Yaw-Chung Liaw, Ph.D.

1
Taiwans 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) 1545 p.m.- 1700
p.m. July 14, 2006
2
CONTENTS

• I. TAIWAN ECONOMIC ACHIEVEMENTS AND CHALLENGES
• II. TAIWAN CURRENT ECONOMIC DEVELOPMENT
• III. GLOBAL ECONOMIC DEVELOPMENT TRENDS AND
  CHALLENGES
• IV. TAIWANS FUTURE ECONOMIC DEVELOPMENT AND
  OUTLOOK
• V. CONCLUSION

3
I. Taiwan Economic Achievements and Challenges
1. Taiwans Industrial Development History
(Course of Change in the Factor Intensity of
Production)
yf(L, K, T, knowledge)
Knowledge yf(T/L)
L
L
K
T
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
4
2. Taiwans 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).
1952 2005 Annual rate of change ()
Population (million persons) 8.54 22.65 1.9
GDP (US million current prices) 1,675 345,862 10.6
Per capita GDP(US) 196 15,271 8.6
Agricultural output as ratio of GDP () 32.2 1.8 -
Industrial output as ratio of GDP () 19.7 24.6 -
Services output as ratio of GDP () 48.1 73.6 -
Exports (US million) 116 198,435 15.1
Imports (US million) 187 182,616 13.9
Foreign reserves (US million) - 253,290 -
Source Directorate General of Budget,
Accounting, and Statistics. Note US82 million
in 1959.
5
? Taiwan Has Become a Global Stronghold of
High-Tech Products
Taiwans World Top Producer Items in 1983 and
2005
1983 1983 2005 2005 2005 2005
Products Production Value (US billions) Products (excluding offshore production) Production Value (US billions) Production Volume (billion units) Global Market Share ()
Shoes Electric fans Bicycles Umbrellas Sewing-machines Bicycle tires Thermos flasks MSG Bicycle brakes Camphor Bicycle chains 1.8 .23 .22 .19 .18 .10 .08 .04 .01 .01 .01 Foundry IC packaging IC testing Mask ROMs CD-R discs CD-RW discs DVD-R discs DVD-RW discs Glass fiber ED Cu Large-size TFT-LCDs TN/STN-LCDs IC design DRAM WLANs 11.3 5.53 2.1 .28 .49 .52 17.79 1.25 7.97 5.64 .52 4.82 .18 3.5 .19 67 45 60 91 58 77 71 59 48 36 41 (2) 20 (2) 22 (2) 22 (2) 23 (2)
Sources CEPD, MOEA ITIS Plan.
6
3.Trend of Industrial Structure
? Industrys 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.
7
? 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 (NT1.14 trillion)
Semiconductor (NT1.11 trillion)
industries
?
Communication
Digital content (NT290 billion)
Image display
Iron steel
Textile mill products
Machinery equipment
Biotech (NT15 billion)
(909)
(476)
(579)
(640)
(955)
8
? 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.
?Taiwans 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.
9
? 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.
Upstream industries (13.0) (31.1)
Flat panel display industry 290 (0.9) 4,759
(7.8)
Plastics and composite fiber industry 1,200
(3.8) 4,513 (7.4)
1996 export value (percentage)
Semiconductor industry 2,623 (8.3) 9,690 (15.9)
2005 export value (percentage)
Supportive industries (13.9) (11.9)
Machinery and parts 1,730 (5.4) 2,873 (4.7)
Passive components industry 1,188 (3.7) 1,821
(3.0)
Metal products 1,537 (4.8) 2,551 (4.2)
Final consumption (20.9) (13.8)
Computers and peripherals 4,558 (14.3) 2,662
( 4.4)
Communications industry 828 (2.6) 3,764 (6.2)
Vehicles and parts 1,258 (4.0) 1,944 (3.2)
Unit NT100 millions
Source Compiled by CEPD from MOEA and MOF
statistical data.
10
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.
11
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)
Economic Growth (yoy) Net Foreign Demand
Economic Growth (yoy) Domestic Demand Private Consumption Private Gross Fixed Capital Formation Others Net Foreign Demand
2001 -2.2 -4.6 0.4 -4.4 -0.6 2.5
2002 4.3 1.6 1.5 0.5 -0.4 2.6
2003 3.4 0.7 0.6 -0.03 0.1 2.7
2004 6.0 6.3 2.3 3.7 0.3 -0.2
2005 4.1 1.6 1.8 -0.2 0.0 2.5
2006 (Jan.-Mar.) 4.9 1.2 1.3 -0.5 0.4 3.8
Source Directorate General of Budget,
Accounting, and Statistics.
12
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
Total Private investment Public enterprises investment Government investment
2001 -19.9 -26.8 1.4 -6.4
2002 -0.6 4.1 -1.3 -12.8
2003 -0.9 -0.3 -4.1 -1.1
2004 17.5 31.0 -18.2 -5.7
2005 0.5 -1.3 17.2 0.3
2006 (Jan.-Mar.) -4.0 -3.9 -4.9 -3.8
Source Directorate General of Budget,
Accounting, and Statistics.
13
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
Total
Total Mining Manufacturing Electricity, gas, and water construction
2001 -7.8 0.1 -8.4 1.1 -11.2
2002 7.9 8.3 9.4 3.3 -20.7
2003 7.1 -7.4 7.4 3.8 8.9
2004 9.9 -4.4 10.6 3.0 4.9
2005 3.4 -9.9 3.2 3.8 11.4
2006 (Jan.-May) 7.9 -6.2 8.0 2.8 19.3
Source Ministry of Economic Affairs.
14
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 US15.8 billion in 2005,
  from US13.6 billion in 2004. It posted US7.8
  billion in first half of 2006, up US3.6 billion
  from the same months last year.

