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CIAO DATE: 3/99
Contested State and Competitive State: Managing the Economy in A Democratic Taiwan *
Victoria University of Wellington
International Studies Association
40th Annual Convention
Washington, D.C.
February 16–20, 1999
Abstract
An assertive and effective state is seen as instrumental in Asian development. This study, focusing on the post-Cold War Taiwan, investigates the changed nature of the polity and, at the same time, the persistent manipulation of market forces by the government, and explains why the state is still a preferred and capable institution in an environment of democratic politics and market economy and even more so in Taiwan; and how the new state activism should be understood in relation to its earlier form in the controlled politics and corporatist society of the Cold War and what it says abut the emergent political economy in East Asia.
Introduction
Chalmers Johnson used the term, “developmental state,” to describe a model of economic development in his seminal work on the driving forces behind Japan’s impressive economic growth over the period from the intra-war years to the mid-1970s. 1 Subsequent studies identified a pattern of development under such a model across countries in Pacific Asia 2 and suggested a broadly-applicable theory of economic development based on the Asian experience. 3
The Johnson paradigm depicted a national campaign of development and modernization orchestrated by a determined, capable and effective government with the political will, administrative skills and the ability of social and corporate penetration. 4 But the prevalent idea that a strong, autonomous and even authoritarian state would be needed for an East Asian type growth has gone far beyond what was intended in the concept its and subsequently become quite ambiguous and confusing. At one level, the development state is often related to the corrupt and oppressive government found in many Asian model countries(AMCs) 5 at the time when their “miracle” was manufactured and others still today. 6 Indeed, the type of authority structure did leave its mark on the economic record of these AMCs. But the development state, or state activism in general, was not a genetic function of an authoritarian structure. The same active and effective state can be found in diverse authority structures, 7 and as the case this study is to make, the state is still assertive and effective in the post-Cold War Taiwan where democratic political structure has replaced the authoritarian party-state. If the corrupt and authoritarian authority structure cannot be directly related to state activism, one has to rethink the relations between the authoritarian structure and the active and effective state, specially in the context of Asian development. The questions then are what is the “mark” by the authoritarian structure and what is the exact nature of the institutional foundation of East Asian development.
What the authoritarian structure provided, which comes to a second popular reading of the state in the developmental model, was a political environment in which investors would have confidence in their investment and the state would have a relatively free hand in pursuing unpopular economic policies and programs. The first aspect is mainly an empirical one. As the Harvard IIE/ADB 1997 Report, echoing a 1994 study by Lindauer and Roemer, pointed out that “[s]ustained political stability in most of these countries enabled governments to be consistent in their approach and to implement linger-term economic strategies. Almost all of the successful Asian economies had stable political leadership, with few changes in heads of state and little shift in underlying economic direction.” 8 One needs to be a bit cautious though. While political stability can indeed be measured by the fact of “few changes in heads of state” (presumably a key indicator of the authoritarian regime as well) as in the “miracle” period in Asia, it is not a necessary condition for political stability. Political stability can also be achieved through regular, predictable and democratic transfer of political power. Perhaps “little shift in underlying economic direction” is closer to what political stability means.
On the other aspect, the whole ideology of political stability did and still does provide immunity for the government from unwanted political check and balance and interference of societal interests that collide with the government’s overall economic program. To be sure, state autonomy, 9 an institutional condition that helped strengthen the state’s capacity to turn the developmental ideal into economic reality, is much easier to occur in an authoritarian structure than in a democratic one. It is naturally to assume that the democratic structure rebuilds the missing link between the state and societal and corporate interests and therefore would seriously weaken, if not eliminate, the state autonomy. Under the new environment of free-floating political capital, there is also, according to Susan Strange, a “sideways” shift of authority from the state, and the state, rather than being autonomous, has become “defective.” 10 This is a second stream to be tested in this study: how does the state retain its “capacity” with presumably weakened autonomy? Does state autonomy matter in the new environment? If yes, how does the state continue to preserve its autonomy?
Finally, the third group, particularly those working in economics and other public policy areas, who see state capacity at the core of the developmental state, the strong state, or the Asian model. Instead of viewing Asian development as the function of a particular political structure, this body of literature focus on the institutional capacity of the state. The now infamous World Bank “miracle” report, for example, believes that the essence of the miracle is “rapid growth with equity,” which is the function of sound public policy, long-term macroeconomic stability, institutional collaboration, appropriate strategy of capital accumulation, and efficient use of resources. All these require an active and capable state. 11 Linda Weiss carefully points out that strong state is “not a coercive state but one with the organizational capacity for governing industrial transformation.” 12 State capacity is seen as an essential quality that made the strong economic performance possible in East Asia. 13
The notion of state capacity as a core institutional foundation of Asian development is at the heart of the Asian model. More importantly, the perspective serves as a useful basis for an explanation of the fact that the replacement of authoritarian structure by democratic institutions has not affected the state’s capacity to manage national economy and that the Asian model is still very much alive and effective, with or without an authoritarian structure. State capacity is a set of institutional arrangements underlying the effectiveness of the government’s policy formulation and implementation, while authority structure is a set of relationships among predominant societal forces that reflect as well as ensure a distribution of political power in a given human environment. In an authoritarian polity, the state would be the central carrier of both political authority and policy functions. In a democratic order, the state ought not to be the center of political authority, but may still well be that of policy functions.
It is this latter thinking that has inspired this study. In the following sections, I will first examine the democratic redistribution of political power in Taiwan over the past decade and institutional restructuring centered on liberalization, decentralization and opening up, and thereby demonstrate the changed nature of the authority structure. The second part then will investigate why an assertive state is still demanded under the new democratic and market conditions, and how the government actually performed its interventionist function in the new environment. The study will focus on the government’s tackling of the recent financial crisis, and identify new forms of its intervention. With the democratic nature of the new authority structure confirmed and the state continuing activism demonstrated, the third part of this paper will concentrate on some key issues that will help explain the new state activism in a democratic Taiwan. Specially it will build an explanation of the phenomenon on a theoretical perspective that the active and effective state would emerge from a market situation through democratic mechanisms as the preferred institution that better protect and promote the interests of the members of the society.
This study argues that while the political function of the state in Taiwan has transformed from enforcing an authoritarian structure to ensuring a democratic order, its policy function remains. The continuing need for such policy function has much to do the new political and economic conditions. Moreover, state capacity to perform such function is embedded in the mutually dependent social and corporatist relations. While there are different views on the roots of the recent financial crisis in Asia, responses in the region appeared to form two categories. Those of South Korea and Indonesia, for example, were heavily effected by their IMF package and targeted mainly on public sector restructuring. In China, Taiwan, and to a less extent, Malaysia(with the restoration of restrictions on foreign currency accounts), and Singapore and Hong Kong(with their unprecedented market interventions), the theme underlying their responses was still the discipline and stimulation of the private sector by the state. Rather than invalidating the principles of the Asian model, managing the economy in a democratic Taiwan can be seen as an instance of their continuing utility.
1. A Democratically Contested State
The period from the end of the 1940s, when the Kuomintang (KMT) government moved to Taiwan, to 1986 when the principal opposition party, the Democratic Progressive Party (DPP), was founded and subsequently President Chiang Ching-kuo, towards the end of his life, ordered the lift of the Martial Law which banned free press and political parties, is regarded as the authoritarian era in the recent history of Taiwan. The following decade from 1986 to 1996, when the founding elections had been successfully held and for the first time the President was directly elected through a popular vote, is generally considered as the period of democratic transition. Thus, many, including this author, see 1986 as the “starting point” of the process of democratization. 14 For Tien and Chen, and others, using 1986 as the cutting-off point may involve sophisticated theories of democratization. For this author, the year o 1986 separated two very different historical periods in terms of distribution of political authority. The authoritarian era featured the predominance of the party-state structure with authority concentrating in the hands of the state, the KMT, and its two successive chairmen, Chiang Kai-shek and Chiang Ching-kuo. The democratization in essence was a redistribution of the political power. Instead of the state being the sole authority holder, political authority was relocated to the citizenry, exercised on their behalf by their representing institutions: branches of the government, competitive political parties, and the central and local government.
The decade-long democratic power redistribution proceeded in three directions. The first was the establishment of a competitive party system. The rapid growth of the DPP and the reorientation and revitalisation of the ruling KMT led to the emergence of a competitive party system with the dominance of the two major parties, the KMT and the DPP. Second, a series of steps in constitutional reform revitalized and streamlined relations among branches of the national government, trivialized under the authoritarian party-state of the Cold War. The democratic power redistribution also took place intensively between the local and central government. As we will see, the democratic process not only restructured the authority distribution, provided legitimacy for the new political order; but also turned the state into an institution whose actions are accountable to the public, constrained by legal procedures, and subject to credible challenges of contending political forces and interest groups.
The Formation of a Competitive Party System
The new party system grew with the rapid rise of the DPP and simultaneously decline of the KMT. With the KMT being the symbol of the party-state regime and the greater China identity, the DPP was launched on a platform aimed at the collapse of the KMT state and promotion of a “Taiwanese identity” against the greater China mentality. 15 This was the political foundation upon which the DPP built itself. The past 10 years of the DPP growth and expansion can be roughly divided into two phases. The first phase, a period of radical methods of mass mobilization and policy pursuit from the mid 1980s to early 1990s, was to break the KMT’s monopoly on the state machinery and national resources. Through decades of institutional building, resource allocation and personnel cultivation, the KMT developed a high level control of the state apparatus and all aspects of the society, from the military to national economy and from police to mass media. 16 A consequence of this was an effective and coercive system of marginalising, neutralizing and eliminating political oppositions, a system that effectively produced what might be called “institutional violence” that the DPP and other opposition forces had to survive and overcome. In its “formative” years, “physical” violence became an important aspect of the DPP’s political participation and mobilization in confronting the ruling KMT’s effective dominance. “Violence against violence” was a main form of political contestation between the KMT and the emerging opposition.
The DPP’s campaign was advanced on three fronts. In the Legislative Yuan, the DPP used procedural measures such as filibusters, and even physical interventions, to challenge the KMT’s “majority dictatorship.” “Parliamentary violence” however had a limited effect on the political reality in the Legislative Yuan with the KMT’s overwhelming majority. The DPP had to take violence on to the streets. “Street violence” had a strong anti-system appeal and its operations were less constrained by the existing institutions. Parliamentary and street violences frequently occurred in the early ice-breaking years of the democratic transition. “Violence” also reflected in the DPP’s radical approach to many key national issues. The most significant among them was the DPP’s position on the problem of national identity concerning the constitutional status of Taiwan in relation to mainland China. The DPP’s position was very “ideological” or fundamentalist. The 1991 amendment to their Party constitution claimed an independent Taiwan as its ultimate goal. Technically, the DPP’s position was aimed at the weakening of the constitutional foundation of the KMT regime and therefore de-legitimizing of the KMT’s rule.
Into the 1990s, political conditions in Taiwan had changed significantly. The ambiguous “ideological” orientation of the triumphantly emerged “mainstream faction” of the KMT 17 effectively reduced the national identity appeal of the DPP. Factional fightings within the KMT and consequently the weakening of the ruling party, accompanied by the gradual installation of new democratic institutions and procedures, 18 also made less relevant the DPP’s attack on the KMT’s authoritarianism. The DPP also came under great pressures to project itself as a responsible and national interest-minded political party that can be trusted with national responsibilities, in order to enhance the prospect that it would become the ruling party, or lead a coalition government with the KMT. 19 These new conditions narrowed the kinds of issues that the DPP could play, and at the same time, demanded the DPP to expand its political basis and move toward the “vital center.”
