A Trip to Northeast Asia Jude Wanniski September 9, 1986

Executive Summary: From August 1 to 21 I traveled to five countries in Northeast Asia, whistle-stopping in South Korea, Japan, the People's Republic of China, the Philippines and the Republic of China on Taiwan. It was an efficient "fact-finding" trip organized by the World Media Association, a Washington outfit financially backed by the Unification Church of the Reverend Sung Myung Moon. About 25 journalists, academics, and Asian scholars made the trip, led by Douglas MacArthur II, former Ambassador to Japan, now a sprightly 81. Meetings were arranged (where possible) with high-level government officials, opposition representatives, the U.S. ambassadors, academics and businessmen. Dr. Bo Hi Pak, president of The Washington Times and the Rev. Moon's right hand, said the objective was to heighten the sensitivity of U.S. opinion leaders to the region at a time of great change there — as opposed to the predominant focus in the U.S. on the Atlantic region. There were several spirited speeches by Dr. Pak along the way, extolling the relative merits of freedom, liberty and democratic capitalism. But otherwise the itinerary could just as well have been set by the Rockefeller or Ford Foundations, and it was extremely useful in understanding the region's immediate dynamic. Herewith, my observations on a country-by-country basis, taken in sequence, with some comments on the region as a whole following.

A Trip to Northeast Asia

SOUTH KOREA (Seoul)

The central fact of South Korea in this summer of 1986 is the approach of the 1988 Olympics, which it will host. In both direct and subtle ways, the enormity of the Olympics to a nation the size of Indiana influences almost all important political and economic behavior. It's only the second Asian nation to host an Olympics — and because the power elite in the population of 43 million believes the 1964 Tokyo games propelled Japan into an industrial power of the first rank, it is obsessed with a similar dream. As Korea accelerates into the gravitational pull of the 1988 games, pressures to clean house intensify.

The most important pressure is political reform. President Chun Doo Hwan is an unusually unpopular head of state, given the fact that the economy has boomed in his six years. A hard-nosed ex-military man, Chun is still blamed for the deaths of 200 students in May 1980, whose demonstrations following the assassination of President Park Chung Hee were ended with savage military efficiency.

A long-promised democratic constitution is in the works, although it still hasn't been decided whether the new system will be a parliamentary or presidential one. In any case, Chun has promised to retire. Candidate selection is planned for 1987, with elections in the spring of 1988. The schedule is such that the profound skepticism among the democratic forces of opposition has been allayed, knowing the power elite doesn't want a mess on its hands in the summer of 1988 and would like to have the games introduced by a popularly elected head of state. Chances are the constitution will call for the parliamentary form favored by Chun's Democratic Justice Party, and the prime minister will be his hand-picked successor. The New Korea Democratic Party favors a presidential form, figuring one of its "two Kims" would stand a better chance of winning a popular vote.

Curiously, there isn't a political leader or faction identified with "the left," even a milquetoast left standing for "social justice" and such. It's as if the entire political class ranged across the right side of the Republican Party's political spectrum. The ruling DJP will put up the equivalent of George Bush. Kim Dae Jung, who stands for democracy but has no other visible agenda, might be the Howard Baker of Korean politics. Kim Yung Sam, who carries the banner for entrepreneurs and lifts an eyebrow at the corporate elites, seems to be the Jack Kemp in the picture. There is a premium on education in the political class. The U.S. Ambassador, Richard (Dixie) Walker, points out there are more advanced degrees in the top tier of the Korean government than in any other country in the world, including the United States.

The Threat From North Korea

Kim ll-sung, the leader of communist North Korea since 1945, will turn 75 soon, and perhaps choose the time to formally turn power to his son, Kim Jong-il. According to an account in the Korea Herald in Seoul, of the 40 motion pictures produced in Pyongyang in 1985, 13 were designed to idolize the elder Kim and rationalize the power transfer to his son. On the minds of South Koreans to a rather surprising degree is the possibility that the North will take some kind of military action before the Olympics to undermine its success.

The common rationale is that time is running out for Kirn ll-sung in more ways than one. The population of the North is less than 20 million and its per capita GNP about $800, while the South's is about $2,200. The North spends 40% of its GNP on the military, the South only 7% to stay even, and these gaps are widening in the South's favor. At the same time, Pyongyang's one-time benefactor in Beijing is moving toward geopolitical alliance with the western nations as the PRC experiments with western-style economic reforms. Asked whether he'd like to see a militarily stronger or weaker mainland China, one of the highest ranking generals of the ROK Army told me "Stronger, of course stronger!!"

