Taiwanese Association of American

June 2005

Thomas M. F. YehVice Chairman

Council for Economic Planning and DevelopmentExecutive Yuan (Cabinet), Taiwan

Taiwan’s Economic Situation

and Outlook

2

I. ECONOMIC SITUATION IN TAIWAN

Economic Growth

Private Investment

Foreign Trade

Employment

II. TAIWAN’S DEVELOPMENT STRATEGY

Challenges

Policy Initiatives

III. FUTURE PROSPECTS

CONTENTS

3

4.174.88

1.143.97

5.80 2.54

3.25

5.277.886.72

5.88

-0.12

3.21

-8

-6

-4

-2

0

2

4

6

8％

The business monitoring indicators flashed “yellow-blue” for the first time since July 2003, signaling the

economy’s shift to a slower pace of expansion

I. ECONOMIC SITUATION IN TAIWAN

1. Economic GrowthTaiwan’s economy grew by 5.71% in 2004, the best performance in the last seven years.

2002 2003 2004 2005

Growth 3.94 ％ Growth 3.33 ％ Growth 5.71 ％

I II III IV I II III IV I II III IV I

4

2. Private Investment

Domestic demand is the driving force of economic growth. Private investment grew by 28.2 ％ in 2004, the biggest increase since 1993.

Economic Growth

(yoy)

Net Foreign Demand

Domestic Demand

Private Consumption

Private Gross Fixed

Capital Formation

Others

2001 -2.2 -4.8 0.6 -4.6 -0.8 2.6

2002 3.9 1.2 1.3 0.4 -0.5 2.8

2003 3.3 0.5 0.5 -0.2 0.2 2.8

2004 5.7 5.7 1.9 3.1 0.7 0.02

2005f 3.6 2.9 1.8 1.1 -0.02 0.8

Contribution to Economic Growth

Units: US$ billion, ％

Trade Exports Imports

Balance Value Growth Value Growth Value Growth

2000 288.3 24.1 148.3 22.0 140.0 26.5 8.3

2001 230.1 -20.2 122.9 -17.2 107.2 -23.4 15.6

2002 243.1 5.7 130.6 6.3 112.5 4.9 18.1

2003 271.5 11.7 144.2 10.4 127.2 13.1 16.9

2004 341.9 26.0 174.0 20.7 167.9 31.9 6.1

2005 Jan-Mar

85.4 10.1 42.8 7.8 42.6 12.6 0.3

Exports and imports both posted very large double-digit increases in 2004, with two-way trade growing 26% to just under US$342 billion.

3. Foreign Trade

5

6

2.9

1.8

2.6 2.7 2.7 3.0

4.65.2 5.0

4.4 4.2

1.9

1.11.0

1.2

1.20.3 1.2 0.8

1.3

2.2

-1

0

1

2

3

4

5

6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Employment Growth Rate

Unemployment Rate

％

4. Employment

The unemployment rate dropped to 4.4% in 2004, continuing a steady descent from its historic high of 5.2% in 2002.

(Jan-Mar)

7

Green, energy-saving drive

Development of clean energy and green production chain

Sustainable national strength

Global structural changes

Population aging

Global operations (outsourcing)

◎ Challenges from global trends

Taiwan˙Challenges˙Position

Emerging economic powers

Rapid growth in Brazil, Russia, India and China (BRICs)

The coming of an Asian era Knowledge

Economy

Social Fairnessand Justice

EnvironmentalSustainability

II. TAIWAN’S DEVELOPMENT STRATEGY

8

Investment environment Inadequate

infrastructure Institutional and

regulatory modernization

Sustainable development Environmental and ecol

ogical preservation Greenhouse gas emissio

ns

Financial and fiscal reforms Fiscal imbalances Financial weakness

Industrial innovation Falling profits of high-

tech industries Emigration of traditional

industries

Social security net Rapid aging of population Structural change of labor market

InternalNeeds

◎ Challenges from internal needs

9

◎ Policy Initiatives

InnovationInnovation

Healthy Taiwan

Establishing sound financial and fiscal systems

Developing a favorable investment climate

Promoting innovation- oriented industries

Extending global logistics operations

10

“SMILE”-oriented industrial positioningAdded Value

Develop knowledge-intensive services

Manufacture Assembly Logistics Brands 　　Marketing 　

Innovation 　 Design R&D Market Research

Industrial Value Chain

Help makeover of traditional industries

Manufacturing center for high value-added products

Knowledge-based economic development is the prevailing global trend.

