“There was little excitement and not much shopping. I received one-third of the New Year cards I normally get,” said a member of the island’s foreign business community, who asked not to be named.
“People are waiting to see what happens in the election.”
Taiwan goes to the polls on March 22 to decide who will follow Chen Shui-bian as president. It’s a choice between Frank Hsieh, Chen’s successor as head of the Democratic People’s Progressive Party (DPP) and Ma Ying-jeou, the Kuomintang (KMT) candidate.
From Beijing’s point of view, either man would be an improvement on Chen, whose talk of Taiwan independence has antagonized the mainland authorities.
“It seems obvious that both candidates would cooperate more with China,” said Dr Chen Miao of the Taiwan Institute of Economic Research.
Beijing, having publicly courted the KMT, will have been cheered both by the party’s comprehensive victory in Taiwan’s parliamentary elections in January and Ma’s strong lead in opinion polls.
Experts said in mid-February that it was premature to write Tsieh off, noting that political sentiment in Taiwan can be a fickle creature. But campaigning for the presidential poll has so far seen economics take precedence over emotive issues.
“In the 2004 election, Chen made it a race about Taiwan identity,” said Richard C. Bush, director of the center for Northeast Asian policy studies at the Brookings Institute in Washington DC. “Since then, the public has become more receptive to seeing the economy as an issue.”
Taiwan’s economy needs the attention. Investment bank UBS recently downgraded its forecast for GDP growth in Taiwan this year to 3.5% from 3.9%. One must go back to 2001 for the last time the economy performed any worse. Export-generated income accounts for 19% of the island’s GDP (twice as much as mainland China) and the US downturn expected this year is likely to hit hard.
It is not all down to global tightening, though. External factors merely exacerbate domestic problems that are already there: Real income growth is very slow, which means consumption is lagging.
“To cope with a US slowdown, consumption would have to grow, but household debt in Taiwan is 92% of GDP compared to 96% in the US,” said Sean Yokota, an economist with UBS in Hong Kong. “It is a highly leveraged economy.”
The biggest impact the new president could have on the situation is accelerating economic integration with the mainland. Dr Tung Chen-yuan, an academic who serves as vice chairman of the cabinet-level Mainland Affairs Council, said an agreement on direct links between Taiwan and the mainland for tourism, cargo shipments and passenger flights was basically concluded in January 2007.
“The Chinese then postponed talks because they didn’t want to give credit to the DPP ahead of the election,” he said. “If Hsieh wins there will be no reason for delay. We [could] conclude negotiations very soon, maybe within two months.”
Tung is more circumspect about the implications of a Ma victory. Any agreement between the KMT and the mainland authorities would have to endorse the “one China” principle and Tung believes it could take time to thrash out the exact wording of this endorsement.
On the flip side, if and when Ma does reach a consensus with Beijing, it is likely to deliver greater benefits to Taiwan in the long term. Beyond the direct links outlined by Tung, much could be gained by easing restrictions on mainland money and people entering Taiwan. Axing the rule that stops local firms from investing more than 40% of their net worth in the mainland would be another positive step.
Peter Sutton, head of Taiwan research at brokerage CLSA, believes these reforms will see the island emerge as a service sector for Greater China.
Should Ma become president and secure a deal on opening up with Beijing, Sutton expects a stock market boom, with property and financial plays leading the way. The likes of Taiwan Fertilizer and Cathay Financial could see long-term gains of 50-75%. He also tips retail, airline and telecom stocks to do well.
It is believed that the surge in economic activity – with domestic players investing at home rather than offshore and foreign multinationals moving their regional offices back to the island – would more than offset the accelerated “hollowing out” of Taiwan as more companies shift their operations to the mainland.
No plain sailing
However, there are still hurdles to be overcome. Domestic investors remain cynical and concerns exist regarding the candidates’ economic plans, as well as the availability of talented – and honest – personnel to implement them.
Ma and Hsieh may also face uphill battles within their own parties. The KMT and DPP represent the core elements of two coalitions that accommodate a wide variety of political views.
Attempts by Hsieh to target the middle ground may be undermined by his more conservative party colleagues. And although Ma would have the luxury of working with a KMT-controlled legislature, Wu Po-hsiung, the KMT chairman, and Wan Jin-pyng, president of the legislature, wield considerable power.
“Ma was elected because he has been built up as the person to win, not because he can unite the party,” said Chen Miao.
Ultimately, the winner will have to work with Beijing. Taiwan’s economic health depends on it and the two sides are too interlinked to turn the clock back.
But the onus is also on mainland authorities to win over the Taiwan people rather than alienate them through an aggressive military and diplomatic approach. Tung is scathing of Beijing’s efforts in recent years but accepts the tide may now be turning, albeit slowly.
“We have more contact with the Chinese government, some mutual understanding and a desire to increase exchanges. There will be no short-term solution for either side. We must be patient.”