By Billy Stampfl
Discussions of Taiwanese economic growth and prosperity usually return to some version of a familiar refrain: Taiwan’s trade-dependent economy is driven by a competitive manufacturing sector that specializes in the production of electronics and machinery. Or, that Taiwan prospers because it successfully manufactures and markets quality high-end semiconductors and other electronic components. While there is truth in this, such oversimplifications miss another key part of the story behind Taiwan’s success: economic freedom.
Economic freedom is about personal choice, voluntary exchange, freedom to compete in markets, and property rights. Governments can promote economic freedom affirmatively (e.g., by establishing a legal structure that enforces contracts), or they can do so by refraining from the sort of coercion that would constrict labor markets and make it hard to start a business. There is a push-and-pull between imposing onerous regulations on one side, and emboldening private actors and market forces on the other.
This article has three aims:
- The first is to explain economic freedom and why it matters. Not all components of economic freedom definitively raise growth rates, but most serve to foster an environment conducive to growth.
- The second is to examine the role that economic freedom has played in Taiwan’s economic growth. Taiwan’s output per capita is impressive, and it is a relatively free country—freer than powerhouses like India and China, and on par with Asian democracies like Japan and South Korea.
- The third is to outline the leading indices of economic freedom, and assess how they affect this analysis.
As will be seen, Taiwan’s high level of economic freedom has been a vital factor that has allowed it to keep pace with or exceed other East Asian economies on a per capita basis.
Taiwan’s economic growth
Taiwan has performed well economically in the first quarter of this century, doubling its gross domestic product (GDP) per capita from an estimated USD $16,000 to USD $32,000 between 2005 and 2022. This compares favorably to much of the rest of East Asia. Taiwan has steadily expanded its economy since 2005, placing it among some of the best-performing economies in the world today: Taiwan ranked 14th in per capita GDP worldwide in 2024. Among Asian states, although Taiwan’s GDP per capita remains below Singapore and Hong Kong, it has pulled roughly even with South Korea and Japan, and is significantly ahead of China and India.
Of course, the trends above are no secret; Taiwanese growth is well-documented. But in explaining Taiwan’s prosperity, the island’s economy is often described as “export-oriented” or “trade-dependent.” These terms fail to tell the whole story—because Taiwan’s success also has something to do with economic freedom.
Taiwan’s economic freedom ratings
One of the most reliable measures of economic freedom is the Fraser Institute’s Economic Freedom of the World index, which focuses on five areas: (1) the size of government; (2) the legal system and property rights; (3) a stable currency; (4) the freedom to trade internationally; and (5) the extent of regulation. Another useful metric is the Index of Economic Freedom, a collaboration between the Wall Street Journal and the Heritage Foundation. It measures economic freedom based on four pillars: (1) the extent of the rule of law; (2) government size; (3) regulatory efficiency; and (4) open markets.
Taiwan scores well across both economic freedom indices, and it does particularly well in comparison to peer countries in Asia. Among nations in the East Asia-Pacific region, Taiwan posted the fourth-highest economic freedom score in 2020, as determined by Fraser’s index. Zooming out, Taiwan compares favorably to large economies around the world. In the past decade, it has surged past Canada, the United Kingdom, Japan, and France, all of which fell in Fraser’s economic freedom rankings between 2015 and 2020. 
What drives Taiwan’s high degree of economic freedom? The country’s rankings in each of Fraser’s five key areas indicates that it excels across the board. The legal system enforces property rights: there has been little change in that category this century. In two other areas—“regulation” and “size of government”—Taiwan has gotten significantly better, rising in Fraser’s ranking nearly every year since 2009. “Sound money” (meaning a stable currency, which allows the government to more effectively manage inflation and monetary policy) and “free trade,” on the other hand, are more volatile categories: Taiwan could improve in the latter (its COVID-19-era controls on the movement of people and capital made trade more difficult) but ranks among the world’s best in the former (Taiwanese banks provide relatively easy access to foreign currency bank accounts, and the government has managed inflation well).
By the measure of the Heritage Foundation’s Index of Economic Freedom, Taiwan ranks fourth among all countries worldwide in economic freedom. It has slowly climbed the rankings since 2009—when it was considered “moderately free”—and is now one of only four countries that enjoys a “free” rating (it is joined by Singapore, Switzerland, and Ireland). Taiwan’s score on this index stands at 80, compared to a regional average score of 57.4 and a global average of 58.6.
