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Asia-PacificFebruary 3 2004

Taiwan’s outlook hangs on poll

Prospects for economic upgrade and liberalisation depend on the results of the coming presidential elections. Dennis Engbarth reports from Taipei.
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Taiwan’s prospects of upgrading its economic and financial structure may be determined by the results of the presidential election on March 20. That is when voters will decide whether to retain the reformist Democratic Progressive Party (DPP) administration of President Chen Shui-bian or restore the conservative former ruling Nationalist Party of China (Kuomintang) to power.

The KMT’s hopes of regaining control of central government, which it lost four years ago to the DPP after nearly 55 years of monopoly control, rest on KMT chairman Lien Chan and People First Party chairman James Soong. These two are running on a coalition presidential and vice-presidential ticket against Mr Chen and incumbent vice-president Annette Lu, both of whom were political prisoners during the KMT’s authoritarian period.

In the March 2000 election, Mr Chen scored an upset victory by snaring 39.3% of 12.7 million votes against 36.9% for Mr Soong, a former KMT secretary-general who broke with his party to run as an independent, and Mr Lien, then Taiwan vice-president, who won only 23%. The two KMT-PFP candidates are now resting their hopes for restoration on their combined support and the economy’s lacklustre performance under the DPP.

Affected by the global information industry bubble bursting and by the political transition, the economy suffered an unprecedented 2.1% contraction in 2001, reviving by 3.6% in 2002 and an estimated 3.2% last year. Unemployment also rose to 5.2% in 2002, including a peak of 5.4% in August 2002.

However, charges of economic incompetence, which ignore the obstruction of public works budgets and numerous reform measures by the KMT-PFP legislative majority, may be losing force in the wake of a timely economic rebound. The estimated 3.2% increase in inflation-adjusted GDP growth in 2003 included a -0.1% second-quarter figure that was caused mainly by the massive impact of severe acute respiratory syndrome (SARS) in March to July on domestic consumption and tourism. This masks an export-led revival to 4.2% in the third quarter and an estimated 4.8% in the final quarter of 2003.

Merchandise exports rose 10.4% in 2003 to $144.2bn and spurred an expansion of imports by 13.1% to $127.3bn, leaving a trade surplus of $17bn, down 6% on 2002’s figure.

Economic rebound

The momentum of the rebound was reinforced by the 20.5% year-on-year rise of export orders that Taiwan companies received in December. This brought the value of total orders to $15.7bn, which is the second-largest monthly figure on record, and to $170bn for the year, up 12.6% on 2002, according to data released on January 20 by the Ministry of Economic Affairs.

Unemployment has declined steadily to 4.7% in November and a forecast of 5% for 2003 on average. This is due to both the rebound in production and T$70bn ($2bn) in programmes to boost employment in public services and infrastructure, which was approved reluctantly by the KMT-PFP legislative majority.

Domestic forecasts for real GDP growth in 2004 vary. The official Directorate-General for Budget, Accounting and Statistics issued its prediction of 4.1% in mid-November; the Chunghua Institution for Economic Research offered an estimate of 4.3% in mid-December; and the Taiwan Institute for Economic Research issued a figure of 4.6% in mid-November.

In analysing the possible election results, SinoPac Holdings senior executive officer Daniel Chen Wen-lang told The Banker that the result of the poll would not result in any major differences in economic or financial policy. “The government’s role is declining and the most important factor in the economy is the vibrancy of the private sector,” he says. He notes that the Taiwan economy and its capital markets are now “highly regionalised and globalised”.

But he says that a Lien victory “will be a little better for the economy” because the former ruling party, which still verbally favours eventual unification with China, “will not provoke China, and better cross-strait relations will be better for the economy”.

Prospects under the DPP

Although SinoPac’s Mr Chen believes the DPP “will do better in a second term”, he says that the party remains “too ideological” and that “no solution” to the deadlock with the People’s Republic of China could be reached while the DPP insists that Taiwan and China are separate countries on their respective sides of the Taiwan Strait.

But he acknowledges that there are risks that the KMT-PFP team “will devote themselves more to dividing the spoils instead of pursuing reform after the election”.

Taiwan Thinktank chairman Chen Po-chih also warns that tensions in the marriage of political convenience between the KMT and PFP would result in “internal divisions and dissension” in a coalition government that would “hinder decision-making and reduce government efficiency”.

“A more serious consequence is that the pace of reform measures actively promoted by the DPP, including in the field of financial reform, will slow and perhaps even come to a halt,” he warns.

“The KMT-PFP alliance has dragged its feet in the Legislature over the Financial Restructuring Fund and other moves because they [the parties] are responsible for the mountain of bad loans and policy errors that led to the problem in the first place and because strong measures to deal with issues, such as rectifying failing grassroots financial institutions, affects their vested interests.”

Although some enterprises would benefit from faster liberalisation of cross-strait economic and financial ties under a new KMT-PFP government, Chen Po-chih also warns that acceleration of such linkages before the economy is upgraded would worsen Taiwan’s long-term competitiveness.

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