In the following analysis, senior journalist Osman Tseng assesses the major issues awaiting the guidance and direction of the new premier.
When Lee Huan became the 12th Premier of the Republic of China on June 1, he not only inherited the results of an outstanding record of accomplishment from his predecessor, he also acquired a host of social and economic problems that will challenge his political prowess in the months ahead.
The strength of the ROC on Taiwan and the well-being of its people have been greatly improved since June 1984, when Yu Kuo-hwa became premier. During his five years in the office, Taiwan's economy on the average grew a high 9.3 percent, while prices remained relatively stable. This economic environment led to more than a twofold increase in per capita income, which is expected to reach US$7,000 by the end of this year.
In the same period, foreign trade more than doubled, reaching US$110 billion in 1988. Strong exports continued to pile up a large trade surplus, building the ROC's foreign exchange reserves to US$75 billion.
Other important events that contributed to the former premier's outstanding record include the termination of the Emergency Decree, abolishing restrictions on strikes and mass demonstrations, lifting the ban on new political parties, and opening the newspaper industry to new investment. The removal of these social and political restraints has led Taiwan toward a more open and pluralistic society. Because of these striking developments, Taiwan has been able to win growing recognition from the international community. The number of nations with which Taiwan maintains trade and other substantive relations has now expanded to more than 120.
Labor and management are urging quick revision of the Labor Standards Law, which has become a major source of disputes.
For all these significant achievements, the Yu Cabinet left many difficult problems that reflect a long-time disequilibrium in the ROC's development. These demand urgent resolution by the new Cabinet under the leadership of Premier Lee Huan. Problems include how best to combat rising inflation, check stock and other forms of economic speculation, promote better labor-management relations, and enact a set of more realistic environmental protection standards.
Preventing inflation from getting out of control is the most pressing of these problems. Inflation of consumer prices in the first four months of this year was running at an annual rate of about 5.7 percent, compared to 1.3 percent in 1988. The sharply rising inflation rate has largely been the result of Taiwan's continuously growing trade surpluses, which have in turn caused a steady expansion in the money supply.
The steep growth in the money supply (in terms of M1B) means that over the past few years much more capital has been flowing into the economy than is necessary—money that has been chasing fewer goods and services. The liquidity pouring into the stock and real estate markets, for example, has been extraordinarily large, causing prices to skyrocket.
Faced with the threat of soaring inflation, the government adopted a series of credit-tightening programs early this year. As a result, the annual growth rate of the money supply was brought down to nearly 11 percent from the range of 30 percent registered in earlier months. Initial statistics for May show an easing of the rise in consumer prices. But the anti-inflation program does not seem to be having any major impact on the realty market. Only prices for secondhand houses located in some parts of Taiwan showed any signs of weakening. But for houses and apartments under construction, the prices retain their brisk upward trend. As for stock share prices, they continue to set new highs.
There are many other potentially threatening factors that could spark another wave of high inflation. First, the nation's trade surplus in May swelled to a high of US$1.6 billion. That could generate a new expansion in the money supply during the months ahead. Second, planned government acquisitions of land for the construction of public works will cause the treasury to release some NT$300 billion (about US$11.5 billion) into the economy by late this year. Finally, and perhaps more seriously, there is a growing trend among savers to revise their long-term deposit contracts in favor of putting funds into one month to three month short-term accounts. This shift in deposits obviously indicates a lack of confidence in price stability or expectations of worsening inflation. The risk is that any further large price increases will seriously erode purchasing power, undermine export competitiveness, and cause unemployment and other social problems.
The wild speculation on the stock market and in real estate is not just an economic problem—it has become a social and political issue.
Economic speculation is another major issue that needs to be addressed promptly by the new premier. Speculative activity in the stock and real estate businesses is especially wild, driving up prices and increasing public concern. Sun Chen, a noted economist and president of National Taiwan University, indicated the seriousness of the situation in a recent speech. "Taiwan's soaring share and realty prices are no longer just an economic problem, they also have become social and political issues," he said.
Citing the realty market, Sun added: "Home prices have gone through the ceiling, far beyond what the middle-class family can afford. A government employee's life savings can buy no more than 10 ping [1 ping = 36 sq. ft.] of a house, given the present market rate. When a person who works hard all his life cannot even afford a home of his own, he cannot be expected to be happy with the whole system."
Sun is not alone in voicing such concern. Many others have complained of Taiwan's unreasonably high real estate prices, which they say are not only destroying the dreams of many would-be home buyers, but also dampening manufacturers' willingness to invest in new factories. The blame is most commonly placed on speculation by unscrupulous developers, and the public is calling on the government to take prompt countermeasures.
As with the real estate business, Taiwan's stock market has long been a speculative undertaking, perhaps more so than anywhere else in the world. In the first five months of this year, share prices surged by a sharp 92.32 percent, far surpassing the world's largest exchanges, such as New York, Tokyo, London, and Zurich. But this particularly strong performance reflected a powerful tendency toward speculation rather than economic strength, because both corporate profits and the overall economy failed to perform in an equally strong manner during the same period.