In particularly, the DPP had to deal with the two mutually excluding elements on its political agenda, the party platform for an independent Taiwan, and the campaign to win 50% voters, 50% seats in the Legislative Yuan, and ultimately the presidential election. The platform confined the DPP’s political basis to a fixed set of constituencies (stable at about 30% of the voters in the past 5 years) while the national power drive demanded the DPP to reach beyond these traditional constituencies. As far as the Taiwan Independence clause is concerned, while a majority of the population may not necessarily want to return to mainland China, they did not consider an independent Taiwan a feasible and reasonable option. 20 It was apparent that the DPP needed a new party line of broader appeal to maintain a creditable challenge to the KMT, and to further the redistribution of political power from the KMT. The DPP needed a transition of itself from a “revolutionary” party to a professional one.
The transition was put on the Party’s agenda and into concrete political and policy moves under the leadership of the moderate faction within the DPP led by Hsu Hsin-liang and Shih Min-te. Prof. Xu Bodong, a leading watcher in Beijing of the DPP politics, identified four elements of the DPP transition. 21 On the party’s independence platform, the DPP reinterpreted its position as that Taiwan is already independent and there is no need for a public declaration. This position was further confirmed by its China policy that emerged from a major internal party debate in April 1998. In terms of the methods of political mobilization and participation, the Party called for abandonment of various forms of “violence.” In fact, parliamentary and street violence was rarely seen in recent years. On industrial policy, the Party reached out to the business community in an attempt to change its image as the champion of marginal social groups such as the environmentalists and labor unions. In April 1998, the DPP called a national conference to develop an “industrial policy” [chanye zhengce] for the Party aimed at making the DPP a constructive force in the sustainable growth of national economy and building positive relations with the business community. Finally, the DPP also pursued democratization within the Party itself. Organizational changes were made and are further proposed to turn the party from a political force challenging and destroying the establishment to one that is a critical part of the new democratic order it helped build, and ready for effective national leadership. The DPP was the first among major political parties to replace the method of the Party Center’s nomination with direct elections of party candidates for public offices. The DPP also planned to reorganize its central leadership to give it more decision-making efficiency and less constraints by factional politics. 22 Prof. Xu, echoing what Hsu, then chairman of the DPP, claimed that the DPP’s victory of 43.3% voters over the KMT’s 42.1% in the 1997 County and City magistrates elections vindicated the success of the Party’s transition. 23
The democratic redistribution of political power was materialized in the first instance through the painful rise of the opposition party from the monolithic authority structure. The process of the DPP turning itself into a credible and effective agent of political power was also the one in which the KMT lost its monopoly. But what happened in Taiwan was not just a one-way transfer of such power from the old guard KMT and eventually its collapse, as we have seen in many other transitional polities in recent years. The KMT was not someone waiting to be dismantled. In many ways, the political power redistribution was ironically a process controlled and managed by the loosing KMT. Through internal party fighting, reorientation in party ideology and political platform, and a series of initiatives of reform of the political system itself, the KMT managed to slow down the process of “chronic shrinking” and remain a dominant political force in the emergent new democratic environment. 24
The transformation of the KMT was a much more difficult process than the rise of the DPP. It was a transition from a revolutionary quasi-Leninist party 25 to a bureaucratic professional political party, coupled with tensions involved with the leadership succession, the ideological division within the KMT, and consequently the reorientation of the KMT from a party of Sun Yat-sen’s Three People’s Principles to a party of “Neo-Taiwanesism.” 26 It was a process in which the Party searched its identity, rebuilt its legitimacy, and ultimately demonstrated the relevance of its continued existence.
The challenge that the KMT faced in the democratic redistribution was to exit gracefully from the old party-state-society complex and emerge as a “kindlier and gentler” as well as effective and capable new KMT. As in any other transitional polities, the process of self-transformation was difficult and dangerous because of the impact it would have on the existing interests and established arrangements. Unlike in many others, the KMT leadership succeeded in controlling the process from being turned into a violent one between the KMT and the rest of the political society. A key to such a unique experience was Lee Teng-hui’s political entrepreneurship in seeking broad political support beyond his KMT party apparatus and positioning himself as a force “outside the system” against the KMT establishment. The Lee Teng-hui syndrome, an ambivalent feeling the opposition DPP developed toward Lee that Lee may be closer to the DPP than the KMT establishment on many issues the DPP held dear, laid the ground for a sophisticated political game played out among Lee, the DPP and the KMT establishment that eventually led to the consolidation of Lee’s leadership within the KMT as well as his rise as a broadly accepted national leader.
The success of the transition also had to do with Lee’s tactics of facing his enemies one at a time to phase out the resistance within the Party to his leadership and programs. From 1988 to 1996, there were three major campaigns in which Lee isolated and marginalized his major opponents. Each served as a major stepping stone in the consolidation of his leadership. Each round of the political wrestling ended with the replacement of the leading figure in the opposition by another who would in turn become a new target in the next round. The past decade saw the rise of the mainstream faction of Lee Teng-hui to the predominance and the marginalization of the opposition forces within the Party into the nominal “non-mainstream faction.”
The leadership change in the KMT laid down the political foundation for the successful execution of the Party’s reform program. A key aspect of the reform was the reorientation of the KMT in its political constituencies, ideological foundation and fundamental interests, a process, referred to as “bentuhua,” or indigenization, in which the KMT transformed itself from a great-China-based political party to a Taiwan-based one. In addition to an increasing number of offices within the Party and in the government held by native Taiwanese, such an reorientation was most aggressively pursued in the KMT’s redefinition of Taiwan’s relations with mainland China. In 1990, the KMT called a National Affairs Conference which produced a view that Taiwan and mainland China both were “political entities with their own authority of jurisdiction.” 27 In 1994, the Foreign Ministry issued a Foreign Policy White Paper setting forth the idea of “one China, two entities and phased equality.” 28 The idea was advanced further in the first visit to mainland China in 1998 by the chief of Taiwan’s quasi-government body dealing with mainland China, the Foundation for Cross-Strait Exchanges. As one commentator pointed out that behind the notion of “equal status” was a subtle shift from “one divided China and two political entities” toward “one divided China and two equal states.” 29
The new mainland policy was the most important element of the KMT’s reorientation, as social cleavages in Taiwan are revolved around the issue of national identity and consequently the voter basis of political parties is divided mainly by that issue. 30 The new mainland policy turned the image of the KMT from a party for the great China to a party for Taiwan. Consequently it helped the KMT build a major issue basis for the legitimacy of its rule, revitalize the public’s trust in the Party, and alleviate its relations with the DPP who was fiercely against the traditional KMT policy line on the cross-strait relations. Lee’s ambiguous position on national identity, 31 while reflecting his world view and personal philosophy, effectively limited the room for the DPP’s manipulation of the issue and forced it into either giving up the issue or taking a radical position. Consequently the DPP had to shift its focus to those more costly and less effective issues such as social welfare or environment protection. Those who have strong faith on the issue broke from the DPP and formed their own parties and the DPP was further weakened.
On the other hand, Lee’s position also helped Lee’s mainstream faction firmly control the policy agenda within the KMT. With the support of the public for Lee’s new thinking on China relations, Lee managed to isolate and discredit those in the KMT establishment who were reluctant if not refused to be in line with Lee in the Party’s leadership succession. The mainstream faction’s series of campaigns against the KMT fundamentalists were assisted with the tensions generated by the issue. The KMT fundamentalists were exposed to an effective Party chairman and his growing group of loyalists; an aggressive DPP whose only concern was to destroy the KMT; and a concerned public a majority of which have little confidence in the traditional KMT line on the issue. The fate of the fundamentalists was not hard to imagine.
There were also signs of reform in the KMT’s internal “party affairs.” The KMT, like many other “permanent” ruling parties that used to operate in a feigned democracy, relied heavily on transfer of cash benefits to voters through grass-roots party workers for return of their political support for the KMT. Within the KMT itself, the Leninist principles are still very much alive, even after years of its leading national process of democratization. The KMT tried to do something about the traditional link between the Party and its constituencies and the methods of mass mobilization. In the 1997 elections, the Party made a minor change in its campaign tactics. While still relying on local party “footers” to keep up the old machine running, the KMT “parachuted” several senior government officials to run for local offices, hoping this could be a new way of party mobilization without the burdens of having to appease local factions. All these three instantly converted candidates failed in their bid. In the 1998 election, the Party went back to the old way.
The rise of the DPP and the fall of the KMT over the past decade reflected the breaking down of the monolithic party-state authority structure. The subsequent reform, adjustment and reorientation in both parties led to the emergence of two effective, competitive and credible political organizations. This in turn made them logical holders of the redistributed political power and primary destination of political capital flows. By the end of 1990s, a stable national power distribution has been established. Elections in the past three years have consistently returned a roughly 30-40% of votes for the DPP and 45-55% to the KMT. The establishment of the power structure forced national parties to shift their attention, along with resources, not only to politics at local levels where elections formally take place; but also to branches of government where national decisions are formally made.
Restructuring of Government Organization
The democratic redistribution of political power also took place in a series of institutional changes and modifications in government bodies at the highest level, often referred to as “constitutional reform.” The constitutional reform was necessary for several reasons. First, the 1947 Constitution has never actually “abolished,” but was only “suspended.” In place of the suspended Constitution under the authoritarian era was the Temporary Articles. After the abrogation of the Temporary Articles in 1991, the legal basis of any new political order had to be found in the 1947 Constitution. There was in a sense a restoration of political order based on the 1947 Constitution. Second, the 1947 Constitution was designed for the whole China including Taiwan and Mongolia, where the KMT government then constitutionally ruled. The structure of the government and procedures of its formation laid out in the Constitution could be hardly relevant over the territories the KMT government controlled in the late 1980s. Adjustment was seriously needed to match the Constitution with the land, the people, and the state that it actually governed. Third, the 1947 Constitution was uniquely modeled after the five-power structure framed by the founding father, Dr. Sun Yat-sen: the President, the National Assembly, the Executive Yuan, the Legislative Yuan and the Control Yuan. The Constitution had never really been put into practice after its establishment. The decade of its actual function after the restoration indicated that there were serious problems in such constitutional design. There was, for example, no clear center of government authority and responsibilities. They were evenly distributed among the five branches. Functions among the branches of the government were overlapping. Consequently, the government was ineffective, inefficient, and most importantly, unsatisfactory for the emergent democratic and presidential politics.
The constitutional reform has been carried out in constitutional amendments passed by the National Assembly from 1990 through 1999. 32 The pattern usually was that the President convened a National Affairs Conference where a consensus was formed among contending political parties and interested groups and the National Assembly would turn the consensus into concrete constitutional amendments. In 1990, the first National Affairs Conference was called upon and a general consensus was reached regarding the substance of the initial constitutional changes. The overall mandate to the National Assembly was: to amend the Constitution where necessary so that the state would have an appropriate and indisputable constitutional foundation and the government would, with an improved internal arrangement of authorities and responsibilities, function effectively and efficiently in the new political environment. The mandate led to subsequent constitutional amendments that fell into three categories. The first group were aimed at the reconstruction of the constitutional foundation of the state, reflecting the view that the government no longer ruled the territories the Constitution had defined and public offices should be elected by the people over which the government had actual jurisdiction. The revoking of the Temporary Articles was not simply a return to the original Constitution. In fact, The assemblymen were forced to vote the old National Assembly into history as the new National Assembly would have only members elected from within Taiwan. Following that, new articles were adopted that the President as well as the provincial governors would be selected through direct popular vote rather than indirect vote by the National Assembly as in the past.
