Problems and Potentials in the Development of

Newly Industrialized Countries: The Case of Taiwan

Joseph E. Medley
Economics
University of Southern Maine
Portland, Maine 04103
medley@usm.maine.edu
(207) 780-4293

It is widely recognized that a number of Newly Industrializing Countries (NICs) have, in important ways, developed. Taiwan, for example, successfully integrated into the world capitalist economy while experiencing growth (in industry, exports, real incomes, and social welfare indices) with equity. However, radical critics (Bello and Rosenfeld 1990, Petras 1990, Hart Landsberg 1993) point out that Taiwan's success depended upon low wage labor, imported means of production and a narrow range of exports to limited developed country markets. The success of its development process relied upon labor repression, environmental degradation and non-democratic political regulation.
Critics contend that the effects of Taiwan's success are beginning to undermine the conditions that produced its development. Other countries are emulating Taiwan's low-wage export model and are increasing competition over increasingly protected developed country markets. Taiwan faces the prospect of losing its increasingly crowded, competitive and restricted low-wage export niche. At the same time, internal pressures (labor strife, environmental protests, democratic political struggles) are disrupting the domestic foundations of Taiwan's model. The critics also argue that the barriers to moving "up" to a new, "hi-tech" export niche are substantial and that Taiwan, so far, is not able to surmount them.
Radical critics conclude that a capitalist Taiwan faces stagnation and decay. In this paper I suggest that, although many of the critics' dire assessments are accurate, Taiwan can continue to prosper, but only if it carefully plans and coordinates changes in direct production processes, in activities that support those processes and in its role within the world capitalist economy. In other words, I argue that in order to continue on its development path Taiwan must restructure its internal class processes and alter its position within international imperialist networks. I further argue that it is important to emphasize the existence of different capitalist development "paths," to recognize that policy choices matter and to understand that capitalism, even in the underdeveloped world, generates no necessary, insuperable limits to development.
Taiwan's successes have been won at high cost to its agricultural sector and environment (Bello and Rosenfeld 179). Government policies to promote industrialization drained the rural areas of surplus and labor and now threaten Taiwan's agriculture with extinction. Current government efforts to modernize and rationalize agriculture though mechanization and land consolidation are encountering fierce opposition. Aging farmers cling to their traditional life-style on small, over-worked plots, vigorously resist the new policies and protest the flood of US imports into their markets. Meanwhile, Taiwan faces an "...environmental tragedy of massive proportions" (Bello and Rosenfeld 179). Overly intensive, chemically based agricultural development has pressed the land to its limits, while rapid, widespread industrial development has seriously overused common resources. Taiwan's air, water and land are now loaded with toxic contaminants. Environmental groups strenuously protest existing levels of pollution and aggressively oppose further development of the polluting industries. These increasingly active social movements raise business costs, increase economic and political instability and therefore discourage investment and further growth.
Alice Amsden argues that Taiwan is a "late-industrializing" country. Its development depended on "borrowing" (by importing) technology and making it cost competitive with a combination of low wages, productive workers and selective, conditional government subsidies (Amsden and Hikino 246). In order to compete effectively with imports or to be able to export, Taiwan's state subsidized new industries as long as they continued to raise productivity and improve product quality (Amsden 1994 627). Exports became the key to Taiwan's productive efficiency because on one hand they provided the basis to realize economies of scale and on the other, they imposed the discipline of the world market on costs and so compelled the most profitable use of inputs (Amsden and Hikino 245). In this context, the shop floor became the crucial strategic battle ground because it is where imported technology must work well enough to produce competitive unit labor costs (Amsden and Hikino 247). Taiwan's macro conditions for growth, its high levels of saving and investment, extensive investment in human (especially education) and physical infrastructure and export surpluses, are anchored in government created, firm level institutions.
"In the learning paradigm the precise reason for success creates the very conditions for dysfunction of this particular growth mechanism..." (Amsden and Hikino 259). By 1990 a turning point was reached by Taiwan and some other late industrializers. Their labor reserves were completely absorbed by rapid capital accumulation and real wages increased to the point where Taiwan could no longer comfortably occupy a low wage niche. Export successes had induced major suppliers who were also competitors to reduce Taiwan firms' access to developed countries' technology and to restrict their access to major, developed country markets. Since Taiwan's firms historically depended upon low wage labor, imported means of production and exports to developed country markets these changes eroded major competitive advantages. Paradoxically, "(t)he quicker a country learns and the closer it approaches the world technological frontier, the sooner it exhausts the opportunities to grow by borrowing" (Amsden and Hikino 259). Therefore, in the view of some critics, borrowing becomes a less viable strategy as Taiwan approaches the world technological frontier (Amsden 1992 25).