One primary factor behind the market's bullish performance is that investors treat stock buying as speculative purchasing, rather than an investment activity. This is evident in the widespread short-term trading; many hold their stocks for no more than three to six days. That is why the market's trading value continues to create new highs. Turnover on May 23, for example, hit a record of NT$130 billion (about US$5 billion)—the world's third largest, only after Tokyo and New York. The magnitude of this becomes clearer in light of the fact that the Taiwan exchange is only about one-tenth the size of these other markets in terms of the number of listed companies.
Manipulation by big players is another major reason for the continuing rapid rise in Taiwan's stock market. They use various means, many of which would be considered illegal in other stock exchanges, to jack prices even higher. One of the most common practices is for a big player to keep buying a target stock until he holds an influential position. The player then lets a short market drive the stock's price all the way up, and finally chooses an opportune moment to unload his holdings.
A steep growth in money supply created a society awash in cash—and chasing too few goods and services.
About 50 percent of the stocks put up for trading on the exchange are reportedly being played by the big manipulators, many of them underground investment companies. These players have a special need to engage in stock and other high-yielding speculations in order to reimburse their exorbitantly high money costs. Investment firms of this kind, totaling an estimated 120 throughout Taiwan, offer interest rates about four times higher than banks to attract funds.
Unlike foreign stock exchanges, the Taiwan bourse is especially conducive to speculation for two important reasons. One is that the supply of stocks has been limited. The number of corporations listed on the local exchange totals no more than 170. What makes matters worse is that stocks of listed companies in Taiwan are mostly owned by a few large shareholders, and these people are usually loath to sell their holdings lest they lose their management rights.
On the other hand, society is awash in idle funds and people can find few other investment opportunities that make quicker and greater profits than the stock market. This has led residents in growing number to invest in stocks. According to official statistics, there are now some 2.5 million registered accounts at Taiwan brokerage houses, meaning that of every 10 local citizens, one is a stock investor. For many corporate workers, government employees, housewives, and others, stock buying has now become a part of daily life.
The stock market's continuing absorption of large numbers of investors and its rapid increase in trade volume have caused considerable worry among government authorities and economic analysts. They fear that the huge amounts of cash pouring into the market will have a destabilizing effect on the economy. They are also concerned that the wide public participation in the stock market will encourage people to seek short-term profits and seriously damage the traditional Chinese virtue of hard work.
Yet another urgent task for the premier and the Cabinet is how best to revise quickly the Labor Standards Law in order to promote better labor-management relations. The law has been a major source of disputes between employers and employees ever since it was put into force in late 1984. Employers charge that the law has contributed to what they call a growing militancy of workers. They complain that employees these days often abuse their right to strike and demand more than what they deserve.
Employees, on the other hand, contend that the law, while designed to provide minimum labor protection, is vague about many of its provisions. This gives companies the opportunity to interpret these provisions to their own advantage in order to avoid providing employee benefits. To seek a remedy, the former Cabinet spent almost a whole year drawing up a draft revision of the law. But that bill remains highly controversial, indicating that the new premier must move without delay to encourage further amendment of the labor bill so that it can be acceptable to both labor and management.
The need to establish a set of effective environmental laws and related regulations is equally important. The absence of such rules, many observers say, has contributed to growing excesses and abuses by civil and environmental groups. They refer to cases in which villagers blockaded industrial plants to demand compensation for damage caused by pollution, or instances of mass demonstrations staged to block the establishment of manufacturing facilities believed to produce pollution. Many industrialists have warned that unless the government steps in to stop the recurrence of similar actions, Taiwan's industry will suffer because few people would be willing to make new investments in the present circumstances.
Investors also complain of rigid environmental regulations, which they say do not give manufacturers enough time to bring their facilities into compliance. They note that in some instances pollution-control requirements are so strict that investment in the required equipment and technology is far beyond the reach of their resources.
But the fact is that more and more local citizens believe that pollution in Taiwan is becoming an increasingly serious problem, and they insist that environmental protection should be placed above economic growth. Even though the government has long stressed equal emphasis on protection and growth, the question remains how to translate that policy into realistic legislation that would safeguard the environment, while at the same time preventing unrealistic reactions from residents and environmentalists that could dampen investment willingness.
Needless to say, the resolution of these issues is no easy task. It calls for concerted efforts by the various Cabinet ministries and departments, as well as the cooperation of the legislative branch. It also requires the reaching of a national consensus, one sufficient to rally wide social support. Shortly after his inauguration, Premier Lee Huan announced he had already given all of these issues priority status on his agenda, and the public appears to have great confidence in his abilities, considering the favorable comments made on his appointment.
Lee, who is from Hupeh Province and is 72, has already had long experience in public service. During his early years of work with the ruling Kuomintang's Department of Organization Affairs and the China Youth Corps, he often had to work with college-educated young people and other intellectuals, many of whom now hold important posts both in and outside the government. He later served as education minister and as president of National Sun Yat-sen University. Lee was secretary-general of the KMT's Central Committee when he was appointed as Premier by President Lee Teng-hui. Given his broad experience, political popularity, and his own personal influence, many believe Lee Huan should be able to deal successfully with all the important issues he now faces as premier.