Taiwan. Country Profile 2003

Country Profile 2003 Taiwan This Country Profile is a reference work, analysing the country s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit s Country Reports analyse current trends and provide a two-year forecast. The full publishing schedule for Country Profiles is now available on our website at http://www.eiu.com/schedule The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where its latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023 E-mail: london@eiu.com Website: www.eiu.com New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 E-mail: dantecantu@eiu.com Hong Kong The Economist Intelligence Unit 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, on-line databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright 2003 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 0269-7025 Symbols for tables n/a means not available; means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 1 Contents 3 Basic data 4 Politics 4 Political background 6 Recent political developments 8 Constitution, institutions and administration 10 Political forces 14 International relations and defence 20 Resources and infrastructure 20 Population 21 Education 22 Health 22 Natural resources and the environment 23 Transport, communications and the Internet 25 Energy provision 26 The economy 26 Economic structure 27 Economic policy 33 Economic performance 35 Regional trends 36 Economic sectors 36 Agriculture 36 Mining and semi-processing 37 Manufacturing 38 Construction 38 Financial services 40 Other services 40 The external sector 40 Trade in goods 42 Invisibles and the current account 44 Capital flows and foreign debt 45 Foreign reserves and the exchange rate 46 Appendices 46 Membership of regional organisations 47 Sources of information 48 Reference tables 48 Population 48 Labour force 48 Labour productivity measures 49 Transport statistics 49 National energy statistics 50 Money supply 50 Government finances 50 Government tax revenue 51 Gross domestic product 51 Gross domestic product by expenditure at current market prices The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

2 Taiwan 52 Gross domestic product by expenditure at constant 1996 prices 52 Gross domestic product by sector 53 Prices 53 Agricultural production 53 Industrial production 54 Construction statistics 54 Banking statistics 54 Taiwan Stock Exchange indicators 54 Foreign visitor arrivals 55 Main composition of trade 55 Main trading partners 56 Balance of payments, national series 56 External debt, OECD series 57 Foreign reserves 57 Exchange rates Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 3 Taiwan Basic data Land area Population Main towns 36,000 sq km 22.5m (end-2002) Population in 000 (2001; not including surrounding counties) Taipei (capital) 2,633 Kaohsiung 1,494 Taichung 984 Tainan 741 Climate Weather in Taipei (altitude 9 metres) Languages Measures Currency Time Public holidays Subtropical Hottest month, July, 24-33 C (average daily minimum and maximum); coldest month, February, 12-18 C; driest month, November, 66 mm average rainfall; wettest month, August, 305 mm average rainfall Mandarin, Taiwanese and Hakka Metric system; some Chinese, Japanese and British measures also in use New Taiwan dollar (NT$)=100 cents. Average exchange rate in 2002: NT$34.75:US$1; exchange rate on April 1st 2003: NT$34.81:US$1 8 hours ahead of GMT Founding Day of the Republic of China, January 1st; Chinese New Year (four working days starting from New Year s Eve; late January or early February), February 1st 2003, January 22nd, 2004; Ching Ming (Tomb Sweeping Day), April 5th; Labour Day, May 1st; Dragon Boat Festival (one day in late May or June), June 4th 2003, June 22nd 2004; Mid-Autumn Festival (one day in September or October), September 11th 2003, September 28th 2004; National Day/Double Tenth, October 10th The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

4 Taiwan Politics Taiwan is now a representative democracy, having recently emerged from years as a one-party state. The president (currently Chen Shui-bian) presides over the Executive Yuan (the cabinet). The Legislative Yuan (the parliament) has become an increasingly important body over the last decade. The government is run by an informal coalition, led by the Democratic Progressive Party (DPP). The largest opposition party is the Kuomintang (KMT), which ruled Taiwan for 55 years until 2000. Foreign relations are dominated by the issue of China. It was widely feared in Taiwan that the often tense cross-strait relationship would become even more difficult if ever the main opposition DPP were to win power the DPP s political platform, adopted in 1991, calls for the establishment of an independent Republic of Taiwan. So it was to the relief of many that the election in 2000 of the DPP candidate, Mr Chen, as president of the Republic of China (ROC) administration, was not accompanied by a crisis in cross-strait relations. That said, modern Taiwan s first experience of non-kmt government has not been smooth, with the island since 2000 suffering from an unprecedented degree of domestic political instability. This has been partly related to the DPP s lack of experience in wielding national executive power, but also because the party has been unable to gain a majority in the Legislative Yuan. Political background Immigration from China The arrival of Chiang Kai-shek Taiwan s earliest known inhabitants, commonly referred to as aboriginals, form less than 2% of the population today, having given way to successive waves of immigration from mainland China, from the 12th century onwards. The largest of these inflows occurred after 1661, when a Fujianese trader and pirate, Koxinga (Zheng Chenggong), captured the island from Dutch and Spanish colonists who had landed there around 50 years earlier. About 100,000 mainland Chinese followed Koxinga in a bid to escape the Manchu forces of the newly established Qing dynasty in China. Their respite was brief, as in 1683 the Qing invaded and conquered Taiwan. For the next 200 years the island remained a backwater of the Chinese empire. Taiwan was only declared a province in its own right in 1886, just nine years before it was ceded to Japan at the end of the Sino-Japanese war. The island remained under Japanese occupation albeit of a less barbarous variety than that which characterised Japanese rule in Korea and Manchuria until the end of the second world war. In 1945 Taiwan was restored to Chinese sovereignty and the rule of the KMT and its leader, General Chiang Kai-shek. However, many people in Taiwan viewed the mainland Chinese regime as just another colonial oppressor, feckless and corrupt. Discontent with the KMT triggered a crackdown that resulted in the deaths of 10,000-20,000 people in a period starting on February 28th 1947, an event now commemorated as the 2-28 incident. Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 5 The divide between natives and newcomers The promotion of economic growth from 1949 Authoritarian rule by the KMT The Kaohsiung incident The abolition of martial law The KMT was also viewed unfavourably on the mainland and this contributed to the inability of General Chiang to win the civil war against the Chinese Communist Party (CCP). Facing defeat in 1949, the KMT retreated to Taiwan with the remnants of its army, the national Treasury and the ROC government, which had been established by Sun Yat-sen in Nanjing on January 1st 1912 (year one in the official ROC calendar) following revolution in the previous year. Descendants of those who lived on Taiwan before the KMT exodus from the mainland, call themselves natives (benshengren). Although Mandarin Chinese has gradually become more common, these people have traditionally spoken Taiwanese, which is similar to the southern Fujian dialect, minnanhua, as a first language and constitute around 85% of the island s population. The KMT refugees and their families, who make up about 13% of the population, are called mainlanders or outsiders (waishengren). Despite intermarriage, the two communities remain largely distinct political constituencies. The story of Taiwan between 1949 and the 1980s was one of spectacular economic growth set against a backdrop of authoritarian rule. The KMT inherited an island with a comparatively well-developed economic and social infrastructure. During their years of colonial rule, the Japanese had developed Taiwan s communication and transport networks and fostered commerce and education. Under pressure from the US, the KMT initiated a programme of land reform, which established a strong foundation for agricultural growth. From the late 1950s onwards an export-oriented industrial policy was adopted, the results of which were so successful that by 1965 the US had largely stopped granting the island economic aid. Political freedoms, meanwhile, were suppressed. Martial law, imposed in May 1949, was not lifted until 1987. Although supplementary elections for the Legislative Yuan and the National Assembly the Assembly used to choose the president were held periodically after 1969, martial law permitted full elections only at local levels. The only legal political parties were the KMT and two small pro-government parties, the Young China Party and the Socialist Democratic Party (although independent candidates were also allowed to contest elections). Throughout the martial law period, the KMT s official line was that its exile on Taiwan was temporary, and that it would eventually return and retake the mainland. This stance became even more untenable when in the early 1970s the US began to build relations with the CCP government in Beijing. The US eventually switched its diplomatic recognition to the mainland regime in 1979. The KMT responded by tightening martial law restrictions to contain a wave of domestic political and social unrest. When a demonstration at the end of the year in the southern city of Kaohsiung turned violent, the authorities arrested virtually the entire leadership of the island s fledgling democracy movement, many members of which subsequently spent several years in jail. Most senior leaders of the opposition DPP, officially formed, albeit illegally in 1986, trace their political coming-of-age to this event. The realism that motivated countries such as the US to switch their allegiance to China took some time to encroach on attitudes within the KMT leadership. The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

6 Taiwan Initially Chiang Kai-shek s son and heir, Chiang Ching-kuo (who became president in 1978), followed his father s authoritarian stance. However, by the mid-1980s, China s leader, Deng Xiaoping, was presenting the acceptable face of communism to the world, making the KMT s proclaimed aim of reclaiming the mainland appear more ridiculous than ever. As a series of scandals began to tarnish the KMT s public image, Chiang Ching-kuo moved towards political liberalisation. In 1987 martial law was lifted and political prisoners were released. Opposition parties were gradually legalised over the next two years. Lee Teng-hui s political reforms The state-to-state cross-strait policy Moulding a Taiwan identity After consolidating his power within the party, Lee Teng-hui, who was appointed president in 1988 after Chiang Ching-kuo s death, convened a National Affairs Conference in 1990 in order to map out a dramatic programme of constitutional reform. The reforms began with an election of the National Assembly in December 1991. This was followed by the election of the Legislative Yuan in 1992, the first full election since 1949. As a result of these polls, virtually all of the ageing mainland representatives, elected or nominated in the election held in 1947, were removed. Reform of the executive branch led to Taiwan s first direct presidential election in 1996, which Mr Lee won with 54% of the vote. The arrival of democratic debate in Taiwan brought the sovereignty issue to the fore. By the end of the 1980s only a small minority of Taiwan s citizens mostly elderly waishengren who came to the island in the late 1940s supported the official policy of reclaiming