ideological goal of removing links to China from the constitution (see Yeh, 2002, for a somewhat similar interpretation).

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This first round of constitutional reform was based on an overlap of the DPP’s ideological interests and the mainstream KMT’s power considerations. It left the DPP still advocating the need for major constitutional change but satisfied the mainstream KMT, thereby making it difficult, if not impossible, to create sufficient support for more reform (Rigger, 2007). A second round emerged, though, in a battle over the status of the National Assembly, which had lost its major function of electing the president. In 1999, the National Assembly passed an amendment that extended the term of its members, which led to a great popular uproar and was then declared unconstitutional by the Council of Grand Justices. The widespread opposition to the National Assembly’s self-aggrandizement led to a new amendment in 2000 that substantially downgraded its status in line with the DPP’s long-standing ideological opposition. The KMT supported this amendment because it wanted to avoid the upcoming National Assembly election that would have benefitted a new party founded by KMT defector James Soong (Rigger, 2007; Yeh, 2002). President Chen Shui-bian’s presidential victory in 2000 was soon followed by a vicious confrontation with the KMT-controlled Legislative Yuan (see Chapter 6). The public seemingly agreed with the DPP that the legislature had become overly obstructionist and bore the brunt of the blame for the polarized gridlock that was afflicting Taiwan. In addition, there was a widespread perception that the single nontransferable vote electoral system promoted political polarization and corruption in public affairs. Thus, the new push for constitutional reform during the first Chen administration focused on making what had become a chaotic government more effective and efficient. While the Kuomintang was far from enthusiastic about this third round, it did not feel that it could defy overwhelming popular support for reform. Consequently, a new set of amendments was passed in 2005 that cut the size of the Legislative Yuan in half, replaced the single nontransferable vote system with a combination of mostly single-member districts supplemented by some proportional representation of major parties (which, ironically, worked to the KMT’s favor in the next elections in 2008), abolished the National Assembly, and made further constitutional change difficult without broadbased support (Hsieh, 2009; Rigger, 2007). The actual constitutional change produced by the third round focused on making Taiwan’s government work better. President Chen and many others in the DPP, though, had ambitions for more drastic reform in line with the DPP’s ideological goal of creating a new constitution. The DPP thus renewed a campaign for revising the constitution that combined

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Chen’s periodic proposals for creating a “second republic” with initiatives to make the structure of the government more effective. However, this fourth round was essentially abandoned in mid-2007 when the DPP switched its focus to supporting a referendum in the 2008 elections on whether the nation should join the United Nations under the name Taiwan while the Kuomintang showed little interest in major constitutional reform (Rigger, 2007). While not necessarily a major constitutional issue, the potential use of referenda in Taiwan politics also has some relevance for the question of how to make the political system work better. The Democratic Progressive Party had initially advocated a referendum for declaring Taiwan independence in the early 1990s. Thus, the idea of adopting legislation to allow referenda and of holding referenda strongly appealed to the DPP base. Referenda, of course, can be held on many issues that have nothing to do with Taiwan independence and the island’s status and sovereignty (e.g., a township referendum that was held on whether it should get a freeway exit). Indeed, when Chen Shui-bian began to push for a referendum law in 2003 with the goal of holding a referendum simultaneously with the 2004 presidential election, he took more than a little care to choose issues that did not involve a direct change in Taiwan’s status or the declaration of independence (e.g., whether Taiwan should be granted membership in the World Health Organization, which appealed to the presumably large majority of citizens who were frustrated and angered over the PRC’s ability to deny Taiwan status and face in international affairs). As Rigger argues, this certainly appears to have been politically motivated in terms of the upcoming election: “The theory is that referendums, especially symbolic ones like that on the WHO, will help the DPP politically by mobilizing the party base and perhaps even exciting patriotic emotions that will draw votes beyond the DPP’s traditional supporters. Holding the referendum together with the presidential election would allow enthusiasm for the referendum to spill over into the presidential race” (2004: 186). Chen Shui-bian’s advocacy of establishing referenda turned out to have two quite distinct and separate appeals. It certainly appealed to supporters of Taiwan independence among the Pan-Green forces. It also had wide support among the general public who rejected independence as too radical and provocative because referenda were seen as a way of surmounting the ongoing gridlock in Taiwan’s politics and as deepening Taiwan’s democracy by allowing the people to determine policy directly (Mattlin, 2004; Rigger, 2004). Consequently, the politics of the referendum

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issue during 2003–2004 turned out to be quite convoluted. The legislative enactment involved a three-sided struggle among Chen, more radical advocates of using the referendum to achieve Taiwan independence, and the narrow KMT-led majority in the Legislative Yuan that initially opposed passing a referendum law but came to support the idea when its strong popular support became apparent. The final law set a high threshold for approval—support by 50% of all registered voters—which has greatly limited its effectiveness. For example, Chen was able to hold referenda simultaneously with the 2004 and 2008 elections, but they were defeated by boycotts of the referenda organized by the Kuomintang (Clark, 2006; Gold, 2009). The 1947 constitution, to sum, created an unwieldy government whose institutional incoherence was covered up by the KMT’s authoritarian rule. The shortcomings of the constitutional system became increasingly apparent as the democratic era progressed, and a series of constitutional reforms were enacted between 1991 and 2005 that sought to redress these problems. These reforms were certainly successful in some regard. The institutional basis for a democratic polity was constructed; several bodies of dubious effectiveness (e.g., the provincial government and the National Assembly) were eliminated; and, more recently, the single nontransferable vote election system was reformed. Still, the continuing gridlock and polarization in Taiwan demonstrate that the country’s institutional imbroglio has yet to be satisfactorily resolved. Taiwan’s institutional shortcomings are often attributed to the fact that its constitutional reforms have been incremental, piecemeal, ad hoc, and opportunistic, both by those who want a more effective government and by those who advocate a new constitutional order (Rigger, 2007; Yeh, 2002). In addition, Hsieh (2006) provides a broader and more theoretical critique of the ROC’s political system. He argues that constitutional systems can be ranked along a continuum from the liberal objective of protecting human rights to promoting efficient policymaking, with the checks and balances of a presidential system promoting the former and the unified decisionmaking of a parliamentary system conducive to the latter. Election systems, similarly, can promote the populist value of individual representation or efficient policymaking by majority parties, with proportional representation systems providing the former and single-member district ones the latter. He then uses these distinctions to create a typology of four different kinds of democracies. He classifies Taiwan as a presidential system in practice (though fairly parliamentary in constitutional design) and quite populist, at least under the old single nontransferable

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vote system. This creates a hyperdemocracy, which, according to Hsieh, is the least desirable type because of its tendency for political stalemate and ideological polarization, exactly the problems facing Taiwan today.

The Politicization of the Financial Industry

The growing politicization of the financial industry represents a cost of success that is associated both with Taiwan’s rapid industrialization and with its democratization. The strong contribution of financial chaos and collapse to the KMT’s loss in the Chinese Civil War in the late 1940s led the regime to control the industry tightly after moving to Taiwan and to mandate fairly conservative financial practices. For several decades, this system worked fairly well as the formal financial system primarily funded large-scale investments (both public and private) while the informal curb market proved sufficient for small enterprises (Clark, 1997; K. J. Fields, 1995). Yet Taiwan’s financial institutions did become more open cumulatively, and the democratization of the 1990s increasingly brought political pressures to bear on the system with not altogether positive consequences (Tan, 2008). The importance of the financial industry in economic growth and development was strongly highlighted by the global economic crisis that began in 2008. As a service industry, the financial sector plays the role of facilitator to other sectors of the economy. By making credit available, banks and financial institutions act as the oil that greases the wheels of industry. In Taiwan’s fifty-year economic development march to the status of an industrialized economy, the role of its financial institutions cannot be overstated. Haunted by the financial crisis and economic collapse that occurred when it was governing in China, the KMT established a financial system to ensure that would not happen in Taiwan and undermine its control of the state. Scholars, historians, and political elites have all pointed to the failure of the KMT government to manage the economy as well as to control hyperinflation as a primary culprit for why it lost power and was exiled to Taiwan. Raging inflation in the late 1940s (about 500% annually during 1946–1948 and a stupendous thirtyfold during the first half of 1949) presented the regime with an extreme challenge that had to be overcome before any growth policies could be implemented. The government, hence, imposed a stringent stabilization program in the late 1940s and early 1950s. This package included currency reform and high interest rates as well tight governmental controls over the state-dominated

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financial system aimed at controlling money supply and credit availability. In addition, Taiwan followed a conservative fiscal policy of maintaining balanced budgets. These stabilization policies proved to be highly successful. The inflation rate “fell” from 3,000% in early 1949 to 300% in 1950 and about 30% in 1951–1952 before stabilizing at under 10% for the rest of the 1950s (S. W. Y. Kuo, 1983; K. T. Li, 1988; Lundberg, 1979; Scitovsky, 1986). The central lesson that Taiwan’s leaders drew from this was that the government should strongly influence the financial industry so that it would serve the regime’s overall economic development plan. The government’s desire coincided with the reality that financial capital was scarce and that the government was the only institution that could act as a credible financier for the economy. Consequently, Taiwan’s financial and banking industry was dominated by a variety of government-owned, government-controlled, or party-owned banks. Oversight of the banking and finance sector was assigned to the Ministry of Finance as well as the Central Bank of China. As the key players in Taiwan’s financial sector, both the ministry and the Central Bank used a heavy regulatory hand to ensure that the financial industry served the government’s priorities (Chiu, 1992; S. W. Y. Kuo, 1983; K. T. Li, 1988; Tan, 2001). Up until the 1990s, for example, the state controlled over 80% of the resources in the formal financial sector as it directly owned or the KMT controlled the major institutions: the Central Bank of China, almost all the commercial banks, the postal savings system, and the KMT-dominated farmers’ associations and fishermen’s cooperatives (Chiu, 1992; Clark, 1997; Wade, 1985). Another consequence of the regime’s fears about inflation and financial mismanagement was a conservative lending strategy that focused on the safest and most secure candidates such as state enterprises and large corporations (Chiu, 1992; K. J. Fields, 1995; Wade, 1985). While this might make sense financially, it would appear to have been quite inconsistent with the central role of small and medium enterprises in promoting the nation’s rapid growth for most of its postwar history. The lack of formal finance for the SMEs was more than made up for, though, by the development of the so-called curb market, which encompassed a pervasive set of informal lending arrangements. While such credit dealings occurred outside the formal financial system, they could be considered at least semilegal since the government tolerated them and even passed several laws that encouraged curb market transactions. Loans on the curb market took a wide variety of forms. Many reflected the family financing made possible by the high levels of household savings in the 1970s and 1980s (see Tables 2.4 and 2.6 in Chapter

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2), and others were part of revolving credit associations among friends and close business associates. At the same time, there was considerable activity by underground “bankers” and loan sharks with ties to organized crime. Curb market transactions differed from those in the formal financial system in two fundamental ways. First, they were much more informal and dispensed with the usual collateral requirements, disclosure of financial data, and bureaucratic hassles from lenders. For example, one of the most common forms of curb market financing was the use of postdated checks, which were fairly secure because they were subject to criminal sanctions until the late 1980s and because not paying would destroy a businessperson’s reputation. Second, because of these advantages, the interest rates on the curb market were extremely high (Chiu, 1992; K. J. Fields, 1995; Wade, 1985). Overall, the curb market became surprisingly important for business finance in Taiwan. In 1985, for example, the curb market provided 15.6% of company financial resources, which was not that much lower than the 19.7% provided by formal financial institutions (Chiu, 1992: 180–181). Taiwan’s traditional financial system, therefore, appears to have been paradoxical. On the one hand, the most important parts of the system were rigid, state dominated, and clearly discriminatory toward the dynamic SME sector. On the other, informal practices, such as the curb market, helped produce an extraordinary record for savings, investment, and economic dynamism. Indeed, it has been argued that this system produced “prosperity from countervailing perversities,” which prevented the dysfunctional incentives of the system from becoming too powerful (Clark, 1997). Furthermore, the lack of financial reform through the 1990s has been given credit for Taiwan’s escape from the Asian financial crisis of 1997–1998 with relatively little damage because the country remained comparatively insulated from the international financial system (Tan, 2001). Over time the pressures for liberalizing and for opening Taiwan’s financial institutions grew, however, both domestically from firms that wanted more access to it and internationally from advanced industrial nations that wanted greater participation in East Asia’s globalization (Chiu, 1992; Clark, 1997; Lundberg, 1979; Tan, 2008; Y. L. Wu, 1985). The financial system was also part of what appeared to be an explicit strategy by the regime to limit the power of business and keep the relationship between the government and business cool and distant (Y. H. Chu, 1989). The state controlled the formal financial sector that financed large businesses while the SMEs had to rely on catch-as-catch-can financing and were too small to exercise much political power. Consequently, the KMT

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government was able to inhibit the rise of concentrated interest groups in key industries and, at the same time, cultivate a diffuse base of social support by providing a conducive context for the development of the SMEs (Tan, 2008). Indeed, it is appropriate to describe Taiwan’s economic interest groups as either “weak, concentrated interest groups or performance-based, dispersed interest groups” (Tan, 2001: 171). The dispersed nature of these interest groups, in turn, sheltered the economic technocracy from rent-seeking pressures, thereby creating a relatively autonomous decisionmaking environment for it (Tan, 2008). By the late 1980s, the financial industry began expanding to cater to cash-rich corporations and high net worth individuals. With the onset of democratization and the election of Lee Teng-hui as Taiwan’s first islander president, the government began to set in motion plans to liberalize the financial industry by allowing private commercial banks. In 1991, Taiwan opened up the banking industry to allow for private commercial banks. Many of Taiwan’s major business groups decided to invest in private banks as either full owners or part owners of these new start-ups. The resulting increase in the number of banks in Taiwan created an environment where competition for customers and business was intense. Before the 1997 Asian financial crisis, therefore, the government took several significant steps to further liberalize the banking and financial industry. Some of the plans included the privatization of state-owned banks and financial institutions, increased participation of foreigners in Taiwan’s equity market, liberalized futures transactions, liberalized foreign exhange currency transactions, and an increase in the number and scope of operations of foreign banks. However, during and after the crisis, the government decided to backtrack on many of these programs while increasing its oversight and regulation of the financial industry. The Central Bank and, in particular, top Central Bank officials believed that the main impetus for the Asian financial crisis had been the accelerated liberalization of the banking and financial sector of neighboring countries. Because SMEs and exporters have been the backbone of Taiwan’s economy, the economic technocracy devised a variety of programs to insulate Taiwan’s economy from this financial crisis. In particular, the government devised various business assistance programs, such as export insurance and export loans and guarantees to exporters, to alleviate the political and economic risks that Taiwanese businesses were experiencing. During the height of the Asian financial crisis, the autonomy of the Taiwanese developmental state allowed the economic technocracy to intervene in the market immediately to prevent the spread of the crisis to

