Abstract
Taiwan’s transition from a miracle of ‘growth with equity’ to inegalitarian growth in the 21st century cannot be fully explained by the prevailing theories of globalization or social politics derived from the study of Western capitalism and social politics. Instead, the literatures relating inequality to authoritarian regime types and conditions of democratisation are more relevant to the case of Taiwan. While it is a ‘rich democracy’, its prosperity and relative egalitarianism was in large part achieved under a besieged authoritarian regime facing both internal threat (regime insecurity) and external threat (state insecurity). This article will examine how the Taiwanese state’s responses to these evolving dual threats have shaped growth strategies and distribution. Our analysis will highlight how the interaction of changing internal and external threats helped to generate a growth path that stifled the emergence of countervailing powers to capital and that continues to motivate forms of pro-big capital state activism. In so doing, this case study contributes to the growing literature on capitalist hybridity resulting from the melding of developmentalist legacies with economic liberalism.
Keywords
Introduction
For the first generation of East Asian newly industrialized economies (NIEs) (South Korea (hereafter, Korea), Taiwan, Hong Kong, and Singapore), the attainment of high-income status in the twenty-first century has been accompanied by the worsening of income inequality. This contrasts with the achievement of ‘growth with equity’ that characterized their era of miraculous development (c. 1960–90). Inequality has worsened despite the consolidation of democracy and the maintenance of relatively high levels of manufacturing employment based on small and medium sized enterprises (SMEs) that was a source of egalitarian development. This paper argues that changes in distributive outcomes cannot be explained solely by the neo-liberalizing effects of globalization or even by economic institutions and their path dependency. It further argues that given the intense challenges to the very survival of the rulers and the state in Taiwan, political considerations exerted even more pronounced influences, one of which is to push rulers towards the making and unmaking of economic institutions. In other words, state and regime security hold the key to understanding Taiwan’s twenty-first century turn towards inegalitarian development. State security in the context of Taiwan means preservation of the state of the Republic of China on Taiwan (ROCT) in the face of strategic threat from the People’s Republic of China (PRC) 1 . Regime security refers to consolidation of the regime type, firstly, the authoritarian Kuomintang (KMT) regime and subsequently the democratic regime. We argue that the alignment of the two insecurities during the miracle era produced policy combinations favourable to social equality while their dealignment in the twenty-first century produced unfavourable combinations leading to inequality.
Given Taiwan is one of the few non-Western states that has achieved ‘growth with equity’ which also confronts particularly acute security threats, this case study will follow Tilly’s (1984) ‘individualising strategy’ to reveal the structural conditions and historical sequences that underpin Taiwan’s peculiarities. This ‘individualizing’ strategy will enable an in-depth understanding of Taiwan rather than an elaborate effort to build generalizable theory. The study also seeks to provide useful insights for comparative research. The paper draws upon a wide range of secondary research, published in both Chinese and English, to generate new interpretations. It also uses extensive primary documents, mostly statistics and annual reports published by the Taiwan government and those released by global institutions. Apart from making empirical and theoretical contributions, the paper’s use of non-English documents also helps to convey local scholarly voices.
This paper will make three arguments to account for Taiwan’s transition to relative inequality in the twenty-first century. First, the pre-1980s ruling KMT was faced with a combination of state insecurity (threat from China) and regime insecurity (governance over a hostile local Taiwanese population), 2 and these two types of insecurity were intertwined. Sensitive to these insecurities, the KMT party-state put Taiwan under martial law (1949–87). In response to deeper sources of regime vulnerabilities, it engaged in developmental activism while introducing a ‘state’ or ‘authoritarian corporatist’ (Ho, 2015) 3 system based upon elaborate economic and social control measures. These measures helped to build ‘broad coalitions’ that included the local Taiwanese population in the growing economy. At the same time, the measures kept capital on a tight leash and prevented the rise of powerful Taiwanese big business groups (BBGs). 4 These conditions were conducive to ‘growth with equity’.
Second, democratisation in the 1980s–1990s weakened and eventually unravelled the alignment between state and regime security. Democratisation lent legitimacy to the government-in-office (i.e. alleviated regime insecurity) and induced competing political parties to introduce some social welfare measures. However, democratisation also created incentives for competing parties to cultivate big business support. This opened opportunities for big business to influence political actors. Against the backdrop of authoritarian corporatism which had stifled social accountability from below and absence of well-developed democratic rules, the rise of business influence enabled cronyism to emerge, leading to the worsening of distributive outcomes.
Third, while democratisation alleviated regime insecurity, state insecurity persisted because of the sovereignty dispute with China. Insecurity has arguably become more acute as China emerged as both as a military threat and as a source of economic opportunity for Taiwanese capital. Accordingly, Taiwanese governments responded with economic policies that were both liberal (e.g. foreign direct investment (FDI) in China) and developmental (e.g. state support for new technologies and sectors). These policies sought to maintain state security by maximizing growth and facilitating technological advancement. However, the benefits of these policies accrued mainly to BBGs and very small segments of highly skilled workers, thereby contributing to the worsening of inequality.