The second category was designed to redefine the type of the government in terms of the primary location of the government’s executive authority. There was a widely debate as whether Taiwan needed an American presidential, Japanese parliamentary, or French semi-presidential model. In the second phase of the reform between 1992 to 1994, several amendments were passed intended to strengthen the office of the Presidency in relation to the Prime Minister, the National Assembly, the Legislative Yuan. The President can now make cabinet and other government appointments without Prime Minister’s endorsement. Direct election of the President through popular vote also makes the President accountable to the voters rather than to the National Assembly. In a new set of amendments in 1997, the power of the Legislative Yuan was further weakened with a higher threshold on its non-confidence vote and impeachment of the President. 33
Those intended to streamline the jurisdictions among branches of the government fell into the third category. In addition to the clarification of division of labor among the five branches of the government, efforts have been intensified in recent years to restructure the Governmental Organization through two major undertakings: “Province Diminution Plan” and “Government Restructuring Plan.” The first one, accomplished in 1998, reduced Taiwan Province from a major layer in the constitutional structure of the government to a nominal intermediary organization without popular mandate. The other one, still in the process of forming a multi-party consensus, is the reformation of the National Assembly and the Legislative Yuan, or “parliamentary reform,” and consequently the restructuring of the overall national government organization, particularly the relations between the National Assembly and the Executive Yuan. Opinion makers agreed that the reform shall move in the direction of turning the National Assembly and the Executive House into one parliament, but disagreed as whether the parliament should have one or two houses. If a bicameral legislature, then the National Assembly would be the Upper House and the Legislative Yuan the Lower House. The DPP favored the abolishment of the National Assembly altogether and therefore a unicameral legislature. The KMT took a position of “improving the existing system,” that is, combing the existing Legislative Yuan and the National Assembly into a bicameral parliament. 34 The parliamentary reform was seen as the last leg of President Lee’s decade-long crusade in constitutional reform.
All the undertakings in the constitutional reform can be seen as part of the effort to restore constitutionalism. But it was not a process of constitutional restoration as seen in many other countries. Rather it was a very innovative and entrepreneurial experience of institutional building. More importantly, the reform rebuilt the constitutional basis for the emergent new political order and provided legitimate and modern institutional carriers of the representative and executive authorities.
Ascension of Local Politics and Government
The democratic redistribution further took place in the relationship between the central and local 35 government. Local politics tended to be underdeveloped under the authoritarian regime. There was no exception to Taiwan. The underdevelopment of local politics in Taiwan however was particularly a consequence of Taiwan’s Chinese-style political tradition and the suppressive regime of the Cold War. Under the Presidency of the two Chiangs from 1949 to 1986, local elections still took place even at the era’s darkest times. But they were isolated shows, not part of the normal function of a political system of open competition. There was not much political contestation involved. With the Marshal Law in place and the Constitution suspended, there were no opportunities nor incentives for the citizens to exercise their civil liberties or pursue their individual interests through open political competition. The KMT through various state institutions deeply penetrated into and controlled the society. The society was completely “incorporated” into the party-state system.
The revitalisation of local politics was no less significant than the development of party politics and reconstruction of the constitutional order. The new constitutional order vests the ultimate authority in the hands of the voters. Political parties become a primary carrier of the public’s interests and chief organizer of their presentation at the national level. The government is given the mandate to organize the satisfaction of citizens’ interests. The open and competitive electoral system makes sure that not only the people’s access to public authority is fair and open, but also the relationship between public office holders and the authorizing public stays “democratic.” This new fundamental structure, in a sense, an anticipation of it, directed the flows of political capital “downward.” This created some new dynamics in the political system. First, there was a change in the public’s attitude toward politics. The public became more assertive than in the past and saw politics as a way of personal gain and civic life more than remote “state affairs.” Such an attitude, plus the bottom-up election process, has been effective in forcing public office seekers to have their attention and resources shifted to the level of individual voters.
Second, it was not just individual voters but also the local government that became more assertive. Under the old regime, the local government was only a functional extension of the central government and designed to implement or enforce policies of the central government. Local government did not have the political mandate or executive rights independent of those of the central government. It collected taxes for the central government and relied for various functions on the budget allocation from the central government. Chief local government officials were appointed by the central government. Police, fire fighters, and others serving in public services were salaried by the central government.
With the active involvement of the citizenry in the political process and local elections becoming substantive in recent years, the local government started to redirect their services toward their local constituencies and tried to build a sense of accountability to local voters. At the same time, the local government significantly reclaimed a series of executive authorities from the central government, including its jurisdiction over personnel appointments, entitlements to local taxes and self-source revenue. These developments intensified the political confrontation between the central and local government. A new central-local relationship could no longer be delayed for a fair and sensible division in administrative responsibilities as well as financial and personnel authorities between the local and central government. Since late 1997, bills have been proposed in the Legislative Yuan addressing the problem. Two major bills passed in the Legislative Yuan in the early 1999 after the long process of deliberation: one, the Law of Local Government [difang zhidu fa] and the other, Amendments to the Law of Division of Financial Authorities [caizheng shouzhi huafenfa zai xiuzheng an]. 36 The new laws define a more balanced central-local relations and gave the democratic structure more substance at the local level.
Finally, driven by move active involvement of the citizens and growing power of the local government, contestation among political parties at the local level has also intensified. This could be normally seen as a consequence of the newly established democratic order as political parties have to win elections at local levels. But there were additional factors in the case of Taiwan. Dominance of local factions in local as well as national politics, for instance, was critical in directing political capital to local politics. Politics in Taiwan has never been a “direct” process. It was mediated and manipulated through factions especially in local politics. This indirect and factionalized politics has been built into internal party process in both the KMT and the DPP. With the voting power in the hands of the citizens and the whole authority structure leaning “downward,” local factions became more important than ever in securing the loyalty of their constituencies and therefore the party’s political basis. In a sense, factions played a pivotal role in the democratic redistribution of political power as they created initial cracks in the monolithic part-state system. It also, as we have pointed out, attracted political capital to local politics and therefore effectively helped to reshape the centralized and elitist authority structure. 37
The State In Contestation
The formation of two-party dominated and open competitive party system, reconstruction of the constitutional order, and ascension of local politics and government were key streams of the democratic redistribution of political power in Taiwan. In the process of the redistribution, political parties, branches of national government, and local factions and government have taken much of the political power and resources used to be in the hands of the party-state. Behind the democratic institutions and values, there were clear, self-sustained political interests and the reality of balance of power among defining political forces. All the benefits of the democratic order aside, the new distribution will certainly affect the function of the state, its decision making and implementation. It is beyond the scope of this paper to have a systemic demonstration of the quality of state capacity in policy making and execution under the new democratic environment. Also the new democratic structure is not the only factor that may have affected the state capacity. What is intended in the discussion here is to make a case that the new authority structure has indeed a limiting effect on the state capacity.
The first case, the Bayer investment project in Tai-chung, suggests growing constraints on state capacity by local factional politics. Bayer Taiwan, an subsidiary of the German drug manufacturing company, planned a NT$ 50 Billion (US$1.7 billion) investment project in Tai-chung County. Since 1994, the company had spent about US$10 million on planning, design, commercial assessment and twice environmental evaluations, with all the support of the Executive Yuan and was ready for the actual ground-breaking. But the project encountered political difficulties after the 1997 local elections when the newly elected DPP governor of Tai-chung Country requested the project to be put on public referendum before he could issue a land permit and construction licence. After a prolonged period of political wrestling with no clear sign of permit issuance, Bayer decided to withdraw the project and moved it to the United States. 38
There are many issues involved in this case. For the DPP leadership, sandwiched between the local DPP factions and the business community, regarded it as an issue of “industrial policy” that the Party needed to evaluate and hoped to solve the problem through an internal Party debate. For Governor of Tai-chung County, this was an issue of the rights and responsibility of the local government. 39 For Bayer Taiwan and many others, and the central government itself, this was an issue that local politicians tried to impose a local agenda over the nation and taking an economic issue as a political hostage. The CEO of Bayer Taiwan, for instance, claimed that the Bayer case exposed the irresponsibility of some politicians and their politicizing of a pure economic issue. 40
But more than anything else, we can see in the Bayer case, as well as many other similar cases, such as the No. 4 Nuclear Plant Construction Project, how local agenda crucial in local politics may well be incompatible with the national agenda and, through the mechanism of democratic procedures, would effectively limit the state’s capacity to pursue the national agenda. The Bayer project had passed standard public hearings, community comments as well as environmental evaluations that were required for such an investment project. From the viewpoint of national economy, the Bayer project would bring thousands of employment opportunities, and substantial tax contribution. The Executive Yuan regarded the project as a major stimulation to the sluggish national economy and declining foreign investment. The Executive Yuan mobilized all forces it could to get the project through.
The actual picture was bigger than that. Because of the long suppression under the centralized state, the local government was incapable and less experienced in handling national issues. It was often not adequately funded and less taken serious in national deliberations of public policy issues. Politicizing of a public policy issue could help the weak local government strengthen its role in national as well as local politics. The issue had also to do with factional politics in Tai-chung itself. The politics in the port area of Tai-chung County where the Bayer project was to be located was dominated by two major political forces: the Red and the Black who cannot simply tolerate each other. To compete for the support of the voters in local elections, they all stood against the Bayer project. To overcome the problem, Bayer Taiwan had to use a third force, Ch’ang-I Group which had influence in both Tai-chung and national government, as its local partner to push the project. In the 1997 elections unfortunately, Ch’ang-I Group supported a third-party candidate, rather than those of either the Red or the Black. Bayer since then had never got away with this political bad luck. 41 Local politics, specially factions in battles to win elections, played a critical role in the new political environment. It is only fair to say the Bayer project, and the government’s ability to mobilize, and the long term interests of the society as a whole, became a victim of such local politics.
A second case, the increasing competitive relations between the Executive Yuan and the Legislative Yuan, shows the redistribution of power among branches of government and consequently the decline in the capacity of the executive branch in getting its agenda through and its programs appropriately funded. Under the old authoritarian party-state, all major national decisions were made at the KMT central decision making body, zhongchanghui [the Central Standing Committee of the KMT], and in most cases, by the paramount leader himself. The branches of government were mainly implementing arms of the party-state. The democratic transition and constitutional reform gave many essential legislative and financial authorities back to the Legislative Yuan. In addition to the constitutional division of labor, the executive capacity is further limited in several ways. First, the Legislative Yuan, transforming from being responsive to the state to being accountable to the constituencies and financial donors, learnt to use their privileges in allocating national resources for their own electoral interests. Often public policies were to be compromised. One case at hand was the appropriation decision for the state enterprises in the 1999 budget exercise. The consensus regarding funding for state enterprises was that it should be reduced to further the process of privatization. On Dec. 30, 1998, both the KMT and the DPP legislators agreed that the funding in the government budget proposal should be taken off. 42 One week later, the same legislators overthrew their own agreement and reinstalled and passed the funding of almost NT$ 2 trillion (US$ 65 billion), to satisfy the affected enterprises that the legislator were associated with in one or another. 43 The general direction of the government’s policy proposal could not survive the individual legislator’s agenda.
