Comparison of the Economic Systems
of China and Taiwan

by Richard Jue, April 2002

China’s Background In 1949, Mao Zedong declared China the Chinese People’s Republic. It was the beginning of the socialist revolution where the Chinese leaders had decided to follow a modified Soviet model created to better suit China’s specific needs. During this time, China was a poor developing rural country with the largest population in the world, and with a landmass slightly larger than the United States (Gregory Stuart 252). In following the Soviet model, there were at first two main goals of Mao Zedong. The first was the land reform with the redistribution of the land of the individual households, organizing them for collectivization. The government eliminated class differences and distributed machinery and equipment through centralized facilities. The second was the nationalization and consolidation of the holdings in the industry. These first steps were taken in order for the state to take ownership of the land and pave the way for economic planning (Gregory Stuart 253). Unlike the sudden transition of the Soviet Union from a privatized industry to a socialist industry however, the change for China was more gradual. The goals of the government were a gradual change over a five-year period of planning. By 1955, over 68% of the gross value of output was due to the state (Gregory Stuart 254). In China, the State Planning Commission similar to the Central Planning Board of the Soviet Union made the decisions of economic planning. There was a great emphasis placed upon heavy industry with less focus on agriculture. Throughout the 1950s, 85% of the state’s investment was in heavy industry while only 8% was invested in agriculture. Similar to the Soviet Union, there were problems created through the central planning however. There were imbalances and shortages, inflation, poor quality of planning, late plans, and deviation of results from their targets (Gregory Stuart 254). However, throughout the beginning of the change to socialism throughout the 1950s, China’s economy experienced significant growth with a doubling of GNP per capita, and increases in both industrial and agricultural production. After the first five-year plan showing economic growth and up until 1978, China could be characterized by its political upheavals led by the old communist revolutionaries such as Mao Zedong. It could be marked by its struggles of power within the Communist Party as they fought for control. There were periods of economic stagnation followed by longer periods of recovery. Mao introduced many new ideologies in favor of rationality. Some of which were the movement of the heavy industry from the urban areas to the rural areas, and the introduction of the commune system. The Rural Peoples Communes were very large units used as local units of government, and also used in helping to produce agricultural and handicraft products. “The Great Leap” and the Cultural Revolution, these two ideological movements left China scarred with great economic losses. Even though the two major movements were created in partly to increase GDP, they failed to do so. In 1976, Mao Zedong, the father of the socialist revolution, died which led to the end of the revolutionary changes, and to the beginning of the new era of reforms of Deng Xiaoping leading China closer and closer to the way it is today (Gregory Stuart 257). Before the late 1970s under the central planning system, imports were minimized and exports were carried out only to the extent of paying for the imports. It wasn’t until the Deng era of reforms after 1978 did China finally begin to open up its economy to international trade and foreign direct investment to become a more market-oriented system. Because Deng Xiaoping realized that China lacked advanced technology and had shortages of capital, he decided that China would need to enter the Western markets and also take advantage of the capital and technology nearby in Hong Kong, Taiwan, and the rest of East Asia. China set up many free enterprise trade zones near Hong Kong that were exempt from Chinese taxation and regulations. It also opened up its joint venture laws to try to encourage more export-oriented growth. Due to these reforms, it led to a dramatic influx of foreign direct investment. In 1996, China had accumulated over $40 billion in foreign direct investment of which almost 60% came directly from “Greater China”: Hong Kong, Macao, and Taiwan (Gregory and Stuart 250-260). Not only did China change its trade policies, it dramatically changed its agricultural system. Deng Xiaoping essentially replaced collectivization and the commune system with the contract responsibility system. This new system reintroduced the markets back into agriculture (Gregory Stuart 259). The new system gave households’ more responsibility and increased the authority of the local officials and managers, encouraging small-scale enterprise growth in services and industries; something the government had never done before (“China”). As a result of the reforms made by Deng Xiaoping and a shift away from the old Soviet socialist style to a more open market capitalistic type system, China was able to quadruple its GDP since 1978 and grown to become the world’s second largest GDP in terms of purchasing power parity. However due to the size of the population, China still remains a relatively poor country.