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Taiwan. In sum, the ROC responded to the East Asian flu with sustained state autonomy and a step back from liberalization (Tan, 2001). Many of the measures that the financial authorities adopted reinforced the strong oversight of the industry and halted liberalization programs that had been planned or under way. By and large the measures were able to insulate Taiwan from the crisis. The ability of Taiwan’s economic technocracy to respond to the crisis had a lot to do with the institutional arrangements prior to the consolidation of democracy in Taiwan. As Tan argues, The ability of Taiwan’s economic policy makers to effectively respond with strategic capital market interventions, including increased barriers to capital outflows, reflects the autonomy of the regime and its economic technocracy. Continued autonomy amid democratization is based on the decentralized nature of the industrial structure, and the associated political weakness of concentrated interest groups combines with a strong performance record yielding broad political support from dispersed interest groups. . . . This made for a political and institutional environment that left Taiwan’s technocrats free to implement policies aimed at protecting their successful economic model. (2001: 175)

This policy, however, remained viable only during the era of a relatively dominant one-party regime where Taiwan was best characterized as a developmental authoritarian state. As Taiwan’s political system continued to democratize, the developmental state and the role of the economic technocracy began to change and pressures continued to mount for liberalizing the financial system. In July 1998, the government passed a new law—the Trust Enterprise Law—with the aim of diversifying the banking and trust industry. The beneficiaries of this new law were the private commercial banks that are members or a part of large business groups. Consequently, close to one-third of Taiwan’s largest 100 business groups have financial institutions among their holdings. These include institutions like insurance companies, stock brokerage firms, bill finance companies, trust companies, and commercial banks (China Credit Information Service, 2002). Taiwan continued on its path of democratic consolidation and institutional reforms with the turnover of executive power to the opposition Democratic Progressive Party in May 2000. One immediate impact of the DPP presidency was the occurrence of executive-legislative deadlock. With the KMT’s majority control of the Legislative Yuan, it was not interested in cooperating with the DPP administration. The existence of a divided government created opportunities for interest groups to be

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able to get involved and influence the outcome of policymaking in the financial and economic sphere. This scenario was further aided by the fact that the DPP was for a long time an opposition party without strong linkages to the business community in the island. With an initial antibusiness party image, the DPP had to be accommodating to cultivate the support of the business community. By so doing, the changes in the ruling political party and the structure of government resulted in an increase in the number of veto points that could aid or block policy adoption or policy implementation. Under the DPP administration in 2000, the move toward greater democracy coincided with the weakening of the world economy in general and the Taiwanese economy in particular. This economic recession and the consequent reduction in available resources compromised the government’s ability to respond to the demands from the empowered citizenry and interest groups. One clear example relates to the use of reserve funds from the Postal Savings Bank and Labor Insurance to create a stock stabilization fund in response to the precipitous decline of the Taiwan stock market just one year into President Chen Shui-bian’s administration. The use of a stock stabilization fund to prop up share prices, while popular, created a moral hazard problem whereby public money is used to support individual investors. At the same time, the use of such a fund failed to introduce the investment community to a proper risk culture. As a direct consequence of the meltdown of the stock market, Taiwan’s banks experienced a steady increase of nonperforming loans (NPLs). At the start of privatization of the banking industry, Taiwan’s domestic banking units carried an NPL ratio of 0.97%. By the end of December 2001, the domestic banking units had an NPL ratio of 7.48% while grassroots financial institutions (such as farmers’ associations or fishermen’s credit unions) were carrying about 18.50% NPLs. Furthermore, the proliferation of banks led Taiwan from an underbanked economy to an overbanked economy with 53 domestic banks, 178 security houses, 30 insurance companies, and 360 credit companies for a population of 22 million (Tan, 2008). As summarized in Table 5.1, the growing economic crisis stimulated a series of five major laws concerning the financial sector between November 2000 and July 2001. In November 2000, the government passed more amendments to the Banking Law that further liberalized the financial industry by trying to increase the competitiveness of the industry. In less than a month, the Legislative Yuan passed another law—the Financial Institutions Merger Law—this time to promote mergers and acquisitions,

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Table 5.1 Major Finance Laws Passed at the Turn of the Century

Law

Date

Trust Enterprise Law

July 1998

Amendment to Banking Law

November 2000

Financial Institutions Merger Law Asset Management Company Law Finance Restructuring Fund Law

December 2000

Finance Holding Company Law

July 2001

January 2001 July 2001

Goal Diversify banking and trust industry Promote financial liberalization Promote bank mergers Clean up bad loans and assets Halt operations of mismanaged finance companies Allow multiple area financial operations and increase size and competitiveness

and the Asset Management Company Law was passed in January in an attempt to clean up bad loans and assets. By the time these bills were signed into law, Taiwan’s financial liberalization had already begun to exhibit serious signs of problems. In October 2000, Alan Wheatley (2000) writing for Business Asia called Taiwan’s banking woes a “time bomb” as the industry was sitting on a large proportion of nonperforming loans as well as being overbanked. The increasing percentage of NPLs not only in the commercial banking sector but also in grassroots financial institutions so threatened to undermine Taiwan’s economic growth that the The Economist dubbed it a mini-financial crisis (“Heavily Indebted Taiwan,” 2000). In an attempt to avert a full-blown financial crisis on the island and address the issue of overbanking, the government passed a Finance Restructuring Fund Law to halt the operations of mismanaged finance companies and then promulgated the Finance Holding Company Law in July 2001. The effect of these two laws was to promote the conglomeration of the banking and financial industry. Interestingly, in contrast to the initial intent to increase competition and efficiency in 1990, banks that are part of large business groups have come to dominate Taiwan’s financial industry. The Finance Holding Company Law resulted in the rapid conglomeration of Taiwan’s banking industry as well as the privatization of

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government-controlled financial institutions. Analysts have suggested that consolidation of the banking sector was needed to address the problem of overbanking in Taiwan (Cavey, 2002). Indeed, the government’s rationale for passing the Finance Holding Company Law was to address overbanking and to permit mergers and diversification within the industry to help banks’ profit margins. In 2003, the government established a new Executive Yuan commission to oversee the financial industry and supposedly resolve overlapping authorities of finance-related agencies. The Financial Supervisory Commission was established and essentially peeled away some of the regulatory and supervisory functions of the Ministry of Finance, the Bureau of Monetary Affairs, the Department of Insurance, and the Securities and Futures Commission. The Financial Supervisory Commission is headed by commissioners who are appointed by the president, and the membership is apportioned according to the political parties represented in the Legislative Yuan. Overall, the creation of the commission appears to represent the penetration of party politics into Taiwan’s bureaucratic autonomy (Tan, 2008). Unfortunately, this quickly led to a considerably greater politicization of policy toward the financial sector. As Tan argues, Up until the introduction of political liberalization that culminated in the 1996 direct presidential election and the relative weakening of the KMT, Taiwan’s economic decision-making was the purview of the economic technocracy, which is largely autonomous of society. The political democratization process has also forced the democratization of the economic decision-making process. The opening of the economic decision-making sector empowered interest groups and other relevant social actors. Consequently, the increase in the number of actors has led to the reduction in the policy choice set of the government. (2008: 161)

In the case of the financial industry, the financial reforms that were initiated by the Finance Holding Company Law have led to a marked increase in the number of mergers and acquisitions of the huge financial holding companies. Interestingly, most of these financial mergers and acquisitions featured private financial holding companies acquiring larger public financial holding companies or banks. For example, the Fubon Financial Holding Company acquired the then Taipei City Bank, which was a public bank with large shareholdings by the Taipei city government. In 2006, a high-profile attempt to acquire significant shares (15.5%) of the Mega Financial Holding Company by the Chinatrust Group raised eyebrows among the media and observers. The Mega Financial Holding

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Company was established by the amalgamation of two large public commercial banks—the Bank of Communications and the International Commercial Bank of China. These two banks had a long history as successful and profitable commercial banks. When the two merged and formed Mega Financial Holding to become Taiwan’s second largest financial holding company, it immediately became a competitive and formidable presence in the financial markets. The media and public attention following the stock acquisition of Mega Financial Holding by Chinatrust Financial Holdings was due to the fact that the smaller and less profitable Chinatrust (Taiwan’s fourth largest financial holding company) acquired a significant share of the larger and more profitable Mega Financial Holding Company. Instead of the large competitive and profitable banks acquiring smaller financial companies, the financial reform has resulted in a paradoxical situation of a small fish eating up a big fish. One common denominator of many of these acquisitions is that they involve a smaller private finance holding entity acquiring a larger public holding company. Since the inauguration of the Ma administration in May 2008, the corruption and money-laundering investigation of the former president Chen, his family, and their associates has uncovered numerous improprieties relating to the financial reforms and particularly to mergers and acquisitions in the financial industry (Gold, 2009). The strength of Taiwan’s developmental state concerning finance, therefore, has been weakened over time as the political institutions that were effective in sheltering the technocracy and allowing for relatively autonomous decisionmaking were not reformed and strengthened but instead became porous, allowing strong and influential interest groups to influence and even control policymaking. Coupled with a tradition of strong leaders and personalistic politics, the multiple entry points and the ambiguity and incoherence of government institutions increasingly provided influential interest groups as well as entrepreneurial politicians with considerable power to shape governmental policy. More broadly, Taiwan’s transition to a democratic system allowed rent-seeking behavior to increase as pluralist politics become the norm, which, in turn, democratized the process of economic decisionmaking in line with the theory of Mancur Olson (1982). Thus, the political success of the ROC has brought with it a cost of success in the form of a decreased ability to formulate and implement effective financial policy. As William Keech suggests in Economic Politics (1995), democracy is ultimately about the political process. Consequently, while there are costs

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attached to democracy, it is not easy to evaluate democracies since there are no noncontestable standards. While there seems to be an amount of messiness in the policymaking environment of democratic Taiwan, citizens’ support for democracy continues to be robust.

Confronting Taiwan’s Institutional Imbroglio

Taiwan’s democratic era, welcome and successful as it has been in many respects, has been marked by growing political gridlock and polarization over the divisive national identity issue (see, especially, Chapter 6). To some extent, this represents a cost of success from democratization because the authoritarian KMT party state papered over a variety of problems in the country’s political institutions. First, there was substantial institutional incoherence, in particular, with unclear and overlapping authority among the president, premier, and Legislative Yuan. Second, a constitution designed for a tutelary democracy in continental China had what seemed like superfluous institutions (e.g., the National Assembly and the provincial government) when applied to democratic Taiwan. Third, the single nontransferable vote election system was widely perceived to promote corruption and extremism. Finally, democratization brought a much greater politicization of economic and financial policymaking. Taiwan has adopted a series of constitutional amendments over the past two decades to address these problems. Their effectiveness has been limited, however, both because most have been piecemeal or opportunistic and because the nation suffers from a major rift over the legitimacy of the existing constitution. This might imply that the institutional imbroglio in the ROC is intractable. Yet such problems should not obscure the substantial advancements that the nation has made politically. Taiwan is clearly a well-functioning democracy. Elections are held regularly and their results are accepted, albeit with a lack of good grace at times. Governmental transitions from one party to another are managed smoothly. Furthermore, whether the standoff and gridlock between the Chen administration and the KMT-dominated Legislative Yuan during 2000– 2008 and the perverse effects of single nontransferable vote elections distorted the normal flow of Taiwan politics is at least a little open to question. The nature of Taiwan politics does not appear to have been transformed much by the new electoral system or by the strong victory of the KMT in the 2008 presidential and legislative elections (Gold, 2009,

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2010). Furthermore, while few would praise the results of financial policymaking in Taiwan, it seems little, if any, worse than Charles Gasparino’s (2009) description of the US financial system in terms of The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System. In short, the sound and the fury that often engulfs Taiwan politics diverts attention from the fact that it is a fairly normally functioning polity.

6 The Polarization of Politics

During the first decade of the twenty-first century, politics in Taiwan

became increasingly polarized over the strongly interlinked issues of national identity and cross-strait relations. Policy gridlock and increasingly vicious politics resulted from the even balance of power that existed during the period 2000–2008 between the Pan-Green coalition led by the Democratic Progressive Party that controlled the executive branch under President Chen Shui-bian and the Pan-Blue coalition led by the Kuomintang that controlled the legislature. This situation, in turn, created serious problems for Taiwan as it faced challenges at the dawn of the new century in two distinct areas. First, it made responding to China’s threat to Taiwan’s sovereignty difficult because of the intense partisan dispute over what should be the policy toward the PRC. Similarly, Taiwan’s growing economic integration with China over the past two decades meant that any discussion of economic policy, which became vital at the time of the Great Recession of 2008–2010, quickly became inflamed with the emotional battle over national identity. Yet the vicious polarization over national identity does not appear to have been preordained as the central dynamic in Taiwan politics. Indeed, the median voter appears to be in a moderate middle on this issue rather than falling into two bipolar extremes. In this chapter, therefore, we examine the strident debate over national identity. We first describe the escalating polarization on national identity over the past decade; then seek to explain why this occurred. Next, we argue that elite polarization on national identity appears to be somewhat inconsistent with the attitudes of the general electorate. Finally, we provide an interpretation of 133

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why the major political parties in Taiwan have pursued strategies that seemingly ignore the distribution of public opinion among the citizenry.

