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How capitalism developed in Taiwan and South Korea – any parallels with China today? Part One

The crisis that has shaken the world economy since 2008 has pushed bourgeois ideologists to desperately seek a solution. They are looking for alternative ways of running their system, seeking to square the circle and maintain capitalism without its inevitable contradictions. As Asia, and China in particular, is doing so well, there is a burgeoning literature about the Chinese model, just as in the past there was so much made of the “Japanese miracle”. In Part One of this article Luca Lombardi looks at the experience of Taiwan.

The conclusions the bourgeois “experts” draw from the economic development of China are completely off the mark and, above all, there is not much new in it. The fact is that bourgeois ideologists have begun to believe in their own propaganda, losing sight of past experience and history itself. In order to create illusions about the future, they have forgotten their own past!

For decades, they lectured the world about globalisation, forcing the governments of the “emerging” economies to sell off everything to big multinationals, mainly from western countries, to reduce state intervention in the economy, to crush trade unions and so on. Then, all of a sudden, the IMF and all the rest discovered how risky these very same policies are in the face of the present crisis. As they have forgotten their own history, now they find it difficult to understand what is going on.

Role of private capital and role of the state

Highspeed Train produced in Taiwan - Phono: Mailer_DiabloThat private capital promotes growth is historically a rare exception. Once the first European powers had started to develop as capitalist economies, no one else could develop in the same way. Even Germany, the most powerful capitalist nation in Europe, and countries like Italy and other smaller European capitalist economies were not developed by private capital alone. If Germany, that was already a powerful economy at the end of the 19th century, was not able to grow without permanent and strong help from the state, it was certainly impossible for Asian nations that had been colonies or semi-colonies of the imperialist countries.

Today’s big multinational companies cannot be challenged by the small emerging capitalists of the less developed economies. If these “newcomers” wish to compete with these giants, they can only hope to do so by using the combined resources of the state. Without such help these emerging economies would be simply squeezed out by the higher efficiency, the greater productivity of the multinationals and forced to produce what the imperialist giants deem necessary to maximise their own profits.

All the fundamental economic and political events of the 20th century flow from this fact, that Marxists define as the “law of uneven and combined development”. This law explains why a spontaneous development of economies outside the grip of the imperialist countries is impossible. It also explains why the indigenous bourgeoisies of the developing countries can only aspire to being the local errand boys of the more powerful imperialist powers. Trotsky drew the political conclusions from this situation in developing the theory of the Permanent Revolution[1].

Planning and state intervention – contrary to what many believe – play a role in capitalist development. Indeed they are by far the most used methods in underdeveloped economies because there is no alternative other than to remain completely subdued to imperialism. This is particularly true in Asia. Japan was the first country to endogenously develop capitalism on the continent. This happened in a very peculiar way, basically transforming former soldiers into businessmen[2].

The success of Japan was remarkable. Before the Second World War, it had already become a world power with a vast sphere of influence in Asia. Japanese imperialism was no less cruel than its western version, albeit with Japanese ideologists pretending that the Land of the Rising Sun was protecting Asia from western invasion, giving back to the continent its historical primacy. The reality was that Japan was amassing territories and slaves for its big companies.

The way Japan became a world power influenced the whole of capitalist development in Asia. Then came the 1949 Chinese revolution that also strongly changed the outlook of the ruling classes in Asia. Thanks to the victory of the Maoist Red Army, for the first time since western powers had occupied Asia, China was united and independent, and able to decide on its own destiny, whereas the other Asian countries were basically puppets of US imperialism or, in the best case scenarios, instruments of the Kremlin’s foreign policy. The political and economic examples of Japan and China show how state planning and intervention has been the accepted norm of capitalist development on the continent.

As we have dealt elsewhere with Japan (see above quoted article) here we will deal with the two most prominent cases after Japan: South Korea[3] and Taiwan. It is worth noting that both of these states came into being as the result of revolutions and civil wars between emerging deformed workers’ states and imperialism. Taiwan was occupied by the Kuomintang defeated on mainland China. South Korea started to develop after a bloody war that provoked the partition of the country. Their origin and position explain the desperate need for rapid economic growth to counter the influence of Stalinist neighbours. US imperialism and the national elite of these countries discovered in practice that the only way of achieve that goal was through economic planning, albeit on a capitalist basis.

