Taiwan actually managed to develop into a relatively stable democratic state after the war. This was due to a variety of reasons, not in the least substantial amounts of US military and economic aid (both direct and indirect):

In 1949, the Kuomintang (Nationalist Chinese, or KMT) were defeated by the Gongchandang (Communist Chinese, or CCP). Because of the fact that naval and air power was still mostly dominated by the KMT forces, the leader of the KMT, Chiang Kai-Shek, ordered a withdrawal to the island of Taiwan, which had only recently been liberated from the Japanese after WWII. As a result, hundreds of thousands (if not millions) of refugees, soldiers, and party loyalists fled to Taiwan, bringing with them whatever they had, which ranged from the clothes off their backs to the contents of the National Palace Museum of China (which mostly remain in the National Palace Museum of Taiwan to this date).

This large amount of refugees and soldiers created a demographic crisis on the island of Taiwan. The existing inhabitants, including landlords and industrialists, weren't very happy about having to share their island and land even prior to the withdrawal, especially after Chiang Kai-Shek ordered several centralization reforms that angered the Taiwanese, resulting in a rebellion known as the 2-28 incident. The ensuing crackdown by Nationalist forces lasted for some time after, known as the "White Terror." This crackdown probably got out of control as it quickly became used to detain people for being suspected communist spies, both Taiwanese and mainland emigres. Even Lee Teng-Hui, a future president of China, was detained and threatened with lethal force, for suspected Communist tendencies.

This was compounded by Chiang Kai-shek utilizing force in order to establish other policies, including land reform that redistributed large plantations from the Taiwanese to the newly arrived refugees. While this certainly was not helpful to improving relations between the KMT and the Taiwanese, it did sow the seeds for the rapid economic growth that would catapult Taiwan from being a sleepy tropical island to the world's semiconductor center.

The US, after being relatively ambivalent about the fate of the KMT prior to the withdrawal (due to splits in various US government agencies and a general suspicion of Chiang) quickly moved in to protect Taiwan after the Korean War, signing a defense treaty in 1955 and having a naval presence in the Taiwan strait between Taiwan and China. This, coupled with a decisive Communist defeat at Quemoy, would establish Taiwan's security and independence from the mainland. The US also gave aid to Taiwan, not just in the form of money but also through allowing Taiwan to enact protectionist policies. These protectionist policies allowed Taiwan's fledgling industry to grow without being crushed by the much larger US industry.

Remember the land reform I mentioned earlier? This policy created many family-sized plots, which were later cultivating so-called backyard industries, similar to the mom-and-pop shops that were the key component of Japan's wartime industry. These mom-and-pop shops laid the fertile ground for the creation of large heavy industry, which rapidly moved from things like toys and plastic consumer goods to microchips and electronics. By the time the American economic and military protection had lapsed, Taiwan's economic strength was staggering-rendering it one of the so-called "Asian Tiger" economies. Just to get an idea of how capitalist this environment was, there is a joke about Taiwan's free market which states that the first day, there is a new product, the second day, there is a competitor, and the third day everybody is out of business due to the subsequent price war.

As fears of communism faded and the economy grew, and the old guard of the KMT faded away (with Chiang dying in the 1970s and his son, Chiang Ching-kuo, gradually expanding political freedoms) a powerful democratic force began rising up. Consisting of intellectuals and native Taiwanese, the Democratic People's Party (DPP) acted as the opposition for the KMT. While it was not officially legal until later on, Chiang Ching-kuo chose not to suppress it, which lent fuel for Lee Teng-Hui, who is considered to be the "father" of Taiwanese democracy. Lee Teng-Hui, a native Taiwanese KMT member, started gradually rolling back the martial law (which had officially ended in 1987) and around this time the White Lily movement, a student movement demanding more freedom and rights, sprung up across Taiwan. These factors in tandem led to Taiwan's first real election in 1992, which Lee won fairly convincingly but continued to both liberalize and create a "Taiwanese" identity.