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Taiwan is a 300km, sub-tropical island covered mostly in rugged 4000m mountains with most of its population residing in its western Coastal Plain that faces China. When many people visit Taiwan, they notice that things are a little, well, messy. Things are relatively unorganized as opposed to most industrialized countries, yet this is the beauty of the country.
The mess is because they are decentralized. Zoning for commercial, industrial, and residential property is virtually nonexistent. The city is laid out more like the work of leaf-cutter ants than with the usual organizational structure of a completely state-centralized industrial economy. So they sacrifice a little organization for, well, freedom. The liberty Taiwan gives its market has led to its prosperity as a country.
But where did Taiwan's current economic system come from? And why is it so different from its mother country China in its economy?
Tensions Between China and Taiwan
China and Taiwan have had a rocky history. Recently, tensions have increased with President Xi Jinping conveying a desire to unify China with Taiwan, with military force not out of the picture. Additionally, on March 31, two Chinese Air Force jets crossed the median line of the Taiwan Strait, violating a long-held agreement between the two countries. Taiwan recently ran large-scale military drills in preparation for a potential invasion from China. Suffice it to say that the two countries are not on the best of terms.
Taiwan's Economic Success
So why doesn't Taiwan allow itself to be tied back into the Chinese mainland? What does it have to lose? There is much to lose on many fronts. For one, since the 1980s, Taiwan has embraced a relatively free-market and decentralized economy, which has led to a high standard of living and the thirteenth-freest economy in the world, according to the Heritage Foundation's 2018 Index of Economic Freedom. With a per capita GDP of $48,095, and tenth place in Fraser Institute's Human Freedom Index, the island of Taiwan has far surpassed China in economic freedom and prosperity. In fact, China's rank in Heritage Foundation's Index of Economic Freedom is 110th, 135th place in the Fraser Institutes Human Freedom Index, and a per capita GDP of only $15,399.
China's Economic and Political Troubles
Yes, Taiwan has a lot to lose by joining China. Taiwan came to be the free market it is today through a series of events stemming from World War II. In 1945, the nationalists retreated from the Chinese mainland and took control of modern-day Taiwan where they established the de facto Republic of China while the communists gained control over mainland China in 1949. China's historically communist and economically totalitarian rule has been oppressive to its people. Since the end of the Chinese civil war in 1949, Taiwan broke apart from the Chinese mainland, but China has treated Taiwan as a rogue province rather than a separate nation.
When communist dictator Mao Zedong initiated the Great Leap Forward to put the whole Chinese economy under control of the government, a market-based economy was not an option. China's declining gross production and tampering with the agricultural sector left millions starving. Mao continued his oppressive communist rule through the cultural revolution of 1966 to 1976. When Deng Xiaoping gained power in China, he helped stabilize the economy with land privatization and special economic zones. The latter protected free trade areas and specific geographical, and financial functions allowing innovation in many different industries. This also allowed greater foreign investment and a more stable economy.
However, China still remains far behind Taiwan and many other countries economically. Much talk about China "overtaking" the US in economic output is mostly exaggerated. China has just recently reached the world average when you look at GDP Per-Capita. On the other hand, Taiwan is far above both. While Taiwan ranks among the top-20 in economic freedom, China ranks 123 out of 153 countries. This is primarily due to Taiwan's very modest government spending with the public sector only consuming 21.5 percent of economic output. In fact, through various spending freezes, the expenditures of the Taiwanese government has hardly moved.
How Taiwan Became a Free Market Economy
While Taiwan's early history as an independent nation began with violence through the authoritarian rule of Chiang, its economic miracle story is a result of dedication to market reforms. In the 1950s, Taiwan's economy was characterized by a decline in land per capita, flexible sub-contracting networks of small enterprises leading to cheap manufactured exports, and import substitution policy. The latter is a trade policy that replaces foreign exports with domestic production so the country can reduce foreign dependency.
Often the historical focus on the success of Taiwan's economy has focused on the effects of government policy, but the statistical data that leads to these conclusions is weak and unclear. Unlike the Chinese mainland, Taiwan maintained a degree of property rights and liberty of private industry. As a result, the Taiwanese economy of the 1960s and 1970s boomed with the GDP growing about 10% (7% per capita) each year, which can be attributed to production factors.
When Chiang Kai-Shek died in 1975, Taiwan took on a more hands-off, free-market approach to economic policy. As a result, Taiwan's gross national product grew by 360 percent from 1965 to 1986. Savings rates grew, primary education became universal, and higher education increased dramatically.
