The main aim of this article is to explain how the Taiwanese government managed to create institutions conducive to economic development. The paper analyzes the process of institutional transition in Taiwan by applying a conceptual framework proposed by D.C. North, J.J. Wallis, S.B. Webb, and B.R. Weingast. The analysis makes it possible to positively verify the research hypothesis that a security threat from China was an important factor that determined the economic policies of Taiwan. The threat exerted continuous pressure on the country’s elites, as a result of which they were forced to cooperate and their action became more predictable. That is why Taiwan’s authoritarian government has been able to build institutional foundations for economic development. The result of economic growth was the enrichment of society, education and the development of a civil society, which allowed the opposition to exert pressure on the regime and finally led to democratization. Because specific circumstances played a key role in the economic development of Taiwan today’s developing countries would find it difficult, if not impossible, to imitate the Taiwanese development model.