The upcoming section will illustrate Taiwan’s deteriorating income distribution and critically review existing explanations that centre on globalization. It will then introduce research that highlights political institutions and power relations amongst non-Western authoritarian regimes, as well as research on state and regime security in Northeast Asia, identifying their potential for a better understanding of inequality in the Taiwan case. The third section will undertake an individualising historical analysis to illustrate how the alignment of state and regime security considerations compelled the KMT regime in the 1950s to introduce authoritarian corporatism that restrained big business to the benefit of equality. The fourth section will examine the dealignment of the two forms of security since the mid-1980s owing to democratisation and the emergence of pro-business politics. The fifth section will analyse how Taiwan has responded to China’s opportunity and threat with a mix of policies (FDI to China and developmental activism) that has skewed distribution in favour the BBGs and a small segment of highly skilled labour.
The globalization and democratisation theses: their limits in explaining the decline of ‘growth with equity’ in Taiwan since the 1990s
Taiwan was one of the East Asian NIEs lauded for its ‘growth with equity’ by the World Bank (1993). However, as Taiwan has become a ‘high-income economy’ in terms of per capita GDP growth in the twenty-first century, its income distribution has worsened despite some effort to extend welfare benefits. Figure 1 reveals the increase in Taiwan’s Gini index during the twenty-first century, and Figure 2 indicates the increase in its income polarization between the top and the poorest 20% of households. GDP per capita and gini coefficient. Squeeze on the middle class: middle 40% share of pre-tax national income 1990–2019 (percent).
Notwithstanding Taiwan’s more favourable performance vis-à-vis Korea in the above two measures, the Piketty team’s findings on the top 10% share of the pre-tax national income, which considers the wealth effect, reveal a striking decline in Taiwan’s distributive equality. Between 1990 and 2020, the figure in Taiwan increased from 37.0% to 48.1%, which was much more rapid than Korea’s 32.0% to 34.5%, Germany’s 32.6% to 37.4%, and even the liberal United States’ 39.8% to 44.4% (WID, 2023; see also Hong and Cheng, 2013). That the pre-tax income share of Taiwan’s top 10% population has increased most rapidly in the last 30 years to reach a level that surpasses that of United States signifies a disconnection between growth and equity. What has caused the trend towards inequality in Taiwan, especially considering the consolidation of democracy in the twenty-first century?
Taiwan scholars have identified globalization and related processes as the underlying causes of Taiwan’s deteriorating income equality. Hsiao (2013) contended that precaritization was compelled by globalization-induced competitive cost reduction. His study was corroborated by Ko and Chang’s (2014) findings concerning the increase in non-standard employment and emergence of a segmented labour market between 2008 and 2012. Analysing changes in employment opportunities between 1978 and 2012, Chang (2016) found that, despite the stabilisation of manufacturing employment, the expanding services sector was associated with the polarization between a small number of highly paid knowledge-intensive jobs and a vast number of low-income ones. Pressing the point further, Chu and Kang (2015) argued that the relocation of manufacturing to China generated high profit for Taiwanese capital at the expense of domestic investment and job creation.
SME Share of Domestic and Export Sales, Employment 1997–2020 (Percent).
Source: Small and Medium Enterprise Association, White Paper on Small and Medium Enterprises, several issues.
Second, Taiwan’s deteriorating income equality coincided with the country’s transition into a high-income economy with a GDP per capita approaching that of the richer OECD countries. As research into Western and East Asian ‘rich democracies’ has shown, globalization has induced different national responses. These range from the deepening of dualization in the traditional manufacturing powerhouses such as Germany, Japan, and Korea to the emergence of ‘flexicurity’ in more service-oriented economies such as Denmark and the Netherlands. These cases reveal how the nature of economic institutions (business concentration, training regime, internal or external flexibility) as well as the relationship between autonomous labour organizations and governing parties can shape labour market and social welfare policy responses resulting in differing degrees of inclusiveness (Chu and Kong, 2022; Thelen, 2014). Given Taiwan’s SME-oriented industrial structure and less dualistic training regime as compared with Japan and Korea, it is inexplicable as to why the island-state was unable to choose a more inclusive response to globalization.
Third, in line with prevailing findings that democratisation favours redistribution in new democracies (Haggard and Kaufman, 2008), Taiwan has experienced social welfare expansion in some key areas, notably health and pensions. Correspondingly, the share of Taiwan’s public social expenditure in GDP increased from 5.5% in 1998 to 9.4% in 2002 and 11.1% in 2020 (DGBAS, 2021). Nevertheless, the 2020 figure remains lower than that of Korea 5 (12.3%), Germany (25.6%), and the United States (18.3%), exemplifying the limitations of redistribution policy in Taiwan (OECD, 2023). The mild redistributive outcome of social welfare benefits paled in the face of sharp income increase amongst the wealthiest members of the society. Taiwan has also neglected future-oriented social investment (e.g. active labour market policies) urgently needed to face the challenges of demographic crisis and an economy founded increasingly on knowledge and services (Yeh and Lue, 2022). Such social under-development contradicts the expectation that socio-economic accountability is a concomitant of political accountability. Recent theories of advanced capitalism expect this relationship because electorally successful parties must satisfy the aspirations (including provision of public goods) of the majority block of new middle class whose vital non-substitutable skills, which are embedded in the local community, cannot be easily replicated by relocation to lower-wage economies (Iversen and Soskice, 2019).
