Text: "the United States and Taiwan: Enhancing Our Economic Relations"
I am here today to lead the U.S. delegation to the U.S.-Taiwan Subcabinet Economic Dialogue, which is being held under the auspices of AIT and TECRO. I headed the U.S. delegation for the first session of these consultations in Washington, D.C., last year and am pleased to have the opportunity to do so again this year. I am particularly happy, finally, to be able to visit Taiwan, for whose people and accomplishments I have long held a deep admiration. I am also thoroughly pleased that this trip has provided me an opportunity to meet with many friends from Taiwan - both new and old - who I have come to know during my career as an economist and as a policy maker. On Saturday, for example, I was delighted to be welcomed to Taiwan by Vice Finance Minister Yen, whom I remember well from my days at Harvard University, when he worked with me and my wife, Vicki, at the Harvard International Tax Program.
The Remarkable Asian Transformation When the history of the latter half of the twentieth century is written, I believe that the end of the Cold War will be seen as the second story. The first story will be the rise of Asia. I think that Asia's transformation ranks with the Renaissance and the Industrial Revolution as a turning point in modern history. Just think of it - almost three billion people live in a region where per capita incomes for many are doubling every decade, where democracy is making important gains, and where the basic conditions for a healthy life that have been taken for granted for much of the century in the rich countries of the West are now being satisfied for billions more in the East.
Taiwan is at the forefront of this Asian miracle. By any measure, Taiwan's record of accomplishments has been spectacular:
Taiwan's growth has been amazing - averaging 8.6 percent average real GDP growth over the last three decades, the second highest in the region. Taiwan's per capita income has risen by the phenomenal annual average rate of 6.7 percent over the same period.
In 1952, Taiwan was an impoverished island. Per capita income was only $200. Two-thirds of the population lacked indoor plumbing. Over 40 percent were illiterate, and only one in 300 had a telephone. Taiwan is now an economic powerhouse. It has amassed the third largest stock of foreign exchange reserves in the world. It is the 14th largest exporter in the world and commands sizable world market share - 57 percent in computer monitors, just to mention one example. Built on this kind of success, per capita income on Taiwan is now over $12,500 - the 25th highest in the world, modern sanitation is the norm, there is almost one phone line for every two people, and literacy is nearly universal.
Taiwan's growth was accompanied by remarkable equality in the distribution of income.
And Taiwan's first democratic Presidential elections in 1996 marked the culmination of the process of democratization that began ten years ago.
The United States' Vital Interest in the Asian Miracle We in the United States cannot idly stand by while this Asian miracle unfolds before our eyes. We have learned that greater prosperity abroad means greater prosperity at home. This is why the President has made promoting U.S. exports, global integration, and world prosperity central to his economic policy.
In his first major speech on international affairs, President Clinton declared that America must compete, not retreat, in the global economy and in its fast growing markets, wherever they may be.
Indeed, U.S. exports have been vital to the sustained period of economic growth we have enjoyed. Exports have accounted for more than 20 percent of U.S. growth since 1992; and more than 40 percent of U.S. exports now go to the so-called emerging markets. Since 1992, jobs supported by exports have risen by 1.5 million to an estimated level of 11.4 million in 1996. These jobs pay an estimated 13-16 percent above the U.S. national average.
Global economic integration is essential for our firms to access these emerging markets and also for improving the quality of life for Americans as consumers.
The President also recognizes that a world where economies are bound together for mutual economic advantage is a world in which the likelihood of conflict diminishes and democratic ideals take root. That is why we embrace Asia's economic miracle rather than fear it.
Building the U.S.-Taiwan Economic Partnership
The United States is Taiwan's largest export market and Taiwan is the United States' eighth largest trading partner. Last year, the United States imported $28 billion in merchandise from Taiwan. We exported $18.5 billion to Taiwan. Despite the attention that we in the United States give to our economic relations with Mainland China, we have not forgotten that this is almost $9 billion more than we exported to the Mainland.
We are also significant investors in each other's markets. The United States has over $6 billion in direct investment in Taiwan; Taiwan has at least $3.5 billion in direct investment in our economy. The banking sector offers an important illustration of these close investment ties. Fourteen U.S. banks operate twenty-four branches in Taiwan, more than any other foreign country operating in Taiwan. Ten Taiwan banks operate twenty offices in the United States. These banks had more U.S. assets than some of our G-10 and OECD partners, and more than all of the ASEAN countries put together. Since 1991, more Taiwan banks have been granted approval to open offices in the United States than banks from any other economy.
To continue to strengthen our relationship as economic partners, however, we shouldn't just rely on trade and investment. As markets become more integrated, relationships among economic policy makers must also move in parallel.
