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January 29, 1998

An Island of Stability in a Sea of Bailouts

By

As the Asian economic crisis mounts, the cries for bailouts have become deafening. But amid the din, there is an island of tranquillity -- one piece of troubled Asia where only the low, busy hum of productivity is heard: the Republic of China on Taiwan.

In 1997, while stock markets plummeted by 55 percent in Thailand, 52 percent in Indonesia, and 42 percent in Korea, Taiwan's stock market rose by 18 percent. And while inflation was shooting up by 12 percent in Indonesia and 8 percent in Thailand, it rose a scant 0.2 percent in Taiwan.

How did Taiwan immunize itself against a continent-wide economic crisis? To a greater degree than other Asian nations, Taiwan harbors a deep respect for democracy, the rule of law, and economic freedom. To maintain a healthy economy, Taiwan's government has largely avoided interfering with the right of its people to take risks, create wealth, and keep what they earn. Money-losing ventures are allowed to go bankrupt, rather than being propped up by government assistance. Taxes remain low, regulations minimal, and spending restrained. In short, Taiwan's government fosters an environment conducive to free enterprise -- as evidenced by its ranking as the seventh freest economy in the world on the 1998 "Index of Economic Freedom," published by the Heritage Foundation and Wall Street Journal editorial page.

Another advantage: Taiwan's leaders have long been committed to policies that promote entrepreneurship, which has led to more jobs and higher standards of living. Specifically, Taiwan has encouraged the formation of small and medium-sized enterprises. Over time, these enterprises evolved from home-based light manufacturing to high-tech industries such as semiconductor and computer memory board plants. These nimble companies are better able to adapt to the ever-changing global economy, and are less likely than larger enterprises to form bonds of corruption with government and banks on a scale that could jeopardize the entire economy. Moreover, the sheer number of these companies means greater competition, which lessens the risk of poor management and the kind of large-scale industry failures that lead to a national crisis. And where there's no crisis, there's no need for an international bailout.

All this has enabled Taiwan to buck the Asian trend. Taiwan's gross domestic product is expected to grow by nearly 7 percent in 1998, even as analysts predict recessions in Indonesia and Thailand and anemic 2 percent growth in Korea. And although Taiwan's currency lost 15 percent of its value in 1997, it still fared far better than the currencies of Korea, Thailand and Indonesia -- all of which lost more than half their value.

Taiwan's economic performance has been achieved through its free-market institutions, not through government planning and intervention. It was also achieved during a time of intense democratic competition, not under the heavy hand of Asian authoritarianism. Yet Taiwan still faces challenges. The government must continue down the path of economic freedom by further lowering trade barriers, opening the economy to foreign competition, and lowering taxes and other barriers to wealth creation. These measures will be critical to the success of Taiwan's bid to join the World Trade Organization.

That said, Taiwan's economy remains a sterling example of how to adapt to the ever-changing demands of a global economy. Its low debt, high savings rate and strong economic growth are reasons for optimism. Indeed, if other Asian nations want to know how to avoid economic crises in the future, they should pay attention to how Taiwan avoided the current crisis.

Even the West still has something to learn from the "Asian way" of economic development -- as long as the correct Asian model is chosen. Taiwan, with its strong commitment to low taxation, light regulation and economic freedom, is the right model. Best of all -- from the American taxpayer's point of view -- it doesn't need the international community to bail it out.

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