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NOVEMBER 24, 2000 VOL. 26 NO. 46 | SEARCH ASIAWEEK

A Brush-Off for Business
Chen needs to rebuild confidence — fast
By ALLEN T. CHENG

Cosmetics magnate Tsai Yen-ping has her sights set on China. A chain of 5,000 beauty salons is her goal. Eventually, the founder of Taiwan's Natural Beauty Corp. wants to move her regional headquarters from Taipei to Hong Kong. "China is a vast market for my products," says Tsai. "In Taiwan our market has almost reached maximum capacity." Though loath to admit it, Tsai confesses that government instability is another factor influencing her plans. "Politics," she says, "is too messy right now in Taiwan."

Under the island's previous Kuomintang (KMT) rulers, what was right for business was right for Taiwan. Things have changed. Though Chen Shui-bian, the long-time opposition leader, came to power in March with a limited mandate and a hostile legislature, many Taiwan people reacted with pride. The historic transition of power had gone smoothly. Taiwan was proclaiming its political maturity. Even big business, content with the KMT's pro-industry policies, welcomed Chen. Indeed, some tycoons, fed up with the KMT's corrupt reputation, publicly supported the Democratic Progressive Party (DPP) upstart. Yet a spate of recent Chen moves has shaken such fragile approval. Business smells an anti-business agenda.

The economy has stumbled badly in recent months. Taiwan's stock market has plunged 50% since Chen's May inauguration — despite a $1.8 billion government injection over the past six months. About $15 billion in foreign exchange has slunk offshore. Financial services giant Morgan Stanley Dean Witter has revised Taiwan's 6% growth estimate to 4.5%. Andy Xie, a Morgan Stanley Dean Witter economist in Hong Kong, says the only factor blocking a near-term economic meltdown is Taiwan's $111.7 billion in foreign exchange reserves. Meanwhile, the DPP-led municipal government in Hsinchu has recently proposed hiking taxes on high-tech businesses at the industrial park near Taipei. Citing environmental concerns, the Chen administration also has scrapped electricity projects designed to fuel industry and exports.

More disturbing is the political instability: Chen and the opposition have almost irreconcilable differences over the economy. In coming weeks the KMT, People's First Party and New Party plan to unite in the legislature to table a vote of no-confidence in the government or to seek Chen's impeachment. They have the numbers.

The fuel for the impeachment moves is the cancellation of Nuclear Power Plant No. 4, a $5.6 billion project that is already one-third finished. Citing his party's anti-nuclear stance, Chen ignored the objections of his then KMT premier, Tang Fei (who has since resigned), and aborted the project. In the process, he bypassed the KMT-dominated legislature, which had approved the plant. Taiwan's existing supplies were more than enough to maintain economic growth, the president said. Also canceled on environmental grounds was the proposed Mei Nong hydroelectric dam in southern Taiwan, which was due to supply the Tainan science-based industrial park. "It is not just a matter of electricity," says Philip Yang, a political scientist at National Taiwan University. "It is a matter of Taiwan's future. People are afraid that Taiwanese industries are no longer competitive and can't survive." Moreover, while a plan to levy a 25% tax on high-tech share options was scrapped, the proposal created the impression that Chen does not care for the high-tech sector.

Chen says his critics are ignoring many other policies aimed at boosting the economy, such as low-mortgage loans for the middle class and boosting elderly social security benefits. But winning back the business community's support won't be easy. As the new president, Chen was careful to court the conglomerates. But his party's electoral support came mainly from pro-independence and anti-nuclear groups, which had been ignored by the KMT. "The DPP uses environmental reasons as excuses for its policies," says Yang. "But the real reason is political. Chen won the presidential election by a slim margin and is afraid to lose support from his core constituencies." Economist Xie believes Chen's party is caught in a conundrum. "It's a first-time ruling party and must deliver on campaign promises to get re-elected," he says. "However, it is a minority party and cannot possibly be successful in that regard. Taiwan is in for political gridlock for the next three-and-half years."

The outlook is certainly grim. Xie predicts that the information technology industry, the core of Taiwan's economic growth, will start moving offshore. "Without Taiwan Semiconductor Manufacturing Corp., United Microelectronics Corp. and a few other I.T. companies, what is the difference between Taiwan and the Philippines?" he says. "I'm afraid that over the next three years Taiwan will lose it all." Public support for Chen has plummeted from 80% in March to 40% in recent polls. But 55%, fearing even more instability, want him to remain in office. Clearly impeachment is not a popular option. But if Chen can't rebuild confidence, Taiwan will surely lose.

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