The example of Taiwan

For most of the first decades of the 20th century, the Chinese economy was in a state of permanent chaos due to war, civil war and military occupation. The only viable modern economic initiatives were taken either by Japanese imperialism in what it considered its sphere of influence or by the nationalists (the Kuomintang). Since the 1930s the Kuomintang (KMT) had set up a Central Committee for Planning in charge of managing most of the big factories of the country, to help in the military efforts. When the Chinese Communist Party took power in 1949, it seized the around 3,000 companies that were already state owned and that formed the backbone of Chinese industry. The Kuomintang on its part, having been pushed onto a small island, subjugated the population and started from where it had finished on mainland China.

Taiwan, just after the war, was in ruins. The Japanese army had fled leaving behind chaos and hyper-inflation. Moreover, there was a threat of a Maoist invasion. The government needed social cohesion and a base of support among the population to resist. That is why the KMT was forced to carry out an agrarian reform. On the surface, the fact that a national bourgeois government actually carried out such a policy may seem to disprove the theory of the permanent revolution. In reality, as Marxists always explain, reforms are a by-product of revolution. The Chinese revolution terrified the ruling classes all over Asia and the agrarian reform in Taiwan was a direct consequence of this. It was either this or lose any base of support the regime may have had. It is also true that Japanese imperialism had already begun to implement an agrarian reform after 1895 in order to facilitate their own corporations in grabbing the best land on the island. That process was accelerated after the break out of the Korean War. It was US imperialism that forced its Asian allies to carry out these reforms in order to to appease the masses:

“With American help, the government implemented a land reform programme. This programme (1) sold public land to tenant farmers, (2) limited rent to 37.5% of the expected harvest and (3) severely restricted the size of individual landholdings forcing landlords to sell most of their land to the government in exchange for stocks and bonds valued at 2.5 times the land’s annual expected harvest. This land was then redistributed. The land reform increased equality among the farm population and strengthened government control of the countryside”[4]

In the 1950s, economic planning was firmly established as the core strategy for the development of the island. In 1953, the Taiwanese government adopted the first four-year plan. In the forty years from 1953 to 1993, the government adopted and carried out ten “medium term plans”. It is true that Taiwan succeeded because it enjoyed the benefits of an expanding world market in the post-war boom and US aid. Nevertheless, the results, thanks to economic planning, were astonishing.

In 2009 the Council for Economic Planning and Development published a document that summarises fifty years of economic growth strategy of the Republic of China (the official name of the Taiwan state)[5]. In this interesting document we find that between 1952 and 2007, the average annual growth of Taiwan was 7.8% (10.4% according to other sources), raising the per capita GDP from id="mce_marker"97 to almost id="mce_marker"7,000. In the 1950s, Taiwan was basically a third world country, but by the 1990s it had become one of the “Asian tigers” and enjoyed world leadership in many economic sectors.

This remarkable development was achieved by successive stages. First came the agrarian reform that motivated the peasants and increased productivity in the primary sector, freeing manpower for the industry. Then the state created export powerhouses in heavy industry. After the 1970s, the CEPD and the government directed Taiwanese industry towards high-tech sectors, where the country conquered a leadership position that it has kept until now.

As we said, as well as the role of the state we should not overlook aid from Washington:

“Taiwan benefited enormously from a huge infusion of economic and military aid from the United States, totalling more than four billion U.S. dollars. Economic aid alone accounted for 7.4% of GNP and 30.5% of government revenues; altogether, U.S. aid provided 85% of the money spent by the government carried out one of the most extensive land reform programmes undertaken in Asia.”[6]

The point here is, however, that this aid was used within the dynamic of state planning, with the Taiwanese government using foreign investment as well as internal resources to plan the national economy, with very good results.

In 1966 the government set-up “export-processing zones” to attract western multinationals that were seeking cheap labour to exploit. This policy was to be copied by Deng some years later. The Taiwanese leaders did not used communist rhetoric to justify this choice of policy; instead they resorted to a more traditional Confucian philosophy. The results were similar: factories mushroomed and both countries enjoyed a big trade surplus used to finance the development of infrastructure.

