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p. 11 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia Newly Industrialized Economies Hong Kong, China Republic of Korea Singapore Taipei,China Central Asian Republics, Azerbaijan, and Mongolia People’s Republic of China Southeast Asia South Asia The Pacific III. Asia's Globalization Challenge

Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia : Newly Industrialized Economies

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Taipei,China

The economic recovery of 1999 continued in 2000 due to a strong performance of exports and export-related private investment that benefited from surging global demand for electronic goods. However, performance of traditional industries was weaker and unemployment remained at historic highs. During 2001, reflecting a slowdown of the US economy, growth is likely to slow.

Recent Trends and Prospects

The economic recovery of 1999 further strengthened in 2000, with growth in real GDP accelerating to 6.0 percent from 5.4 percent in 1999. The major contributing factors were a jump in exports of more than 20 percent and export-related private investment, both of which benefited from strong global demand for semiconductors and telecommunications equipment. The rapid pace of growth, however, slackened later in the year as political uncertainty undermined consumer and investor confidence considerably, and aggregate demand tapered off.

Private investment expanded by 13.7 percent, compared with a contraction of 0.7 percent in 1999. It rose sharply in the first two quarters, by 18.4 percent and 27.1 percent, respectively, as companies, responding to the boom in electronics demand, expanded and upgraded production facilities. It moderated later in the year, however, because of the anticipated slowdown in the global economy. Investment in traditional industries such as textiles, construction, and real estate remained weak. Public sector investment, on the other hand, shrank by 8.3 percent, as the implementation of state projects was sluggish. Total fixed investment grew by only 7.8 percent.

Private consumption picked up to 5.6 percent in 2000 from 5.4 percent in 1999. It rose by 7.7 percent year on year in the first quarter, stimulated by campaign funding in connection with the presidential election in March, a vigorous stock market, and a low base in the previous year. Political weakness in dealing with economic issues after the election had an adverse effect on the stock market, and largely as a result of the negative wealth effect of this decline, subsequent private consumption growth fell to around 5.3 percent. State consumption increased by a mere 1.9 percent as a result of attempts to rein in the fiscal deficit that had snowballed after a strong earthquake in 1999.

Led by the robust performance of high-tech industry, the industrial production index grew by 7.7 percent compared with 7.5 percent in 1999. While electronics production surged, production in traditional industries remained sluggish. Production in light industries such as food, wood, and rubber fell by 0.8 percent and construction contracted by 4.2 percent. Agricultural production fell by 1.3 percent due to unfavorable weather conditions. In the services sector, telecommunications served as the main engine of growth, while the financial sector and state services remained weak.

Export growth jumped to 22.3 percent from 9.9 percent in 1999. Recovering Asian economies and booming global demand for electronic, information, and communications products were the main driving forces. Imports also soared by 27.3 percent, from 6.2 percent growth in the previous year. The rapid growth of private investment stimulated a sharp increase in imports of capital goods, while the current account surplus narrowed as imports rose faster than exports.

The unemployment rate has risen gradually in recent years, from a low of 1.4 percent in 1993, to 2.6 percent in 1996, to 2.9 percent in 1999. At the end of 2000, unemployment was 3.0 percent. The downturn of traditional industries, the slowdown of the financial sector, and the influx of foreign workers are the main reasons for the high rate.

The budget deficit, which had swollen from 3.4 percent of GDP in 1998 to 6.0 percent in 1999, fell to 4.8 percent of GDP in 2000. Improved budgetary revenues—thanks to a healthy economy—and a slowdown in current expenditure were the major factors. Despite an easing of the monetary stance earlier in 2000, money supply (M2) growth slowed later in the year, to give M2 growth of 6.5 percent for the whole year. This was lower than the 8.3 percent in 1999 and was due mainly to outflows of foreign capital.

Prices rose in 2000 due to rising world oil prices and the depreciation of the currency. Consumer price inflation was 1.3 percent, an upswing from 0.2 percent in 1999, while wholesale inflation reached 1.8 percent, in contrast to 4.5 percent price deflation in 1999. Import prices rose by 4.6 percent. However, compared with other economies in Asia, inflation remained low.

In 2001, real GDP growth is projected to moderate to just over 5 percent as the global economy slows. Export growth is forecast to be weaker due to anticipated softer global demand. Domestic demand will also likely be softer than in 2000. Private consumption growth is projected to decelerate to around 4.6 percent. Private investment growth, closely linked with the external sector, will also slow to around 7.4 percent. Imports, however, are expected to continue growing, albeit more slowly, as market-opening measures are implemented when Taipei,China joins the World Trade Organization. Continued robust growth of the economy in the next few years requires economic restructuring, especially in the financial sector and in traditional industries.

