REAL GDP GROWTH : The Chinese Taipei economy was in recession in 2001. With notable declines in investment and consumption, real GDP shrank 2.18 percent. Both domestic and international research institutions repeatedly lowered their forecasts for the economy during the year. The recession was triggered by global as well as short-term and long-term domestic forces.

On the global front, the worldwide high-tech downturn had a significant impact on Chinese Taipei’s export-led production. Commodity exports contracted 17.2 percent from the previous year, with information and communications technology (ICT) exports down 23.6 percent. The industrial production index fell 7.3 percent.

On the short-term domestic front, consumer and business confidence was eroded by the ravages of destructive typhoons as well as by rapidly rising unemployment and steep falls on the stock market. As a result, private consumption and investment both declined. The stock price index slumped from 9,891 in February 2000 to 3,782 in October 2001. Concerned with the worsening situation of non-performing loans, banks turned more conservative in lending, which further dampened private investment. At the same time, a proposed stimulus package was prevented from having its desired effect due to delays in the legislative process.

On the long-term domestic front, industrial restructuring has resulted in more business exits than entries. While knowledge-intensive industries have been vigorously promoted, most traditional industries and some information technology industries have relocated overseas in pursuit of the optimum mix of competitive advantages. But as domestic innovation and the creation of new industries have not been able to keep pace with the exodus, both industrial production and employment have lost growth momentum.

Domestic demand shrank by 5.18 percent, contributing -4.93 percentage points to the overall economic growth of -2.18 percent in 2001. Owing to significant capacity excess and production outflows, private investment declined 29.17 percent, contributing -4.78 percentage points to growth. Private consumption registered a positive growth of 1.04 percent, contributing 0.62 percentage point. As the government cut spending, government consumption was 1.02 percent smaller than the previous year, contributing -0.12 percentage point. Because of delays in bureaucratic and legislative processing, government investment decreased 2.2 percent, contributing -0.1 percentage point. Exports of goods and services shrank 7.8 percent due to a substantial downturn in the ICT market. Imports declined 13.9 percent with the slump in export-induced demand and domestic demand. Exports and imports translated into a 2.8 percentage-point contribution by net foreign demand.

Both industry and agriculture declined in 2001. Agricultural production, accounting for merely 2.0 percent of GDP, slipped 2.1 percent due to bad weather and cutbacks in rice growing. Industry, accounting for 31.1 percent of GDP, recorded a record fall in output of 6.0 percent, with manufacturing and construction shrinking 5.7 percent and 12.6 percent, respectively. Manufacturing’s share of GDP shrank from 26.4 percent to 25.6 percent whereas that of the service sector decreased by 0.1 percent to 67.0 percent. Transportation and communications posted a 3.1 percent expansion, with the steady development of mobile telecommunications. Financial services and real estate grew by a meager 0.5 percent, due to lower levels of stock trading and loans.

INFLATION : Though the depreciation of the New Taiwan dollar generated upward pressure on import costs, the softening international prices of oil, raw materials and finished products produced an opposite effect and helped reduce wholesale prices by 1.3 percent. Consumer prices slipped fractionally by 0.01 percent, thanks to increasing competition in the domestic market.

EMPLOYMENT : The labor market has seen rising unemployment in recent years as job creation by the high-tech and services industries has failed to keep pace with redundancies in construction and traditional industries. In 2001, the labor market generally reflected the recession and investment outflows. Moreover, the domestic labor market has lacked the flexibility to adjust to cyclical change, while imported foreign workers have filled a large percentage of jobs in construction, the wholesale and retail trade, restaurants, and housekeeping. As a result, employment dipped 1.1 percent from the previous year and the unemployment rate jumped to a historic high of 4.6 percent.

The monthly earnings of labor in industry and services increased only 0.2 percent, the lowest increase ever recorded. Among the unemployed, 45.8 percent were out of work due to business closures or downscaling. Most affected were those in the age group 35-54, who are generally family providers, not easily able to switch to different occupations.

