An island republic struggles to revive economic miracle

The Republic of China is going through a transition period as delicate as silk.

In just a few decades this country has been transformed from a small agricultural island into a modern industrial state.

But many of the forces that helped shape this Asian economic miracle -- such as an abundance of cheap labor -- no longer exist.

Today the country faces the task of reviving its once-robust economy and ushering in a new era of modernization without spawning political upheaval.

This could mean potentially far-reaching corrections in economic policy, including perhaps a bigger role for the private sector and greater emphasis on ''brain-oriented,'' high-technology industries.

''It's no easy job to completely change the face of our industry and economy, '' sums up T. Wu, Taiwan's vice-minister for economic affairs. ''Very brave measures, however, have got to be taken because our very survival is at stake.''

Trying to implement the solutions at this time, however, won't be easy. This year finds the small island republic in difficulties.

Says Mr. Wu: ''Production down, exports and imports down, employment down, corporate investment down.''

Headlines in the local press reinforce this: ''Corporate Profits Slump 53 Percent in First Quarter'' . . . ''Unemployment Shows Signs of Increasing'' . . . ''Export Prospects Gloomy'' . . . ''Handbag Industry Goes From Boom to Bust'' . . . ''Bicyclemakers Find Exporting an Uphill Ride'' . . . ''Phone-equipment Industry Faces Severe Competition.''

Considering Taiwan's overwhelming amount of trade in comparison to its gross national product (exports alone account for more than 50 percent), the difficulties are understandable.

A large percentage of companies in the manufacturing sector rely almost exclusively on exports. The impact of a world economic recession is immediate -- especially as the Taiwanese emphasis has been on the production of nonessential consumer products.

And the belief here is that the situation is going to get worse before it gets better. The backlog of orders held by many of the country's most important export industries has shrunk significantly.

Some companies have received no orders whatsoever for the second half of the year. There is considerable nervousness. Eyes are on the United States and Western Europe, hoping to detect the first signs of economic recovery.

This is a rather unusual situation for Taiwan, and there is considerable concern within the government about how the people will cope. Over the past two decades, the hard-working Taiwanese have seen their economy growing at a rapid clip of 20-30 percent a year.

That may be over for good. Such a performance, government economists admit, was comparatively easy when the comparison base was small. To achieve a comparative performance in the 1980s is considered a tough proposition, if not close to impossible.

Last year, the projection was for GNP growth of 7.5 percent. The actual achievement was just over 5 percent - not bad by most standards.

Robert Chien, deputy governor of the central bank, says: ''We are again looking for 7.5 percent growth. But unless something drastic happens (externally), I think we will be very lucky to get 5 percent.''

As a result, there is considerable belt tightening. The government has decreed austerity. Traditionally it has paid its workers an additional 15 percent a year, but this year there will be a pay freeze. This has affected private-sector wage negotiations as well.

Instead of the 15-20 percent-plus they have always been able to get, most workers are having to settle for a single-digit increase. As it is, Taiwan -- with a per capita income of $2,378 -- has already priced itself out of the market in a number of the labor-intensive industries that have been the backbone of past economic successes.

By boosting productivity, some industries (especially textiles) have been able to buy some time. But it is generally accepted that this is only postponing the inevitable. Taiwan simply cannot compete any more with the lower wage costs of the newly developing countries coming up behind it.

Both government and private industry speak of the country being in a delicate transition stage. It has to move rapidly out of the uncompetitive, labor-intensive industries and into high technology areas - which will require high investments, but also yield high profits if the strategy pays off.

There is particular concern in government circles over the lack of investment activity, which is contributing to the gradual sapping of economic vitality. But until they are convinced good times are around the corner, many industry officials are holding fast to their purse strings.

''If the investment incentive remains at a low level, we are going to have a very serious problem on our hands,'' says Robert Chien.

Mr. Wu, the vice-minister of economic affairs, adds: ''This is the main task for the government at present . . . stimulating a willingness to invest. We have already taken a series of measures, which have not really worked so efficiently, partly because of the worldwide recession.''