Starting from the 1970s, when a modern industrial economy was already in place, Taiwanese planning started to change, concentrating more on infrastructure than on actual industries:

“In 1973, the government launched the Ten Major Development Projects, a set of national infrastructure projects for railway electrification, freeway, International airport, steel plant, and nuclear power plant construction, and other such works to drive forward the transformational development of Taiwan’s economy. This was followed in 1978 by the Twelve Development Projects, which encompassed not only physical infrastructure for such purposes as developing heavy and chemical industries, but also basic social, welfare and cultural infrastructure. In the 1980s, as Taiwan’s national income rose rapidly, the government turned its focus to enhancing national living quality. This formed the main theme of the Fourteen Major Infrastructure Projects launched in 1984”[7]

This turn in policy is very common at this stage of economic growth. In capitalist economies the more the economy develops, the more the bourgeoisie becomes hostile towards the role of the state as it begins to feel that it is able to directly manage big companies to make profits for themselves. Today, after the crisis of 2008, this approach no longer has the force it had in the past as the state is more and more forced to intervene to sustain private capital.

In Taiwan, this change meant a gradual erosion of direct planning in favour of what the French call “planification indicative”, that is a general analysis of the direction of capitalist development and a mild indirect intervention of the state based on fiscal tools such as tax incentives. In Taiwan, the role of the state remained vital to economic growth during the transition to ordinary “light” planning. For instance, in 1991 the Six-Year National Development Plan was launched with the aim of expanding sectors such as electric power and aviation, but also to enhance environmental protection, medical care and public construction.

As the CEPD points out, “the private sector overtook the public sector in R&D spending for the first time in 1993”. This means that only after 40 years of economic planning under the guiding hand of the state did private capitalists invest more than the state. The big role of the state could also be seen in terms of total employment. Up to now, the state sector has accounted for a third of GDP and a quarter of total employment, more than in “Communist” China according to some statistics.

Economic planning in Taiwan started to change even more significantly over the last decade due to the growing integration with China, what the Taiwanese government calls “cross-strait reconciliation”. Today, there are hundreds of thousands, possibly millions, of Taiwanese working in mainland China and tens of thousands of Taiwanese firms doing business there. Many Taiwanese entrepreneurs complain that the situation on the ground is too dependent on local authority vagaries, in other words, paradoxically they complain of the lack of central planning. It is worth noting that even if the two Chinas are getting closer by the day in terms of economic development, the leaders of the CCP never forget their “national” interests and they squeeze “bad” Taiwanese capitalists, while they are very friendly to the “good” ones. What decides what a bad Taiwanese capitalist is, has nothing to do with how he treats his workers but only with his acquiescence or not to the demands of the CCP leaders[8].

China and Taiwan

Economic planning in a fully developed capitalist state normally finds many constraints and, above all, it finds a political barrier in the organic subordination of the state to the bourgeoisie. Basically, the capitalist class accepts state intervention and planning only when other alternatives have failed and inasmuch as these help to rebuild its economic base putting the economy back onto its feet. After the collapse of 1929, economic planning in one form or another was adopted by almost all capitalist states in the world, not only the fascist ones but also the “democracies”. This kind of intervention served to save industries that already existed but were facing collapse due to the crisis and also to expand infrastructure. The state seized firms to save and modernise them. When they started to be profitable again, the state handed them back to the capitalists. Sometimes, this handing over to the private capitalists took decades because of the historical weaknesses of the national bourgeoisie, such as in Italy where the banking sector was mainly state owned from the 1930s to the 1990s. Public, of course, never meant that these were used for public purposes; it only meant that Italian capitalists were unable to manage banks and make a profit.