Radical critics rightly note the many contradictions produced by Taiwan's development. Taiwan exploited its agricultural sector to provide surplus and a labor force to build industry. It oppressed its industrial labor force by limiting its organization and by permitting harsh and unsafe shop floor conditions at depressed wages. It allowed polluting industries to readily pass these costs on to the detriment of the environment. All in order to keep production costs low to compete in export markets. However, in industries dependent on these policies Taiwan is now threatened by new low-wage exporting countries. Taiwan's own capital is migrating to these new locations in search of lower wages and reduced regulations (Bello and Rosenfeld 180). Since Taiwan's firms are squeezed by the new low-wage competitors and since it is not easy to "move up" to compete directly with the developed nation's firms (Hart-Landsberg 253), Taiwan faces the prospect of falling back into the 3rd World.
The contradictions which have arisen in Taiwan's development, however disruptive, are not insurmountable barriers to its continued capitalist development. However, they dramatically emphasize that Taiwan's development cannot continue upon an unchanged foundation. If Taiwan's resources remain in mature and low-wage direct production, it can be caught from behind (Perez and Soete 1988 459). Real technological progress can only be achieved by building capacities to generate and improve technologies as opposed to simply using them. In order to continue their success, Taiwan's firms need to either create new products or processes, or quickly imitate them (Perez and Soete 1988 477).
I argue that Taiwan successfully developed, not just because of political oppression and low wages, but because it created the conditions necessary to rapidly approach and then closely follow the technological leaders. "Industrial success in developing countries depends essentially on how well individual firms manage the process of technological and managerial development" (Lall 1994 648). Simply to gain mastery of a transferred technology requires skills, effort and investment by the receiving firm (Lall 1992 166). The capacity of a firm to learn technology involves interactions with other firms and institutions. Therefore, learning technologies not only requires transformation of direct production but also requires learning how to organize and administer; handle and process information; establish networks of suppliers, consultants and contractors; plan, finance and account for business operations; develop and market products; and train staff. That is, firms must learn to provide various conditions for, as well as actually extract, surplus value in direct production; they must learn to run whole businesses.
Setting up this complex network of cooperation requires developing incentive structures (mediated by government interventions to help establish adequate conditions for the capitalist class process), enhancing human resources and exerting conscious technological effort (government efforts to provide institutional support to enhance firm capabilities to do new things) and effectively linking these various efforts (Lall 1992 170). Implementing rapid technological change requires innovation related skills in organization and management as well as in direct production.
With strong institutional support, Taiwan's firms have been able to follow the moving technological frontier closely (Simon 1992b 125). Taiwan successfully absorbed foreign technology because it created the conditions necessary for innovation (Simon 1992a 110). The international diffusion of technology has sped up. Newer technologies are finding their way overseas earlier(Simon 1992a 99). Taiwan is still a purchaser of technology, but it is no longer entirely dependent on external sources for its product and process know how. Taiwan has increased the technological sophistication of its manufactured products. For example, Taiwanese firms are a source of sophisticated components in hi-tech sectors of various industries, especially electronic components (Simon 1992a 104,109) and computers (see the case of Acer in Chang 1992 202-204).
Taiwan's firms can continue to profit from direct production because, even though they are mostly unable to innovate at the technological frontiers, they have the capacity to follow early and closely. With improved workforce, infrastructure and direct incentives the Taiwan government can continue support firms' efforts to adapt leader's products and techniques under conditions that permit a greater extraction of relative surplus value. That is, Taiwan can follow the technological frontier closely by effectively implementing the new techniques. Taiwan has benefitted from significant increases in labor productivity and movement of labor and other resources into higher value added stages of production (Schive 1992 124). Taiwan firms are progressively learning to adapt as well as do, to improve upon as well as implement designs and to innovate and create as well as set up production systems. They established backward and forward linkages and hence, increased their capacity to play a productive role in the value-added chain, either as part of a multi national network or as independent actors (Simon 1992a 99). Taiwan's firms are thus able to selectively appropriate aspects of direct production from developed country firms. Taiwan need not achieve "leadership" in advanced industries in order to continue to prosper.
