Taiwan's standing in the Heritage Foundation's international survey of economic freedom has slipped to 20th place from 11th place last year.
One of the major reasons behind the drop is heavy government intervention in the financial markets, including the foreign exchange and stock markets.
Analysts said the intervention in recent months has hurt investor confidence and yielded no successful results.
The pundits say if Taiwan wants to regain economic efficiency, such intervention may have to be abandoned.
"Historically, there are no cases of successful stock market intervention," said Liu Kai-pin (
Henry Cheng (
"The result is that Taiwan's economy cannot optimize its operating efficiency and the financial market mechanism is completely twisted. The consequences of such a policy is that the banking industry is not competitive," Cheng said.
"On the eve of entering the WTO, Taiwan's archaic banking industry is about to face a severe challenge from foreign competitors, and other financial services are face with a similar dilemma. This is all the result of protectionism policies," Cheng said.
"The KMT administration regularly intervened in the foreign exchange and stock markets. Relatively speaking, intervention in the foreign exchange market is more acceptable than the stock market. However, the government should not intervene in the market on a continuous basis," Cheng said.
"If the present administration wishes to regain investor confidence, it should refrain from intervening in the stock market. When prices fall low enough, investors will start bargain hunting and the market will recover," Cheng said.
"Intervention by the stabilization fund will only prolong the bearish market."
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