Taiwan’s Economic Momentum and Prospects

Taiwan’s Economic Momentum and Prospects Yaw-Chung Liaw, Ph.D. Director General Overall Planning Department, Council for Economic Planning and Development Executive Yuan (Cabinet), Taiwan The 14th Annual Conference on Pacific Basin Finance, Economics, and Accounting Panel Session IX (Room 105) 15:45 p.m.- 17:00 p.m. July 14, 2006

CONTENTS I. TAIWAN ECONOMIC ACHIEVEMENTS AND CHALLENGES II. TAIWAN CURRENT ECONOMIC DEVELOPMENT III. GLOBAL ECONOMIC DEVELOPMENT TRENDS AND CHALLENGES IV. TAIWAN’S FUTURE ECONOMIC DEVELOPMENT AND OUTLOOK V. CONCLUSION

I. Taiwan Economic Achievements and Challenges 1. Taiwan’s Industrial Development History (Course of Change in the Factor Intensity of Production) y＝ｆ(L, K, T, knowledge) Knowledge y=f(T/L) ＬＬＴＫ Knowledge Economy Stage First-phase Import Substitution Export Expansion Stage Second-phase Import Substitution and Export Expansion Stage Economic Liberaliz-ation Stage High-tech Industrial Develop-ment Stage Light industry Light industry Basic and heavy industries Development of strategic industries Promotion of ten emerging industries Knowledge- based industries 1953 1961 1973 1991 2000 1984

2. Taiwan’s Economic Development Experience and Achievements Over the past fifty-some years, Taiwan has achieved rapid economic growth accompanied by price stability. From 1953 to 2005, the economy grew at an average annual rate of 7.9%, with consumer prices (the CPI) rising by an average of only 4.5% per year (2.4% if the energy crisis years in the 1970s are excluded). Source: Directorate General of Budget, Accounting, and Statistics. Note: *US$82 million in 1959.

 Taiwan Has Become a Global Stronghold of High-Tech Products Taiwan’s “World Top Producer” Items in 1983 and 2005 Sources: CEPD, MOEA ITIS Plan.

3.Trend of Industrial Structure ◎Industry’s Structural Trends (1) The industrial structure has undergone enormous change: In 1986, industry share of GDP rose to a historic high of 44.8%; services’ share increased year by year, to reach 73.6% in 2005. (2) Within the manufacturing sector, high-tech industries accounted for 43.1% of output in 2005. (3) Changes in the industrial structure have generated structural unemployment. In recent years, the government has adopted a raft of short-, mid- and long-term employment promotion measures, and in the future must consider industrial development directions in the light of such structural changes. Source: Directorate General of Budget, Accounting, and Statistics.

⊙Main competitive industries have large output value. As trillion-dollar industries have gradually take shape, they have also gradually developed comprehensive supply chains. 2005  2-Trillion 2-Star  Petrochemicals (NT$1.14 trillion) Semiconductor (NT$1.11 trillion) industries  Communication Digital content (NT$290 billion) Iron & steel Image display Textile mill products Machinery & equipment Biotech (NT$15 billion) (909) (476) (640) (955) (579)

⊙Certain industries have fallen into severe decline, and need assistance to transform and upgrade. Under the impact of the international competition brought by globalization, some export industries have experienced relatively serious decline. These include the apparel, leather & fur, and wood & bamboo products industries. Taiwan’s entry to the WTO has also delivered a serious blow to certain traditional-industry manufactures. Besides the large-volume import of low-cost towels from China, ceramics, furniture, non-woven cloth, fiber-optic cable, paper, and building materials all face competition from Asian countries.

⊙Internationally competitive products have already generated industrial and regional clusters, with industries developing backward from downstream to upstream and toward capital and technology intensity, while science parks have also promoted related industrial clustering. 1996 export value (percentage) Flat panel display industry 290 (0.9%) 4,759 (7.8%) Plastics and composite fiber industry 1,200 (3.8%) 4,513 (7.4%) Semiconductor industry 2,623 (8.3%) 9,690 (15.9%) Upstream industries (13.0%) (31.1%) 2005 export value (percentage) Passive components industry 1,188 (3.7%) 1,821 (3.0%) Machinery and parts 1,730 (5.4%) 2,873 (4.7%) Metal products 1,537 (4.8%) 2,551 (4.2%) Supportive industries (13.9%) (11.9%) Communications industry 828 (2.6%) 3,764 (6.2%) Computers and peripherals 4,558 (14.3%) 2,662 ( 4.4%) Vehicles and parts 1,258 (4.0%) 1,944 (3.2%) Final consumption (20.9%) (13.8%) Unit: NT$100 millions Source: Compiled by CEPD from MOEA and MOF statistical data.

