Rohan Abeygunawardena ACMA, CGMA

Some years ago, in the early nineties, when I was working for a manufacturing company, I was part of a team tasked with expanding and modernizing one of the factories. I met a technocrat from a Taiwanese company that quoted for the machinery needed for our project. I had some reservations about their ability to deliver high-quality machinery compared to a European company that also submitted a quote. However, Taiwan offer was much more attractive in terms of price. Along with my managing director, I had the opportunity to discuss the credentials of the Taiwanese company.

When I mentioned that our perception was that European machinery was superior, he replied it might have been true about ten years ago, but now they can compete with any product in the world. In the end, we chose their machinery mainly because of the price. Although I left that manufacturing company a few years later, I understood they continued working with the Taiwanese company for machinery procurement.

This particular company was German origin (FDI) and later had been given to Taiwanese CEO through a share transfer agreement.

Taiwan’s development history is very interesting. Unfortunately, they built the country during a different geopolitical environment. Sri Lanka can learn some lessons from their experience.

• History of Taiwan

I only knew that Taiwan was established by the former rulers of mainland China after Chinese civil war, and Mao Zedong was at odds with them at the time. When Sri Lanka recognised the People’s Republic of China in 1950, the official diplomatic ties with the Republic of China (Taiwan) were severed.

However since opening of Sri Lanka’s economy in 1977, trade between the two countries increased.

Taiwan is a small island nation located about 160 km off the south-eastern coast of mainland China, separated by the Taiwan Strait. It has a total land area of approximately 36,197 km². The main island is roughly 394 km (245 miles) long and 144 km (89 miles) wide. Sri Lanka is also a small island nation but has a land area 67,240 km².

Although Chinese records date back to the 3rd century CE, the island was mostly ungoverned prior to the 17th century. Portuguese sailors in 1544 were the first Europeans to record the island, naming it Ilha Formosa (“Beautiful Island”).

The Dutch took control and colonized it from 1624 to 1662. The Dutch East India Company (VOC) used Taiwan as a trading hub connecting Japan, China, and Southeast Asia, trading silk for silver and exporting local products like deer hides, sugar, and rice. They also developed the island, encouraging Chinese immigration to work on plantations and building infrastructure such as Fort Provintia.

The Spanish established a separate colony in northern Taiwan between 1626 and 1642, but the Dutch expanded their control by ousting the Spanish. Ming loyalist Koxinga (Zheng Chenggong) defeated the Dutch forces, ending their 38-year rule in 1662.

During World War II, the Japanese colonized the island and developed its infrastructure, economy, public health, and education system. They initiated a railway system in 1899, improving transportation and connectivity between the northern and southern parts of the island. Both Taiwan and Sri Lanka have similar colonial history.

On December 10, 1949, Chiang Kai-shek the leader of Chinese Nationalist Party (Kuomintang or KMT), who ruled mainland China, arrived in Taiwan. This was following his government’s defeat by the Chinese Communist Party in the Civil War. This, and the subsequent days, represented the culmination of a massive retreat that saw a substantial portion of the then Republic of China (ROC) military, government officials, and civilians relocate to Taiwan to establish it as a base for an intended retaking of the mainland. Taiwan became ROC and mainland became People’s Republic of China (PROC) under Mao Zedong.

Since then Taiwan had been facing external threats from mainland communist China.

The Kuomintang (KMT) government ruled Taiwan under martial law since 1949 restricting civil liberties, banning new political parties, and suppressing dissent for nearly 38 years.

First major turning point toward democratization took place when the martial law was lifted on 15 July 1987. This ended many political restrictions, allowed opposition parties to organize, and opened space for civil liberties.

By 1991–1992, laws such as the Temporary Provisions Effective during the Period of Communist Rebellion were repealed, eliminating much of the legal basis for one-party authoritarian rule.

A crucial milestone came when Taiwan held its first direct presidential election on 23 March 1996.

The democratic process was further solidified in 2000, when the opposition Democratic Progressive Party (DPP) won the presidency, marking the first peaceful transfer of power between political parties after decades of KMT dominance.

