Report on

Macroeconomic Analysis of Taiwan

Submitted By-

Chandan Patekar [M1141]

Dhiraj Nemade [P1140]

Mandar Patil [P1144]

SYDENHAM INSTITUTE OF MANAGEMENT STUDIES, RESEARCH

AND ENTREPRENEURSHIP EDUCATION

Index

1. Introduction _________________________________________________________________ 3

2. History of Taiwanese Economy _________________________________________________4

3. Taiwanese Economy: Statistics ________________________________________________5

4. Macroeconomic Indicators _____________________________________________________6

4.1 GDP

4.2 Inflation

4.3 Unemployment

4.4 Interest

4.5 Trade

4.6 Industrial production

4.7 Latest Policy Changes

5. Taiwan in Global Economy _____________________________________________________14

6. Conclusion _________________________________________________________________16

7. Reference _________________________________________________________________17

Page | 2

1. Introduction

Taiwan also known as The Republic of China (ROC) is a unitary sovereign state located in East Asia. Taiwan is a multi-party democracy that has a presidential system. Taiwan has a dynamic capitalist economy with gradually decreasing government guidance of investment and foreign trade. It experienced rapid economic growth, industrialization, and democratization during the latter half of the 20th century. It is one of the Four Asian Tigers and a member of the WTO and APEC. It is the 19th largest economy in the world. Its advanced technology industry plays a key role in the global economy. The ROC is ranked highly in terms of freedom of the press, health care, public education, economic freedom, and human development.

The political status of the Republic of China is a contentious issue. The People's Republic of China (PRC) does not recognize Taiwan (ROC) as a nation. Internationally, there is controversy on whether the ROC still exists as a state or a defunct state as per international law due to the loss of membership/recognition in the United Nations and lack of wide diplomatic recognition. Despite its controversial political status, the ROC is an industrialized advanced economy.

Taiwan has a developed capitalist economy that ranks as the 19th largest in the world by Purchasing power parity (PPP) and 24th in nominal GDP of investment. Most large government-owned banks and industrial firms have been privatized. Real growth in GDP has averaged about 8% during the past three decades. Exports have grown even faster and since World War II, have provided the primary impetus for industrialization. Inflation and unemployment are low; the trade surplus is substantial; and foreign reserves are the world's fourth largest. Agriculture contributes 3% to GDP, down from 35% in 1952, and the service sector makes up 73% of the economy. Traditional labor-intensive industries are steadily being moved off-shore and replaced with more capital- and technology-intensive industries, as well as creative industries.

Taiwanese investors and businesses have become major investors in mainland China, Vietnam, Thailand, Indonesia, the Philippines, and Malaysia. Because of its conservative financial approach and its entrepreneurial strengths, Taiwan suffered little from the Asian Financial Crisis of 1997-1999 compared to many of its neighbors. Unlike in neighboring Japan and South Korea, small and medium-sized businesses make up a large proportion of businesses in Taiwan.

Taiwan is a member of the Asian Development Bank (ADB), the World Trade Organization (WTO), and the Asia-Pacific Economic Cooperation (APEC) forum. Taiwan is also an observer at the ‘Organisation for Economic Co-operation and Development’ (OECD). Taiwan's top five trade partners in 2010 are China, Japan, USA, the European Union, and Hong Kong.

Page | 3

2. History of Taiwanese Economy

Development of Taiwanese Economy can be divided into 3 phases-

Before Chinese Civil War (Till 1950):

Before Chinese rule, British Empire and Japan continued to trade with Taiwan as an independent state. During Chinese rule, most of the economic development happened from settlement of migrants. However, it faced some obstacles economically as a result of the mass destruction during World War II and the Chinese hyperinflation in the 1940s. Taiwan's economy during the Japanese rule period was a colonial economy.

