Taiwan's political uncertainties spilling over into its economy

Taiwan -- long considered one of East Asia's ``economic miracles'' -- is experiencing an economic slowdown not unlike the downturns its chief competitors have been seeing. Like the economies of South Korea, Hong Kong, and Singapore, Taiwan's is flagging -- revealing fundamental weaknesses in the island's industries. Also increasingly apparent is an underlying lack of confidence here in Taiwan's future -- and in the political leadership's ability to cure economic ills.

Adding to its domestic difficulties, Taiwan also faces increasing demands from Washington to reduce a massive surplus in its two-way trade with the US.

``We can feel the pressure,'' Economics Minister Li Ta-hai said in an interview recently. ``But we're expecting some kind of compromise.''

In 1984 Taiwan's output expanded by nearly 11 percent -- second only to the surging economic performance of mainland China last year. Taiwan's high growth last year reflected a 21 percent increase in the island's overseas sales. Now exports are growing at roughly 1 percent, and most economists believe the island will be fortunate if it achieves a 4 percent or 5 percent growth rate. Such declines are currently common across the Pacific.

The strength of Taiwan's currency, which is tied to the US dollar, has retarded efforts to diversify into European and Japanese markets. As a result, almost half the island's $52 billion in exports last year went to US consumers.

But weakening overseas demand and a strong currency -- cyclical factors quickly cited in conversations with many government officials -- only mask deeper structural problems now threatening to undermine Taiwan's long-term growth prospects.

As wage levels rise here, lower-cost producers such as China, Thailand, and Malaysia are offering tough competition in many of Taiwan's traditional activities -- such as textiles, footwear, and toys.

But the island's businesses have been slow to invest in higher-technology industries and reluctant to update stubbornly backward management practices. Much of the corporate sector is consequently in shaky financial condition.

Bankruptcies are rife in Taiwan. The local stock market recently opened a special category for nonperforming companies -- almost 20 percent of the exchange's listed stocks are in it. The 32 foreign banks with branches here currently hold among them some $600 million in questionable loans.

Many analysts, however, believe Taiwan's most basic problem is political: uncertainty over the island's future policy toward mainland China, with which it now has no formal contact, and over the future leadership. There is no clear indication of who will succeed President Chiang Ching-Kuo, who is 75 years old and ailing.

Such questions have taken a severe economic toll. Domestic investment has dropped by a third over the past several years, and capital flight, by available measures, is increasing steadily.

``We seem to have lost our confidence in ourselves,'' laments Yu Tzong-Shian, vice-president of the Chung Hua Economic Research Institute.

In May the Kuomintang (KMT, or Chinese Nationalist Party) government named an Economic Revitalization Committee to develop solutions to Taiwan's problems. It is expected soon to recommend a range of measures to encourage investment, including tax reform and liberalized management of the New Taiwan Dollar. But many executives and economists -- including some on the revitalization committee -- view the administration as too conservative to act on any but the most minor proposals.

Despite the economy's declining performance, Taiwan now faces markedly greater pressure from Washington to liberalize its import regime and bring its two-way trade with the US closer to balance.

A recent congressional delegation, led by Sen. Robert Dole (R) of Kansas, was viewed here as the most critical to have visited the island to date. Mr. Dole pressed for ``very significant reductions'' in tariffs covering 174 items. He also repeated long-standing demands for liberalized treatment of US concerns in banking, insurance, and other service industries.

Taiwan has progressively reduced its import tariffs, which now run to 75 percent on some items, although officials here acknowledge that the liberalized products do not represent a meaningful proportion of Taiwan's imports.

There are indications that the KMT government recognizes the threat posed by protectionist sentiment in the US Congress. President Reagan's recent decision to block measures limiting footwear imports, for instance, was greeted here with near-jubilation. Although it is viewed as a declining industry, Taiwan exported $2.3 billion worth of footwear last year -- almost three-quarters of it to the US.