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Report on

Macroeconomic Analysis of Taiwan

Submitted ByChandan Patekar Dhiraj Nemade Mandar Patil [M1141] [P1140] [P1144]

SYDENHAM INSTITUTE OF MANAGEMENT STUDIES, RESEARCH AND ENTREPRENEURSHIP EDUCATION

4 Interest 4. Introduction _________________________________________________________________ 3 _________________________________________________4 ________________________________________________5 2.5 Trade 4.Index 1. Macroeconomic Indicators 4.3 Unemployment 4.1 GDP 4. Conclusion _________________________________________________________________16 7. Taiwan in Global Economy _____________________________________________________14 6. Reference _________________________________________________________________17 Page | 2 . History of Taiwanese Economy 3.7 Latest Policy Changes _____________________________________________________6 5.2 Inflation 4.6 Industrial production 4. Taiwanese Economy: Statistics 4.

Taiwan suffered little from the Asian Financial Crisis of 1997-1999 compared to many of its neighbors. Its advanced technology industry plays a key role in the global economy. Traditional labor-intensive industries are steadily being moved off-shore and replaced with more capital. Thailand. Vietnam. economic freedom. Taiwan is a multi-party democracy that has a presidential system. small and medium-sized businesses make up a large proportion of businesses in Taiwan. have provided the primary impetus for industrialization. Taiwan is also an observer at the „Organisation for Economic Co-operation and Development‟ (OECD). public education. Japan. and foreign reserves are the world's fourth largest. It experienced rapid economic growth. Agriculture contributes 3% to GDP. Internationally. the ROC is an industrialized advanced economy. It is one of the Four Asian Tigers and a member of the WTO and APEC. The ROC is ranked highly in terms of freedom of the press. Page | 3 . Because of its conservative financial approach and its entrepreneurial strengths. health care. Exports have grown even faster and since World War II. and Malaysia. The People's Republic of China (PRC) does not recognize Taiwan (ROC) as a nation. and Hong Kong. the trade surplus is substantial. and human development. and the Asia-Pacific Economic Cooperation (APEC) forum. Unlike in neighboring Japan and South Korea. Most large governmentowned banks and industrial firms have been privatized. Inflation and unemployment are low. Taiwan has a dynamic capitalist economy with gradually decreasing government guidance of investment and foreign trade. It is the 19th largest economy in the world. the European Union. 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. and the service sector makes up 73% of the economy. The political status of the Republic of China is a contentious issue. Taiwanese investors and businesses have become major investors in mainland China. Introduction Taiwan also known as The Republic of China (ROC) is a unitary sovereign state located in East Asia. industrialization. and democratization during the latter half of the 20th century. as well as creative industries. Taiwan is a member of the Asian Development Bank (ADB).1. Taiwan's top five trade partners in 2010 are China. USA. Despite its controversial political status. down from 35% in 1952. Indonesia. 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. the World Trade Organization (WTO).and technology-intensive industries. Real growth in GDP has averaged about 8% during the past three decades. the Philippines.

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. Taiwan moved from cheap. a crucial step in modernizing the economy. However. Taiwan had become an economic power. From 1981-1995. labor-intensive manufactures.52%. with a mature and diversified economy. the economy grew by an average of 9. Page | 4 . such as textiles and toys. and the service sector became the largest sector at 51. together with government planning and universal education. Taiwan's economy during the Japanese rule period was a colonial economy. surpassing the industrial sector and becoming a major source of the economy's growth. By the 1980s.21% each year. and it constituted more than 30 percent of domestic investment from 1951 to 1962. The first step towards industrialization was land reforms. The government also carried out an import substitution policy and 19-point program of Economic and Financial Reform. Taiwan has recovered quickly from the global financial crisis of 2007-2010 and its economy has been growing steadily. Many Taiwanese companies became global suppliers. the Taiwanese society was relatively stable politically. most of the economic development happened from settlement of migrants. the economy grew at an annual rate of 7. During Chinese rule. The economy shifted from an agriculture-based economy (32% of GDP in 1952) to an industry-oriented economy (47 % of GDP in 1986). brought huge advancement in industry and agriculture. After ROC retreated to Taiwan. British Empire and Japan continued to trade with Taiwan as an independent state.2. as it created a class of landowners with capital they can invest in future economic endeavors. Like Korea. into an expansion of heavy industry and infrastructure in the 1970s. History of Taiwanese Economy Development of Taiwanese Economy can be divided into 3 phasesBefore Chinese Civil War (Till 1950): Before Chinese rule. US aid was also important to stabilize post-war Taiwan. Privatization & Globalization (1980-Current): In the 1980s.67%. solid presence in international markets and huge foreign exchange reserves. and living standards. These factors. Taiwan suffered little from the Asian Financial Crisis of 1997-1999 compared to many of its neighbors. and then to advanced electronics in the subsequent decade. it faced some obstacles economically as a result of the mass destruction during World War II and the Chinese hyperinflation in the 1940s. the economy was becoming increasingly open and the government moved towards privatization of large banks and government enterprises. Because of its conservative financial approach and its entrepreneurial strengths. Between 1952 and 1961.