Public policy process is also constrained by factional politics in the Legislative Yuan. Like politics in Taiwan in general, the Legislative Yuan is dominated by factions. Factions organized in the form of so-called “ciji wenzheng tuanti” [ secondary policy group] either among the same party legislators or across the party line. Each group has a specific political background and follows a particular policy agenda. Slightly different from factions in the KMT where political support is a major concern or in local politics where family connection is the founding basis, secondary policy groups are more interested in policy, and function as “caucuses” in the Legislative Yuan. The bargaining process among these factions often led to a situation where it often took unreasonable long time for a bill to pass if it would pass at all. Thousands of bills piled up waiting for deliberation. Ineffectiveness and inefficiency of the Legislative Yuan seriously hindered the implementation of the government’s policy agenda. The same legislative process can also be used to serve political purposes of key players. In the last day of the 3 rd Legislative Yuan, for example, the legislators worked overnight to pass five major laws of congressional reform and the two other laws redefining the central-local relations: the Local Government Law and the Amendments to the Law of Division of Financial Responsibilities between Central and Local Government. 44 This, according to KMT politics watchers, was the last-minute efforts by the House Speaker to rescue his bid for reelection against the challenge from the Deputy Speaker of the same KMT. 45
Finally, patrician politics created conditions that often limited the ability of the government to pursue public policy for the sake of public interests. Reform of the electoral system was an example. The existing electoral regulations have many areas that are not necessarily compatible with the emergent democratic order. Taiwan, for example, still use “single-non-transferable vote” or, SNTV, system SNTY system which a handful of countries around the world still use. 46 Up until 1998, the law prohibited TV campaign ads during the official campaign period. The law also prohibited campaign rallies after 10 p.m. the day before, but no candidates seemed to listen and the government did not enforce the law either. There was a prolonged debate on whether the current SNTY should be replaced by a new system of proportional representation which would combine smaller districts and party proportional representation. 47 The debate symbolized best the political effect of a particular institutional arrangement on different political parties; how these parties can effectively determine the fate of such an arrangement; and how party maneuvers could marginalize the role of the government in providing a fair and effective playground for competing political forces. While there is an agreement on the need for the proportional representation, disagreement has remained as to whether a German version or a Japanese one. The current system is generally considered as benefiting large parties. The KMT and the DPP would prefer keeping the system if possible. But the problems with the current system are overwhelming and the change to the proportional representation appeared to be inevitable. If the current system has to be given up, the KMT would prefer the Japanese model which gives fewer party proportional seats and therefore less small party challenges. 48 With both the KMT and the DPP hesitating, the reform of electoral system went never too far from academic discussion and politicians’ pledge. As the chief of the Central Election Commission of the Executive Yuan conceded, it is not too difficult for people to see the necessity of the proposed change-over, and technically the change itself is not difficult neither. But it is very difficult to actually introduce the change because it would affect the existing power structure among major political parties. 49
2. An Assertive and Effective State
The democratic redistribution has provided the foundation for the new political order. It is natural to think that the state in a democratically contested political order is less intended to be assertive and less effective. In a way, the previous section has demonstrated just that. It would be difficult for a departmentalized 50 state to function as an unitary actor on its own in the name of national interest. It would be particularly so and even “immoral” for the state to take on the kind of responsibilities that would be otherwise expected in an Asian model environment. Indeed, as I have shown, the policy process has become much more politicized, and often a victim of partisanship, factional politics, and local interests.
The perceived weakening of state autonomy was also accompanied by the expectation of the retreat of the state from the management of national economy. The late 1980s and early 1990s has seen not only the shift in political power from the state, but also the streamlining of its functions to embrace the market economy at home and abroad. In Taiwan, such streamlining took on several fronts: transferring of state-owned enterprises (SOE) to private ownership; relaxing the government’s macro-control and micro-management of national economy; and rationalizing the government’s economy-related actions on the principles of economic individualism. The government started the privatization [ minyinghua] program in the 1980s and encouraged SOEs to reinvest their assets into private enterprises. In 1987, the government lifted restrictions on foreign capital accounts. The following year, regulatory controls on bank loan rates and deposits were abolished and foreign exchange rates became free floating. In 1989, banking laws were amended to set up new private banks and relax restrictions on operations of foreign banks in Taiwan.
In contrast to the fundamental restructuring in the political arena, changes in above-mentioned areas were moderate, and perhaps insignificant from the viewpoint of those with high liberal expectations. As we shall see below, SOEs are still substantive and influential. The government is not hesitant combining old practices with new methods to promote, protect, discipline, and when needed, manipulate various aspects of the economy. It still has a fairly solid control of resources and institutional mechanisms necessary for its intervention functions. The public and corporate community are generally willing to support such activism. But before we move to elaborate further on how the state governed the economy in the new environment, an explanation is in order of why state activism is still needed in the first place.
“To Be or Not To Be”
The problem of state activism is not a new. The state’s active engagement and effective and manipulation are seen as the “engine” of the envied and yet controversial experience of economic growth and social development in East Asia. On the other hand, similar state dominance in national economy is believed to have caused the economic failure in the former socialist countries, and increasing difficulties in European and Australasian welfare countries. Even for the AMCs, many believe that the state-centric Asian model is incapable of generating sustainable growth. Even it could manage, such a mode of political economy is not compatible with the new conditions emerging from political liberalization and global integration of markets. A consensus seemed to have emerged in the late 1980s and early 1990s that the state activism of the Asian model style needed to be further limited and eventually eliminated. Institutional structuring and liberalization in trade, investment and finance were seen a fundamental solution to the problems across countries of these three categories.
Then there came the financial crisis. In this author’s view, the Asian financial crisis had less to do with the Asian model than with the new global economic conditions. The discrediting of the state in the wave of liberalization and globalization and the rapid expansion of the global monetary economy challenged us to face the old problem of institutional responsibility and accountability. Liberal economists believed that the capitalist economy has within itself the mechanisms for equilibrium building. The overall beauty of the modern economy could come only after the satisfaction of private interests at the level of business owners and managers. There is no need for organized manipulation beyond that. Some globalists, on the other hand, rested their hope on prospects of new global arrangement. They recognized the uneven distribution of global resources and capacities; national nature of the global economy, and discriminative effects of such an economy on different national units of economic accounting and distribution. But they believed solutions can be found only at the global rather than national or corporate level.
The 1997-8 financial crisis and subsequent responses from the region pointed to a third candidate. Indeed, the utilitarian 51 return of an assertive state in many East Asian countries responding to the turbulences in the global system forces us to take a second look at the Asian model, revisit the political and economic transition in the region, and rethink the process of globalization. One is more inclined to know how these processes were related to each other and together led to the latest crisis and responses as well? And what we can learn from answers to these questions about the nature of the new political economy. To pursue these questions, one has to go back to the original question about the nature of Asian development, or, the Asian model.
There are several widely received views on the nature of the Asian model. The first one, constituting the mainstream of Asian model interpretations, focuses on the unique institutions as the independent variable. For them, the particular type of the state structure, corporatist business environment, and mutually dependent state-society relations are decisive factors. 52 A second view stresses the operational side of the model: industrial targeting, preferential monetary and financial policy, export-oriented marketing, saving promotion, subsidies and barriers, etc. 53 The third view locates the independent variables outside the Asian economies. For those of this view, the international trade regime, Cold War security environment, and the unique relationship between the United States and the AMCs in market access and capital supply were instrumental in the circumstanced growth. 54 Finally, there are scholars who identify the unique qualities of the people and their behavioral habits as the primary factor. 55
It is the argument of this paper that Asian development was a consequence of the capitalist calculation by the AMCs in turning their economy into a globally competitive one, against a particular set of conditions they started with. The responses of the AMCs were essentially similar. With their limited domestic market and an urgent need for hard currency to finance their domestic programs, the main focus of their economy was on the hard-currency markets abroad. This set the parameters for their export-oriented growth strategy. Moreover, merely the comparative advantage in labor and resources was not sufficient for the competitiveness of products on the international markets. Different forms of institutional manipulation were developed that turned the national economy into a giant internal market, (GIM). 56 The GIM reduced internal transactional costs, evened out business risks, eased burdens on individual firms for capital accumulation and market share, and provided mutual preferential treatment. These mechanisms resulted in a nationally shared competitiveness of these individual firms on the global market. In addition to this corporatist support, there was also a system of manipulation in policies and regulations by the government. The design and implementation of fiscal policy, monetary policy, industrial policy, tax code, etc. were targeted at the concentration of national resources on key industries and further the strengthening of the competitiveness of products. These manipulations effectively divided the global market into the national market and the international one where the former is a coherent and corporative operation and the latter only a battle field for competing national economies. Above all, such a response demanded an assertive and effective public authority with political leadership, entrepreneurship, managerial skills, and a cooperative social and corporate environment.
To be sure, similar conditions existed elsewhere immediately after World War II. In Europe, for example, there was a “total” devastation and a similar US-dominated patron-client relations via the Marshall Plan. The situation in Latin America was not much different either from that in East Asia. In fact, there was a similar attempt in Latin America to forge a rapid economic growth in the 1960s and 1970s. 57 But it was the prevalent cultural and social conditions in the AMCs that made their response much more effective and the needed institutional arrangements and ways of resource allocation not only desirable but also possible. The AMCs were known for their paternalistic social structure, centralized state, well-developed and autonomous bureaucratic elite; and a history of a closed and self-sustainable political and economy system. These conditions satisfied the requirement of a strong political leadership, a corporatist social structure and the separation of domestic and international markets. These conditions were the institutional foundation of the Asian model. 58
Along this line of interpretation, the recent financial crisis could be seen as a manifestation of the fundamental changes in economic conditions that have constantly shaped the Asian economies and indeed the Asian model itself. In essence, the Asian model was a national organized response to a particular set of economic conditions and has the proven capacity of institutional adjustment in response to the shifting comparative advantage. An assertive and effective state has been the primary assurance of such responses and adjustments. The utilitarian return of the assertive state following the recent financial crisis not only validated the basic spirit of the Asian model, but more importantly, the continuing utility of the state under the new condition of market economy and democratic politics. Now we turn to examine the renewed utility in details in the case of Taiwan.
The New State Activism
The new state activism in Taiwan is substantive and that can be seen in many aspects. This paper will focus on three of them: state-owned enterprises; industrial promotion programs; and market-governing measures.
State-owned Enterprises
SOEs has been the backbone of the government’s presence in the economy and the foundation of the party-corporation-state. 10 years After the implementation of the privatization program, the SOEs still have a total annual retail sales at NT$ 2 trillion(US$65 billion) in the 1998 (2.9% of 1997 total GNP), almost 1.6 times of the total annual government budget, NT$1.22 trillion (US$42 billion) of the same year. Almost all the 21 SOEs are running with profits in 1998, with an average of 8% before tax. In 1998, they brought NT$128 billion(US$4.3 billion) revenue for the government, 8.9% of total government revenue. 59
Besides its “healthy fundamentals”, SOE privatization faced formidable challenges. First, the SOEs involves a significant slice of government budget. With the Legislative Yuan becoming a key battle field for allocation of national resources among various factions of legislators and corporate and societal interests they represent, the SOEs are something that nobody really wants to give up. Even for those designated for privatization, there are difficult labor problems to deal with. Employees are more conscious of their own rights and ways of influencing the institutional restructuring, and better organized than before. For those SOEs that have actually converted themselves into private corporations, they often “reinvested” government holdings in the private sector to reduce the total government holdings bebow the legal line of 50% share. This essentially is more a transfer of ownership of state assets than a change in the nature of their management, a big dark hole in the privatization business. Moreover, the line separating a SOE from a privatized corporation was often intentionally kept simple and easy. In many cases, 1% below or above the 50% makes the qualitative difference. Converted SOEs with government holdings below 50% are not subject to the supervision of the Legislative Yuan. At the same time they continued to receive government support for its share. This new form of corporation with combined private and state ownership and benefits of both, provided a strong basis for the continued presence of mutual engagement of the business community and the government, a key element of the Asian model.
Finally, there is a substantive part of the SOEs that the government never wanted to “privatize.” This part of the SOEs, including the Postal Service, Pension Fund, Postal Savings, Government Employees Fund, state banks, etc. are mainly finance services rather than manufacturing companies. As financial operations, they do not need government regular inputs but are as much profitable as other SOEs. These fund-based state run enterprises are a primary tool with which the government engages the markets. Of a total NT$ 283 Billion (US$ 70 Billion) the Ministry of Finance (MOF) made available later last year for the government’s intervention in the financial markets, these funds provided a total of NT$ 189 Billion, or 67%. 60
Industrial Promotion Program
Industrial policy is a set of financial, monetary and administrative measures that are designed to promote certain industries over others and enhance the overall competitiveness of national industries in the global market. Industrial policy as another key supporting mechanism of the Asian model has been criticized for adding an institutional component in the exports expansion of the national economies and consequently making the global competition unfair.