This is why I have come to Taiwan. The U.S.-Taiwan Subcabinet Economic Dialogue is one of the most important bilateral venues that we have in which to conduct an exchange of views on economic issues and build our relationships as policy makers.
What do we need to talk about? One of our major objectives in this forum is to strengthen our mutual commitment to sound macroeconomic policies. While the policies that paved the way for Taiwan's superior economic performance are well known, let me highlight some facts that I think are particularly salient:
Taiwan's savings rate has been above 25% of GDP since the early 1960's. Fiscal restraint during much of this period has been one of the most important factors behind this.
Taiwan has paid close attention to maintaining the appropriate balance between savings and investment and to managing its external liabilities. We can see this in Taiwan's strong external balances - current account surpluses on the order of 4 percent in recent years, negligible external debt, and reserves of some $85 billion.
For our part, under President Clinton's leadership, we have worked hard to preserve an environment in which Taiwan's policies could be rewarded.
First, during the Clinton Administration, we have brought the U.S. fiscal deficit down from 4.5 percent of GDP in 1992 to 2.2 percent of GDP in 1995. The budget deficit is projected to fall to 1.7% of GDP for fiscal year 1996, its lowest level in fifteen years. This significant fiscal consolidation has contributed to a benign global interest rate environment.
We've also worked hard to keep our market open. President Clinton secured Congressional approval of our Uruguay Round commitments. He also took the bold and politically difficult step of pushing hard to maintain mainland China's most-favored-nation status so as to strengthen its prospects for further liberalization. This has had enormous economic benefits for all the economies in this region, including Taiwan, that seek to expand their investments in, and exports to, the mainland.
Reinforcing the Domestic Consensus for Economic Liberalization
Our second objective in the Subcabinet Economic Consultations is to reinforce Taiwan's domestic consensus for further economic liberalization. I've already said that Taiwan has become an economic powerhouse. As it continues to mature into a world class economy, its economic problems will become more like those of the United States. And the solutions to those problems lie in rapid economic liberalization. I am convinced of this; and I believe that Taiwan is convinced of this as well.
Taiwan has already traveled a long way down the road of economic liberalization. Some years back, it embarked upon a significant program of trade and investment liberalization in many important areas. It also moved to a more market-determined exchange rate system in the late 1980's, which led to some strengthening of the New Taiwan dollar and some desirable adjustment of its external surpluses. More recently, in the context of Taiwan's bid to join the WTO, it has promoted accelerated market opening, including liberalization and innovation in its financial markets. The loosening of capital and exchange controls that accompanied recent financial market liberalization will further strengthen the role of market forces in exchange rate determination.
The Need for Further Financial Market Development
Yet, more needs to be done to liberalize Taiwan's domestic economy. In illustrating this point, I'd like to comment particularly on the need for further financial sector development.
As former Central Bank Governor Dr. Samuel Shieh rightly commented, "financial liberalization and financial discipline are like the wings of a bird. The two wings must be equally strong and well balanced." Taiwan's financial markets must become broader and deeper to intermediate Taiwan's savings more efficiently. Financial market broadening and deepening, however, must be accompanied by adequate prudential regulation and supervision to ensure safety and soundness. But it is equally important that regulation and supervision not be allowed to stifle innovation.
There are at least four reasons why financial market development and integration are important for Taiwan:
First, as Taiwan's economy matures, the cost of capital will become an increasingly decisive factor in determining whether Taiwan's manufacturing remains competitive and profitable and whether real wages can rise, bringing higher living standards.
Second, Taiwan still has significant unmet needs for better physical infrastructure. Better transportation networks, power generation and distribution facilities, water treatment, housing, and cleaner air are needed not just to maintain economic competitiveness, but also to satisfy the legitimate aspirations of an increasingly wealthy society for a better standard of living.
I strongly recommend that Taiwan work with U.S. firms and investors that are at the forefront of efforts to increase private sector participation in infrastructure investment.
Third, Taiwan's population is aging, just like the United States'. As an aging population anticipates the financial requirements of retirement, it will become more insistent not only that policy makers maintain low inflation, but that they allow savers to have access to a broad and diversified range of financial instruments, including foreign assets. Increasingly, savers will insist that they be able to choose investment instruments from adequately capitalized and well supervised financial institutions, without being forced by outmoded controls to have recourse to the informal, unregulated financial sector.
Fourth, rising dependency ratios and growing health care costs are likely to increase pressures on the budget, as they are doing in the United States.