2% (2011) 10.1 billion $298.5% (2010) -1.57 TWD (Feb 2012) PPP: $885.4 billion. Nominal: $504.data are in 2011 US dollars) (Source: CIA World Fact Book) Currency GDP New Taiwan dollar (NT$).3. .97 billion Page | 5 1.6 billion 8.591 Nominal rank: 40th PPP: $37.3% Inflation (CPI) Population below poverty line Labour force Exports Imports 11. Taiwanese Economy: Statistics (2011 est.612 billion Nominal rank: 24th 1 $ USD = 29.6% 1.9% Industry (secondary) 32% Agriculture (primary) 1.9% (2009) GDP per capita Nominal: $21. Rank: 5th $116 billion $7.900 PPP rank: 27th GDP by sector Services (tertiary) 66.16 million $325.16% Industrial production growth rate Reserves of foreign exchange and gold External Debt Fiscal Deficit .3 billion PPP rank: 20th GDP growth 5.5% $418.

GDP is also regarded as sum of value that is added at each and every stage of production.4.1 GDP GDP is a popular method used to measure income and output of a particular country. Taiwan is one of the world's largest suppliers of computer chips. 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. Taiwan's economy.66 billion dollars reaching an historical high of 430. one of the "Four Asian Tigers". It is normally expressed in terms of money. is another major industrial export sector.58 billion dollars in December of 2010 and a record low of 42. Historically. according to the World Bank. is export-oriented and specialized in production of electronics and machinery. It is also known as GDI or Gross Domestic Income. Page | 6 . Macroeconomic Indicators 4. It has been defined as aggregate worth. DRAM computer memory.23 billion dollars in December of 1980. In fact. Textile production. from 1980 until 2010. Taiwan Gross Domestic Product is worth 431 billion dollars or 0. and consumer electronics. LCD panels. in a market. Taiwan's average Gross Domestic Product was 231. of all finished goods and services that are produced at a particular point in time. Taiwan is an industrialized. although already in decline. networking equipment.70% of the world economy. developed country.

growth slowed to 4. Taiwan has transformed itself from an underdeveloped.5% to 6.S. At the same time. Through decades of hard work and sound economic management. labor-intensive technology to the island. full employment. following growth of 5. capitalintensive and technology-intensive products for export and toward developing the service sector. Taiwan's economic growth ranged from 3. In the 1960s. With the global economic downturn. Taiwan joined other regional economies in its first recession since 1949.72%. such as shoe manufacturing. and low inflation for many years. rising labor costs. and Taiwan became a major exporter of labor-intensive products. foreign investment in Taiwan helped introduce modern. many labor-intensive industries. Page | 7 . Taiwan has transformed itself from a recipient of U.56 percent in March of 2009.98% in 2007. from 1962 until 2011. Its real GDP. Taiwan's average annual GDP Growth was 7. growing by 10. Taiwan's economy slumped into recession in the second half of 2008. agricultural island to an economic power that is a leading producer of high-technology goods. focus shifted toward increasingly sophisticated. Taiwan is now a creditor economy.81% in 2009. shifted production and moved their manufacturing to China and Southeast Asia.2% per year. Although Taiwan enjoyed sustained economic growth. In 2011. and the highest rate in 28 years.Historically. aid in the 1950s and early 1960s to an aid donor and major foreign investor. The economy saw a robust recovery in 2010. as a result of the appreciation of the New Taiwan dollar (NT dollar or NTD).03% amid the European debt crisis.6 billion as of December 2011). In the 1980s.43 percent reaching an historical high of 17. in 2001. rose 0. holding the world's fourth-largest stock of foreign exchange reserves ($385.73% in 2008 and contracted 1. and increasing environmental consciousness in Taiwan. From 2002-2007. especially in Asia.06 percent in September of 1978 and a record low of 8.

