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Taiwan’s President Chen Shui-bian shares a political problem with Presidents Bush and Chirac after success in the parliamentary elections: he still doesn’t have a parliamentary majority. That makes him something of a lame duck until the presidential elections two years from now.
As in other democratic representative governments, we are now going to see a convoluted effort to put together a coalition behind a prime minster and legislative initiatives. There appears little doubt that former President Lee Teng-hui’s last minute new party — which got a respectable 13 of the Legislative Yuan’s 225 seats — is a candidate. And there may be individual defectors from the KMT, the ruling party through Nationalist China’s history until it lost the presidency two years ago to Chen and now its role as the largest parliamentary party.
Chen, who was hobbled by pre-election factionalism, has some tough problems head. The economy is in a deflation that looks too much like Japan’s with a continuing series of bailouts but without urgently needed structural reform especially in banking. Taiwan has little foreign debt, but it suffers a massive domestic overhang, totaling more than 170% of GDP. Taiwan's chronic budget deficit is is now more than 6% of GDP,.twice the 3% deemed prudent by international bankers. The deficit looks even worse if the contingent liability of the banking system, estimated at about 16% (or 19% of GDP], is taken into account. Nobody expects a financial crisis, in part because of Taiwan’s continued high savings rate — $575 billion in deposits.
But a reworking of the debt is necessary to face a more fundamental macroeconomic changeover now facing the Island. What is worrying is Taiwan’s $50 billion in investment over the past decade which has gone to Mainland China. This outflow is likely to accelerate as Taiwanese businesses struggle to survive under the new trading rules imposed by its entry [along with the Mainland] into the World Trade Organization. Rather than continue to fight unsuccessfully what seems an inevitable trend, the Taiwan government now has decided to work out a program for meeting the challenge it presents and profiting from the huge China investments.
But while Hong Kong faced this changeover a couple of decades ago by making itself a financial center, it seems unlikely Taiwan can follow suit. Like Japan, what it must do is move up to more sophisticated knowledge-based exports. But this puts it into competition, not only with Japan also seeing much its manufacturing base move off to lower cost producers like China, but, Korea, and Singapore, all facing the same problem. There is also the problem that Mainland China itself is trying to move up the food chain. Whether this competition deepens in the next few months with the onset of the worldwide recession, as seems likely, it is a long-term adjustment the Island must make if its recent prosperity is to be assured.
These economic worries, at least in so far as they concern relations with the Mainland, go hand in hand with Chen’s political problems. While Chen’s DPP has modified its call for Taiwan “independence” — and its broadened base in the elections will probably reinforce that new and nebulous position — Beijing will not view the DPP’s electoral victory as an opportunity to advance it’s “one China, two systems” solution to the question of Mainland-Taiwan relations. Ex-Pres. Lee minced no words in the last hours of the campaign by announcing that “The Republic of China” — the old KMT term — was dead. In the immediate post-election hours, the KMT announced it would not be willing to enter Chen’s proposed "cross-party stability alliance” which he called for before the elections. The breakaway People First Party, which captured 48 seats from the old KMT, favors a more conciliatory policy toward the Mainland, and does not seem a candidate for the coalition.
Much now depends on how Beijing will react to the elections. Chinese Communist leadership apparently was not prepared for the massive KMT defeat. On the other hand, it did not try to interfere as it did in the 2000 presidential elections with disastrous results. If favorable economic relations are to be a major concern in Beijing, the fact Taiwan outbound shipments to Mainland China totaled US$2.03 billion in August, accounting for a record high of 21.5% of the country's total exports that month, ought to count. This expanding commercial relationship which is of such enormous benefit for the Mainland economy ought to dictate an accommodating line in Beijing toward Greater China. But an oncoming recession there, deep structural economic problems with political implications, may dictate other policies. After all, Taiwan’s peaceful and free elections are the first in China’s long history and a succession struggle is evolving in Beijing over President Jiang Ze-min’s seat.
Sol W. Sanders, (solsanders@abac.com), is an Asian specialist with more than 25 years in the region, and a former correspondent for Business Week, U.S. News & World Report and United Press International.
He writes weekly for World Tribune.com.