The Eruption of Partisan Polarization over National Identity

Taiwan’s political dynamics in the late 1990s suggested that partisan differences over national identity were narrowing and losing their intensity (see Figure 3.2 in Chapter 3). However, a reescalation soon erupted following the dramatic victory of the DPP’s Chen Shui-bian in the 2000 presidential election. Chen won with just under 40% of the vote in a three-way race (plus a couple of inconsequential minor candidates) with the KMT’s Lien Chan and James Soong who ran as an independent after failing to get on the KMT ticket. Two distinct types of issues were involved in this polarization. The first was an ongoing struggle over the Bentuhua (localization) of the country’s politics and, especially, culture that was consistently pushed by the Chen administration. The second involved cross-strait relations with the People’s Republic of China and was more episodic; here, Chen’s policies were far from consistent over time. Yet these two issues were also strongly linked in what Daniel Lynch (2004), for example, has termed “Taiwan’s self-conscious nation-building project.” According to Lynch: “Taiwan is in the midst of a self-conscious nation-building project whose architects feel anxiety at China’s economic and geopolitical accomplishments and worry that unless Taiwan can achieve formal independence soon, it will—peacefully or otherwise— be extinguished as an autonomous entity” (2004: 513). While the political dynamics of the 1990s tended to moderate partisan differences on national identity significantly, there was good reason to think that more intense conflict might erupt. In particular, the very nature of the issue was potentially inflammable. National identity in Taiwan (or elsewhere) is what David Leege and his colleagues have termed a “cultural issue” that directly reflects the identities of and allegiances to competing social groups: People who identify with different social groups often have different, deeply held perspectives not only on how they should live but also on the scope of the political community and its purposes. They have a sense of legitimate moral order, and they expect other citizens and their government to further that design. They often dislike and distrust groups with rival perspectives, and they even feel that some groups

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have no right to participate in democratic politics, much less to have their rivals’ perspectives become binding on society. Parties become anchored in social groups, and political leaders fashion value and interest coalitions for electoral advantage. (2002: 5)

Leege and colleagues argue that this group basis of social and cultural issues is the key to understanding why they are so emotional and polarizing. Some of these issues (e.g., abortion) involve intense moral questions and, as a consequence, lead to polarization between camps of extremist supporters and opponents. Beyond such effects, these social issues also involve how groups and communities define themselves and view opposing groups that threaten their most cherished and fundamental values: “Cultural politics is less a set of issues than a style of argumentation that invokes fundamental social values and emphasizes group differences” (2002: 27–28). Cultural politics, therefore, often involves issues that are highly emotional and focus on the fundamental status and well-being of particular groups in a society. This results in issues being presented in highly symbolic terms on which compromise is impossible because it would undermine the status and position of a particular group (Hunter, 1991; Leege, Wald, Krueger, and Mueller, 2002). As the new century and new era in Taiwan politics with a DPP administration opened, the national identity issue created cross-pressures on both sides of the political spectrum. For the new president Chen, the PanGreen base constituency or Deep Greens in the Democratic Progressive Party and Taiwan Solidarity Union expected and demanded major policy changes promoting the Bentuhua movement to create a Taiwan-centric paradigm for the nation (Hsiau, 2005; Jacobs, 2005) while the political dynamics in Taiwan over the 1990s seemed to be working against radical policy shifts. The Pan-Blue coalition of the Kuomintang, People First Party, and remnants of the New Party contained a similar base of Deep Blues that demanded a push back against what they saw as a rising tide of Taiwanese nationalism. For example, a few New Party politicians had led an emotional protest against new textbooks on Renshi Taiwan (Getting to Know Taiwan) in 1997 (F. C. Wang, 2005). The downside for the Deep Blues in trying to preserve a China-centric paradigm, of course, was that it appealed to few beyond the minority of mainlanders that constituted less than 15% of the population. In terms of cross-strait relations, Chen clearly opted for moderation and the preservation of the status quo at first. He responded to fears that

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his election might set off a new crisis in the Taiwan Strait by taking a surprisingly conciliatory position toward China. He sought to reassure Beijing with the “Five No’s” in his inaugural speech that he would not do anything to change Taiwan’s status unless the PRC intervened militarily. China, however, responded with studied contempt to Chen’s conciliatory approach. It quickly switched its primary demand from Taiwan’s not declaring independence to Taiwan’s accepting the One China principle, a certain deal breaker. More ominously, it continued a buildup of short-range missiles across the strait from Taiwan, as a means of exerting military pressure on Taipei and perhaps Washington. Chen, in a fairly dramatic policy shift, took a much sharper position on cross-strait relations in the summer of 2002, advancing a theory that one country on each side of the Taiwan Strait existed, provoking significant unhappiness in both Beijing and Washington. This policy initiative probably reflected several factors in Chen’s thinking: frustration in the face of Chinese intransigence, growing self-confidence because of support from the George W. Bush administration, and a desire to appeal to the Pan-Green base constituency (D. A. Brown, 2001; Copper, 2000; Rigger, 2003; T. Y. Wang, 2003). Domestically, in contrast, Chen was considerably less circumspect in pursuing Bentuhua. The administration used its executive power to promote what it called a “Taiwanese subjectivity” that certainly was aimed at its base constituency. Wei-chin Lee (2005), for example, argues that Chen promoted a cultural reconstruction movement that included such initiatives as changing the name of many agencies and organizations to stress “Taiwan,” promoting islander dialects in language policy, revising the official policy toward the mass media to reverse the previous KMT domination of outlets (including the encouragement of underground radio stations), and changing the focus from Chinese to Taiwanese history in education policy. Lynch (2004), as noted above, concluded that Chen and the Pan-Green bloc were trying to create a new nation rooted in Taiwanese history and culture. Chen’s appeals to Taiwanese nationalism intensified as preparations for the 2004 presidential election commenced. Jacques deLisle (2004) termed it the Taiwan Yes! (China No!) campaign after one of its central themes and slogans. One important explicit appeal to Taiwanese nationalism was Chen’s plan to hold a referendum on policy toward China simultaneously with the presidential election, although support for holding referenda turned out to be considerably broader than just a reflection of Taiwanese nationalism. The DPP had initially advocated a referendum for

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declaring Taiwan independence in the early 1990s. Thus, the idea of adopting legislation to allow referenda and of holding referenda strongly appealed to the Deep Greens. In contrast, it raised consternation in Beijing and, to a somewhat lesser extent, in Washington. The same logic applied to Chen’s campaign promise to promote major constitutional change and revision, which he initiated with a sudden announcement at the anniversary of the founding of the DPP in September 2003 that he planned to have major constitutional change finished by 2006. On the one hand, DPP factions and members have long advocated the need for a new constitution to achieve, in essence, Taiwan independence by, for example, renaming the country “the Republic of Taiwan.” Lee Teng-hui and the Taiwan Solidarity Union also strongly advocated a new constitution for a new nation (Copper, 2004; deLisle, 2004; Mattlin, 2004; Rigger, 2004). The high point of the Pan-Green campaign was the 228 Hand-inHand rally, which was held to protest Chinese military threats. The rally involved a human chain of an estimated 2 million people that stretched from the north to the south of Taiwan, with Chen Shui-bian and Lee Teng-hui clasping each other’s hands in Miaoli County in the middle. The huge turnout certainly indicated that the rally was a tremendous success in igniting Pan-Green supporters. It was also highly symbolic. It was held at 2:28 P.M. on February 28, 2004, thereby commemorating the 1947 antigovernment uprising, known as the 228 Incident. In addition, it was modeled on a 1989 human chain in what were then the Baltic Republics of Estonia, Latvia, and Lithuania of the Soviet Union, protesting the Soviet occupation of what are now three independent nations. The implicit calls for ethnic justice internally and independence from China externally, therefore, were far from subtle. This certainly reinforced perceptions that Chen was using Taiwanese nationalism as the driving force in his campaign and was willing to push the envelope on the independence issue (Chan, 2005; Copper, 2004; deLisle, 2004). The PRC then did its part to increase tensions in the Taiwan Strait. China’s Communist regime had turned to nationalism as its central legitimizing motif after the tragedy of Tiananmen Square, which put it under increasing popular pressure to prevent Taiwan from asserting sovereignty independent of the PRC (Gries, 2004; Zhao, 2004; Zheng, 1999). China, therefore, almost certainly felt that it had to respond to Chen’s growing assertiveness and especially to his somewhat unexpected reelection. The government formulated an Anti-Secession Law that created a legal foundation for its oft-repeated threats of a military response

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to the declaration of Taiwan independence. Its final adoption in March 2005 raised a storm, though, fueling strong anti-Chinese sentiment in Taiwan and hurting China’s image on the international stage by calling attention to its rapid military modernization and to its seemingly unprovoked threats against Taiwan. The leaders of the Pan-Blue coalition— Lien Chan of the KMT, James Soong of the PFP, and Yu Mou-ming of the New Party—responded to this situation by negotiating a series of visits to the PRC in the late spring and early summer of 2005. The Blues argued that this helped stabilize cross-strait relations while the Greens accused them of undermining the Chen administration and Taiwan’s sovereignty (Chan, 2006; Clark, 2006). By the middle of the first decade of the twenty-first century, therefore, a harsh and viciously divisive debate over cross-strait relations and national identity had come to dominate Taiwan’s politics. The Greens argued that they must stand up for Taiwan and accused the Blues of selling Taiwan out to China. In stark contrast, the Blues contended that the Greens were needlessly provocative and that a more accommodating policy could defuse the threat from China. Taken to the extreme (which they often were), these positions implied that one side was the savior and the other the destroyer of Taiwan and its statehood. Unfortunately, both critiques seem to have had some merit. President Chen’s periodic appeals to his pro-independence base constituency for primarily domestic purposes both infuriated China and at times strained relations with the United States, thereby threatening to undermine Taiwan’s position in the Taipei-Beijing-Washington triangle. Conversely, the Blue attempts to do business with Beijing undermined Chen’s ability to deal with China and there even were fairly credible rumors that Blue leaders had urged both the PRC and the United States to get tough with the Chen administration, which in itself might have created a security threat to Taiwan (Clark, 2006; Hickey, 2006; Rigger, 2005). This polarization was exacerbated in 2006 when Chen Shui-bian changed his previous pattern of being highly nationalistic during campaigns but returning to a more moderate approach after the election, a strategy that did not win much favor in either Beijing or Washington (Clark, 2006). He evidently concluded that the Green loss in the December 2005 local elections was the result of the alienation of his base. Consequently, Chen became more, not less, aggressive toward China after the election. In the words of one of his national policy advisers, Chin Heng-wei, explaining President Chen’s new policy toward the PRC: “Chin said . . . that the DPP suffered a major setback in last December’s

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elections because it lost many of its ‘core supporters’ by trying to court middle-of-the-road voters. ‘The core supporters ended up not voting because they thought that Chen was not being loyal to them and they wanted to teach the party a lesson,’ Chin claimed” (“Adviser Predicts a Su-Tsai DPP Ticket for 2008,” 2006: 3). Furthermore, Chen was also pushed in a more radical direction in the summer of 2006 by the emergence of expanding scandals of financial malfeasance that resulted in his support dwindling to primarily the Deep Greens (Y. H. Chu, 2007). Consequently, Chen signaled a significant policy change in early 2006 with strongly nationalistic pronouncements on policy toward China. In particular, his Chinese New Year speech in late January threatened to abolish Taiwan’s National Unification Council and Guidelines, indicated that he “would like to see the nation join the United Nations with the name of Taiwan,” and stated that he wanted to draft a new constitution by the end of the year that would be approved by a popular referendum (Ko, 2006: 1). All three of these actions came close to the line that China had drawn concerning declarations of independence. Subsequently, Chen followed up in all three issue areas. Despite consternation in China and pressure from the United States, he froze the National Unification Council and Guidelines in the spring of 2006 (Y. H. Chu, 2007). He then launched a high-profile campaign to revise the constitution, which appeared to be a central issue in the 2008 elections until Chen and the DPP switched their emphasis in mid-2007 to proposing a referendum on whether the ROC should join the United Nations under the name of Taiwan. Although the referendum was ultimately defeated, this was certainly provocative to the United States and especially the PRC since at least a few Deep Green supporters felt that passage of the referendum might constitute a change of the country’s official name (Y. H. Chu, 2008; Copper, 2008; Gold, 2009; Rigger, 2007). Despite the referendum, there was some feeling that the 2008 elections might result in some deescalation of the national identity cleavage. In particular, both of the candidates—Frank Hsieh of the DPP and Ma Ying-jeou of the KMT—were moderates. For example, Ma, who won the election handily after proposing a rapprochement with China, advocated a set of “Three No’s” that pledged commitment to the status quo in cross-strait relations: no unification, no independence, and no use of force. Still, Ma’s mainlander status made many Greens quite suspicious of his intentions. Thus, his promotion of cross-strait economic ties, in particular the agreement on the three direct links in November 2008 and the much broader Economic Cooperation Framework Agreement in June

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2010, prompted massive popular demonstrations and, in the case of ECFA, a major brawl in the Legislative Yuan (Copper, 2008; Gold, 2009, 2010; Rigger, 2007; F. Wang and Mo, 2010).

Explaining the Eruption of the National Identity Issue

The intertwined issues of national identity and cross-strait relations exploded into the driving dynamics of Taiwan politics during the first decade of the twenty-first century. An important question, obviously, is why this occurred. As Figure 6.1 shows, both authoritarian legacies and the dynamics of democratization contributed to this major change in Taiwan politics. As indicated in Part A of the figure, the authoritarian era bequeathed a legacy of strong ethnic resentments that created a potential for cultural conflict (see Chapter 3) but did not develop a tradition of democratic compromise and policymaking, which inhibited resolving this conflict by creating what in Chapter 5 is called an institutional imbroglio. Part B of Figure 6.1 then summarizes how three political conditions at the turn of the century interacted to reverse the moderating differences among the major parties on national identity and cross-strait relations. The first was that other issues faded in importance, leaving national identity as one of the few major issues with any traction. The second was that a change in the party system after the 2000 elections promoted more polarized parties. Finally, the nature of Taiwan’s distinctive electoral system made it easier for more radical candidates to win office. One of the most important functions of a democracy is to facilitate popular influence over decisions concerning the major issues facing a society. Four issues were fairly important at one time or another during the early democratic era: (1) democratization itself; (2) national identity and ethnic justice; (3) political corruption; and (4) social welfare policy. As shown in Table 3.7 in Chapter 3, all these except national identity had become fairly marginal by the end of the twentieth century. By the turn of the century, therefore, there were generally only moderate differences between the major parties on most issues, and there even seemed to be a movement toward convergence on national identity (Clark, 2002; Fell, 2005). This seeming consensus created a problem for the competition among the major political parties, however, since it made it difficult for the parties to distinguish themselves and mobilize their voters. Consequently, the exhaustion of other issues gave them a strong incentive to arouse the more divisive political cleavage over national identity.

