Defense Burden and Economic Growth: Unraveling the Taiwanese Enigma

Abstract

Taiwan has displayed a comparatively heavy defense burden and rapid economic growth. Time series data from this case are used to analyze three models of the effects of defense burden on economic growth: the modernization model, the capital formation model, and the export-led growth model. The results indicate that all these models capture parts of the empirical reality, but none can account for all the complexity of this reality. Indeed, in some crucial respects each of the models—based, as they have been primarily, on intercountry comparisons—is contradicted by the Taiwanese time series. I conclude that Taiwan has not so much been able to avoid entirely the trade-offs between defense and growth as to relax these trade-offs. The reasons contributing to this relaxation tend to set the Taiwanese experience apart from the experiences of most other countries.