the mainland. A slightly larger minority, which found political expression in the DPP, supported the establishment of an independent Republic of Taiwan. The majority of the population, however, favoured maintenance of the status quo in other words, de facto independence under the guise of the ROC, where their new-found prosperity and democracy could be preserved without prompting conflict with China. Mr Lee, a KMT benshengren, reacted to these changes by embarking upon a strategy of moulding a Taiwan national identity. The ban on the use of the Taiwanese language in schools and government offices was lifted, and in 1991 Taiwan renounced its long-standing goal of reconquering the mainland. This Taiwanisation was accompanied, at least initially, by maintaining the official policy of seeking eventual reunification with China. However, Mr Lee s attachment to this goal appeared to fade over time. In July 1999 he announced that Taiwan had still not abandoned its goal of eventual reunification with the mainland, but that any future negotiations with China would be conducted on a special state-to-state basis. Recent political developments The election of a DPP president While prompting a furious response from mainland China, Mr Lee s state-tostate policy was popular with Taiwan voters. This was not enough, however, to boost support for the KMT in the run-up to the March 2000 presidential election, which was won by the DPP s candidate, Chen Shui-bian. The KMT s poor performance can be partly explained by the fact that, although Mr Lee had democratised Taiwan s political system, he had made little attempt to Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 7 tackle the black gold issue gangster involvement in politics and close connections between officials and big business. Mr Chen s pledge to crack down on such shenanigans won wide support. Although his government got off to a rocky start Taiwan suffered from a substantial amount of political instability during his first year in office this was not enough to halt the decline in the KMT s fortunes. In the December 2001 election it was replaced by the DPP as the largest although not the majority party in the Legislative Yuan. Important recent events March 1996 Against a backdrop of military exercises and missile tests by China, the first direct presidential election returns Lee Teng-hui to office for a four-year term. December 1996 A cross-party National Development Conference proposes a range of changes to the constitution, as well as far-reaching economic reform. April 1997 Limited cross-strait shipping links are restored after 48 years. November 1997 The opposition Democratic Progressive Party (DPP) outpolls the nationalist Kuomintang (KMT) in local- and intermediate-level elections. April 1998 Bilateral contact with China resumes. December 1998 The DPP makes gains in the election to the Legislative Yuan (the parliament). July 1999 Mr Lee announces Taiwan s new state-to-state approach to cross-strait relations, prompting fury from China and a stalling of cross-strait contacts. September 1999 A massive earthquake kills more than 2,400 people and causes widespread material damage. November 1999 James Soong, a former KMT stalwart who had decided to contest the March 2000 presidential election as an independent candidate, is expelled from the KMT. March 2000 The DPP candidate, Chen Shui-bian, is elected president. Mr Chen takes the unprecedented step of forming a coalition government led by a KMT premier, Tang Fei. After beating the official KMT candidate, Lien Chan, into third place in the presidential poll, Mr Soong forms a new party, the People First Party (PFP). Mr Lien s defeat causes turmoil within the KMT. October 2000 Mr Chen s first government collapses with the resignation of Mr Tang. The president reacts by appointing a DPP premier, Chang Chun-hsiung, who quickly announces a The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

8 Taiwan halt to the construction of Taiwan s half-finished fourth nuclear plant. The announcement provokes outrage in the KMT, which considered the plant a pet project, and unleashes a period of unprecedented political instability. February 2001 The government yields to pressure from the Legislative Yuan and allows the construction of the fourth nuclear plant to resume. Domestic political tension begins to ease. December 2001 The DPP replaces the KMT as the largest party in the Legislative Yuan, winning 87 of the 225 seats. August 2002 Mr Chen calls China and Taiwan two separate states, a provocative statement out of character with the largely conciliatory stance adopted by his administration towards China up to that point. February 2003 The opposition KMT and PFP announce their intention to run on a joint ticket for the 2004 presidential election. Constitution, institutions and administration The constitution Taiwan s constitution is based on that of the Republic of China, promulgated in 1947. This lays out a government structure consisting of the president s office, a National Assembly and five branches (yuan) of government: the Executive Yuan, the Legislative Yuan, the Judicial Yuan, the Examination Yuan and the Control Yuan. The system is semi-presidential, with executive power shared by the president and the legislature. The most prominent example of this type of system is the French Fifth Republic. However, in Taiwan the relationship between the president, prime minister and parliament is less well defined than it is in France. Successive waves of constitutional reform since 1991 have not resolved this lack of clarity, and some academics argue that the changes have made the situation even more confused. This lack of clarity reflects the fact that the deficiencies in the constitution were not obvious, nor perhaps deemed important, when the KMT controlled all of Taiwan s political institutions. The KMT s dominance came to an end when the DPP won the presidency in 2000. Despite the KMT s decline, the DPP has yet to gain control of the Legislative Yuan. As a result, the lack of a clear division of powers and responsibilities between the executive and legislature has been an important cause of the instability that has characterised Taiwan s political scene since Mr Chen took office. Nevertheless, although its relationship with the president remains murky, the policymaking powers of the Legislative Yuan have increased in recent years, relative to the National Assembly, as the island moves towards a unicameral parliamentary system. The balance of power between the two institutions changed most dramatically in April 2000, when most of the National Assembly s remaining responsibilities were transferred to the Legislative Yuan. Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 9 Constitutional change May 1991 To reflect the fact that Taiwan and mainland China are ruled by separate political entities, ten additional articles to the constitution are promulgated. New elections for the Legislative Yuan (the parliament) and the National Assembly are first introduced. Delegates who have filled seats in these institutions since the 1947 election, and who have continued officially to represent mainland constituencies, are voted out. January 1992 Eight additional articles are adopted. These provide for the popular election of both the president and the vice-president. The Control Yuan is reformed from a parliamentary body into a quasi-judicial organ. July 1994 The additional articles, introduced since 1991, are reduced from 18 to ten. The ten new articles detail the arrangements to be used for the direct election of the president and the vice-president. They also provide the National Assembly with a speaker and a deputy speaker. July 1997 Amendments are introduced to allow the president to appoint a prime minister without the prior approval of the Legislative Yuan. The amendment also downsizes the provincial government an administration parallel to that of the national government, the provincial government was introduced to support the pretence that Taiwan s Republic of China (ROC) administration had jurisdiction over the whole of China. The changes give the Legislative Yuan the power to hold votes of no confidence against the prime minister, and give the president the authority to dissolve parliament. Finally, and perhaps most controversially, the requirement that spending on education, science and culture account for at least 15% of the government s budget is abandoned, although spending in this area is to remain a priority for the government. September 1999 Amendments allow direct elections for the National Assembly and extend the term of the deputies serving in this institution, from May 2000 to June 2002. Seats in the National Assembly are to be allocated in proportion to the number of votes won by each political party in the Legislative Yuan poll. These amendments, however, are later overturned by Taiwan s Council of Grand Justices. April 2000 Amendments are passed, reversing many of the revisions passed in September 1999. The latest amendments transform the National Assembly from a standing committee to an ad hoc body and transfer its power to propose changes to the constitution, to the Legislative Yuan. The National Assembly will now convene only to vote on constitutional revisions proposed by the Legislative Yuan, on motions to impeach the president or the vice-president, or on proposals to alter Taiwan s territorial boundaries. When it is convened, the National Assembly is to be constituted according to the percentage of votes won by each party in the previous Legislative Yuan election. It will be in session for a maximum of one month at a time. The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

10 Taiwan Legislative election results (% of vote) KMTa DPPb New Party PFPc Legislative Yuan (1980) 72 13 - - National Assembly (1980) 66 - - - Legislative Yuan (1983) 69 19 - - Legislative Yuan (1986) 67 25 - - National Assembly (1986) 64 24 - - Legislative Yuan (1989) 59 29 - - National Assembly (1991) 71 24 - - Legislative Yuan (1992) 53 31 - - Legislative Yuan (1995) 46 33 13 - National Assembly (1996) 50 30 14 - Legislative Yuan (1998) 46 30 7 - Legislative Yuan (2001) 31 37 3 20 a Kuomintang, or Nationalists. b Dangwai (non-party) candidates in elections before the Democratic Progressive Party was formed in 1986. c People First Party. Sources: Cal Clark, The 2000 Taiwan Presidential Elections; Asia Society website. The Control, Judicial and Examination Yuans The Control Yuan has a supervisory role, dealing with security matters, censure and audit, and has the power to impeach public officials. Formerly a parliamentary body, it has since been reformed into a quasi-judicial organisation, and its membership has consequently fallen from 223 to 29. The other two organs of government are the Judicial Yuan, which oversees the judicial system, and the Examination Yuan, which is responsible for civil service examinations, pay and conditions of employment. Political forces The KMT The KMT, which ruled Taiwan as an authoritarian state until 1987, initially proved adept at adapting to democracy. Although opposition parties made some inroads into its support, particularly at local levels, the KMT retained control of all the main national institutions. Several factors contributed to this success: Mr Lee s popular decision to democratise Taiwan s main political institutions; the successful transformation of the island from a poor, agricultural-based economy to one in which standards of living rapidly approached those found in the developed world; and the maintenance albeit only just at times of the status quo in cross-strait relations, together with the gradual promotion of a Taiwan national identity. During its 50-year rule, the KMT also built up a powerful network of influence based around a business empire, according to some estimates worth NT$600bn (US$19.4bn) which could be used to bring out the vote during elections. But the party s hold on power was not invincible. As a result of its long tenure, the KMT came to be viewed increasingly as old and tired. The party s deep involvement in the local economy