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Figure 6.1 Model of How Authoritarianism and Democratization Both Contributed to Political Polarization on National Identity

A. Authoritarian legacies Islander resentments Authoritarianism and white terror No tradition of democratic policymaking and compromise

B. Democratic success of late 1990s degenerates into costs of success Absence of other important cleavages Changed party system promotes more polarized parties

Strong reversal of moderating differences among parties on national identity and cross-strait relations in late 1990s

Electoral system’s encouragement of extremist candidates

Furthermore, the 2000 elections quickly led to a transformation of Taiwan’s election system that helped to stimulate growing polarization over national identity and cross-strait relations. As the New Party faded in the late 1990s, it appeared that Taiwan was developing a stable twoparty system. The 2000 presidential election, however, provided a major shock that transformed the party system. The election quickly turned into a three-candidate race among DPP nominee Chen Shui-bian, KMT nominee Lien Chan, and James Soong who ran as an independent after failing to get on the KMT ticket. The aftermath of Chen Shui-bian’s victory proved to be even more disastrous for the KMT. Hostility between Soong supporters and KMT loyalists led Soong to create a new party, the People First Party. Moreover, Lien Chan removed Lee Teng-hui, his former patron, as KMT chairman to take responsibility for the election loss. Lee was soon at war with the KMT establishment and became the godfather of another new party, the Taiwan Solidarity Union. Taiwan’s party system then moved quickly to being one based on two competing blocs or

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coalitions of parties. The DPP and TSU became allied in the Pan-Green coalition—named for the primary color in the DPP’s flag—while the KMT, PFP, and New Party formed the Pan-Blue bloc—named for one of the colors associated with the KMT and its symbols (Clark, 2000a, 2002; Copper, 2000; Hsieh, 2002b; Y. S. Wu, 2001).The combination of the nature of these coalitions with Taiwan’s election system created a substantial push for greater polarization on national identity. The minor parties were more radical on the divisive national identity question and pressured the major parties away from moderate stances. The TSU in the Green bloc was unambiguously pro-independence, and the PFP and New Party in the Blue bloc were widely seen as being pro-mainlander and pro-unification (Copper, 2004; W. C. Lee, 2005). Moreover, Taiwan’s election system of the single nontransferable vote considerably magnified the pressure that the minor parties could exert on their coalition leaders, as we discussed in more detail in Chapter 5. In the single nontransferable vote, each voter can cast only one vote in a large multimember electoral district. Consequently, candidates must compete against both other members of their coalition and candidates of the other coalition, and only a fairly small percentage of the vote is necessary for victory. This encourages radical candidates whose victories make it harder for the parties to compromise (T. J. Cheng and Hsu, 2005; Hsieh, 2006, 2009; Rigger, 1999b). The incentives of the party and election systems were exacerbated, in addition, by a change in party strategies that put more emphasis on appealing to base constituencies rather than the median voter. For the Pan-Blue parties, there were two specific conditions that help explain this. First, because they were out of power, they were primarily concerned with raising the spirits of their current supporters and directed their attention to criticizing and obstructing the Chen administration rather than formulating and advocating realistic policies. Second, Lee Teng-hui’s departure from the KMT changed the nature of the party significantly. With the triumph of Lee and his mainstream faction in the party during the 1990s, the old KMT of the authoritarian era and the “white terror” had clearly been supplanted. The post-Lee Kuomintang, in contrast, seemed much more compatible, especially to Green supporters, with the old China-centric paradigm (Clark, 2006; W. C. Lee, 2005; Y. S. Wu, 2011). Indeed, Lee’s departure brought the return to power of many pro-China members of the anti-mainstream faction (Fell, 2005). We have already seen how Chen Shui-bian used Taiwanese nationalism and the Bentuhua movement as a conscious electoral strategy. Wei-chin

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Lee (2005) argues that an important difference between Chen’s approach to Bentuhua and Lee Teng-hui’s in the 1990s made this especially polarizing. Lee sought to create a Taiwanese nationalism and nation that could encompass all residents of the country, representing what has been called civic nationalism (Shen and Wu, 2008). This can be seen in his attempt to create the basis for a new national identity during the highprofile 1998 campaign for Taipei’s mayor in which the KMT’s Ma Yingjeou challenged Chen, the popular DPP incumbent with approval ratings of 70%. To help Ma overcome the disadvantage of his ethnic heritage, Lee asked him to proclaim his loyalty to Taiwan in a manner that redefined the categories of national identity on the island: “Taiwan’s President Lee Teng-hui added drama to the Taipei mayoral campaign when he asked the KMT nominee, Ma Ying-jeou, ‘Where is your homeplace?’ Ma, a Mainlander, replied in broken Minnan dialect, ‘I’m a New Taiwanese, eating Taiwanese rice and drinking Taiwanese water’” (Rigger, 1999a: 48). Lee’s concept of a New Taiwanese identity was open to everyone and implied that old ethnic enmities could be left in the past, creating a new approach to national identity that appeared to be widely popular across the political spectrum (M. J. Brown, 2004; Rigger, 1999a). In contrast to Lee Teng-hui’s broader understanding of a developing Taiwan nation, Wei-chin Lee (2005) believed that Chen Shui-bian was more concerned with appealing to specific groups in what has been called ethnic nationalism (Shen and Wu, 2008). In particular, by the middle of the decade, the DPP was primarily appealing to the Minnan ethnic group that had come to Taiwan from Fujian Province and constituted slightly over 70% of the population. In contrast, while the DPP paid lip service to the slogan of the Four Great Ethnic Groups (Makeham, 2005), some prominent DPP leaders disparaged not just mainlanders (a little under 15% of the population), but also two groups of islanders: Hakka, about the same size as mainlanders, and aborigines, about 2% of the population (Copper, 2010). Consequently, the Chen approach was much more polarizing than Lee’s strategy.

A Disconnect Between Elite Polarization and the Attitudes of the General Citizenry

Several distinct strands of theory in the political science literature seek to model the relationships among the electoral laws, characteristics of the party systems, and divisions of public opinion on major issues in

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democracies. In particular, such disparate theorists as Anthony Downs (1957) and Giovanni Sartori (1986) conclude that the distribution of public opinion on the major issues in a society is one, if not the, major influence on the nature of the party system (see Lipset and Rokkan, 1967, for a much broader model of how cleavage structures, party systems, and voter alignments fit together). Public opinion on a specific issue can have numerous possible distributions. Two are particularly relevant for this analysis. Popular attitudes on many items have a distribution that is close to what is considered normal. Most of the citizens are concentrated in the middle of the distribution; there is a clearly declining number of cases as one moves from the middle toward either extreme; and the distribution is symmetric in that equal numbers are associated with the two extremes of the distribution, creating a bell curve. In stark contrast, a polarized distribution has a substantial number of cases at both the extremes while there are relatively few in the middle, creating a U-shaped curve if the number of cases are plotted. A polarized distribution is also bimodal in the sense that there are two modes (i.e., the categories with the largest number of cases in them), one at each of the ideological extremes. The polarization over national identity and cross-strait relations in the elite discourse and party competition in Taiwan strongly suggests that such polarization also exists among the general electorate for either of two reasons. The elites might have responded to a sharp polarization in public opinion, or the citizenry may have become more polarized once the elite debate brought the issue to the center of Taiwan’s politics. If neither of these conditions existed and a majority of Taiwanese were in the moderate middle, the major parties would have a strong incentive to moderate their policies or risk punishment at the polls. A variety of public opinion data cast doubt on the image of a polarized electorate. In contrast, many of Taiwan’s citizens possess a complex identity that includes both Taiwanese and Chinese components and thus are wary about extreme positions on cross-strait relations (M. J. Brown, 2004; Rigger, 1999a; Wachman, 1994). For the past two decades, public opinion surveys have asked whether people identify themselves as Chinese, Taiwanese, or a combination of both. Table 6.1 shows that national identity clearly possessed a normal distribution in 1992 as just over half the population (52%) expressed a dual identity while Chinese identifiers slightly outnumbered Taiwanese ones (28% to 20%). This changed dramatically in only eight years. In 2000, about half the population (47%) still had dual identification, but Taiwanese identifiers outnumbered Chinese

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1992 1996 2000 2004 2008 2010

Taiwanese

Both

Chinese

20 24 39 43 51 55

52 56 47 51 45 42

28 20 14 6 4 3

Source: Election Study Center, “Results from Election Polls” (Mucha, Taiwan: Election Study Center, National Cheng-chi University, 1992, 1996, 2000, 2004, 2008, 2010).

ones 39% to 14%. The Chen Shui-bian years continued this trend as Taiwanese identification grew from 39% to 51% between 2000 and 2008 while Chinese identification collapsed further to just 4%. Finally, Taiwanese identifiers continued to increase to 55% of the population during the first two years of the Ma Ying-jeou administration. These data certainly show that the China-centered paradigm is a thing of the past in Taiwan since, by 2010 (or even as early as 2000), the number of purely Chinese identifiers in Taiwan had become minuscule. T. Y. Wang and Chang (2005) show that this trend was even pronounced among mainlanders, as shown by the data in Table 6.2. Chinese identifiers among mainlanders fell by almost half from 57% to 29% between just 1994 and 2000, and then fell by nearly a half again to 16% by 2004. Even before the sharp polarization of the 2000s, therefore, the Deep Blues were a decided minority of a small minority of the population, and the decline in Chinese identification among mainlanders continued apace during the first Chen administration despite his escalating appeals to Taiwanese nationalism. The Chinese cultural renaissance movement of Chiang Kai-shek (see Chapter 3) was surely dead and buried. Evaluating the degree of polarization versus moderation concerning the Taiwan-centric paradigm is a little more problematic and ambiguous, however. By 2000, the distribution of opinion on national identity was no longer normal, as Taiwanese identifiers greatly outnumbered Chinese ones. Over the next ten years, furthermore, the number of Taiwanese identifiers grew substantially, surpassed those who thought of themselves as both Taiwanese and Chinese in 2008, and attained a marked lead over dual identifiers of 55% to 42% in 2010. These data, therefore, support two quite different interpretations. On the one hand, there clearly was a massive shift toward Taiwanese identification (S. Y. Ho and Liu, 2003;

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Table 6.2 Ethnic Identification of Mainlanders (percentage)

1994 1996 2000 2004

Taiwanese

Both

Chinese

5 8 11 15

38 49 60 69

57 43 29 16

Source: T. Y. Wang and G. A. Chang, “Ethnicity and Politics in Taiwan: An Analysis of Mainlanders’ Identity and Policy Preferences,” Issues and Studies 41, no. 4 (2005): 49.

Shen and Wu, 2008), which is consistent with the argument that Chen Shui-bian was able to create a new nation rooted in Taiwanese history and culture (Lynch, 2004). This was expressed during the 2004 campaign not just by the supporters of Chen and Lee Teng-hui. Rather, it could also be seen in the actions and words of the Pan-Blue leadership. For example, during their final massive campaign rallies both Lien Chan and James Soong kissed the ground in Taipei and Taichung, respectively, to demonstrate their devotion and loyalty to Taiwan (T. L. Huang, 2004). On the other hand, the continuing strong minority of citizens that profess a dual identity is inconsistent with the image of the new totally Taiwanese nation that was supposedly created by what Wei-chin Lee (2005) called Chen’s cultural reconstruction movement. This can also be seen in how the public views the best option for Taiwan’s international status: (1) Taiwan independence; (2) the current status quo of an uncertain sovereignty; or (3) unification with the PRC. Table 6.3 demonstrates that over the past two decades marked majorities of about 60% have supported the diplomatic status quo, ambiguous and even ridiculous as it may be. This distribution is not fully normal, though, because the two extremes are not balanced. In particular, between 1994 and 2010 the relative support for independence and unification flip-flopped from 14%–25% to 24%–12%. Still, since the Taiwan-centric paradigm advocates independence, popular opinion does appear to be dominated by the moderate middle. This strong and continuing support for the status quo in Taiwan’s international status is especially striking because, as Rigger (2004) has noted, growing frustration across the political spectrum with Taiwan’s lack of international status and treatment by the PRC is easy to discern. Rather, the dangers of the two extremes are so pronounced that the not particularly satisfactory current situation is accepted as tolerable. In short, the moderate middle in Taiwan almost certainly does not have any hesitation in

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The Polarization of Politics Table 6.3 Preference for Taiwan’s International Status (percentage)

1994 1996 2000 2004 2008 2010

Independence

Status Quo

Unification

14 17 18 24 26 24

61 56 59 61 63 64

25 27 23 15 11 12

Source: Election Study Center, “Results from Election Polls” (Mucha, Taiwan: Election Study Center, National Cheng-chi University, 1994, 1996, 2000, 2004, 2008, 2010).

affirming “Taiwan, Yes!” However, its Taiwan-centric allegiances fall considerably short of what the Deep Greens consider to be necessary for a Taiwan nation. For example, Shelley Rigger’s (2011) interviews of young people found that even the term “Love Taiwan” was viewed with suspicion because it had become so politicized. Thus, Chen’s cultural reconstruction movement may have overreached, just as Chiang Kai-shek’s Chinese cultural renaissance movement did. More recent and specific attitudes about cross-strait relations also suggest a pragmatism in public opinion that rejects the ideological extremes. Table 6.4 shows public opinion on whether the pace of crossstrait interactions was too slow, just right, or too fast in April 2007 and December 2008. At both points in time, a significant plurality of 40% in 2007 and 48% in 2008 felt that the pace was just right, suggesting a moderate middle. However, considerable change occurred in the extreme positions, as too slow plummeted from 34% to 16% and too fast rose from 26% to 36%. People were becoming more worried about cross-strait interactions perhaps because of growing insecurity from the Great Recession, as Table 4.11 in Chapter 4 shows the overwhelming support for tightening restrictions on cross-strait economic ties at that time. In addition, worries fanned by the DPP attacks that Ma Ying-jeou was moving too fast in reaching accommodations with China could also explain this change. The results from Taiwan’s elections over the past decade shown in Table 6.5, such as the public opinion data, are a little ambiguous about the degree of polarization, but ultimately they too suggest that the electorate was not strongly polarized over national identity. Perhaps the most obvious conclusion supported by these data is how even a division there was in the strength of the Pan-Blues and Pan-Greens over most of the

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Table 6.4 Taiwanese Views About the Pace of Cross-strait Interactions (percentage)

Too slow Just right Too fast

April 2007

December 2008

34 40 26

16 48 36

Source: T. Y. Wang, “Cross-Strait Rapprochement, Domestic Politics, and the Future of the TRA,” paper presented at the Conference on Thirty Years After the Taiwan Relations Act, University of South Carolina, Columbia, 2009, p. 8.

Table 6.5 Electoral Support of Major Parties (percentage)

Election 2000 President 2001 Legislative Yuan 2001 Magistrates mayors 2004 President 2004 Legislative Yuan 2005 National Assembly 2005 Magistrates mayors 2008 President 2008 Legislative Yuan 2009 Magistrates mayors 2010 Metropolitan mayors

DPP 39 33 45 50b 36 43 42 42 39 45 50

TSU

KMT

PFP

New Party

c

23 29 35 50 33 39 51 58 53 48 45

37a 18 2

2 10

8 c c

8 7 1 c

1 c c

c

14 6 1

c

c c

1 c

c

c

c

c

c

c

c

c

Sources: Central Election Commission, Government of Taiwan, “Election Results,” www.cec.gov.tw, 2010; J. F. Copper, Taiwan’s 2011 Metropolitan City Elections: An Assessment of Taiwan’s Politics and a Prediction of Future Elections (Baltimore: University of Maryland Series in Contemporary Asian Studies, 2011), p. 53. Notes: a. Votes for James Soong, who ran as an independent and founded the PFP after the election. b. The DPP’s Chen Shui-bian defeated the KMT’s Lien Chan, 50.1% to 49.9%. c. Under 0.5% or no candidate.

decade. The DPP’s Chen Shui-bian narrowly won the presidency in 2000 and 2004 while the Blues narrowly won the Legislative Yuan in 2001 and 2004. The Blues also did better in the votes for the chief executives of local governments (city mayors and county magistrates) by a narrow margin in 2001 and more comfortably in 2005. In contrast, the Greens won the National Assembly elections in 2005, perhaps somewhat ironically since they wanted to abolish it (Rigger, 2007).