It defies logic that there would be a strike against the South, given the geopolitics of the moment and the 41,000 U.S. military personnel in South Korea. But an American businessman who's been posted in Seoul for several years assured me I wasn't hearing plain and simple paranoia. "There's a real fear that the Kirns will do something wacko," he shrugged. The atmosphere is nudging Seoul into a coaxingly conciliatory policy to the North, to demonstrate to the world that it isn't trying to prevent an improvement in relations: It has offered to let Pyongyang hold the archery and ping-pong events in 1988 (but the communists want much more). In early August, North Korea did not show for long-scheduled bilateral economic talks at the truce village of Panmunjom, without a reason, raising the irritation level. But then there was Mikhail Gorbachev's July 27 Vladivostok speech, unveiling Moscow's Asia initiative. This was part of the buzz everywhere we traveled, and in Seoul it was of course particularly noted that the Soviet leader had said it was vital "to eliminate the tension on the Korean peninsula..." (The Kremlin lately has been stepping up its military help to Pyongyang.) The guessing is that Moscow, which boycotted the Los Angeles games in 1984, in fact wants the 1988 games to be held and will work to keep anything "wacko" from being planned. Meanwhile, more than a million troops remain deployed on either side of the Demilitarized Zone, "a tragic waste," says Ambassador Walker, an extremely impressive fellow.

The Economic Dynamic

Imagine living in an Indiana that instead of being part of the U.S. is a separate nation. The Hoosiers have been hardworking people and they get along with their neighbors in trading relationships. But to live in this Indiana, which has an "export-led" economy, certain special rules apply. Only two kinds of automobiles are allowed, Fords and Chryslers. You can drink Schlitz beer and smoke Marlboros, but none other. Eat pork and ham but not beef and veal. And if you want to travel as a tourist to Ohio, unless you are older than 55 you have to apply for special permission, which the government rarely gives because that would mean the loss of precious foreign exchange. It's not hard to see that Indiana might still have a thriving economy, but that it would have an added burden competing for world class talent in all fields.

This is South Korea, which has had a 45% GNP growth since 1981 and has fantasies of someday overtaking Japan, its rival, where growth has stalled. Seoul, a city of 10 million, has the appearance of a modern European metropolis, with an imposing skyline, broad boulevards, and magnificent hotels. But you soon notice that there are only two types of autos in the streets, the Korean-made Hyundais and Daiwoos. In five days I spotted one Fleetwood and one Mercedes. A Korean businessman advised me that the government permits entry of a handful of foreign luxury cars each year — with import tickets for them going to executives of companies with the best export growth.

This is almost a caricature of the export-driven model devised by Korean manic-Keynesians trained in the U.S. after the Korean war. Consumption is okay as long as it doesn't involve foreign exchange, and until very recently Korean nationals could actually go to jail for being caught smoking a foreign cigarette. (Michael Deaver's lobbying on behalf of Philip Morris in Korea involved the tobacco and wine monopolies whose profits provide the government with 7% of its revenues.) Hundreds of other import items are simply banned, or with duties so steep — as on computers — that they are effectively banned. I was told that U.S. soldiers do a thriving business buying U.S. goods at the PX and selling them on the black market — Hellman's mayo goes for $3 a quart.

The rule on tourist travel is another dizzy one. In 1985, tourist passports were issued to fewer than 2,000 Koreans, 0.4% of the total number of outgoing Koreans (on business or emigration). Kimpo Airport, as a result, is very small for the size and wealth of the country. Here again, the 1988 Olympics is putting pressure on the system — with the travel industry beating on the government to relax tourist travel for people over 40. The Asian Games scheduled for September 20 - October 5 will test the already-completed athletic facilities, but the Olympic crowds will dwarf anything the Asian Games will hit Kimpo with.

Trade

In its years of extremely rapid growth, South Korea ran up sizeable trade deficits as capital poured in. Foreign debt is now about $47 billion, but almost all is private debt. The trade account went into surplus in 1985 because of what the Koreans call the "three lows" — the lower won (stronger yen), lower oil price, and lower international interest rates. A lower growth rate than has been usual, of 5%, also helped, and the trade surplus with the U.S. went to $4.3 billion. The "three lows" went even lower this year and the bilateral surplus with the U.S. may hit $6 billion in 1986.

Thus, the U.S. Treasury's open pressure on Seoul to appreciate the won by 15% to 20%, which brought an outburst of indignation and student demonstrations against the U.S. while we visited. The U.S. Embassy was irked at Treasury for "overloading the circuits," a rather protectionist multi-fiber textile agreement having just been shoved down Seoul's throat. The Korean Herald correctly identified C. Fred Bergsten, the manic dollar-devaluationist who served President Carter's Treasury, as the source of this foolishness. Bergsten, now running the U.S. Institute for International Economics in Washington, had been in Seoul earlier in the summer, wagging his finger at the Bank of Korea for keeping the won steady against the dollar. His counterpart in the Reagan Treasury, David Mulford, is just as dim and arrogant. To push Korea and Taiwan into a currency deflation, as he has, would only widen their trade surpluses with the U.S. by slowing their economies. This kind of "Ugly American" imperiousness has had a sour effect on Korean attitudes toward the Reagan Administration. There is a "We-must-not-let-the-superpower-take-advantage-of-us" posture among Koreans, who correctly sense there are U.S. politicos who think they can use military leverage to extract trade concessions from them. It's one thing for Jim Baker to urge our trading partners to expand; it's quite another for Mulford to press them to contract.