While the government is still trying to hang on its role as chief export promoter and organizer, 61 there were factors that have rendered East Asia’s export-centered industrial policy less attractive, less effective and increasingly difficult. The first was the development of the global market itself and efforts to make it a fair playground on the basis of market principles. Through global(WTO, for example), multinational(APEC) as well as bilateral (US-Taiwan) arrangements, national “barriers” have been greatly reduced and liberalisation in trade and investment has changed and will continue change business practices across national boundaries. Second, the national character of business has been increasingly obscured. Components of a product could originate in different nations, and phases of production and sections of a corporation can be multinationally located. Traditional measures of national industrial promotion, such as control of foreign exchange rates, preferential loan interests and government-funded export insurance, are difficult to implement. Third, as the global markets are tightening up and becoming increasingly unstable and unpredictable, the national economy, from Japan to China and from Taiwan to Korea, is confronted with a strategic challenge to develop potentials in the domestic market for a sustainable growth. Thus the protectional role of industrial policy will become less relevant. What has become more critical perhaps is not the global market share but the attractiveness of industries in Taiwan as the destination of global capital flows.
But industrial policy still has its legitimate function as a convenient and effective way for the government to provide incentives and discipline for the efficient use of national resources and effective steering of industrial growth. For example, Taiwan’s Act of Industrial Upgrading Promotion, to be extended for another 10 year after its expiration at the end of 1998, “gives” various tax and financial benefits to “important high-tech industries” and “important investment projects,” specifically enterprises of electronic research and manufacturing, and their share-holding investors. 62 The purpose is simple: to enhance the competitiveness of those high tech industries, as they are seen as the engine of national economy, and capable of attracting global investment. In contrast to traditional direct subsidies encouraging export expansion, the main concern behind the new industrial policy seems to be in a balanced and sustained growth of national economy.
Besides targeting on key industries, industrial policy has also functioned as a credible framework for the market calculation of individual investors. For instance, the Ministry of Economy (MOE) implemented a plan in May 1998 for the long-term industrial restructuring. This plan declared that the weight of heavy industry in the overall manufacturing sector in the next 20 year would decrease by 50%. Its annual growth rate from 2006 to 2020 will be kept under 1%. To reach that target, the overall economic growth for the same period will have its annual growth rate at 4.35 %. 63 This long-term economic plan, with its matching government funding and regulations, will inform the investors of the sectoral direction of future economic growth and effectively direct the flows of capital.
In addition to different purpose and methods, industrial policy is now carried out in a more open policy environment, and subject to the public’s inputs, parliamentary consent, interest group influence, professional advice, and inter-departmental check and balance. Again the example of the Act of Industrial Upgrading Promotion. The proposal of its extension was not only thoroughly debated in the Legislative Yuan, but also put on the table for professional comments and public inputs. The MOF, more concerned with the plan’s consequences on tax revenue and the MOE, more interested in sustainable growth, would have to work together to find a balance between economic growth and financial costs. 64
While the purpose and methods of the government’s engagement in national economy may be different and so is the policy environment for such active engagement, the same philosophy still reigns: use of government-operated mechanisms to direct market forces for the purpose that is necessary for the market to work but can’t be an automatic function of the market itself. This was true 30 years ago and is still so now. It is true in Taiwan as much as in Singapore, Japan or mainland China.
Market-Governing Measures
One thing that distinguishes the state activism of the 1990s from that of, for example, the 1960s, is that the market has become the dominant force in the management of national economy. This has turned the state’s economic governance into a whole new game. There are several aspects to the development. First, the market has ascended to become the primary target of economic activities and a principal value in social life. As such, the state has to take the market itself as the center of its economic planning, operation and manipulation. In a final analysis, it is the market that determines the necessity, substance and effectiveness of these economic activities. Second, the ascendance of the market also suggests an increasing separation of the monetary economy from the traditional goods economy. As modern financial products and monetary mechanisms proliferate, the monetary economy has developed its own dynamism that requires a particular system for its management. Third, not only the monetary economy is separated from the traditional goods economy, its often violent and unpredictable movements tend to threaten the secure growth of the traditional goods economy. These factors have forced the government to shift its directing activities from those promoting goods manufacturing and export to those targeted at the financial market.
If there were something that made the survival of Taiwan in the recent financial crisis possible so far, it was the conservative economic philosophy in both the government and the business community, which limited the scope of the problems they had and justified a series of the government’s intervening steps and programs. Moreover, it was the diagnosis of the government which saw the stability of and confidence in the financial market and the expansion of domestic demands as the cure of the economic difficulties. It was also the determination of the government and the cooperation of the business community that made feasible the timely, appropriate and sometime selfish measures of government intervention. Finally it was the fundamentally good economy that absorbed the effects of the crisis and provided the resources needed for the government’s rescue plan to work. Behind the government’s efforts, there were sufficient resources at its disposal. Foreign exchange reserves were at a historical height of US$84.5 billion in June 1998, 65 plus US$70 billion funds mobilized by the government from various sources affiliated with the government. 66
There are however different interpretations of how Taiwan related to the recent financial crisis in Asia. Many seemed to believe Taiwan escaped the crisis because of its “basically healthy fundamentals” and different economic conditions. 67 A step beyond that, there is an argument that an important reason for Taiwan’s luck was the liberalization and internationalization of its financial and monetary system in the past 10 years, particular its free-floating exchange mechanism. 68 But increasingly, particularly towards the end of 1998, a crisis of unique type emerged in Taiwan. One started to realize that there were also serious economic difficulties in Taiwan, whether they were called crisis or not. One could argue that Taiwan was also part of the Asian or perhaps global turbulence. Conditions for a crisis existed in Taiwan as much as in other Asian countries. But as we discussed earlier, there were two dimensions to the problems in Taiwan that helped shape the unfolding of the economic difficulties and the government’s response: one pointing to the consequences of the prolonged Asian model development and the other locating the dynamics in the new global financial markets.
With regard to the first dimension, Taiwan, even part of the Asian model, was slightly different from countries like South Korea, Japan and Indonesia in growth strategy, method of capital accumulation, corporate culture and industrial structure. Consequently problems in Taiwan were different in form, substance as well as timing and magnitude. And their receptivity to non-economic manipulation was different as well. Taiwan’s economy, for instance, was built around small and medium-sized enterprises (SME). Foreign capital, particularly short-term loans, was insignificant in the overall capital structure. This type of economy was more stable and easy to adjust in the face of major market disturbances. On the other hand, the “bubbling” activities in Taiwan were concentrated in the financial market and real estate industry, unlike South Korea and Japan where they were seen more in the manufacturing sector. This made Taiwan’s financial market more vulnerable than its manufacturing sector. The combined effect of the internal and external conditions gave Taiwan a form of unfolding of its economic difficulties that was gradual and centered in a few but critical areas. It also allowed a greater degree of manageability of the market tensions.
From the mid 1997 through mid 1998 when neighboring countries experienced waves of financial turbulence, the situation in Taiwan was reasonably stable and the impact was minor. The government focused its attention on the stability of its financial market and possible chain-reactions of the external troubles. In the second half of 1998, problems on the “fundamentals” side emerged, along with an increasingly volatile situation in the financial sector. Real estate industry accumulated tones of new houses waiting for buyers. Banks after banks became unable to pay back their debts on time. Facing signs of a more serious crisis breaking out, the government took a series of emergence steps to reduce market tensions and reenergize the economy.
Exports Insurance [chukou baoxian]
The effort to reenergize the economy was directed first to securing regular exports markets. Collapsed markets in Southeast Asia and their new competitive exchange rates left Taiwan’s export-oriented economy in a particularly difficult situation. In October 1997, over the wave of currency devaluations in Southeast Asian countries, the government engineered its own devaluation, though minor, hoping to offset somehow the effect of the devaluation drive on its exports. In March 1998, the government set up a plan, “Insurance for Promotion of Export in Southeast Asia,” with a total of NT$ 11 billion to insure exports to the crisis-devastated region. 69
Domestic Demands Expansion [kuoda neixu]
The effect of the exchange rate manipulation and exports support was limited, and often invited criticism. Reflecting a new thinking in growth strategy among many AMCs in the new global market structure dramatized by the financial crisis, the government moved in a series of steps under the umbrella program called “Domestic Demands Expansion Plan” [kuoda neixu an] for a long-term resolution. The new strategic thinking believed that an ultimate release of the tensions between over-capacity of the economy and the shrinking and competitive international markets had to be found in the expansion of the domestic market. This was in contrast to the logic behind the rescue package adopted in Korea and Indonesia where over-capacity was tackled with the reduction in inflated demands generated mostly from programs in the public sector and financial institutions, and cutback of production capacity by forcing noncompetitive businesses out. Like in China and Japan, the new strategic thinking resulted in a program of government-led massive capital investment.
The domestic demand stimulation plan was just a general principle. It consisted of several programs providing tax break and new investment opportunities to release the pressures of over-capacity and over production. For the year of 1998-99, the government set aside a total of US$8 billion for the plan. 70 In addition to the extension of the Industrial Upgrading Promotion Act that concentrating on high-tech industries and proposed tax break for various industries, both the Council for Economic Planning and Development(CEPD) and the MOE organized multi-billion programs to give further capital support for various industries and services, particularly those SMEs. While the CEPD plan benefited mostly public infrastructure projects, the MOE’s “Action Plan for Creating Domestic Manufacturing and Business Opportunities,” targeted at non-infrastructure projects, such as education equipment, general use of computers, digital TV, water facilities and energy conservation services, etc. 71
Business Rescue[qiye shukun]
For many troubled enterprises, the export promotion and domestic demand stimulation measurers were too slow to produce desired effects. Particularly the turmoil in the financial market required timely measures of turbulence prevention, damage control and confidence building. The government was under pressures to resort to various emergence measures for immediate effects. Toward the end of 1998, there were increasing signs of troubles worsening in the financial market and real estate industry. One financial institution after another experienced difficulties in capital flows and in honoring their financial obligations. On November 5, the Executive Yuan set up a multi-ministrial ad hoc rescue group led by the MOF to deal with the short-term financial difficulties of many businesses. These businesses were allowed an extension of 6 months for their unpaid debts. 72
In December 1998, the Executive Yuan decided to set up a Construction Industry Stimulation Fund with NT$150 billion (US$5 billion) funded by the Postal Savings it controlled. The fund provided through the Central Bank a preferential mortgage interest to anyone who would buy new house within a year at “super lower interest rate.” Prime Minister also “urged” the real estate industry to lower their housing prices. While the mortgage subsidy program received various criticisms from scholars, experts and public policy advocacy groups, the government hoped it would lead the construction industry out of recession and prevent national economy from sliding into further troubles.