Some of the priorities that I see in strengthening the financial system and improving the intermediation of savings include:
privatizing Taiwan's banking system;
continuing to develop a more active interbank market that has a broader range of participants and a wider range of instruments - one that is capable of supplying greater liquidity with greater predictability;
accelerating the development of the asset management market, in part by encouraging greater participation by institutional investors in Taiwan's securities markets;
developing the bond market, particularly the market for long-term, non-government bonds to help the private sector ease pressure on public finances in meeting Taiwan's requirements for physical infrastructure investment; and
removing the array of micro-level restrictions that exist to control which foreign investors can invest, in what amounts, in what kinds of instruments, and with what maturities.
Having described my sense of these priorities, I would like to come back for a moment to Dr. Shieh's metaphor of liberalization and discipline. I would say that, in a world of increasingly integrated capital markets, an approach to prudential regulation and supervision that is based on a presumption of prohibition will not succeed. What is needed is an approach built on a presumption of permission. There is not much in the financial history of the last decade to suggest that an effort to maintain an illiberal system will provide the desired market stability beyond the very short-term, much less the greater efficiency of resource mobilization and improved safety and soundness that are needed over the long-term.
Addressing Bilateral Trade and Investment Concerns
Our third aim is to discuss our bilateral economic concerns. We have had some important successes in improving the protection of intellectual property rights and in securing greater market access in agriculture and financial services. But, significant problems remain.
Taiwan productivity and competitiveness could benefit from improving market access in a number of areas in which American business excels. These include telecommunications, agriculture, financial services, and medical devices and pharmaceutical products. In this last area, Taiwan should make sure that cost containment efforts in its national health insurance plan do not discriminate against U.S. medical and pharmaceutical product imports.
Government procurement reforms to improve transparency, openness, and uniformity of application and due process are also vital. Corruption and improprieties in bid awards have become a major hindrance in Taiwan's efforts to increase private involvement in infrastructure investment. In this regard, I am particularly pleased to hear about the anti-corruption campaign that the authorities are pursuing.
Developing clear rules of the game for investors - rules that don't change at the whim of a bureaucrat - is also essential to expanding our economic links and Taiwan's own prosperity. Our businesses can compete in just about any regulatory environment, but the environment needs to be stable and predictable.
Contributing to the International Economic System
Fourth and finally, in the Subcabinet Economic Dialogue, we also want to encourage Taiwan to accept the international responsibilities that come with its evolution as an advanced economy. Taiwan's most fundamental contribution in this regard is its progressive economic liberalization, since this contributes to others' prosperity as well as Taiwan's. But Taiwan's greater cooperation in multilateral institutions is also appropriate, where possible, based on a consensus among other members.
Taiwan is already a member of APEC. We welcome its membership because APEC is the centerpiece of the United States' broad economic engagement with Asia. Taiwan is playing an important role in APEC in areas such as small-and-medium enterprise policy and trade promotion. We encourage Taiwan to play an even more active role in this important grouping of economies.
I also look forward to the day when we can welcome Taiwan into the WTO. Taiwan has made much progress to date in its accession negotiations. Its membership bid would be strengthened by additional action and commitments in a number of areas:
meaningful reform of the Taiwan Tobacco and Wine Monopoly Bureau;
passage of legislation consistent with the WTO Agreement on Government Procurement;
resolution of market access issues on automobiles;
improved market access for agricultural commodities; and
additional market access and national treatment commitments in services, including legal and financial services.
Finally, I would like to urge Taiwan to strengthen its overseas development assistance programs by making them more systematic. Taiwan is already a member of the Asian Development Bank. There is now a golden opportunity for Taiwan to increase its role in this important international organization as negotiations are currently under way to replenish the Bank's Asian Development Fund.
I recognize fully that Taiwan's name in the ADB is a sensitive issue in Taiwan. But it is also sensitive in other quarters and will not be easily or quickly resolved. I would argue that Taiwan should transcend this issue and pragmatically set its sights on a goal that it can attain, which is to make a substantial contribution to the leading regional multilateral organization. In three previous replenishments, Taiwan contributed a total of only $17 million dollars. I think it can do more. This would enhance Taiwan's stature in Asia, in the international development community, and in the global economy. These would be clear and meaningful benefits for Taiwan, and for the international economic and financial system in which Taiwan has gained so much.
Conclusion With the prospects for prosperity in Asia holding such promise for America, attention has indeed shifted to strengthening our relations with this important region. However, we do not forget for a second that we already have important economic relations with Taiwan. And with half of your Cabinet trained at American universities and 32,000 of your young people even now studying at American universities, the prospects for deepening the ties between our two economies could not be better.
I firmly believe, as do my government colleagues in Washington and all of us in this room, that Taiwan has much to offer the region and the world. We are committed to continuing strong economic relations with Taiwan and to enhancing economic and technical cooperation in a variety of areas under the auspices of AIT and TECRO. By working together in this way, I believe we can contribute to the prosperity of both our peoples and find ways to support the economic development of Asia and other regions of the world.