Taiwan’s Background In 1895, China was forced to give up Taiwan to Japan, however it was able to reclaim Taiwan back after World War II. Because of the spread of communism in 1949 and the defeats of the Nationalists, 2 million Nationalists fled to Taiwan to establish its own government and declare its independence (“Taiwan”). When the Nationalists first fled to Taiwan, they began with a political leadership dedicated to state ownership similar to a Leninist party, however this was only in order to centralize the power of the Chiang Kai-shek and the Kuomintang (KMT). This allowed the government to make decisions freely. The KMT wanted to avoid the mistakes previously that China had made, with the underdevelopment of the rural areas, inflation, and poor fiscal policies (Aberbach Dollar Sokoloff 48). This led to the development of the private sector under the guidance of the government. This was called the “Planned Free Economy” where Chiang Kai-shek said, “the First Economic Construction Program should combine economic freedom for the population with a national economic plan” (Aberbach, Dollar, Sokoloff 311). This is not to say that under the guidance of the government, the government would restrict capital or equalize the land however. The government would create stability in prices and exchange rates, while encouraging the development of the private sector through a central banking system. From the 1950s, many entrepreneurs from China, especially those from Shanghai came to Taiwan. As a result of the many entrepreneurs, Taiwan started out with many small new firms and has remained this way ever since. Starting from the 1960s, Taiwan believed in the development of capital-intensive industry trying to move away from labor-intensive industries. It put heavy emphasis on the development through “export-led” growth. “Export-led growth” in Taiwan meant growth created by continuous improvements in production method facilitated by manufacturing exports. Since then, Taiwan has been able to exhibit remarkable economic growth, with an average GDP growth rate over 8%. As a country, it has always been able to keep inflation under control and keep the unemployment rate below 4%, and as low as 1.6%. Taiwan developed as a market capitalistic country with some governmental control and planning with emphasis on the development of technology, privatization, and international trade. In regards to industrialization, there were 2 main goals. Taiwan wanted to “widen” the industrial sector, meaning to increase industry’s share in total output, and it wanted to “deepen” the industrial sector, meaning it wanted to shift industry toward more “higher value-added activities”(Aberbach, Dollar, Sokoloff 6).

Comparing China and Taiwan Capitalism vs. Socialism Even though Taiwan is considered a market capitalistic country and China is considered a socialistic country, both have exhibited that they do not follow a purely capitalistic system or socialistic system respectively. They actually follow a mixture of both types systems to different degrees. Even though Taiwan follows a capitalistic system, the state still has control over the banking and finance system and decides which industries to protect and support. China on the other hand, started out almost under strict socialism but has begun to change to develop both foreign and domestic markets. One of the main reasons for the differences in growth between Taiwan and China was the differences in international trade. High-exporting industries tend to lead to faster productivity than low-exporting industries (Aberbach, Dollar, Sokoloff 43). State-owned firms with no foreign help are also less productive than privatized firms and joint-venture firms with foreign direct investment. It was not a mere coincidence that China for the first time was able to finally match the 8% GDP growth rate of Taiwan that it has put up for decades after it opened up its foreign market and allowed for the entry of foreign direct investment. Even though one of the main advantages stated of socialism/communism over capitalism was stable growth over long periods of time. However, Taiwan under capitalism has exhibited a more stable GDP growth rate of about 8% over the last 5 decades whereas China has been unstable and shown a negative GDP growth rate to the point where the Chinese government would not even reveal official statistics anymore. It was not only until recently when the government took advantages of capitalism did the economy finally begin to grow again. Not only did Taiwan exhibit a more stable growth rate, it had much less inflation than China, a lower unemployment rate, and a greater equality of income distribution. Taiwan’s unemployment rate never reached over 4%, but China’s unemployment rate was 4% in urban areas and up to 10% in underdeveloped rural areas (“China”). In Taiwan, the per capita income was $16,500 while in comparison to China, which only has a per capita income of $3,600. It can be easily seen how capitalism is in fact a more efficient system than socialism when comparing China with Taiwan. Even though Mao Zedong adapted the Marxist-Leninist view of socialism to better fit China, the state was unsuccessful at generating prolonged periods of economic growth. The decisions of the state were not effective in creating greater economic equality and socialization. China’s state planning was unable to reach the Pareto efficient equilibriums that markets have proven to produce where the supply meets the demand to determine the equilibrium prices.