But one foreign economic analyst here comments: ''There's been a lot of talk about this, but not much is being done. In 1980, for example, they spent only 0. 63 percent of their GNP on research and development, compared to the US's 2 to 3 percent and Japan's over 3 percent. They have at least $6.5 billion in foreign exchange reserves and a savings rate of over 30 percent . . . so they have the cash. Yet they still have a poor man's mentality here.''

One problem is Taiwan's size. It has a population of only 18 million, and has few if any corporate giants in the private sector able to take large-scale risks and adopt a long-range viewpoint.

Some analysts in Taipei, in fact, have serious doubts whether the private sector would ever be able to lead the way on research and development without heavy government involvement. Stressing the philosophy of ''leaning into the wind'' - spending heavily in bad times in order to enjoy big profits in the good - these analysts are critical of the government for cutting back heavily on spending this year.

A number of important construction projects - such as a central-government office complex, intercity railway line, and a subway system for Taipei - have all been postponed in an austerity drive. This has damaged the construction industry, a key to any economic revival since many other industries depend on it for profits and survival.

Construction all round is in the doldrums. Housing starts, for example, have declined steeply (to stimulate sales, one company is even offering home buyers a free new car). Amid a general recession, therefore, this would not seem to be a good time to be talking, as the government is, of a much larger role for the private sector.

The government remains the largest single component in the economy, through 15 state enterprises (mostly in heavy industry) that have an annual turnover approaching $6 billion. This dominant government role was inevitable when the campaign began to transform a small agricultural island into a modern industrial state.

Now, many people on Taiwan regard it more as a drag on economic development. The majority of the state enterprises, critics claim, are wasterful, inefficient , and uncompetitive. Economic Affairs Minister Chao Yao-tung and Finance Minister Hsu Li-teh - brought into the Cabinet last December - are the leading advocates of shifting the industrial emphasis from the public to the private sector.

Mr. Hsu, for example, argues that - with the exception of a handful of enterprises, such as steel, shipbuilding, and transportation - the government-controlled companies should be turned over to private investors.

But critics argue that many of the industries could not survive without a government lifeline. They cite the example of the struggling petrochemical industry. Heavily dependent on expensive, imported crude oil, the industry probably would have collapsed if the government had not decided last December to provide subsidies.

Some analysts see this propping up of a ''white elephant'' as a contradiction of the government's avowed aim. But Taipei officials say the idea is to get the country through a tough transition period with a minimum of pain - ''evolution, not revolution,'' as one minister put it.

Changes, therefore, will be introduced gradually and at a rate the country can absorb - and, more important, afford. There will be no grandiose industrial revolutionist schemes that push the nation heavily into debt, which is one reason why Taiwan borrows little money internationally. The current debt-service ratio on international borrowing is less than 5 percent of the GNP.

In fact, confesses Robert Chien of the central bank: ''We could finance everything at present from our foreign reserves. But we like to borrow some funds abroad to promote international relations.''

In Taipei there is some admiration of the South Korean full-speed-ahead approach to economic development. But then comes the qualifier: ''But that's not the right way for us. We're too small.''

Nevertheless, the pace of industrial renovation has to be stepped up, everyone knows. One way is to attract foreign capital and technology. Government policy now is dominated by consideration of ways to create a more attractive financial and industrial environment for foreign investors and bankers.

Another way is a complete overhaul of the local financial structure to generate more government revenue and also give local businessmen better access to development funds. Finance Minister Hsu, for example, is currently working on reforming the anachronistic income-tax structure under which only a third of the wage earners now file returns. Income taxes now account for only 17.8 percent of total tax revenues (dominated by various indirect taxes difficult to calculate and collect). Mr. Hsu wants to introduce a value-added tax and slash customs duties.

Finally, the nation's banking structure has to be overhauled to create a more sophisticated structure - with many different types of financial institutions - better attuned to the country's changing needs.

''We have intelligent, diligent workers with a willingness to learn and improve,'' says a government minister. ''What we have to do now is to marry these assets with the right investment climate to achieve our ultimate modernization goals.''