Radicals tend to focus their analysis on what goes on in direct production, its expanded reproduction and its consequences. This is reasonable, but it is only part of the class story of development. The extraction of surplus in the fundamental class process (FCP) provides only one aspect of the basis for development. The distribution of the appropriated surplus to processes which secure conditions for direct production deserves attention too. These subsumed class processes (SCP) produce jobs, income and partially constitute the conditions for development (Resnick and Wolff 1987). Just as learning must occur in direct production in order to effectively extract surplus within the world economy, learning must occur in supporting activities (SCP) in order to effectively provide the conditions for profitable direct production.
Taiwan's government and firms initiated steps to capture more surplus by creating conditions to establish the fundamental class process in more advanced sectors of industry and by extending subsumed class processes within Taiwan itself to capture and retain more produced surplus. Taiwan firms have shifted their resources to engage in some of the processes (e.g., identifying and obtaining proper inputs, developing or adapting new technologies, financing and organizing the production process, marketing and distributing the output, etc.) which organize and support direct production (see, for example, the case of Microtek, Chou and Tsai 1992). On the supply side, these changes are reflected in Taiwan's changing employment structure. For example, the proportions of engineers and other technical staff, of accountants and other professionals, of (middle) managers and other administrative (and clerical) personnel are growing as larger businesses become more sophisticated and as family firms evolve their own, small, corporate bureaucracies. On the demand side, the general increase in incomes has increased demand for a variety of domestic consumption services, including financial, legal, educational and health services. Learning in these areas develops capacities for "new" exports (perhaps indirectly) of business and consumer services. Taiwan's firms learned to provide competitive business and other services inside and outside their firms and, hence, receive increased portions of surplus that once went to foreign firms or did not exist.
Taiwanese (firm-based) imperialism in China and other parts of Asia extends the possibilities of receiving distributions of surplus and, therefore, of increasing domestic income and employment. Taiwan firms are closely following US and Japanese imperialist firms and are appropriating space in their imperialist networks. The Taiwan government developed processes and institutions that permitted Taiwanese firms not only to be able to secure some of their own conditions for direct production but also to do so in other countries and so capture surplus there.
Thus, for example, rising wages may squeeze profits for direct producers in Taiwan and may consequently encourage the exit of some industries. However, the learning associated with establishing those industries increased capacities, not only in direct production, but also in supporting activities. These foundations enable Taiwan to construct itself as a "headquarters" for low-wage, overseas production sites (e.g., China) and to appropriate surplus value extracted there to expand its own subsumed class process generated income and employment. Investment by Taiwan firms directly (and indirectly via Hong Kong) in China has exploded to over 13 billion dollars in just the last few years (CND 1/20/95). Employment, and exploitation, of tens of thousands of Chinese direct producers has occurred in toys, sporting goods, footwear, electronics assembly and other industries in which Taiwanese firms have held dominant export positions. Direct production now takes place in China, while administration of these firms and other support services (as well as the flow of income) remains largely in Taiwan. A country's role in the international division of labor is not limited to direct production. Its role can also extend to the subsumed class processes that support and increase the effective profitability of direct production. If a country has previously built its own successful businesses, then those experiences, processes and institutions can be used to run businesses elsewhere.
The development problems faced by a country like Taiwan are not, therefore, just of the sort: Can we compete in the most advanced industries? Instead, the problems are best understood as the effects of complex contradictions within a shifting web of international class and non-class processes. From this perspective, institutional analysis informs class analysis of fundamental and subsumed class processes, while complex class analysis focuses institutional analysis on subsumed class processes, political, cultural and economic, as well as on those of direct production.
Why is this sort of approach important? This perspective emphasizes that developing countries can make policy choices that, in the context of a world capitalist economy, genuinely influence the pace and character of development. It is important to emphasize the different, complex ways through which capitalism is constituted and to specifically recognize the resulting variety of possible effects. This includes the recognition that capitalism, even in the underdeveloped world, generates no inherent, insuperable limits that will cause its own demise, and that, therefore, capitalism will only be modified, or replaced, by conscious struggles to establish new class relations.

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