To understand why Taiwan’s consolidated democracy is unable to generate more powerful pressures for redistribution, we can get some clues from the recent scholarship that seeks to explain the relationships between regime types and inequalities in non-Western contexts. Investigating the durability of authoritarian regimes, some comparative political scientists have undertaken large-n studies to examine the institutional characteristics associated with egalitarian outcomes. Pelke (2020), for instance, found that greater degrees of political inclusivity (broad coalition-based regimes) and party institutionalization (party rules providing for effective intermediation between leaders, elites and followers) favoured the provision of public goods by authoritarian regimes. 6 In turn, Panaro and Vaccaro (2023) found that a higher level of state capacity, hence performance rather than regime institutions, contributed to lower levels of inequality.
Other scholars have drawn attention to economic interests and power relations that mediate the effect of democratic transition on equality. Albertus and Menaldo (2014) started from the premise that economic elites prefer democracies where their property rights are more secure from capricious authoritarian rulers. Their large-n study concluded that greater equality is achieved only under the rare condition of transition (to popular democracy) during which the economic elites are weakened. In most instances, however, economic elites can influence the democratisation process by manipulating either the political elites or the masses or both. This results in stronger legal grounding of property rights, liberalization of the financial system, and other measures that foreclose the prospects for redistribution. In these conditions, democracy is ‘gamed’ in favour of capital. Albertus and Menaldo (2016: 58) designated Taiwan as an example of transition from ‘redistributive dictatorship’ to ‘gamed democracy’ wherein ‘economic elites team up with political incumbents to capture democracy and circumvent the masses’.
Security as an analytical angle
By highlighting the nature of authoritarian regime coalitions, state capacity, and institution-building in shaping distributive outcomes, the comparative political science literature reviewed above supplements the explanations derived from the globalization thesis and findings from the advanced capitalist democracies. To account for the Taiwan case fully, however, the drivers identified by the comparative political science accounts need to be set within their proper context, especially the dimension of external insecurity. That insecurity may arise from direct military threat from a rival state or from pressures exerted by a big power protector. The dimension of external duress makes it easier to explain why some authoritarian states seek stronger state capacity (Panaro and Vaccaro, 2023) and pursue strategies of institutionalization (Pelke, 2020) that proved favourable to egalitarian outcomes.
Insofar as the external roots of the state elites’ motivation to build state capacity, party institution, and political coalition are concerned, much research on Northeast Asia has addressed the issue, though they mostly focus on the relationship between security interests and the emergence of ‘redistributive dictatorship’. However, their findings can be borrowed to help us understand the transition from ‘redistributive dictatorship’ to inegalitarian democracy. First, Nordhaug (1998) and Zhu (2002) argued that external insecurity favoured industrialisation policies necessary for the maintenance of a formidable military base. In turn, authoritarian regimes looked to economic and social development to bolster their domestic legitimacy, a project for which local capitalists served as willing but subordinate allies (Woo-Cumings, 1998). Third, because the security interests of Taiwan (and Korea) meshed with those of the US, they experienced not only a buttressing of US military protection but also active US interventions into their long-term development trajectories. Notably, with the shift in US strategy from containment towards regional economic integration centred on the revived Japanese economy, Taiwan (and Korea) was steered towards export orientation in the early 1960s (Haggard and Zheng, 2013; Woo, 1991). Strategic interest in the Cold War led the US to tolerate its junior allies’ use of nationalist economic policies to ascend the value chain in the 1970s–80s (Cumings, 1987).
Doner et al. (2005) have woven together these factors under the concept of ‘systemic vulnerability’. They use this concept to encapsulate the three disadvantageous conditions, namely, sustained and intense strategic threat, domestic unrest, and natural resource shortage, faced by the political elites of Taiwan and Korea. The presence of all three conditions motivated the elites to build developmental institutions to deliver the material base for ensuring state security and regime legitimacy. The third condition rendered industrial development with continuous upgrading as the only feasible option. Unlike Nordhaug (1998), Woo (1991) and other scholars that do not directly examine the issue of distribution, Doner et al. (2005) emphasized the importance of growth with equitable distribution for the building ‘broad coalitions’ supportive of the regimes, much in line with the findings of large-n studies by Pelke (2020) and Panaro and Vaccaro (2023).
The role of external security in the transition towards inequality under democracy has been less explicitly theorized. However, extrapolating from the above studies, one can postulate that the relaxation of internal security threats, such as the enhancement of domestic legitimacy through democratisation, is a condition that may tempt former redistributive dictatorships to narrow their political coalitions, acquiesce to the ‘gaming of democracy’, and sanction the turn to inequity (Albertus and Menaldo, 2016). Similarly, the above studies provide clues as to why the alleviation of external security threats may diminish the drives for developmentalism and hence reinforce the turn towards inequality. Cumings (1998) connected the US strategy of opening up Northeast Asia to US capital in the 1980s to the twenty years (1990s–2000s) of US-China economic cooperation. It was within this broader external security shift that Taiwan’s massive outflow of investments to China occurred to the detriment of domestic mid-income jobs (‘narrowing the coalition’). Taiwan’s turn towards economic and technological nationalism in response to China growing strategic threat in the 2010s has narrowed the coalition by concentrating the benefits among a narrow stratum of high-tech capital and labour. Figure 3 presents a schematic outline of the causal relationships between the factors discussed here. The upcoming sections will use such factors to examine historically Taiwan’s transitions to inegalitarian growth. Schema of explanation.