As of now, Taiwan is one of the best examples in the world of a market economy. In the 2000s, Taiwan's government restrained its spending with several spending freezes that allowed more growth of the private sector than the government. Taiwan's market reforms include cutting corporate taxes in 2010 to the lowest corporate tax rates of developed countries while the corporate rate in the US is about 40%. As a result, more international companies are choosing to build their companies in Taiwan where they are also able to afford more for their companies, including factories, machines, and workers.
Taiwan and Hayek's Economics
When it comes to state development, Taiwan shows that maybe F.A. Hayek was right in saying that smaller political units are usually more likely to produce a stable and growing economy. Switzerland and the Netherlands are further examples of this.
Should countries consider restraining government spending and perhaps breaking up into smaller jurisdictions for more stable economies? Maybe bigger is not always better when it comes to economic and political stability. As Hayek says in the aftermath of World War II, "The increasing veneration for the state, the admiration of power, and of bigness for bigness' sake, the enthusiasm for 'organization' of everything…and that 'inability to leave anything to the simple power of organic growth'…are all scarcely marked in England than they were in Germany." (1) Hayek saw the freedom of the individual as the true guiding principle for a successful economic system. Conversely, he saw government intervention in markets as leading inevitably to a loss of freedom.
In The Road to Serfdom, F.A. Hayek "[warns] against the tyranny that inevitably results from government control of economic decision-making through central planning." Sound familiar? The communist system under Mao Zedong was all about central government control, and nothing about the free market or economic liberty. Although Mao is an extreme example that led to the deaths of millions, all state-centralized economies have been found wanting. We can see leanings towards completely centralized economic theories today in the likes of socialism and Modern Monetary Theory. Socialism, in Hayek's view, may be presented with equality as its goal, but uses "restraint and servitude" to achieve that end, while "democracy seeks equality in liberty." Hayek would also highly oppose MMT as "coercive" and completely reliant on central planning and government intervention rather than the organic growth of the free market. It would require the "will of a small minority be imposed upon the people" (2) as in all state-centralized economic philosophies.
If these ideas take hold, they will lead our country away from economic prosperity and to a state-centralized economic system that nearly always leads to authoritarianism and abuse of the common man's economic standing: "the individual would…become a mere means, to be used by authority in the service of such abstractions as the 'social welfare' or the 'good of the community." (3) Individualism and classical liberalism are the true roads to both political and economic freedom, and a free market economy is a protection against an oppressive or tyrannical government. Hayek reasons that many capitalistic economies have "progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past." (4)
Centralized planning is the mistake many countries make in trying to bring economic prosperity, but this inevitably leads to totalitarianism and is, at its core, undemocratic. Centralized systems may initially have humanitarian goals, but nearly always have to use brutal methods or effective propaganda to attain them. The question is, are those goals accomplished when they must consistently use non-humanitarian means to achieve their humanitarian goals? A free market is superior to central planning because "it is the only method by which our activities can be adjusted to each other without coercive or arbitrary intervention of authority." (5) In Hayek's view, the only way to improve our world is through improving the general level of wealth through free markets. He concludes, "The guiding principle that a policy of freedom for the individual is the only truly progressive policy remains as true today as it was in the nineteenth century." (6)
Mitchell's Golden Rule
Taiwan is one of a few countries that have achieved remarkable success through following Mitchell's Golden Rule: "The Private Sector should grow faster than the government." Put another way, "good fiscal policy is achieved when the burden of government spending shrinks compared to the size of the public sector." (7) Taiwan's spending freezes on the government have effectually helped keep government out of the free market so its economy can grow organically. There is no need for constant government spending and intervention to make a thriving economy. Taiwan and other countries like Denmark and Singapore that have achieved great success through a free-market economy are proof of Mitchell's Golden Rule. When government spending increases slower than private output, what you will normally see is a healthy and growing economy. As Dan Mitchell explains, "What matters, as Milton Friedman taught us, is the size of government. That's the measure of how much national income is being redistributed and reallocated by Washington. Spending often is wasteful and counterproductive whether it's financed by taxes or borrowing… If the problem is properly defined as being too much government, then the only logical answer is to restrain government spending." (8)
Mitchell goes on to say that the government should grow at a level that allows more resources to be allocated by markets than government officials. Balanced budgets, deficits, or debt control don't focus on the "underlying problem of excessive government." In his article The Golden Rule of Spending Restraint, he gives multiple examples of countries that have achieved economic success through restraining government spending and borrowing.
Any country that decides to implement this golden rule has an excellent potential to become a more healthy and growing economic entity. A free market and limited government are the historically-tested ways to a politically and economically prosperous country.
- Hayek, Friedrich August (1994). The Road to Serfdom. University of Chicago Press. ISBN 978-0-226-32061-8. 200.
- Hayek 1994:1183–198
- Hayek 1994:44
- Hayek 1994:16
- Hayek 1994:262
- Hayek 1994:262