Generally speaking, the subordination of the state to large companies holds true also for Asian capitalist states. The problem was that in Taiwan, right after the war, there were no big private companies to serve. The role of the state could not be limited to merely putting in order the situation as in the West; it had to be expanded considerably: there was no industry to seize; it had to be created from scratch by state planning. This gave to Taiwanese planning a sweeping role as many commentators have noted: “as the private sector lacked economic power, the government commanded great influence in the national economy”[9]. Of course, here we are not dealing with the kind of planning that we observed in deformed workers’ states such as the Soviet Union, but neither was it the typical “light touch” capitalist planning. To be more precise, it was not so at the beginning. Later, in the 1990s, it started to become similar to classical capitalist planning in the sense that the development plans only fixed general targets, not detailed instructions for every factory and every sector. This change is perfectly clear to the Taiwanese bourgeoisie:

“Many economists believe that the less a government interferes in the economy, the better… However, in general, developing nations are not like their advanced counterparts. Since a government exercises direct influence over a nation’s economic development, it can make or break the economy. The role of the ROC government has changed along with advances in the nation’s economic development, the general level of education, and the arrival of full democracy.

“From the 1950s to the 1960s, the government assumed the role of an economic babysitter. As such, the government usually approached problems related to industrial development from the protectionist angle, while solving such problems in an equally controlling fashion…

“By the 1980s, Taiwan’s economy had achieved considerable success, with private enterprises sprouting up in large numbers. The government’s grasp of the international market was nothing compared to that of the private sector. This fact rendered REI less attractive to investors. At the same time, the utilisation of the export processing and industrial zones set up by the government was also on the decline. Private enterprises wanted the government to loosen up regulations and provide a better investment environment. However, economic planning at that time only targeted government agencies and state-run enterprises, and not the private sector.

“Under such circumstances, the government had to adjust its role, from that of babysitter to mentor. As mentor, it could provide private enterprises with information on economic growth and technology as well as assistance in training personnel.”

In other words, in Taiwan as anywhere else, the state, even a strong semi-bonapartist state, is obliged to follow the interests of the big capitalists and planning is only a way of achieving profits in the long run, not an end in itself. To put it differently, the fact that in any given economy there is planning is not sufficient in and of itself to pinpoint the nature of that economy and the direction it is going in.

It is also a mistake, when assessing the social nature of an economy, to single out an aspect that can be easily used to confirm a thesis, especially for such a complex economy that has been in transition such as the Chinese one. Red flags in Tiananmen Square do not make China Communist; neither is economic planning automatically proof of its Stalinist nature. Some comparisons with Taiwan can help to highlight how China is very far from even that primitive and terribly deformed form of workers’ state that existed under Mao in the past.

Firstly, the actual control of the central state over the economy is in today’s China far less pervasive in most of the economic sectors than it was in Taiwan some decades ago. For instance financial regulation in the PRC now is by far less invasive. As recently as 1989, in Taiwan it was not possible to set up new banks, interest rates were fixed by the state and foreign banks were allowed to operate only with strong limitations. Nowadays in China rates are fixed by the market, new banks are created regularly and foreign banks have important stakes in the biggest Chinese banks. There remains the planned exchange rate, which is considered the only anomaly left in the Chinese financial sector, because the yuan is not fully convertible yet. In contrast, Taiwan totally controlled its exchange rate until 1978.

As for the strategic axis of development, the two countries are very similar, as China is aping the Asian Tigers that, in their turn, aped Japan. In post-Deng China, as was the case in Taiwan, FDI (Foreign Direct Investment) played a key role at the beginning in helping economic growth, which was then gradually substituted by internal accumulation from the state and private capitalists. The difference is that in Taiwan the process was more gradual. For instance, in 1952 industrial production by the State Owned Enterprises (SOEs) in Taiwan accounted for 57% of the total, 1980 21% and in 1990 10 to 15% (according to different measures). The same reduction in the PRC took ten-fifteen years. Both countries based their development strategy on exports. Ironically, Taiwan was accepted as a member of the WTO only after the PRC. Historically speaking, Taiwan for years adopted a protectionist policy, whereas China after Deng was one of the more enthusiastic supporters of free trade on a world scale.

