Increasingly dynamic and diverse, Taiwan, also known as Taipei, China, is the world’s 24^th largest economy, the 16^th largest exporter, and the 16^th largest importer in merchandise trade. Taiwan is an archipelago of 86 islands, with the largest, Taiwan Island, comprising almost 98% of the country’s land mass of 13,900 square miles. One of Asia’s “Four Tigers,” along with South Korea, Singapore and Hong Kong, Taiwan has transformed itself through decades of hard work to a well-industrialized and mature economy. Today, it is an important economic and trading center with one of the world’s busiest ports in Kaohsiung. From being an underdeveloped, agriculture-based island, Taiwan has grown to be a world-class leader in technology. A recipient of U.S. aid in the 1950s and 1960s, Taiwan is now a major foreign investor, an aid donor, and holds the world’s fifth-largest stock of foreign exchange reserves. Growth has been painstaking. Taiwan was first transformed from a Dutch East India Company colony to the home for a Ming-loyalist regime. It endured centuries as a province under the Qing Empire, followed by a Japanese occupation, and eventually more than 50 years under the Kuomintang (KMT). Yet, despite being only a third the size of Virginia or a little smaller than Switzerland, Taiwan has overcome its physical limitations and challenges to remain one of the economic centers in Asia.

History

An island of refuge for the fleeing

The islands of Taiwan were first occupied by the Japanese as far back as the 12th century. Later on, in 1590, Portugal became the first European nation to set foot on the island, which they poetically named Ilha Formosa, meaning beautiful island in Portuguese. A tug of war then followed with the Dutch and the Spanish all vying for possession of Taiwan. Eventually, the Dutch held sway, claiming occupancy of the P’enghu Islands in 1622. The Dutch occupation, however, was short-lived. Once the ruling Ming dynasty in China was overthrown by the Qing dynasty, change was inevitable on the tiny island.

Eventually, Cheng Cheng-kung, known as Koxinga in the West, and one of the most famous resistance fighters against Manchu rule, immigrated to Taiwan. Large-scale immigration of Chinese began in the 17^th century, especially from the coastal provinces of Fujian and Kwangtung, as they fled to escape the oppression of the Manchu. Taiwan grew during this phase as an anti-Manchu base. Cheng’s death hastened the end of Manchu resistance, and in 1683, Taiwan finally surrendered to Qing rule. Peace, however, was to be elusive for the long-suffering island as it was ceded to Japan, under the Treaty of Shimonoseki, following the end of the Sino-Japanese War. Infrastructure was developed under the Japanese but the Taiwanese seethed under the yoke of occupation, and several revolts rocked the island, all of which were brutally put down by Japan. In 1945, with the surrender of Japan in World War II, both Taiwan and the P’enghu Islands were declared a province of China. At this time, Taiwan was governed from Nanjing by the KMT led by Chiang Kai-shek. However, enmeshed and embroiled in a bitter civil war with Mao Zedong’s Communist Party, the Kuomintang fled to Taiwan upon its defeat. Establishing the Republic of China, Chiang Kai-shek ruled as the first President of Taiwan. Despite attempts by China to invade Taiwan, the island nation gained the support of the U.S., helping it to resist Chinese incursions. The U.S. continued to support Taiwan, promising to defend the country in case of outside attack. The Nationalist Army was trained and equipped by the U.S., and along with substantial aid from its benefactor, Taiwan enjoyed spectacular economic growth, building on the infrastructure laid by the Japanese. By the 1960s, after the U.S. had injected around $4 billion in Taiwan, the country progressed to such an extent that such aid was rendered superfluous. However, Chiang Kai-shek, who was elected President for the fifth time in 1972, witnessed increasing criticism against what was termed dictatorial rule. At this time, China was also increasing pressure on the international community to acknowledge Taiwan as its province. The result was that by 1981 very few nations maintained diplomatic relations with Taiwan including close ally U.S., which formalized diplomatic relations with China following President Reagan’s historic maiden visit to the Communist country in 1972. Disillusioned with the lack of support from the international community, Chiang Kai-shek, who died in 1975, was succeeded by his eldest son, Chiang Ching-kuo. Martial law, which had been imposed since 1949, was lifted in 1987. The first Taiwanese president, Lee Teng-hui, headed a government that in 1988 moved towards empowering more Taiwanese in the government. Since then, changes have been swift. In 1991, Taiwan proposed a long-term, three-phase reunification plan with China, along with plans to restructure the government. More political miracles occurred when Lee Teng-hui won the first popular election for president in 1996. Relations with China reached a new low when pro-independence Democratic Progressive Party (DPP) candidate Chen Shui-bian was elected president.

