Political outcomes matter!

What non-economic factor has the greatest impact on the success or failure of the economy? In Taiwan, as in many developing countries, the answer is "politics."

At the end of 1993, while making his economic forecast for 1994, Wei Duan of the Directorate-General of Budget, Accounting, and Statistics pointed out: "Because there will be the first-ever elections for the governor of Taiwan Province and for the mayors of Taipei and Kaohsiung, people will have a lot on their minds." A year later, on December 4, a day after the election, he was sitting with his family in a restaurant. The eatery was full of customers, all happy and smiling, giving him an even stronger sense that "another election is safely past."

There is one businessman whose family has three voters in it, and each of them cast their votes for a different party. He was unable to persuade his wife and son to vote for his favored candidate, but he insisted on giving his employees a "direct warning": "If the opposition party wins control of the government, I will be the first to flee. I will emigrate and take my assets with me. I will never stay in Taiwan."

The alternation in power of different political parties is taken for granted in the advanced nations. But in Taiwan, a change in ruling parties would bring the possibility of a declaration of independence from China, followed by a possible retaliatory attack by the PRC. The results of the 1994 election allayed some of these fears, but the elections for Legislative Yuan at the end of 1995 and for the president early in 1996 are coming up fast, not to mention the difficult situation Taiwan will be in after the PRC takes back Hong Kong in 1997.

"When I think of how every election there is arguing over the same topics again, with the same apprehension, I feel as if questions about buying a house or changing jobs are insignificant, and I don't even have an interest in doing anything about them," says one office worker who still can't quite figure out why politics gets in the way of her daily life so much.

Of course politics does not stop when there are not elections. But elections drive politicians to make many ridiculous promises, or to temporarily shelve policies that may offend voters. Government policies and the distribution of resources get distorted. One can think of countless examples, from expanding state pensions for the elderly to halting collection of taxes on stock trading and on income made from stocks. Such policies bleed an already anemic treasury by NT$100 million or a billion at a time.

Naturally, with so many elections, interest groups do not pass up these golden opportunities. Just recently there were reports that representatives of workers protesting the imminent privatization of their state-run corporations threatened the ruling Kuomintang that they would "give our votes to the Democratic Progressive Party if you don't agree to our conditions!" And since the representatives of interest groups have come to take control of the legislature, incidents in which they throw economic order into chaos just to protect their private interests have become the "most hated" headache for private enterprise managers who stick to orthodox business methods.

Protests by residents in Yunlin County have slowed down construction of Formosa Plastics' Sixth Naphtha Cracker. （photo by Vincent Chang）

Many variables, many fears

For those in the financial industry, politics often has a disgustingly negative connotation, but it is not without its good points. "Because in this election the Kuomintang lost the mayorship of the capital city [Taipei], in order to protect their position they will have to speed up reform and improve their governing performance, which is good for economic development," argues Yu Tzung-hsien, the president of the Chung-Hua Institution for Economic Research.

The thing that people feel most ambivalent about is that they still want a government that can get things done. Nevertheless, in the transition toward a pluralized democratic political system, sometimes it is difficult for the government to play its role effectively. One often hears criticisms that "the government cannot assert its authority."

Formosa Plastics has come across many problems of this type in the construction of its Sixth Naphtha Cracker, which is still in the "land reclamation" stage. The worst problem has been "blackmail" by local fishermen.

"That coastal land does not belong to those fishermen. They occupied it illegally to operate some fish ponds. Sometimes they raise fish there, sometimes they don't. Anyway, no one registered with the government, and the operators change constantly. When we went to begin work there, in order to deal with the issue of compensation, we asked people to register their claims. In the end five or six times as many people came as had real claims, including some people who had left long before but came back looking for compensation," complains Li Chih-tsun, vice-president of Formosa Plastics.

Of course, everyone has their own version of the story, and it is hard to say who is right or wrong. But Li, looking at things from the point of view of enterprise development, feels that democratization in Taiwan is divorced from the rule of law, that the media is biased, that local elected officials stir up the population to win favor, and that the government--though willing to help--is unable to do anything. All these keep investors from moving forward.

"In Japan, if you say a factory will be finished within 18 months, when the time comes the construction will be finished. But in Taiwan, it seems no one is in charge, and there are many variables, so there is always risk and uncertainty," Li concludes.

"Often the problem is not that government efficiency is deteriorating. Rather, the external environment is changing too quickly, and people's expectations are increasing, while neither the legal structure nor the government can adapt quickly enough," suggests Wu Chin-sung, director of planning for President Enterprises. He takes the example of vending machines. Originally this was an industry encouraged by the Ministry of Economic Affairs, but it has been restricted by irrational placement regulations. Frustratingly, no agency is willing to come forward to take responsibility, so the problem remains unresolved.

Social welfare is necessary, but more work is needed to ensure that the system is completely fair. （photo by Hsueh Chi-kuang）

Whose welfare? Whose responsibility?

