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Taiwan Of Today: Going Strong

DQI Bureau

30 Nov 1998 00:00 IST

New Update

Strategically located in the middle of a
chain of islands, stretching from Japan in the north to the Philippines in the south, and
160 km off the southeastern coast of the Chinese mainland, the island of Taiwan is a
natural gateway to east Asia. With a population of 21.4 million, Taiwan is one of the most
densely populated places in the world. Spread in an area of 36,000 sq km, its agricultural
production accounts for only 2.8% of the GDP. Taiwan does not possess natural resources
and hence relies heavily on imports of raw materials to fuel its rapid industrialization
needs. More than 90% of its energy needs are met by imports.

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Economic indices

According to 1996 Economic Indices, Taiwan's GNP rose to $275.1 billion, making
it the 19th largest economy in the world. Per capita GNP climbed to $12,872, getting it
the 25th rank among countries with a population of over 1 million. The foreign exchange
reserves at the end of 1996 amounted to $88 billion, third largest worldwide after Japan
and mainland China. Merchandise exports totaled $115.9 billion and merchandise imports
$102.4 billion, making Taiwan the world's 14th largest exporter and 15th largest importer,
with its two-way volume of trade pegged at 14th place in the world.

Growth with stability

From 1960 to 1980, Taiwan sustained an annual economic growth rate of 9.2% on an
average. Breaking the $1,000 level in 1976, per capita GNP climbed to $12,396 in 1995.
During this period of rapid economic expansion, the ratio between income received by the
most affluent one-fifth of Taiwan's households and that received by the least affluent
one-fifth, rose from 4.18 to 5.34, although on a per capita basis the ratio was virtually
unchanged. Though Taiwan's economy has entered a more mature stage in recent years, the
rate of economic growth has been static. From 1990 to 1996, the economy expanded 6.5% per
year, while the annual increase in consumer prices averaged 3.7%.

Trade

In 1971, Taiwan recorded its first trade surplus and in 1987 its annual trade
surplus peaked at $18.7 billion. To correct this external imbalance, the government in
1987 began to expand public spending and bolster domestic demand. As a result, Taiwan's
trade surplus narrowed significantly and in 1995 amounted to only $8.1 billion. In 1996,
Taiwan's trade sector gave its poorest performance since 1991. Amidst sluggish economic
conditions worldwide, exports grew by only 3.8%, while imports declined by 1.1%. Thus,
Taiwan's trade surplus rose again, reaching $13.6 billion for the year, its highest since
1990.

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Trading partners

In 1996, Taiwan shipped 23.7% of its exports to Hong Kong-its main export market.
Although the US remains Taiwan's major two-way trading partner, the proportion of its
exports shipped to US has diminished sharply, from 47.7% in 1986 to 23.2% in 1996. In
1996, Taiwan's merchandise to exports to ASEAN accounted for 14.4% ($16.7 billion) of its
total merchandise exports worldwide, up from 5.4% in 1986. Before 1996, Japan and the US
accounted for more than half of Taiwan's total imports, by 1996, the figure fell to 46.9%.

Strategy For
Economic Development

During
the past five decades, Taiwan has seen rapid economic growth. Price stability, equitable
income distribution and a drop in rate of unemployment are some of the indicators of this
growth. In addition, Taiwan's industries have successfully completed a shift from
labor-intensive to technology-intensive production. The most important factor behind
Taiwan's economic success has been the pragmatic and flexible government policies,
especially the promotion of social and political stability and the adoption of an outward
looking development strategy. And timely market-friendly policy initiatives have been
undertaken to cope with new problems and challenges. Taiwan's economic development can be
divided into five stages.

- face="Arial" size="2" color="#000000"> A pursuit for stability and self-sufficiency: In
the 1950s, the priority was given to economic stabilization and food production. The major
tasks were to effectively utilize US aid to develop the economy and to adopt high tariffs
and import controls to nurture the development of the domestic industry. A land reform
program was introduced to encourage food production and stabilize food prices. At the same
time, labor-intensive, inward-looking and import-substituting industries were encouraged
to help save foreign exchange with mixed results.

- face="Arial" size="2" color="#000000"> Expanding exports of light industry: In the 1960s,
the emphasis was placed on promoting labor-intensive and export-oriented industries to
take advantage of low-cost labor. The government enacted foreign exchange and trade
reforms and the statute for the encouragement of investment. These two measures and the
establishment of the first export processing zone in 1966 labeled Taiwan an
outward-oriented development pattern. Amid buoyant recovery of the world economy, Taiwan's
export increased rapidly, becoming the locomotive of its economic growth.