Today, the head of state remains the president, elected by popular vote for a four-year term. Having made the transition from a one-party regime to a democracy, Taiwan is now headed by President Ma Ying-jeou from the Nationalist (Kuomintang) Party, who defeated DPP’s candidate Frank Hsieh in March 2008. Hsieh’s defeat marked the end of eight years of DPP rule, and the return to power for the Nationalist Party. Ma is also known to be pro-China, and his election was greeted with delight by Beijing, especially after former president Chen Shui-bian proposed the controversial Four Wants and One Without policy. In this policy, Chen said that Taiwan wants independence and a new constitution, and wants the rectification of its name, as well as development. He insists that politicians in Taiwan would be divided only on the question of unification or independence.

Chiang Kai-shek, who fled to Taiwan after the Kuomintang suffered heavy losses in the civil war with the Communists, became the Republic of China’s first president in March 1948. He ruled Taiwan with an iron hand, imposing martial law. Yet, he was responsible for implementing land reforms, and launching five successive four-year economic development plans that laid the foundation for the meteoric rise of Taiwan.

Taipei is the heart of modern Taiwan – a bustling, traffic-clogged city that is the center for the KMT-dominated national government, and the seat of its executive offices, cabinet ministries, and the supreme courts. The city is also the stronghold of the ethnic mainlander, or wai-sheng jen, who continues to exercise fair dominance in government.

Culture

Japanese, Chinese and Western fusion

Taiwanese culture is a fusion of indigenous customs with Chinese, Japanese and Western traditions. The birthday of Ma-tsu is a celebration with great fervor all over Taiwan, and is a major event in the island’s religious and cultural calendar. Buddhism, Taoism and Chinese folk religions have all held their pride of place in Taiwanese society over the years. Other important festivals include the Hungry Ghosts Festival, the Lantern Festival, the Dragon Boat Festival and Lovers Day, all of which are popular in China too. During these festivals, hakka people make a variety of traditional ban rice patties. Since Taiwan is an archipelago of more than 88 islands, several tribes on some isolated islands managed to retain their aboriginal status. Indigenous tribes include the Amis, Atayal, Bunun, Rukai, Puyuma, Sao, Tao, and the Zou. Remnants of Taiwan’s colonial culture can be found throughout the country. There are around 12 indigenous tribes recognized by the government, which have a combined population of 464,000. Each group has carried through centuries their unique customs – for example in the Atayal tribe, face tattooing and cloth weaving are dominant.

Mandarin Chinese is the official language, while Min Nan Chinese or Taiwanese as it is more popularly known, is widely spoken on the island. The combination of popular songs (ge zih) with the performing style of che gu or cart drum opera led to the birth of the traditional Taiwanese opera. Taiwanese cuisine can be divided into Holo (Minnanese), Hakka and aboriginal dishes. “Pearl Milk Tea,” which is made with flour balls and aromatic milk was invented in Taiwan, and has spread in popularity throughout the world. Also famous is Taiwanese glove puppetry, which has its roots in Taiwan’s folk society. In fact, long before television made its appearance in Taiwan, glove puppetry was the main form of entertainment. Accompanied by music, the puppets wear highly colorful costumes that enable the audience to decipher their “social class.”

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Economy

Industrialization and foreign trade spur growth

Taiwan’s economic growth has been nothing short of spectacular. Hailed as one of the Asian Miracles of the modern era, Taiwan in the 1960s and 1970s, was heavily dependent on foreign technology and aid, especially in the electronics and information technology industry. The country’s gross domestic product (GDP) grew in real terms by 44 times from $1.7 billion in 1952 to $282 billion in 2001. Even per capita income increased 16 times from $196 in 1952 to $12,678 in 2001. This growth was sustained even during the great Asian financial crisis, which severely affected countries such as South Korea and Thailand, but left Taiwan relatively unscathed. Taiwan’s GDP declined by only 2% in 1998. Much of this growth can be traced to strong industrialization. Manufacturing production, which accounted for 84% of industrial production in 2001, expanded by 130% (in real terms) over the period 1986-2002. (Source: ADB). Today, Taiwan is a modern, developed economy with heavy emphasis on services, manufacturing and high technology.