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This even division is certainly consistent with an electorate that has two large groups at either end of the ideological spectrum (China-centric Blues versus Taiwan-centric Greens), with a small number of people in the moderate middle deciding who will win a specific election. Yet several facets of the election results suggest that this probably is not the case. First, the data on Chinese versus Taiwanese identification in Tables 6.1 and 6.2 indicate that a large majority of Blue supporters were not Chinacentric. Therefore, the Pan-Blue parties must have been attracting voters with other issues. Second, the smaller, more extremist parties (the PFP and New Party for the Blues and TSU for the Greens) had clearly faded by the middle of the decade. While the abolition of the single nontransferable vote electoral system in 2005 undoubtedly undermined the minor parties (Rigger, 2007), their slide to oblivion also suggests a limited amount of support for the extremes on national identity. Third, the convincing KMT victories over the DPP in the 2008 elections for the Legislative Yuan (53% to 39%) and president (58% to 42%) demonstrate that Chen Shui-bian had not created a near majority committed to a new Taiwan nation since such partisans would almost never defect. Rather, voters appeared to respond primarily to strained relations with China (which would not have bothered Taiwanese nationalists) and the deteriorating economy (Copper, 2008; Gold, 2009). The Kuomintang’s triumph began to dissipate fairly quickly, however. President Ma Ying-jeou’s popularity faded due to some combination of the deepening Great Recession, his administration’s poor reaction to the devastation of Typhoon Marakot in August 2009, DPP-fueled fears about China’s threat to Taiwan’s sovereignty, and the continuing problems with the functioning of the KMT-dominated Legislative Yuan. Consequently, the DPP scored an impressive electoral comeback in 2009–2010. It won a series of by-elections for the Legislative Yuan in 2009 and 2010, only narrowly lost the 2009 magistrate and mayor elections by 45% to 48%, and significantly outpolled the KMT 50% to 45% in the 2010 elections for metropolitan mayors although the Kuomintang won three of the five races (Copper, 2011; Gold, 2010; Rigger, 2010; Tien and Tung, 2011). These results, therefore, show that the DPP had not alienated the electorate with its position on national identity. Thus, Taiwanese voters appear to be more pragmatic than wedded to extremist ideological positions. Indeed, greater moderation generally marked the 2010 metropolitan elections in Kaohsiung, Taichung, Tainan, Taipei, and Xinbei (previously Taipei County). The Kuomintang tried to nationalize these elections by campaigning on the strong economic

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recovery of 2010, political stability, and honesty after the scandals of the Chen Shui-bian administration. As the campaign heated up in the fall, the DPP responded to the popularity of ECFA when party chair and Xinbei mayoral candidate Tsai Ing-wen switched positions on advocating a referendum on ECFA in September, and the party generally tried to distance itself from Chen. Instead, the DPP tried to localize the elections by focusing on local issues, committing itself to helping the poor in the face of growing inequality, and limiting appeals to Taiwanese nationalism to its strongholds in southern Taiwan (Copper, 2011; Tien and Tung, 2011). It is too soon, however, to conclude that the partisan polarization on national identity is moderating or that issues such as social welfare, corruption, and governmental competence are reemerging. For example, many Deep Greens were unhappy with Tsai’s reversal on ECFA and many Deep Blues feel that Ma Ying-jeou is too accommodating toward the DPP (Copper, 2011).

Understanding Polarization and Perverse Strategies

Thus far in this chapter, we have discussed and examined the polarization of Taiwanese society during its march toward democratic consolidation. One prominent consequence of polarization in Taiwan that we have highlighted is the seeming incongruence between elite opinion and general public opinion. Both the public opinion and election data demonstrate that the sharp polarization at the elite level is not reflected in the general electorate. If we follow the logic in the Downsian theory of the median voter (Downs, 1957), we may infer that Taiwanese elites’ emphasis on identity politics appears to be a perverse political strategy. How can we explain this apparent anomaly? Should not Taiwanese parties and elites be punished at the polls for adopting an unstable strategy? We offer four plausible, but nonexhaustive, explanations of how we can reconcile this perverse political strategy: (1) the absence of other salient cleavages in Taiwan; (2) the institutional structures that benefit the major parties; (3) the fully mobilized nature of Taiwan’s voters; and (4) the disconnect between politics and the personal lives of voters. These factors can be broadly categorized as sociological and institutional in nature. Let us briefly examine each one. First, besides the ethnic cleavage and the national identity cleavage, there is an absence of other salient cleavages in Taiwan that can fulfill the criteria for creating a major issue in party competition. To be such an

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issue, it must meet the following three criteria: (1) that it distinguishes differences among important political groups; (2) that the groups are aware of the differences; and (3) that an organizational basis relevant to the cleavage exists. Indeed, studies have shown that the left-right schema is not prominent in Taiwan and that Taiwanese parties tend to converge on many of the typical left-right positions (Hsieh, 2002a; Tan, 2004). Taiwanese society is characterized by a middle class that is broad based and by major political parties that tend to have weak left-right ideological commitments, but instead are pragmatic survivalists with no qualms about intervening in the economy and at the same time circumscribing labor rights. This restricted issue space means that, by default, national identity and reunification versus independence politics tend to be emphasized because they offer larger maneuvering room and are easily understood by the electorate. Second, there are institutional constraints that protect the two major parties. While there have been other splinter parties in the system, they are not as dominant as the KMT and DPP. Not only does the electoral system reinforce that—both the single nontransferable system and, even more so, the new multimember majoritarian system—but legislative rules and other institutional rules give dominance to both the KMT and DPP. Nathan Batto (2006), for instance, shows that legislative committees in Taiwan are designed so that large parties are able to dominate the agenda. Reminiscent of Richard Katz and Peter Mair’s (1995) cartel party system, institutional rules and constraints reinforce the roles of the KMT and DPP. “Taiwanese committees also have a prominent role in the legislative process. . . . Except for the budget, they can rewrite bills without restrictions. They control their own agenda, and they can hold hearings and compel government officials to testify” (Batto, 2006: 6). Taiwanese scholars (Hawang, 2003; Sheng, 2000; Y. L. Wang, 2003) also argue that the Legislative Yuan’s committees are generally weak due to several institutional factors such as “rampant committee switching, the lack of seniority system, the encouragement of party leaders to pack whichever committee is especially crucial for a given legislative session” (Batto, 2006: 6). Moreover, “since the committee assignment system has not always assured that the partisan balance in committees will reflect the partisan balance on the floor, it has been necessary for the floor to review all committee decisions and be constantly ready to overturn them. . . . In January 1999, the legislature formalized this practice by passing a law institutionalizing inter-party negotiations after the committee stage bill” (Batto, 2006: 6). While this is seen by scholars of the Taiwanese

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legislature as greatly weakening the committee system, the flip side is to reinforce the dominance of the larger political parties in the legislature. Third, voter mobilization in Taiwan is both saturated and fixed. There is a high level of stability in voting patterns in Taiwan if we group the electorate into the large classification of Blues and Greens. Most of the volatility occurs in the intraparty group voting rather than interparty group voting. We do not see many crossovers with regard to voting. This means that voter mobilization is quite fixed and stable without much room for mobilization by other parties. One way to interpret the stability of the mobilized voter public and low level of interparty volatility is that it provides party elites with a reassurance that they have some flexibility in how to define issues and gives them a significant level of carte blanche within some fairly minimal constraints. Voters have nowhere to go to since they are forced to vote for various shades of Blue or Green. In other words, it is highly unlikely that Green voters will crossover to vote Blue and vice versa. The data in Table 6.6 support this explanation. Using available data on electoral support since Taiwan’s democratization, the mean level of Pan-Blue support is bounded by 48.9% to 56.2% (95% confidence interval) and the range of Pan-Green support levels is between 33.1% and 42.4% (95% confidence interval), indicating that the mean support levels for the two camps are between these figures. These figures point to the fact that the Taiwanese electorate is highly mobilized by the two camps— Blues and Greens—providing the KMT and DPP with solid bases of electoral support. We can also infer that because both camps have captive

Table 6.6 Voter Support for Pan-Blue Versus Pan-Green Parties in Legislative Yuan Elections

Pan-Blue

Pan-Green

1995 1998 2001 2004 2008

59.1% 53.5% 49.8% 46.9% 53.5%

33.2% 31.1% 41.2% 43.5% 39.6%

Mean Standard deviation

52.5% 4.1

37.7% 4.8

Source: Central Election Commission, Government of Taiwan, “Raw Data,” www .cec.gov.tw, 2010.

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voter support levels, other parties outside of the Blue-Green divide are left with little maneuvering room to recruit and mobilize voters. Furthermore, it also indicates that swings in the electoral fortunes of the major parties are primarily affected by splits within the parties or by short-term campaign-specific factors (e.g., scandals) that can sway the small, but critical, group of unattached independents. Finally, there seems to be a fundamental disconnect between what happens in politics and what voters perceive as what happens in their own lives (i.e., politics appear to be external and relatively unconnected to private lives). One way to examine this disconnect is to look at the political efficacy of the Taiwanese public. Internal political efficacy deals with how much that a person feels their skills and abilities can have an effect on the political system. Higher levels of internal political efficacy are generally associated with being more participatory and politically active. External political efficacy, on the other hand, relates to how a person feels that the government is responding to their concerns. Higher levels of external political efficacy tend to be associated with a higher level of trust or at least the feeling that the government is responsive to their needs. Low levels of external political efficacy indicate a more apathetic attitude toward government and politics (Milbrath and Goel, 1977; Pollock, 1983). The Taiwan Election and Democratization Survey has included survey questions on internal and external efficacy that are valuable for our examination. Table 6.7 shows how the survey respondents array on the various efficacy and political interest questions. We can infer from the data in Table 6.7 that Taiwanese voters have a low level of internal political efficacy, but have relatively higher external political efficacy. In response to the statement “Politics is too complex for a person like me to understand,” at least six in ten voters agreed, implying that a large majority of voters have low levels of internal political efficacy as well as low levels of political interest. Yet the same survey data show that Taiwanese voters have high levels of external efficacy (with a large proportion stating that citizens have influence on government actions as well as that politicians care about citizens’ views), indicating a high level of trust in the system. If external efficacy is high but internal efficacy is low, we see voters expressing opinions and participating in traditional electoral and conventional modes. Studies have shown that “inefficacious individuals who nonetheless perceive a responsive political world are likely to express their allegiance through ritualistic or symbolic participation” (Pollock, 1983: 404; see also Milbrath and Goel, 1977). Pollock (1983) finds that

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Table 6.7 Political Efficacy Levels Among Taiwanese Voters

Citizens have influence Politicians care Politics is complex Political ability/interest

2002 Taipei

2002 Kaohsiung

2003 National

2004 National

72.6 56.6 60.2 35.9

65.0 48.6 63.5 25.8

62.8 53.8 78.1 —

55.1 30.4 65.8 29.6

Source: Election Study Center, “Taiwan Election and Democratization Survey, 2002, 2003, 2004 L-A, Raw Data” (Mucha, Taiwan: Election Study Center, National Cheng-chi University). Notes: “—” indicates no data available. Figures represent the percentage of respondents agreeing to the questions. Question item “I am able to participate in politics,” which we term “political ability,” was not asked in the 2004 survey. Thus, the entry for 2004 is about “political interest.”

these types of individuals also tend to have a low propensity for unconventional participation. In the case of Taiwan, Pollock’s conclusion is supported by Tan’s (2006) finding that Taiwanese voters tend to have lower levels of unconventional participation in comparison to other industrial democracies. With such a conformist and allegiant type of political participation, it is plausible that Taiwanese voters are able to detach politics from their everyday lives. This attitude can be seen from the popularity of current affairs call-in television programs saturating the Taiwanese media. Viewers watch these programs for their entertainment value much like reality television or as a comedy show, but the shows are seen as quite remote from their everyday lives and thus reinforce this disconnect. The above four factors taken together may create dynamics that tend to reinforce the elite–mass public opinion disconnect that contributes to the perverse political strategies of Taiwan’s major parties. Under a normal Downsian environment, these disjuncture and perverse strategies would not be observed. However, it is also reasonable to expect that the interactive dynamics of these four factors can create a new set of constraints or opportunities that may change the calculation of rational political actors in the Taiwanese political system. These incentives and disincentives make these actors act differently. That is, in a scenario where different institutional and sociological dynamics generate a new cost-and-benefit structure, the resultant cost minimization and utility maximization strategies undertaken by political actors in Taiwan (though perverse to detached external political observers) may be rational and logical to the actors themselves in such a political arena.

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Continuing this line of thought, the cost structure resulting from the interaction of these four factors is quite beneficial to the political elites as it gives them substantial flexibility in defining issues because the costs for not being in lockstep with public opinion are fairly low. In one sense, there is a seeming asymmetry of the political reward and punishment structure. The cost of not following public opinion is low because voters cannot actually punish political elites. Additionally, voters are aware that Taiwan’s fate on national sovereignty issues and relations with China that are prominent in Taiwan’s political discourse is largely outside the control of Taiwanese voters and political elites. However, since there are no other big issues to define and distinguish political parties, no deep ideological divide, and no easily understood issues, elites find it easier to give cheap talk on old irresolvable issues like national status that can rile up their fixed and loyal constituencies and hope that short-term campaignspecific policy and nonpolicy issues (economic crisis management, corruption, and other scandals) can swing uncommitted voters to one camp or the other.

Polarization, Perverse Political Strategies, and the Problems of Responding to Taiwan’s Challenges

During the past decade in Taiwan, politics have become strongly polarized over national identity with the Democratic Progressive Party being associated with a Taiwan-centric paradigm and the Kuomintang with a China-centric one. National identity in Taiwan is clearly what Leege and associates term a “cultural issue . . . that invokes fundamental social values and emphasizes group differences” (2002: 27–28). This curtailed the country’s ability to respond to the considerable challenges facing the nation at the end of the decade. Given Taiwan’s growing economic integration with China over the past twenty years (see Chapter 4), managing economic relations with China is inevitably one of the central problems for coming out of the Great Recession. Furthermore, China’s persistent claims to sovereignty over Taiwan constitute another grave challenge (Chow, 2008). The emotional and seemingly irresolvable debate over policy toward China, therefore, makes it difficult for any government to develop a strategy for effectively protecting and promoting Taiwan’s sovereignty. The eruption of the national identity issue after the turn of the century is at least a little surprising because the differences on it among the major parties had moderated significantly in the late 1990s. Moreover,

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both public opinion data and election results imply fairly strongly that the sharp polarization at the elite level was not replicated in the general electorate. If we accept the general premise that parties should appeal to the median voter in an essentially two-party system like Taiwan’s, this would appear to be a perverse political strategy in which activists substitute their preferences for policy positions that attract the maximum number of voters. In abstract theory, this should be an unstable situation because parties taking extreme positions should be punished at the polls. Yet the data in Table 6.5 indicate that this has not really happened in the elections since 2000 for some combination of the four factors discussed in the previous section. This is not a unique situation, incidentally. In the United States, highly ideological party activists appear to have led the increasing polarization across a wide array of issues between Democrats and Republicans (Layman, Carsey, Green, Herrera, and Cooperman, 2010). This suggests, for better or worse, that the nature of politics in Taiwan probably is not about to undergo a fundamental transformation, although the 2010 metropolitan elections indicate the possibility of a swing back toward moderation on the divisive national identity issue.

