Taiwan Economy: Swamp of Negativism

UNCLAS SECTION 01 OF 02 TAIPEI 004647

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SENSITIVE

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Taiwan Economy: Swamp of Negativism

Ref: a) Taipei 4461, b) Taipei 4331, c) Taipei 4187, d)
Taipei 3880


1. (SBU) Summary: As AIT/T has reported in recent cables
(refs),public trust in Taiwan's ruling Democratic
Progressive Party (DPP) has been seriously undermined by
news of scandal, corruption, and mismanagement over the past
several weeks. The erosion of trust in Taiwan institutions
and of confidence in Taiwan's economic prospects has been
accelerated by economic statistics that show Taiwan's
economic performance lagging compared to its three main
rivals (South Korea, Singapore, and Hong Kong). Polls
indicate a widespread perception of economic gloom that
discounts upbeat official statistics and bodes ill for the
ruling DPP in upcoming elections. End summary.

No End to the Bad News
--------------


2. (SBU) For weeks now, local media have been dominated by
news of scandals, corruption, and poor economic performance.
Major ongoing corruption scandals include the alleged abuses
in the Kaohsiung metro construction project that has tarred
senior administration officials and DPP insiders including
former Deputy Presidential Secretary General Chen Che-nan,
and the "vultures" insider trading scandal has forced the
resignation of Financial Supervisory Commission Examination
Bureau DG Lee Chin-cheng and is rumored to extend to other
high-ranking financial officials. The media has focused on
scandals in the high-speed rail project and on the Taiwan
ambassador to Senegal failure to foresee the end of
diplomatic ties there. Media reports that rates of chronic
unemployment, suicide, crime, and emigration are up, as are
negative sentiments about Taiwan's future.


3. (SBU) Taiwan's United Daily News ran a series of four
articles earlier in November reviewing Taiwan's economic
performance over the past five years. The articles asserted
that Taiwan's economic situation has greatly worsened,
claiming that `sixty percent of Taiwan families live a life
worse than five years ago' (without explaining the origin or
detailed meaning of the statements).


4. (SBU) According to other recent media reports, the
Taiwan economy has been left out of the generally favorable
global economic performance this year. Taiwan's "misery
index" (i.e., the inflation rate plus the unemployment rate)
has reached its highest level in 24 years, over 7%. In the
past five years, average annual wage increases have been
below 2%. The 5% total increase in wages from 2000 to 2005
was completely offset by price increases. Unemployment,
which had never exceeded 300,000 prior to 2000, now exceeds
400,000. Domestic investment in each of the past four years
has been less than 20% of GDP, the lowest since 1960. Even
though foreign portfolio investors have made net stock
purchases of over NT$300 billion so far this year, Taiwan's
stock index has not risen. Over two million (about 10%) of
Taiwan's most talented and wealthy elites have reportedly
moved to China and are living and/or working there. The
loss of these people has dampened overall private
consumption on the island.


5. (SBU) This stream of negative news about the economy has
created a widespread pessimism that even recent upbeat
statistics from the Directorate General of Budget,
Accounting, and Statistics (DGBAS) has been unable to
dispel. According to DGBAS, in the third quarter Taiwan's
GDP increased 4.38% from the same period a year earlier,
better than the August forecast of a 4.32 increase. DGBAS
also raised its forecast for all of 2005 to 3.8% from its
August prediction of 3.65% and is now forecasting that
Taiwan's GDP will reach above 4% in 2006.


6. (SBU) In contrast with the DGBAS upbeat assessment, an
opinion poll conducted by the Chung-kuo Shih-pao on November
15 and 17 indicated only 12% of respondents believe that
Taiwan's economy will be better in 2006 than today, 15%
believe things will remain essentially the same, and 31%
believe the economy will be worse (42% expressed no
opinion.)


7. (SBU) Taiwan's economic performance has, in fact, been
worse in recent years than that of its three closest
economic rivals, South Korea, Singapore, and Hong Kong, as
illustrated in the table below. Behind these statistics
there are economic factors such as the varying impact of the
1997 Asian financial crisis and the 2001 tech declines on
these economies, as well as non-economic factors such as the
impact of SARS and cross-Strait tensions around the time of
Taiwan's 2004 presidential election. However, this lagging
performance will certainly feed the growing sense among many
Taiwan people that the current government has failed to
deliver on its economics promises and will bolster the
chances of the opposition parties in the upcoming "three-in-
one" December elections.

Unit: percentage points

Year Taiwan South Korea Singapore Hong Kong
-------------- -------------- -------------- -------------- --------------
1997 6.37 4.7 8.6 5.1
1998 4.33 -6.9 -0.8 -5.5
1999 5.32 9.5 6.8 4.0
-------------- -------------- -------------- -------------- --------------
3-year Ave 5.34 2.43 4.86 1.2

2000 5.78 8.5 9.6 10.0
2001 -2.22 3.8 -2.0 0.6
2002 3.94 7.0 3.2 1.8
2003 3.33 3.1 1.4 3.1
2004 5.71 4.6 8.4 8.2
-------------- -------------- -------------- -------------- --------------
5-year Ave 3.30 5.4 4.12 4.74

1-H 2005 2.78 3.0 3.95 6.5

Source: Directorate General of Budget, Accounting, and
Statistics (DGBAS)

PAAL