• Comparison of Taiwan and Sri Lanka’s Economic Development

Many Sri Lankans tend to compare Sri Lanka with Singapore, a tiny city-state, when discussing the success and failures of national development. But in my opinion, Taiwan makes the right benchmark for Sri Lanka’s missed opportunity.

Taiwan and Sri Lanka looked remarkably similar in the fifties. Both were agrarian societies with large rural population and had comparable population sizes. In 1960, Sri Lanka’s per capita GDP was $ 152, and Taiwan’s was $ 149. Like Sri Lanka, Taiwan too was highly dependent on a few exports with a limited industrial base. Both had large rural populations.

• Taiwan Miracle
  • Export-led industrialization

Like in Sri Lanka from 1956 to 1977, Taiwan also pursued a system of import-substitution industrialization in the early to mid-1950s. This led to a chronic shortage of foreign exchange and stagnant growth.

The main focus sectors during this period were textiles, footwear, food processing, and simple household goods. These products were primarily made for the local market.

Premier Chen Cheng, widely regarded as a key architect of the Taiwan Miracle, brought in several technocrats to decide on policy changes while remaining the ultimate decision-maker in economic policy. K.Y. Yin was one of them and became the main architect of Taiwan’s economic policy in the 1950s. He was one of the few Taiwanese officials during that period who consistently promoted free trade.

Yin introduced a dual-rate system for the Taiwan dollar, devaluing the currency to make exports more competitive. The government began reducing import controls, simplifying procedures, and offering tax rebates on raw materials, mainly to encourage exports. By 1962, this new strategy started to show results, with manufacturing production increasing and exports of manufactured goods rising significantly.

Afterwards, the country shifted to export-led industrialization, mainly focusing on manufacturing for global markets. The first Export Processing Zone (EPZ) was established in Kaohsiung in 1965, offering infrastructure and tax benefits to export-oriented firms. This attracted Foreign Direct Investment (FDI) for establishing factories in garments, electronics assembly, toys, and machinery. It enabled local managers and workers to learn new technologies and upgrade their skills. It also created numerous jobs, rapid productivity improvements, and integration into global markets.

Several more EPZs followed.

This process supported the growth of indigenous entrepreneurship, resulting in thousands of small and medium enterprises (SMEs) and strong subcontracting networks.

The Taiwanese government guided industry without suffocation, protected emerging industries, but required them to export and compete—”export or perish.” Unlike Korea, Taiwan did not rely solely on large conglomerates.

Between the 1980s and early 1990s, Taiwan undertook a phase of technological upgrades. Major government initiatives included founding the ITRI (Industrial Technology Research Institute), similar to the CISIR (Ceylon Institute of Scientific and Industrial Research) established in 1955; creating Hsinchu Science Park in 1980; and promoting government-supported R&D mainly applied, not fundamental research.

They also encouraged overseas Taiwanese to return.

1. Education and skills

Taiwan aligned education with industry and made heavy investment in science and engineering. They linked universities directly to industry needs and established technical colleges and science parks (Hsinchu).

Sri Lanka too expanded its university system, but courses were mainly to increase arts graduates. There was no mechanism to provide higher education or technical education to youths who could not be absorbed into the state university system, creating frustration among them. Weak education policies in Sri Lanka also led to the creation of educated youth including university graduates without relevant skills who became unemployable, creating unrest.

In other words Sri Lanka produced degree holders whereas Taiwan produced engineers and technologists.

1. Institutions and governance quality

A strong, disciplined bureaucracy was created by the Taiwan government with merit-based promotion in civil service and controlled corruption (not eliminated, but contained). The officials selected were mainly technocrats and they were knowledgeable and capable of advising the government on planning of economy in terms of short-term, mid-term and long-term.

In Sri Lanka appointments were made based on loyalty, not competence, and gradually politicised public service undermining the technocrats. The frequent policy reversals also affected the national development, and after the 1970s, corruption became systemic. Over decades, this destroyed investor confidence.

1. Treatment of the private sector

The Taiwan government partnered with private firms and supported SMEs to become exporters. Institutions were created to help companies to access credit, technology and foreign markets. Firms like TSMC, Acer, and Foxconn emerged from this ecosystem. Taiwan imposed a simple rule: if you receive state support, you must export and compete internationally.

