Q: What major new economic policies have followed since the opposition DPP came to power two years ago? In terms of economic thought, what is different from the past?

A: The most important planning concepts of the new government can be summarized as "taking people as the foundation, and sustainable management." In the past you could say that in Taiwan everything was sacrificed for economic growth. Although Taiwan has been praised by the international community for its economic miracle, this is somewhat misleading, since our growth was purchased at the expense of the environment and labor.

In order to reverse this bias, at the same time as the government devotes maximum energy to the economy, it is also giving greater consideration to the environment and quality of life. In particular, in the knowledge-based economy and society of the future, people will be the decisive factor. In order to attract the most talented people and companies in the world to Taiwan, we must have a better environment. This is what is meant by government slogans like "a humanistic technology island" and "a humanistic knowledge-based economy."

In terms of concrete development policies, we stress "global deployment, with roots in Taiwan." In addition, at the Economic Development Advisory Conference convened last August, we adopted the new principle of "active opening, effective management" to replace the previous policy of "no haste, be patient" in dealing with mainland China. We hope to reorganize the global resources of Taiwan business, so that Taiwan businesses can be even more competitive.

Q: Last year the domestic economy declined sharply. What policies has the government adopted for recovery? How have the results been?

A: The economic decline last year was mainly the result of an international downturn. But in the first quarter of this year the domestic economy grew at a rate of 0.89%, much higher than the anticipated 0.52%. So you can see that overall the economy is recovering.

However, I am less concerned with the immediate economic climate than with transforming the structure of the domestic economy. Over the last 15 years, Taiwan's economy grew at an average rate of 6.4%, and was only slightly affected by the 1997 Asian financial crisis. Everyone became complacent, which has become the biggest problem in dealing with the challenge of maintaining national competitiveness.

During the last two years, Taiwan's economic situation has changed dramatically, and a number of problems have surfaced. The gap is closing between Taiwan and other Asian countries. Taiwan's industries have been too slow at upgrading, and are failing to differentiate themselves from competitors, so they are unable to maintain competitive advantage

I want to emphasize that in the future Taiwan industry must, on the foundation of a sound manufacturing sector, continue to extend outward to the two ends of the "smiling curve," moving toward a strategy of increasing added value, and producing smaller volumes of more diversified and differentiated products. There must also be movement toward upstream R&D and innovation, as well as downstream marketing and distribution.

Currently, Taiwan spends only about 2.05% of its GDP on R&D, or only US$6.6 billion. This is far behind the US$18.5 billion that Korea spends. Over the next ten years, we hope to raise R&D to 3% of GDP, with the ratio of government to private investment being 30:70.

Q: What policies does the government have in terms of improving the investment environment?

A: Substantially speaking, if you examine all major manufacturing factors one by one-land, water, electricity, transportation, human resources, government administrative efficiency, tax incentives, market capacity, and so on-you'll discover that Taiwan is not in a strong position on many of these items. So we must have even more ingenious planning so that resources can be optimally used.

For example, Taiwan is small and heavily populated, so land is very expensive. It often accounts for as much as 40% of total costs, posing great difficulties for firms. I recently proposed the "006688" plan. Under this plan, industrial parks in Taiwan would collect no rent for the first two years, only 60% of rent for the third and fourth years, and 80% in the fifth and sixth years, after which they would collect full rent. It could even be that the government calculates rent as investment in a company, which not only would reduce the rent burden on businesses, but also create the possibility for government to share in the profits.

Besides this, there are new incentives for additional investment in manufacturing. Companies can enjoy a five-year tax holiday on profits earned from new investments in equipment or facilities. While high-tech firms received many incentives in the past, including low taxes, traditional manufacturers were subject to relatively heavy taxes. This new policy can encourage traditional manufacturers to continue to invest.

Of course, improving the investment environment is a never-ending process. The relative competitiveness of nations is dynamic. I often say that competitiveness requires not only "comparability," but also "timeliness" and "multiplicity." You not only have to beat your competitor head-to-head, you also have to be aware of trends and changes, and accumulate as many advantages as you can; that's the only way to stay ahead of the game.

In order to help cultivate the next wave of key industries, recently the government came out with its "two trillions, twin stars" national development plan. It will focus development on semiconductors, displays, digital content, and biotechnology.

