The ultimate goal of economic development is to elevate the standard of living. Economic development usually includes three parts: economic growth, distribution of wealth, and quality of life. Generally speaking, not only has Taiwan achieved great results in all three aspects, but it also has done quite well according to other economic indicators. For example, it has enjoyed a mild inflation rate, low unemployment rate, and has accumulated vast foreign exchange reserves with almost no foreign debt. A prosperous society has been firmly established. It could be fairly stated that the countries today which possess all of these outstanding characteristics are few and far between.

The second stage of Taiwan's economic development ran from 1981 through 1999. During this period, economic conditions around the world and within Taiwan itself underwent great changes. Combined external and internal forces exerted a rather detrimental effect on Taiwan's economic development, slowing the growth rate to a low of 7.15 percent. The focus of Taiwan's economy slowly shifted from the industrial sector to the service sector. Meanwhile, the agricultural sector grew a mere 0.63 percent annually as its GDP share continued to diminish.

Limited natural resources and a high population density mean that Taiwan is not self-sufficient. Hence, foreign trade has come to play a leading role in Taiwan's economic development. The development of foreign trade and the increase of foreign investment are driving forces behind Taiwan's industrial sector, which in turn fuels development in the service sector. From 1952 through 1980, the annual growth rate of commodity and labor exports averaged 16.5 percent, while local demand grew an average of 10.97 percent per year. During the second stage of economic development, commodity and labor exports grew 10.05 percent per year, while local demand grew 7.51 percent. From these figures, the importance of foreign trade to Taiwan's economic development can be seen quite clearly.

The large crowds found daily in Taiwan's department stores are a reflection of the greater purchasing power held by modern Taiwanese consumers.

Despite the fact that the average economic growth rate declined between the two stages of economic development, the average overall economic growth rate from 1952 through 2001 was still 8.13 percent. Such an astonishing rate of growth has seldom been seen in other countries.

Of course, whether the results of rapid economic development will be enjoyed by a select few or by everyone is a major concern for many. In other words, has the high economic growth rate narrowed the gap in the distribution of wealth, or widened it?

Two methods are often used to evaluate how evenly a country or society's wealth is distributed. The first method is the Gini coefficient. A small coefficient means a fairly equitable distribution of wealth, while a large coefficient signals inequities. The second method involves dividing all income-earning households into five groups according to the amount of income earned. A ratio is then calculated by comparing the income of the top fifth earners with that of the bottom fifth. The higher the ratio, the more unfairly the income is distributed.

In 1964, the Gini coefficient for Taiwan was 0.321. This figure fell to 0.277 in 1980, indicating that the distribution of wealth had improved in step with Taiwan's advancing economic development. However, since 1981, the Gini coefficient has been slowly increasing. By 2000, the coefficient had reached 0.326. By using the second method, a similar trend in the distribution of Taiwan's wealth can be seen: In 1964, the income ratio between the top fifth and the bottom fifth was 5.33. It declined to 4.17 in 1980 but, for the most part, managed to maintain a steady increase from 1981 to 2000, when it reached a high of 5.55 (see Table XI). Examining the reasons for the reversal of these figures yields several causes:

• In 1986, the price of real estate began to skyrocket. Those lucky enough to own land or property suddenly found themselves members of the upper class almost overnight. Members of the middle class who did not own any land or property discovered that, even if they saved money their entire lives, they would still find it difficult to purchase a home.
• Large households were slowly broken down into groups of smaller households. Since both of the aforementioned methods of evaluating income distribution use the number of households as the basis for calculations, an increase in the number of small families has an adverse effect on how income appears to be distributed.
• As industries became more technologically advanced and knowledge-intensive, demand for personnel with specialized skills and a higher level of education also increased. Thus, those who possessed such expertise could often command a higher salary than those who did not.

Inflation is a matter of concern throughout the world--not only because of its unfavorable effect on a country's competitiveness, but even more so because of the negative impact that it has on the standard of living and distribution of wealth. During the early stages of Taiwan's economic development following the relocation of the central government, the aftermath of several wars and an overall lack of basic necessities drove the inflation rate up very high. Afterward, though, with the exception of the periods during two energy crises, from 1973 to 1974 and from 1979 to 1980, inflation in Taiwan has been moderate. For example, between 1952 and 1980, the consumer price index rose at an annual rate of 7.95 percent, whereas the wholesale price index averaged an annual increase of only 7.14 percent. If the four years of energy crisis were excluded, the consumer price index rose only 5.39 percent annually, and the wholesale price index increased by a mere 4.3 percent per year.