Stalinist countries were known for providing a wide ranging, if not always efficient, welfare state to their citizens. That is why, in fact, in spite of the brutal nature of the old regimes, many Romanians look back to the Ceausescu era and Russians to the Brezhnev era as periods when many social services and reforms were available. Of course, this is not the case in China. The Taiwanese welfare state is no match for the Chinese and the gap is widening. However, differently to what happened in most capitalist countries after the 1980s, the welfare state was expanded in Taiwan:

“In March 1995, it introduced national health insurance, which now covers almost the entire population; and in January 1999, an unemployment insurance scheme was inaugurated. Labor rights received further protection from the enactment of the Employment Insurance Law in May 2002 and the Labor Pension Act in June 2004. In 2008, the government actively implemented a series of measures to promote employment, aiming to increase job opportunities and relieve unemployment.”

While Taiwanese governments were actually building up a welfare state, in Beijing they were busy destroying the conquests of the revolution. What is even more striking is that Taiwan is now a more egalitarian society than China. Traditionally, Taiwan has always been a fairly egalitarian society for a capitalist state as. This was due to the fact that it had to justify its existence vis à vis China. For instance, in 1964 the Gini coefficient[10] was 0.321 and in 1980 it reached a minimum of 0.277, much lower than the international average. At that time, the Chinese coefficient was even lower (about 10% less). After that, the Taiwanese coefficient increased once again but it always remained low for capitalist standards. On the contrary, the so called People’s Republic became one of the most unequal societies and every year has become more so. Now the Chinese Gini coefficient is around 10% higher than in Taiwan[11]. In fact, China is such a polarised society that even the bureaucracy is concerned[12].

To sum up, in China we have an economy where the state has a role comparable to that in Taiwan after the war (although proportionally less important) but is shrinking, where the welfare state is smaller and every year more so and inequality is higher and growing. Of course, the Chinese bureaucracy quotes Marx and Mao, while the Taiwanese governments prefer Confucius. Hot air, however, remains hot air even if tinged in red. When the leaders at the top of the CCP think about their future they have no central economic planning in mind. They are building a “mixed economy”, where they see their heirs as being wealthy thanks to the ownership and management of giant companies, together with the brutal repression of the working class by the state. The Taiwanese CEPD summarises as follows the history of economic growth on the island:

“Contrary to popular perception, Taiwan’s economic growth did not result from the ruling party’s commitment to a purely capitalist, free market economy. Instead, the government has exerted direct influence by operating enterprises and through economic planning. It also has channelled capital, contracts, and other resources to favored sectors and firms, and is able to make life difficult by denying licenses and funds to entrepreneurs who support the opposition.

“Government enterprises only accounted for 10% of industrial output in the late 1980s, down from 57% in 1952, but the government maintains monopoly control in such industries as ship building, steel, electric power, petroleum refining, and tobacco and alcoholic beverage production and distribution. The state also enters into joint ventures with local and foreign firms: the Taiwan Semiconductor Company, for example, is jointly owned by the government, Taiwanese private investors, and the Dutch electronics firm Philips. Until 1989, the government also held monopoly control over domestic banking, and greatly restricted the activities of foreign bank branches. Government-owned enterprises produce some 50% of state revenues, thereby offsetting extremely lax income tax collection.”

The top leaders of the CCP hope they will be able to tell a similar story to their children in the future while, in the meantime, they are carrying out similar policies in China.

[To be continued...]



[1] As there are plenty of articles on www.marxist.com – such as The Theory of The Permanent Revolution – that deepen this theory, we will not deal with it here. We also suggest http://www.trotsky.net/permanentrev.html for a detailed outline of Trotsky’s theory.

[2] For a more detailed account of the Japanese example, see The role played by the state in the development of capitalism in Japan by Fred Weston (http://www.marxist.com/role-played-by-state-in-capitalism-in-japan.htm ).

[3] Hereafter, Korea stands for South Korea if not stated otherwise.

[7] Quotations in this and the following paragraph are from the CEPD website if not stated otherwise.

[8] Murray Scot Tanner, Chinese Economic Coercion Against Taiwan A Tricky Weapon to Use, 2004, (http://www.rand.org/pubs/monographs/2007/RAND_MG507.pdf).

[10] The Gini coefficient is a measure of the inequality of a statistical distribution, in this case, income distribution. It goes from 0 to 1, where 1 is total inequality. In other words, the higher it is, the more unequal the society (see, for an introduction, http://en.wikipedia.org/wiki/Gini_coefficient).

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