The Taiwan Miracle (1950-1980):

Taiwan Economic Miracle refers to the rapid industrialization and economic growth of Taiwan during the latter half of the twentieth century which made Taiwan as one of the ‘Four Asian Tigers. After ROC retreated to Taiwan, the Taiwanese society was relatively stable politically. The first step towards industrialization was land reforms, a crucial step in modernizing the economy, as it created a class of landowners with capital they can invest in future economic endeavors. US aid was also important to stabilize post-war Taiwan, and it constituted more than 30 percent of domestic investment from 1951 to 1962. The government also carried out an import substitution policy and 19-point program of Economic and Financial Reform. These factors, together with government planning and universal education, brought huge advancement in industry and agriculture, and living standards. The economy shifted from an agriculture-based economy (32% of GDP in 1952) to an industry-oriented economy (47 % of GDP in 1986). Between 1952 and 1961, the economy grew by an average of 9.21% each year.

Privatization & Globalization (1980-Current):

In the 1980s, Taiwan had become an economic power, with a mature and diversified economy, solid presence in international markets and huge foreign exchange reserves. Like Korea, Taiwan moved from cheap, labor-intensive manufactures, such as textiles and toys, into an expansion of heavy industry and infrastructure in the 1970s, and then to advanced electronics in the subsequent decade. By the 1980s, the economy was becoming increasingly open and the government moved towards privatization of large banks and government enterprises. Many Taiwanese companies became global suppliers. From 1981-1995, the economy grew at an annual rate of 7.52%, and the service sector became the largest sector at 51.67%, surpassing the industrial sector and becoming a major source of the economy's growth. Because of its conservative financial approach and its entrepreneurial strengths, Taiwan suffered little from the Asian Financial Crisis of 1997-1999 compared to many of its neighbors. Taiwan has recovered quickly from the global financial crisis of 2007-2010 and its economy has been growing steadily.

Page | 4

3. Taiwanese Economy: Statistics

(2011 est. - data are in 2011 US dollars) (Source: CIA World Fact Book)

Currency New Taiwan dollar (NT$); 1 $ USD = 29.57 TWD (Feb 2012)

GDP Nominal: $504.612 billion PPP: $885.3 billion

Nominal rank: 24th PPP rank: 20th

GDP growth 5.2% (2011)

10.5% (2010)

-1.9% (2009)

GDP per capita Nominal: $21,591 PPP: $37,900

Nominal rank: 40th PPP rank: 27th

GDP by sector Services (tertiary) 66.9%

Industry (secondary) 32%

Agriculture (primary) 1.3%

Inflation (CPI) 1.6%

Population below poverty line 1.16%

Labour force 11.16 million

Exports $325.1 billion

Imports $298.6 billion

Industrial production growth rate 8.5%

Reserves of foreign exchange and gold $418.4 billion;Rank: 5th

External Debt $116 billion

Fiscal Deficit $7.97 billion

Page | 5

4. Macroeconomic Indicators

4.1 GDP

GDP is a popular method used to measure income and output of a particular country. It is also known as GDI or Gross Domestic Income. It has been defined as aggregate worth, in a market, of all finished goods and services that are produced at a particular point in time. GDP is also regarded as sum of value that is added at each and every stage of production. It is also known as aggregate value of every finished goods and services that are produced within a certain period of time in a particular state. It is normally expressed in terms of money.

Taiwan Gross Domestic Product is worth 431 billion dollars or 0.70% of the world economy, according to the World Bank. Historically, from 1980 until 2010, Taiwan's average Gross Domestic Product was 231.66 billion dollars reaching an historical high of 430.58 billion dollars in December of 2010 and a record low of 42.23 billion dollars in December of 1980. Taiwan is an industrialized, developed country. Taiwan's economy, one of the "Four Asian Tigers", is export-oriented and specialized in production of electronics and machinery. In fact, Taiwan is one of the world's largest suppliers of computer chips, LCD panels, DRAM computer memory, networking equipment, and consumer electronics. Textile production, although already in decline, is another major industrial export sector.

Page | 6

Historically, from 1962 until 2011, Taiwan's average annual GDP Growth was 7.43 percent reaching an historical high of 17.06 percent in September of 1978 and a record low of -8.56 percent in March of 2009.

