US embassy cable - 05TAIPEI4647

UNCLAS SECTION 01 OF 02 TAIPEI 004647 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, PINR, TW, Finance 
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