87 percent and the wholesale price index by 4. For example. whereas the wholesale price index averaged an annual increase of only 7.2 Inflation Inflation means a persistent rise in the price levels of commodities and services. In this era of globalization.01 percent. from 1952 through 2000.4. On average. between 1952 and 1980.87 percent.14 percent. The problem of inflation used to be confined to national boundaries. and the wholesale price index increased by a mere 4. From 1981 to 2000. Afterward. the aftermath of several wars and an overall lack of basic necessities drove the inflation rate up very high. If the four years of energy crisis were excluded. inflation in Taiwan has been moderate. the consumer price index went up annually by 5. Consumer and wholesale price indexes fell. from 1973 to 1974 and from 1979 to 1980. the inflation rate in Taiwan was even lower. Page | 8 .95 percent. and the wholesale price index averaged an annual decrease of 0. though. the consumer price index rose only 5. leading to a fall in the currency‟s purchasing power.24 percent. and was caused by domestic money supply and price rises. the consumer price index rose at an annual rate of 7.3 percent per year. the effect of economic inflation crosses borders. with the exception of the periods during two energy crises. the consumer price index averaged an annual increase of 2. At the beginning of the 21st century.39 percent annually. During the early stages of Taiwan's economic development following the relocation of the central government. During this period. there were new developments in the world economy and dramatic changes in Taiwan.

during the period of economic boom since the 1960s. 4. Page | 9 . They are skilled and/or white-collar workers but suffer from income loss due to lay-offs or job instability. underprivileged elderly and indigenous people. However. especially to China. mainly due to global economic changes and the shifting of production centers to other countries. below two percent. the number of Taiwanese living in poverty had increased. surpassing the two percent mark in 1996 and reaching record high of 5.4 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.69 percent in 2010.3 Unemployment Rate Taiwan had maintained relatively low unemployment rate. 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. 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. unemployment had been increasing since the late 1990s. Since 1996. Interest rate is also known as the cost of borrowing assets.4. The “new poor” are mainly middle-aged breadwinners who have secondarylevel education and who support dependents at home.

plastics & rubber (8%). USA (12%). Japan (7%). Taiwan's economy is export-oriented.5 Trade Export: Taiwan exports were worth 21080 Million USD in December of 2011. Europe (11%) and ASEAN countries (15%). Main export products are electronics (28% of total). Main exports partners are Mainland China & Hong Kong (42% of total). Page | 10 . Historically Taiwan‟s interest rates have been low except during the global financial crises such as 2008 crisis. 4. basic metals (9%). interest rate decisions are taken by Central Bank of the Republic of China (Taiwan). optical and photographic instruments (8%) and chemicals (7%).In Taiwan. The official interest rate is the discount rate on 10-day loans to banks.

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

An increase Page | 12 . as high levels of industrial production can lead to sudden changes in prices. due to the fact that the government of Taiwan is lowering the tax rate hoping that it will increase the money supply. 4. This policy is an example of expansionary fiscal policy.7 Latest Policy Changes Fiscal Policy On May 28. mining. 2010 Taiwan's legislature approved a cut in the corporate income tax rate to 17 % from 20 %. Lowering the corporate income tax rate will cause the investment rates and expenditures to increase. This was the second tax cut within the last twelve months. which causes the aggregate demand curve to increase and shift to the right. Industrial Production in Taiwan declined 16. Foreign trade has been the engine of Taiwan's rapid growth during the past 40 years.Taiwan reported a trade surplus equivalent to 420 Millions USD in January of 2012.5 percent in January of 2012 mainly due to seasonal factors and global economic doldrums. and utilities. Industrial Production is an important indicator for economic forecasting because is highly sensitive to interest rates. the government hopes that with these recent tax cuts the island of Taiwan will become more competitive for foreign investors.6 Industrial Production Industrial production measures changes in output for the industrial sector of the economy which includes manufacturing. 4. Industrial Production is also used by economists and central bankers to measure inflation pressures.

which was the first time since the year of 2008. which is a relating factor with spending. which in result leads to an increase in the aggregate supply curve shifting it to the right. With interest rates increasing this monetary policy will be considered contractionary. Prices remain stable. while the unemployment rate decreases due to more job openings.375%. the economic growth rate and the quantity of goods and services increases. and the aggregate supply will have no effect. Page | 13 . When interest rates begin to increase it starts to become more expensive and difficult for people to borrow money. Monetary Policy Taiwan's central bank raised their interest rates from a record low of 1.in investments leads to an overall increase in productivity. Due to the increase in interest rates. spending will start to decrease which will have a decreasing effect among the aggregate demand.25% to 1.

