Taiwan’s forgotten bubble

**Jawad Mian** (0:00)
Taiwan is often held up as one of the great economic success stories of the modern era. Over the past four decades, it built the world's most important semiconductor industry, became indispensable to the global technology supply chain, and transformed itself into one of Asia's wealthiest economies. What is less remembered is that one of the greatest stock market bubbles of the 20th century unfolded just as that transformation was beginning to accelerate. Between 1986 and early 1990, the Taix rose more than 12-fold, before losing roughly 80% of its value in less than a year.
Millions of ordinary Taiwanese opened brokerage accounts, property prices surged, unregulated investment companies attracted billions of dollars from retail investors by promising extraordinary returns, and at its peak, daily trading on the Taipei Stock Exchange briefly exceeded the combined volume of both New York and Tokyo.
Looking back, it is tempting to dismiss the episode as simply another speculative mania that would miss what makes Taiwan's experience so fascinating. The optimism was not built on fantasy. Many of the forces investors were responding to proved entirely real. Taiwan was becoming more prosperous, more technologically sophisticated, and increasingly important to the global economy.
That history has become particularly relevant as I think about South Korea today, which is undergoing a genuine industrial and financial transformation, while also displaying many of the characteristics associated with a developing bubble. How do you distinguish between a country whose future is genuinely improving and a market that has already priced in too much of that future? Taiwan offers one of the clearest historical case studies for thinking through that question. To understand why, we need to return to the mid-1980s. A country on the rise.
By 1985, Taiwan's economic transformation was already well underway. Over the previous two decades, the island had evolved from a low-cost manufacturing economy into one of the world's leading exporters of electronics, machinery, and consumer goods. Rising productivity, disciplined industrial policy, and an increasingly skilled workforce had produced sustained economic growth, while large trade surpluses generated a rapidly expanding pool of domestic savings. The catalyst that transformed a successful economy into one of history's greatest stock market booms arrived from an unexpected place. In September 1985, finance ministers and central bankers from the world's largest economies met at New York's Plaza Hotel and agreed to weaken the US dollar against the Japanese yen and the German Deutsche Mark.
Although Taiwan was not a signatory to the agreement, its rapidly growing trade surplus with the United States placed similar pressure on the new Taiwan dollar. Between 1985 and 1989, the currency appreciated from nearly 40 to around 26 new Taiwan dollars per US dollar, an extraordinary adjustment in less than four years. For Taiwan's export-driven economy, the appreciation created a difficult problem. A stronger currency reduced the competitiveness of the manufacturers that had powered the country's rise. To slow the pace of appreciation, Taiwan's central bank intervened aggressively in the foreign exchange market, purchasing US dollars and injecting newly-created domestic currency into the financial system. Between late 1986 and early 1987, Taiwan's M1 money supply expanded by more than 50% year over year, while the country's foreign exchange reserves grew from approximately $20 billion in 1985 to nearly $80 billion by 1987 Under normal circumstances, some of that capital might have found opportunities overseas. Instead, strict capital controls kept much of the liquidity at home, leaving domestic investors with remarkably few places to put their money.
Bank deposits offered unattractive real returns. The domestic bond market remained relatively small, and overseas investment opportunities were largely unavailable.
As wealth accumulated, increasing amounts of capital flowed into the two assets that appeared capable of preserving and expanding it– real estate and equities.
Long before speculation became visible, the conditions that made it possible were already in place. After nearly four decades under martial law, the political landscape also began to change. In July 1987, President Chiang Ching-kuo lifted martial law, ending one of the longest periods of emergency rule in modern history. Opposition parties were legalized, restrictions on the press gradually eased, and the island began a transition toward a more open political system. Following Chiang's death in early 1988, Lee Teng-hui became Taiwan's first Taiwan-born president, symbolizing a new chapter in the country's political evolution. What political reform provided was a growing sense that Taiwan's future was becoming more stable, more confident, and increasingly its own. That confidence was reinforced by an economy that continued to expand and by industries that were steadily moving up the value chain. The Hsinchu Science Park, established in 1980, had begun attracting a new generation of technology companies. United Microelectronics was laying the foundations of Taiwan's semiconductor industry, while Acer was emerging as an internationally competitive computer manufacturer. Then, in February 1987, Morris Chang founded Taiwan Semiconductor Manufacturing Company. Few could have imagined at the time that TSMC would eventually become one of the world's most important companies, pioneering the pure play foundry model, and reshaping the global semiconductor industry.