Taxation and Economic Development among Pacific Asian Countries

Ting-an Chen and Peter Wen-hui Cheng

For more than three decades Taiwan's economy has experienced rapid growth, especially in its foreign trade sector. During the years 1952-1988, real gross national product (GNP) grew at an average annual rate of 8.82 percent. Meanwhile, the expansion of foreign trade was even more impressive, with exports and imports increasing at annual rates of 21.81 percent and 19.25 percent, respectively. Taiwan experienced a trade surplus for most of the 1970s and 1980s and accumulated the third largest amount of foreign exchange reserves in the world--US$73.4 billion by the end of August 1989. ¹ Not surprisingly, Taiwan's currency was forced to appreciate a dramatic 53.86 percent from 1985 to June 1989. ² Per capita GNP jumped from US$3,297 in 1985 to US$6,333 in 1988.

The external imbalance not only has created tensions and disputes between Taiwan and its major trade partners but also has generated excess liquidity and strong inflationary pressure in the domestic economy. As shown in Table 12.1, excess savings in Taiwan have been incredibly high, over 10 percent of GNP since 1984. The terrible effects were most evident in the recent money-chasing games in the housing and stock markets, which distorted the allocation of resources and worsened the distribution of income. Furthermore, Taiwan also faces the problem of restructuring its industries. Many factors have contributed to these and other negative changes in the domestic investment environment. The labor shortage and resulting increases in wages, intensification of the environmental protection and labor movements, and the increased difficulty of acquiring new plant lots for factories were the problems most acknowledged by the government. To cope with the overflow of liquidity, in 1987 the government began the process of deregulating exchange controls. ³

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