The authorities will probably adopt a more relaxed monetary policy in 2001 to attempt a soft landing for the economy. The budget deficit is projected to shrink to 4.3 percent of GDP, as the authorities keep a tight grip on expenditure and implement plans to raise revenues, such as reforming the tax system and privatizing state-owned enterprises. The authorities have little room to use fiscal policy to stimulate the economy since, in 2000, they pushed to the legal limit the amount of debt that they can issue. As a result, the currency is expected to depreciate further and prices will likely rise moderately due to weaker aggregate demand and to deflationary pressures from market-opening measures adopted in preparation for World Trade Organization membership. Unemployment will probably rise even higher, to 3.4 percent.

Issues in Economic Management

Traditional industries, such as textiles, construction, and real estate, as well as agriculture, have recently plunged into a structural downturn. These industries, dominated by small and medium-sized enterprises (SMEs), face serious challenges. Their profitability has persistently decreased with rising fixed costs and wages. Their production modes, however, are too inflexible to accommodate rapid changes in market demand and their technology has yet to develop to compete with large international companies. Moreover, a tumbling stock market have curtailed banks’ willingness to lend, thereby restricting these SMEs’ access to bank credit and so aggravating their financial distress.

Consequently, it is high unemployment in these industries, particularly among unskilled and older workers, that has pushed unemployment higher over the last few years. Official statistics show that unemployment among unskilled and semi-skilled workers in traditional industries reached 3.3 percent in the second quarter of 2000, compared with an economy-wide unemployment rate at that time of 2.8 percent.

Since most SMEs in traditional industries have low levels of knowledge and capital, it is very difficult for them to restructure their business. Therefore, restructuring led by the authorities would be more realistic, and this should include effective and stronger policy measures to upgrade workers’ skills and make the labor market more flexible.

Policy and Development Issues

The banking sector has suffered from overcrowding and surging volumes of nonperforming loans (NPLs). In 2000, more than 450 financial institutions, including 47 domestic banks and 314 credit departments of farmer and fisherfolk associations, were operating. The excessive competition and limited market share dragged down aggregate profitability. Moreover, the downturn in traditional industries, and flagging real estate and stock markets, raised the NPL ratio of financial institutions to 5.5 percent by the end of October 2000. The NPL ratio of cooperative associations and credit departments of farmer and fisherfolk associations surged to 15.6 percent.

The authorities moved to solve the overcrowding problems and improve the quality of bank assets through a range of measures. One was an amendment to the Banking Law, passed in October 2000, which relaxed restrictions on banks’ investment activities and raised the ownership ceiling in other banks or financial companies from 15 to 25 percent. The authorities also passed the Merger Act of Financial Institutions in December 2000 to encourage mergers, including those by foreign financial institutions. In addition, the central bank cut the average reserve requirement ratio from 7.7 to 6.4 percent in 1999 and lowered the gross business revenue tax for banks from 5 to 2 percent, then eliminated it altogether in November 2000.

Though these financial restructuring measures have tackled several weaknesses, concerns remain. For example, the authorities recently urged banks to roll over loans to troubled traditional industries. However, this will only worsen the bad debt problem. The authorities’ decision to relax restrictions on banks’ investment activities will make banks even more vulnerable to stock market volatility. The weakening real estate market also raises uncertainties about the pace of restructuring. To activate the market, the authorities may introduce both a real estate price monitoring system to reduce price distortions and a real estate secondary market.

The information and communications technology (ICT) industry has grown substantially over the last several years, serving as the main engine of economic growth. Production of computer hardware, growing by over 40 percent a year in 1995–2000, amounted to around $50 billion in 2000. Despite the weak performance of the domestic economy, hardware’s rapid expansion was brought about partly by the authorities’ various incentives and the flexibility of local SMEs in adapting to global market trends. Exports of software are smaller than hardware, but this subsector also registered very strong growth of 30 percent a year in 1995–2000. Output of domestic communications and Internet-related products has also increased, at about 10 percent a year over the same period.

Given that the ICT industry in Taipei,China is highly cyclical and sensitive to market shocks, the industry still has to overcome several challenges if it is to prosper in international markets. First, most SMEs in the ICT industry spend only a small percentage of their turnover on research and development, and are not therefore ready to quickly adjust to new market trends. For example, traditional makers of wire for tele-communications equipment—most of them SMEs—did not adapt to the surging demand for mobile phones and wireless products and were, therefore, forced to withdraw from the international market due to lower sales. Second, Taipei,China’s ICT industry still relies heavily on the US and Japan for its key components and technology. Third, the economy’s main trading partners are these two countries and the People’s Republic of China. Policymakers must, therefore, provide a policy and institutional environment in order to (i) enable the ICT industry to adopt rapid technological change to meet continually evolving market conditions, (ii) encourage research and development and support the transfer of technology to domestic firms, and (iii) diversify exports to more destinations to enable the industry to better weather any downturn in the economies of its major trading partners.

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