Taiwan: security, authoritarian corporatism, and ‘growth with equity’ in the miracle era
Apart from the vulnerability of the ROCT state to the communist regime on the mainland, the KMT also faced three major forms of regime insecurity throughout its 40 years of one-party rule in Taiwan, namely, its legacy of misgovernance during the 1940s, lingering resent by native Taiwanese of the mainland émigré regime, and the potential threats from economic transformation like the emergence of big capital and a demanding middle class. Regime security in Taiwan during the miracle era was based on three main policies. The first, which was also linked to state security, involved state-directed development 7 or the provision of incentives for local and transnational enterprises, coordination of public and private initiatives, and efforts to facilitate continuous industrial upgrading beyond the potential of private capital (Haggard and Zheng, 2013; Ho, 1987; Wade, 1990). The second was the commitment to economic stability, which entailed monetary stability and fiscal conservatism (Cheng, 2001: 27). The third was a careful balancing of economic interests that favoured egalitarian outcomes. 8
It is unclear if regime insecurity had directly inspired the KMT to build broad coalitions and promote equality in the logical sequence stated in the compelling account presented by Doner et al. (2005: 331). However, the security concerns certainly informed the choice of development policies and consolidation strategies, which entailed institution-building to facilitate the co-optation of social forces that were useful for development while keeping them checked from becoming too powerful, the distributive outcomes of which turned out to favour egalitarianism. The consolidation strategies can be grouped into three broad dimensions.
Pre-distributive reforms
The first dimension concerns the introduction of ‘pre-distributive’ reforms. To avoid repeating mistakes committed on the mainland and pre-empt rural unrest, land reform was introduced in the 1950s. This measure eliminated the biggest source of socio-economic inequality characteristic of developing economies. In freeing capital and labour from their rural bondage, it also founded the precondition for launching industrial development in Taiwan. Politically, it built a solid base for the regime in the countryside (Davis, 2004: 194–201) where successive mobilization campaigns were launched to consolidate regime support (Looney, 2021: 217–8).
Authoritarian corporatism
The second dimension involves the rejuvenation of the KMT and the introduction of authoritarian corporatism, which both enhanced regime security and engendered new yet limited forms of inequality. In addition to the self-selection process whereby only the most loyal members retreated with the party to Taiwan, the KMT also reorganized itself along Leninist lines (Cheng, 1987; Dickson, 1993). The reorganization and the subsequent growth of membership allowed the party to introduce authoritarian corporatism (cf. Pelke, 2020). An important aspect involved the scrutiny and mobilization of social organizations through the establishment of party cells within them. Just as business entities were required to join KMT-orchestrated producer organizations, workers and their organizations were overseen by party personnel located in the human resources departments of larger enterprises and the Chinese Federation of Labour (CFL). While depriving Taiwan workers of the right to organize autonomously, top-down labour organization did not serve as a tool for wage suppression either (Hsu, 2000).
Another aspect was the cultivation of patron-client relations with Taiwanese elites whose local influence pre-dated the KMT’s arrival. Given the local factions’ domination over local elections, the KMT hoped to sway the latter in its favour and thus enhance the party-state’s legitimacy. To keep factions loyal, the KMT provided political sponsorship and economic benefits such as local construction and transportation contracts, access to the funds of farmers’ associations, and fees for the discharge of public duties (Mattlin, 2018: 61–2). Although the patron-client relationships were essentially a form of corruption that engendered inequality, they were confined to local monopolies, and did not spill over to erode other emerging economic opportunities for the Taiwan people.
Although not strictly speaking a form of authoritarian corporatism, the KMT also used its monopolistic control of state resources to give dispensations in exchange for political loyalty. Examples include government jobs for retired military personnel and, more generally, stable jobs for civil servants (Cheng et al., 1998: 99). The KMT also intermittently adjusted the public sector’s salary to tackle challenges to its legitimacy, which gradually extended to the private sector, resulting in a tendency for real wage in Taiwan to grow faster than productivity since the 1970s (Cheng, 1987: 138–140; Hsu, 2000). 9
Checking business expansion
A third dimension and one that was unique to Taiwan was the effort to check and balance business interests. Instead of grooming Korean-style conglomerates, the KMT strove to achieve a division of labour between state-owned enterprises (SOEs) that dominated the upstream sectors, private BBGs that prevailed in the intermediate sectors, and the mass of SMEs that spearheaded and flourished in the export industries (Hamilton, 1998; Wu, 2004: 111).
Concern with regime security had left the KMT cautious of the excessive growth of private enterprises, especially Taiwanese operated ones. Upon retreating to Taiwan, the KMT captured former Japanese assets and turned them into SOEs, party-owned enterprises (POEs), and a few private enterprises as part of the compensation to landowners in return for land reform (Hsiao, 1993). The KMT further reinforced these enterprises by assigning them leadership roles in the island-state’s reconstruction and import substitution industrialisation. Prominent examples of such enterprises included the Chinese Petroleum Corporation (SOE); Broadcasting Corporation of China (POE); Formosa Cement (a public enterprise privatized during the land reform and owned primarily by the Gu family), and Formosa Plastics (founded by Wang Yung-ching, a Taiwanese, with USAID funding support).