Differences in Trade China With a labor force of over 700 million, China is clearly a labor abundant country (“China”). China is consistent with the Heckscher-Ohlin model where countries tend to export goods whose production are intensive in factors in which they are relatively abundantly endowed; it has a comparative advantage in labor-intensive goods (Krugman, Obstfeld 66-68). Its main exports lie in machinery and equipment; textiles and clothing, footwear, toys and sporting goods while its main imports were machinery and equipment, mineral fuels, plastics, iron and steel, chemicals (“China”). Even though China exports mainly labor-intensive goods and low-tech products, however after the reforms of 1978, it led to a significant boost of capital and technology through foreign direct investment. This had led China to begin focusing on producing more capital-intensive goods and higher technology products (Gregory, Stuart 260). In 1995, China still had a high comparative advantage in low-tech and labor-intensive products with a growing comparative advantage in medium-tech products (Liu, Parker, Vaidya, and Wei 9). Overall, China was at a comparative disadvantage in high-tech products and capital-intensive goods; however, it did have a comparative advantage in telecommunications equipment, office machines, and a growing competitiveness in automatic data processing equipment (Liu, Parker, Vaidya, and Wei 3).

Taiwan Taiwan on the other hand, does not have a large overall population of 22 million, and only has a labor force of 9.8 million. However, its comparative advantage lies in human capital, capital-intensive goods and high-tech products. Its main exports lie in machinery and electrical equipment, metals, textiles, plastics, chemicals, while its main imports are machinery and electrical equipment, minerals, and precision instruments (“Taiwan”). The one industry where it has a definite advantage in and of which the government still has a considerable interest in, is the semiconductor industry. The reason for this is because of the government’s investment in higher education to accumulate human capital. The government developed the Industrial Technology Research Institute (ITRI) and the Electronics Research Service Organization (ERSO) in order to further develop the semiconductor technology and move it along into the private sectors. (Aberbach, Dollar, Sokoloff 174-177). The ITRI was founded in 1973. It was founded to promote technological innovation. Even though it is not considered a government organization, it receives a great amount of government assistance. Its most important role is as a partner in high priority government-inspired projects. The ITRI is composed of several distinct institutes, but the most important is ERSO. ERSO is involved in the island’s ongoing ultra-large scale integrated circuit development program. ERSO has become the premier research institute in Taiwan’s current and future advances in integrated circuits and other complex microelectronics components. In the late 1970’s, it was the local recipient in a major microelectronics technology transfer project with RCA of the United States where it received and absorbed the technology from RCA and worked to disuse the technology into the local privatized market. ERSO provides technical support to over forty local integrated circuit manufacturers and wafer makers in Taiwan. It serves as the training ground for young engineers, some of who eventually leave the organization to start up their own firms. One of the most important joint ventures in the semiconductor industry was of Acer and Texas Instruments. In 1989, Acer concluded a technology transfer agreement with TI. Acer’s importance was that it showed an emphasis on nondependence on outside sources, especially the Japanese, moving out of the low-end computer market and the building of a large integrated research-oriented company. It showed that Taiwan was no longer a technological imitator but an innovator. And it showed a shift from low labor-intensive assembly type operations to the concentration on high-technology sectors. (Aberbach, Dollar, Sokoloff 177-188).

On November 11, 2001, both China and Taiwan officially joined the World Trade Organization (WTO)(“China officially joins the WTO). They were amongst the few remaining major trading nations to finally join. By joining the WTO, it shows how both China and Taiwan have become accepted amongst the international trading community. By joining the WTO, it opens up both of the countries’ markets even more to the other 142 countries/members and is expected to increase the trades of both countries significantly. This move also signifies how China will face many new market reforms including tariff reductions moving it closer and towards a market economy.