II. Taiwan Current Economic Development 1. Monitoring Indicators • The monitoring indicators flashed “green” in May 2006 for the tenth successive month. The positive movements of most indicators suggest continued steady expansion.. Source: Council for Economic Planning and Development.

2. Economic Growth • Despite the deceleration in the first half of 2005 due to a worldwide slowdown, the economy gained momentum in the second half, thanks to the boost brought to exports by the upswing in the global consumer electronics market, and steady pickup in private consumption, leading to a 4.1% growth for the whole year. • The economy grew 4.9% in the first quarter of 2006, with exports and manufacturing production remaining strong. Contribution to Economic Growth (in percentage points) Source: Directorate General of Budget, Accounting, and Statistics.

3. Domestic Investment • Total investment increased at a modest rate of 0.5% in 2005, with private investment declining 1.3% while investment by government and by public enterprises expanding 0.3% and 17.2%, respectively. • In 2006, private investment is expected to grow more quickly while government investment will grow only marginally. Investment by public enterprises is expected to fall as a result of privatization. Gross Fixed Capital Formation: Growth rate unit：% Source: Directorate General of Budget, Accounting, and Statistics.

4. Industrial Production • Industrial production softened in the first half of 2005, but has displayed much more strength since August, increasing 3.4% for the whole year. It went up higher in the first five months of 2006, with manufacturing and construction industries increasing 8.0% and 19.3% respectively. Growth of Industrial Production unit：% Source: Ministry of Economic Affairs.

5.Foreign Trade • Exports and imports softened in 2005, with two-way trade increasing to 8.5%. Exports and imports expanded by 12.9% and 9.5%, respectively, in the first six months of 2006. • Trade surplus grew to US$15.8 billion in 2005, from US$13.6 billion in 2004. It posted US$7.8 billion in first half of 2006, up US$3.6 billion from the same months last year. Source: Ministry of Finance. 6

6. Employment • Total employment growth decelerated in 2005 and further in the first five months of 2006. • The unemployment rate continued to display a declining trend, dropping to 3.8% in January-May 2006, the lowest since 2001. ％ Unemployment Rate Employment Growth Rate (Jan.-May) Source: Directorate General of Budget, Accounting, and Statistics.

7. Price • Prices increased moderately in 2005, with consumer prices up by 2.3%. . • Due to higher prices of energy, mineral and basic metal products, wholesale prices in the first half of 2006 increased 4.0% from a year ago. Consumer prices rose 1.4%, with increases in fruits, oil, tobacco, and medical care offsetting a fall in garments. Core prices (excluding fresh food and energy prices) rose 0.6%. Core Prices Source: Directorate General of Budget, Accounting, and Statistics.

8. Money and Banking • For the first five months in 2006, M1B and M2 expanded 6.2% and 6.7%, respectively. • Market interest rates have seen a slightly upward trend since the second half of 2004. In May 2006, commercial paper rate and interbank rate recorded 1.50% and 1.52%, respectively. The Central Bank raised the rediscount rate four times in 2005, and further to 2. 500% in June 2006. • Since the broadly defined non-performing loan (NPL) ratio of domestic banks peaked at 11.27% at the end of 2001, a continuing program of financial reforms has slashed it dramatically to just 2.24% in December 2005 . Source: The Central Bank of China, R.O.C.