While favouring these big businesses, the KMT also used the party’s investment arms and state-controlled finance to exert domination over them. Soon after the economic take-off of the 1960s, the KMT became wary of the scale of the private BBGs and, in the 1970s, reasserted the importance of SOEs, relying on them to spearhead the ‘Ten Major Construction Projects’, Taiwan’s version of industrial deepening (Hsiao, 1993). Whereas the Korean state turned the petroleum, shipbuilding, and steel manufacturing sectors over to selected chaebols that subsequently became unassailable industrial giants, the KMT called upon the SOEs to build a ‘triple alliance’ with private BBGs and transnational corporations in the same industries (Cheng, 1987: 148–520). 10 The ‘triple alliance’ did not materialize in the end due to the lack of interest or weakness of the BBGs. In other words, apart from actively blocking the private BBGs’ entry into the heavy and chemical sectors, the KMT’s resolve to provide no more than guarded support since the 1950s had either failed to groom strong enough enterprises or generated a schism with Taiwanese firms, the outcome of which was to hinder the BBGs’ expansion into such sectors.
Until the 1960s, Taiwanese SMEs received barely any state support. Unable to compete with the BBGs in the domestic market, many relied on the curb market for loans, business networks for market information, and opted to take on the risky export opportunities presented by trading firms from Japan and the US looking to benefit from the thriving post-WWII retail revolution (Chen, 1994; Hamilton and Kao, 2017; Hsiao, 1993: 148). The projected termination of USAID in 1965 led the KMT to draft the Nineteen-point Reform in 1960 and pass the Management Regulations Governing Export Processing Zone (EPZ) Administration in 1965. These measures lent state support to export-led industrialisation by providing tax reduction or exemption for exports and certain types of machinery imports and facilitated the formation of East Asia’s first EPZ at Kaohsiung, among others (Fitting, 1982). Apart from this, various para-statal agencies were also established between the mid-1960s and early 1970s to provide technological knowledge and market information (Hsieh, 2016).
None of these export promotion policies privileged sectors or enterprises that exceeded certain export volumes. Hence, while it would be presumptuous to suggest that the KMT deliberately prevented the BBGs from entering the export sector, this ‘hands off’ approach (Cheng, 1987: 97) placed both the SMEs and BBGs on a level playing field, which contrasted sharply with Korea’s ‘picking winners’ strategy that progressively benefited only the chaebols (Amsden, 1989). The SMEs were thus able to make use of their advantages of low costs and swift reaction to attain export success as original equipment manufacturer (OEM) (Hu and Schive, 1998: 324). In addition, production networks that emerged out of SME coordination generated opportunities for workers to become small entrepreneurs. This route to social mobility became an important basis of Taiwan’s egalitarian development (Chen, 1994; Shieh, 1992). The increase in industrial support to SMEs helped the party-state to gain support from an array of ‘performance-based dispersed interest groups’ (Tan, 2009: 205) at a time when the ROCT’s diplomatic setbacks 11 had weakened the KMT’s legitimacy (Haggard and Zheng, 2013: 455-6; Wu, 2004).
Transformation of the security factor and its inegalitarian effects (1): democratisation and pro-business orientation
Taiwan’s deteriorating income equality coincided with democratisation. This begs the question why the extension of political accountability has not led to social accountability. The following will explain how the legacy of authoritarian regime consolidation sowed the seeds of worsening inequality in the twenty-first century and how changes in regime security considerations have brought about reversals in Taiwan’s equalizing tendencies.
Authoritarian corporatism introduced in the 1950s left a legacy of weak social institutions that was unfavourable to redistribution from below. The subsumption of all labour unions under the KMT-orchestrated CFL stunted the formation of autonomous unions. The organizational dispersal and weakness of labour organizations was further reinforced by the proliferation of SMEs that were not amenable to unionization. Since 2017, membership of enterprise and industrial unions, organizations most relevant for the negotiation of labour affairs, stayed at 7.6%, which was much lower than the 15–16% among the OECD countries (Yang, 2022). Weakness of labour unions in Taiwan made it impossible for workers to exert pressure for wage increase or engage in negotiation along the societal corporatist path.
Being organizationally weak and unable to confront their employers directly, labour organizations in Taiwan developed a strategy of obtaining collective goods by manoeuvring between the competing political parties (Lee, 2009). Given the historical alignment between the DPP and the independent Taiwan Confederation of Trade Unions, the strategy seemed to have worked initially, as witnessed by the year 2000 reform that reduced working hours from 48 hours per week to 84 per 2 weeks (alternating between 40 and 44 hours per week). However, the strategy’s objectives were undermined by the DPP government’s introduction of flexible working hours in 2002 (Ho, 2020: 413), and its lack of initiative to remove constraints that prohibited the formation of unions in enterprises with less than 30 workers (Congiu, 2019). The lukewarm effort to improve the workers’ lot reflected more generally a pro-business turn among the major political parties. This in turn was caused by a decline in threats to regime security (i.e. social rebellion and other systematic opposition) and the latter’s untangling from state security.
