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Asia-PacificJuly 3 2005

Deadlock stifles reform

The Democratic Progressive Party’s reform plans continue to be blocked by the opposition-controlled legislature. By Dennis Engbarth in Taipei.
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Facing intensifying economic and political pressures, the centrist Democratic Progressive Party administration of President Chen Shui-bian is looking for a ray of hope to end five years of deadlock with a stubborn legislature controlled by the conservative opposition so that momentum for overdue political, social, fiscal and economic reforms can resume.

Since ending nearly 55 years of one-party rule by the former ruling Chinese Nationalist Party (Kuomintang or KMT) in May 2000, the greatest contributing factor to the disappointing achievements of Mr Chen’s administration has been the bitter standoff between the DPP-dominated executive branch and the legislative branch, which is controlled by the ‘pan-blue’ conservative opposition alliance of the KMT and its splinter People First Party (PFP).

Mr Chen’s effort to end the stalemate by appointing the moderate Kaohsiung City mayor and former DPP chairman, Frank Hsieh, as premier under the slogan of “coexistence and co-operation”, and the holding of wide-ranging talks with the PFP chairman, James Soong, on February 24 has not made an appreciable impact on the situation.

Tension with China

In the meantime, cross-strait tensions have risen in the wake of China’s March 14 enactment of a so-called “anti-separation law”, which authorises the Beijing government to use “non-peaceful means” against Taiwan if “the possibilities for unification are exhausted”. Up to one million Taiwanese participated in a demonstration in Taipei on March 26 against the People’s Republic of China’s legislative action.

In successive visits to China in late April and early May, two conservative opposition leaders, former ruling KMT chairman Lien Chan and Mr Soong, met the Chinese state chairman, Hu Jintao. In separate meetings with Mr Hu, both men expressed opposition to “Taiwan independence” and a general commitment to a “one China” principle in exchange for “gifts”, such as the offer of two pandas for Mr Lien, lifting tariffs on fruit imports and a two-year timetable for establishing direct transport links.

The two visits and the apparent lack of strong counter-reaction by the DPP government, besides affirming that no agreements were valid unless conducted by the two governments, appeared to weaken the authority of the Chen administration and sparked a “China fever” (concern over cross-straight relations) that threatened to reverse the growth of the Taiwanese identity. However, a growing perception of excessive concessions by Messrs Lien and Soong – including a veiled threat issued by Mr Soong after meeting with Mr Hu of “war and disaster” if a proposed constitutional amendment to mandate ratification of future constitutional changes was passed by a national citizen referendum in Taiwan – may have sparked a backlash.

The DPP remained Taiwan’s largest party in the May 14 elections for a “task-oriented” 300-strong National Assembly, called to ratify a package of five constitutional changes approved almost unanimously by the legislature last August.

The DPP gained 42.5% of the 3.88 million votes cast and took 127 seats; the KMT won 38.9% of the votes and 117 seats; the Taiwan Solidarity Union captured 7.1% and 21 seats; and the PFP took 6.1% and 18 seats.

Despite the low turnout of just 23%, the election and the National Assembly’s successful ratification of the amendments by a 249-48 margin on June 7 blunted the China fever and has given new energy to Mr Chen’s financial and political reform efforts.

Both the DPP and KMT supported the package. However, the failure of the KMT to supplant the DPP as the first party, despite Mr Lien’s high-profile visit to China, was a significant defeat for the KMT chairman. This has effectively blocked his hopes of holding on to the party’s leadership in a scheduled election for the chairmanship.

Nevertheless, the first session of the opposition-dominated legislature elected last December ended in late May, having approved only 46 bills, a record low.

Stalemate continues

The continued deadlock will inhibit government efforts to maintain economic momentum and to upgrade Taiwan’s physical and institutional infrastructure. The timing could hardly be worse.

After economic expansion revived to 5.7% last year, the slowdown in the global economy, combined with steep world commodity prices and sluggish public investment, is dampening prospects for Taiwan’s growth in 2005.

On May 19, the official Directorate-General for Budget, Accounting and Statistics sliced its inflation predictions, adjusting gross domestic product growth for the year to 3.6%, from 4.2% in its February forecast. This followed a disappointing 2.5% pace of expansion in the first quarter. Given the decelerating pace of world trade growth, the directorate has forecast that Taiwan’s real growth in exports of goods and services will slow from 15.3% in 2004 to just 2.2% this year, and the expansion in the import of goods and services will cool to 1.2% compared with last year’s torrid 18.6%.