The times are changing rapidly, and the government is unable to keep up. At the same time, heavy burdens accumulate. Chou Yu-jen, a professor in the Department of Public Administration at National Chung Hsing University, notes that in modern countries government efficiency falls after democratization. But, in addition, demands for environmental protection, rising consumer consciousness, increased labor activism, and protection of intellectual property rights have all been blows to corporate operations and to economic development. The latest trend in Taiwan--and one that business people find hard to accept--is the hotly debated subject of "social welfare."

"Britain and the Scandinavian countries have had their fill of the costs of social welfare, and are trying to go back. So why does Taiwan want to repeat the same mistakes?" Talk of old-age pensions, annual welfare payments, unemployment insurance, and national health insurance (which is set to begin early this year) are all adding to the worries of business people.

"In fact, the impact of national health insurance and annual welfare payments on economic development is largely psychological, and will not have much of a practical impact," says K.C. Lee, director of the Economic Research Department at the Council for Economic Planning and Development. He notes that the costs of these two programs to enterprises will be equivalent to a 2.6% increase in wages. Though this figure might be somewhat higher in the final version of the still-unfinished legislation, "compared to routine salary adjustments of 10%, these welfare programs should not prove to be too much of a burden." He argues that a country must have balanced development, and that one should not be "too economic." Moreover, "it is about time that we do these types of things."

Companies have different capacities for adaptation, so each will feel the weight of the burden differently. "It's not that we are miserly about spending the money, it's just that we feel the system has been poorly designed, so that these welfare programs will become 'unreasonable,'" says Li Chih-tsun, who insists that "reasonableness" has always been the standard for Formosa Plastics. By way of example, he says that last year while on a business trip to Japan he got the flu, and received a huge bag of medicines through the hotel's medical insurance. "I was amazed when I saw it. Did I really need so much medication for a little cold? If I had had to pay myself, would I have been so happy to accept them?" he wonders.

Universal health insurance will cover all illnesses large and small, and patients will not be required to absorb much of the cost. Thus it is unlikely that the old viewpoint, widespread under labor and farmers' insurance, that "anyway, insurance pays for everything," will change, so heavy deficits can be anticipated. Whatever happens in the future, these deficits will sooner or later fall upon the taxpayer. In Taiwan the overall amount paid in all forms of taxes amounts to about 20% of the average income. It is not impossible that in the future this will rise to the level of the US (40%) or European nations (over 50%).

After universal health insurance is implemented in a few months, based on an average worker with a salary of NT$22,000 per month and 1.36 dependents, employers will have to pay NT$1,300 per month in insurance costs for each employee. Add to this the fee for labor insurance (including ordinary incidents and old age pensions), which still must be paid, and the cost is about NT$2,000 (about US$75) per worker, or almost ten percent of the monthly wage. This is much higher than the current payment of only NT$700 under labor insurance.

"The insurance payments alone are enough to hire a technically skilled worker in mainland China. We are in an era of global competition. In order to survive, corporations will run to where costs are lowest. Five or ten years from now, what will be left in Taiwan?" You can hear complaints like this all the time in the business community, which is feeling very resistant and waiting to see how things turn out.

Comprehensive upgrading... but when?

Getting to the root of the problem, "the government's role is really very difficult," says one official. In the past the government could just play the "maestro" and run the show, using industrial policy and protectionism to develop textiles, petrochemicals, electronics, and other industries, and to assist the private sector to earn lots of money. Today the government wants to play the "maestro" to ensure a more equitable distribution of this money, but it is meeting intense resistance.

"This is not a problem only for Taiwan. Right now the whole world is facing the problem of 'reinventing government.' There are many debates over what role the government should play, and just how much scope it should have to decide the distribution of resources," notes Chou Yu-jen.

The inability to define the role of government has repercussions everywhere. It extends beyond the economy, to education, culture, law, and society. Many entrepreneurs, who used to be full of confidence and who feel that Taiwan's economic success was built on their individual daring and ability, are feeling frustrated.

Antony C. Hu, the president of Sinkong Spinning Company and also a member of the National Assembly, says that over the past 40 years the government has always relied on economic growth and industrial upgrading to carry forward the other levels of society, and that this has shown clear success. But at certain level, he says, it is quite clear that "the situation is reversed": "You can't just rely on industry alone to achieve industrial upgrading. Only with comprehensive upgrading--of politics, culture, society--can there be true industrial upgrading."

Economic development and industrial upgrading are Taiwan's life blood, but they rely on non-economic factors as well. Looking forward to 1995, will these factors mature? What will be their impact? Obviously the answer is not something an economist can calculate.

[Picture Caption]

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The fruits of economic development may taste sweet, but one must beware of industrial pollution, money politics, and imbalances in values so as not to sacrifice the most fundamental things. (drawing by Tsai Chih-pen)

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The elections at the end of 1994 were intense, but the results were gratifying, and inspired confidence in the wisdom of Taiwan's electorate. (photo by Hsueh Chi-kuang)

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Protests by residents in Yunlin County have slowed down construction of Formosa Plastics' Sixth Naphtha Cracker. (photo by Vincent Chang)

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Social welfare is necessary, but more work is needed to ensure that the system is completely fair. (photo by Hsueh Chi-kuang)