By the mid-1980s, the unwinding of the Cold War tension, Taiwan’s economic confidence vis-à-vis Communist China, and failures of the KMT’s hardline tactics (e.g. court martial of the Formosa Incident dissidents and murder of US-based Taiwanese dissident journalist Chiang Nan) led the KMT to identify power retention with political liberalization, the upshots of which were the regime’s tolerance of the formation of the opposition DPP in 1986 followed by the lifting of the 38-year martial law in 1987. The KMT’s bright prospects of holding onto power spurred the regime towards further democratisation following the death of President Chiang Ching-Kuo in 1988 (Reidl et al., 2020). With democratisation, what remained at stake for Taiwan’s political forces was to be fought out in electoral competitions, both inter- and intra-party.
The moderation of regime insecurity reduced the exigency to check big business expansion, the tendency of which was given a boost by the KMT’s intensive post-Chiang succession struggle fought between the mainlander and indigenous Taiwanese factions. This set the scene for the ‘gaming’ of democracy by various private economic interests (cf. Albertus and Menaldo, 2014). Given the mainlander faction’s stronghold in the state sector, the Taiwanese faction had a powerful motive to introduce privatization and other measures of neo-liberalization. In turn, electoral competition augmented the local factions’ role of vote mobilization, enabling them to turn from KMT’s clients into rent-seekers that actively solicited favours from the KMT in the liberalizing economy (Kau, 1996: 301–4).
The DPP also supplanted its former empathy with labour and SMEs with a pro-big business orientation. However, electoral calculation increasingly directed the DPP towards an ethnic-oriented agenda that would enable it to appeal to Taiwanese capitalist for financial support while tapping into the material discontent of ordinary native Taiwanese (Yang, 2007: 526). In government from 2000, the first DPP regime (2000–08) also needed to align with Taiwan’s impending entry into the World Trade Organization (WTO) in 2001 and discard its anti-business reputation in order to govern effectively amidst an opposition majority in the legislature. The DPP, like its counterpart Kim Dae-Jung government in Korea, also supported economic liberalization which democratic forces connoted with the dismantlement of the remnants of the KMT authoritarian state.
In the crucial decades after Taiwan’s democratisation, both the KMT and DPP regimes have introduced salient economic liberalization measures (Hsiao and Lee, 2013). Just as the criteria of eligibility for the Statute for Upgrading Industries were relaxed progressively since the 1990s, President Ma Ying-jeou (2008–16) reduced the Estate and Gift Tax to 10% in 2009 (Chu, 2020: 100). In turn, apart from halving the Land Value Increment Tax in 2003, President Chen Shui-bian (2000–08) also introduced measures in 2000-01 that enabled one-third of Taiwan’s top 100 BBGs to become owners of financial institutions (He, 2020: 12–13; Tan, 2009: 206–7). Most of these measures were meant to appeal to voters in general, yet they disproportionately benefitted the big businesses and well-to-do individuals.
Transformation of the security factor and its inegalitarian effects (2): the uneven benefits of cross-strait economic integration
Despite economic opening, China has persisted as a source of state security threat to Taiwan. Indeed, that threat has become more formidable with China’s global rise. Despite their wariness about economic over-dependence on China, neither the KMT nor DPP was able to stop Taiwanese businesses from investing there. Democratisation, in boosting business influence, has exacerbated the tendency. The effect of massive Taiwanese investments in China was to widen socio-economic inequality in Taiwan.
Taiwan’s political relationship with China had waxed and waned as the island-state underwent regime transitions. Only in 1992 when the PRC and the ROCT ceased to be officially ‘at war’ were Taiwanese enterprises permitted to invest in China. Even then, President Lee Teng-hui (1988–2000) warned in 1994 that Taiwanese enterprises should adopt a ‘take caution, no haste’ attitude toward such matters. Similarly, President Chen Shui-bian’s DPP administration introduced the Go South policy that encouraged Taiwan enterprises to look towards Southeast Asia. The allure of China, especially following WTO entry in 2001, was simply too difficult to resist. The relationships between China and Taiwan improved considerably with the inauguration of President Ma Ying-jeou in 2008, following which the Cross-Strait Economic Cooperation Framework Agreement (ECFA) was signed. However, riding on the students’ protests against ECFA’s insufficient consultation and the threat of mainlander domination of the Taiwan economy (Zheng, 2013), the DPP went on to win the next presidential election and President Tsai Ing-wen (2016–24) adopted the New Southbound Policy. What is notable is that despite the ups and downs of the cross-strait relations, including the deterioration under President Chen Shui-bian, FDI to China continued to increase (Figure 4) as did overall trade with China (Table 2). Taiwan’s investment in mainland China 1991–2019. Trade and Dependence on China (including Hong Kong) 2000–20. Source: Asian Development Bank, Key Indicators for Asia and the Pacific 2021 (Manila: ADB, 2021).