Taxes

At first glance, the Korean tax structure seems relatively onerous, with a 71% top marginal income-tax rate at $26,000 (including surtaxes for residence, defense and education). The 31% bracket is encounted at $14,500 of taxable income. But there are big loopholes designed by the conservative Keynesians to boost capital formation — which have positive supply-side effects. The biggest is the top rate of 16.75% on all dividend and interest income. The corporate rate is 20% on the first $60,000 of profits, 30% thereafter. And foreign-source income can be repatriated without tax (Koreans making fortunes in Japanese real estate pump capital back into the home industries and clip coupons with that 16.75% top rate on unearned income.) A 10% VAT provides 26% of all government revenue (the income tax only 11%). Exports are excluded. So are enterprises with sales of under about $1,000 a month — which is why there are a few hundred thousand mom-and-pop enterprises in Seoul.

The system keeps little enterprises little and invites bigness at the top, with an atrophied middle ground. As the work force moves into higher brackets, though, the tax system is bound to pinch off productivity. The Finance Ministry should be thinking about a tax reform to hike thresholds on earned income and pull down the rates. But the government's attention is devoted to spending, prettying up Seoul for 1988, putting in miles of flower beds on the banks of the Han-gang, widening highways, etc. There's no talk of tax reform and probably won't be until the games are over and the new electoral process allows these issues to be opened to partisan debate.

So much depends on the Olympics. As 1988 approaches it's likely we'll see a transfer of power in both the Koreas, which seems to becoming the geopolitical center of gravity in Asia. In almost every way, the pressures the games are putting on South Korea to reform are positive. I left Seoul feeling good about what I'd encountered, a sense that Korea is in the process of shaking off adolescence and entering young adulthood, that good things will happen there politically and economically in the era ahead — including the beginnings of reconciliation with the north. It's a side to the Olympics I'd never given a thought to. Perhaps the 1964 games in Tokyo had a similar effect in the maturing of modern Japan.

JAPAN (Tokyo)

To an American traveler, the most startling fact of Tokyo these days are the prices. Tokyo has been an expensive city for decades, but with the 40% appreciation of the yen against the dollar in the last 15 months the prices are truly stupefying. A sushi lunch for two at a Seoul airport restaurant, abundant and delicious, came to $8 with one beer and one coke. Dinner for two at the Japanese restaurant at the Hilton International in Tokyo, two Kirin beers each, was $160, and we left the table hungry. (A bottle of imported wine on the Hilton wine card starts at $100.) The airport bus, for goodness sakes, was $17.50 into Tokyo. In the city, our group spent odd hours "shopping" in the Ginza, reading price labels in horror. Doctor Alvin Rabushka, the Stanford economist, saw a gold Rolex that sells for $9,000 in Tiffany's — and for $7,000 in Hong Kong — in a swanky Ginza jewelry store for 3,900,000 yen: about $26,000. Richard Grenier, columnist for The Washington Times, observed that the "ladies by the hour" in the Shinjuku district were ignoring obvious Americans (who didn't have the yen?).

"Going to Tokyo from New York these days is like going from Mexico City to New York," someone remarked, more in the context of the psychological impact than the physical -- a vague feeling of inferiority that creeps in with the prices of things. One gets the same effect quickly by going from Macy's to Bergdorfs. It was also observed that the unfailingly polite Japanese are fraying around the edges, showing irritation and impatience with Americans in small ways. We could imagine the waiters at the airport hotel running a prisoner of war camp.

But there is, after all, a general awareness that the stalling of their economy has been arranged to accomodate Americans over the bilateral trade deficit. The Japanese businessmen are as anguished over the exchange rates as we were at their prices. Their frustration is compounded as they watch Japan's trade surplus rise month after month in dollars even as exports in yen are in steady decline. (Think about that, and you will eventually realize why exchange rate changes don't change trade flows.)

Our Ambassador to Tokyo, Mike Mansfield, began his briefing to us by declaring that "Japan's $50 billion trade surplus with the United States is intolerable!!" Mansfield, Senate Majority Leader back in the LBJ/Nixon years, was disappointing, a beloved anachronism here, reeling off statistics amidst a patter of cliches to demonstrate his mind is still sharp at 75.