Market Stabilization [gushi wending]
The determination and skillfulness of the government in directing the economy was demonstrated no better than in its recent campaign to secure the stability of the financial market. Different from many Southeast Asian countries and Korea where controls on capital accounts were lifted, it was still intact in Taiwan even after years of liberalization of the financial and monetary system. 73 But even this conservative financial system could hardly sustain the months of tensions building up through the procession of the financial crisis. In August 26, 1998, days after the significant drop in the stock market below the psychological line of 7000 point in reaction to the problems in Hong Kong, the MOF announced the first series of emergency stabilization regulations, including a raise from 70% to 90% in preparation fund for securities transactions[rongjuan baozhengjin] and other safe-guarding measures that would make capital flows in the financial market less easier. 74 These measures were pushed further several days later when the market collapsed by 220.30 points, or 3.4%. The government placed a ceiling on stock selling prices, and raised the lending ratio [rongzi bilu] from 50% to 60%. 75
Such restrictions appeared to be insufficient in dealing with the troubles of such magnitude. The government took even more dramatic steps as the situation was getting worse. The first unusual step was to mobilize the so-called dengzheng jijin (party-state funds) at the government’s disposal, including those from KMT-owned enteprises, state-owned enterprises, various government controlled or affiliated funds, and state and private banks. The government used the funds to buy selected stocks to release the selling pressures and prevent the collapse of the market. Through this manipulation, the government, because of the overwhelming size of the funds it controlled, forced the market to move in the desired direction. The government’s Work and Retirement Fund, for example, bought US$4 million stocks in August 1998, adding to its already US$ 600 million strong stock holdings. On November 5, with further instability in the market, the Fund entered again and bought another US$7 million. This market manipulative mechanism was first used in recent years by the government in the spring of 1996 when the stock market collapsed by 98.08 point, or 2%, reacting to the missile crisis over the Taiwan Straits. 76 It was also successfully used by the Hong Kong government in August 1998 in battling the maneuvers of international speculators. 77
Intervention through moves of individual funds though appeared to be incapable of arresting the further worsening of the financial market. The government decided to pool all these funds together to form a Market Stabilization Fund(MSF). In August, the MOF proposed to set up a “standing mechanism of crisis management” in a form of ad hoc “major event response group,” centralizing the “wide-ranged” efforts in market stabilization. The subsequently established MSF, to become a primary tool for the government in the management of the crisis, consisted of 10 state banks, many part-state funds and 23 private banks, with a total disposable fund of US$10 billion. 78 With this Fund in place, the government’s intervention in the market became a daily operation. In December, the Fund selected for its members a set of stocks as targets for members’ intervening purchase and the 10 year lowest level of stock index 6,300 point as the bottom line for members to act.
Moral Persuasion [daode quanshuo]
In the new political and legal environment, however, the government could not direct the market beyond the party-state funds under its direct control. The mechanism that the government compelled private institutions to follow its market rescue guidelines was so-called “moral persuasion.” The government considered as the moral responsibilities of private institutions to help the government to overcome the financial and economic difficulties. Much of the government’s intervention measures were based on that assumption. For example, one reason for the problem in the real estate industry was high house prices. While the government provided mortgage subsidy for new house buyers, it also used “moral persuasion,” in view of the increasingly sluggish real estate market toward the end of 1998, to press house builders to lower house prices. The government did so by suggesting target prices in public and negotiating with the house constructors association for voluntary compliance. The government received an expected response from the Construction Investment Society which promised to persuade their members to initiate price reduction within the reasonable margins of costs. 79 As the house construction industry was no longer administrated by the government and there was no relevant laws to regulate the industry’s pricing, moral persuasion was a way to seek the cooperation of the business community. Obviously such moral persuasion did involve clear consequences of various options the real estate industry might take in terms of the government’s administrative support and preferential treatment in the future. For example, the government could tighten license issuance and financial auditing for those who fail to follow government guidelines. 80
Moral persuasion often involved support of the business community against economic “common sense” and the principles of market economy. In the case of Hongfu Securities, 81 for example, the government mobilized US$ 100 million in just one day from other banks to fill in the cash shortage Hongfu had from its due financial obligations. Many financial institutions who participated in the rescue operation disagreed with the government on the case, believing that Hongfu’s bad and even selfish business practice created the situation and other banks had no obligations to provide rescue and should not do so. It was the government’s “moral” argument that all would be down with Hongfu it were allowed to fail that finally moved the funds. 82 To prevent further chain collapses of Hongfu type, the MOF extended its moral persuasion to 62 financial institutions and asked them to “join” the government in helping the survival of troubled businesses by postponing their debts for another six months. 83
The dilemma for the government between the value of market stability and that of free market principles can be better seen in its decision to intervene in the stock market. The MSF’s manipulative moves did have an effect of disciplining individual and corporate investors. But when the intervention was administrated as a regular response to the market, its effect diminished as its market intervention activities became a pattern of behavior upon which other market participants could base their calculations. On December 29, after days of the MSF intensive intervening purchases, the market experienced a sharp drop of 201 points. It was estimated that about US $3-4 billion of MSF members’ funds were lost. When the ordinary investors knew the government’s intervention calculations (when and how much), the market turned itself into a situation where MSF members bought in, following the government’s guidelines, while others would sell and take advantage of government-guaranteed capital gains.
From the above analysis, one can argue that the state’s active engagement in the national economy is as substantive as it was, though the forms and substance may be different. Such a substantive role facilitages the security and continual growth of the economy of this nature in the new global economic conditions. It is hard for SMEs to battle large-scale market turbulences on their own. It is equally difficult to leave an economy like Taiwan’s to the mercy of the global market. Moreover, the state’s intervention is as effective as it was, though the methods for such effectiveness may be different. It is the economic and social structure and corporate culture that made the interventionist government much easier to be expected and respected. The public and the business community not only hold the government responsible for the economy, but naturally allow it some leeway in performing such a responsibility. Close “incorporation” among the government bureaucracy, business community and society turned their relations into a mutually dependent partnership in which the government designs its financial and monetary policies, with the business community in mind; and in return, the business community rises in support of the government when needed, even at the sacrifices of their particular interests.
3. A Democratic and Assertive State
The state’s continuing substantive and effective engagement suggests that the new political structure has not become a confinement to such an active state. This, at least at the factual level, casts doubt on the thesis that an interventionist state is incompatible with democracy and market economy. What interests this author is the institutional foundation of this assertive state in the new political economy. In other words, why the state is still preferred; how the preference is formed; and how the state is still capable of such assertive role.
The questions go back to the problem of institutional selection and indeed the initial conditions under which the territorial state became the primary form of human organization in a contest with other competing forms centuries ago. Hendrik Spruyt, examining the historical process from the 14 th to 17 th century in Europe in which the territorial state emerged as the winner over city-league, and city-state at the decline of the feudal system, Church, multinational empire, argues that the territorial and hierarchical state prevailed “because it proved more effective at preventing defection by it members, reducing internal transaction costs, and making credible commitments to other units.” 84 Building his theme on a blend of new institutionalism and historical sociology, Spruyt sees the state as an institutional solution to market arrangements where the individuals operate “in the absence of higher authority to arbitrate disputes and enforce agreements.” 85 The faith in the market is built upon the classical assumption in chaos theory that “market arrangements will suffice to achieve efficient solutions.” But “transactional and informational costs are not zero, and a more hierarchic form of human organization is called for.” 86 “Individuals engaging in commerce thus will have reasons to prefer more hierarchy when this reduces information and transaction costs and creates more certitude in their environment. Political entrepreneurs will prefer to extend such hierarchy based on a calculation of a variety of factors. This calculation will depend on their responsiveness to the demands of domestic actors and on the costs of attempting such as strategy.” 87 The territorial state “won out” over rival institutional forms because its “competitive institutional efficiency.” 88
Spruyt’s thesis is part of the intellectual tradition of Oliver Williamson, Douglass North, Robert Gilpin, Margaret Levi, Mancur Olson. 89 Also his focus is on the external side of the state building. But two messages from the idea of the state as a preferred institutional solution to market dynamics are particularly relevant to us. First, the market function will ultimately lead to a need for institutional interference and the state is so far the most preferred and effective one. The case of Taiwan has demonstrated that in addition to the reduction of transaction and information costs, prevention of defection and free ride, provision of long-term commitments to forces internal as well as external to the state, and dispute arbitration and agreement enforcement, contemporary market conditions give even stronger justification for the “institutional efficacy” of the state. If the market failed to “achieve efficient solutions” five hundred years ago and thus paved the way for the institutional solution of the state, it is even more difficult for such a market efficiency today. In contrast to the conventional wisdom, transaction and information costs are becoming more substantive as the magnitude and speed of the markets increase. Defection and free ride are much easier, and in fact become a principal practice in market operations, thanks to the growing number of new forms of economic transactions. Credible commitments are much more difficult to nurture because of increasing fluidity in institutional relations and mobility in economic activities.
Besides the continual relevancy of these founding elements demanding the provision of internal order by the state, there are new conditions that add further weight to the value of the state, particularly for those economies dominated by weaker and/or smaller businesses. Global market competition is no longer among equal individuals, if it ever was five hundred years ago or in the abstract model of chaos theory. It takes place among economic entities of different magnitude(think about Macdonald’s and a family restaurant business in Beijing), or individuals of different capacities(think about Mr. Sorros and a stock market investor in Taipei). Market competition of this kind involves huge “magnitude costs” often bearing on those of less magnitude. The state not only provides a sense of security, but indeed, through its “representational” actions, make up the magnitude deficiency of individual businesses.
The second message, on the other hand, seems to suggest that such an institutional choice by the individuals in the market environment is hostile to democratic institutions because its preference for “political hierarchy.” This study has shown the otherwise. The market, an assertive and effective state, and the new democratic order seem to work side by side. The problem may lie in these concepts themselves. What the market function would lead to, in Spruyt’s model, is a centralized prioritizing of economic activities. It is the state’s institutional efficacy that matters. It is not about the constitutional nature of authority structure. An institutionally efficient state could be a democratic or authoritarian one. Democracy, on the other hand, as the first part of this study has demonstrated, is an individual-centric distribution of political authority and a set of arrangements for the sustenance of such distribution. It is the antithesis of a state-privileged authority structure rather than the state-preferred public mandate. In a democratic polity, the state is the mandate of the public authority through the contestation of contending forces. This democratic authority structure, in this author’s view, can far better ensure that the individuals’ market-driven preference be transmitted with least distortion to the mandated operator. Democratic institutions and procedures are intended to make sure that the state will continue to act on such a preference. It is possible therefore that an assertive and effective state is compatible with the normal function of the market and democratic political order. Under certain conditions, they can be mutually supportive.
Democracy, however, does affect the state’s ability, as this study has also shown. It not only authorizes the state to act on the behalf of the individuals, but also allows individuals and their groups to act on their own whenever and wherever possible, because of its imbedded contestedness through which the public shapes the state’s mandate. More than often, this affects the contents of the public’s mandate to the state through the tempering by effective participants of parochial interests, and circumscribes the ability of the state to perform its designated functions, because of the procedural consequences of the new political structure.
Overall, democratic structure and procedures, at reasonable procedural costs for the fundamental soundness of the political order, facilitate the market-state interaction and consequently reinforce the preference for the state as the institutional solution. This explains the simultaneous growth of a democratic politics, the market economy, and an assertive and effective state in Taiwan over the past decade.
Concluding Remarks
What one could draw from the case made so far? First, the state-centric authority structure and the state-preferred economic governance are not necessarily the same thing. While an assertive and effective state may not necessarily entail an authoritarian structure, the function of the market and democratic institutions may well lead to such a state.
Second, institutional support, symbolized by an assertive and effective state, shall be accepted as an important component in economic governance. The essence of the Asian model is not the rampancy of the authoritarian regime, nor the superiority of some cultural traits. It is simply a skilful and determined utilization of such an institutional component.
Third, the market itself is too an institution. One would have to be an institutional fundamentalist to assign the generative power to either the market and the state, or, for that matter, any other institutions. But it is the human interests that ultimately determine the form of their satisfaction. It is our ever-changing needs and surrounding conditions that make our institutional selection dynamic. And it is this original substance to which either the market or the state ought to submit.
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Endnotes
*: Theme Panel TD25: “Krugman, Johnson and Cox: East Asian Dynamism in Perspective” The 40th Annual Convention of the International Studies Association Washington, DC. Feb. 16–20, 1999. All Rights Reserved. Jan. 30, 1999. Back.
