Taiwan: The Reformer In Charge

Chen Shui-bian not only has to mollify Beijing but clean up the rot in Taiwan Inc.

It should have been a time to savor the fruits of a decade of hard struggle. But no sooner was Democratic Progressive Party (DPP) leader Chen Shui-bian declared winner in Taiwan's Mar. 18 presidential election than it became clear that the transition from 55 years of one-party domination would be anything but smooth.

From Beijing came a quick rebuke of Chen's formula for normalizing relations, heightening fears that Taiwan is sliding toward a violent confrontation with its giant neighbor. And in Taipei's streets, angry recriminations against the defeated Kuomintang (KMT) pointed to a period of political infighting rather than a new era of stability and consensus Chen needs to cope with the job ahead. "We did not open the champagne bottles or cut the cake the night of the victory," says DPP official Hsiao Bi-khim. "Most of us are having difficulty even smiling today."

With good reason. Of the many crusaders who have risen to power during Asia's shift toward democracy, few have faced a challenge as formidable as the double-barreled one confronting Chen. First, he must find a way to defuse the explosive feud with China's Communist Party, which has warned that his insistence on Taiwan's sovereignty could lead to war. He also has the numbing task of cleaning up the rot of a half-century of KMT rule. Voters chose the 49-year-old former lawyer and Taipei mayor more for his promises of reform than for his views on independence.

WORK CUT OUT. With its global success in exporting electronics and its dynamic democracy, Taiwan to much of the outside world represents a high-tech dynamo and an efficient, modern society. But beneath this exterior, Taiwan Inc. is a mess. Under the KMT, corruption and cronyism thoroughly infested government at all levels. The tentacles of the KMT entangle the economy. The party's assets, estimated at up to $20 billion, span broadcasting, securities, and real estate. And its leaders have wielded enormous sway over everything from the leading banks to the securities markets. Chen's task will be as politically sensitive, and potentially economically disruptive, as the one South Korea's reformist President Kim Dae Jung took on when he assumed power in 1998.

As the KMT grew more decrepit with age, it became so corrupt that even some of its own politicos quit in disgust. Even though strong exports are enabling the economy to grow at a 7% annual clip, the government has become increasingly dysfunctional at completing basic public works, implementing much-needed education reform, and developing modern capital markets. Rulers have dragged their feet on privatizing state industries such as power and petrochemicals. Vast sections of such industries as finance, telecommunications, and agriculture remain cosseted from competition. "Taiwan has a First World export sector and a Third World domestic economy," says Morgan Stanley Dean Witter economist Andy Xie. "The living standard could improve substantially" if Chen follows through on his pledges. It was for such reasons that before the vote, some of Taiwan's most prominent businesspeople, including the chairmen of Acer Inc. and Taiwan Semiconductor Manufacturing Co., agreed to work with Chen, who earned a reputation as a relentless reformer while Taipei's mayor from 1994-98.

For Chen to succeed would spell revolutionary change in the world's 17th-largest economy. But to even get off the ground with this agenda, he has his work cut out. For starters, the DPP has been great at sloganeering and whipping up enthusiasm. But the party's 150,000 members boast little administrative experience and have drafted few specific policies for achieving their aims. Chen is still assembling his economic brain trust.

What's more, Chen's power will be tenuous. The legislature still is dominated by the KMT. Chen's only hope of ruling effectively is to form a strong coalition with other reform-minded factions. But although the DPP is likely to abandon its divisive pro-independence plank, the factional warfare now breaking out will make that difficult. And even though the KMT now seems to be disintegrating, there's no guarantee the DPP will be the biggest winner in the next legislative elections. Chen won the presidency with only 39% of the vote. Runner-up James Soong, a former KMT stalwart who is friendlier toward Beijing, got 37%. He probably would have won had Lee not ousted him from the party and pushed the candidacy of lackluster Vice-President Lien Chan, who snared 23% of the vote. At least 30 disaffected KMT members will swing to an independent party formed by Soong, who also says he is pro-reform, predicts Lai Shyh-bao, a legislator belonging to the New Party, which finished a distant fifth. "Chen doesn't have the power now," says Lai. Thus, the DPP will have to team up with reform-minded KMT members and probably Soong himself.

BANK SCANDALS. To win broad support, Chen must handle mainland issues deftly. He must convince doubters he won't provoke a confrontation that will rock Taiwan's economy and distract him from the domestic problems he was elected to solve. Chen's big test is "whether or not he can aggressively decrease the tensions without losing Taiwan's sovereignty and dignity," says Ray Chen, CEO of Compal Electronics Co.

Business is hoping the new government can somehow promptly pull that trick off so that it can get on with the job of building a new economy in the post-KMT era. Compal, a $1.5 billion exporter of notebook computers and monitors, illustrates the frustrations of some of Taiwan's best companies. Although Taiwan under the KMT did a good job promoting the electronics sector and building first-rate industrial parks, CEO Chen notes, it neglected other needs. "We need the government to create transportation and other infrastructure," he says. "Electricity supply is always a problem in the summer. We need new science parks. We need to make environmental regulations that are strict and clear, with no gray areas." It's a sentiment echoed across the business community. Lin Hsin-yi, chairman of auto parts maker China Motors Co., also calls cross-strait security Taiwan's "No. 1 priority." But Lin stresses that "the new President must implement new plans to maintain economic growth."

