The ROC economy has again performed well in 1999.
Exports grew 7% through the first eight months
of this year. The current account registered a
surplus of US$3.8 billion, while the overall surplus
reached US$10.1billion in the first half of the
year. As a result, foreign exchange reserves built
up to US$100.1 billion at the end of August and
foreign assets held by the private sector approached
US$70 billion. Not surprisingly, the level of
our external debt is negligible.
Real GDP rose 4.26% at annual rate in the first
quarter of 1999 and the pace of growth accelerated
to 6.54% in the second quarter. For the year
as a whole, the economy is expected to grow
5.74%. The expansion in output has been driven
by strong external demand, and an increase in
both private consumption and public investment.
In the meantime, prices have remained stable.
The CPI went up merely 0.23% at annual rate
up to the end of August. Inflation should remain
subdued and is projected to be around 0.5% for
the year. Unemployment rate is currently the
lowest in Asia. The Living Misery Index, as
measured by the sum of the unemployment rate
and the inflation rate, gives Taiwan a total
of 3% as of the end of August, also the lowest
in Asia. According to a forecast made by the
World Economic Forum, Taiwan’s average economic
growth rate will be the second highest in the
world over the next eight years. In terms of
global competitiveness, Taiwan ranks fourth
overall in 1999, moving up two places in spite
of the Asian financial crisis. Time and again,
the Taiwan economy has exhibited exceptional
resilience and strong potential in the face
of adversity.
If we look at the period from mid-1997 to mid-1999,
two features of the ROC economy stand out. First,
Taiwan was the economy least affected by the Asian
financial crisis and was moreover able to maintain
steady growth throughout the crisis. While most
other Asian economies experienced sluggish or
even negative growth, the ROC managed to register
a 4.65% growth rate with 1.68% inflation in 1998.
Second, as the crisis has gradually subsided,
Taiwan has emerged as one of the few economies
to recover strongly. To put it simply, the most
remarkable attribute of the Taiwan economy is
its flexibility. It has proved itself capable
of withstanding the onslaught of a financial crisis
while continuing to perform credibly.
Back in 1995, I wrote a paper on the Mexican
peso crisis. I concluded by saying: “The Philippines,
Indonesia, and Thailand have all been running
current account deficits for some time. These
economies rely heavily on foreign capital inflows.
In the case of Thailand, these inflows are mostly
of a short-term nature. This should be a cause
for concern.” At this point, let me make it
quite clear that I am no crystal ball gazer.
My prediction was based on a study of the balance
of payments of the various countries in question.
Persistent current account deficits, heavy reliance
on foreign capital, inflexible exchange rate
regimes, and overvalued real exchange rates
are a potent mixture that could give rise to
currency crises. Short-term capital tends to
be highly volatile in nature. Massive and rapid
movements of short-term capital can seriously
undermine the stability of the financial system
and ultimately affect the whole economy. An
excessive surge in capital inflows might plant
the seeds of a currency crisis by contributing
to (1) a real appreciation of the local currency,
(2) a build-up of external debts, (3) an explosive
growth in domestic credit and a current account
deficit, (4) over-investment in risky ventures,
and (5) an equity or property market bubble.
International capital movements in the form of
long-term foreign direct investment support economic
development in recipient countries by providing
access to foreign savings. The investing country
enjoys a higher rate of return on capital, creating
a win-win situation. Short-term capital, on the
other hand, is highly volatile in nature. In most
cases, the size of a developing or newly industrialized
economy is too small to withstand the effects
caused by sudden financial reversals. It is for
this reason that short-term capital inflows should
be modulated so that they do not impair the performance
of the domestic economy. The ROC has followed
an appropriate sequence to open up its capital
account. This orderly and gradual approach has
lessened the impact of the recent financial crisis
by giving the private sector more time to adjust
and improve its ability to compete.
Strong economic fundamentals are also reasons
why Taiwan has escaped the Asian crisis relatively
unscathed. In 1997, at the height of the financial
crisis, the average non-performing loan ratio
for the banking sector was 4%, much lower than
for other countries in the region. The average
capital adequacy ratio stood at 11.4%, well
above the 8% requirement set by the BIS. With
steady improvement in corporate financial structure,
the average debt-to-equity ratio for listed
companies has fallen to 78%. Furthermore, companies
in Taiwan are less susceptible to foreign exchange
fluctuations because they don’t rely on foreign
borrowing. This in effect creates a firewall
that can shield Taiwan from the contagion of
a financial crisis.
In order to redress a number of weaknesses
that were uncovered during the Asian financial
crisis, the government has introduced a series
of financial reforms. These measures are designed
to improve bank balance sheets and profitability.
The government has also actively encouraged
consolidation in the banking industry. A new
supervisory authority will be set up at the
beginning of next year which will assume overall
responsibility for supervising financial institutions,
including banks, insurance companies, and securities
houses. By further strengthening the soundness
of the banking system, we are preparing ourselves
for the challenges posed by the new global economy.
Financial stability forms the bedrock of sustained
economic development. It enables the private sector
to make sound judgements with respect to production
plans and trade decisions under a consistent macro
environment. The central bank in Taiwan adopts
a flexible exchange rate regime, allowing market
forces to determine the nominal exchange rate,
while also ensuring that the real exchange rate
reflects economic fundamentals. Other features
of our exchange rate policy indicate our resolve
to remove distortions from the market, improve
bank risk management, and offer market participants
accurate and timely information.
With respect to monetary policy, we closely
monitor developments both at home and abroad
and fine tune our policies accordingly. By maintaining
the money stock within the target range, we
are not only able to meet the funding requirements
of both private and public enterprises, but
are also able to create a low-inflation environment.
These policies have successfully preserved the
stability of the domestic economy during the
Asian financial crisis in the short run, and
have made important contributions to economic
development in the long run.
