Taiwan’s Economic Momentum and Prospects

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

Yaw-Chung Liaw, Ph.D.Director General

Overall Planning Department, Council for Economic Planning and Development

Executive Yuan (Cabinet), Taiwan

Taiwan’s Economic Momentum

and Prospects

2

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

CONTENTS

31953 1961 1973 1984 20001991

First-phase Import

Substitution

Export Expansion

Stage

Second-phase Import

Substitution and Export Expansion

Stage

Economic Liberaliz-ation Stage

High-tech Industrial Develop-men

t Stage

Knowledge Economy

Stage

Light industry

Light industry

Basic and heavy

industries

Developmentof

strategic industries

Promotion of ten

emerging industries

Knowledge-based

industries

1. Taiwan’s Industrial Development History (Course of Change in the Factor Intensity of Production)

y＝ｆ (L, K, T, knowledge)

ＬＬＫＴ Knowledgey=f(T/L)

I. Taiwan Economic Achievements and Challenges

4

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).

19522005 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: *US$82 million in 1959.


Note: *US$82 million in 1959.

2. Taiwan’s Economic Development Experience and Achievements

5

Taiwan’s “World Top Producer” Items in 1983 and 2005

1983 2005

Products

Production Value(US$

billions)

Products(excluding offshore

production)

Production Value(US$

billions)

Production Volume (billion units)

Global Market Share (%)

ShoesElectric fansBicyclesUmbrellasSewing-machinesBicycle tiresThermos flasksMSG Bicycle brakesCamphorBicycle chains

1.8.23.22.19.18.10.08.04 .01.01.01

FoundryIC packagingIC testingMask ROMsCD-R discsCD-RW discsDVD-R discsDVD-RW discsGlass fiberED CuLarge-size TFT-LCDs TN/STN-LCDsIC designDRAMWLANs

11.35.53

2.1.28

.49

.5217.79

1.257.975.64

.52

4.82.183.5.19

6745609158777159483641 (#2)20 (#2)22 (#2)22 (#2)23 (#2)

Sources: CEPD, MOEA ITIS Plan.

Taiwan Has Become a Global Stronghold of High-Tech Products

6

3.Trend of Industrial Structure

0

10

20

30

40

50

60

70

80

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Service

Industry

Agriculture

%


◎ 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.

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

Digital content(NT$290billion)

Biotech(NT$15 billion)

2-Trillion 2-Star

industriesSemiconductor

(NT$1.11 trillion)

Textile m

ill products

(476)

Petrochemicals(NT$1.14 trillion)

Com

mu

nicatio

n

(579)

Mach

inery

&

equipm

ent

Image d

isplay

Iron & steel

(640)(909)

(955)

8

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.

⊙ Certain industries have fallen into severe decline, and need assistance to transform and upgrade.

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.

9

Upstream industries

(13.0%)(31.1%)

Supportiveindustries

(13.9%)(11.9%)

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%)

Machinery and parts

1,730 (5.4%)2,873 (4.7%)

Passive componentsindustry

1,188 (3.7%)1,821 (3.0%)

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)

Source: Compiled by CEPD from MOEA and MOF statistical data.

Semiconductorindustry

2,623 (8.3%)9,690 (15.9%)

Metal products

1,537 (4.8%)2,551 (4.2%)

Vehicles and parts

1,258 (4.0%)1,944 (3.2%)

⊙ 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.

Unit: NT$100 millions

2005 export value(percentage)

10Source: Council for Economic Planning and Development.

1. Monitoring IndicatorsThe monitoring indicators flashed “green” in May 2006 for the tenth successive month. The positive movements of most indicators suggest continued steady expansion..

II. Taiwan Current Economic 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.

Economic Growth

(yoy)

Net Foreign Demand

Domestic Demand

Private Consumption

Private Gross Fixed Capital

FormationOthers

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

Contribution to Economic Growth (in percentage points)


12

3. Domestic Investment

Gross Fixed Capital Formation: Growth rate

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.

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

unit ： %


13

4. Industrial ProductionIndustrial 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 Productionunit ： %

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.

Units: US$ billion, ％

Trade Exports Imports

Balance Value Growth Value Growth Value Growth

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

5. Foreign Trade

6

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.

15

2.9

1.82.6 2.7 2.7 3.0

4.65.2 5.0

4.4 4.1 3.8

1.61.11.01.2 1.2

0.3

1.2

-1.1

0.81.3

2.21.5

-2

-1

0

1

2

3

4

5

6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Employment Growth Rate

Unemployment Rate

％

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.

(Jan.-May)


16Source: Directorate General of Budget, Accounting, and Statistics.

7. PricePrices 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%.

1.43

2.33.08

0.891.69

0.171.26

-0.01

-0.2 -0.28

1.62

1.82

0.6

-1.01-0.45

-4.55

-1.34

0.05

2.48

0.61

4.01

7.03

-6

-4

-2

0

2

4

6

8

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006(Jan.-Jun.)

CPI

WPI

%

-0.61

0.71 0.650.58

2003 2004 2005 2006

(Jan.-Jun.)

Core Prices

17

8. Money and BankingFor 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. I

n May 2006, commercial paper rate and interbank rate recorded 1.50% and 1.52%, re

spectively. The Central Bank raised the rediscount rate four times in 2005, and furthe

r to 2. 500% in June 2006.

Since the broadly defined non-performing loan (NPL) ratio of domestic banks peaked a

t 11.27% at the end of 2001, a continuing program of financial reforms has slashed it dr

amatically to just 2.24% in December 2005 .

