After retreating from the mainland in 1949, the leaders of the government on Taiwan instituted land reforms that increased agricultural productivity. In the 1960s Taiwan adopted export-oriented policies, establishing export processing zones with incentives to attract direct foreign investment. Meanwhile, the government also pursued industrialization. A strong manufacturing sector developed, with most products consisting of labor-intensive goods. During the 1980s the focus of manufacturing shifted to capital- and technology-intensive commodities, such as personal computers and machinery. In an effort to join the World Trade Organization, an international body that promotes and enforces trade laws, Taiwan’s government began liberalizing the economy in the 1990s by deregulating banking, finance, the stock market, investment, and trade.

During the 20th century Taiwan's economy has been transformed from agricultural to industrial, and the island's postwar economic development has been one of the most spectacular of any developing country. In constant prices, gross national product increased more than 10 times between the mid-1950s and mid-1980s. The major reason was vigorous export promotion in an expanding global economy. Per capita product and personal income quintupled, while a relatively equal distribution of income became more equitable. The major reasons were the initially broad distribution of ownership of land and capital and the high returns to labour, first in agriculture and later in the export industries. The obligation to increase and repay family resources has motivated the individual Chinese and has produced much of the rapid growth of Taiwan's economy. This growth has proceeded in three phases. The first (c. 1905–55) was the modernization of agriculture and the development of other primary or extractive industries. The second (c. 1935–85) was the development of modern secondary manufacturing industries. The third (since 1965) began the modernization of service industries.

Taiwan has a dynamic capitalist economy with gradually decreasing guidance of investment and foreign trade by government authorities. In keeping with this trend, some large government-owned banks and industrial firms are being privatized. Real growth in GDP has averaged about 8% during the past three decades. Exports have grown even faster and have provided the primary impetus for industrialization. Inflation and unemployment are low; the trade surplus is substantial; and foreign reserves are the world's fourth largest. Agriculture contributes 3% to GDP, down from 35% in 1952. Traditional labor-intensive industries are steadily being moved offshore and replaced with more capital- and technology-intensive industries. Taiwan has become a major investor in China, Thailand, Indonesia, the Philippines, Malaysia, and Vietnam. The tightening of labor markets has led to an influx of foreign workers, both legal and illegal. Because of its conservative financial approach and its entrepreneurial strengths, Taiwan suffered little compared with many of its neighbors from the Asian financial crisis in 1998-99. Growth in 2001 will depend largely on conditions in Taiwan's export markets and may be about 5%.