In Sri Lanka the private sector was often treated with suspicion, and nationalisations destroyed investor confidence (1960s–70s); even after liberalisation (1977), policy inconsistency remained.

•  Export culture vs import culture

Taiwan used a brutal but effective rule, i.e., firms that failed were allowed to die.

Sri Lanka adopted a completely opposite strategic industrial policy and protected firms behind tariffs and continued to protect them even if firms stayed inefficient. A typical example is loss-making state enterprises that were kept alive for politics by pumping taxpayers’ money.

Taiwanese government conditioned the mind-set of the people to ask How can we sell to the world?” On the other hand Sri Lankan mind-set created by local politicians was How can we protect our market and distribute benefits?”

That difference alone explains much of the divergence.

Taiwan commenced developing tourism in a planned, national way in 1966, with the creation of the Taiwan Tourism Bureau to increase foreign exchange earnings. In 2025 Taiwan received 8.57 million Tourists. Sri Lanka also commenced developing this sector almost at the same time.

•   Internal and External Security

Economic development cannot occur in an environment of chaos. Taiwan understood this early. Before rapid industrialisation even began, Taiwan ensured domestic stability. The government crushed armed insurgencies and criminal militias after 1949 and established tight control over armed groups. They maintained central state authority nationwide by building a disciplined police and intelligence services. They strictly enforced law and order. This created predictability, safety for investors, confidence for citizens and ability to plan long-term.

Taiwan faced a serious existential threat from Communist China. Instead of militarising the whole economy, Taiwan made a strategic choice and signed a defence alliance with the United States (1954 Mutual Defense Treaty). They hosted US military support in the region and received military aid and training. They also relied on US naval power to deter invasion.

This meant they did not need to devote all resources to the military and kept defence spending relatively stable (not crippling the economy). As a result Taiwan leaders could concentrate on economic growth.

• Disaster Management

Since Taiwan sits on the collision zone of the Eurasian and Philippine Sea plates, thousands of earthquakes occur every year. While some are minor, seven major ones have happened between 1949 and 2024. The most recent major earthquake was the 2024 Hualien earthquake, which caused significant damage across Hualien County and beyond. The worst was the 1999 Chi-Chi earthquake, which killed 2,415 people and injured 11,305. That quake resulted in NT$300 billion (US$10 billion) worth of damage.

Taiwan also faced eight major typhoons during the same period.

Instead of treating disasters as bad luck,” Taiwan plans its entire development assuming disasters will happen regularly, since the country sits on the Pacific Ring of Fire (earthquakes) and the typhoon belt (cyclones), and is prone to landslides and floods due to steep mountains.

Taiwan learnt from Japan and strict building codes such as base isolation, shock absorbers etc., and enforced nationwide when high-rise buildings are constructed. They use.

Result is even strong earthquakes today cause limited casualties, not mass collapse.

The Taiwan High Speed Railway, which started operation on January 5, 2007, and reaches speeds of up to 300 km/h, also includes an automatic safety system to stop all trains safely if a significant earthquake is detected.

Conclusion:

The above analysis shows that Taiwan didn’t succeed because it started rich, but because it forced itself to become globally competitive. Sri Lanka didn’t fail because it started poor, but because it prioritized political comfort over economic progress.

As a result, Sri Lanka faced a severe debt crisis and economic collapse, requiring deep structural reforms to rebuild credibility.

Sri Lanka can still follow the Taiwan Model” or development logic—not its exact historical path—but only if it accepts three hard truths:

1. Development isn’t about slogans or mega-projects.

2. Discipline matters more than democracy-driven populism.

3. Export performance must dominate domestic politics.

Taiwan’s rapid growth happened in an era with fewer competitors. Despite facing a highly competitive global market now, Sri Lanka can develop its economy to a satisfactory level within a few years if it follows these principles.

The bottom line is Taiwan currently has a per capita GDP of about US $34,000—placing it among the higher-income economies worldwide—while for Sri Lanka it’s about US $4,500 (2024 estimate).

Rohan Abeygunawardena ACMA, CGMA

(Writer could be contacted on abeyrohan@gmail.com)