As the knowledge-based economy has been developing in Chinese Taipei, knowledge-based employment has been on the rise. Between 1987 and 1993, such employment increased 7.5 percent yearly. Although the rate slowed down to 2.5 percent between 1994 and 2000, it was above the economy-wide average. As a result, the proportion of knowledge-based employment grew from 17.5 percent in 1987 to roughly 28 percent in 2001.

EXTERNAL TRADE ACCOUNT : Heavily affected by the global downswing and tumbling demand for information technology products on the international market, Chinese Taipei’s goods exports contracted 17.2 percent to US$122.9 billion in 2001. Most affected were ICT exports, down 23.4 percent from the previous year. Imports in value terms decreased 23.4 percent to US$107.2 billion, depressed by a slump in the purchase of capital equipment. The goods trade balance showed a surplus of US$15.6 billion for the year.

Having grown steadily in the 1990s and through 2000, Chinese Taipei’s trade in services shrank 3.6 percent in 2001 under the impact of the global economic downturn. Because it contracted less sharply than trade in goods, its share of trade in goods and services rose to 17 percent from 14.4 percent in 2000. Services exports increased 2.5 percent year-on-year to US$20.5 billion, with exports of trade-related services growing 30 percent. Trade-related services have become the key component of services exports since 1997 as global logistics activities by domestic industries have gained increasing importance. Services imports decreased 8.2 percent to US$24.7 billion, with travel services accounting for the lion’s share of the total. While trade in services has always shown a deficit, the deficit has narrowed since 1996, and in 2001 it diminished considerably to US$4.2 billion from US$6.9 billion in the previous year.

The current account balance recorded a surplus of US$18.9 billion and the capital account a deficit of US$0.2 billion. The current account surplus rose to 6.7 percent of GDP, as imports contracted more than exports. The financial account recorded a modest outflow of US$0.7 billion, down substantially from the preceding year’s US$8 billion. The narrowing was owing to an increase in foreign purchase of domestic securities and global depository receipts (GDRs) issued by domestic enterprises. Though inward foreign direct investment (FDI) decreased by US$0.8 billion to US$4.1 billion, it was the second highest level on record. Outward FDI amounted to US$5.5 billion and portfolio investment by domestic residents increased significantly to US$12.4 billion. The capital account displayed a net outflow of US$0.2 billion as outward remittances related to emigration moderated. The overall balance of payments posted a much larger surplus of US$17.4 billion thanks to a sizable current account surplus and a modest financial account deficit.

EXCHANGE RATE : The exchange rate of the New Taiwan (NT) dollar against the US dollar strengthened in the first quarter of 2001, thanks to an upsurge in the stock market and indications of a downward trend in US interest rates. It then weakened in the second quarter under the impact of the devaluating Japanese yen, reports of financial troubles in the corporate sector, the downward spiral of stock values, and lower-than-expected economic growth. After a modest rebound in the fourth quarter, the continuing yen devaluation set it falling once again. Over the year, the currency slid 7.6 percent from the previous year to 33.81 against the US dollar, with its real effective exchange rate down by 5.2 percent.

FISCAL POLICY : Government revenues totaled NT$2,100.3 billion in 2001, up 13.1 percent from the previous fiscal year. With government expenditure increasing 22.1 percent to NT$2,577.3 billion, the fiscal deficit grew to NT$457.0 billion.

Tax revenues fell for the third consecutive year due to the economic recession and a series of tax cutting measures, including the waiver of tax on capital gains and a lowering of the land tax base. Tax revenues as a percentage of gross national product (GNP) maintained their downward trend by falling to 12.9 percent, the lowest on record, with a corresponding lessening of the tax burden.