Note 1: Charmer Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975, Stanford: Stanford University Press, 1982. Back.
Note 2: See for examples, Frederic Deyo, The Political Economy of the New Asian Industrialism, Ithaca: Cornel University Press, 1987; Peter Berger and Hsin-huang Michael Hsiao, In Search of an East Asian Development Model, New Brunswick: Transaction Boos, 1988; Gordon White, Developmental States in East Asia, London: Macmillan, 1988; and Yun-han Chu, “State structure and economic adjustment of the East Asian newly industrializing countries,” International Organization, 43(4), 1989, pp. 647-669. Back.
Note 3: Most notable among them are The World Bank, The East Asian Miracle: Economic Growth and Public Policy, Oxford: Oxford University Press, 1993; and Steven Radelet, Jeffrey Sachs and Jong-Wha Lee, Economic Growth in Asia, Cambridge: Harvard Institute for International Development, 1997. Back.
Note 4: See Johnson, 1982, especially, “Chapter 1, The Japanese miracle,” pp. 3-34 and “Chapter 9, A Japanese model?” pp. 305-324. Back.
Note 5: An Asian model country can be defined as one that has upheld basic principles essential to the economic success in the region for the past 50 years: growth-centered market calculations at all levels; state-activism in producing and maintaining economic order and priorities; and strategic planning and manipulation at the national level against internal pressures and external disadvantage. While those AMCs we discuss here are all in Pacific Asia, it is not necessarily a geographic concept. Back.
Note 6: See for instance, Christopher Lingle, Singapore’s Authoritarian Capitalism: Asian Values, Free Market Illusions, and Political Dependency, Fairfax: The Locke Institute, 1996 and The Rise and Decline of the ‘Asian Century’: False Starts on the Road to the ‘Global Millennium,’ Hong Kong: Asia 2000, 1998. Back.
Note 7: Chu, 1989, p. 671. Back.
Note 8: Radelet, Sachs ad Lee, 1997., pp. 51 and David Lindauer and Michael Roamer, “Legacies and opportunities,” in David and Lindauer and Michael Roemer (eds.) Asia and Africa: Legacies and Opportunities in Development, San Francisco: Institute for Contemporary Studies, 1994. Back.
Note 9: This ideologically more neutral concept has attracted considerable attention of the research community, most notabl among them has been the persistent work by Peter Evans and his associates. See, Peter Evans and Dietrich Rueschemeyer, Bringing the State Back In, Cambridge: Cambridge University Press, 1985, and Peter Evans, Embedded Autonomy, Princeton: Princeton University Press, 1995. Back.
Note 10: See Susan Strange, “The defective state,” Daelalus, 124(2), 1995, pp. 55-74. For more a more detailed version, Susan Strange, Power Diffused: State and Non-state authority in the World Economy, Cambridge: Cambridge University Press, 1996. Back.
Note 11: The World Bank, 1993. Back.
Note 12: Linda Weiss, “The myth of the powerless state,” New Left Review, 225, 1997, pp. 3-27, and its lengthy version, The Myth of the Powerless State: Governing the Economy in a Global Era, Cambridge, Polity Press, 1998. Back.
Note 13: Linda Weiss and John Hobson, “Phoenix Rising? The Vulnerability of Neo-liberal Capitalism,” paper presented at the conference, From Miracle to Meltdown: the End of Asian Capitalism? August 20-22, 1998, Fremantle, Western Australia; Linda Weiss and John M. Hobson, States and Economic Development, Cambridge: Cambridge University Press, 1995, and John M. Hobson, The Wealth of States: A Comparative Sociology of International Economic and Political Change, Cambridge: Cambridge University Press, 1997; and Linda Weiss, 1998. Back.
Note 14: See, for instance, Hung-mao Tien and Tun-jen Cheng, “Crafting Democratic Institutions in Taiwan,” The China Journal, No. 37, p. 1. 1997. Others though may see an earlier “juncture,” for example, in 1977 when the ruling KTM suffered the first major setback in local elections and its local factions allied themselves with opposition forces in a rebellion against the KTM. See for example, Chen Min-tung, Paixi zhengzhi yu taiwan zhengzhi bianqian [Factional Politics and Political Transition in Taiwan], Taipei: Yueh-tan Press, 1995. p. 268. Back.
Note 15: Most central figures in the DPP leadership, for instance, were victims themselves of major KMT brutal campaigns against opposition forces over the past 40 years, or members of their legal defense team. All of them are native Taiwanese. The DPP Constitution of 1986, with the 1991 amendment, proclaims a democratic political order and sovereign independent Taiwan as the two primary objectives of the Party. Back.
Note 16: The type of political regime is referred to as “quasi-Lennist regime.” See Tun-jen Cheng, “Democratizing the quasi-Leninist regime in Taiwan,” World Politics, 42(4), 1989, pp. 471-499. Back.
Note 17: After a series of internal party clashes between Lee Teng-hui and his conservative opponents, the KMT leadership of post-Chiang generation split into three factions around the time of the 14 th Party Congress in 1993. The mainstream faction led by Chairman Lee Ten-hui managed to control the Party’s agenda and established its dominance in the Party. Consequently, those opposing Lee’s leadership, generally referred to as ‘non-mainstream faction,” were successfully marginalized by the mainstream faction. A third faction was a group of young KMT elite often holding public offices. After years of opposition within the KMT under the umbrella of the New KMT Alliance, the group finally decided to break from the KMT all together and formed their own New Party. Back.
Note 18: These included the lift of the Marshall Law and the ban on free press and opposition political parties in 1987, the termination of the Temporary Articles in 1991 that replaced the Constitution in the Marshall Law period, a series of national affairs conferences on constitutional reform in the early 1990s that streamlined the relationship among branches of the government, between central and local government., and most important, free elections through open competition of legislators and mayors, provincial governors and the president in 1992, 1994 and 1996 respectively. Back.
Note 19: The 1995 Legislative Yuan election gave the DPP 33.17% of the voters and 32.53% of the seats in the Yuan, against the KMT’s 46.07% and 52.40% respectively. The same distribution of power was confirmed again in the 1998 Legislative Yuan election, with the KMT receiving 46.53% of the voters and 54.67% of the seats and the DPP, 29.56% and 31.11%. Source: Election Information Databank, Central Election Commission, ROC, and the Election Study Center, National Chengchi University. Back.
Note 20: For the past 5 years, 45-55% of those surveyed preferred a status quo over either independence (10%) or unification (20%) in Taiwan’s relations with mainland China. Source: Election Study Center, National Chengchi University, and I-chou Liu, “the Democratisation of Taiwan: Changing Political Structure and Diversified Mass Behavior,” Department of Political Science, National Chengchi University, unpublished manuscript, June 1998. Back.
Note 21: Xu Bodong, “Minjindang zhuanxin si you buke nizhuan zhi shi,” [The Inevitability of the DPP’s Transition], zhongguo shibao [ China Times], Feb. 12, 1998. Back.
Note 22: Fan Chia-Chieh, “Minjindang dangzhongyang jue chongni chuxuan banfa” [DDP leadership to redesign primary elections], China Times, April 2, 1998; Chen Chia-hong, “Minjindang quanli jieguo jiang dafu chongzu” [DPP to have a major overhaul of its central organization], China Times, Dec 31, 1998. Back.
Note 24: The elections of 1997 and 1998 clearly indicated that the KMT had accomplished the self-transformation. Up until the 1997 election, the KMT had been on the decade-long trend of shrinking in party membership, weakening in party effectiveness, and decline in party influence, all reflected in the numbers of popular votes the KMT received, and seats in the Legislative Yuan and offices at all levels of government the KMT held through the years. The 1998 elections saw the first time a decisive reverse of that trend. Back.
Note 25: For the notion of the KMT as a quasi-Leninist party and its transition, see Tun-jen Cheng, “Democratizing the Quasi-Leninist Regime in Taiwan,” World Politics, 1989(4), pp. 471-499, and Bruce J. Dickson, Democratization in China and Taiwan : the Adaptability of Leninist Parties, Oxford: Clarendon Press, 1997. Back.
Note 26: In a major campaign speech for a KMT candidate in 1998, Lee Teng-hui claimed that all who live in Taiwan are Taiwanese, regardless of when they immigrated to Taiwan and shall leave behind the sad experiences in the history and work together for a better Taiwan. This so-called “xin taiwanren zhuyi” (neo-Taiwanesism) apparently moved away from Lee’s long-held view that separated the native Taiwanese from those migrating from the mainland and saw the KMT government as a “foreign” one imposing the suppressive rule on Taiwanese, towards a more inclusive approach to the ethnic and national identity problem. Back.
Note 27: Xinzhengyuan luweihui[Mainland Affairs Council], Taihai liangan guanxi shuoming shu [The Executive Yuan, On The Relations Cross the Taiwan Strait], Sept. 1994. Back.
Note 28: [Yige Zhongguo, liangge shiti, jieduanxing fenzhi], Waijiaobu [Foreign Ministry], Waijiao hengce baipishu,, [ Foreign Policy White Paper], August, 1993. Back.
Note 29: Wang Min-yi, “Liangan dingwei zhi zheng, zinde duihua jiaodian” [Controversy over status and a new focus in dialogue], China Times, Oct. 19, 1998. Back.
Note 30: For further on this point, see Wu Yu-shan, “Wei taiwande zhengzhi minzhu hecai” [Cheers for Democratic Politics in Taiwan], China Times, Dec 31, 1998. Back.
Note 31: While a middle position shall seek a permanent status quo, which has been “separate but not independent,” in Taiwan’s relationship with China, the “ambiguous” position calls for a temporary status quo and allows alternative scenarios of either unification or independence depending on conditions in the future. For more discussion on that, please see Huang Xiaoming, “Taiwan zai liang-an guanxi zhong de xin sanminzhuyi [Taiwan’s New Three People’s Principle in The Cross-Strait Relations],” in Huang Xiaoming(ed.), Zai kan taiwan: zhengzhi, shehui, jingji he liangan guanxi [Taiwan Revisited: Politics, Society, Economy and Cross-Strait Relations], Hong Kong: Xianggang xhehui kexue chubanshe [Social Sciences Press], 1996, pp. 1-12. Back.
Note 32: For more detailed discussion on the earlier phases of the reform, see Hung-mao Tien and Tun-jen Cheng, “Crafting democratic institutions in Taiwan,” The China Journal, No. 37, 1997, pp. 3-9 and Hunt-mao Tien and Yun-han Chu, “Building Democracy in Taiwan,” The China Journal, 148, 1996, pp. 1151-1154. Back.
Note 33: Luo Jen-lan, “Xianzheng dingwei buming, gaige kong jintui shiju” [Reform may lack necessary constitutional direction], China Times, Sept. 7, 1998. Back.
Note 34: Lu Tian-cai, “Guohui gaige: xianzheng xiaozhu qingxiang liangyuanzhi” [Parliamentary reform: the committee prefers a bicameral system], China Times, Dec. 12, 1998 and Lin Chen-po, “Guomingdang ni tuidong guohui liangyuanzhi” [KMT plans to pursue a bicameral legislature], China Times, Dec. 16, 1998. Back.
Note 35: In theory, “local” in the 1947 Constitution means the province, county/city and town/village, the so-called four-tiered government structure. With the diminution of Taiwan Province and elections at towns and villages to be suspended, “local” shall refer primarily to counties and cities. Back.
Note 36: See China Times, Nov. 11, Dec. 31, 1998 and Jan. 1, 1999. Back.
Note 37: For the role of local factions in the democratic transition, see Chao Yung-mau, “Taiwan difang paixide fazhan yu zhengzhi minzhuhuade guanxi” [Relations between local factions and political democratization in Taiwan], Zhengzhi kexue lunchong [Political Science Review], No 7, June 1996, pp. 39-56. Back.