"I don't like our country being the biggest debtor country in the world....Last year the interest on our debt was $133 billion! This year it will be $145 billion! We no longer hold the enviable position we had following the world war!....Protectionism is not the answer! It might bring some temporary relief, but it would only be temporary! We have to do something about the deficit!'.....American businessmen have to get off their duffs!"

There were some useful tidbits. Asked about why the Bank of Japan is resisting a cut in its discount rate, he suggested we wait and see what Germany does and that we give the new Finance Minister time to "get his feet on the ground." The economic attache mentioned the tax reform being cooked up behind the scenes, for presentation this fall: They want to bring the rates down, but the desire is for revenue neutrality. There's talk about a VAT to pay for the income-tax cuts, but since a VAT is export exempt, it would stimulate exports, the problem to begin with; maybe some tax on savings accounts.

While we were in Tokyo, Prime Minister Nakasone's chief spokesman announced that a drastic income tax cut was needed as part of the tax reform aimed at correcting an unfair tax burden on salaried workers, and that government intends to help workers and companies affected by the yen's rapid appreciation — even though the combined national/local debt is now 200 trillion yen! That's $1.3 trillion!!! (Get off your duffs, boys.) Also, the Daily Yomiuri lavished editorial praise on the Reagan tax reform, urging Nakasone to get going: "Japan must lower corporate rates and not raise them to compensate for the revenue loss from cutting personal income tax....Distortions in the income-tax system in Japan are so great that they need immediate remedy. But it is not clear whether the government intends to finance a personal income tax cut by increasing indirect taxes or settling the issue by reforming personal income tax only.... Nakasone should clarify to all what he intends to do."

In the absence of clarification, the Tokyo stock market has been on a roller coaster, albeit trending ever upward. The top income tax rates (30% at $40,000 equivalent, 50% at $100,000, 70% at $530,000) will be knocked down sharply. How does Japan do so well at those rates at all? Loopholes! On the first $65,000 of salary income, 21% is exempt. Plus employee housing allowances are taxed lightly. Plus the personal exemption is $2,100. Plus Social Security tax is deductible. Plus most retirement income is exempt. Plus dividend and interest income is capped at 35% tax. There is also no tax on portfolio capital gains. On rumors the reformers have their eyes on this source, the market plunged. There are plenty of supply-side vibrations in Tokyo, though, suggesting they will get it right. (I had an added thought in Tokyo that not long after the plan is unveiled Seoul will have its attention forced to tax reform — just as Canada is being nudged by its business community to follow the U.S. reform.)

Geopolitical Realm

In the geopolitical realm, there was a medium buzz in Japan over Gorbachev's Vladivostok initiative. Gorbachev has ambitious plans to develop the eastern regions of the USSR, and wants access to Japanese capital and technology. He's visiting Tokyo in January and Nakasone is talking about going to Moscow in '87 (a shrewd domestic political ploy by Nakasone — remember he's trying to get his political party to let him stay as prime minister beyond next spring). As always, the key issue is the northern territories, the Kurile Islands that the Soviets grabbed from Japan in 1945. So far, we're told at the U.S. Embassy, the Japanese reaction to Gorbachev's overtures has been cautious. There are no illusions here.

Another item worth mentioning was a Reuter dispatch I spotted in the Korea Herald about Nakasone's newly appointed and just dismissed education minister, Masayuki Fujio, 69, described as the "most aggressive post-WWII Japanese politician." In his first two weeks, "he has insulted China, raised the specter of Japanese militarism, accused the western allies of arrogance in Japan after World War II and severely embarrassed his government."

In a "recent outburst" Fujio said Japan's postwar generations were twisted by enforced Western values: "Who gave the victors the right to judge the losers? It's wrong to think prewar Japan was all bad and the occupation period perfect." He has also urged parents to hoist the Japanese flag in their homes and to instill love of country in their children. "Many Japanese, who remember prewar military drills in schools beneath the Flag of the Rising Sun, were appalled." Fujio also blasted the execution by the allies of seven Japanese wartime leaders.

What's going on? Why did Nakasone put up with this fellow (who actually seems like my kind of guy)? According to Reuter, one view was that "By letting Fujio loose, the prime minister can gauge international reaction to such provocative views and yet look good himself by taking the role of pacifier. And, if Fujio oversteps the mark, Nakasone can remove him whenever he wants."

Fujio's recent remarks that Korea shared responsibility for its 1910 annexation by Japan threatened to jeopardize Nakasone's visit to Seoul later this month. When the outraged Koreans postponed this week's meeting between the countries' foreign ministers Nakasone dismissed Fujio.

Hmmm. First $100 wine. Then the ladies of Shinjuku spurn American gents. Then Fujio was unleashed. Next we'll be hearing about a Greater East Asia Co-Prosperity Sphere. So much for the benefits to the U.S. of a weak dollar. Bye-bye Japan.

