Rural Development and Dynamic Externalities in Taiwan's Structural Transformation

Abstract

The agricultural and industrial development experience of the Republic of China (ROC) on Taiwan has been widely lauded as a successful model of balanced growth. A rapid increase in per capita GNP from $145 in 1951 to $8,800 in 1991 has been associated with a highly equitable distribution of income.1 This accomplishment is all the more remarkable given its historical context. In the 1950s and 1960s, in response to external and internal threats, an enormous amount of resources was allocated to national defense and internal security. In addition, high underemployment and population growth rates had reached near crisis proportions in the 1950s.2 Despite many attempts to draw lessons from the ROC's experience, there is still considerable controversy over which rural-industrial linkages were most important in the Taiwan case and what the appropriate role of government should be more generally in maximizing the gains from intersectoral interactions.3 The dynamic nature of structural transformation also makes the correct sequencing of policies critical to seizing opportunities as social and economic conditions change. Many western and Taiwanese economists have stressed the importance of successful land reform in the 1950s as being a foundation and strong impetus for rapid growth in Taiwan. Others have ably documented resource transfers in and out of agriculture, growth in labor productivity, the transfer of labor from agricultural to nonagricultural activities, and the rapid rise of labor-intensive smalland medium-scale enterprises (SMEs) in the 1960s and 1970s.4 Though drawing upon this literature, this article attempts to take a fresh, integrative perspective on rural-industrial policy interactions by examining the extent to which structural transformation was connected to spillover effects (or increasing returns phenomena) due to demand-side linkages and human capital development, two less explored aspects of Taiwan's develop-