Except for some ‘strategic’ sectors, no limits were imposed. This suggests that neither the KMT nor the DPP were able or willing to control the outflow of investment to China. With its massive supply of inexpensive workers, vast consumer market, increasingly sophisticated investment strategies, and cultural proximity, China became the biggest economic opportunity for Taiwanese business. This combination of investment attractiveness and capacity for catching up and overtaking makes China atypical among middle-income recipients of FDI. Take the case of the semiconductor giant TSMC as an example, although the US is the biggest market, China is the fastest growing one (Chang, 2021). Kwon (2022: 73) even estimated the value of Taiwan’s semiconductor trade with China (excluding Hong Kong) to be worth USD 24 billion compared to USD 8 billion for the Taiwan-US semiconductor trade. Until 2017 when US–China trade wars intensified and 2020 when COVID-19 disrupted the supply chains, many Taiwanese entrepreneurs, especially those already in China, firmly believed that the future of Taiwan’s economy depended in large part on integration with China’s regional hub, and few hesitated to share their views with political leaders (Schubert et al., 2017: 881).
The expansion of Taiwanese investments into China has, on balance, intensified socio-economic inequality in the island-state. For Taiwanese enterprises, China’s economic opportunities were open to all sizes. Some Taiwanese SMEs invested in China before it was officially allowed and took the chance to grow into mega-sized firms. Hon Hai Technology Group (the holding company of Foxconn) and Tingyi Holding Corp are exemplary cases (Chu, 2021). 12 However, once the official ban was lifted, large Taiwan enterprises tended to benefit the most. Apart from their scale advantage, they also enjoyed special access to policymakers in both territories.
As for workers in Taiwan, deindustrialisation owing to cross-strait integration had initially only hastened the out-transfer of low skill jobs that were no longer desired in this high-income economy. Like their counterparts in other NIEs, Taiwanese enterprises were originally attracted by China’s low wage rates and vast labour supply. Most of them were manufacturers operating on OEM contracts that, by the 1990s, had difficulties recruiting Taiwanese workers to fill the low skill assembling jobs. This explains why most Taiwanese enterprises did not return to Taiwan, but chose to go to Vietnam, India, and for strategic considerations, the US, when they were forced to move out of China after 2017 by factors mentioned previously (cf. Wang, 2021). 13 China also lured away many skilled jobs from Taiwan. Along with highly developed infrastructure, it practised its own brand of developmental activism. Beginning in the 2000s, Taiwanese enterprises in China began to hire local Chinese supervisors, technicians, R&D staff, and even sourced from local contractors (Cheng, 2015; Wang and Tseng, 2015). In short, the expanding economic opportunities were in China, inaccessible to most Taiwanese. Furthermore, even as manufacturing jobs in Taiwan stabilized at around 40% between 1978 and 2012 (Chang, 2016), import competition from China led to greater casualization, the resultant deterioration in socioeconomic equality belied the stability of the manufacturing employment rate (Wong, 2021: 126).
Taiwanese workers used to rely upon entrepreneurship and subcontracting for social mobility. This was because Taiwanese manufacturers had historically formed cooperative networks, and the subcontracting relationships tended to be more egalitarian than those of their Korean counterparts. Responsible for specific components or processes, individual enterprises in the networks worked closely and innovated together to take advantage of the rapidly changing global demands (Chen, 1994; Hamilton and Kao, 2017). Studies of SMEs in the 1990s found that, once the lead firm within the network moved to China, other firms in the network had to relocate or risk being dropped. Some SMEs staying on within Taiwan were able to re-create themselves and capture new export niches. Hamilton and Kao (2017: 225–40) found a metal parts firm in Taichung that switched from manufacturing metal eyelets for shoes to manufacturing stamped metal parts for automobiles. They also reported how a Taiwan bicycle manufacturer, in losing its assembling jobs to competitors in China, upgraded and exported high-end bicycles using its own brand name. 14 Yet others have thrived by developing innovative everyday products such as bubble tea (Lee and Jioe, 2017), umbrellas and socks sold under the ‘made in Taiwan’ label. 15 However, these remain rare success stories. Lin and Hu (2019) even argued that, for Taiwanese SMEs, scale expansion into China was unprofitable, whereas upgrading at home was unaffordable. In narrowing the option of achieving social mobility via entrepreneurship and subcontracting, the relocation of manufacturing to China exacerbates the decline of social equality in Taiwan.
Transformation of the security factor and its inegalitarian effects (3): developmentalism in response to China’s threat
This brings us to the third source of twenty-first century inequality, namely, the persistence of developmental activism. The rise of cross-strait integration in the 1980s–90s led some to observe a weakening of the state security threat that had motivated developmental activism during the Cold War (Nordhaug, 1998; Zhu, 2002). Yet the threat has arguably become more sophisticated. In addition to the persistence of sovereignty dispute with the PRC, heightened economic integration threatened to make Taiwanese enterprises over-dependent on China. With the maturation of mainland infrastructure and market, there was a danger of the migration of Taiwan’s leading sectors and the eventual erosion of Taiwan’s technological edge. Furthermore, Taiwanese entrepreneurs’ dependence on the mainland might induce them to press for closer economic integration to the detriment of external security (Wu, 2017).
Total and ICT and Electronics Exports (USD Billion) and Composition (Percent).
Source: DGBAS.
