KMT ECONOMIC PLATFORM STRESSES DOMESTIC GROWTH

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 002283

SIPDIS

SIPDIS

STATE PASS USTR, STATE FOR EAP/TC,USTR FOR STRATFORD AND
ALTBACH, TREASURY FOR OASIA/TTYANG, COMMERCE FOR
4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: DECL: 10/03/2017
TAGS: ECON PGOV PREL ETRD EFIN EINV PINR TW
SUBJECT: KMT ECONOMIC PLATFORM STRESSES DOMESTIC GROWTH

REF: TAIPEI 2193

TAIPEI 00002283 001.2 OF 003


Classified By: Stephen M. Young, AIT Director, for reasons 1.4 (b) and
(d).


1. (U) This cable is one of a series on the Taiwan
presidential candidates' economic policies and advisors.


2. (C) SUMMARY. In an October 3 meeting with AIT economic
chief, Ma Ying-jeou advisor Yun-Peng Chu previewed the KMT
presidential candidate's economic platform, which will target
Taiwan voters yet to benefit from booming cross-Strait trade
and technology sector expansion. Chu said Ma will emphasize
boosting growth through service sector reform and stimulation
of domestic investment. Cross-strait opening will not form
the core of Ma's economic platform, but will instead be
incorporated into a broader agenda stressing jobs and salary
growth. Chu identified direct transportation links and
tourism as the priority areas for cross-Strait
liberalization, and said Ma would likely shift the focus of
cross-Strait investment policy from capital restrictions to
limits on technology transfer. Elaborating on vice
presidential candidate Vincent Siew's views, Chu explained
that Siew would favor unilateral trade concessions within an
APEC context. Ma plans to outline his economic policies in
an October 11 speech. END SUMMARY.


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Taiwan's bifurcated economy
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3. (C) In Chu's analysis, Taiwan's income distribution
remains a bell curve, but "the shape of the bell is changing"
and distribution is becoming more unequal. Chu divided the
Taiwan economy into two broad categories: a world class
technology sector that serves as the main engine for GDP
growth, and a stagnant service sector unable to generate
significant increases in jobs. The service sector accounts
for 72 percent of GDP, he observed, but only 58 percent of
employment. Similarly, he continued, Taiwan society is
increasingly divided between highly-skilled professionals
linked to the technology sector and/or resident in China, and
the relatively unskilled majority who rely on the Taiwan
economy, rather than booming trade and investment with the
PRC. Chu maintained that wages for university graduates
outside the technology sector have actually declined over the
past fifteen years, a situation he acknowledged may partially
be the result of the relatively higher number of people
holding degrees. At the same time, he continued, shortcomings
among Taiwan universities make many employers unwilling to
pay top dollar for what they perceive as graduates with
sub-par skills.

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Ma's economic platform to emphasize domestic growth
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4. (C) Chu stated that Ma plans to deliver a major economic
policy speech at an October 11 Citigroup-sponsored forum in
Taipei. Although the presentation is not yet complete, Chu
said that Ma will focus on bridging the gap between Taiwan's
rich and poor by developing a competitive, labor-intensive
service industry in sectors where Taiwan already enjoys an
apparent competitive advantage, such as financial services.
Chu complained that many Taiwan residents invest their money
abroad, and said Ma would like to implement tax and financial
regulatory reforms to encourage more domestic investment. He
bemoaned the fact that financial sector employment growth has
recently turned negative in Taiwan. Ma and his advisors are
still discussing whether or not to include medical services
among the service sector reform priorities to be outlined in
the speech, he added.


5. (C) Previewing Ma's economic campaign message, Chu said Ma
will focus on three major themes: growth, equity, and
sustainability. "Growth", he explained, will be articulated
in terms of creating jobs, while "equity" will be cast as
poverty eradication, and "sustainability" will be presented

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as making Taiwan a "beautiful homeland" with strong
environmental protection. Policy initiatives in such areas
as urban renewal, improved local infrastructure, and better
farming conditions will be grouped under these three broad
rubrics. In Chu's analysis, Taiwan voters are primarily
concerned with jobs and salaries, and the KMT platform is
designed to resonate with voters concerned about
bread-and-butter domestic economic conditions. "We're not
worried about Taiwan businesspeople in China," stated Chu,
"because they can take care of themselves." Taiwan must
instead focus on developing its domestic economy and limit
the ongoing drain of investment and talent to China. Chu
expressed the concern that if Ma does not win the election,
many pan-Blue voters will psychologically "give up on Taiwan
for good" and consider emigrating to China, the U.S., Canada,
and other destinations abroad.

