Saturday, September 4, 2010

Does Taiwan really have More Economic Freedom than the Mainland?

Without a doubt, going to Taiwan for me has been a real eye-opener.
But as I stated in previous posts, the real physical differences
between the two are too insignificant to their discrepancies in
mentalities, worldviews, and attitudes. Such a mental difference can
also be reflected in economic terms, even though the two has strong
and obvious gaps in wealth and overall sense of development. Yet,
even though we all know that Taiwan leads in terms of living
standards, productivity, or per capita income, there should still be a
sense of doubt whether the situation is so because of more successful
market model undertaken in Taiwan as the West claims.

The ruling Kuomintang has always stressed the importance of capitalist
(or rather, anti-communist) ideology in governance. Yet, its
political strength has always been sapped by the economic dominance of
few families, who held the exclusive rights to the key industries.
The economic oligarchy was not really broken until much later and the
influence of such an oligarchic system can still be seen on the
economy, with few major conglomerates dominating the landscape while
small shops often finds not much room to grow.

Of course, that is not to say that the small enterprises are not doing
well. Largely due to high income, healthy dependence on service
sector, as well as highly mechanized, productive manufacturing and
agricultural sectors, the Taiwanese economy allows for a generally
equitable distribution of wealth. And of course, the small companies
are the guarantees that wealth can be distributed in such equal ways
to the general population. But, the point is that a more
market-oriented, equitable economy does not necessarily mean that the
people that are part of this economy think in an "economically free"
way, and with that, there is no way to prove that new business
entrants in Taiwan will enjoy economic freedom.

Let's first define this concept of "economic freedom." According to
the Heritage Foundation, economic freedom is defined as the autonomy
of the individual from the state and other organizations. In other
words, the individual is completely in control of his or her labor and
properties without the pressure of higher authorities to use them in
their will. Even as the world map of the Heritage Foundation displays
the wealthiest countries in the world as those with the most economic
freedoms, the perceived correlation is highly deceptive in that the
three of the fastest growing countries, China, India, and Russia, are
placed in the "mostly unfree" category.

As the historical and modern-day economic situations of Taiwan and
mainland China are compared in the following essay, the commonly
perceived correlation between wealth and freedom, growth and
individualism will be destroyed. Instead, historical economic
situations, international political relations as well as the domestic
political policies made by the different countries to act and react to
international developments rather than economic freedom are the
fundamental reasons for rapid accumulation of wealth and raise in
standard of living in some parts of the world as opposed to the
others.

From a historical perspective, it is inaccurate to simply compare the
growth of the Taiwanese and the mainland Chinese economies relatively.
The two economies started from completely different point even a
hundred years ago, much due to political reasons. Even before the
fall of the Qing Dynasty in the early part of the 20th century, Taiwan
faced much more threat of invasions by the Japanese and interventions
by major powers such as the Dutch and the British comparatively to the
mainland. In response, the Qing government expended much more effort
and funds to fit the island with modern equipments to fend off
possibility of foreign occupation. As a result, Taiwan was installed
with a modern infrastructure system, consisting of a road, telegraph,
and railroad networks. The same luxury did not exist on the mainland
until much later with the establishment of foreign spheres of
influence.

The existence of the basic infrastructure enabled Taiwan to develop
rapidly under Japanese colonial rule, as the Japanese capital flowed
in to make Taiwan into a major supplier of raw materials and
agricultural products for the continued Japanese war efforts. The
same cannot be said of the Chinese mainland where continuous warfare
among warlords and foreign invaders destroyed the little
infrastructure already present and created an environment absolutely
impossible for investment and development.

Such a gap in the developmental environment for the two sides became
only bigger with the end of Chinese Civil War. The Kuomintang under
Chiang Kai-shek, facing defeat on the mainland, fled to Taiwan with
the entire gold and foreign currency reserve of China, leaving China
completely deprived of any capital to rebuild after the devastating
war. But even worse, the majority of intellectuals of China, such as
scientists, professors, and engineers, all left the mainland with
Chiang, leaving China with neither the human capital to develop its
economy independently nor the capability to replenish the loss of
human capital to Taiwan with education due to lack of qualified
teachers.