423.8370.5455.0

518.1576.5590.7

688.9740.5

841.6

2.532.242.8

3.243.663.8

4.524.9

5.72

0

300

600

900

1200

20043 6 9 12

20053 6 9 12

20065

0

2

4

6Non-performing Loan Amount

Non-performing Loan Ratio

No

n-p

erform

img

loan

s (NT

$ b

illion

)

No

n-p

erform

img

loan

ratio (%

)

year

month

Source: The Central Bank of China, R.O.C.

18

Already signed and set up

Under consideration or negotiation

Southern Cone Common Market （ MERC

OSUR ）

North American Free Trade Area (NAFTA)

2005 Establishment of Free Trade Area of the Americas

(FTAA)

EU-Mexico FTA

Expanding to Latin American countries

China-ASEAN FTA

(2010)

European Union

15 Countries(EU)

2004 Eastward Expansion to 25 Countries

EU-ACP (African, Caribbean & Pacific Countries) FT

As (more than 70 countries)

Japan-ASEAN Comprehensive

Economic Partnership Framework Agreement

(2003)

Japan-South Korea FTA

Japan-SingaporeNew Century Economic P

artnership Agreement(2002)

EU-ASEAN

ASEAN-India

ASEAN-Australia-New Zealand

Closer Economic Relations

(CER)Taiwan-Panama FTA (concluded)Taiwan-Nicaragua FTA (under negotiation)Taiwan-Guatemala FTA (concluded)

China-HK/Macau Closer Economic

Partnership Arrangements

(CEPA)

ASEAN Free Trade Area

(AFTA)

1. The Formation of Economic and Trade Networks

around the World

US and Central America Free Trade Agreement

(CAFTA)

III. Global Economic Development Trends and Challenges

19

2.5

3.2 3.2

2.5

3.2 3.2

1.71.9 1.8

1.5

2.3 2.2

5.9 6.05.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2001-2004 2005-2008 2005-2015

˙World economy entering golden decade of stability and prosperity.

˙Asia’s rise serving as a new driving force for the global economy.

World

US

A Japan

EU

East A

sia

％

Econ

omic grow

th rate

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.

2. The Rising Power of Emerging EconomiesBRICs GDP rising as ratio of G6 GDP

2003 ： 13.3 ％ 2015 ： 19.1 ％

2005-2015 annual average growth ratesUnit: ％

G6 China India Russia Brazil

2.6 6.8 5.5 4.3 3.9

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.”

Heavy Investment in the Service Sector by Transnational Corporations － Global FDI Flows by Industrial Sector

39%6%

55%

22%7%

71%Services ServicesManufacturing Manufacturing

Primary industry

Primary industry

Source: UNCTAD

　　 1989~1991 2001~2002

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.

21

4. Accelerating Trends of Population Aging and Fertility DeclineItem Year-end Population Fertility

Year-end Population Structure (%)

Dependency Ratio (%)

Year

Total Populatio

n(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

7.8 55.2 37.0

11.3 68.1 20.6

13.9 74.3 11.8

19.3 71.3 9.4

25.1 67.8 7.1

31.6 64.0 4.4

2051

2026

2014

2004

1993

1981

Year-end

0-14 15-64 65 &+

Unit: ％ ◎ Future Population Structure ◎ Projected Future Birth Rate (Median Projection)

86104

131

169189

218

50

100

150

200

250

2004 2014 2021 2031 2041 2051

1000 persons

22

Global CO2 Emissions from Fossil Energy

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.

Industrialized countries’

greenhouse gas emission

reduction pledges

(2008~2012)Emission limits (1990=100)

EU 92

Japan 94

Canada 94

5. Green Energy-Saving Driving Tide

100 million tons

0

50

100

150

200

250

300

350

400

1970 1980 1990 2001 2010 2020

CoalNatural gasOil

23

Average In

come

Development Stage

Resource driven

Investment driven

(capital)

Innovation driven

(knowledge)

Taiwan’s current

stage

◎ The Driving Forces of Taiwan’s Economic Development

IV. Taiwan’s Future Economic Development and Outlook

24

◎ Forecasts for Taiwan’s 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

2006~20082006~2008

4.94.9 ％％4.94.9 ％％

US$18,000US$18,000（（ 20082008 ））US$18,000US$18,000（（ 20082008 ））

4.04.0 ％（％（ 20082008 ））4.04.0 ％（％（ 20082008 ））

1.41.4 ％％1.41.4 ％％

2006~20152006~2015

4.64.6 ％％4.64.6 ％％

US$27,000~30,000US$27,000~30,000（（ 20152015 ））

US$27,000~30,000US$27,000~30,000（（ 20152015 ））

4.04.0 ％（％（ 20152015 ））4.04.0 ％（％（ 20152015 ））

1.21.2 ％％1.21.2 ％％

TargetsTargets

Per capita GDPPer capita GDPPer capita GDPPer capita GDP

Unemployment rateUnemployment rateUnemployment rateUnemployment rate

Employment growthEmployment growthEmployment growthEmployment growth

CPI increaseCPI increaseCPI increaseCPI increase

Growth of potential GDP

Economic growth

New Century Manpower Plan

◎ Macroeconomic Targets

20062006

4.54.5 ％％4.54.5 ％％

US$15,207US$15,207US$15,207US$15,207

Less than 4.0Less than 4.0％％


1.41.4 ％％1.41.4 ％％



26

⊙ Sources of Potential GDP growth

27

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.

28

Thank you

Documents

Taiwan’s Economic Momentum and Prospects