The Economic Development of Taiwan, 1980-1993 Macroeconomic Policy: Overzealous or Inflexible?

This paper analyzes the macroeconomic policies of Taiwan since 1980, to set the framework in which trade and industrial policy took place. When Taiwan's strategy for rapid economic development was being put in place during the 1950s and early 1960s, macroeconomic policy was central to the thinking of Taiwanese policymakers. The first major policy changes were the rise of real interest rates in the early 1950s,followed by the devaluation and unification of the exchange rate towards the end of the decade. Over the next two decades, sound macroeconomic policy was a hallmark of Taiwan's development. By the 1980s, however, it appeared that policymakers may have overdone conservative macroeconomic policies. Domestic saving grew as investment fell relative to GNP; exports exceeded imports by growing margins; and foreign reserves accumulated to the point of wasteful investment. The major question is whether policymakers intended to accumulate reserves or whether this was a result of mismanagement. It is evident that the stringent macroeconomic policies of the late 1970s were maintained too long. Even if policymakers' aim was to accumulate reserves, they pushed the policy so far that a sharp correction was inevitable and may have been forced on Taiwan by US. pressure. The post-1986 co"ection was also overdone. Private credit expansion was too rapid, the government, uncharacteristically, began running large deficits, and these policies may have exacerbated the stock market bubble of the late 1980s.