Units US billion, Units US billion, Units US billion, Units US billion, Units US billion, Units US billion, Units US billion, Units US billion,
Trade Trade Exports Exports Imports Imports Balance
Value Growth Value Growth Value Growth Balance
2001 234.3 -19.9 126.3 -16.9 108.0 -23.3 18.3
2002 248.5 6.1 135.3 7.1 113.2 4.9 22.1
2003 278.6 12.1 150.6 11.3 128.0 13.0 22.6
2004 351.2 26.1 182.4 21.1 168.8 31.8 13.6
2005 381.0 8.5 198.4 8.8 182.6 8.2 15.8
2006 (Jan.-Jun.) 204.3 11.3 106.0 12.9 98.3 9.5 7.8
Source Ministry of Finance.
6
15
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.
16
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.
17
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.
18
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)
19
2. The Rising Power of Emerging Economies
BRICs GDP rising as ratio of G6 GDP 200313.3 ?
201519.1
?World economy entering golden decade of
stability and prosperity. ?Asias rise serving
as a new driving force for the global economy.
2005-2015 annual average growth rates Unit
G6 China India Russia Brazil
2.6 6.8 5.5 4.3 3.9
Economic growth rate

East Asia
World
USA
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.
20
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 20012002, 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
19891991
20012002
21
4. Accelerating Trends of Population Aging and
Fertility Decline
Item Year-end Population Year-end Population Fertility Fertility Year-end Population Structure () Year-end Population Structure () Year-end Population Structure () Dependency Ratio () Dependency Ratio ()
Year Total Population (1000s) Annual Growth Rate () Total Fertility Rate (Ave. no. of children per woman) No. of Births (1000s) 0-14 ? 15-64 ? 65 ? Infants ?/?100 Elderly ?/?100
1993 20,944 0.9 1.76 325 25.1 67.8 7.1 37.1 10.5
2004 22,615 0.4 1.20 217 19.3 71.2 9.5 27.1 13.3
2005 22,690 0.3 1.12 205 18.6 71.7 9.7 26.0 13.5
2011 23,138 0.2 1.10 197 15.3 74.0 10.7 20.6 14.5
2021 23,284 -0.1 1.10 169 12.0 71.3 16.6 16.9 23.3
2051 18,627 -1.4 1.10 86 7.8 55.2 37.0 14.2 67.0
? Projected Future Birth Rate (Median Projection)
? Future Population Structure
Unit
1000 persons
0-14
15-64
65
Year-end
22
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
23
IV. Taiwans Future Economic Development and
Outlook
? The Driving Forces of Taiwans Economic
Development
Average Income
Innovation driven (knowledge)
Investment driven (capital)
Taiwans current stage
Resource driven
Development Stage
24
-
? Forecasts for Taiwans economic growth
Forecasting Institution Release Date 2006 2007
DGBAS May. 2006 4.31 -
Academia Sinica Jun. 2006 4.13 -
TIER April 2006 3.91 -
CIER April 2006 4.17 4.18
IMF April 2006 4.5 4.5
EIU July 2006 4.0 4.3
World Bank March 2006 4.1 4.1
Global Insight March 2006 3.7 3.9
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.
25
? Macroeconomic Targets
Targets
20062008
20062015
2006
4.5
4.9
4.6
Growth of potential GDP
Economic growth
US18,000 (2008)
US27,00030,000(2015)
US15,207
Per capita GDP
1.4
1.4
1.2
Employment growth
4.0(2008)
Less than 4.0
4.0(2015)
Unemployment rate
Less than 2.0
CPI increase
New Century Manpower Plan
26
? Sources of Potential GDP growth
27
V. Conclusion
?Conference on Sustaining Taiwans Economic
Development (COSTED)
? Macroeconomic Targets

• During 2006 to 2015, Taiwans average growth rate
  of GDP is estimated at 5.
• Per capita GDP is projected to increase to
  US32,000 in 2015.

28
Thank you