Since the 1960s, Taiwan’s government was known for adopting export-friendly policies, while instituting reforms that led to greater agricultural productivity. Foreign trade spurred Taiwan’s growth for the next 50 years. Gradually, as manufacturing and industry developed, export composition changed from mainly agricultural commodities to industrial goods. Of special importance was the electronics sector, which became the single largest recipient of U.S. investment. The share of the industry sector increased from 26.9% of the GDP in 1960 to 45.7% in 1980. Today, manufacturing accounts for 27.5% (2007 estimates from CIA World Factbook) of the GDP. Major manufactured products include petrochemicals, electrical and electronic machinery, paper products, and basic metals. Similarly, the services sector increased its share in the GDP from 44.6% in 1960 to 54.6% in 1990 and 71.1% in 2007, (2007 estimates from CIA World Factbook) buoyed by strong growth in the financial, insurance, and retail subsectors. Today, the most important services are finance, insurance, and business services, followed by wholesale and retail trade. Tourism remains an important economy driver, as almost 3.7 million visitors toured Taiwan in 2007. Meanwhile, agriculture has been declining. In 2007, agriculture contributed to just 1.4% of the GDP, (2007 estimates from CIA World Factbook) as Taiwan’s economy began to increasingly resemble that of developed countries. Main crops include rice, sugarcane, tropical fruits and vegetables.

China (including Hong Kong) and the Association of Southeast Asian Nations (ASEAN) have become increasingly important trade partners for Taiwan since 2000, though trade with these two regions has grown more slowly in the last three years. Japan has remained Taiwan's largest supplier of imports, despite a narrowing share. At the same time, exports to the U.S., Europe, and Japan have slowed as those of China and ASEAN have increased.

Economy dependent on imported energy

Taiwan does not have sufficient domestic energy resources and must rely on imports to meet a large portion of its energy needs. Of Taiwan’s total energy consumption in 2005, around 45% of was derived from oil, followed by coal with 36%, and natural gas representing 9%. Because of its low domestic oil reserves, (Estimated proved oil reserves of 2.38 million barrels as of January 2008), Taiwan must meet all its oil demand through exports. Taiwan is also the sixth-largest importer of liquefied natural gas (LNG) in the world and the third largest in Asia. Most of the electricity in Taiwan is generated from conventional thermal sources, which accounts for nearly 78% of total electricity generated. Nuclear sources remain in a nascent stage although they do account for 18.1% or 38 Bkwh of electricity generated. The country currently operates three nuclear power plants, but construction of the fourth, the Kungliao project, has been mired in controversy. At first, the then President Chen cancelled the construction of the nuclear reactor, aiming for a vision of a “nuclear-free homeland.” The new KMT government subsequently revived the project, and the first unit of the Kungliao plant is expected to begin commercial operations in 2009, with full operations set to be completed by 2012.

Taiwan’s economy is 71% free, according to the 2008 Index of Economic Freedom, making it the world’s 25th freest economy. The country scores significantly higher in the Asia Pacific region, ranking sixth out of 30 countries. The Index notes that the government has continued to liberalize the financial sector by allowing foreign investment in banks, and gradually loosening capital controls. At the same time though, Taiwan is officially isolated in the diplomatic community. In Taiwan, they call China the An-Shan, meaning mountain. And China is always looming large in Taiwan’s landscape. Beijing insists that countries cannot have formal relations with both China and Taiwan, and asks them to choose. Most nations inevitably choose China. As a result, Taiwan has had formal diplomatic relations with only two dozen countries, mainly in the Pacific, South America and Africa. The U.S., however, recognizes Taiwan as an independent state, choosing instead state-to-state relations. The country is also currently not a member of key organizations such as the International Labor Organization (ILO), the International Monetary Fund (IMF), the World Bank (expelled in 1980), and crucially is not included in the United Nations (UN). It is however, a member of the Asia-Pacific Economic Cooperation (APEC), the Asian Development Bank (ADB), and World Trade Organization (WTO) under the name Separate Customs Territory of Taiwan, P’enghu, Kinmen, and Matsu (Chinese Taipei).

Challenges for development and economic prospects

Taiwan’s accession to the WTO enabled the tiny nation to seek better international opportunities as many free-trade agreements were signed. Despite this progress, crucially, the country’s complex relationship with China needs to be ironed out.

Although the global financial crisis that is plaguing the world began in 2007, Taiwan saw growth accelerate that year. Domestic demand picked up, and exports continued to strengthen as GDP rose to 5.7% in 2007, one percentage point above the average for 2003-2006. Exports to the U.S., showed signs of slowing, falling by 0.9% in 2007, but was offset by strong demand in China, and other markets in Asia. With the rise in global commodity and energy prices, inflation rose. Services grew at a rate of 4.3% even as manufacturing registered its best performance in more than a decade. That sector expanded by 10.1% spurred by increased demand for electronics components, telecommunications products, and chemical materials. The agricultural sector, on the other hand, was dampened by a severe typhoon in the fourth quarter, which caused the sector to contract by 2.9%. Despite such a glittering performance, Taiwan’s prospects in 2008-09, and beyond would be undermined by its excessive reliance on exports as a main driver of growth. As the U.S. slips further, economic growth is forecast to decelerate to 4.2% in 2008 although growth is again expected to pick up to 5.6% in 2009, according to the ADB.