Ways to Improve for China and Taiwan China With 1.3 billion inhabitants, China is the world’s most populous country. China covers over 3.8 million square miles, which also makes it one of the world’s most densely populated countries. Despite showing signs of rapid growth with a current real GDP growth rate of 8%, China is still considered a poor country. China is a resource-rich country in land, population, and minerals, however many of the resources have been underutilized due to variations in the climate and land fertility, along with large areas of rough unusable terrain. A considerable part of China’s land is unsuitable for any agricultural development without capital investment, and overall China would need much more capital investment in order to fully exploit all of its resources. Because of China’s size, its growth in different regions has been highly uneven. The most rapid GDP growth has been in urban areas that the government allowed to as free enterprise zones such as areas near Hong Kong and also Shanghai. These areas were stimulated by foreign investment and were encouraged to develop export-led joint ventures. In order for China to stimulate economic growth and development across all regions however, the government must first open up its state control and not withhold development to within the special enterprise trading zones. This would increase foreign trade and investment across China and allow for a more even regional GDP growth. This would also help in China’s transition in shifting towards producing more capital-intensive goods and high technology products moving away from labor-intensive goods and low technology products as more capital would enter the entire country. China must continue to privatize the state sectors and continue to introduce more market capitalistic system. It will be very difficult for China to continue its current growth rate if there are constant clashes between the state and the market. It must also improve upon its education and literacy rate if it wants to change to more high-tech industries. Its current literacy rate was only 81.5% as compared to the literacy rate of Taiwan at 94%.

Taiwan Starting from the beginning, Taiwan was dominated by state-owned banks. Taiwan’s financial system remained underdeveloped. The government set interest rates. There was great reliance on collateral, and over the 1950s, a strong public-sector bias operated, with state-owned enterprises absorbing more than half of the outstanding loans and discounts (Aberbach, Dollar, Sokoloff). In 1957, the Bank of Taiwan launched a new export loan program under which short-term loans were extended to exporters to finance the entire production chain of their export operations. Firms were granted credit lines based on past export performance and future plans. This was how the government was able to encourage export-led growth (Aberbach, Dollar, Sokoloff). However, it has already Taiwan has already proven that it can be much better under a market oriented system. Thus, Taiwan must continue to dissolve the government ownership of the large banks with privatization. It must also be well aware that China has become a major player in the world market. It must continue to work with China so that the two countries are able to complement one another in order to continue to lessen political tension. It could also work on stabilizing its stock market and increase its financial service abilities. It must also open the overprotected financial market to foreign companies where Taiwan heavily protects certain domestic industries such as insurance firms

What Lies Ahead Many people, including myself, believe that what lies ahead for both China and Taiwan is the eventual reunification. However, for this to happen, China must continue to evolve from socialism, to market socialism, and finally into market capitalism. Only when China finally becomes capitalistic will Taiwan reunify, otherwise with the two different systems, they will end up clashing and nothing will ever get accomplished. China must also agree to leave much of Taiwan the same without making dramatic disrupting changes. Some future problems can already be seen as when Hong Kong first rejoined China. After Hong Kong was reunified with China, it took economic losses because China had already made plans to further develop Shanghai as its dominant trading port, taking away some international trade from Hong Kong even though it had promised to leave Hong Kong the same.



Works Cited Aberbach, Dollar, Sokoloff, Joel D. David, Kenneth L. The Role of the State in Taiwan’s Development. New York: M.E. Sharpe, Inc. 1994.

Gregory, Stuart, Paul R. Robert C. Comparative Economic Systems. Boston: Houghton Mifflin Company 1999.

Krugman, Obstfeld, Paul R. and Maurice. International economics Theory and Policy. Reading, Massachusetts: Addison Wesley Longman, Inc. 2000.

Liu, Parker, Vaidya, Wei, Xiaming, David, Kirit, Y. “Changes in China’s Comparative Advantage in Manufacturing 1987-1995.” June 2000

Central Intelligence Agency. “China.”

Central Intelligence Agency. “Taiwan.”

“China officially joins the WTO.”



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