also made it appear corrupt, a perception strengthened by the wave of graft scandals in which the party became embroiled in the 1990s. It was also weakened by damaging bouts of infighting. In 1993 several leading members of the KMT, dissatisfied with the party s policy of Taiwanisation, broke away to form the New Party. Another split occurred Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 11 when a former party stalwart, James Soong, having failed to win official KMT endorsement to contest the March 2000 presidential poll, stood as an independent. Mr Soong secured 36.8% of the vote, and relegated the KMT s official candidate in the poll, Lien Chan, to third place. Mr Lien, who subsequently became KMT chairman, lacks the charisma of Mr Lee, and the KMT slumped again in national polls at the end of 2001. The DPP The split in the KMT in March 2000 contributed to the election of the DPP s most popular politician, Chen Shui-bian, as president. Mr Chen first gained national attention when he displaced the KMT candidate to be elected as mayor of Taiwan s largest city, Taipei, in 1994. In an experience that would be repeated six years later, Mr Chen won partly as a result of a split in the opposition vote, and he failed to win re-election against unified opposition in the 1998 election. Such a high-profile DPP win in a local election was perhaps inevitable. Following its establishment in 1986, the party had gradually established a firm presence in local government. Even after losing three seats in 2001, the DPP still has as many county commissioner and city mayors as the KMT. Until Mr Chen s election, the DPP had made less headway at the national level. Its candidate in the 1996 presidential election, Peng Ming-min, won only 21.1% of the vote, and until the 2000 election, the party found it difficult to capture more than around 30% of the ballots cast in Legislative Yuan elections. Paradoxically, one of the factors that restrained the DPP s performance in national-level elections was its lack of experience, with voters wary of handing an inexperienced party the reins of national government. The DPP has also been vulnerable to charges of radicalism the party s policy platform calls for the establishment of an independent Republic of Taiwan, and the party has been closely associated with the promotion of green issues. Nor was the DPP s emphasis on democracy within the party necessarily a vote-winner, with lively and public debate within the party making it appear to some more like an unstable grouping of warring factions than a unified political force. Mr Chen made great efforts in the run-up to the March 2000 presidential poll to tackle the DPP s electoral weaknesses, toning down, for example, the party s pro-independence stance. The winning of national office then prompted reform of the party s internal structure. In 2002 party members approved reforms to allow any DDP president of Taiwan automatically to become head of the party; Mr Chen subsequently became DPP chairman on July 21st. While the weakness of the opposition parties has also been a factor, this steady de-radicalisation of the DPP appears to have boosted its poll performance, with the party winning 87 of the 225 seats, and 36.6% of the vote in the December 2001 Legislative Yuan poll. The DPP s legislative strength is slightly greater than these numbers suggest because most of the time it can rely on the support of the strongly proindependence Taiwan Solidarity Union (TSU). This group was formed in mid-2001 at the instigation of Mr Lee, who was becoming concerned that following his departure as chairman of the KMT, the former ruling party was abandoning the localisation policies that he had promoted as president. The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

12 Taiwan (Nominally the spiritual leader of the TSU, Mr Lee s support for the new group led to his expulsion from the KMT in September 2001.) In the December 2001 poll, the TSU won 13 seats and 8.5% of the vote. Despite the support of the TSU, the DPP faces a tough task in retaining the presidency after Mr Chen s first four-year term comes to an end in May 2004. This is largely because the opposition vote is unlikely to be split at the next presidential poll, as it was four years previously. Following his failure to win the presidency in March 2000, Mr Soong established his own party, the PFP. However, whereas the PFP performed strongly in its first electoral test, winning 46 seats and 20% of the vote in the December 2001 Legislative Yuan election, Mr Soong s popularity has since waned. By early 2003 Mr Soong seemed to have accepted that his best chance of satisfying his government ambitions lay in serving as the junior partner to Mr Lien on a joint KMT-PFP ticket for the 2004 presidential poll. Main political figures Chen Shui-bian After first achieving national prominence as the elected mayor of Taipei in 1994-98, Chen Shiu-bian became the first Democratic Progressive Party (DPP) president of the Republic of China (ROC) in March 2000. Mr Chen is a charismatic and sometimes unorthodox politician. During his tenure as mayor of Taipei he established a reputation for appearing in public, dressed up as characters ranging from Superman to Santa Claus. Although sometimes criticised for an authoritarian style of leadership, he is also known as a can do figure, having pushed through many changes during his time as head of the Taipei administration. So far, however, Mr Chen has struggled to leave a favourable imprint on Taiwan s national scene, with his presidency dominated by political instability and economic recession. Lien Chan Vice-president until 2000, Lien Chan has had a proven career in Taiwan s bureaucracy, and under Lee Teng-hui he travelled overseas frequently, often in difficult circumstances, to represent Taiwan. Nonetheless, given his aloof manner, he was a curious choice as the official candidate of the Kuomintang (KMT) in the March 2000 presidential election. Although by no means a shoo-in, it was nevertheless widely assumed that Mr Lien s access to the vast