PEOPLE'S REPUBLIC OF CHINA (Beijing)

It has been three years since my first trip to China, when I found that Deng Xiao-ping really had put the PRC on the capitalist road. It would have been nice to spend two weeks making comparisons, but three days had to do.

My overall impression was of progress and of eagerness to progress. The people of Beijing in the summer of 1983 were still plain in appearance, blue tunics or white. Now there is color and cosmetics and occasional signs of higher fashion. There are 200,000 Americans visiting China annually, so the people of Beijing no longer gawk and gape at us. There are more signs of prosperity, more cars and trucks, far more high-rise apartments than I'd remembered. Our embassy people say the openness of the society has improved in recent years, that there is better access to outlying areas — 150 cities are now open and travel for 90 km around Beijing is unrestricted. But they say it is still a controlled society, that it's hard to make friends because the security apparatus is thorough and will focus on repeated contacts, that official access is good — even among military personnel, that conversations from the man on the street on up are comfortable — but it's not okay to invite officials to your home. China is still among the poorest countries of the world, a per capita income of about $300, the average wage in Beijing about $100 a month. Poking around the back streets of the city one finds incredible living conditions, dozens of families crammed into dwellings that appear at one time to have housed one or two. Yet even here the people seem cheerful. The press is very much controlled, but unlike the Soviet press the news coverage is balanced and thorough. The problems of New York Times correspondent John F. Burns, expelled for traveling in a closed area, helps prove the point, they say. Burns knew things were relaxing and pushed past the limits in order to see China unadorned.

We met with several high-ranking government officials, the Deputy Foreign Minister, the Vice Minister of the State Economic Commission, a VP of the Academy of Social Sciences, the director of the Center of International Studies at Beijing University, and with dozens of well placed Chinese policymakers and journalists at receptions. In the public sessions, but even more in the private chats with these people at the meals and receptions, the talk was of reform, reform and reform ~ what we came to call "Socialism with Chinese characteristics," a phrase we heard from Li Shenzhi, a charming fellow from the Social Science Academy.

Sun Yat Sen, ''The Greatest"

It was also Mr. Li who advised us that Sun Yat Sen, "the pioneer of the Chinese Revolution, was the greatest person of the last century in the course of which China modernized itself." Take that, Mao! This was the most striking thing I heard in this visit, and it made it easier to put all else I heard in context. The comment came in response to a series of questions that probed for exactly where China stood these days vis a vis Marxism-Leninism and Capitalism.

One doesn't necessarily have to use the name, Marxism-Leninism, he said. That's an ideology. "We consider ourselves a socialist country, Marxist-Leninist in the course of our development/' Romania, he explained, doesn't say it is Marxist-Leninist, but a country of scientific socialism. So too with Yugoslavia, a country with another system. Leaders may believe in Marxism-Leninism as a theory, but in practice we each develop a system for ourselves. Thus, socialism with Chinese characteristics.

Sun Yat Sen was the greatest because his revolution did away with the emperor, though leaving feudalism and war-lordism in place. "His successor [curiously, Li refers to Chiang Kai Shek in this elliptical fashion] practiced feudalism." The task was finally completed by Mao, he went on, although "Mao made mistakes in his later years and China detoured in its modernizations. We are trying to inherit the good things that Sun Yat Sen and Mao have done." As for the past, "there were not much better ways of doing things than we did them at that time." We don't know what the future will bring but are groping toward it. A process of democratization is being forced by all countries of the world, he said, an unfortunate state of affairs in that economic reforms can not reach their ultimate stage without political reforms.

What a wonderfully diplomatic formulation! As if to allow differences of opinion on Jeff Davis and Abe Lincoln as long as there is agreement on George Washington as "the greatest" of the revolutionaries. Of course there is hardly a soul on Taiwan who would insist that Chiang Kai Shek was a better man than Sun Yat Sen (whose book of Three Principles can be found in all the better hotel rooms of Taipei). And this "groping" toward a kind of socialism with Chinese characteristics is open-ended enough to embrace a kind of capitalism with Taiwanese characteristics.

We noticed, in fact, that there was an astonishing passivity among these officials when challenged by members of our group on ideology, as if they'd rather not waste any more time on theory and get on with practicalities.

A Few Reform Items

***** Korea Times, August 2, Beijing (AFP) Vice Premier Wan Li called for more democratic decision-making procedures in China to improve the country's "imperfect" Socialist system and boost economic development.
Wan's remarks were quoted by the New China News Agency (NCNA) after a prominent Chinese sociologist, Fei Xiaotong, urged a measure of people power to complement the leadership of the Communist Party.
"We have not yet established a rigorous system and procedure for policy decision-making, nor have we had an adequate support system, consultancy system, appraisal system, supervision system and feedback system for the purpose," Wan said.
"There is no scientific way of testing the soundness of a policy decision made in that manner," NCNA quoted him as telling a national science symposium in the latest call for greater democracy here.
Wan, also a member of the Communist Party Politburo, said that without change, "Our Socialist system will remain imperfect and the national economy will not be able to develop continuously and steadily."