III. Global Economic Development Trends and Challenges • The Formation of Economic and Trade Networks • around the World Already signed and set up Under consideration or negotiation EU-Mexico FTA 2004 Eastward Expansion to 25 Countries Japan-South Korea FTA European Union 15 Countries (EU) China-ASEAN FTA (2010) North American Free Trade Area (NAFTA) China-HK/Macau Closer Economic Partnership Arrangements (CEPA) ASEAN-India EU-ASEAN Japan-ASEAN Comprehensive Economic Partnership Framework Agreement (2003) US and Central America Free Trade Agreement (CAFTA) ASEAN Free Trade Area (AFTA) EU-ACP (African, Caribbean & Pacific Countries) FTAs (more than 70 countries) Expanding to Latin American countries Southern Cone Common Market（MERCOSUR） 2005 Establishment of Free Trade Area of the Americas (FTAA) Japan-Singapore New Century Economic Partnership Agreement (2002) ASEAN-Australia-New Zealand Closer Economic Relations (CER) Taiwan-Panama FTA (concluded) Taiwan-Nicaragua FTA (under negotiation) Taiwan-Guatemala FTA (concluded)

2. The Rising Power of Emerging Economies BRICs GDP rising as ratio of G6 GDP 2003：13.3％  2015：19.1％ ˙World economy entering golden decade of stability and prosperity. ˙Asia’s rise serving as a new driving force for the global economy. 2005-2015 annual average growth rates Unit: ％ Economic growth rate ％ East Asia USA World Japan EU Note: BRICs refers to Brazil, Russia, India and China; the G6 are the US, Japan, Germany, UK, France and Italy; East Asia refers to the 4 Asian Dragons, the ASEAN 4, and China. Source: Global Insight Inc.

Services Services Manufacturing Manufacturing Primary industry Primary industry Source: UNCTAD 3. Pivotal Profit Niche of Innovational Services In the wake of the tremendous advances in information and communications technology, and the sharp fall in communication costs, service industries will break through their traditional limitations of “inseparability”, “unstorability” and “undeliverability” to spark a new “service sector revolution.” • With IT industry hardware and consumer electronics having already reached a plateau, the focus will shift from hardware to software in the next stage of the information revolution, and innovational services will become the key competitive factor. • In recent years, the sharp expansion of investment by transnational corporations has fully reflected the opportunities of service industry development. • A look at FDI flows shows that in 2001~2002, 71% of global FDI went into the service sector, with telecommunications, storage and transportation showing the fastest growth, followed by business services. Heavy Investment in the Service Sector by Transnational Corporations －Global FDI Flows by Industrial Sector 1989~1991 2001~2002

4. Accelerating Trends of Population Aging and Fertility Decline ◎ Projected Future Birth Rate (Median Projection) ◎ Future Population Structure Unit: ％ 1000 persons 0-14 15-64 65 &+ Year-end

Kyoto Protocol  38 countries (excluding non-signatory US) to reduce greenhouse gas emissions by average of 5.2% below 1990 levels from 2008 to 2012. 400 Coal Natural gas 350 Oil 300 Industrialized countries’ greenhouse gas emission reduction pledges (2008~2012) Emission limits (1990=100) EU 92 Japan 94 Canada 94 250 200 150 100 50 0 1970 1980 1990 2001 2010 2020 5. Green Energy-Saving Driving Tide Speeding up the development of renewable energy Implementing green production and consumption Global CO2 Emissions from Fossil Energy 100 million tons

IV. Taiwan’s Future Economic Development and Outlook ◎The Driving Forces of Taiwan’s Economic Development Average Income Innovation driven (knowledge) Investment driven (capital) Taiwan’s current stage Resource driven Development Stage

－ ◎Forecasts for Taiwan’s economic growth Note: 1. DGBAS = Directorate-General of Budget, Accounting and Statistics, Taiwan, ROC. 2. CIER = Chung-Hua Institution for Economic Research, Taipei. 3. TIER = Taiwan Institute of Economic Research, Taipei. 4. IMF = International Monetary Fund. 5. EIU = Economist Intelligence Unit. Source: Websites of each forecasting institution.

◎ Macroeconomic Targets Targets 2006 2006~2008 2006~2015 4.5％ 4.9％ 4.6％ Growth of potential GDP Economic growth US$15,207 US$18,000 （2008） US$27,000~30,000（2015） Per capita GDP 1.4％ 1.4％ 1.2％ Employment growth Less than 4.0％ 4.0％（2008） 4.0％（2015） Unemployment rate Less than 2.0％ CPI increase New Century Manpower Plan

⊙Sources of Potential GDP growth

V. Conclusion Conference on Sustaining Taiwan’s Economic Development (COSTED) ◎ Macroeconomic Targets • During 2006 to 2015,Taiwan’s average growth rate of GDP is estimated at 5%. • Per capita GDP is projected to increase to US$32,000 in 2015.

Thank you

Taiwan’s Economic Momentum and Prospects