A Political Explanation of Economic Growth: State Survival, Bureaucratic Politics, and Private Enterprises in the Making of Taiwan's Economy, 1950-1985.

Lin, Chao-Chai

A Political Explanation of Economic Growth: State Survival, Bureaucratic Politics, and Private Enterprises in the Making of Taiwan's Economy, 1950-1985. By Yongping Wu. Cambridge: Harvard University Asia Center. 410 pp. $49.50. Cloth.

Taiwan is a classic case of an export-oriented economy. Compared to other export-oriented economies where large enterprises have been major exporters, Taiwan's small and medium-sized enterprises (SMEs) were until the late 1980s overwhelmingly successful in the export markets, while state-owned enterprises (SOEs) and large enterprises (LEs) jointly monopolized the domestic market. How did this industrial structure come into being? What role did the state play in its formation and ongoing development? Yongping Wu's A Political Explanation of Economic Growth explores this puzzle and argues that the rise of SMEs as exporters in Taiwan was an unintended consequence of the state's policy, but that it was the state that played a role in the ongoing development of the industrial structure.

Wu begins by tracing how the relationship between the state and the private sector formed and developed. When the Kuomintang (KMT), the ruling party until 2000, moved from Mainland China to Taiwan, the overriding concern was to retake China, and 80 percent of budget was allocated to defense. Moreover, as an emigre party, the KMT did not have a local support base. To prevent local groups from becoming strong enough to threaten it, the KMT inhibited the development of big business groups and maintained a huge public sector. Only when needed did the state transfer economic rent to certain firms in exchange for political support, which resulted in a few privileged LEs (initially relying on emigre capital from the Mainland). As a result, at the initial stage of the KMT's rule, the state did not have a development strategy and the relationship between the state and the private sector as a whole was distant.

Next, Wu shows that the state's policy shifted from import substitution to export-oriented growth, mainly as a result of US pressure. The state offered export promotion measures, and LEs were expected to engage in exports. However, preferential export treatments were nondiscriminatory, did not favor LEs only, and other groups (including SMEs) could benefit from the favorable treatment. More than that, the particular rents accorded to the LEs as a result of the state's protectionist policy continued. Therefore, LEs were not very interested in engaging in exports. By contrast, the combination of the monopolized domestic market and low entry barriers to exports unexpectedly encouraged SMEs to export. Not until the late 1960s, when the SMEs' contribution to exports became significant, did the state formulate a policy for SMEs. Wu argues that, faced with a legitimacy crisis resulting in a diplomatic predicament and domestic opposition, the state thought that the SMEs' success could be cited as proof of the state's legitimacy and started to establish a special agency and to provide special funds to help SMEs. The state even deliberately promoted SMEs in the information industry, which became internationally competitive.

Wu rightly points out that the state-business relationship changed over time and goes on to explain how it further affected the distribution of resources and the formation of the industrial structure. The material presented in the book is principally derived from extensive interviews, documents, biographies, and scholarly works, especially the works of local scholars. The considerable amount of information provided is this book's strength. However, the arrangement of the book is a little loose. Detailed and repeated accounts of events and particular actors make the book difficult for readers to follow. Some conflicting statements may further confuse readers. For example, Wu argues that the development of the semiconductor industry was a state-led process (p. 264) but later emphasizes that there was neither state-led nor market-led development in the semiconductor industry (p. 266). People will wonder what really happened.

What makes this book hard to follow is its theoretical framework. Right from the beginning, Wu emphasizes that the developmental state model's account of Taiwan is incorrect. To a large extent, Wu revisits the state versus market debate and uses Taiwan to show what statism and the neoliberal view can and cannot explain. Although Wu wants to find a third way to investigate Taiwan's economic growth, his overemphasis on what the existing literature misses and cannot explain makes his own argument unclear and even ambiguous. Furthermore, just as Wu admits that both statism and the neoliberal view partially explain the case of Taiwan, the argument regarding the state versus the market appears to be unsolvable. Especially following the Asian financial crisis, the limitations, both empirical and theoretical, of the developmental state model have been recognized. Wu's comments on the developmental state and the neoclassical view, unfortunately, do not really help him contribute much to theory building. Wu does, however, propose seven hypotheses, but they are more like arguments than testable hypotheses and do not allow others to duplicate or scrutinize them with ease.

Moreover, since the author is wary of the explanatory power of institutionalism, the analysis focuses strongly on individual actors. He concludes that the government was successful in sectors where the strongmen were present but unsuccessful elsewhere. It is true that institutions need actors. If it had not been for Zhongrong Yin and K. T. Li, there might not have been any economic liberalization or science parks. Wu succeeds in pointing out the weaknesses of the institutional argument regarding Taiwan by adding the story of actors. Nevertheless, arguments that focus on personal factors tend to be descriptive. More important, when taken to an extreme, personal factors seem to obscure part of the whole picture, as actors are the primary factor determining the result and are regarded as being unlimited. Actors' choices of strategies, however, are not unlimited, because choices are derived from incentives and resources that are shaped by the institutional context. Wu did not try to theorize on the relationship between institutions on the one hand and his actors on the other. Such theorizing would have contributed a great deal to theory building.

Wu tends to offer a political explanation of Taiwan's economic growth. However, he does not offer much analysis of domestic politics. Arguing that noneconomic factors--that is, political factors--dominate economic motivation or that government policy is formulated for political exigency does not really help us understand why the state acted in that way. Moreover, why SMEs wanted to export is not very clear. Wu emphasizes that universal preferential export treatments allowed SMEs to engage in exports. It is true that export promotion was nondiscriminatory and that any firms could benefit from the policy. However, the fact that SMEs were not discriminated against does not mean that SMEs were encouraged. Wu mentions that, in addition to low entry barriers, lower capital requirements as compared with import substitution activities resulted in SMEs being willing to shift to exports. However, Wu also repeatedly emphasizes that SMEs had funding difficulties and did not have easy access to bank loans. What do lower capital requirements mean? What has been missing is an explanation of what specific measure, intentional or unintentional, helped lower the SMEs' cost of borrowing money from banks. Wu argues that SMEs developed "a capital-substituting industry system" to overcome the capital shortage. The characteristics of SMEs raise a question as to what enabled SMEs to move from a labor-intensive production system to produce more capital-intensive goods. Finally, the export contribution of SMEs peaked in 1982 and has been declining since 1986. In recent years, the export growth performance of SMEs has been inferior to that of large enterprises. What implications can we draw from the book for the decline in the SMEs' export contribution and the changed division of labor? Is it the result of the changed state-business relationship or something else, such as the changing globalized environment?

Putting the problem of the theoretical context aside, Wu's book provides detailed accounts and a historical overview of the economic development in Taiwan. Readers who need elaborate information will gain a lot from this book.

Chao-Chi Lin

Department of Political Science

Stanford University