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Priorities for cross-Strait opening
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6. (C) Chu emphasized that differences on cross-Strait
economic policy "should not be delivered as if it's the only
economic difference that Ma has with (DPP presidential
candidate Frank) Hsieh." Echoing the approach outlined by
KMT vice presidential candidate Vincent Siew during his
September 26 meeting with the Director (reftel),Chu said he
advises Ma not to make cross-Strait economic issues the
centerpiece of his campaign platform, but instead to package
economic opening to China as part of a comprehensive economic
growth package that plays to Taiwan residents' concerns about
their economic status. Chu agreed with Siew's emphasis on
stimulating domestic demand (reftel) as the key factor in
boosting Taiwan's economic growth.


7. (C) According to Chu, Ma is "cautious' about opening too
rapidly to the Chinese economy. He explained that the
"common market" concept sometimes identified with Ma's
cross-Strait economic policy is in fact a Vincent Siew
"slogan" that was used to set up Siew's Cross-Straits Common
Market Foundation think tank, and the campaign has no plans
for anything as sweeping as an EU-style common market. On
cross-Strait investment, Chu argued that current policy
places a misguided emphasis on capital, rather than
technology. Taiwan companies are now prohibited from
investing more than 40 percent of their new worth on the
mainland. Ma would revise the limit, said Chu, but would not
abolish it altogether. At the same time, he continued, Ma
would implement strict regulations on technology transfer
from Taiwan investors to Chinese firms.


8. (C) Chu identified direct transportation links and tourism
as top priorities for cross-Strait liberalization. Taiwan
companies are more competitive in cargo, he observed, so the
PRC would likely insist on linking cargo and passenger
liberalization to help ensure that Chinese passenger airlines
are able to benefit from opening the cross-Strait market.
Chu said that roughly 4 million Taiwan residents travel to
China as tourists each year, versus only around 200,000
Chinese visitors to Taiwan, an imbalance that should be
redressed.

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Emphasis on regional free trade
--------------

9. (C) Elaborating on his understanding of Vincent Siew's
trade vision for Taiwan, Chu explained that Siew's philosophy
is marked strongly by Taiwan's experience after its departure
from the UN in the early 1970s. As Taiwan's formal
diplomatic relations dwindled, Taiwan had to renegotiate many
of its existing bilateral trade and economic agreements.
During this period, Taiwan sometimes chose to lower tariffs
unilaterally as a means of facilitating negotiations. Chu
said that Siew continues to favor unilateral trade
liberalization. In order to be consistent with Taiwan's WTO
MFN obligations, however, such liberalization would be
pursued under APEC auspices. Since APEC has formally
endorsed a free trade area, Taiwan would be able to give

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special trade concessions to other APEC members, while
remaining consistent with WTO regulations. Note: Taiwan
would presumably not be able to offer these tariff
concessions until the APEC free trade structure is
formalized. This may take many more years into the future.


10. (C) COMMENT. Assuming Ma's public line hews closely to
the path outlined by Chu, it looks as though the KMT
candidate is focusing on public concern about Taiwan's
overall economic performance while downplaying his more
politically sensitive cross-Strait liberalization agenda.
Chu's comments about the Taiwan economy's relative strengths
and weaknesses track with views expressed by many private
sector observers: Much of Taiwan's economy, particularly the
service sector, is not keeping pace with the burgeoning
technology industry. END COMMENT.


11. (SBU) BIOGRAHPHIC DATA: Chu was born on August 17, 1953,
and is originally from the Taipei area. He holds a doctorate
in economics from the University of Maryland (College Park),
and spent a year at Stanford University in the late 1980s.
His past positions include research fellow at the Academia
Sinica, and Commissioner of the Fair Trade Commission. He
now serves as Professor of Economics, School of Management
and Director of the Research Center for Taiwan Economic
Development at National Central University, and is also the
founder of the Asia-Pacific New Economy Association (APNEA).
In addition, Chu serves as Vice Chairman of the Technology
and Economy Committee at the National Policy Foundation, a
KMT-funded think tank. Chu speaks fluent English. He has
two children: a son in junior high school, and a daughter.
YOUNG