***** China Daily, August 11, Beijing. Zhu Houze, head of the Propaganda Department of the Party Central Committee, discussed ways to raise China's cultural level at a gathering of officials in charge of cultural matters. Excerpts follow:
A society needs leading "stars." Without such an elite there is little driving force. "Selecting the superior and eliminating the inferior" is important for ensuring the dynamism of a society. But at the moment, many officials have misgivings about upgrading people with "superior" ability as well as eliminating "inferiors." They seem determined to artificially narrow the gap between the two....
Since many of those in charge of cultural matters are newly promoted and young, I suggest that they both make good study of the Marxist theory of culture and arts and read some non-Marxist and foreign theories of culture. Here I would like to ask a question: Wasn't Marxism forged from the raw materials of non-Marxist theories?

***** China Daily, August 11, Dalien. This major port in Northeast China has become the first of 14 open coastal cities to respond to Premier Zhao Zhang's call to offer more attractive terms to the foreign investor....
These include charging the same rates for infrastructure, engineering and utilities services, lower land use fees, more reasonable fringe benefits for Chinese employes and faster depreciation systems along with permission to use the depreciation fund for servicing bank loans....The local surcharge on the corporate income tax can be exempted until the seventh year after the joint venture breaks even.

***** China Daily, August 12, Beijing. The Tianqiao Department Store Co. Ltd. in Beijing has made a breakthrough in reforming China's state-owned commerce by issuing stocks, a People's Daily report said yesterday.
The report quoted officials at the State Commission for Restructuring Economic System as saying that the way the company is being managed helps promote the development of the socialist commodity economy.
The company, which was formed by merging two department stores and a wholesale store, began selling stocks early last year...State investment now accounts for 50.97 percent of the shares. The other share owners are banks, which control 25.89 percent of the total; other enterprises, 19.68 percent; and individual citizens, 3.46 percent.

The 1987 Party Congress

Just as Korea is now in the magnetic field of the 1988 Olympics, the PRC is gearing up for the Party Congress of late 1987. It's obvious from the contacts we had and the press accounts that the reformers in the Politburo are serious about moving toward political reform — separation of the party and the state, decentralization, and separation of powers in the state apparatus. The U.S. Embassy people believe disagreements are now being thrashed out, but that the leaders want to put something over at the Plenum later this year, leading to the Party Congress.

It may also be that the Party Congress is accelerating plans for more striking economic reforms. My sense is that there is a great eagerness to charge down the capitalist road among the Deng reformers, that their enthusiasm is growing geometrically and their internal opposition shrinking, that they have a good idea of where they want to go, that they are betting their political careers on liberalization, and that there may be greater change in the next year than even they realize. Stanford's Rabushka was similarly impressed with the yearning for faster reformation, which he found in private conversations.

The Vice Minister of the State Economic Commission, Zhu Rongji, responded to a question about when they might go to market pricing with a long ramble, about how crucial, sensitive and complicated that will be, how people are most concerned with prices of goods in the marketplace, how "we have to be most cautious in study of this issue," how "we can't continue a situation where prices and values of goods are not in line," but how the process is long term — because it is controlled by the state. "But next year, there may be some big steps taken."

Why not? Our Ambassador, Winston Lord (who I was prepared to dislike, but who turns out to be an impressive diplomat with depth), believes Deng will use the Party Congress to retreat further into the background, Hu Yaobang advancing toward the top. Hu has confessed to an ignorance of economics. It's reasonable to suppose that if there are big doings in the works, Deng will want them to be in place before he retreats.

Besides, it's time and they all seem to sense it. The reports in our press are that the leaders are concerned with the fall off in grain production in China, because the peasants are choosing to grow cash crops and raise livestock in response to market pricing in agricultural products. But when the huge grain inventories fall, prices will firm and so will grain output. The Old Guard wants grain now! The reformers know what's going on — the increase of economic efficiency in rural China. But we get confused press releases out of Beijing as the government asks the farmers to produce more grain, but to not stop producing cash crops! The reformers know if they're going to get this engine going in urban China, they've got to move to market pricing.

Relations With the U.S.S.R.

Beijing was still chewing over Gorbachev's Vladivostok initiative when we were there. Of the PRC's "three obstacles" to improved relations with Moscow, Gorbachev only dealt with the easiest, pulling some troops back from the China border. Its gesture on Afghanistan (reducing troops a bit) and silence on Kampuchea have kept things cool. But Beijing is on its toes, sensing a busy autumn ahead and fluidity of movement in U.S. - Soviet relations.

