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Throughout its history Taiwan has experienced periods of economic boom and bust. Several centuries ago the island was a major trading centre in East Asia, and it prospered. Taiwan grew economically under Dutch rule in the mid-1600s and in the late 1800s under Chinese rule. It did well economically as a colony of Japan from 1895 to 1945 but experienced decline in the years immediately after World War II.
In the late 1940s and early 1950s, many economists regarded Taiwan’s economic situation with considerable pessimism. That assessment was based on Taiwan’s unfavourable land-to-population ratio, its lack of natural resources, a shortage of capital, and a discredited government. However, that perception did not turn out to be true. Taiwan’s economic growth beginning in the mid-1960s was so spectacular that it acquired the appellation “economic miracle.” In the 1990s Taiwan’s economy slowed, but its growth remained good, even during the East Asian financial crisis of 1997. In 2001 Taiwan experienced a recession, mainly caused by political paralysis. Its economy again underwent a downturn, beginning in 2008 with the global recession, from which it recovered only slowly.
Taiwan’s economic boom of the 1960s and for several decades after was preceded by land reform, which generated a marked growth in the agriculture sector. Rural prosperity stimulated industrial development, while more-efficient farming released labour for Taiwan’s industrialization that drove the economy in the 1960s and ’70s. In the 1980s Taiwan moved to capital-intensive and knowledge-based industries. A high rate of savings, rising labour productivity, privatization, astute government planning, considerable foreign investment, and trade all propelled Taiwan’s rapid economic expansion.
Taiwan’s initial industrialization was spurred by the growth of textile factories and companies that produced light manufactures, such as small appliances, footwear, and athletic equipment. Companies subsequently moved to manufacturing semiconductors and electronic equipment, including radios, television sets, and computers. By the mid-1980s Taiwan had become one of the world’s largest producers of computers and computer peripherals. It also succeeded in establishing steel and shipbuilding industries, but those were of less significance than the enterprises manufacturing information- and communication-technology (ICT) products. One reason given for that circumstance is that Taiwan’s economy is based primarily on small- and medium-sized companies rather than on large conglomerates—as has been the case in Japan and South Korea.
Early on, Taiwan adopted a policy of import substitution, imposing high tariffs to protect its budding industries. However, it soon abandoned that strategy in favour of strongly promoting exports—to the degree that it soon was trading more than Japan and had become a model for development that refuted the dependency theory model that had been applied to developing countries in other parts of the world (e.g., Latin America). Of note in Taiwan were the creation of export-processing zones, in which foreign companies were allowed to establish factories that were given significant tax breaks and other advantages but that also trained local labour and generated spin-off enterprises that were also part of the “Taiwan model.” Other components of that model included low taxes, a good infrastructure, a stable society, and a good educational system.
Agriculture, forestry, and fishing
Taiwan has long been known for its productive agriculture, based on its rich volcanic soil, plentiful rainfall, and good climate. In fact, those conditions are what attracted early Chinese migrants. During the Japanese colonial period Taiwan exported large quantities of rice and sugar to Japan. In the early post-World War II years agriculture flourished. Double cropping of rice and some other crops, fertilization, and irrigation enhanced yields considerably, as did the introduction of hybrid and other improved seed stocks.
Since the beginning of the 21st century, however, Taiwan’s farmers have been hit hard by foreign competition, in part because individual farms on the island are small but also because after Taiwan joined the World Trade Organization (WTO) in 2002, it became easier to import cheaper foreign agricultural products. Raising livestock has fared little better. Pigs, chickens, and ducks have been preferred over cattle, but all options have met with difficulties in the face of foreign imports. Farmers who raise fruits and vegetables have fared somewhat better, and those growing tea and some specialty crops have done fairly.
Forestry and fishing, which were once important sectors of the economy, have also diminished in importance. Forests have been depleted, and the forestry sector now accounts for only a tiny fraction of Taiwan’s economy. Fishermen have to fish in more-distant waters, and many now engage in aquaculture to remain employed. One area of significant growth has been floriculture, with Taiwan becoming a major exporter of orchids. Organic farming has also become popular in Taiwan.
