POLICY - INDUCED PROBLEMS

     Historically, the refugee Chiang regime never had any intention of settling down and develop the island's economy. Its whole purpose was the daydream to retake the mainland someday. In the '50s, 80% of the national budget was for the military, which by the '60s still accounted for about 45%--leaving very little for economic development at all. When military spending was finally scaled back, money went mostly to debt-service and social programs. The impact of this policy was that economic development was sacrificed and delayed. Subsequently, when the pendulum swung the other way, so much had to be made up very little attention was given to the environment and quality of life issues. These are still big problems for Taiwan, so this miracle didn't happen without its social cost.

     Now in response to the economic red lights mentioned before and to prevent the situation from getting worse, the Taiwan government undertook a vigorous but disputable series of support measures worth over $28 billion or over 10% of GDP to:

1)

Support stock prices-A $8.7 billion stabilization fun was provided by large banks, insurance and pension funds to support stock equity prices which otherwise could be used to stimulate the economy or for other more constructive purposes. Stock transaction taxes were reduced to help big brokers and big accounts at the expense of treasury coffers. The ownership limit for foreign purchase of a single stock was raised to 50%, encouraging speculative hot monies to destabilize the market.

2)

Boost economic activities-Banks were pressured to continue to loan to troubled business as well as to lower their loan rates in violation of basic sound bank practices.