Note 38: Shijie ribao [World Journal] Dec., 19, 1997, p. 1; and China Times, April 11, 1998. Back.
Note 39: World Journal, Dec. 15, 1997. Back.
Note 40: World Journal, Dec. 18 and 19, 1997. Back.
Note 41: “Local factions Tied Down Bayer,” World Journal, Dec., 20, 1997. Back.
Note 42: Lin Chen-po and Hsiu Hsiao-ch’i, “Guoying shiye xintuozi yusuan zao sanchu” [New budget funding for state enterprises nipped off], China Times, Dec. 31, 1998. Back.
Note 43: Luo Ju-lan, “Liangzao guoying yusuan zhenyi zhong guoguan” [NT$2 trillion passed amidst controversies], China Times, Jan.6, 1999. Back.
Note 44: Lin Chen-po, “Liyuan yezhan guohui wufa jingsheng erfa sandu” [3 Congressional Reform laws and 3 Province Dimunition Laws passed overnight], China Times, Jan. 13, 1999. Back.
Note 45: China Times, Jan. 21, 1999. Back.
Note 46: A traditional electoral system with multiple seats in a district and each voter allowed one vote for one candidate. Back.
Note 47: Single seat and dual vote, a system combining single-seat district and party proportional representation where the vote has two votes, one for the district candidate and the other for the party. Of those countries with this electoral system, the German model has higher allocation (50%) for party proportional seats while Japan’s 2/5. Also the German model has 5% votes for a party to be qualified for proportional seats while Japan’s 2%. Back.
Note 48: Shen Fu-hsiung, “Danyi xuanqu liangpiao zhi bu kexing” [SCDV not feasible], China Times, Jan 5, 1999; Chang Ch’i-k’ai, “Guomindang jinnian xiuxian dixian fuxian” [KMT’s bottom line on constitutional reform emerges], China Times, Jan. 6, 1999; and Tung Meng-lang, “SCDV: German and Japanese models], China Times, Jan. 6, 1999. Back.
Note 49: Liu T’ien-ts’ai, “Jian Tailang: xuanzhi gaige gunnandu gao” [Chien T’ai-lang: difficulties in electoral reform], China Times, Jan. 25, 1999. Back.
Note 50: The monolithic party-state has dissolved into a structure of power sharing among often competing institutions: the Executive Yuan vs. the Legislative Yuan, or the central vs. local government, etc. Even the Legislative Yuan itself is often split among political parties and influential factions. Back.
Note 51: The term “utilitarian” connotes a narrower definition of the state’s role in providing market-conforming guidance and separates it from an “ideological” one, the more comprehensive role found in the AMCs in their initial economic development during the Cold War. Back.
Note 52: For example, Chalmers Johnson, 1982; Anis Chowdhury and Iyanatul Islam, The Newly Industrializing Economies of East Asia, London: Routledge, 1993; Henry S. Rowen, Behind East Asian Growth: the Political and Social Foundations of Prosperity, London: Routledge, 1998; and Chu, 1989. Back.
Note 53: The World Bank, 1994, for example. Back.
Note 54: For a discussion of these external factors, see Stephan Haggard,“The newly industrializing countries in the international system,” World Politics, 39(2), 1986, pp. 343-370. Back.
Note 55: For a representative of this view, see Hung-chao Tai, Confucianism and Economic Development: An Oriental Alternative? Washington, DC: Washington Institute Press, 1989. Back.
Note 56: Or “quasi-internal organization or, “QIO,” as Chowdhury and Islam put it. See Chowdhury and Islam, 1993, pp. 42-56. Back.
Note 57: There are quite many studies comparing the post-World War II experiences of industrialization in Latin America and East Asia. Among them, Gary Gerffi and Donald L. Wyman, in their Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia, Princeton: Princeton University Press, 1990, offer a quite comprehensive one. Back.
Note 58: Minxin Pei, “Constructing the political foundations of an economic miracle,” and Hilton L. Root, “Distinctive institutions in the rise of industrial Asia,” both in Rowen, 1998, pp. 39-77. Back.
Note 59: For the data cited here and discussion below, see Luo Ju-lan, “Liangzhao guoyingshiye yusuan, zhenyizhong guoguan” [2 Trillion budget for state-owned enterprises passes in the midst of controversies], “Erzhi zhengzhi, zuai guojia gaizhao” [Low quality politics hinders institutional reform], China Times, Jan 6, 1999, and Lin Chen-po and Xu Hsiao-ts’u, “Guoying shiye xin tuozi yusuan, quan zhao suanchu” [Budget for state-owned enterprises eliminated], China Times, Dec 31, 1998, and Economic Research Department, Council for Economic Planning and Development(CEPD), Major Economic Indicators, Nov., 1998. Back.
Note 60: Liu Hsin-yang, “Wending gushi, ke tuoru 2830yi zijin,” [283 Billion available for market stabilization], China Times, Nov. 17, 1998. Back.
Note 61: For example, the Ministry of Economy still has a Trade Expansion Promotion Fund that supports business expansion abroad. Back.
Note 62: For more discussion of the Act, see a series of reports, China Times, Jan 8, 1999. Back.
Note 63: Chen Hsiu-lan, “Guonei chanye jieguo jiangzuo zhongda tiaozheng” [Major industrial restrucuring planned], China Times, May 18, 1998. Back.
Note 64: Hou Nan-feng, “Jingjianhui pan liangbu zhaodao zhongjiandian” [CED seeks compromise between the two ministries,” China Times, Jan 8, 1999. Back.
Note 65: Matthew Miller and Dennis Eegbarth,, interview with the Finance Minister, South China Morning Post, July 9, 1998. Back.
Note 66: Liu Hsin-yang, “Wending gushi, ke tuoru 2830yi zijin,” [NT$280 Billion available for market stabilization], China Times, Nov. 17, 1998. Back.
Note 67: This is a view certainly held by the government of Taiwan and widely received in mainstream media. See, for example, Matthew Miller and Dennis Engbarth, interview with Paul Cheng-hsiung Chiu, Finance Minister of Taiwan, “Chiu keeps his ship steady as other economies flounder,“ South China Morning Post, July 6, 1998; and “Taiwan can survive the Asian financial crisis,” The Asian Wall Street Journal, Dec. 22, 1997, written by the chief of the Dow Johns Taipei Bureau, and cited in China Times, Dec 24, 1997. Back.
Note 68: Lien Chan, interview with Gongshan shibao [Industry and Commerce Times], Dec. 18, 1997. This view is shared by many international economists who separate financial liberalization and globalization from the financial crisis and believe that Taiwan should take the opportunity of the financial crisis to further liberalize its financial ad monetary system. Hsie Chin-fang, “Jianli yatai jinrong zhongxin, ci qi shi ye” [Time to set up the Asia-Pacific Center of Operations], China Times, Dec 14, 1997. Back.
Note 69: Li Chu-hsun, “Xinzhengyuan tonguo baiyi tongnanya shuchu baoxian” [Executive Yuan passes NT$10 billion export insurance Plan] , Zhongshi wanbao [CT Evening News], March 12, 1998. Back.
Note 70: The Executive Yuan’s 1998-99 budget for the plan was NT$240 billion (US$8 billion). Chang Ch’i-k’ai, “Guoda neixu an, jiahui zhongxia qiye” [Demestic demand expansion plan to benefit SMEs], China Times, Nov. 7, 1998. Back.
Note 71: Chen Hsiu-lan, “Jinjibu jiangti suqianyi chuangzhao shuangji fangan” [MOE to propose multi-billion business stimulating plan], China Times, Jan. 6, 1999. Back.
Note 72: Chang Ch’i-k’ai, “Qiye jiqi zaiwu ke zhanyan bannian” [Business debts to be postponed for six months], China Times, Nov. 5, 1998. Back.
Note 73: Taiwan had a plan to lift the control by year 2000 and they now apparently became more cautious. See Wang Chiao-ch’i,, “Zibenzhang guanzhi, bubi wanquan jiechu” [No need of complete lift of control on capital accounts], Industry and Commerce Times, Feb. 26, 1998. In fact, Singapore and China were the two countries that had this mechanism in place and successfully stopped the financial troubles at their door. The survival of China, Taiwan, and Singapore in the financial crisis, plus Malaysia’s experience before and after its reinstallation of capital control suggested, among other things, that institutional mechanisms at the national level did make a difference in the management of the global financial dynamism. Back.
Note 74: Hsie Ch’in-fang, “Caibu xuanbu wending gushi si cuoshi” [MOF announces four measure to stabilize the stock market], China Times, August 26, 1998. Back.
Note 75: Hsie Ch’in-fang, “Wanjiu gushi, caibu zaitui 3 cuoshi” [MOF to introduce 3 measures for stock market rescue], China Times, Sept. 4, 1998. Back.
Note 76: Liu Tsai-wu, “Taihai jinzhang shenggao, yazhou gushi quanmian buzhi daodi” [As tensions arise over the straits, Asian markets collapse], China Times, March 12, 1996. Back.
Note 77: Mr. Yang Ti-liang, Executive Councilor of the Exchange Fund Investment (EFIL), disclosed that the SAR government spent a total HK $118.1 billion, about US $14.6 billion, in August 1998, as much as US$ 8 billion on a single day, buying the selected stocks in the market against international speculators. Together with other market defense measures, this move brought the markets from collapsing, and Hong Kong from becoming another victim in the domino of Asian market collapses. See Mark Landler, “Hong Kong’s Market Meddling Draws Mixed Reviews,” The New York Times, August 29, 1998; and “$118b spent on 33 blue chips,” Hong Kong Standard, Oct. 27, 1998. Back.
Note 78: Luo Yu-sha and Liu Hsin-yang, “Gushi wending jijin, 630yi luxu jinchang” [Market Stabilization Fund organizes NT$ 63 billion to enter the market], China Times, Nov. 16, 1998 Back.
Note 79: Lin Shu-lin and Lu hsao, “Tiaojiang fangjia, zhengyuan jiang daode quanshuo” [Executive Yuan: moral persuasion to lower housing prices], China Times, Jan. 6, 1999. Back.
Note 80: Liu Hsin-yang, “Kajianzhao, cazhang, cuijiang liqi” [licensing control, account auditing, good ways to lower prices], China Times, Jan. 7, 1999. Back.
Note 81: One of the series of bad debt cases involving financial institutions in late 1998. Back.
Note 82: T’ui T’si-ti, “Chu hengku ting hongpiao, chabu daode quanshuo,” [MOF moral persuasion to press banks to rescue Hongfu], China Times, Nov. 7, 1998. Back.
Note 83: T’ui T’si-ti, “Peihe shukun ge yinheng tongyi zhan buchou yingen” [Banks agree debt deferment in rescue attempt], China Times, Nov. 8, 1998. Back.
Note 84: Hendrik Spruyt, “Institutional selection in international relations: state anarchy as order.” International Organization, 48(4), 1994, p. 527. Back.
Note 85: Spruyt, 1994, p. 529. Back.
Note 86: Spruyt, 1994, p. 531. Back.
Note 87: Spruyt, 1994, p. 531. Back.
Note 88: Spruyt, 1994, p. 554. Back.
Note 89: Oliver Williamson, Markets and Hierarchies, New York: New York University Press, 1975; Mancur Olson, The Logic of Collective Action, Cambridge: Cambridge University Press, 1965; Robert Gilpin, War and Change in World Politics, Cambridge: Cambridge University Press, 1981; Douglass North, Structure and Change in Economic History, New York: Norton, 1981; and Margaret Levi, Of Rule and Revenue, Berkeley: University of California Press, 1988. Back.
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