Political news shook Taiwan’s economy last week. The tumultuous chain of events began with a cancelled power project, led to a cabinet shakeup, a warning to investors, and then a run on the stock market. Afterwards, Taiwan ‘s recently elected President Chen Shui-bian and his Democratic Progressive Party, (DPP) was left with full control of the executive branch, at the price of further alienating the Kuomintang (KMT) Nationalist Party-controlled legislature.
Taiwan’s industrialists and foreign investors are increasingly viewing the Democratic Progressive Party leaders as economic incompetents.
The political dominos began falling when Taiwan’s Economics Minister announced that a US$5.4 billion, 2,700MW nuclear power plant project should be cancelled. Scheduled to be Taiwan’s fourth nuclear power plant, the project is already one-third complete.
Even worse, Taiwan’s fast-growing electronics and semiconductors industry was counting on this plant to add capacity to an overburdened power grid. Last year, two blackouts hit Taiwan leading to tens of millions of dollars of lost production, and electronics makers now fear government caused electricity problems will harm their global competitiveness.
Days later, Taiwan’s Premiere Tang Fei resigned from his position, citing ill health. While certainly ill, one must note that he had previously threatened to resign if the before-mentioned nuclear power project was cancelled. Tang Fei was chosen from the opposition Kuomintang party to serve as a bridge between the DPP and the legislature, so his departure signals a move towards more confrontational politics.
As a replacement for Tang Fei, President Chen announced a new Premiere, Chang, from the DPP. A reconstitution of the president’s Cabinet Ministers followed, where there were some notable changes. A new Finance minister, Yen, was installed, and in his first press conference the new Finance minister implied that foreign investors were to blame for Taiwan’s stock market problems. In his speech he said that while foreign investors comprise only 5% of trading, they “cast a much longer shadow.” Upon hearing this, many foreign investors felt decidedly less welcome, spurring further market weakness.
The result of this political reshuffling has been that President Chen and the Democratic Progressive Party has strengthened its control of the executive office, which is bad news for Taiwan’s economic policy.
The DPP proposes a center-left economic agenda: higher government spending, new taxes including taxes on stock trades, and greater regulations and financial burdens placed on business.
Though proposing few specific new laws (which creates uncertainty), the DPP vows to “pursue the goals of a welfare state,” “establish a social security system,” establish national medical insurance, impose new environmental regulations, forbid all nuclear power in ten years, create new pro-union labor laws, and hike the minimum wage. Welfare spending is a priority, as a recent budget proposed by the DPP dedicated 18.8% of the government’s 2001 budget to “social” welfare spending, 20% higher than the current year.
The leftist policies the DPP has emphasized are unappealing to much of Taiwan’s traditionally self-reliant, and hard-working population, and even more unpalatable to the pro-business Kuomintang-controlled legislature. So while President Chen Shui-bian proposes new laws and budgets, the legislature, thankfully, blocks them.
Given the new situation, political friction is likely to increase, and it seems unlikely that foreign investors will regain confidence in Taiwan’s policymakers in the near term. Since President Chen’s inauguration in May of this year, the Taiwan stock market has declined by approximately 30%. According to an opinion poll by cable network TVBS, President Chen Shui-bian ‘s approval rating has sank from 77 percent in June to 37 percent.
The DPP was lucky that it even is in power. The DPP candidate Chen won, with a 39% of the vote, while his two opponents: James Soong, former Governor of Taiwan Province (who was booted from the KMT party and ran as an Independent) and Lien Chan (KMT), former vice-president, received 37% and 23% of the vote respectively. Over sixty percent of the voters who went to the polls voted against Chen Shui-bian. It appears that Chen’s victory was due more to the division amongst his opponents rather then his popularity amongst voters. Soong and Chan should have run together under the KMT ticket. Unfortunately for the KMT, Soong was forced out of the KMT and ran as an independent thus splitting the KMT vote.
The DPP seems to ignore the contradictions between its leftist policies and the better, pro-capitalist ideas in its party platform. These should be emphasized if they seek popularity and prosperity: “respect private property,” “promote the value of a free economy by opening the domestic market,” “allow private investment in state-run enterprises [privatization],” and “reduce the people’s tax burden.”
If the DPP could turn its focus away from its wealth destroying welfare-statist and environmentalist policies and toward its better pro-freedom and production ideas, it would regain the confidence of foreign investors. However, if the DPP pursues incompetent statist economic policies such as forbidding the development of new power plant, Taiwan may soon be literally stumbling in the dark.
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