Through decades of hard work and sound economic management, Taiwan has transformed itself from an underdeveloped, agricultural island to an economic power that is a leading producer of high-technology goods. In the 1960s, foreign investment in Taiwan helped introduce modern, labor-intensive technology to the island, and Taiwan became a major exporter of labor-intensive products. In the 1980s, focus shifted toward increasingly sophisticated, capital-intensive and technology-intensive products for export and toward developing the service sector. At the same time, as a result of the appreciation of the New Taiwan dollar (NT dollar or NTD), rising labor costs, and increasing environmental consciousness in Taiwan, many labor-intensive industries, such as shoe manufacturing, shifted production and moved their manufacturing to China and Southeast Asia. Taiwan has transformed itself from a recipient of U.S. aid in the 1950s and early 1960s to an aid donor and major foreign investor, especially in Asia. Taiwan is now a creditor economy, holding the world's fourth-largest stock of foreign exchange reserves ($385.6 billion as of December 2011). Although Taiwan enjoyed sustained economic growth, full employment, and low inflation for many years, in 2001, Taiwan joined other regional economies in its first recession since 1949. From 2002-2007, Taiwan's economic growth ranged from 3.5% to 6.2% per year. With the global economic downturn, Taiwan's economy slumped into recession in the second half of 2008. Its real GDP, following growth of 5.98% in 2007, rose 0.73% in 2008 and contracted 1.81% in 2009. The economy saw a robust recovery in 2010, growing by 10.72%, and the highest rate in 28 years. In 2011, growth slowed to 4.03% amid the European debt crisis.

Page | 7

4.2 Inflation

Inflation means a persistent rise in the price levels of commodities and services, leading to a fall in the currency’s purchasing power. The problem of inflation used to be confined to national boundaries, and was caused by domestic money supply and price rises. In this era of globalization, the effect of economic inflation crosses borders.

 During the early stages of Taiwan's economic development following the relocation of the central government, the aftermath of several wars and an overall lack of basic necessities drove the inflation rate up very high. Afterward, though, with the exception of the periods during two energy crises, from 1973 to 1974 and from 1979 to 1980, inflation in Taiwan has been moderate. For example, between 1952 and 1980, the consumer price index rose at an annual rate of 7.95 percent, whereas the wholesale price index averaged an annual increase of only 7.14 percent. If the four years of energy crisis were excluded, the consumer price index rose only 5.39 percent annually, and the wholesale price index increased by a mere 4.3 percent per year.

From 1981 to 2000, the inflation rate in Taiwan was even lower. During this period, the consumer price index averaged an annual increase of 2.87 percent, and the wholesale price index averaged an annual decrease of 0.01 percent. On average, from 1952 through 2000, the consumer price index went up annually by 5.87 percent and the wholesale price index by 4.24 percent.

At the beginning of the 21st century, there were new developments in the world economy and dramatic changes in Taiwan. Consumer and wholesale price indexes fell.

Page | 8

4.3 Unemployment Rate

Taiwan had maintained relatively low unemployment rate, below two percent, during the period of economic boom since the 1960s. However, unemployment had been increasing since the late 1990s, surpassing the two percent mark in 1996 and reaching record high of 5.69 percent in 2010. Since 1996, the number of Taiwanese living in poverty had increased, mainly due to global economic changes and the shifting of production centers to other countries, especially to China. The characteristics of people now in poverty are quite different from those of the “old poor” who tended to be low-skilled and/or low-educated laborers, the disabled, underprivileged elderly and indigenous people. The “new poor” are mainly middle-aged breadwinners who have secondary-level education and who support dependents at home. They are skilled and/or white-collar workers but suffer from income loss due to lay-offs or job instability.

4.4 Interest rate

Interest rates are the amount that a borrower pays for to a lender in order to use capital for a specific period of time. Interest rate is also known as the cost of borrowing assets. Interest rates are expressed in terms of annual percentages on the amount that is borrowed or on that portion of the borrowed amount that remains unpaid.