From our experiences in dealing with the recent
financial crisis, I would like to make the following
policy recommendations.
Domestic saving should be the major source
of capital formation.
Foreign direct investment and long-term foreign
borrowing are suitable alternatives if domestic
saving is insufficient to meet the needs of
domestic investment.
Sustained current account deficits are undesirable
and should be corrected by appropriate policies.
The nominal exchange rate should remain flexible,
while the real exchange rate should reflect
economic fundamentals.
Banks, importers, and exporters should be encouraged
to reinforce risk management.
The deregulation of foreign exchange transactions
should follow an appropriate sequence. The current
account should be liberalized before the capital
account, and long-term capital before short-term
capital.
The supervision and monitoring of financial
institutions should be bolstered.
Corporate governance should be strengthened.
Supply-side adjustments also explain why Taiwan
has consistently managed to produce good results.
The government and the private sector have worked
together to alter the structure of our manufacturing
base, with far reaching consequences. Heavy
and high-tech industries accounted for 76.5%
of total industrial output in 1998, up from
64.6% in 1989. Taiwan is now the world’s leading
producer in eleven categories of manufacturing
products. In terms of output, Taiwan’s information
technology industry now ranks third in the world,
while the semi-conductor industry ranks fifth.
The structural changes that have taken place in
Taiwan’s manufacturing base have also altered
the make-up of our exports. High-tech products
accounted for 24.2% of total exports in 1989.
By 1998, this figure had risen to 41.1%. Conversely,
the share of low-tech products fell from 37.7%
to 18.4% over the same period. The shares of heavy
industry, electrical and electronic machinery
rose from 44.5% and 33% to 64.4% and 52%, respectively.
There has evidently been a gradual shift towards
technology and capital intensive products. Quality
and high value-added have won Made-in-Taiwan products
popularity abroad, which in turn has made the
export sector less vulnerable to a sudden decline
in external prices. Taiwan’s competitive edge
in high-tech production has been conducive to
not only economic growth but also a sustained
current account surplus. Over the years we have
accumulated sizable foreign exchange reserves
that readily served as an important anchor during
the financial crisis.
Capital accumulation and total factor productivity
have both been instrumental in successfully
transforming Taiwan’s industrial base. Between
1961 and 1982, capital accumulation and total
factor productivity accounted for 53.19% and
23.21% of economic growth, respectively. The
corresponding figures for the period 1982-1992
were 36.28% and 49.59%. Technological advancements
and the improvement in the quality of education
have both contributed to the rise in total factor
productivity experienced by Taiwan since 1980.
There is much room for further development in
these areas in the long run. For now, we are
content to say that Taiwan’s economic miracle
was not built on perspiration alone, but inspiration
has also been an important factor.
The government has undoubtedly played a key
role in the transformation of the Taiwan economy.
Apart from numerous measures designed to stimulate
production and investment, the establishment
of the Hsinchu Science-based Industrial Park
has attracted sizable investments from foreign
high-tech firms. In the Six Year National Development
Plan, the government selected ten emerging industries,
including information technology and semiconductors,
as the basis for elevating the domestic economy
to a level with higher capital and technology
intensity. The Asia-Pacific Regional Operations
Center Plan was envisaged as a plan that would
integrate resources and technologies across
the region and bring about economic development
and industrial upgrading. Under the Plan for
National Development into the Next Century,
Taiwan is to be developed into a green high-tech
island that will eventually enable us to join
the ranks of the advanced industrialized nations.
Long-term technological advancements and structural
changes in Taiwan’s industrial base have created
a dynamic comparative advantage for the external
sector. Though natural resources are scarce,
effective utilization of human resources and
persistent R&D efforts as well as creative
innovations have fostered the development of
the high-tech industry, while also creating
a cost advantage in the export sector. Between
1988 and 1997, total expenditure on research
and development grew on average by 15.8% annually.
As early as 1988 more than 34.9% of the R&D
workforce held a postgraduate degree. This figure
rose by 10 percentage points to 44.7% in 1997.
The diffusion of knowledge and know-how has
encouraged development in related industries
that will help consolidate our competitive position
in the international market place. A number
of economists have remarked that, apart from
a low level of foreign debt, successful adjustments
in Taiwan’s industrial structure constitute
a major reason why Taiwan has weathered the
financial storm better than most. A dynamic
comparative advantage combined with the vitality
and flexibility of our small and medium-sized
firms, which form the backbone of the ROC economy,
will prepare Taiwan for the challenges posed
by the new international economic order. We
also believe that, with its well-educated workforce
and a host of technological advantages, Taiwan
will be able to make a smooth transition from
the production of high-tech products to R&D.
Biotechnology and pharmaceuticals are likely
to be the star performers in tomorrow’s economy.
By making good use of available resources, both
at home and abroad, and by pooling together
knowledge, technical know-how, and innovation,
Taiwan can turn these two industries into the
engine of economic growth for the next century.
Ladies and gentlemen, the International Monetary
Fund and the World Bank have contributed greatly
to the stability of the international monetary
system, the growth of international trade, and
the promotion of economic development over the
last fifty years. During the same period, the
Republic of China on Taiwan has also made tremendous
progress. Economically, Taiwan provides a good
example of how a small open economy could be
run. Politically, we have attained true democracy.
The people of Taiwan are peace loving, and we
share with people the world over the same passion
for liberty and prosperity. We are now ready
and willing to do our part for the international
community. Besides, the Asian financial crisis
has again highlighted the importance of regional
economic and financial cooperation. As the ROC
used to be a member country, and most importantly
a founding member, of both the IMF and the World
Bank, we would very much like to fully participate
in these two organizations once again in the
future to fulfill our international obligations.
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