Page | 14 . Second. dollar. with little external debt and with a current account surplus.5. however. after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. will halt financial reform until the Asian crises is over and relations with China improve. cutting its peg to the U. the ratios rose from 13 to 21% and then as high as 40%. Taiwan's slow pace of financial liberalization gives foreign speculators no direct channel to invest the domestic capital markets. and a precipitous rise in private debt. the CBC adopted a "moderately loose" monetary policy. Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations (ASEAN) economies in 1993–96. Taiwan during Asian crisis Taiwan was able to weather the crisis better than other Asian Tigers. while the other northern newly industrialized countries fared much better. and raised fears of a worldwide economic meltdown.S. devalued stock markets and other asset prices. As the crisis spread. At the time. Thailand. economies particularly hard hit by the crisis. consideration for stabilizing the domestic economy. 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. strong economic fundamentals contribute to the stabilization of the New Taiwan dollar. Third. 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). most of Southeast Asia and Japan saw slumping currencies. 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. and Indonesia. based on the concern that the currency devaluation and the contagion effect of neighboring crises might incite inflation. which keeps the price level in a reasonable range. 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. Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. In South Korea. Fourth. and then shot up beyond 180% during the worst of the crisis. Taiwan has huge foreign reserves which allowed it to defend the unexpected speculative attacks in the second half of last year. Only in Thailand and South Korea did debt service-to-exports ratios rise. and thus lessening the magnitude of uncontrolled capital movement.

S.7 trillion in January 2008 to $51. That is. fearing the worst. It fell to -8. a huge jump since 1995.98% in the first quarter of 2009. where General Motors and Chrysler went bankrupt in spring 2009. and adjusted by buying less and investing less. Later a bailout involving a taxpayer buy out and bankruptcy reorganization was authorized by President Barack Obama. More trillions were lost as housing prices fell by 20%. The world is returning to normal and so is Taiwan. as banks refused to lend and consumers refused to spend. or 123% of after-tax income.Due to fall in demand for its products domestically and internationally and Taiwan being an export oriented country the 2008 recession had adverse effect. and its economy has been growing steadily. Americans owned $11 trillion less wealth. Taiwan‟s economy showed a significant decline in the second half of 2008. The stock market fell by 50% in 2008. due to a decrease in US consumer demand. Wealth levels plunged worldwide. Most companies worldwide reported reduced sales and sharply reduced profits.02% in the third quarter of 2008 to -2.5 trillion in January 2009.13% in the first quarter of 2009.05%) in the third quarter of 2008. The growth rate of real GDP was negative (-1. 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. Taiwan during 2008 recession Due to the financial crisis caused by subprime lending. the net worth of American households declined from $63. a decline of $11. 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.Global Financial Crisis of 2008 The recession began in January 2008 in the financial sector as major banks in the U. Its economy faced a downturn in 2009 due to a heavy reliance on exports which in turn made it vulnerable to world markets. Also. Page | 15 . Taiwan has recovered quickly from the global financial crisis of 2007-2010. wiping out trillions of dollars in assets. Stock markets in other major countries fell even faster than the U.S. when it was 83% of income. Meanwhile mortgages and credit-card debt together reached $13 trillion. Trouble spread to the automobile industry. nominal consumption growth rate fell from 1.2 trillion or 18%. Adding together the declines in housing and the stock market.61% in the fourth quarter and fell further to -10. Taiwan is signing MOU with China in order to boost trade with the giant.

Conclusion Taiwan now faces many of the same economic issues as other developed economies. a specialist in manufacturing outsourcing.6. cutting its share of exports to the United States from 49% in 1984 to 20% in 2002. Taiwan's accession to the WTO and its desire to become an Asia-Pacific "regional operations center" are spurring further economic liberalization. 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 future development will have to rely on further transformation to a high technology and service-oriented economy. In recent years. Taiwan continues to rely heavily on its technology sector. With the prospect of continued relocation of labor-intensive industries to economies with cheaper work forces. Taiwan has successfully diversified its trade markets. Page | 16 . such as in China and Vietnam.

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