7 Confronting the Costs of Success

Through the substantive chapters of this book, we have presented

something of a schizophrenic view of Taiwan’s political economy. In Chapters 2 and 3, we credited Taiwan with economic and political miracles. Taiwan’s rapid economic growth and structural transformation from the 1950s through the early 1990s appear little short of miraculous, even in retrospect. The nation’s democratic transition in the late 1980s and early 1990s, even if long delayed, is also quite impressive. Moreover, there were many fathers and mothers of these successes. The mainlanderdominated government and the islander-dominated business community made vital contributions to Taiwan’s spectacular economic rise. Likewise, both the opposition movement and reformers within the Kuomintang pushed the democratic reforms that proved to be so effective. In contrast, Chapters 4, 5, and 6 have highlighted the significant challenges that the ROC has had to meet over the past two decades. In the economic realm, growth has declined and inequality is growing. The declining role of manufacturing suggests that the economy is being hollowed out. The country has had to overcome sharp recessions at the beginning and the end of the first decade of the twenty-first century. And the growing economic integration with and dependence on the People’s Republic of China is certainly worrisome given China’s threat to Taiwan’s very sovereignty. Politically, the thrill of and pride in democratization gave way fairly quickly to a nasty politics marked by the inability of opposing political forces to compromise, general political gridlock, a seemingly counterproductive politicization of economic policymaking, and a growing polarization over national identity that dangerously undercut Taiwan’s ability to respond to the threat represented by the PRC. 157

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We have argued that, in a somewhat bitter irony, many of these problems and challenges are exacerbated, if not caused, by what may be termed the “costs of success” of Taiwan’s previous spectacular accomplishments, particularly its rapid climb up the international product cycle and its successful democratic transition. As shown in Figure 7.1, the former pushed Taiwan into the most advanced technology sectors where a model for state policy is quite uncertain and ambiguous. Likewise, the offshore movement of basic industries away from Taiwan put under increasing stress the small and medium enterprises that had played a central and dynamic role in the Taiwan development model up through the early 1990s. Finally, this major exodus of basic and, increasingly, hightech industries into China created substantial economic dependence on the PRC. These economic challenges also affected the political dynamics. First, the changing nature of Taiwan’s economy made industrial policy much more difficult to design and implement; and, second, growing economic integration with China fed back into the strident domestic debate over national identity and cross-strait relations. Taiwan’s democratization also brought some significantly negative side effects, which considerably decreased the government’s ability for effective policymaking. Figure 7.1 lists five such political changes. The first was the rise of identity politics that involved the rivalry between mainlanders and islanders. Highly emotional identity politics came to dominate the political scene after the election of Chen Shui-bian as president in 2000, making accommodation and policymaking much harder to achieve and adding considerable controversy to the debate over crossstrait economic relations. Similarly, a fairly even partisan division following the turn of the century produced polarization and gridlock. Third, DPP suspicion of many technocrats who had worked in the KMT regime during the authoritarian era led the Chen administration to push a significant number out of public service, decreasing the policymaking capacity of the government. Democratization also brought the politicization of several areas of economic policymaking, such as finance, thereby also contributing to the explosion of corruption over the past two decades. Taken together, these political changes certainly constitute a severe challenge for effective governmental policymaking. Before becoming too concerned about the costs of success, however, it is necessary to ponder what would have been the costs of unsuccessful reform. We argued in Chapters 5 and 6 that the legacies of the ROC’s authoritarian era continue to haunt its polity. This suggests the institutionalist theory, which posits that fairly permanent policymaking arrangements create institutions that shape future policymaking and economic

159

Confronting the Costs of Success Figure 7.1 Costs of Success for the State’s Economic Role

SMEs face increasing problems as economy becomes more sophisticated

Successful climb up product cycle Reach stage of such advanced technologies that government policies become problematic

Movement of mature industries to PRC creates political problems and dependency on hostile regime Rise of identity politics Polarization and gridlock

Democratization

DPP suspicion of technocrats after it won the presidency in 2000

Decreased ability for effective policymaking

Politicization of economic policymaking (e.g., finance) Burgeoning corruption

performance to a considerable extent (March and Olsen, 1989; North, 1990). This perspective proposes that it would be valuable to look for previous political institutions that might have shaped Taiwan’s policymaking and adaptability after the mid-1990s. Figure 7.2 shows the process by which Taiwan’s authoritarian past set off dynamics that brought considerable challenges. The country’s government had long been dominated by strong authoritarian leaders

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Figure 7.2 How the Institutional Legacies of Taiwan’s Development Created Costs of Success

Incoherent government institutions

Gridlock in and ineffective policymaking

No tradition of democratic compromise and policymaking Tradition of strong authoritarian leaders

Patronage politics and corruption Personalistic politics

Appeals to extreme base constituencies

Ethnic discrimination and injustice

Cultural and identity politics

such as Chiang Kai-shek and his son Chiang Ching-kuo. While the movement to electoral democracy in the late 1980s and early 1990s went smoothly, the give-and-take of normal democratic policymaking had not been established and, indeed, the institutional legacies from the past seemed to push the nation toward a fairly dysfunctional politics. This figure identifies five untoward characteristics of authoritarian politics under the Kuomintang: (1) incoherent government institutions; (2) an absence of experience with democratic compromise and policymaking; (3) patronage politics and corruption; (4) personalistic politics; and (5) the repression of islanders, politically and culturally. The first four characteristics contributed to the increasing gridlock and ineffective policymaking in Taiwan’s politics that is so widely decried. The clear existence of these authoritarian legacies, therefore, suggests that political development in the form of democratization should not be considered the real culprit. Rather, political reform appears to be a first step in confronting and controlling these untoward aspects of Taiwan’s political system, even if much more progress remains to be made. This logic also applies to the eruption of cultural and identity politics. Democratization did bring the long-standing political and cultural repression of islanders into the center of public discourse in the ROC. Especially

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with the single nontransferable vote electoral system and Taiwan’s style of personalistic politics, this created a situation where a substantial number of politicians focused their appeals on extremist base constituencies (i.e., the Deep Blues and the Deep Greens), thereby exacerbating the polarization on this highly contentious issue in the early twenty-first century. Yet, as summarized in Figure 3.2 in Chapter 3, the normal dynamics of democratic politics actually led to significant moderation and convergence on this issue in the 1990s before the forces discussed in Chapter 6 stimulated the eruption of this decade. In addition, the need to appeal to the median voter led to a clearly noticeable moderation in the 2010 metropolitan campaign, although it is too soon to say whether this marked the beginning of a permanent trend. Again, consequently, Taiwan’s ongoing democratization may prove to be less a cost of success than a tool for promoting further reform in the long run. A second way of putting the costs of success discussed in Chapters 4 through 6 into perspective is to take a step back and ask how well Taiwan is really doing. This suggests, at least to us, that the national glass is as much half full as it is half empty. In terms of political development, Taiwan must be considered to be a consolidated democracy. Elections are held regularly and the results are widely accepted, albeit if not always with good grace. Taiwan’s politics are polarized and gridlocked much of the time, but this does not appear that different from the situations in many developed democracies such as the United States (Clark and Clark, 2005). Economically, Taiwan has a prosperous society and certainly displays many signs of continued economic dynamism. For example, the real economic growth rate for 2010 was the highest in over twenty years (M. Chang, 2011). This implies that Taiwan has indeed confronted its costs of success with more than limited achievements, which turns our attention to the question of whether the same dynamics that propelled the country’s economic and political miracles in the past may still be at work. Chan and Clark (1992) conceptualized the ROC’s developmental successes in terms of “flexibility, foresight, and fortuna”; that is, being highly flexible in its development strategy and policies, having the foresight to try to move ahead rather than resting on past laurels, and being in the right place at the right time. Chan and Clark further attributed this flexibility and foresight to an eclecticism beyond orthodoxies, reflecting the fact that Taiwan’s strategies and policies cut across the prevailing models or approaches to development such as the competing arguments of the free marketeers and statists that we summarized in Chapter 4.

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The flexibility and eclecticism in the Taiwan development model also indicate that it is extremely unlikely that the nation’s economic and political trajectories unfolded along the lines of some grand design. For example, the birth and early development of what became Y. C. Wang’s Formosa Plastics empire discussed in Chapter 2 is almost comic. More broadly, the distant relationship between the KMT government and the business community during the authoritarian era was at least partially by design from the political logic of preventing challenges to the mainlander regime, which dovetailed well with islander efforts to resist government regulation and extraction. The result, however, was far more beneficial than either party could have imagined, especially after Taiwan moved to export-led growth in the 1960s since it inhibited the rent seeking by either the public or private sector that is found in many developing economies and provided strong incentives for continuous industrial upgrading (Chan and Clark, 1992; Clark and Roy, 1997). Somewhat similarly, what turned out to be good policy was sometimes implemented for cynical and nasty reasons. For example, the land reform that proved successful in alleviating rural poverty and creating resources to finance industrialization was almost certainly motivated in part by the Kuomintang’s desire to limit the power of a potential rival in the rural gentry. We believe that this process of flexibility and eclecticism still marks the political economy of Taiwan as it confronts the costs of its past success. The business community continues to be dynamic and entrepreneurial as the latest economic recovery suggests. Even if official economic policymaking has lost considerable effectiveness, Taiwan has reached the developmental stage where explicit governmental industrial policy is increasingly problematic (J. Wong, 2010). In the political realm, the divisive debate over national identity and cross-strait relations certainly continues. Yet recent analysis shows that positions on economic ties with China are influenced by the class cleavage between those who benefit from and those who are hurt by them as well as by national identity and sovereignty concerns (K. T. W. Wong, 2010). Thus, the strong salience of this issue may, sooner or later, force the politicians to confront issues about growing inequality and marginalization in Taiwan. In short, there is room for optimism, as well as pessimism, about Taiwan in the new century.

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Index

Accountability, 53–54, 59–60 Agriculture, 2; and comparative advantage of different types of economic activity, 76; employment statistics, 13, 15, 16, 21, 27, 83; land reform, 10–11, 34–35, 81; transformation from, 9–13, 35, 39 Amsden, Alice, 24 Anti-Secession Law (PRC), 94–95, 137–138 Asian financial crisis of 1997–1998, 89, 103–104, 124–126 Automobile industry, 76, 78 Batto, Nathan, 151 Bentuhua (localization) of politics, 134–136 Biotechnology, 10, 37, 84 “Black and gold politics,” 60–61, 65–70. See also Corruption Blues. See Deep Blues; Pan-Blue coalition Bush, George W., 136

Calculator industry, 24 Campaign finance, 68, 109 Central Bank of China, 123, 125 Chan, S., 161 Chen Shui-bian: and Bentuhua movement, 134–136, 142–143; and constitutional reform, 139; and corruption, 130, 139; cultural reconstruction movement (Wei-chin Lee’s term), 146–147; as DPP chairman, 115; election campaign of 2004, 136–137, 146; election of (2000), 49–50, 59, 141; and escalation of polarization over national identity, 134–140; and ethnic nationalism, 143; executive-legislative gridlock following election of, 119, 126–127; “Five No’s,” 136; and Pan-Green base constituency, 135–136, 138; and referenda, 120, 136–137, 139; and relations with China, 84, 94–95, 134–136

187

188

Index

Cheng, T. J., 28 Chiang Ching-kuo: death of, 46, 49; reforms under, 44–45, 47, 55; and strong leadership, 109, 115, 160. See also Kuomintang (KMT) regime Chiang Kai-shek, 4; evacuation to Taiwan (1949), 43; and government bonds, 29; mainland regime, 42; promotion of export-led growth, 14; and strong leadership, 42, 109, 115, 160; and transition from agriculture, 10. See also Kuomintang (KMT) regime Chin Heng-wei, 138–139 China, cross-strait relations with, 6; and Anti-Secession Law, 94–95, 137–140; Chen Shuibian and, 84, 94–95, 134–136; China’s threats to Taiwan’s sovereignty, 50, 64, 66, 92, 136–140, 155, 157; difficulties of responding to China’s threats to Taiwan’s sovereignty, 50, 133; events influencing social and economic relations, 103–104; and high-tech industry, 96; Lee Teng-hui and, 50, 94–95; Ma Ying-jeou and, 94, 103–104, 107, 139; movement of Taiwan businesspeople to China, 94; and National Development Conference (1996), 47, 48, 50, 65; and political compatibility between Taiwan and China, 92–94; and public opinion, 64–65, 105–107, 147–148; rise in trade, 96–99; social

ties, 93–94, 101–103; temple politics, 94; tensions and crises, 94–96. See also National identity/ethnic justice; Sovereignty issue China, economic integration with, 2, 5, 37, 73, 92–108; and changing competitiveness of small and medium enterprises, 85, 158; complementarity between Taiwanese and Chinese economies, 23, 92–93; Economic Cooperation Framework Agreement (ECFA), 106–107, 139–140; effects of, 93–94, 157–159; integrated production networks, 93–94; Ma Ying-jeou’s promotion of expanded economic ties, 105, 139–140; Taiwan’s investment in China, 96, 99–101; “three links,” 105, 107. See also China, movement of industries to China, movement of industries to, 2, 10, 22–24, 37, 158–159; complementarity between Taiwanese and Chinese economies, 23, 92–93; and decline in domestic investment, 21; impact on domestic corporations, 90, 92, 158; impact on poorest/least skilled segments of Taiwan population, 26 China Sewing Machine Company, 31–32 Chinese Civil War, 18, 42, 43 Chu Wan-wen, 24 Chu Yun-han, 69, 70

Index

Clark, C., 161 Clinton, Bill, 95 Committee system in Legislative Yuan, 151–152 Commodity chains, 93 Computer industry, 22, 24, 89, 90, 100–101 Constitution of Taiwan: and Chen Shui-bian administration, 139; and classification of Taiwan’s democracy, 121–122; constitution of 1947, 42, 111, 121; constitutional anomalies and confusion over institutional authority, 5, 111–117, 121, 131; constitutional reforms, 117–121, 131, 139; and eventual democratic transition, 44; and informal political practices, 114–115; and martial law (1949–1987), 42 Control Yuan, 111–114 Corruption: and Chen Shui-bian administration, 130, 139; and democratic transition, 60–61, 65–70, 109–110, 158–160; and electoral system, 68, 109, 115, 116, 119, 131; and Hualong Conglomerate, 67–68; and KMT regime, 65; and Lee Teng-hui administration, 61, 62, 66–67, 69; organized crime, 68; parties’ unwillingness to confront, 6, 71; as political issue, 60, 65, 71, 140, 155 Creative destruction (Schumpeter’s concept), 24, 76–77 Cross-strait relations with China.

