TAIWAN
Rank: 26 Regional Rank: 6 of 30
T
aiwan’s economy is 71.1 percent free, according to our 2007 assessment, which makes it the world’s 26th freest economy. Its overall score is 0.5 percentage point higher than last year, partially reflecting new methodological detail. Taiwan is ranked 6th out of 30 countries in the Asia–Pacific region, and its overall score is much higher than the regional average. Taiwan has high levels of investment freedom, trade freedom, property rights, fiscal freedom, freedom from corruption, and freedom from government. The average tariff rate, inflation rate, and level of corruption are all low. Although Taiwan’s personal income tax is high, the corporate tax rate is moderate, and overall tax revenue is low as a percentage of GDP. Government spending is similarly low. Taiwan’s investment climate is healthy, and 100 percent foreign ownership is permitted in most sectors. Property rights are protected by the judiciary, although there are minor problems with case delays and corruption associated with organized crime. Taiwan is relatively weak in labor freedom and business freedom. The country’s labor market is not as flexible as it could be, and dismissing a redundant worker is costly. Starting a business takes as long as the global average, but commercial licensing can be difficult. BACKGROUND: Taiwan is Asia’s fifth largest economy and one of its most dynamic democracies. Despite Taiwan’s long-standing autonomy from the People’s Republic of China, Beijing’s “One China” policy has isolated Taipei from the international community and pressured it to accept PRC suzerainty. Taiwan seeks to participate in the World Health Organization and to maintain a presence in international trade and financial organizations with the help of such democratic partners as the United States and Japan. The service industry leads the Taiwanese economy, and both the agricultural and manufacturing sectors are gradually declining.
The economy is 71.1% free
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Asia Average = 59.1 World Average = 60.6
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1995
2007
QUICK FACTS
Population: 23 million (2006 estimate) GDP (PPP): $631.2 billion (2005 estimate) 6.1% growth in 2004 3.4% 5-yr. comp. ann. growth $27,600 per capita (2005 estimate) Unemployment: 4.4% Inflation (CPI): 1.6% FDI (net inflow): –$5.2 billion Official Development Assistance: Multilateral: n/a Bilateral: $15 million (4% from the U.S.) External Debt: $87.5 billion (2005 estimate) Exports: $199.6 billion Primarily computer products, electrical equipment, metals, textiles, plastics, rubber products, chemicals Imports: $188.3 billion Primarily machinery, electrical equipment, minerals, precision instruments
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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TAIWAN’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 73 76.7 84.7 89.8 81.3 70 50 70 59 56.7
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INVESTMENT FREEDOM — 70%
Repatriation of profits is not restricted, and 100 percent ownership is permitted in most sectors. However, foreign investment is prohibited in a handful of industries such as agriculture, wireless broadcasting, oil exploration of Taiwan’s coastal area, public utilities, and postal services. Foreign investment is limited in the telecommunications sector, electricity transmission and distribution, and highspeed railway transportation. Restrictions on capital flows relating to portfolio investment have been removed. The insurance and securities industries have been liberalized and opened to foreign investment. Access to Taiwan’s securities markets by foreign institutional investors has also been broadened.
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100
100 = most free,
= world average
BUSINESS FREEDOM — 73%
Starting a business takes an average of 48 days, which is about the world average. To maximize entrepreneurship and job creation, it should be easier to start a company. Obtaining a business license can be difficult, but closing a business is easy. The overall freedom to start, operate, and close a business is relatively well protected by the national regulatory environment.
FINANCIAL FREEDOM — 50%
Taiwan has liberalized the traditionally over-regulated financial sector. Among other things, the government has reduced many restrictions on financial activities, particularly the activities of foreign financial institutions. A wide variety of financial instruments are available to foreign and domestic investors on market terms. Four state-owned banks were privatized in 1998, four more in 1999, and one more in 2005. Four state-controlled banks remain, including two of the three largest domestic banks, which together account for 16 percent of bank assets. Banks offer a wide range of services, and foreign banks are treated essentially the same as domestic banks. The insurance and securities industries have been opened to foreign participation and ownership, although foreign participation remains relatively low. The only reinsurance company was privatized in 2002. Capital markets are sophisticated, and the stock market is open to foreign participation, except for select industries.
TRADE FREEDOM — 76.7%
Taiwan’s weighted average tariff rate was 1.67 percent in 2005. Prohibitive agriculture tariffs, import bans and restrictions, import taxes, export subsidies, burdensome standards and certification requirements, complex regulations, restrictive sanitary and phytosanitary rules, service market access barriers, and weak enforcement of intellectual property rights all add to the cost of trade. Consequently, an additional 20 percent is deducted from Taiwan’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 84.7%
Taiwan has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 40 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 8.5 percent.
PROPERTY RIGHTS — 70%
Property rights are generally protected, and the judiciary enforces contracts, although the court system is very slow. One of the judiciary’s biggest problems is corruption associated with organized crime.
FREEDOM FROM GOVERNMENT — 89.8%
Total government expenditures in Taiwan, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 15.3 percent of GDP, and the government received 14.4 percent of its revenues from state-owned enterprises and government ownership of property.
FREEDOM FROM CORRUPTION — 59%
Corruption is perceived as present. Taiwan ranks 32nd out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 56.7%
The labor market operates under inflexible employment regulations that hinder overall productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee is relatively costly.
MONETARY FREEDOM — 81.3%
Inflation in Taiwan is low, averaging 1.9 percent between 2003 and 2005. Relatively stable prices explain most of the monetary freedom score. The government regulates the prices of pharmaceutical and medical products and is also able to influence prices through regulation, subsidies, and state-owned utilities. Consequently, an additional 10 percent is deducted from Taiwan’s monetary freedom score to account for these policies.
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2007 Index of Economic Freedom