Technology and economic development: the case of Taiwan

Abstract

In this paper it is argued that Taiwan succeeded in developing by deviating from the currently popular ‘Washington Consensus’ strategy in specific ways. In particular, it developed investment strategies that have now reached a crucial ‘Schumpeterian’ phase. This has important implications for high and information technology sectors. Following Schumpeter we assume that innovation in specific firms can have economy‐wide effects. Models based on this idea can be shown to have multiple equilibria. The idea of a positive feedback loop innovation system or POLIS is formalized by picking an appropriate sequence of equilibria over time. It is shown that POLIS has empirical relevance by applying the formal model to an actual economy. Recent financial crisis in many Asian countries, most notably South Korea, seems to have reversed the conventional wisdom regarding the East Asian ‘miracle’. This paper applies the concept of a POLIS to show that neither the current view that the miracle was a mirage nor the earlier contrarian view that the growth was a result of factor accumulation only is correct. Ultimately technological transformation—in particular the creation of a positive feedback loop innovation system is what makes the difference between sustained growth and gradual or sudden decline. Although various problems remain in both the real and the financial sectors, the successes of Taiwan in building the preconditions for an innovation system are worth examining. Upon careful examination of Taiwan's system of innovation within the above Schumpeterian model it is found that of all the ‘miracle’ economies Taiwan has the best chance of building a POLIS in the near future. Because of Taiwan's strength in building a POLIS, the PRC can also benefit from continuing contact with Taiwan through trade and FDI from Taiwan.