Page | 9

In Taiwan, interest rate decisions are taken by Central Bank of the Republic of China (Taiwan). The official interest rate is the discount rate on 10-day loans to banks. Historically Taiwan’s interest rates have been low except during the global financial crises such as 2008 crisis.

4.5 Trade

Export:

Taiwan exports were worth 21080 Million USD in December of 2011. Taiwan's economy is export-oriented. Main export products are electronics (28% of total), basic metals (9%), plastics & rubber (8%), optical and photographic instruments (8%) and chemicals (7%). Main exports partners are Mainland China & Hong Kong (42% of total), USA (12%), Japan (7%), Europe (11%) and ASEAN countries (15%).

Page | 10

Import:

Taiwan imports were worth 20660 Million USD in December of 2011. A lack of natural resources had made Taiwan dependent on imports. Taiwan imports mostly mineral products and basic metals, electronic products, chemicals, machinery. Main import partners are Japan (21% of total), Mainland China & Hong Kong (14%), USA (10%), Europe (10%) and ASEAN countries (11%).

Balance of Trade

Page | 11

Taiwan reported a trade surplus equivalent to 420 Millions USD in January of 2012. Foreign trade has been the engine of Taiwan's rapid growth during the past 40 years.

4.6 Industrial Production

Industrial production measures changes in output for the industrial sector of the economy which includes manufacturing, mining, and utilities. Industrial Production is an important indicator for economic forecasting because is highly sensitive to interest rates. Industrial Production is also used by economists and central bankers to measure inflation pressures, as high levels of industrial production can lead to sudden changes in prices.

Industrial Production in Taiwan declined 16.5 percent in January of 2012 mainly due to seasonal factors and global economic doldrums.

4.7 Latest Policy Changes

Fiscal Policy

On May 28, 2010 Taiwan's legislature approved a cut in the corporate income tax rate to 17 % from 20 %. This was the second tax cut within the last twelve months, the government hopes that with these recent tax cuts the island of Taiwan will become more competitive for foreign investors. This policy is an example of expansionary fiscal policy, due to the fact that the government of Taiwan is lowering the tax rate hoping that it will increase the money supply. Lowering the corporate income tax rate will cause the investment rates and expenditures to increase, which causes the aggregate demand curve to increase and shift to the right. An increase

Page | 12

in investments leads to an overall increase in productivity, which in result leads to an increase in the aggregate supply curve shifting it to the right. Prices remain stable, the economic growth rate and the quantity of goods and services increases, while the unemployment rate decreases due to more job openings.

Monetary Policy

Taiwan's central bank raised their interest rates from a record low of 1.25% to 1.375%, which was the first time since the year of 2008. When interest rates begin to increase it starts to become more expensive and difficult for people to borrow money, which is a relating factor with spending. With interest rates increasing this monetary policy will be considered contractionary. Due to the increase in interest rates, spending will start to decrease which will have a decreasing effect among the aggregate demand, and the aggregate supply will have no effect.

Page | 13

5. Taiwan In Global Economy

Asian Financial Crisis of 1997

The Asian financial crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown. The crisis started in Thailand with the financial collapse of the Thai baht after the Thai government was forced to float the baht (due to lack of foreign currency to support its fixed exchange rate), cutting its peg to the U.S. dollar, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt. Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations (ASEAN) economies in 1993–96, and then shot up beyond 180% during the worst of the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as 40%, while the other northern newly industrialized countries fared much better. Only in Thailand and South Korea did debt service-to-exports ratios rise. Although most of the governments of Asia had seemingly sound fiscal policies, the International Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis.

Taiwan during Asian crisis

Taiwan was able to weather the crisis better than other Asian Tigers. Taiwan has huge foreign reserves which allowed it to defend the unexpected speculative attacks in the second half of last year. Second, with little external debt and with a current account surplus, strong economic fundamentals contribute to the stabilization of the New Taiwan dollar. Third, Taiwan's slow pace of financial liberalization gives foreign speculators no direct channel to invest the domestic capital markets, and thus lessening the magnitude of uncontrolled capital movement. In regards to the part of the Asia-Pacific Regional Operations Centre (APROC) development plan to eliminate the government's control on foreign capital flows, however, consideration for stabilizing the domestic economy, will halt financial reform until the Asian crises is over and relations with China improve. Fourth, based on the concern that the currency devaluation and the contagion effect of neighboring crises might incite inflation, the CBC adopted a "moderately loose" monetary policy, which keeps the price level in a reasonable range.

