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Economy of Taiwan

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Through World Bank Group, Multinational corporation and Current account (balance of payments)

During Dutch and Qing rule, Taiwan primarily exported agricultural goods like rice, sugar, and tea. During the period of Japanese colonization, Taiwan's agricultural exports benefited from electrification, railroads, and irrigation infrastructure. After 1949, the Kuomintang (KMT) instituted large-scale land reforms, turning farmer-renters into landowners. The resulting surplus in agricultural yields, as well as rising rural incomes, laid the groundwork for Taiwan's urbanization and industrialization in the import-substitution phase. In the subsequent period of export-oriented industrialization from the 1960s to the 1990s, Taiwan experienced rapid economic development from an agriculture-based society to an industrialized, high-income economy. This period of economic growth is also known as the Taiwan Miracle.

As of 2025, SMEs provide 80% of all employment opportunities in Taiwan's labor market. After 1945, the Kuomintang limited large private enterprise in order to maintain political power. This provided SMEs the room to grow and take market share. In most sectors, notably in electronics, petrochemicals and textiles, the state provided guidance but did not take any direct ownership. Instead, transnational corporations and local businesses cooperated to provide the capital, technology transfers, and cheap labor underpinning the Taiwan Miracle. Today, Taiwan maintains this same large network of SMEs responsible for the export of downstream products. Taiwan's insularity from the 1997 Asian Financial Crisis is often attributed to the resilience, adaptability, and entrepreneurial nature of SMEs.

Taiwan is a significant creditor nation, despite its economy's modest size, due to large and persistent current account surpluses. Taiwan's central bank, and increasingly Taiwan's life insurers, recycle the surpluses overseas. As a result, Taiwan has the world's sixth-largest foreign exchange reserves, and has holdings of overseas fixed income securities totaling $1.7 trillion, representing 200% of Taiwan's nominal GDP. Taiwan's net international investment position totals $1.6 trillion.

Taiwan, as one of the leading producers of computer microchip and high-tech electronics, has benefited from the AI Boom. Taiwan's economy relies heavily on semiconductor and other AI-related gear exports, which account for around 80% of its total exports. The ratio of Taiwan's exports to GDP is 76%. Consumption, by contrast, plays a relatively small role, accounting for 40% of Taiwan's GDP. As of 2026, Taiwan manufactures over 90% of the world's advanced AI chips. However, Taiwan's economy also faces challenges, such as low wage growth, concentration of economic growth in a very small number of tech companies such as TSMC, and an aging population.

History

Pre-colonial period

Prior to the migration of Han Chinese to Taiwan, Taiwanese aborigines were engaged in varying forms of agriculture, hunting, and gathering. During the Ming dynasty period, Chinese pirates and sailors occasionally engaged in trade with the aborigines. The first permanent Han Chinese population of about 50,000 settled near Tainan after the Dutch East Indies Company offered incentives for migrant or permanent settlers to develop agriculture near Fort Orange. At this point, Taiwan's primary exports were sugar, rice, and deerskin. After Koxinga expelled the Dutch, the Tungning regime went to great lengths to develop Taiwan's economy, with about 100,000 Han Chinese residents by 1683. During the Qing period, Taiwan's frontier status meant that administration was lax and taxes were rarely enforced. Taiwan's tenancy rate in the 18th century was unusually high at 75%.

As a result of the Opium Wars, Qing China was forced to open treaty ports. This included ports in Taiwan: Tamsui, Keelung, Kaohsiung, which opened between 1862 and 1864. The treaty ports became a boon for Taiwan's economic growth, while sugar, tea, and camphor became major exports. During this period, Taiwan maintained a positive balance of payments. General Liu Mingchuan, Qing governor of Taiwan, spearheaded the modernization of Taiwan's infrastructure including a north–south railway, telegraphs, and modern naval defenses. His policies also promoted the assimilation of aborigines and reclamation of mountainous land. By the end of Qing rule, Taiwan's population numbered over 2.5 million.

Colonial period

After the Treaty of Shimonoseki, the development of Taiwan's economy began in earnest under Governor-general Kodama Gentaro and administrator Goto Shinpei. Their efforts include standardizing the currency, instituting tariffs, creating domestic monopolies, and the construction of railways, roads, telegraphs, and harbors. The Japanese sought to develop Taiwan's agriculture as a means to supply the grain and commodities necessary to industrialize the Japanese mainland, without necessarily industrializing Taiwan itself. An important first step was a land reform which forced large absentee landowners to sell land to smaller de facto landowners in exchange for government bonds, thereby legitimizing and systematizing private ownership. A combination of advanced farming techniques and new seed varieties produced steady yield growth in the following decades. Taiwan primarily exported rice and sugar, most of which was shipped and processed in Japanese mills.

With the outbreak of the Second Sino-Japanese War in 1937, colonial authorities set into motion the industrialization of Taiwan, to produce materiel for Japan's war machine. Industrialization was accompanied by two other policies--Japanization, in order to create the compliant labor force necessary to work the factories, and "South Bastion," a broad plan to use Taiwan as a fortified launching pad to secure natural resources in southern China and Southeast Asia. The Five-Year Plan of Productivity Expansion (1938) jump-started Taiwan's steel, weapons, chemical, and pharmaceutical industries. As Japan's industrial base suffered due to the Pacific War, Taiwanese factories filled in gaps, birthing a consumer goods industry. By 1941, Taiwan had transformed from a colonial periphery to a self-sufficient economy.