Likewise, growth in merchandise exports is expected to slow to a rate of 6.7% in 2005 compared with 20.7% last year. Imports will decelerate to 8.5% from 31.9% in 2004, a trend that will reduce Taiwan’s merchandise trade surplus from $ 6.1bn to $3.5bn, the directorate predicted.

During the first four months of 2005, Taiwan’s merchandise exports rose 8.7% year on year to $58.49bn, while imports rose 14.2% to $58.11bn, leaving a two-way trade surplus of just $380m.

Trade remained very imbalanced as the country recorded a combined trade surplus of $14.7bn with mainland China and Hong Kong, while absorbing a $10.81bn deficit with Japan. However, the official forecasting agency said domestic demand would help pick up the slack as private consumption expenditures would expand by 3.0% in real terms, compared with 3.1% last year.

Brisk investment in semiconductors and TFT-LCD display production, and continued inputs into the north-south high-speed railway between Taipei and Kaohsiung and petrochemical facilities will help sustain private fixed capital investment growth at 8.5%, compared with an increase of 28.2% last year.

Nevertheless, the government’s inability to use fiscal policy to put public investment funds into needed physical and institutional infrastructure projects is impeding growth and hindering the economy. The opposition-dominated legislature’s refusal to pass public construction and state enterprise budgets on time, and the reluctance to lift a tight ceiling on public debt, has dragged down growth in the past four years.

Despite the announcement of an ambitious six-year development plan for 2002-08 (Challenge 2008) and the earmarking of NT$500bn for public investment in New 10 Major Construction Projects in late 2003, government investment has contracted steadily since 2000, falling 6.4% in 2001, 13.0% in 2001, 1.8% in 2003 and 4.2% last year. Similarly, real fixed capital investment for state enterprises rose 1.6% in 2001 and contracted 1.6% in 2002, 4.7% in 2003 and 15.1% in 2004.

Public capital investment will remain virtually stagnant, rising by just 0.7%. This prediction (along with a forecast for 15.4% growth in investment by state enterprises) may be optimistic given the past five straight years of decline. This can be attributed to delays to – and even wilful boycotts of – government infrastructure budgets by the opposition-dominated legislature.

Economic injections

On May 20, following the directorate’s forecast, Mr Hsieh announced several moves to inject vitality into the economy within the scope of executive discretion. He said the cabinet-level Financial Supervisory Commission would urge the banking sector to add NT$200bn to loans for small businesses and said the cabinet would support this by adding NT$100bn to the official Small and Medium Enterprise Loan Guarantee Fund. These moves could boost employment by up to 240,000.

Mr Hsieh also announced that the government would allocate an additional NT$300bn to the programme for preferential loans to first-time home buyers and continue to offer an official interest subsidy of 0.125 percentage points. He said the cabinet would press for legislative approval of a NT$80bn package of public investment in flood prevention measures over the next eight years in addition to the five-year, NT$100bn New 10 Major Construction Projects programme.

Despite the directorate’s forecast, the premier maintained that the DPP administration would not abandon its 4.5% economic growth target and still aimed to reduce the average annual unemployment rate from 4.5% last year to 4.0% this year.

After the May 14 election victory and the assembly’s ratification of the amendments on June 7, Mr Chen renewed calls for structural reform by proposing a second phase of constitutional reforms aimed at enhancing governance and bolstering protection for human and civil rights, and a new push for tax reform to ease government fiscal difficulties and improve tax fairness. After meeting a panel of private economic advisers on May 31, he advocated a package of measures to lift the national tax burden to 15% by 2007 from the 13.6% posted in 2004, a level far below the average 27% for Organisation for Economic Co-operation and Development countries.

Ray of hope

Although the opposition parties’ initial response was negative, a ray of hope may emanate from the opposition camp itself. Speaking to DPP lawmakers in early June, the president said a new political situation would emerge in July. The China fever would decline following the visits by Messrs Lien and Soong to the country, and Mr Lien would be replaced as the KMT leader by either the Taipei city mayor, Ma Ying-jeou, or the legislative speaker, Mr Wang.

Messrs Ma and Wang are both perceived as relatively moderate and unlikely to maintain the rigid “scorched earth” policy imposed by Mr Lien, who lost presidential elections to Mr Chen in March 2000 and March 2004.

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