The gap became even bigger with the outbreak of the Korean War. As
China fought the United States to a stalemate, the Americans were
determined to punish the Chinese by economic means. The US launched
an economic isolation policy against that greatly hampered China's
potential to develop while at the same time, provided millions of
dollars of investment and economic and technological aid to Taiwan in
order to develop it into an anti-communist bulwark against mainland
China.

While the Taiwanese standard of living surged with the unwavering
American support, the mainland Chinese lost the little support it
obtained from the Soviet Union amid Khrushchev's de-Stalinization and
the Sino-Soviet split. As Soviet technological experts left China,
the Soviets even forced the Chinese to give part of its agricultural
and industrial output to the Soviet Union as compensation for previous
economic support. Commercial relationship between China and the
Soviet Union is completely severed until the Gorbachev era in the
Soviet Union and the leadership of Deng Xiaoping in China.

A survey of history shows the dominance of international political
relations in the development of national economies and the accompanied
rise in standard of living. Such is especially the case in the last
century, when major powers before World War II, such as Japan and
Britain, as well as superpowers during the Cold War, USA and USSR, had
dramatic economic influences on the other countries in the world,
including Taiwan and mainland China. However, during much of the Cold
War, both Taiwan and mainland China had equally little economic
freedom because both faced tight economic control from an
authoritarian regime (Chiang in Taiwan and Mao in China). Thus,
advantage in international relations, especially a favorable
relationship with the United States, rather than greater economic
freedom, allowed Taiwan to quickly surpass mainland China in the
standard of living.

The slow development of mainland China in the Mao era and the
subsequent "economic miracle" after the economic reforms under Deng
Xiaoping both displays the influence of domestic politics and economic
policy on the standard of living for the general populace. While
Taiwan rapidly industrialized with solid American economic aid, the
Chinese mainland suffered from the American isolation policy and the
disappearance of Soviet support in Sino-Soviet split. To bring the
country's industrialization process forward, Mao Zedong launched "the
Great Leap Forward," an economic policy that encouraged farmers to
abandon agricultural production in favor of small backyard industries,
such as small-scale blast furnaces to enhance the country's steel
production.

However, the policy failed miserably when it was proven that the
farmers had neither the technical skill nor the qualified raw
materials to produce industrial goods that have qualities high enough
to be used. At the same time, agricultural production languished as
more and more farmers switched to ineffective small-scale industries,
leading to massive starvation and malnutrition across the country.
The failure of "the Great Leap Forward" effectively nullified the
gains in the standard of living made in the first few years of the
communist rule in mainland China.

Even more damaging to the Chinese economy was the coming of "the
Cultural Revolution," the last desperate attempt of Mao to keep his
legacy alive by active destruction of traditional "backward" and
modern "capitalist" values as well as the mass murder of intellectuals
in every field possible. As time progressed, the attack on the
intellectuals by the youth became more and more violently
uncontrollable, and many different factions of youth groups began
in-fighting, often using real guns on the streets, leaving many dead
and buildings destroyed.

The effect of a decade of "the Cultural Revolution" was in many ways
similar to the fleeing of the mainland by Chiang and the intellectuals
at the end of Chinese Civil War. Violent instability led to
destruction of an environment suitable for economic production and
investment, and death of intellectuals led to the stagnation of
development due to the lack of human capital and the ability to
generate its loss in a short time. The contrast of the peace on
Taiwan with the turmoil on the Chinese mainland shows the
inevitability of the increasing difference in standard of living
between the two regions even though people in both countries still
equally lacked economic freedom under authoritarian regimes.

The winds of change began to blow with the reforms on the mainland
under Deng Xiaoping and the emergence of the pro-independence movement
on Taiwan under Lee Teng-hui and Chen Shui-bian. Deng actively
embraced free-market economy by encouraging foreign direct investments
in China and establishment of private enterprises. With free-trade
zones springing up all over China's coastal regions and inefficient
state-owned companies being privatized, within few decades, the income
of the average Chinese more than quadrupled and hundreds of millions
were brought out of poverty. Simultaneously, the relations across the
Taiwan Straits have chilled since Lee Teng-hui first addressed China
and Taiwan as "two countries" in 1995, a serious breach of the
"one-China policy" agreed on by USA and mainland China since
establishment of diplomatic relations under Nixon Administration.