resources of the KMT would give him the edge in the election campaign. In the end, however, he only managed to win 23.1% of the vote. Perhaps surprisingly, this humiliating defeat did not end Mr Lien s political career. Shortly afterwards he was elected as chairman of the KMT, promising to carry out sweeping reform of the party. In the December 2001 Legislative Yuan poll, the first national poll under his watch, the KMT performed poorly. Even so, Mr Lien has been chosen as the KMT s candidate in the March 2004 presidential poll. Lee Teng-hui Appointed president in 1988, Lee Teng-hui was returned as head of state in 1996, winning 54% of the vote in the island s first direct presidential election. For much of his time in power he combined a tactical genius for manipulating the often recalcitrant KMT with a strong commitment to democratic reform and an empathy Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 13 for the aspirations of ordinary people in Taiwan. His relationship with mainland China was, however, less amicable. Mr Lee encouraged the development of a Taiwanese national identity and tried to raise the island s international profile. Consequently, the Chinese government came to view him with contempt. Furthermore, either Mr Lee s domestic political instincts failed him or, blinded by personal animosity towards James Soong, he chose simply to ignore his instincts in the run-up to the March 2000 presidential election. As a result of his insistence that Mr Lien stand in the election and his apparent lack of support for his chosen successor, Mr Lee was forced to take responsibility for the KMT s defeat and stand down as party chairman shortly after the result was announced. He did not retire, however, returning instead to the political scene in 2001 to support Mr Chen s bid for the presidency, partly by serving as the spiritual leader of the new Taiwan Solidarity Union, for which he was expelled from the KMT. James Soong A former senior government official, and thuggish enforcer of KMT orthodoxy under martial law, the charismatic James Soong is one of Taiwan s most popular politicians. He would have been a natural choice as the KMT s candidate in the March 2000 presidential election if he had not previously fallen out with Mr Lee. Having been denied official KMT backing, Mr Soong announced his intention to run as an independent candidate, and he was consequently expelled from the former ruling party. Mr Soong s popularity suffered during the election because of corruption allegations that were thrown at him by the KMT, but he still ran Mr Chen a close second. Following the presidential election he formed his own party, the People First Party (PFP). The PFP performed strongly in the December 2001 Legislative Yuan election, but Mr Soong s popularity began to wane thereafter. In early 2003 Mr Soong agreed to run as vice-president on a joint KMT-PFP ticket in the 2004 presidential poll. Annette Lu A veteran DPP member and feminist activist, Annette Lu spent several years in jail in the 1980s after being charged with sedition for her role in the 1979 Kaohsiung incident. Following her release in 1985, she served as a legislator and a policy adviser to Mr Lee, before being elected magistrate of Taoyuan county in northern Taiwan. In March 2000 the feisty Ms Lu was elected on Mr Chen s ticket as Taiwan s first female vice-president. Signs of tension quickly emerged between Ms Lu and Mr Chen; she has also been attacked by the authorities in Beijing as the number-one scum of the Chinese nation (Ms Lu s crime had been to say that, despite being close neighbours, Taiwan and China were merely distant relatives). Given Ms Lu s outspoken nature, she is likely to provoke further controversy during the remainder of her tenure as vice-president. Frank Hsieh Elected as mayor of Taiwan s second largest city, Kaohsiung, in December 1998, Frank Hsieh gained greater prominence in mid-2000 when he became chairman of the DPP. Mr Hsieh s background is similar to that of Mr Chen. Both were defence lawyers in the trials that followed the 1979 Kaohsiung incident; they also served together on the Taipei city council in the late 1980s and were rivals to become the DPP candidate for the Taipei mayoral election in 1994. Mr Hsieh was succeeded by The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

14 Taiwan Mr Chen when his two-year term as DPP chairman ended in mid-2002, but later that year he was re-elected as Kaohsiung mayor. Ma Ying-jeou Ma Ying-jeou is the KMT s star politician. Deputy secretary-general of the party in the 1980s and justice minister in the 1990s, Mr Ma has managed to remain free of the sleaze scandals that have affected the KMT as a whole. It was widely reported that it was his eagerness to tackle official corruption that resulted in his removal from the KMT cabinet in 1996. Frequently noted for his film-star looks, Mr Ma beat the incumbent Mr Chen in the Taipei mayor election in 1998, and was re-elected with a huge majority in December 2002. Apparently harbouring presidential ambitions, Mr Ma has been trying to boost his popularity beyond metropolitan Taipei. During the campaign for the December 2001 island-wide polls, the mayor appeared at hustings for KMT candidates in central and southern Taiwan. International relations and defence Where is China? Following the end of the Chinese civil war in 1949, the administrations in both Taipei and Beijing insisted that they each represented the one and only legitimate government of China. Neither side would recognise the existence of the other, and contacts between people on either side of the Strait were extremely limited. This presented outside governments with a choice: to establish diplomatic ties with either the ROC in Taipei, or the People s Republic of China (PRC) in Beijing, but not with both. For many years following the end of China s civil war in 1949, this situation favoured Taiwan. Faced with a regime in Beijing that was both communist and isolationist, most countries chose to recognise the government in Taipei. The tide began to turn against