Country Survey: Defense Policy and Military Spending in Taiwan, 1952--2009

In this article we survey military spending, the evolution of national defense policy, and the role that defense spending played in economic activities in Taiwan from 1952 to 2009. With the ongoing cross-Strait dialogue and closer commercial ties between Taiwan and China, the share of military spending in government expenditures (or GDP) has tended to gradually decline, which is in accordance with the change in defense policy from an offensive posture to a defensive-oriented attitude. In addition, we investigate the defense spending--inflation nexus in Taiwan. The multivariate structural change test identifies two break points and three regimes are categorized accordingly. The Granger causality test based on the VAR model reveals that the heavy defense burden in Taiwan during 1952--71 (the first regime) is essentially an important factor causing the higher price levels. However, when the tension across the Taiwan Strait is alleviated as well as the defense-oriented policy adopted, the military spending no longer plays a crucial role in determining inflation in the recent two regimes. Sensitivity analysis confirms that our results are robust to different model specifications.