Crucial to this growth estimate is the assumption that domestic demand would provide a fresh impetus and Ma’s new, China-friendly policies might realize in greater economic cooperation. Despite the weakness in private consumption, Taiwan’s real GDP grew 4.3% in the second quarter of 2008, as exports continued to boost overall growth. Although private fixed investment fell 9.4% in the second quarter of 2008, forecasts from the government estimate that investment in the second half is expected to rebound along with a 15.4% increase in government fixed investment. Industrial production grew 8.1% in the first seven months of 2008, with manufacturing output jumping 8.8%. With global commodity and oil prices rising, Taiwan felt the heat as the Consumer Price Inflation (CPI) in July 2008 showed a rise of 5.9% year-on-year, and the Wholesale Price Index (WPI) an increase of 11.5% year-on-year for the same period. The U.S. sub-prime mortgage turbulence has been spreading to international financial markets. Under the worsening global economic environment and strong inflationary pressure, the downside risk to Taiwan’s economy is increasing. This is a country that is extremely dependent on oil imports, and the recent spike in global oil prices, will not help the import oil-dependent Taiwanese economy. In fact, the International Energy Agency (IEA) estimates that Taiwan will account for 5.3% of Asian demand for oil by 2030, a staggering figure for an extremely tiny nation.

One of the key challenges for Taiwan lies in facilitating more cross-strait economic integration. China already accounts for 40% of Taiwan’s exports and 70% of its inbound investment. However, in the absence of direct cross strait transportation links, all cargo must be routed through Hong Kong or Macau in order to reach China. Invariably, this means higher business costs. Direct transportation links with China would elevate Taiwan as a research and development, logistics, and financial center. In a step towards a thaw in relations, the first regular flights linking China with Taiwan began operations in July 2008. The weekend flights link Beijing with Taiwan’s capital, Taipei, and the southern port of Kaohsiung. Taiwan had barred direct travel for decades as a security measure, but had allowed charter flights on Chinese holidays in recent years. The move marked a welcome change in Taiwanese-Chinese relations, which were strained during the eight years that Chen Shui-bian was in power.

Inspired by Taiwan’s native bamboo plant, the Taipei 101 Tower is currently the world's tallest completed building with its 509m height. The steel-and-glass skyscraper is reminiscent of a typical Chinese pagoda, and is located in the heart of Taipei’s business center.

Tourism has been steadily picking up, and in 2007, 3.7 million people visited Taiwan, an increase of 5.58% compared to the previous year. The direct flights will further aid the development of tourism in the country, as overseas Chinese contribute to 19.57% of the total visitor arrivals in Taiwan. From just 7,374 Chinese tourists in 1961, 2007 saw as many as 727, 248 visitors, a jump of 9.49% from 664,198 arrivals recorded for the previous year. On a worrying note, construction, one of the major indicators of industrial activity, contracted by 0.4% in 2007. The decline was due to two factors: there was a concern that housing prices might stabilize, and second, rising prices of building materials made investment in this sector more expensive. The Consumer Price Index rose by an average 1.8% in 2007, compared with 0.6% a year earlier, and the average earnings of nonagricultural workers was 2.3%, slightly higher than the inflation rate. During 2007, the Taiwan currency, the New Taiwan (NT) dollar, depreciated on average by 0.9% against the U.S. dollar but the trend has been quite the opposite in 2008. The NT dollar appreciated by 5.6% against the dollar in the January to mid-March period, a fact that is likely to limit imported inflation. The economy also needs to diversify into high-end manufacturing and into services. Crucially, as Taiwan’s economy relies heavily on electronics, a slump in demand in the key U.S. market will have a dampening effect. That, coupled with rising production costs in China, where much of the electronics production has been relocated, and the entry of several more lower-cost countries into the industry, means increased pressure on producers in Taiwan.

Yet, despite these challenges, Taiwan’s economic miracle continues. The country has a dynamic, progressive economy, a stable democracy, and increasing support from its key neighbor, China. Relations with China are improving steadily, especially under the new leader Ma Ying-jeou and Taiwan might truly emerge from the shadows of its immense neighbor. Ilha Formosa has come a long way with modern, teeming cities that justify Taiwan’s status as a megapolis. As the 21st century moves towards the end of its first decade, Taiwan has changed – it is no longer a small isolated province of escapism, struggling for understanding from Europe and America, and battling the might of China – but a pivotal cog in the reshaped, restructured global economy.

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