Although government expenditure narrowed substantially as government at all levels cut spending, the ratio of tax revenue to government expenditure continued to fall, reaching a historic low of 52.0 percent. As a result, the budget deficit as a percentage of GNP rose to 4.7 percent. With the government depending increasingly on raising public debt to cover expenditure, outstanding debt climbed to 31.4 percent of GNP in 2001.

MONETARY POLICY : To boost the economy in 2001, an expansionary monetary policy was adopted amid price stability. The central bank lowered rediscount rates twelve times from 4.625 percent in 2000 to 2.125 percent. With the required reserve ratio also adjusted downward in October, both interest rates and the reserve ratio stood at all-time lows. The inter-bank call-loan rate fell from 4.73 percent to 3.69 percent, and the short-term bills rate from 4.91 percent to 3.69 percent.

With the private sector cutting back investments and showing weaker debt repaying ability, financial institutions curbed lending and investment. As a result, lending and investment contracted 1.02 percent, with lending to private enterprises falling 3.8 percent. The annual growth of broad money supply M2 dipped further to 5.8 percent in 2001, from the preceding year’s 7.0 percent. The annual growth of the narrow measure M1B fell 1.0 percent, due to a reduction in stock market trading.

The non-performing loan (NPL) ratio continued to hit record levels in 2001. The key factor behind the rise of domestic banks’ NPL ratio from 5.34 percent in 2000 to 7.48 percent in 2001 was the worsening performance of community financial institutions. Because of their small scale and limited sphere of activity, these grassroots institutions have been greatly affected by the recent progress of financial liberalization and internationalization. While numerically they make up one quarter of all financial institutions, their shares of deposits and loans slipped to 12.1 percent and 7.6 percent, respectively. Affected by worsening profitability, deteriorating asset quality and a flurry of scandals, these institutions’ NPL ratio went up to 16.39 percent. After the implementation of a series of NPL resolution measures, their growth in net worth turned from negative during the previous two years to a positive 3.9 percent.

MEDIUM-TERM OUTLOOK : With the global economy heading more clearly toward recovery, the Chinese Taipei economy is expected to return to positive growth in 2002. As the upswing in domestic and foreign demand gains strength, the Chinese Taipei economy is forecast to grow 3.14 percent in 2002 while maintaining price stability.

Clearer signs of a recovery in the US will boost the expansion of global trade, which is expected to pick up steadily. This trend should help to nudge Chinese Taipei’s bilateral trade back to a stable growth path. Exports of goods are forecast to grow 5.4 percent and imports 6.1 percent, generating a trade surplus of roughly US$15.8 billion. Real growth of goods and services exports is projected at 8.1 percent and imports at 6.5 percent.

Consumer confidence is on the rise as the effects of equity wealth reduction are diminished by buoyancy in the stock market and as pessimism recedes in the job market. Furthermore, private consumption is expected to be boosted by low interest rates and the influx of consumer imports following market-opening measures. The real growth of private consumption is projected to be 2.2 percent in 2002.

The semiconductor and opto-electronics industries in particular have expansion plans and so do other industries which are expected to rally as they take advantage of new tax concessions and other incentives. Given that the sign of economic recovery is not yet clear and the market competency remains fierce, investment willingness is considered to be conservative. As such, private investment is expected to increase only slightly by 0.7 percent in real terms.

As the government cuts back outlays for personnel and general purchase, government consumption will shrink by 1.8 percent in 2002. With the completion of several large transportation projects, government investment will contract by 9.5 percent as new investment projects remain in the early stage of implementation. Investment by public enterprises will increase by 1.9 percent.

Despite a rising trend in international crude-oil and raw-material prices, domestic market-opening and tariff reductions as part of Chinese Taipei’s WTO commitments will help keep domestic prices stable. Consumer and wholesale prices are expected to increase 0.3 percent and 0.01 percent, respectively.

Annex I

CHINESE TAIPEI: OVERALL ECONOMIC PERFORMANCE

Annex II

CHINESE TAIPEI: FORCAST SUMMARY (percent change from previous year)