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Suddenly, All Bets Are Off In Taiwan


International Business

SUDDENLY, ALL BETS ARE OFF IN TAIWAN

Two years ago, it seemed Taiwan was going to be the next big player in world aerospace. After all, the government and its wealthy frIends planned to invest billions in Taiwan Aerospace. Nobody was paying much attention to some noisy critics of Taiwan's ruling party. But when Taiwan Aerospace signed a $2 billion deal with McDonnell Douglas Corp., angry opponents tore the scheme apart. Now, a less ambitious plan to build narrowbody jets with British Aerospace PLC is also in trouble. Once, Taiwan had a chain of command that was clear, says the shaken president of Taiwan Aerospace, Denny R.S. Ko. But "like a lot of people, I misread the breadth of political change."

Executives such as Ko are waking up to a revolution in Taiwanese politics. Big deals clinched with handshakes between political power brokers are falling apart. Multibillion-dollar public-works projects are gunned down by opposition politicians. Ambitious industrial policies to put Taiwan on the map in aerospace and high-tech electronics are up for glaring reexamination.

TIES THAT BIND? After four decades of dictatorship, the ruling party, the Kuomintang (KMT), is losing its grip on political power. On Aug. 10, a group of key KMT legislators announced that they were leaving the party. They said their New Party, as it's called, would base its platform mn clean government. If the reformers can cut the close ties between government and big business and create a more open economy, they will not just wield new power but also set a new direction for Taiwan. The implications will reach across Asia. If Taiwan can move toward democracy while maintaining steady economic growth, it will help discredit the argument that Asians have to choose between a democratic society and a healthy economy.To succeed, Taiwan's new political class needs to quash the current alliance between well-connected business leaders and the ruling party. Currently, state-run enterprises in steel, oil, and heavy industry account for 20% of gross capital formation. Critics want a decentralized economy led by a dynamic private sector that, despite government opposition, has already invested some $10 billion in China. Business leaders want Taiwan to increase ties with the mainland and become the managerial center for an emerging Greater China.

Among the major parties, only the New Party seems in step with the business community on China policy. The KMT still bans direct commercial links with the communists. The largest opposition group, the Democratic Progressive Party (DPP), wants to renounce all claims to China and declare independence, but Beijing has threatened to invade if that happens. The New Party wants closer links with China but not Taiwanese independence--a policy likely to win voters who are dissatisfied with the KMT yet wary of the DPP's hard line.

The rebels are led by former Cabinet members Jaw Shao-kong, 42, and Wang Chien-shien, 55. They were the top vote-getters among all Taiwanese politicians in last year's legislative elections. They run particularly strong among middle-class urban voters who admire their anticorruption platform. Their New Party commands enough swing votes to defeat President Lee Teng-hui's KMT in critical policy battles because the DPP controls about a third of the seats in the new legislature--where animosities regularly lead to fisticuffs. Pollsters say the KMT will suffer more losses in local elections this fall.

"FRUSTRATING." So far, the transition to democracy hasn't hit the overall economy, which is still growing at a 6.2% annual clip and running healthy trade surpluses. But if the political situation worsens, some business leaders worry, Taiwan will start falling behind in investments needed to keep pace with Asia's other Tigers. "Major things that should be done right now are getting debated and discussed to death," frets Chen Chi-chu, a general manager of state-owned International Commercial Bank of China.

As the factional feud deepens, some key government programs are being attacked because they are closely identified with the ruling clique. For example, top officials at the Industrial Technology Research Institute, a massive bureaucracy charged with leading research and development in high-tech areas ranging from multimedia to semiconductors, are seen as members of the KMT old guard. Last month, the legislature slashed ITRI's $200 million annual budget by 20%. "The transition is very frustrating," says Lance Wu, who heads ITRI's multimedia and HDTV programs. "We no longer have the efficiency of authoritarianism and don't yet have the advantages of democracy."

At the center of the debate: how to clean up money politics and curb rampant boondoggle projects. Most KMT lawmakers have strong ties to powerful financial interests and state-run enterprises. The New Party and the DPP want to privatize the state sector and divert more funds to small business.

Infrastructure projects have also become a major battleground. Over the next decade, some $250 billion will be spent on everything from highways to power plants. Last month, DPP and KMT rebels killed funding for a $17 billion high-speed railroad that was a showcase for the infrastructure plan.

President Lee has been clumsy in handling the political crisis. His supporters have stacked key committees for the party's upcoming congress, set to begin on Aug. 16. That prompted the reformists to bolt the party. Even some KMT legislators say this shows that the KMT is intent on preserving the authoritarian legacy of Chiang Kai-shek and his son Chiang Ching-kuo. "Why try to preserve a Leninist structure brought from China?" asks Wei Yung, a KMT lawmaker.

In order to stay in power, the KMT will have to respond to the reformers. Eventually, that will result in a more democratic society and an open economy hitched to China. The evolutionary process is awkward, but a new breed of Asian Tiger is now emerging. HOW THE KUOMINTANG

IS LOSING ITS GRIP

PARTY POLITICS

KMT is fractured as key lawmakers form New Party

INFRASTRUCTURE

Legislature has rejected funding for the showcase $17 billion high-speed rail

project

CORRUPTION

Lawmakers are launching probes of payoffs in public works

INDUSTRIAL POLICY

Budget for high-tech research has been slashed by 20%, and plans to create a

world-class aerospace industry by linking

government-backed Taiwan Aerospace and British Aerospace

have sputtered

STATE COMPANIES

Legislators want more privatization and are demanding greater oversight of all

capital spending by state-owned enterprises

CHINA LINKS

Taiwanese businessmen have ignored the KMT and invested some $10 billion in the

mainland

DATA: BUSINESS WEEK

Pete Engardio and George Wehrfritz in Taipei


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