Promoting Innovation-oriented Industry

11

◎ Raising Added Value of High-tech & Traditional Industries

2008: Trillion-dollar Industries

Hi-tech Traditional

$ $

＝

Semiconductor(1.14 trillion)

Image d

isplay

Iron & steel

Mach

inery &

equip

men

t

Petrochem

icals

NT$ billion: (900) (571) (880) (715)

2004

1.001.05

1.79

1.43

1.13

0.300.510.570.610.81

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0 Sem

iconductor

Image display

Petrochem

icals

Teleco

m

Iron &

steel

NT$ trillion

Informatio

n services

Design, culture & creativity,R&D, distribution

2-Trillion 2-Star

Digital content

(226.8 bil)

Biotech(138.5 bil)

Industries

Machinery

&

equipment

Digital

hardware

Autom

obiles T

extiles

12

GoalsReal Compound Annual Growth Rate (CAGR) of Services 6.1%

CAGR of Knowledge-intensive Services 8 ％ (2004-2008)

1. Financial services 2. Logistics & transportation services 3. Communications & media services 4. Medical, healthcare & caregiving services5. Manpower training & dispatch, and property management services 6. Tourism, sporting & recreational services7. Cultural and creative services 8. Design services9. Information services 10. Research and development services 11. Environmental protection services 12. Engineering consulting services

◎ The Development of Taiwan’s Service Industry

12 categories of services

High value-added

High knowledge-intensity Large output value

Substantial employment effects

13

High quality manpower, innovation

ST

RA

TE

GY Knowledge-based, cultural creativity

Global logistics, international competition Convenient living, ecological sustainability

Forward looking - meeting trends, creating values

CR

ITE

RIA

Pivotal - critical to restructuring and high linkage effe

ctLandmark - significant breakthrough and inducing reg

ional developmentUrgent - immediate improvement is indispensableBalanced - regional development; central-local par

tnership

2 International arts and popular music centers3 "M" (Mobile) Taiwan4 Taiwan exposition

5 Converting railway to rapid transit 6 Third-phase freeways7 Kaohsiung Harbor intercontinental container center

8 North, middle, south mass rapid transit systems9 Wastewater treatment10 Lowland reservoirs and desalination plants

1 Top-rated universities and research centers

Efficiency

Excellence

Finesse

High-tech

Strengthen International Competitiveness

GO

AL

Vision

◎ Investment in Taiwan － The New Ten Projects Developing a Favorable Investment Climate

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◎ Expected Economic Benefits

IntangibleIntangibleBenefitsBenefits

MeasurableMeasurable BenefitsBenefits

Enrich quality of life Enrich quality of life

Promote economic growth GDP growth up by 1.0~1.4 percentage points a year

Generate private demand Private demand up by 0.6~0.8 percentage point a year

Increase job opportunities Create 64,000 jobs a year

Expand tax collection Increase tax revenue by NT$70~150 billion in the coming 5 years

Increase the capital value of human resources

Increase the capital value of human resources

Raise the commodity value of the environment

Raise the commodity value of the environment

Create cultural valuesCreate cultural values

15

Unit: ％ Outstanding Debt as a Percentage of GDP Tax Central General Burden Government GovernmentJapan 　 15.9 (02) 140.3 (03) －UK 29.7 (02) 48.9 (00) 50.3 (02)

USA 19.6 (02) 33.2 (02) 44.8 (01)