Beyond impressive fiscal health, judicial effectiveness, and trade freedom, the island rates highly in business freedom (the ability to run an enterprise without undue interference from the state) and monetary freedom (which requires a stable currency and market-determined prices). The only area in which Heritage deems Taiwan less than “mostly free” are financial freedom (measuring financing opportunities and entrepreneurship) and labor freedom (the ability for individuals to find work and for businesses to contract freely for labor).
Criticisms of economic freedom indices
There are important questions regarding what Fraser’s and Heritage’s metrics actually reflect about a country. For example, Taiwan excels in economic freedom related to government spending and investment. But this means that the island devotes less money to developing public assets that provide long-term benefits. Such investment might include funding infrastructure improvements, or research into new cures for cancer. Is it really better that a nation spends less on these things? Advocates of the Fraser and Heritage approaches would say yes—because economic freedom means leaving matters like drug development and infrastructure investment to private companies and the free market. Such a position requires a normative judgment as to what one thinks government should do.
A broader critique is that economic freedom is not correlated with growth. Outliers in the indices bolster this argument—for instance, China is a huge and still-growing economy that Heritage considers “repressed.” Relatedly, it could be the case that individual components of the index are calibrated incorrectly. One example is consideration of marginal tax rates, a component of Fraser’s index: some argue that higher tax rates are associated with more economic growth, but Fraser implies the opposite (because higher tax rates mean less economic freedom).
There is also the possibility that these indices proved unfit for a COVID-19 world. Taiwan offers an illustration: former president Tsai Ing-wen’s (蔡英文) administration implemented restrictive pandemic policies—like limited entry for foreign workers—that were not loosened until late 2021. These same policies lowered Taiwan’s Fraser rating (because they constrained the movement of capital and people), but they were widely praised and helped Taiwan effectively fight the pandemic. Would it have been better for the government to have forgone entry restrictions so as to preserve a high degree of economic freedom? Probably not.
These criticisms are serious—and perhaps economic freedom indices mean less during health emergencies, when government assistance is essential—but they should not discredit the enterprise as a whole. Economic freedom, after all, appears to correlate strongly with higher average income per person.
How Taiwan prioritizes economic freedom
Real-world examples provide a plausible story as to how Taiwanese policies have fostered economic freedom—and, in turn, more growth. These include policies in the following areas:
- Monetary policy: The government’s monetary policy has helped Taiwan avoid harmful inflation this century.
- Tariffs: As a member of the World Trade Organization (WTO), Taiwan complies with international trade agreements, and its tariff schedule follows WTO guidelines. President Tsai Ing-wen’s administration made news for slashing trade barriers, as when it eased restrictions on American beef and pork imports in 2020. A year later, it cut tariffs on select commodities in a bid to fight inflation caused by the war in Ukraine.
- Fiscal health: Public debt in Taiwan amounts to just 29 percent of GDP. In other developed countries like the US, Canada, France, and the United Kingdom, public debt exceeds 100 percent of output—which increases interest costs, crowds out investments, and weighs down growth.
- Business regulations: There are few material restrictions on doing business in Taiwan (beyond limits on investors from China) and the government rewards grants to companies in significant industrial sectors: including biotechnology, new pharmaceuticals, and 5G and smart machine technologies. Foxconn, Acer, Evergreen, and Merida are all major Taiwanese firms that have thrived within the island’s less onerous regulatory environment.
- Law enforcement: Taiwan’s National Police Agency (NPA) appoints the leaders of the island’s city and council police departments, which are delegated day-to-day policing duties. This system differs slightly from that of the United States, as it emphasizes a chain of command flowing from the NPA down to each individual local police head, prioritizing local enforcement over top-down control.
- Legal system: Courts provide speedy and fair adjudication free from political interference.
- Foreign currency: It is secure and fairly easy to open a foreign bank account in Taiwan, and a number of banks offer foreign currency savings accounts.
Taiwan’s overall high level of economic freedom provides one of the leading explanations for its prosperity in the 21st century—prosperity that owes in large part to the island’s low-regulation, business-friendly economic environment.
The main point: The well-treaded account of Taiwan’s economy is that it has achieved impressive growth because it excels at manufacturing and exports. This is true, but Taiwan’s freedom-enhancing economic climate also must be considered—as a result of cutting business regulations, protecting property rights, implementing smart monetary policy, and prizing impartial courts and the rule of law, Taiwan has created an environment in which rapid economic growth is possible.
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