Early KMT period

In 1945, Taiwan was returned to the Nationalist government control, leading to swift economic decline. Taiwan's economy, already strained from the demands of the Pacific Theater and an American bombing campaign, was dealt another blow when the Nationalist government swiftly repurposed Taiwan's agricultural production for the Chinese Civil War. The Nationalists also inherited the industrial assets of the Japanese, much of which was disassembled and reassembled on the Chinese mainland. Inflation skyrocketed to more than 3000%. In early 1949, Chen Cheng was assigned governor of Taiwan. His early reforms included a 37.5% cap on rent for tenant farmers, as well as the creation of the New Taiwan dollar.

Following the Great Retreat, the Nationalist government became acutely aware of the importance of land reform--in particular that they had lost the Chinese Civil War to peasants who had been promised land redistribution. The nationalists began by leasing or selling land inherited from the Japanese to farmers, and continued with the "land to the tiller" program, in which landowners were forced to sell their assets to the government, which would then redistribute that land to the existing tenant farmers. In parallel, farmers were provided loans, training, equipment, and higher-value crops. This land reform improved agricultural yields, boosted rural incomes, and created the necessary surplus to be reinvested into Taiwan's manufacturing sector.

Yin Chung-jung, the primary architect of Taiwan's import-substitution phase, overvalued the currency, cheapening input goods and factory construction costs. Simultaneously, the overvalued currency made Taiwan's agricultural exports less competitive, acting as an export tax, incentivizing farmers to instead trade their rice for fertilizer to the government, under the rice-fertilizer barter scheme. The resulting domestic food surplus suppressed food costs, inflation, and in particular wage growth. Much of Taiwan's competitive advantage in its exports-led phase would derive from lower wage costs. A simultaneous policy of tariffs ensured Taiwan's nascent manufacturing sector survived, despite the overvalued currency, and could begin exports.

Taiwan Miracle

By 1957, and certainly by Yin's death in 1963, Taiwan's import-substitution phase had ended. Taiwan's policy makers rejected industrial deepening, and instead instituted the 19-Point Economic Reform Plan (1960), a framework for Taiwan's export-led model. Tax rebates encouraged exports, while controls on foreign exchange and trade were dropped. Senior KMT leadership worried about potential inflation and weakening of government control, but ultimately saw the plan as necessary for Taiwan's independence from USAID. Subsequent economic development took on a liberal tilt, at least by the region's authoritarian standards. In contrast to Korea's centralized economy, or Japan's oligopolisitic companies, Taiwan encouraged free trade, foreign investment, and domestic entrepreneurship. The establishment of a special economic zone in Kaohsiung Port in 1965 presaged the surge of direct foreign investment and small and medium-sized enterprises (SMEs) in the following years. In addition to the established textiles industry, policy makers identified electronics as a top priority in 1966. When Japanese foreign investment in electronics faltered due to local-content requirements, Taiwanese entrepreneurs filled the gaps. Beneficiaries would come to include Lin Ting-sheng of Tatung Company, Chen Mao-pang of Sampo Corporation, and C. C. Hong of Panasonic Taiwan. By 1970, Taiwan had become a leading destination for overseas Chinese, American, and Japanese investors.

The oil crisis in 1973 prompted Chiang Ching-kuo, then president, to launch the Ten Major Construction Projects. Even prior to 1973, Taiwan's rapid economic growth had strained energy supplies, and was increasingly bottlenecked by poor infrastructure. The national project both stimulated the economy in the immediate aftermath of the oil crisis, and provided the long term energy and transportation infrastructure for Taiwan's continued development. The success of the Ten Projects was followed by the state-led establishment of science parks and export processing zones, notably the Hsinchu Science Park (1981). Thorbecke and Wan rationalize these state interventions, counter to Taiwan's more decentralized economy, as a means to capture 'spill-over' benefits from adopting new technologies, such as knowledge and technology diffusion, or synergistic effects on the entire supply chain. As these benefits may not lead to direct profits for private firms, responsibility fell on the state to construct state of the art facilities and infrastructure.

Although cogent financial policy by the Taiwanese Central Bank and the resilience of SMEs insulated Taiwan from the 1997 Asian financial crisis, Taiwan's economic momentum slowed in the 21st century, owing to slowing global trade growth and multiple financial or trade shocks. After the bursting of the Dot-Com Bubble, Taiwan experienced blow back effects from the corresponding financial crisis. A recovery made possible by post-SARS stimulus was soon followed by the Great Recession, where Taiwan's exports-led economy again faced a downturn due to a reduction in global demand. Economic malaise continued into the 2010s with the US-China Trade War and COVID-19 pandemic. In parallel, Taiwan's economy faced longer-term structural obstacles. For one, both foreign and Taiwanese companies increasingly outsourced labor to mainland China. For two, investors feared Taiwan's energy scarcity, as an anti-nuclear lobby prevented the construction of Taiwan's fourth nuclear power plant.

AI Boom

Taiwan, as one of the leading producers of computer microchip and high-tech electronics, has benefited from the Artificial Intelligence Boom. Taiwan's economy grew 8.68% in 2025, outperforming peer economies in Asia. UBS estimates that by 2028, Taiwan's economy will produce the most new millionaires in the world. However, the economic growth is highly concentrated in the tech companies such as TSMC, with smaller and more unproductive small businesses that account for around 80% of Taiwan's employment seeing much slower growth. The growth has made Taiwan's economy to become heavily reliant on semiconductors; around 80% of Taiwan's exports were semiconductors and other AI-related gear in 2026, compared to around half before the COVID-19 pandemic, while Taiwan's non-semiconductor exports have fallen by 40% since 2022 in face of rising competition from China.

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