Even as more and more Taiwanese businessmen headed to mainland China,
the Taiwanese government refused to launch direct communications by
air, ship, and mail. The restricted cross-Strait communication only
through Hong Kong, Macau, or a third country prevented Taiwan to
benefit from the increasing demand on the mainland due to rapid
growth. As the Taiwanese economy stagnates and the mainland overtakes
Taiwan on many economic factors, the island has become increasingly
marginalized. The wealth gap between the two is shrinking at such a
phenomenal pace that many Taiwanese are beginning to doubt the
island's future in the shadow of an economically dominant China.

The economic balance of Taiwan and mainland China in the last half of
the twentieth century was largely swayed by the governmental policies
used by both sides rather than the economic freedom. While the
Chinese economic freedom was held constant, the irrational and
fanatical economic and policies under the Mao era brought about
disastrous decrease in the people's standard of living while the
reforms of Deng led China to become one of the major industrial and
commercial powers of the world. The sudden increase of the economic
freedom in Taiwan with the end of Kuomintang authoritarianism in the
early 1990s did not bring proportionate rise in standard of living due
to chilling relations with the mainland on Taiwan independence issues.
Domestic policies have a much greater effect on the standard of
living in the country compared to economic freedom.

Ultimately, economic freedom is a measure of economic individualism at
the expense of collective will; how much the individual benefits from
the newly gained wealth compared to the state, which frequently
represents those with no ability to contribute to and are thus left
behind by economic development. There is absolutely no reason for the
individual to invest in economic projects that brings them more costs
than benefits. Such is the very reason why only the state would
finance costly infrastructure such as road network and monetary
institutions as well as security measures such as the military and the
police force. The reforms of Deng Xiaoping in mainland China started
with the massive building of infrastructure for modern industries, not
just expansion of railroads and increased productions of electricity
but also establishment of financial institution to stabilize the
currency and free-trade and high-tech zones in major cities to attract
the investments by large foreign corporations and private investments
of Chinese citizens.

For a country to be able to develop the economy rapidly, its
government must have the ability to mass large amount of wealth to
invest in infrastructure and security measures, thereby attracting
private business investments that will push the economy forward and
increase the people's standard of living. In a country with complete
economic freedom, it is utterly impossible for the government to
concentrate its wealth of great magnitude in a short period. In other
words, economic freedom must come at the expense of government-led
development and therefore is not a logical choice for any country just
beginning its transition into a modern economy. Such is definitely
the case for both Taiwan and mainland China in the period immediately
after the Chinese Civil War and also for mainland China after the
destructive "Cultural Revolution."

The individual domestic private investor had very little to invest by
themselves, and none could have choose to invest domestically with
what he or she had due to the high cost of production due to bad
infrastructure and the small market due to the low income level of the
average citizen. In such a case, the government had to concentrate
the wealth of the millions of individuals and take immediate financial
losses by investing in large projects to attract future investments.
Only the government can afford to take such costly risks without much
immediate benefits.

All in all, it can be said the widespread existence of economic
individualism in developing countries at the expense of government-led
collectivism can create a vicious cycle that causes stagnation or even
decrease in the standard of living. Without economic collectivism
that allows the government to concentrate private funds, there can be
no government investments in infrastructure and security. Without the
infrastructure in place, businesses would not come due to the high
cost of transportation and communication, and without the security,
there could not be investments due to the investors' fear of losing
them amid possible instabilities. Without business investments, there
can be no increase in the standard of living. Thus, individualism
characterized by widespread existence of economic freedom can only
hurt an economy in transition to modern industries and therefore would
not contribute to the rise in the people's standard of living.

Throughout the last century, Taiwan held its overall lead over
mainland China in the standard of living, much due to political
reasons. As economically unfree China faced international isolation
for more than three decades after creation of the People's Republic in
1949, an equally economically unfree Taiwan flourished with the
"anti-communist" economic aid from the USA and its Western allies.
With the democratization and the rise in economic freedom in Taiwan,
its growth has slowed down compared to still economically unfree
mainland China, where an "economic miracle" occurred with
government-led economic reforms. The economic history of
cross-Strait, Sino-American, and to lesser extent, Sino-Soviet
relations shows the dominant influence of international relations and
domestic policy on the standard of living compared to economic
freedom.

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