One may debate the strength and effectiveness of these developmental policies. Significantly, Chu (2020: 143) shows that the share of gross fixed capital formation in Taiwan’s GDP has declined persistently from 26.3% in 2000 to 20.5% in 2017 18 despite increase in savings within the island-state, which compares unfavourably with Korea where the comparable figures have stabilized at around 31%. Furthermore, even though Taiwan and Korea expanded into the biotechnology sector at about the same time, no Taiwanese biotechnology firms were found among the top 1000 global R&D investors in 2016–17, which contrasts with Korea where two biotechnology firms made the list (Chu, 2021: Table 1).
Leaving aside the question of the effectiveness of these developmental policies, it remains the case that they were more likely to benefit large enterprises, thus deepening the extent of inequality. Policies that support the development of the information and communication technology (ICT) and biotechnology sectors did not discriminate against SMEs, yet neither did they provide special support. ICT and especially biotechnology require huge investments that few SMEs could afford. Although the Industrial Technology Research Institute and the Small and Medium Enterprise Administration have tried to help different firms to work in coordination on individual projects, the truly small firms could not benefit. Of course, unlike Korea where Samsung Electronics contributed to the lion’s share of R&D, Taiwan tended to see a more dispersed pattern (Chu, 2021: Table 1). Even then, the net asset of Phison Electronics, the ‘smallest’ R&D investor from Taiwan to make it into the list of top 1000 global R&D investors in 2016–17, amounted to US$878 million, meaning it is not a SME by any account.
Apart from strategic industrial support policies that effectively privileged the big businesses, short-term electoral considerations also prevented resources from reaching the most-needly SMEs of the central counties prioritized by the DPP (Hsu, 2011).
The (de)alignment of regime and state insecurity: Implications for Equality.
Conclusion
The rarity of ‘growth with equity’ in non-Western states reminds us of the continuing importance of individual case studies for understanding the politics of inequality. While Taiwan looks like an advanced capitalist democracy with a high per capita GDP along with the consolidation of political democracy, it is characterized by the under-development of social welfare and social investment. This demonstrates an apparent lack of will to address the worsening of income and asset inequality on the part of successive democratic Taiwanese governments. Prevailing theories of advanced capitalism explain levels of inequality in terms of complementary economic institutions (Hall and Soskice, 2001), working class power (Korpi, 2006), societal corporatist initiative (Thelen, 2014), and the design of political institutions (Iversen and Soskice, 2019). These theories, however, pertain largely to advanced capitalist democracies with undisputed territorial boundaries and secure democratic political systems. Taiwan’s sovereignty, by contrast, has been contested since the late 1940s and it has achieved democratic consolidation relatively recently.
Given this distinctive background, the comparative politics literature that investigated how patterns of inequality were shaped by authoritarian regime types and by conditions of democratisation offer more suitable theoretical starting points for our analysis of Taiwan. The large-n analyses reviewed above disclosed features pertinent to Taiwan’s history of inequality such as the effect of the one-party regime and the subsequent ‘gaming’ of democracy by economic elites. Nevertheless, the important dimensions of regime and state security and their interactions remain unexamined. Accordingly, this paper delineates how the interaction of state and regime security considerations influenced power relations and policy choices that made possible the miracle of ‘growth with equity’ in the late 20th century but facilitated the worsening of income equality in the 21st century.
Expanding on the arguments made by Doner et al. (2005) and other scholars, we contend that the KMT party-state was threatened both by its communist counterpart on the mainland and by acute sub-ethnic tension in the island. The tight alignment of these two threats led the KMT to engage in state developmentalism while introducing a system of authoritarian corporatism that both checked the advance of the BBGs and made for a SME-centred industrial structure. These incidentally gave rise to relative egalitarianism in Taiwan’s first four decades of post-1945 development.
Democratic transition since the mid-1980s alleviated regime security threats and de-aligned them from state security ones. In response to competitive electoral pressures, both the post-authoritarian KMT and the opposition DPP sought to demonstrate their anti-authoritarian credentials by promoting economic liberalization, and their economic competence by maintaining business confidence. These conditions generated opportunities for the former clients, especially BBGs, to become rent-seekers. By contrast, the legacy of authoritarian corporatism, including the resultant SME-centred industrial structure, has brought about the palpable weakness of labour unions, dampening the possibility of redistribution from below even in the post-transition period. This stark weakness of labour organization brought about by the alignment of state and regime insecurity is a distinguishing feature of Taiwan’s political economy.
Finally, the de-alignment of regime and state security around the 1990s also enabled Taiwanese businessmen to take advantage of China’s economic opening. Being less advanced but far more powerful both economically and militarily, modernizing China has become a more sophisticated state security threat to Taiwan. The coincidence of economic dependence on and threat from China (which claims Taiwan as its province) once again sets Taiwan apart from other advanced capitalist democracies. Instead of promoting middle-class expansion in Taiwan (cf. Iversen and Soskice, 2019), closer economic integration with China has contracted opportunities for upward mobility. In seeking to preserve the island-state’s technological edge, the Taiwan state continues to engage in developmental activism, which disproportionately benefits the BBGs or sectors that are already highly competitive. In short, the deterioration of socioeconomic equality in Taiwan also results from the juxtaposition of the island-state’s strategic considerations and exigencies of democratic competition along with the opportunities and challenges of economic integration with China.
Footnotes
Declaration of conflicting interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work was supported by the Research Grants Council (Hong Kong), University Grants Committee (12622622).