189

See China, cross-strait relations with Curb market, 123–124 Deep Blues, 135, 150, 161 Deep Greens, 94, 135, 137, 150, 161 DeLisle, Jacques, 136 Democratic Progressive Party (DPP): and constitutional reform, 52, 117–120; and corruption, 6, 69; current stance on cross-strait relations, 106; electoral support for, 57–59, 148–150; and electoral system, 116; and ethnic groups, 143; and executive-legislative gridlock following election of Chen Shui-bian, 126–127; founding of, 47, 48, 55–56; and institutional constraints protecting major parties, 151; and issues in Taiwan politics, 60–70; and national identity issue, 61–66, 155; opposition to Ma’s agreement on “three links,” 107; and pacts, 47–52; and referenda, 136–137; and rise of interest groups, 126–127; role in democratic transition, 4, 55–56; and social welfare policy, 62, 69–70; suspicion of technocrats following election of 2000, 158, 159. See also Chen Shui-bian; Deep Greens; Hsieh, Frank; Pan-Green coalition Democratic transition, 1, 4, 41–71; and authoritarian era,

190

Index

42–45, 140–141, 160; beginning of, 47–49; classification of Taiwan’s democracy, 121–122; and constitution of 1947, 42, 44; and constitutional reform, 117–121; and costs of success, 157–162 (see also Democratization, unintended consequences of); democratic consolidation, 55–56, 161; and evolution of party system, 52–60, 140–142; and forced retirement of senior legislators (1991), 42, 47, 62; functions of democracy, 53–54, 59–60, 140; issue structure as facilitator and potential challenger, 70–71; and issues in Taiwan politics, 60–70, 140; and National Affairs Conference (1990), 47–49; and National Development Conference (1996), 47–48, 50–52; and political pacts, 4, 41, 45–52; and reforms under Chiang Ching-kuo, 44–45, 47; stages of, 45–46. See also Electoral system; Legislative Yuan; National Assembly; Political institutions; Political party system Democratization, as political issue, 60–62, 140 Democratization, unintended consequences of, 2, 109–132; analysis of costs of success, 157–162; and confusion over institutional authority, 5, 111–117, 131; politicization of financial industry, 6, 122–131;

and referenda, 120–121; rise of interest groups, 126–127; rise of money politics, 68; small and medium enterprises’ lack of political influence, 91; and tradition of strong authoritarian leaders, 110, 117, 130. See also Corruption; Economic policy, politicization of; Electoral system; Patronage politics; Policy gridlock; Political institutions; Political polarization Demographics, 25–26, 143 Downs, Anthony, 144, 150, 154 DPP. See Democratic Progressive Party East Asian development state, 33 Economic Cooperation Framework Agreement (ECFA), 106–107, 139–140, 150 Economic growth: and collapse of high-tech bubble (2001), 36, 82; decline in maturing economies, 26–27, 77, 157; and recession of 2008–2009, 82; statistics 1952–1962, 12–13; statistics 1963–1973, 15–16; statistics 1973–1987, 18, 20–21; statistics 1988–2000, 26–27; statistics 2001–2011, 82. See also Export-led growth Economic indicators: and collapse of high-tech bubble (2001), 82; compared to other Asian states, 83; and recession of 2008–2010, 82; S-curve in

Index

increases in productivity and GDP, 76, 78; statistics 1952–1962, 13; statistics 1963–1973, 15–17; statistics 1973–1987, 18, 21–22; statistics 1987–2000, 27–28; statistics 2001–2011, 82–83 Economic policy, politicization of, 2, 122–131, 157, 159; economic integration with China and debate over national identity, 133; and Great Recession of 2008–2010, 122; reasons for, 110; and rent-seeking behavior, 130; and rise of interest groups, 127–130 Economic policy under KMT regime, 4, 33–37; and development of plastics industry, 28–30; and education, 10–12, 34–35; import substitution policy, 10–11, 13–14, 34–35; indirect creation of conducive context for economic development, 34–37; and inflation, 18–19; insulation of economic policy from patronage politics, 6; and land reform, 10–11, 34–35; promotion of export-led growth, 14–17; tax structure, 16; and technology transfer and Taiwan Singer, 31, 33 Economic Politics (Keech), 130 Economic transformations, 9–38; advanced technologies and difficulties of government policies, 159; boxed-in quality of current situation, 2, 4–5, 73, 90, 108; changing compet-

191

itiveness of small and medium enterprises, 5, 73, 84–91, 108, 159; comparative advantage of different types of economic activity, 75–76, 80; and creative destruction (Schumpeter’s concept), 24, 76–77; and development of plastics industry, 28–30; economic development theories, 73–84; and emergence of middle class, 4, 9, 22; free market vs. statist views, 78–80; and globalization, 80; and international product cycle, 77–84, 89–90, 158; movement of traditional industries to China, 2, 10, 22–24, 37; and oil crisis of 1973–1974, 18; role of the state, 33–37, 74, 78–81; Scurve in increases in productivity and GDP, 76, 78; summary of development model, 37–39; Taiwan’s attempts to break into most advanced sectors (biotechnology etc.), 10, 37, 84, 91; technology transfer and Taiwan Singer, 30–33; trade-off between growth and equity, 75 (see also Income inequality); transition from agriculture to domestic light industry, 9–13, 35, 39; transition to export-led light industry, 3, 13–18, 35–36, 39; transition to heavy industry, 3, 9, 18–22, 35–36, 39; transition to high-tech industry and advanced services, 3–4, 9, 18–20, 22–28, 35–37, 39; and

192

Index

unintended consequences of success, 2, 5–7 (see also Democratization, unintended consequences of); “virtuous cycle” of productivity growth (Thurow’s model), 76–77 Education: and industrial upgrading, 33; and international product cycle, 76; and rise of middle class, 25; and role of the state in economic development, 34–36; statistics 1950s–1983, 25; and summary of development, 39; and transition from agriculture, 10–12 Electoral system, 140–141; and authoritarian era, 42–43, 115; and classification of Taiwan’s democracy, 121–122; competitive elections for local governments and Provincial Assembly, 44, 115; and corruption, 68, 109, 115, 116, 119, 131; cultural and identity politics emphasized by, 110, 141–143; current status, 131; described, 115–116; and disconnect between politics and personal lives of voters, 150, 153–154; electoral support for major parties, 57–59, 147–150; expensive campaigns contributing to money politics, 68; first large-scale elections of democratic transition, 46, 49–50; and lack of difference between major parties on most issues, 140–141, 150–151, 155; local elections of 2005, 138; metropolitan

elections of 2010, 161; and patronage politics, 68, 110, 115; presidential election of 1996, 46, 49–50, 57; presidential election of 2000, 57, 59, 134, 140–141; presidential election of 2004, 136–137; presidential election of 2008, 139–140; single nontransferable vote, 110–111, 116, 131, 142, 161; single nontransferable vote abolished, 149; voter mobilization, 150, 152–153. See also Political party system Electronics industry, 16, 17, 19, 24, 35–36, 84, 88, 100, 108 Entrepreneurship, 28–30. See also Small and medium enterprises Environmentalism, 69 Ethnic identity: demographics, 143; ethnic tensions, 43, 140–141, 160; and political polarization, 2; statistics on self-identification, 144–146. See also National identity/ethnic justice Evans, Peter, 34 Examination Yuan, 111–114 Executive, and confusion over institutional authority, 5, 111–117. See also Presidency Executive Yuan, 111–115 Export-led growth, 1, 2, 9, 73–108; and economic development theory, 73–84; end high growth era, 18; and international product cycle, 77–84; and rising standards of living, 17; role of small and medium

Index

enterprises, 19; role of the state, 35–36, 81; statistics, 15–16, 21; transition to export-led light industry, 3, 13–18, 33–36, 39 Exports: and financial crises, 103–104; rise in trade between Taiwan and China, 96–99; statistics, 13, 15–16, 21, 27, 83 Fell, Dafydd, 70 Financial crises and recessions, 96, 108, 127, 128; Asian financial crisis of 1997–1998, 89, 103–104, 124–126; collapse of high-tech bubble (2001), 36, 82; Great Recession of 2008–2010, 82, 96–98, 103–104, 122, 133, 147, 149; oil crisis of 1973–1974, 18 Financial sector: and Asian financial crisis of 1997–1998, 124–126; and Chen Shui-bian administration, 126–127, 130; and corruption, 130; importance of informal sector for finance (curb market), 29, 123–124; laws of 2000 and 2001 following growing economic crisis, 127–129; liberalization, step back from following Asian financial crisis of 1997, 125–126; liberalization of, 125–128; and nonperforming loans, 127; overbanking, 129; politicization of, 6, 122–131; stabilization program of the 1940s and 1950s,

193

122–123; Trust Enterprise Law, 126, 128 Foreign aid, 13 Foreign investment by Taiwan, 23, 96, 99–101 Foreign investment in Taiwan: decline, 24; and ROC strategy 1963–1973, 17; statistics, 13, 15, 17, 18, 21–22, 27, 83 Formosa Plastics, 19, 23, 29–30, 34, 96, 162 Four Great Ethnic Groups, 143 Galbraith, John Kenneth, 74 Gasparino, Charles, 132 GDP, GNP. See Economic indicators Gereffi, Gary, 93 Globalization, 4–5, 80 Gold, Thomas, 106 Government expenditures, 13, 15, 21–22, 27–28, 83 Great Recession of 2008–2010, 82, 96–98, 103–104, 122, 133, 147, 149 Greens. See Deep Greens; PanGreen coalition Gridlock. See Policy gridlock Guerilla capitalism, 86–89 Hakka ethnic group, 143 Han Chinese, 43, 62 Health care, 25–26 Heavy industry, 1, 2; examples, 19; and role of the state, 35–36, 81; transition to, 18–22, 35–36 Heilbronner, Robert, 74 High-tech industry, 1, 2; and cross-strait relations, 96; and

194

Index

education, 36; examples, 24; and industrial upgrading, 18–20; role of small and medium enterprises, 19–20, 36, 86; and role of the state, 35–36, 81; transition to, 22–28, 35–36, 108; and “virtuous cycle” of productivity growth (Thurow’s model), 76–77 Hong Kong, 83 Housing, 25 Hsieh, Frank, 139 Hsieh, John Fuh-sheng, 111, 116, 121 Hsinchu Science-Based Industrial Park, 20, 37 Hua Pei-tsun, 71, 112 Huntington, Samuel, 52 Huolang Conglomerate, 67–68 Hyperdemocracy, 122 Hyperinflation, 122 Identity politics. See National identity/ethnic justice Import substitution, 10–11, 13–14, 28, 34–35, 81 Income inequality, 1; growing inequality, 22, 26, 90, 157; statistics, 13, 15, 17, 21–22, 26–27, 83 Industrial concentration, 85–86 Industrial de-finance, 28–29 Industrial upgrading, 1, 9, 18–22, 39; and international product cycle, 80; role of small and medium enterprises, 2, 30–33; role of the state, 35–36; and technology transfer and Taiwan Singer, 30–33 Inflation, 18–19, 122–123

Institutions. See Political institutions International product cycle, 77–84, 89–90, 158 Investment, domestic: and informal sector for financing, 124; and promotion of export-led growth, 14–17; statistics, 13, 15–17, 21, 27, 83 Investment, foreign. See Foreign investment by Taiwan; Foreign investment in Taiwan Iron and steel, 19, 76, 78 Japan, colonial, 11, 43, 115 JCRR. See Sino-American Joint Commission on Rural Reconstruction Jiang Zemin, 96 Judicial Yuan, 111–114 Katz, Richard, 151 Keech, William, 130 Kuo, Shirley, 25 Kuomintang (KMT) regime, 1, 14–15; competitive elections for local governments and Provincial Assembly, 44, 115; control of formal financial sector, 123–125; and corruption, 65, 160; and delay in democratic transition, 4, 42–43; education system, 10–12, 34–36; and ethnic resentments, 43, 140–141, 160; evacuation to Taiwan (1949), 43; evolution from hard authoritarianism to soft authoritarianism, 41–45, 55; financial stabilization program in the 1940s and

Index

1950s, 122–123; and forced retirement of senior legislators (1991), 47, 62, 109; government expenditures, 13, 15, 21–22; governmental structure, 113–115; governmental technocracy, 14, 34, 38–39, 129, 158, 159; import substitution policy, 10–11, 13–14, 34–35; and inflation, 18–19; and informal political practices, 115; lack of tradition of democratic compromise and policymaking, 140–141, 160; land reform, 10–11, 34–35; and liberalization of financial sector, 125–126; and limited social welfare, 17, 22, 26, 69; personalistic and patronage politics, 6, 130, 160; preexisting social and political groups co-opted/manipulated, 115; and promotion of heavy industry, 19; and promotion of hightech industry, 20; reformers within party, 4, 47, 62; reforms under Chiang Ching-kuo, 44–45; repression under, 43, 115, 140–142, 160; and small and medium enterprises, 86, 125; state corporations, 14, 19, 36, 39, 81; tradition of strong authoritarian leaders, 109, 110, 159–160. See also Democratic transition; Economic policy under KMT regime; Economic transformations Kuomintang Party (KMT): and constitutional reform, 52, 117–120; and corruption, 6,

195

62, 67, 69, 70; current stance on cross-strait relations, 105–106; and departure of Lee Teng-hui, 141, 142; and election of 2000, 141; electoral support for, 57–59, 148–150; and electoral system, 116; and evolution of party system, 55–60; and institutional constraints protecting major parties, 151; and issues in Taiwan politics, 60–70; and national identity issue, 62–66, 142, 155; and pacts, 47–52; and social welfare policy, 62, 69–70. See also Chiang Ching-kuo; Chiang Kai-shek; Lee Teng-hui; Ma Ying-jeou; Pan-Blue coalition Labor: and education, 10–12; prosperity leading to loss of low-cost labor niche, 5 (see also China, movement of industries to); and transition to export-led light industry, 16, 17. See also China, movement of industries to Lam, Danny, 86 Land reform, 10–11, 34–35, 81 Lee Teng-hui: apology for February 28 massacre of Taiwanese by Nationalist troops, 46, 63; China’s reaction to visit to Cornell University, 50, 94–95; and confusion over institutional authority, 112; and corruption, 61, 62, 66–67, 69; and cross-strait relations, 50, 63; and democratic transition,

196

Index

46, 49, 51; election of, 46, 50, 57; as KMT chairman, 115; and National Development Conference (1996), 50, 52; and national identity issue, 63, 137, 143; “New Taiwanese” identity, 65–66, 143; removed as KMT chairman, 141; and strengthening the presidency, 51; and Taiwan Solidarity Union, 141 Leege, David, 134–135, 155 Lee Wei-chin, 136, 142–143, 146 Legislative Yuan: and authoritarian era, 42, 114; committee system, 151–152; and confusion over institutional authority, 5, 111–115; and constitutional reform, 118–119; and electoral support for major parties and coalitions, 57–59, 148–150, 152; executive-legislative gridlock following election of Chen Shui-bian, 119, 126–127; first large-scale election for, 46, 49 Lei Chen, 43 Lien Chan, 51, 59, 134, 138, 141 Light industry, 1; examples, 11; and role of the state, 35–36; transition from agriculture to domestic light industry, 9–13, 35; transition to export-led light industry, 3, 13–18, 33–36, 39. See also Exportled growth; Small and medium enterprises Lin Jih-wen, 117 Lin Yang-kang, 50 Lynch, Daniel, 134, 136