Page | 14

Global Financial Crisis of 2008

The recession began in January 2008 in the financial sector as major banks in the U.S. and Europe got into serious trouble by investing in bad mortgages. The crisis spread globally due to the fact that many banks and other business worldwide had invested in these securitized debts. Trouble spread to the automobile industry, where General Motors and Chrysler went bankrupt in spring 2009, due to a decrease in US consumer demand. Later a bailout involving a taxpayer buy out and bankruptcy reorganization was authorized by President Barack Obama. The stock market fell by 50% in 2008, wiping out trillions of dollars in assets. More trillions were lost as housing prices fell by 20%. Adding together the declines in housing and the stock market, the net worth of American households declined from $63.7 trillion in January 2008 to $51.5 trillion in January 2009, a decline of $11.2 trillion or 18%. That is, Americans owned $11 trillion less wealth, and adjusted by buying less and investing less. Meanwhile mortgages and credit-card debt together reached $13 trillion, or 123% of after-tax income, a huge jump since 1995, when it was 83% of income. Wealth levels plunged worldwide. Stock markets in other major countries fell even faster than the U.S. Most companies worldwide reported reduced sales and sharply reduced profits, as banks refused to lend and consumers refused to spend, fearing the worst.

Taiwan during 2008 recession

Due to the financial crisis caused by subprime lending, Taiwan’s economy showed a significant decline in the second half of 2008. The growth rate of real GDP was negative (-1.05%) in the third quarter of 2008. It fell to -8.61% in the fourth quarter and fell further to -10.13% in the first quarter of 2009. Also, nominal consumption growth rate fell from 1.02% in the third quarter of 2008 to -2.98% in the first quarter of 2009.Due to fall in demand for its products domestically and internationally and Taiwan being an export oriented country the 2008 recession had adverse effect. Taiwan is signing MOU with China in order to boost trade with the giant. The Taiwanese government is encouraging domestic spending by taking various measures like it distributed $108 coupon per person so that they can spend it in shopping. The world is returning to normal and so is Taiwan. Taiwan has recovered quickly from the global financial crisis of 2007-2010, and its economy has been growing steadily. Its economy faced a downturn in 2009 due to a heavy reliance on exports which in turn made it vulnerable to world markets.

Page | 15

6. Conclusion

Taiwan now faces many of the same economic issues as other developed economies. Taiwan continues to rely heavily on its technology sector, a specialist in manufacturing outsourcing. With the prospect of continued relocation of labor-intensive industries to economies with cheaper work forces, such as in China and Vietnam, Taiwan's future development will have to rely on further transformation to a high technology and service-oriented economy. In recent years, Taiwan has successfully diversified its trade markets, cutting its share of exports to the United States from 49% in 1984 to 20% in 2002. Taiwan's dependence on the United States should continue to decrease as its exports to Southeast Asia and China grow and its efforts to develop European markets produce results. Taiwan's accession to the WTO and its desire to become an Asia-Pacific "regional operations center" are spurring further economic liberalization.

Page | 16

7. References

National Statistics, Republic of China (Taiwan), http://eng.stat.gov.tw/mp.asp?mp=5

Central Bank of Republic of China (Taiwan), http://www.cbc.gov.tw/mp2.html

CIA, The World Fact Book, https://www.cia.gov/library/publications/the-world-factbook/geos/tw.html

IMF - World Economic Outlook Database-September 2011,

http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx

World Bank WDI Database, http://data.worldbank.org/indicator

http://www.tradingeconomics.com/

http://cens.com/cens/html/en/news/news_inner_39410.html

www.economist.com

www.bbc.co.uk

Page | 17