Overall, the agricultural sector constitutes only a small fraction of Taiwan’s economy, with crops making up the bulk of the value. Rice has remained Taiwan’s most-valuable crop, notwithstanding the difficulties that Taiwan’s membership in the WTO has caused for rice farmers. The main fruits and vegetables grown, by production value, are bamboo shoots, cabbages, watermelons, shiitake mushrooms, leafy vegetables, and green onions (scallions). Tea has a good local market and is also an important export product. Sugarcane has declined markedly in production because of labour costs and competition from other countries.
Resources and power
Mineral exploitation plays almost no role in Taiwan’s economy, although it was once important. In the late 19th century, Taiwan served as a coaling station for steamships, utilizing locally mined coal. Gold, sulfur, marble, and other resources were once mined or quarried in significant quantities, but by the mid-2010s mining’s contribution to Taiwan’s total industrial output was negligible.
Taiwan’s coal reserves were largely exhausted by the beginning of the 21st century. Small reserves of petroleum and natural gas have been found on the island and offshore and have been exploited. However, domestic production supplies only a small fraction of Taiwan’s fossil fuel needs, and the great bulk must be imported. Petroleum accounts for about two-fifths of Taiwan’s hydrocarbon use, and coal constitutes about a third more. Imports of natural gas increased dramatically in the early 21st century.
Because Taiwan has such a high dependence on foreign fuel imports, it has diversified its sources of those commodities and has considerable storage capacity. Most of its petroleum is imported from the Middle East. It buys coal chiefly from Australia, Indonesia, and South Africa. Natural gas is purchased mainly from Qatar, Malaysia, and Indonesia.
In the years before the start of its dramatic economic expansion in the 1960s, Taiwan benefited from cheap power generation, including hydroelectric installations and thermal plants burning domestic coal. However, the situation changed quickly with Taiwan’s rapid industrialization and subsequent rise in prosperity and consumerism. Taiwan now depends almost totally on power generated from imported fossil fuels. Nuclear power became a factor beginning in the late 1970s, and in the 1980s nuclear plants were producing nearly half of Taiwan’s electricity. That proportion has fallen dramatically, however—now constituting only some one-tenth of the total—and nuclear power has faced increased opposition in the wake of the Fukushima accident in Japan. Hydropower, solar and wind generation, and other forms of renewable energy constitute only a small portion of energy use.
Manufacturing of Taiwan
The Japanese began developing industry in Taiwan at the end of the 19th century, shortly after they made Taiwan a colony, and the pace of industrialization increased even more during World War I (1914–18). World War II provided a further stimulus for manufacturing on the island, including establishing some heavy industry—all of which contributed significantly to the island’s economic growth. Taiwan’s manufacturing sector really boomed, however, beginning in the late 1950s, when the annual growth rate was about 12 percent. Manufacturing grew even faster in the 1960s and ’70s, when it reached rates that were almost unprecedented in world history. During those years Taiwan’s industrialization was increasing at double the pace for the United Kingdom or Japan during those countries’ periods of most-rapid growth.
Taiwan’s industrialization started with light industry—e.g., textiles and small appliances. It soon progressed to more labour-intensive and capital-intensive production—radios and other electronic devices and computers and other ICT products, including integrated circuits.
Meanwhile, Taiwan built a flourishing petrochemical industry utilizing imported petroleum that included spin-off products, including plastics, drugs, and synthetic products, many of which were used in improved textiles. Taiwan also began producing steel and other metals and components that were used to build ships, oil rigs, and automobiles (mostly under coproduction agreements with Japanese and U.S. companies). Tools, auto parts, electrical equipment, optics, and telecommunications became important businesses. Taiwan also produced some state-of-the art weapons, including jet fighter planes and missiles, although it had limited success in competing on the world market for sales.