Taiwan after 1972, however, when the then US president, Richard Nixon, visited Beijing. By the late 1970s most major countries in the world recognised the authorities in Beijing rather than those in Taipei as the legitimate government of China. This intensifying international isolation, together with the pressures resulting from domestic democratisation, prompted the authorities in Taipei to modify slowly their mainland China policies. Although not greatly easing a ban on direct cross-strait trade and transport trading links, which, despite some easing in recent years, even now remains largely in place, in 1987 the ROC government formally allowed its citizens to make private visits to the mainland and in 1990 Taiwan companies were permitted to invest in China, albeit with the prior approval of the Ministry of Economic Affairs. (The easing of the investment ban was more a recognition of reality than a new concession: notwithstanding the ban on cross- Strait ties, many local firms, eager to take advantage of the opening up of the mainland s economy that began in 1978, had covertly invested in China.) SEF and ARATS By the late 1980s the Taiwan government also began to drop its claim to rule all of mainland China a policy change that became official when the KMT ended the Period of National Mobilisation for the Suppression of the Communist Rebellion on May 1st 1991. In March 1991 the Taiwan government adopted the Guidelines for National Unification, which divided the period before the reunification of Taiwan and China into three stages: a short-term phase of Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 15 exchanges and reciprocity ; a medium-term phase of mutual trust and cooperation ; and a long-term phase of consultation and unification. To facilitate the first stage, the semi-official Straits Exchange Foundation (SEF) was set up in Taiwan in February 1991. The mainland responded by forming the Association for Relations Across the Taiwan Straits (ARATS). The SEF and the ARATS quickly established contact, but discussions between the two sides did not proceed smoothly. Negotiations were held up initially by disagreement over the meaning of the One China principle. The authorities in Beijing insisted that the SEF agree that there is only one China; that Taiwan is part of China; and that the PRC is the sole legitimate government representing the whole of China. The SEF rejected this interpretation, seeing it as a denial of the existence of the ROC. Eventually, in November 1992 a compromise appeared to have been reached, whereby both sides agreed that there was only one China, but that the definition of this concept was subject to respective interpretations by the two sides. Under this compromise, Koo Chen-fu and Wang Daohan, the chairmen of the SEF and ARATS respectively, met in Singapore in April 1993 and signed four documents. Although the accords only covered technical issues, such as compensation for lost registered mail, the fact that bilateral agreements were signed at all was significant. Taiwan tries to gain recognition Mr Lee s visit to the US At the same time of abandoning its claim to rule all of China, the Taiwan authorities in the late 1980s tried to adopt a de facto dual recognition policy. In 1989, for example, Taiwan established diplomatic ties with Grenada without requiring Grenada to break its ties with the PRC. This policy was, and continues to be, unsuccessful as the government in Beijing refuses to have diplomatic relations with any country that recognises the ROC. In an attempt to bolster its international prominence, Taiwan has resorted to using the disbursement of aid to poor African and Central American countries to buy diplomatic recognition. Even these efforts have had only limited success. At end-march 2003 only 27 countries maintained full diplomatic relations with Taiwan. Repeated efforts by Taiwan to gain separate entry to the UN have been quickly voted down and the island remains outside most international organisations, such as the World Bank and the IMF. Taiwan is a full member of two key regional organisations, the Asian Development Bank (ADB) and the Asia-Pacific Economic Co-operation (APEC) forum, but even in these bodies it faces difficulties. At China s insistence, the president of the ROC cannot attend APEC leadership meetings. In international sports and cultural bodies, Taiwan participates under such names as Chinese Taipei. Taiwan s bid to join the World Trade Organisation (WTO) was held up by China s insistence with the acquiescence of other member states that China accede to the body before Taiwan. China finally entered the WTO in December 2001, with Taiwan officially entering on January 1st 2002, albeit as the Customs Territory of Taiwan, Penghu, Kinmen and Matsu, rather than the ROC. A second Koo-Wang summit, due to be held in 1995, never took place. In June 1995 the US administration, under pressure from the Republican-dominated US Congress to reward the ROC government for its democratisation of Taiwan, granted a visa for Mr Lee to visit his alma mater, Cornell University. China The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003

16 Taiwan responded by suspending high-level SEF-ARATS talks indefinitely and launching massive military exercises near the island, including the testing of guided missiles. In the March 1996 exercises China fired unarmed missiles just 40 km off Taiwan s main port in Kaohsiung. The US replied to China s belligerence by sending two aircraft carrier groups near the Taiwan Strait. Taiwan voters responded by returning Mr Lee who, following his visit to the US, had been vilified in the official Chinese media with 54% of the vote in the island s first-ever direct popular presidential election in March 1996. Cross-Strait relations remained tense until after the 15th Congress of the CCP in September 1997, where China s president, Jiang Zemin, consolidated his power and started to push a more conciliatory line. Mr Jiang articulated the notion that China s eventual absorption of Taiwan was merely a natural and inevitable