From 1981 to 2000, the inflation rate in Taiwan was even lower. During this period, the consumer price index averaged an annual increase of 2.87 percent, and the wholesale price index averaged an annual decrease of 0.01 percent. On average, from 1952 through 2000, the consumer price index went up annually by 5.87 percent and the wholesale price index by 4.24 percent (see Table XII).

At the beginning of the 21st century, there were new developments in the world economy and dramatic changes in Taiwan. Consumer and wholesale price indexes fell. Even more noticeable was the large decrease in interest rates, from 5 percent for one-year time deposits in December 2000 to an all-time low of 2.1 percent in the third quarter of 2002.

Many countries struggle to keep unemployment down, or suffer from high unemployment that refuses to drop. Fortunately, with the exception of 1950, Taiwan has not had a serious unemployment problem. This is mainly because exports from Taiwan have been strong. Moreover, labor-intensive export enterprises have provided jobs to large numbers of people from both rural and urban areas. Before 1970, the unemployment rate in Taiwan stood above 3 percent; since then, the rate has been steadily dropping. In fact, during the late 1980s, it dropped below 2 percent and a labor shortage emerged, forcing Taiwan to begin employing foreign laborers. Again, such a low unemployment rate was a phenomenon rarely seen in the world (see Chart III).

Money in the Bank and No Debt

Foreign exchange reserves accumulate when a country's exports exceed its imports (i.e., when there is a trade surplus). Between 1952 and 1980, Taiwan for the most part imported more than it exported, enjoying a trade surplus for only eight of those years. From 1981 to 1999, however, Taiwan enjoyed a continuous trade surplus. In fact, in 1985, exports accounted for about 20 percent of Taiwan's total GNP. By 1995, accumulated foreign exchange reserves reached US$100 billion. Foreign exchange reserves decreased slightly thereafter, but by the end of 2000, they had again increased to US$110 billion—a truly outstanding accomplishment, especially considering Taiwan's small size. In fact, Taiwan has been one of the world's largest foreign exchange reserves holders, and was second only to Japan for many years. In 2001, China moved up to second place, having accrued large amounts of foreign exchange for a decade. Taiwan ranked third and remained so by October 2002, when increased exports pushed its foreign exchange reserves to US$150 billion. However, China accumulated foreign debts of over US$160 billion, while Taiwan had practically no foreign debt.

Taiwan's ability to maintain an almost continuous trade surplus in recent years is a result of the government's policy of encouraging exports and limiting imports. Such significant foreign exchange reserves have the following special implications for Taiwan:

• Since Taiwan is not a member of the United Nations nor a participant in the World Bank, it needs to have the large foreign exchange reserves to demonstrate its credibility.
• Although Taiwan shares official diplomatic relations with a small number of countries, it has established trade and cultural ties with more than 100 nations. Thus, having extensive foreign exchange reserves helps demonstrate that Taiwan commands solid financial power.
• Lastly, having large foreign exchange reserves guarantees Taiwan's domestic security; should any crisis occur, Taiwan knows that it can fend for itself without having to rely on foreign loans.

On the other hand, having excessive foreign exchange reserves can have some harmful consequences for the entire economy. For example, during the late 1980s, Taiwan suffered from a financial crisis and a bubble economy. At the same time, the excessive trade surplus caused the New Taiwan Dollar to appreciate drastically, reducing the competitive edge of Taiwan's exports and forcing many labor-intensive industries into the "sunset" stage.

By the end of the 1980s, the United States had become the number one debtor nation in the world, despite its outstanding economic achievements. Meanwhile, Taiwan did not accumulate much foreign debt. In 1986, Taiwan's foreign debts stood at roughly US$4 billion; however, by 1987 this figure had been reduced to US$1.4 billion.

The Dawning of an Affluent Society

After 40 years of hard work and struggle, it can be said that the ROC government succeeded in creating prosperity for its people by the end of the 1980s (see Chart IV).

In Taiwan today, a full 85 percent of people own their own homes. In terms of major home appliances such as television sets and telephones, Taiwan has almost reached the same level as England and the United States, with just about every household possessing such amenities. The number of households in Taiwan that own automobiles and personal computers is also rising, and is expected to reach the level of those in the developed world within ten years. Finally, between 2000 and 2001, the number of trips abroad was equivalent to more than 30 percent of the total population of Taiwan (see Chart V). This figure is comparable to that for other developed countries.