2009 Index of Economic Freedom

Quick Facts

Population:

• 22.9 million

GDP (PPP):

• $640.8 billion
• 4.9% growth
• 4.7% 5-year compound annual growth
• $28011 per capita

Unemployment:

• 3.9%

Inflation (CPI):

• 1.8%

FDI Inflow:

• $7.4 billion

Taiwan’s economic freedom score is 69.5, making its economy the 35th freest in the 2009 Index. Its score is 0.7 point lower than last year, reflecting slight declines in five of the 10 economic freedoms. Taiwan is ranked 7th out of 41 economies in the Asia–Pacific region, and its overall score is higher than the world average.

Taiwan has benefited from a well-developed legal and commercial infrastructure and a long tradition of entrepreneurship. These institutional advantages have allowed small and medium-size enterprises to grow, marking their importance as key characteristics of Taiwan's economy. Over the past five years, the economy has demonstrated its resilience, achieving an average annual economic growth rate of close to 5 percent.

Taiwan scores well in trade freedom, government size, monetary freedom, and investment freedom. Tariffs are very low, and the government continues to improve the trade regime. Government spending is low, but the level of state involvement in the economy remains considerable. Taiwan's transparent and sound regulatory framework facilitates an efficient investment climate. Property rights are protected by the judiciary, although there are minor problems with case delays and corruption associated with organized crime. Corruption is currently being combated by laws, regulations, and penalties. There is room for improvement in Taiwan's labor freedom. The labor market remains inflexible, hindering more robust growth of employment and productivity.

Background Back to the top

Taiwan is one of Asia's most dynamic democracies. In March 2008, former Taipei Mayor Ma Ying-jeou was elected president on a platform that promised a more open economic relationship with China. He has since moved to relax transportation and trade barriers with China—a stance that has attracted more foreign investment to the island. Taiwan is a modern, developed economy, the fifth largest in Asia, with a heavy emphasis on services, manufacturing, and high technology.

Business Freedom 69.5 Back to the top

The overall freedom to conduct a business is relatively well protected under Taiwan's regulatory environment. Starting a business takes an average of 42 days, compared to the world average of 38 days. Obtaining a business license requires more than the world average of 18 procedures. Bankruptcy proceedings are fairly easy and straightforward.

Trade Freedom 85.2 Back to the top

Taiwan's weighted average tariff rate was 2.4 percent in 2006. The government has been improving the trade regime, but import and export bans and restrictions, services market access barriers, import taxes and fees, burdensome standards and certification requirements, restrictive pharmaceutical regulations, cumbersome sanitary and phytosanitary rules, state trade in rice, and weak enforcement of intellectual property rights add to the cost of trade. Ten points were deducted from Taiwan's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 76.2 Back to the top

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. A reduced corporate tax rate of 17.5 percent was approved in early 2008 but has not been implemented. Other taxes include a value-added tax (VAT), a property tax, and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 12.4 percent.

Government Size 89.4 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 18.8 percent of GDP. Privatization and deregulation have reduced the government's role in the economy, but the state is still active in economic management.

Monetary Freedom82.1 Back to the top

Inflation is low, averaging 1.5 percent between 2005 and 2007. The government regulates the prices of pharmaceutical and medical products and influences prices through regulation, subsidies, and state-owned utilities. Ten points were deducted from Taiwan's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

Foreign and domestic investments are equal under the law, and private investment is welcome in most sectors. Foreign ownership is limited in certain sectors. Investment is screened, but approval time is usually short. Investment laws and bureaucracy are generally transparent and efficient. There are relatively few restrictions on converting or transferring direct investment funds. The remittance of capital invested in Taiwan must be reported to the government. Declared earnings, capital gains, dividends, royalties, management fees, and other returns on investments can be repatriated at any time. Large foreign exchange transactions may be required to be conducted over time to prevent market disruptions. There are quantity restrictions on the level of total outbound investment. Investments in China are subject to additional restrictions.

Financial Freedom50.0 Back to the top

Taiwan's modern financial sector has become more competitive. Many restrictions on financial activities, particularly those of foreign financial institutions, have been reduced. A wide variety of financial instruments are available to foreign and domestic investors on market terms. Four banks are state-controlled, including two of the three largest domestic banks, which together account for 16 percent of assets. State-run banks have not been consolidated to create Taiwan's largest bank as planned, and further consolidation has been halted by a lack of political will and an unfavorable financial-market environment. Insurance is open to foreign competition. Capital markets are sophisticated, and the stock market is generally open to foreign participation.

Property Rights70.0 Back to the top

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. Taiwan has made progress on protecting intellectual property rights, passing several laws and improving enforcement efforts, but criminals continue to sell pirated optical media, counterfeit pharmaceuticals, and counterfeit luxury goods.

Freedom From Corruption57.0 Back to the top

Corruption is perceived as present. Taiwan ranks 34th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Taiwan has implemented laws, regulations, and penalties to combat corruption. The Corruption Punishment Statute and the criminal code contain specific penalties for corrupt activities.

Labor Freedom45.7 Back to the top

Taiwan's rigid labor regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee is relatively costly and burdensome. Regulations related to the number of work hours are not flexible.