ROGUES GALLERY. Tackling corruption, especially the so-called "black gold" of the increasingly money-driven political system, is a good place to start. Bank scandals and bailouts of KMT-linked companies have been frequent. Regulators were unable to stop widespread insider stock trading by businessmen with KMT connections. It's widely believed in Taipei that KMT-controlled investment funds also regularly engaged in insider abuses. Taiwan's contracting industry is notoriously corrupt, and Taipei boasts the world's most expensive subway line as evidence--costing $13 billion and finished two years late. The island's high-speed rail and new airport terminal were grossly over budget. Twelve standing legislators have criminal records, as do half of all local council members, according to Soochow University political scientist Julian Kuo. "This election wasn't about cross-strait relations," says William H. Overholt, a Greater China expert at Nomura International Inc. in Hong Kong. "It was about corruption and black gold and gangsterism."

To get to these problems, the new government will have to deal with the KMT's sprawling business empire. Through seven holding companies, the party controls some 300 firms, including Fuh Hwa Securities, Rebar Group, and Chung Hsing Bills Finance. Many KMT companies provide slush funds for the party and lucrative jobs to its officials. They've also received privileged access to bank loans. But interviews with senior DPP officials make it clear Chen's team thus far lacks a game plan for severing the KMT's links with business. Indeed, the legal status of these holdings is murky. It's not clear if they belong to the government or to the party itself. Many KMT-controlled companies grew out of properties expropriated from the Japanese after they left Taiwan in 1945. Typically, these businesses expanded thanks to government support. Adding to the confusion, the KMT exerts influence through many companies by owning minority stakes--including in such blue chips as Acer and United Microelectronics Corp. Chen's government "probably will [only] identify a few companies they think should belong to the government but were taken by the KMT," says Benny T. Hu, president of China Development Industrial Bank, whose chairman is a top KMT official and in which the party holds a small stake. "I suspect much of this is rhetoric."

Yet with the KMT out of power, many of its corporate holdings may become vulnerable. Chen's government could, for example, tell domestic banks to stop supporting the KMT's money-losers. Chen may also set up a panel to monitor KMT companies and put them into a trust to limit party clout.

The construction industry illustrates how corruption also has imperiled public safety. Faulty work was responsible for many of the 2,321 deaths in last September's earthquake, for example. Investigators allege government inspectors were paid off by contractors to overlook flaws in apartment buildings. Also, public-works contracts are routinely let out to unqualified but well-connected companies. Much of the industry "is controlled by government and gangsters who build buildings out of tin cans," contends Shelley Rigger, a Taiwan politics expert at Davidson College in North Carolina.

EARLY TEST. As Taipei's mayor, Chen aggressively pursued vice and corruption and introduced fair competitive bidding for public contracts. He also jolted municipal employees into working more efficiently by making unannounced inspections. Chen didn't seem to dole out jobs for purely political purposes. He hired experienced KMT cadres to help him run the government, turning to them for experience that the DPP didn't have. In fact, Chen picked KMT-linked China Development as lead investor in a $1.6 billion financial center. "He's not antibusiness," concedes Hu.

Taiwan's expected entry into the World Trade Organization, once China joins, will give Chen more leverage in opening the economy. Taiwan now limits foreign ownership of financial institutions to 49% and, until recently, banned foreign participation in fixed-line telecommunications networks. Investment curbs, as well as protection for auto, distribution, and agriculture industries, will ease dramatically. The liberalizations should help Taiwan achieve its goal of becoming a regional business hub.

An early test of Chen's skills and resolve will come with the government's privatization plans. In a deal expected to raise at least $10 billion, Chunghwa Telecommunications Co., the island's long-time phone monopoly, is to float some of its stock this year in what is to be the first step of a privatization process. Stakes in Taiwan Power Co. and China Petroleum Corp., two other big state companies, are due next, even though the asset sales could spark the sort of labor protests that have scuttled deals in the past.

It's a heady agenda. But the big schemes will go up in smoke if a crisis erupts with China. Although an outright invasion is unlikely, military analysts believe Beijing could try a naval blockade or threaten missile strikes if it concludes Chen is moving toward independence.

Currently, a dangerous stand-off looms. Beijing has always said it would go to war if Taiwan declared independence. But before the election, President Jiang Zemin and other top leaders moved the yardstick, warning China would invade if Taipei procrastinates on reunification talks. However, Chen will not agree to Beijing's precondition for a meeting: that he acknowledge Taiwan is part of China. Instead, he insists his government be treated as an equal. He also says Taiwan doesn't need to hold a plebiscite on independence because it already is a de facto sovereign state.

This leaves the communist leadership in a precarious position. Chen's stance could be interpreted to mean Taiwan already has declared independence. So Beijing must decide whether to start a conflict that could draw in the U.S., and set back its economy. The alternative is to do nothing--and risk a possible backlash among citizens whose nationalism has been stoked by the state media. Beijing says it will wait to see what Chen does after taking office on May 20. But it warns it won't let the issue slide. "If Chen Shui-bian continues to insist on the idea of independence, war will be inevitable," warns Li Jiaquan of China's Taiwan Studies Institute.

Despite Beijing's hawkish rhetoric, Chen's victory may actually open opportunities if he proves a tactful diplomat. He has backed away from his party's most provocative positions and even says he is willing to discuss reunification. Meanwhile, the humiliating end to the career of Lee Teng-hui, reviled by Chinese hard-liners, could be viewed as a victory of sorts in Beijing. What's more, China's imminent entry into the WTO--to be followed swiftly by the admission of Taiwan--will present new chances for both sides to negotiate landmark trade and investment agreements as if they were separate nations. Everyone forgets that "the Chinese are masters of the art of political theater," says the Council on Foreign Relations' Robert A. Manning. "I wouldn't be at all surprised to see the beginnings of positive movement."

That's the rosy scenario, of course. Whether Chen has the diplomatic skills to manage a real rapprochement with Beijing remains to be seen. His abilities as a statesman could well determine whether Chen stumbles badly or emerges as the architect of a new Taiwan.

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