- face="Arial" size="2" color="#000000"> Development of basic and heavy industries: By the
end of the 1960s, rapid export expansion stimulated strong demand for machinery and
equipment and intermediate materials on the one hand and led to a substantial accumulation
of capital on the other. This led to the management becoming more sophisticated and
industrial technology more advanced. The time had come to encourage a gradual shift to
basic and heavy industries. This was accomplished by promoting the domestic production
substituting for imported intermediates and the development of technology-intensive
industries. Accordingly, Taiwan effectively reduced its reliance on foreign supply of
these two commodities and helped improve its industrial structure.

- face="Arial" size="2" color="#000000"> Economic liberalization and technology-oriented
development: In the early 1980s, the economy began to reap the benefits of trade promotion
policies and a surplus was consistently recorded in foreign trade. Against this
background, the government adopted economic liberalization and internationalization as the
new guiding principle for Taiwan's further development and gave greater emphasis to the
functioning of market forces and the price mechanism. At the same time, it began to tap
its abundant capital resources to develop technology-intensive industries, such as
electronics, information and machinery.

• face="Arial" size="2" color="#000000"> Coping with change and setting new priorities: As
the 1990s set in, Taiwan turned its attention to strengthening and upgrading its basic
infrastructure. A Six Year National Development Plan was introduced in 1991. The
government subsequently identified and assigned top priority to the implementation of 12
major construction projects, covering transportation, culture and education, improvement
of living conditions, water resources development and environmental protection. A
comprehensive physical development plan was initiated with a view to rationalize land use,
improving the investment climate and upgrading the quality of life. In January 1997, a
plan for national development for the next century (1997-2000) was introduced. The plan,
which has primarily three goals: strengthening national competitiveness, improving the
quality of life and promoting sustainable development, aims at making Taiwan a modern and
fully-industrialized economy. And as an overture to the emergence of a mature economy,
efforts are been made to develop Taiwan into an Asia-Pacific Regional Operations Center.

Foreign direct investment

Foreign Direct Investment has played an important role in Taiwan's economic
development. In 1989, the total FDI amounted to $7 billion and net capital outflow to $5.3
billion. More recently, owing to a rebound in domestic investment and a commensurate
decline in excess saving, the FDI outflow from Taiwan moderated. Taiwan's total FDI in
1996 is estimated at $3.4 billion. Of this amount, 42.4% was invested in the US. The
Chinese mainland received 33.6%, down from 44.6% in 1995. This was mainly due to the
rising cross-strait tensions in early 1996.

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Labor force and employment

The labor participation rate has declined steadily over the past nine years,
falling from 60.9% in 1987 to 58.4% in 1996, its lowest-ever since 1983. Over the past 10
years, Taiwan's employment has increased 1.6% per year on an average. The unemployment
rate during most of this period has remained between 1.5% to 2% of the workforce. In 1996,
the jobless rate reached 2.6% of the workforce, its highest since 1987.

Science and technology

The development of science and technology in Taiwan can be divided into two
stages: labor intensive, which spanned from 1952 to 1985, and technology intensive, which
is the period after 1985. During the former stage, major emphasis was given to introducing
production, managerial and marketing technology from abroad, achieving an efficient use of
labor and capital and quickly adopting advanced production methods to make Taiwan's light
industries internationally competitive. The later stage has been highlighted by the
government's strong support to applied technological development and the promotion of
technology-intensive industries.

Total R&D spending rose from 0.96% of
GNP in 1984 to 1.81% in 1995 and is expected to reach 2.15% of GDP in 1997. The private
sector overtook the public sector in R&D spending for the first time in 1993 and,
since then the private sector R&D expenditures have grown much more rapidly than those
of the public sector. From 1982 to 1996, high-tech intensive products increased their
share in the total exports from 18% to 40%.

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Social security

The government has enacted a new social security legislation and is also working
for the improvement in the quality of the existing services. These efforts are reflected
in the steady rise in public spending on social security, from 9.6% of total government
outlays in financial year 1970 to 20.7% in the financial year 1996, and an increase in the
proportion of the population eligible to receive social security benefits, from 10.9% in
1965 to 57.5% in 1994. The government has been taking steps to strengthen and expand its
social safety net. Currently in the planning stage are an annuity system for the elderly,
job counseling and other services for the native minorities and social security programs
for farmers and fishermen. In March 1995, the government introduced a universal health
insurance program. n