The view from the U.S. Embassy is that we can't consider China an "ally," but we don't have to consider her an enemy, that she does keep a lot of Soviet troops preoccupied, and that she's been acting less ominously toward Taiwan. China sees the U.S. as having rebounded under Reagan, giving her a "greater sense of balance and security," Ambassador Lord believes. While still indulging in Third World rhetoric, Beijing is essentially looking to the U.S. to provide global balance while it devotes the bulk of its resources to building up its economy. If China continues on its present course ("socialism with Chinese characteristics") it will put increasing pressure on the Soviets to restructure their political economy along similar lines — or face a "crunch time" around the year 2000, when economic disparities become too glaring to be ignored. This, at least, is the Embassy view, a reasonable one.

My view is that "crunch time" is already here, that Soviet leadership is already alarmed at the pace of change in the PRC and the implications of its onrushing political and economic reforms — that the Vladivostok initiative is a manifestation of this crunch. The most optimistic assessment of the PRCs path to the year 2000 has its per capita GNP rising to $1,000 from $300. But if the 1987 party congress indeed produces a great leap forward in market-oriented reforms and greater democratization, the growth rates could be considerably faster. The missing ingredient isn't physical or financial capital but human capital, the result of a true Lost Generation in the cultural revolution. If Beijing can bring reconciliation with overseas Chinese, especially those on Hong Kong and Taiwan, that problem will be taken care of. We'll discuss this in Taipei later in the trip, but first the Philippines.

THE PHILIPPINES (Manila)

Good news! Cory Aquino is doing okay and there is hope for the Philippines! In February, when I became persuaded that Ferdinand Marcos had in fact outpolled Aquino in the presidential race — but lost the propaganda battle — my greatest fear was that her inexperience would lead to political and economic collapse. These fears were fed by the early political maneuverings of her revolutionary government: suspending the constitution, dissolving the National Assembly, and replacing several hundred locally elected officials with appointees of her party, releasing the leaders of the Communist Party of the Philippines without their pledges of non-violence, devoting the government's energies to a chase after the wealth of Marcos and his cronies.

There was plenty to worry about on the economic front. The Philippine economy had been in a tailspin during 1984-85, with GNP falling by 4% a year and per capita income dropping back to a meager $625 (the relatively wealthy Chinese of Taiwan are hiring Filipinos as servants). At least some of Marcos's economic problems were instigated by the International Monetary Fund, which had pushed the austerity policies that brought decline. And the IMF was in the wings again, urging higher taxes and currency devaluation. In addition, the Aquino government was echoing the Communist demands for land reform. If done, this would almost certainly doom the agrarian economy, already reeling from the worldwide deflation of commodity prices. We could imagine a Sandinista regime on the horizon, the United States bounced from Clark Air Force Base and the Subic Naval Base.

At the time, I never would have expected that six months later her government would have: 1) achieved a respectable, supply-side tax reform that cut the top marginal corporate tax rate to 35% from 65%; 2) established a 50-member Constitutional Commission, which has drafted a new constitution that will go to the voters this fall — with national elections likely to follow in 1987; 3) outlined a land reform that has been opposed by the land reformers because it isn't radical and confiscatory; 4) held the IMF and other creditors at bay on its $28 billion foreign debt; 5) stabilized prices; 6) kept a relative peace in the cities without much effort; and 7) kept the communist insurgency in the countryside from measurably strengthening while the new team gets its footing.

Tax Reform

We'd read skimpy details in the financial press about a tax reform that had been announced in June and took effect in July. In Manila, the U.S. Embassy supplied the details that explain why the Makati stock market index — which had jumped from 30,000 to 42,000 when Marcos left Manila, jumped from 42,000 to 56,000 when the tax plan was being unveiled. (Throughout, the peso has been held at 20 to the U.S. dollar by central banker Jose Fernandez who Aquino shrewdly held onto from the Marcos era. He is also pushing for reduction of the protective tariff walls that Marcos erected, which makes him unpopular in the protected circles.)

The personal income tax is still much too high and collects little revenue. The top rate of 35% hits at P500,000 taxable income ($25,000) and 24% hits at $5,000. But relief is felt on business income, which had been taxed at 60% at the P500,000 level and is now treated as ordinary income. Married couples are now permitted to file separately, enabling husband and working wife to each pay lower rates instead of being forced to combine incomes and face the highest rates. So-called "passive income" (called "unearned" income in Europe) is taxed at low rates. Interest income is capped at 20%. Dividends received from a domestic corporation will be taxed at 15% in 1986,10% in 1987, 5% in 1988, and 0% in 1989; a flat 35% corporate tax applies throughout instead of a progressive rate up to 65%!!! The 15% turnover tax has been converted to a 15% VAT. Because a turnover tax cascades, or compounds, through the various production stages, it turns out to be closer to a 17.5% tax. Interestingly, while the government offsets static revenue losses elsewhere (by increasing tobacco and alcohol tax rates), it uses Laffer Curve arguments to assume higher revenues with VAT than with the turn-over tax (through higher compliance).