Finance
The Central Bank of the Republic of China, attached to the Executive Yuan (the executive branch of government), maintains monetary stability, controls banking, and regulates the money supply. It issues the New Taiwan dollar (Taiwan’s currency) and manages Taiwan’s foreign exchange. The value of the New Taiwan dollar has been relatively stable for several decades. Taiwan’s foreign-exchange reserves are considerable, ranking it among the world’s top five countries in that category. The banking system was commended during the 1997 Asian financial crisis for preventing problems in neighbouring countries from affecting Taiwan.
Nearly three dozen large domestic banks and nearly as many foreign banks operate in Taiwan, each domestic institution having dozens of local branches. There are also numerous credit cooperatives and scores of farmers’ and fishermen’s associations that provide financial services.
Insurance companies have thrived in Taiwan since the late 20th century after having started at a low point in the 1950s and ’60s. Beginning in the early 1990s, the government revised the insurance laws, which gradually opened the market to foreign interests while easing restrictions on investments by domestic companies in foreign real estate and securities. A clear distinction is made between life and nonlife types of insurance, and the Ministry of Finance controls premiums.
Taiwan now has high levels of insurance coverage. That situation came about as a result of Taiwan’s rapid economic growth in the second half of the 20th century, insurance being a way to save while reflecting some insecurity about future prosperity by purchasers. Taiwan’s insurance industry was hit hard by the global recession in 2008, but it has recovered since then.
The Taiwan Stock Exchange (TWSE) opened in 1962 and has flourished since then as a place for private savings and investments. Originally the TWSE traded almost exclusively in stocks, but it subsequently began to also offer bonds and other forms of investments. The TWSE is among the largest in the world.
Trade
Taiwan was an important trading entity at times during its history, which even included serving as a commercial centre in East Asia. For extensive periods of time pirates operating out of Taiwan carried on illicit foreign trade. During the time when China ruled Taiwan there was considerable commerce between the island and the mainland. Taiwan’s trade was mainly with Japan, however, during the Japanese colonial period.
Early in the post-World War II period Taiwan’s leaders realized that because of the island’s lack of natural resources—especially fossil fuels—Taiwan had to strongly develop trade in order to survive. Exports were essential to pay for the imports. Taiwan’s cheap labour helped make its exports competitive. Later, the export of its human talent became key.
After the brief period of protecting domestic industries through its import-substitution policy, the government shifted to strongly promoting exports, a strategy that was highly successfully. One of the keys to that policy was producing higher-value goods and then improving their quality. Another key was Taiwan’s small companies’ ability to find foreign partners.
Taiwan’s main exports are electronics, basic metals and metal products, plastics and rubber, chemicals, and machinery. Its principal export trading partners include China (including Hong Kong), the United States, Japan, Singapore, South Korea, Malaysia, and Germany. Taiwan’s major imported commodities include electrical machinery and appliances, mineral fuels and mineral products, and chemicals. Its chief import sources are China, Japan, the United States, South Korea, Malaysia, Australia, Germany, and the Netherlands.
Services
The service sector of Taiwan’s economy is now its most dynamic and fastest growing, accounting for some two-thirds of the annual gross domestic product (GDP). The main components of services (in descending importance in terms of GDP) include wholesale and retail trade, government services, finance and insurance, real estate (including renting and leasing), transport (including storage), health care and social services, professional and high-tech services, accommodations (including food), education, and culture (including sports and recreation).
While tourism is not a category of services, tourist-related activities account for a meaningful segment of Taiwan’s economy. Tourism was not encouraged in the years just after World War II over concerns of its being a security threat. That policy changed in the mid-1950s, and the number of annual tourist visits increased rapidly after that. In the early 21st century the number of visitors to Taiwan has grown to several million annually. For years most tourists came from Japan, Hong Kong, the United States, and Southeast Asia, but with the improvement in relations between China and Taiwan since 2008, large numbers have arrived from the mainland.