Germany 21.5 (02) － 62.8 (02)

Singapore 13.0 (03) 111.5 (02) －Taiwan 13.6 (04) 33.7 (04) 39.0 (04)

％

13.6

18.612.712.6

32.2

33.7

29.7

14.2

17.3

23.2

39.036.6

33.5

26.3

10

15

20

25

30

35

40

1993 1995 1997 1999 2001 2003 2004 Year

Establishing sound financial and fiscal systems

Outstanding Debt of General Government

/GDP

Tax Revenues / GDP

Outstanding Debt of Central

Government /GDP

Taiwan’s Tax Burden and Outstanding Debt

Fiscal reformTo raise the tax burden to 15% within three years by broadening the tax base and simplifying the tax system

Target

16

Abolishing the exemption from personal income tax of military personnel and elementary and high school teachers.Abolishing the stamp duty, raising the business tax by

1-2%, and pushing for the adjustment of commodity tax toward a green-oriented system.

Decreasing the highest rate of the estate & gift tax from its current 50% to 40%.

Pushing for the implementation of an Alternative Minimum Tax aimed at achieving equality of taxation as well as industrial development.

◎Initiatives of Fiscal Reform

17

By the end of 2005, the market shares of the top three banks

to be over 10%.

By the end of 2005, the number of state-owned banks to be

reduced to 6 or less.

By the end of 2006, at least one financial institution to be run

by a foreign company or listed on an overseas market.

By the end of 2006, the current 14 financial holding companies

to be reduced by half.

Targets

◎ Launching the Second Phase of Financial Reform

Rate of NPLs in Domestic Banking Institutions

(March 2002)8.04 ％

(March 2005)2.74 ％

18

The Possible Types of Free Ports

Legend:

Type 1 ： Within the control zone of an international airport or seaport

Type 2 ： Area adjoining the control zone of an international airport or seaport

Keelung Harbor

Taichung Harbor

Taipei Harbor

Taoyuan Air Cargo Park

Kaoshiung Harbor

Extending Global Logistics Operations ◎ Free Port Locations

19

ASEAN Free Trade Area (AFTA)

ASEAN ＋ 3 (ASEAN + China, Japan, and South Korea)ASEAN-India

(2011)

ASEAN ＋ N

China-ASEAN Free Trade Agreement

(2010)

ASEAN-Japan

Framework for Comprehensive Economic Partnership concluded between Japan and ASEAN in 2003

ASEAN-New Zealand and Australia Closer Economic Relations (CER)

◎ Current Progress on FTAs

Economic Integration in Asia

20

FTAs under NegotiationNicaragua, Guatemala,Paraguay

FTA ConcludedPanama

Potential FTA PartnersUS, Japan, New Zealand,Singapore

◎ Taiwan’s Progress on FTAs

FTAs under StudyHonduras, El Salvador,Costa Rica,Dominican Republic

Choose our battles: A Taiwan-US FTA Support promotion of liberalization in multilateral organizations

Difficulty Faced by Taiwan in Signing FTAs: China

Taiwan’s Response:

21

2003 2004 2005Economic Performance 33 24 18Government Efficiency 20 18 19Business Efficiency 11 7 6Infrastructure 23 20 18

17

16

12

17

20

65

76

4Population less than 20 million

Total

2000 2001 2002 2003 2004 2005

11

3

Source: IMD, World Competitiveness Yearbook.

◎ IMD Global Competitiveness RankingsIII. FUTURE PROSPECTS

22

2005~20082005~2008

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 ％％

2005~20152005~2015

4.64.6 ％％4.64.6 ％％

US$27,000US$27,000 （（ 20201515 ））

US$27,000US$27,000 （（ 20201515 ））

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 Employment increaseincreaseEmployment Employment increaseincrease

CPI increaseCPI increaseCPI increaseCPI increase

Growth of potential GDP

Economic growth

New Century Manpower Plan

◎ Macroeconomic Targets

23

Thank you