Ma Ying-jeou: and election of 2008, 139; and expansion of economic ties with China, 105, 139–140; fading popularity, 149; investigation of corruption under former president Chen, 130; as KMT chairman, 115; and “New Taiwanese” identity, 143; and rapprochement with China, 94, 103–104, 107, 139; and Taipei mayoral campaign of 1998, 143; “Three No’s,” 139 Mair, Peter, 151 Manufacturing. See Economic indicators; Heavy industry; High-tech industry; Industrial upgrading; Light industry Martial law (1949–1987), 42, 47–48 Mass media, 136, 154 Middle class: and democratic reforms, 4; and restricted issue space, 151; rise in the late 1980s, 9, 22, 24–25, 39. See also Public opinion; Standard of living; Voters Ministry of Economic Affairs (MOEA), 28 Minnan ethnic group, 143 MOEA. See Ministry of Economic Affairs Multinational corporations, 87–88 NAC. See National Affairs Conference National Affairs Conference (NAC; 1990), 47–49 National Assembly: abolished, 118, 121; and authoritarian

Index

era, 42, 114; described, 111–112; and electoral support for major parties, 57–59, 148–149; first large-scale election for, 46, 49; status downgraded, 118–119 National Development Conference (NDC; 1996), 47–48, 50–52, 65 National identity/ethnic justice: and costs of success, 160; and democratic transition, 60–66, 159; and effects of electoral system, 110; and escalation of polarization during Chen Shuibian administration, 134–140, 143; Lee Teng-hui and, 65–66, 137, 143; and legacy of authoritarian era, 140–141; moderation of positions on, 63–66; Pan-Green vs. Pan-Blue positions, 135, 142–143; and polarizing nature of cultural politics, 134–135, 155; and political pacts, 51–52; and politicization of economic policy, 133; public opinion on best option for Taiwan’s international status, 146–147; and reasons for polarization over, 140–143; repression of islanders under KMT regime, 43, 140–141, 160. See also Political polarization; Sovereignty issue National Unification Council and Guidelines, 94–95 NDC. See National Development Conference New Party, 65, 70; electoral support for, 57–59; fading support

197

for, 141, 149; formation from KMT dissidents, 46, 50, 57; and national identity issue, 63, 65, 66, 142; and pacts, 47, 52. See also Pan-Blue coalition Oil crisis of 1973–1974, 18 Oil price escalation of 1979–1980, 20 Olson, Mancur, 3, 130 Ong Daming. See Weng Ta-ming Organized crime, 68 Pan-Blue coalition, 133; base constituency, 135; electoral support for, 147–150, 152; member parties, 142; and relations with China, 138; strategies of, 142, 146. See also Deep Blues Pan-Green coalition, 120, 133; base constituency, 135; and Bentuhua movement, 135; electoral support for, 147–150, 152; member parties, 142; 228 Hand-in-Hand rally (2004), 137. See also Deep Greens Patronage politics, 5–6, 67, 68, 110, 115, 160 Peng Ming-min, 43, 50, 66 People First Party (PFP), 59, 141, 142. See also Pan-Blue coalition Personalistic politics, 110, 130, 160, 161 Petrochemicals. See Plastics PFP. See People First Party Plastics (petrochemicals), 19, 28–30. See also Formosa Plastics

198

Index

Policy gridlock, 2, 5, 6, 109, 157; and classification of Taiwan’s democracy, 121–122; and constitutional reform, 119; and difficulties of responding to China’s threats to Taiwan’s sovereignty, 50, 133, 157; executive-legislative gridlock following election of Chen Shui-bian, 119, 126–127; and National Development Conference (1996), 50; public opinion on causes, 119; reasons for, 5, 110, 133, 159, 160. See also Political polarization Political institutions: and authoritarian era, 113–115, 159–160; classification of Taiwan’s democracy, 121–122; constitutional anomalies and confusion over institutional authority, 5, 111–117, 131; and costs of success, 159–160; and electoral system, 110–111, 121, 131; informal political practices, 114–115; institutional statist, 6; institutionalist theory, 109; lack of tradition of democratic compromise and policymaking, 140–141, 160; overview of governmental structure, 113–114; tradition of strong authoritarian leaders, 109, 110, 159–160. See also Constitution of Taiwan; Executive Yuan; National Assembly; Patronage politics; Personalistic politics; Policy gridlock; Political party system; Presidency; Provincial government

Political issues. See China, crossstraight relations with; Corruption; Democratization, as political issue; National identity/ethnic justice; Social welfare Political pacts, 4, 45–52 Political party system, 4, 131, 143–150; ban on organizing new parties under martial law, 43, 47; change in party system and strategies following 2000 elections, 140–143; disconnect between elite polarization and public attitudes, 143–150; evolution of, 52–60, 140–142; fading support for minor parties, 149; and functions of democracy, 53–54, 59–60, 71, 140; institutional constraints protecting major parties, 150–151; and issues in Taiwan politics, 60–71, 150–151, 155 (see also specific issues); lack of difference between major parties on most issues, 140–141, 150–151, 155; low level of interparty volatility, 152; one-party system under KMT regime, 42, 43, 55, 115; and pacts, 47–52; and polarization, 54, 116, 140–143, 160–161; presidents as party chairmen, 115; reasons for political parties’ perverse strategies, 150–156; and single nontransferable voting system, 116; and tradeoffs among accountability, representation, and stability, 54,

Index

59–60, 71; and voter mobilization, 150, 152–153. See also Democratic Progressive Party; Kuomintang Party; New Party; Pan-Blue coalition; Pan-Green coalition; People First Party; Taiwan Solidarity Union; Tangwai Political polarization, 2, 133–156; and classification of Taiwan’s democracy, 121–122; and difficulties of responding to China’s threats to Taiwan’s sovereignty, 50, 133, 157; disconnect between elite polarization and public attitudes, 143–150; escalating polarization over national identity under Chen Shui-bian administration, 133–140; explanations for, 140–143, 159–161; and party system, 54, 116, 140–142, 150–155; polarizing nature of cultural politics, 134–135, 155; reasons for political parties’ perverse strategies, 150–156 Political stability: dysfunctional nature in states with powerful interest groups leading to distortion of economy, 3; eroded by confrontational and vicious politics, 84; and issue cleavages, 71; and political party system, 53–54, 59–60 Politicization of economic and financial policy. See Economic policy, politicization of Pollock, P. H., 153–154

199

Premier, and confusion over institutional authority, 5, 112 Presidency: and confusion over institutional authority, 5, 111–115; constitutional reforms strengthening presidency, 51, 118; first direct election of president, 46, 49; presidents as party chairmen, 115; strength of presidency leading to authoritarian rule, 42 President Enterprises, 23 Provincial Assembly, 113–114; competitive elections for, 44, 115 Provincial government: and constitutional reform, 117–118, 121; downgraded, 46, 48, 51–52, 118; and government structure, 113–114, 131 Public opinion: on best option for Taiwan’s international status, 64–65, 146–147; on causes of gridlock, 119; on Chinese hostility during Ma Ying-jeou administration, 107–108; disconnect between elite polarization and public attitudes, 6, 143–150; on Economic Cooperation Framework Agreement (ECFA), 106–107; on ethnic identity, 144–146; polarized vs. normal distribution of, 144; and political efficacy of voters, 153–154; on restrictions on cross-strait economic ties, 105–106, 147 PVC plant, 28–30

200

Index

Referenda, 120–121, 136–137, 139 Repression, 43, 115, 140–142, 160 Research and development (R&D), 35, 81, 90–91 Rigger, Shelley, 117–118, 120, 146–147 The Rise and Decline of Nations (Olson), 3 Rubinstein, Murray, 94 Sartori, Giovanni, 144 Savings: and favorable tax structure, 16; and informal sector for financing, 124; and low social welfare net, 17; statistics, 13, 15–18, 21, 27, 83 Scandals, 2, 67–68, 139 Schumpeter, Joseph, 24, 76–77 The Sellout (Gasparino), 132 Semiconductors, 22, 24, 84, 92, 96 Service economy, 4, 21, 24, 27, 75–78, 122 Siew, Vincent, 52 Singapore, 83 Singer Sewing Machine Company, 30–33 Single nontransferable vote, 110–111, 115–116, 131, 142, 149, 161. See also Electoral system Sino-American Joint Commission on Rural Reconstruction (JCRR), 10 Small and medium enterprises (SMEs): and Asian financial crisis of 1997, 89; changing competitiveness of, 5, 73, 84–91, 108, 159; and develop-

ment of plastics industry, 28–30; and economics of scale, 90; entrepreneurial strategies of, 19, 86–89; flexibility of, 19, 86–89; and hightech industry, 19–20, 36; importance in export-led boom, 4, 19, 38, 85; independence from state, 4, 19, 36, 81, 89; and industrial concentration, 85–86; and industrial upgrading, 18; and informal sector for financing, 29, 123–124; and international product cycle, 89–90; and KMT regime, 86; lack of political influence, 36, 85, 91; and movement of traditional industries to China, 90, 158; organizational characteristics, 86–87; and political role of islanders, 44; and technology transfer and Taiwan Singer, 30–33; and unintended consequences of success, 2, 5, 90 Smith, Adam, 73–75 Social ties with residents of China, 93–94, 101–103 Social welfare: and Confucian tradition, 26; and government spending 1973–1987, 21–22; and health care, 26; limited nature of, 17, 22, 26, 69; low social welfare net leading to savings for retirement, 17; as political issue, 60–61, 69–70, 140; and traditional development theory, 74–75 Soong, James, 59, 69, 119, 138, 141 South Korea, 83, 89 Sovereignty issue, 92; and Anti-

Index

Secession Law, 94–95, 137–138; China’s threats over 2000 elections, 94, 95; China’s threats to Lee Tenghui (Taiwan Strait Crisis of 1995–1996), 64, 66, 95, 103–104; difficulties of responding to China’s threats due to policy gridlock, 50, 133, 157; economic integration and growing dependence on China, 2, 5, 105–106, 157; rapprochement under Ma Ying-jeou, 94, 103–104, 107, 139; summary of events, 95, 104. See also China, crossstrait relations with; National identity/ethnic justice; Political polarization; Public opinion; specific presidents Standard of living, 17, 25–26, 75. See also Income inequality State corporations, 14, 19, 36, 39, 81 State institutions. See Political institutions Steel. See Iron and steel Sun Yat-sen, 44 Taiwan: demographics, 25–26, 143; energy dependence of, 18; ethnic tensions, 43, 140–141, 160 (see also National identity/ethnic justice); independence movement (see National identity/ethnic justice; Sovereignty issue); name change proposal, 139. See also following headings Taiwan, current situation: boxedin quality of current situation,

201

2, 4–5, 73, 90, 108; changing competitiveness of small and medium enterprises, 5, 73, 89–91, 108, 159; and costs of success, 157–162; democratic consolidation, 55–56, 161; “flexibility, foresight, and fortuna” (Chan and Clark’s concept), 161–162; and international product cycle, 90; and polarization, 155–156, 161 (see also Policy gridlock; Political polarization); and political institutions, 131–132 (see also Political institutions). See also China, crossstrait relations with; China, economic integration with; Policy gridlock; Political polarization Taiwan, economy of. See China, economic integration with; Economic growth; Economic indicators; Economic policy, politicization of; Economic policy under KMT regime; Economic transformations Taiwan, government of. See Constitution of Taiwan; Democratic transition; Democratization, unintended consequences of; Electoral system; Government expenditures; Kuomintang (KMT) regime; Policy gridlock; Political institutions; Political party system; Political polarization; Political stability; Provincial government; Provincial government; Sovereignty issue

202

Index

Taiwan, population of. See Education; Income inequality; Labor; Middle class; Public opinion; Standard of living; Voters Taiwan Election and Democratization Survey, 153 Taiwan Semiconductor Manufacturing Corporation, 84 Taiwan Singer, 30–33 Taiwan Solidarity Union (TSU), 59, 135, 137, 141–142, 149. See also Pan-Green coalition Taiwan Strait Crisis of 1995–1996, 64, 66, 95, 103–104 Tan, A. C., 126, 129, 154 Tangwai, 44, 45, 47, 55–58 Tax structure, 16 Technocrats, role in KMT regime, 14, 34, 38–39, 129; DPP suspicion of technocrats, 158, 159 Television industry, 24 Temple politics, 94 Ten Major Development Projects, 19 Textiles, 11, 16, 76, 77, 78, 86, 87, 101 Three Principles of the People, 44 Thurow, Lester, 76 Tiananmen Square massacre (1989), 103–104 Trade: and financial crises, 103–104; rise in trade between Taiwan and China, 96–99; statistics, 13, 15–16, 18, 21, 27, 83 Transportation, 25 Trust Enterprise Law, 126, 128 Tsai Ing-wen, 150

Tse-min Lin, 69, 70 TSU. See Taiwan Solidarity Union 228 Hand-in-Hand rally (2004), 137 228 Incident, 46, 63, 137 2008 White Paper on SMEs in Taiwan (white paper), 90–91 Typhoon Marakot, 149 United Nations, and status of Taiwan, 63, 120, 139 United States: and Chen Shui-bian administration, 136, 138–139; polarization in, 156, 161; and Taiwan-China tensions, 95 Voters: disconnect between elite polarization and public attitudes, 143–150, 154; disconnect between politics and personal lives of voters, 150, 152–153; political efficacy of, 153–154; voter mobilization, 150, 152–153. See also Electoral system; Public opinion Wang, Joseph, 28 Wang, Y. C., 96, 162 Wang Yung-ching, 28–30, 34 The Wealth of Nations (Smith), 73–75 Weng Ta-ming, 67–68 Wheatley, Alan, 128 “White terror,” 43, 141, 142 World Health Organization, 120 Yu Mou-ming, 138

About the Book

Taiwan’s economic and political transformation was once consid-

ered a model for developing nations, but in recent decades the momentum has stalled. Why? Cal Clark and Alexander Tan explain the country’s paradoxical political economy, tracing its achievements and exploring its challenges. The authors appraise Taiwan’s hard-won accomplishments—a legitimate democracy and a prosperous society—and also investigate the stubborn institutional legacies undermining its progress. Without discounting Taiwan’s significant stress and turmoil, they provide ample evidence to support optimism about its future. Cal Clark is professor of political science at Auburn University. He is

the coeditor of The Evolving Pacific Basin in the Global Political Economy: Domestic and International Linkages and coauthor of Comparing Development Patterns in Asia. Alexander C. Tan is associate professor of political science at the University of Canterbury in Christchurch, New Zealand.

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