follow-up to its July 1997 absorption of Hong Kong. (The one country, two systems concept, under which Hong Kong was reunified with the mainland, was originally formulated for Taiwan.) In December 1997 China unofficially suggested that China could be reunified under a different name to the PRC, with a new flag. Under the proposal Taiwan would even have been allowed to keep its armed forces. Taiwan rejected the new overtures, but a second meeting between the heads of the SEF and the ARATS, which had been in the offing since early 1998, was finally held when Mr Koo visited China in October that year. Although no new agreements were forthcoming, the fact that a summit was held at all seemed to signal an improvement in relations between the two sides. During his visit to China, Mr Koo held talks with Mr Jiang, a meeting that represented the highest level of contact between China and Taiwan since 1949. The two sides also agreed to continue their dialogue, and Mr Wang was expected to visit Taiwan during 1999. Special state-to-state relations This visit has yet to take place. In July 1999, in an interview with a German radio station, Mr Lee said that Taiwan s links with the mainland were best characterised as state-to-state, or at least as special state-to-state relations, rather than as ties between two political entities within one China, the formulation that had previously been used. The president s statement was even more provocative than is suggested by this widely cited translation. Mr Lee used the Mandarin phrase guojia yu guojia in his interview guojia is usually translated as nation-state or country. This was therefore the furthest that Mr Lee had gone in stressing Taiwan s de facto independence from China. On July 11th the chairman of Taiwan s Mainland Affairs Council (MAC), Su Chi, said that the government felt that there was no need to continue using the One China term, as this formulation had been used by the government in Beijing to reduce Taiwan s ability to maintain official ties with other countries. In addition to refusing to allow Mr Wang to visit Taiwan, the mainland government stepped up its attacks on Mr Lee, saying that Taiwan s then president was a criminal of the nation who will leave a stink for a thousand years. China, however, did not resume the military intimidation of Taiwan that had followed Mr Lee s 1995 visit to the US. This may have been because the new definition did not signal that Taiwan had completely abandoned the Country Profile 2003 www.eiu.com The Economist Intelligence Unit Limited 2003

Taiwan 17 One China policy in the week after Mr Lee made his remarks Taiwan officials said that the government would henceforth define China and Taiwan as being two states within one nation. The relative moderation shown by the mainland s leadership was also because the new definition was closely associated with Mr Lee, who was about to withdraw from prominence, given that Taiwan s constitution prevented him from standing for another term as president in the March 2000 election. The mainland government seemed willing to wait and see what would happen to the state-to-state definition under Mr Lee s successor before considering a more hardline response. The moderate Mr Chen? Relations with the US The state-to-state definition was popular in Taiwan, but it was viewed less positively elsewhere the US government in particular thought it unnecessarily provocative. As a result, although Mr Lee s successor, Mr Chen, has been a strong supporter of Taiwan independence in the past, the new president ruled out putting the state-to-state definition into Taiwan s constitution. Mr Chen also tried to reassure the regime in Beijing in other ways, for example by easing cautiously restrictions on cross-strait economic ties. Initially, these gestures seemed to have little effect, with China continuing to insist that Taiwan acknowledge the One China principle before talks could be resumed, a precondition deemed unacceptable by Taiwan. In 2002 officials in Beijing appeared to soften their stance towards Taiwan, but this met with little response from Taiwan. Then in August 2002 Mr Chen broke with his conciliatory stance, saying that to put it simply, with Taiwan and China... there is one state on each side, a statement that looked little different from Mr Lee s state-to-state formulation. Since then, Mr Chen has not used such provocative rhetoric again. Nevertheless, the government in Beijing has offered further concessions to Taiwan, with one of China s vice-premiers, Qian Qichen, saying the One China principle could be set aside when discussing the issue of direct cross-strait transport links. Even in the absence of direct flights, economic exchanges between the two sides have been flourishing in recent years, but the establishment of direct cross-strait transport links would bolster this process, perhaps thereby providing the basis for a less-tense political relationship. It is unclear, however, if and when direct cross-strait transport links will be established. A breakthrough on this issue would probably help Mr Chen s 2004 re-election bid, but the DPP is worried that the development of closer economic links between Taiwan and China will make it harder, if not impossible, for the island to become fully independent. Furthermore, with the CCP leadership making a transition from a third to fourth generation of leader, the new leaders in China will spend much of 2004 consolidating their positions. The Taiwan authorities place great importance on their relations with the US. In principle, the US supports the eventual reunification of Taiwan and China, while acting as a tacit guarantor of Taiwan s sovereignty. However, the US has left it unclear exactly what, if anything, it would do if China tried to invade Taiwan. Under the terms of the Taiwan Relations Act (TRA) of 1979, which forms the basis for Taiwan-US relations, any military action, boycott or embargo against Taiwan would be considered of grave concern to the US. The Economist Intelligence Unit Limited 2003 www.eiu.com Country Profile 2003