Currently the value of production of semiconductors in Taiwan is over NT$500 billion, putting Taiwan fourth in the world, while Taiwan is third in production of displays, behind only Japan and Korea. These are Taiwan's two most competitive leading industries. It is estimated that by 2004 for semiconductors, and 2006 for displays, the total value of production will surpass NT$1 trillion in each industry, which is what the "two trillions" means in the plan name.

As for the "twin stars," this refers to digital content and biotechnology. Taiwan is well-placed to achieve profitability in these two areas, and it is hoped that over the next six years the value of production in these two industries can reach NT$200-300 billion.

Q: The Economic Development Advisory Conference last year broke the political deadlock, to a considerable degree, on domestic economic policies. Are there any plans to establish a regular decision-making mechanism of this type in the future?

A: I don't think that is necessary. Since becoming vice premier in February, and in my role as chairman of the Council for Economic Planning and Development (CEPD), the goal I have set for myself is to serve as the "operations room of the combat cabinet." I want to strengthen coordination of policies among ministries, and become the ultimate backstop for decisions by the president or the premier.

In order to achieve this goal, every time there is a meeting of the CEPD, I want the heads of the cabinet agencies to attend, so they can communicate with each other. At a higher level, I can increase coordination and integration, so we can avoid the kinds of situations that existed in the past: ministries playing "first come, first served," agencies singing different tunes, and chaotic decision making. I am a practical person. I always start with number crunching, and proceed with analysis and projections for the future, and plan for every contingency. I hope that all policy decisions can be "bottom up"; only in this way can we avoid mistakes.

Q: Defining Taiwan's economic status and cross-strait economic relations have always been controversial issues. What are your views?

A: I believe that the economic interaction between the two sides is not a "zero-sum game," and that we should be able to achieve a "win-win" situation. In fact, since the lifting of restrictions on foreign exchange and the opening up of exchanges with mainland China in 1987, investment in mainland China by Taiwanese companies has become increasingly visible. By the end of last year, investment in mainland China accounted for about 40% of all overseas investment by Taiwanese companies, and Taiwan's export reliance on the PRC approached 20%.

Because so many traditional industries have moved to mainland China, this has opened up domestic resources that businesses which remain in Taiwan can use to upgrade, so that our high-tech industry continually develops. Last year high-tech products accounted for 56% of exports, even higher than the 50% in the European Community. As far as this point is concerned, there's no concern about "de-industrialization" as some are talking about.

Looking to the future, in order to increase the competitiveness of Taiwan's businesses, we are continuing to work on plans for the "global operations center." This July, planning will be completed for the first free port in Taiwan, which should increase the efficiency of the movement of goods significantly. This will be helpful to Taiwan's becoming a regional operations center for both local businesses and multinational companies.

Q: Perhaps the issue of greatest concern is the "three links" with mainland China. What is your view?

A: It is inevitable that we will go the road of the three links. But this does not mean that they should be entered into rashly. We must also take into account the three principles of equality, dignity, and reciprocity. Right now the problem is mainland China, with the mainland being stuck on political considerations and ideology. Under the circumstances, our government is first moving forward with those things that are within our control. For example we opened the "little three links" with pretty good results. It is regrettable that the mainland side did not respond in a friendly way.

In order to resolve the controversy over the relative importance of "national security" and "economic development," when I was minister of economic affairs I raised a new idea: "The internationalization of Taiwan's economic position is the best guarantee of national security." We have to depart from the previous conservative, defensive viewpoint of security, and instead adopt a viewpoint of actively strengthening our structural position. For example, Taiwan has 15 products for which it is number one in the world in terms of production volume. As a result, production interruptions caused by the September 21 earthquake sent shock waves through the global technology community. This is an example of how Taiwan's global economic power elevates Taiwan's status in the international community.

Of course, while we want firms to make positive use of mainland resources and proceed with global deployment, we also hope that companies can take national security into consideration. We don't want them to put their money in mainland China and leave their debts in Taiwan, nor do we want to see them move their core technologies to mainland China too early. I believe that we can have both national security and economic development, and that the two are not at opposite ends of a spectrum.

Finally, I want to say that the future is very hopeful for Taiwan's industries, which are characterized by dedication, flexibility, and resilience. People should treasure this land and its people. If we simply face up to problems directly and humbly, we can overcome any difficulty.

"Smiling Curve" Lin Hsin-i believes that the "smiling curve," originally the idea of Acer's Stan Shih, could be a helpful guide to the transformation of Taiwan's economy.

In preparation for the eventual opening of the "three links" with mainland China, many citizens have taken the first step by taking advantage of the "little three links" between Kinmen and the mainland.