This should also have been the rationale for bolder treatment of the personal income tax. Indeed, there is so little revenue collected on the income tax it is highly likely the costs of collection exceed the revenue, and the government would save money by scrapping the tax entirely. This idea was favorably considered by Winnie Solita Monsod, the Director General and Minister of Economic Planning, and had the support of Vice President Salvador Laurel. But it was probably too politically daring for the moment. The tax reform was achieved by executive order, though, and it still could be amended in the aftermath of the U.S. reform, with rates and thresholds closer to ours. A lot more revenue could be coaxed out of the citizenry -- with voluntary compliance --  at the lower levels. As it is, the June reform has the beleaguered middle class feeling moderately pleased.

Where economic reform has stalled are on the proposals for import liberalization and the privatization of the hundreds of government owned companies that are sapping the government's resources. Until the government clears up its intentions on these, President Aquino will see little new investment. As with the income tax, it would be better if the import liberalization were less daring than its proponents want than to have the issue hang unresolved. The government should also be discouraged from attempting the restructuring of the companies it owns before it sells them off, a process that always winds up costing $2 for every $1 in value added. It should be unloading as many of the corporations as quickly as it can, even fire-sale auctions, and letting the new owners do the restructuring. There are now only a handful of publicly traded companies in the Philippines.

Constitutional Commission

We met with high officials of the government, including Pres. Aquino and Defense Minister Juan Ponce Enrile, who was the Marcos minister who turned against him at the critical moment. I arranged a breakfast with Bias Ople, the Marcos Labor Minister who remains one of the most impressive political figures in the islands, appointed by Aquino to the 50-member commission that has been drafting the new constitution. We also met at length with U.S. Ambassador Stephen Bosworth, of whom I'd had a negative preconception, but who was as impressive in his briefing as his counterparts in Seoul and Beijing.

There has been great and open conflict in the Aquino cabinet from the very start, and the political debate within the Con-Corn has also been "rambunctious," to use Bosworth's term. All this has been to the good, I expect, Mrs. Aquino in a way inviting an open-ended debate as a way of getting a quick education herself in the process of government. We didn't get a chance to gauge her mental agility in our too brief visit at Malacanang Palace. But my general sense is that Bosworth is right and she is "very bright." The way President Reagan is bright, though, not Jimmy Carter. She has far more powers than Marcos had, given the nature of her revolutionary government, but has been loathe to use them, frustrating those of her advisers who think they know the way the world works. She's been on a steep learning curve, and as issues come around for the second time she observes that most of the technicians have no better idea than she does on how to handle them. She won't be hurried or bamboozled, so far.

Ople (pronounced O-play) thinks she made a mistake in saying she won't seek re-election when her six years is up. But after meeting Enrile, who clearly sees himself as presidential material, she's probably smart to keep him thinking five years out instead of a coup around the corner. Ople thinks the plebiscite on the constitution this fall will legitimize her presidency to a degree, if it is approved, and have the opposite effect if it fails.

This is why her supporters are bending on the issues, and why Bosworth thinks the moderates on the Con-Corn will win most, perhaps all of the issues. Ople is widely disliked by the Aquino people, no doubt because his powerful intellect and personality served Marcos to the end. He still says openly he believes Marcos won the election by about 200,000 votes. But he's a patriot, and his intellect is serving Aquino in the subtle way only a loyal opposition can — and it would be surprising if Corazon didn't realize his importance in this unusual period as she strains toward the re-establishment of democratic institutions. Ople refused to join the pro-Marcos/Tolentino group at the Manila Hotel incident in June, and brushes aside as "ridiculous fantasy" any rumors that the Marcos forces can come back. Instead, he's carefully building the Opposition necessary to a democracy, with pungent, polite criticisms of the oddball ideas that waft out of the Aquino cabinet. A return to democracy seems on track.

Land Reform

The land reforms that undermined the agrarian economies of South Vietnam and El Salvador were supposedly patterned after the successful land reform of Taiwan. But later, in Taiwan, I finally discovered why its reform was such a success. The Taiwan ingredients were not present in Vietnam or El Salvador, as we will see later in this travelog. Nor will they be present in the coming land reform in the Philippines. But at least we can say the outlined Philippine reforms, while not any boon to the economy, should not have more than a mildly disruptive effect.

The land reformers are especially unhappy that the Constitutional Commission proves "that the State shall encourage and understake the just distribution of all agricultural lands, subject to such priorities and reasonable retention limits as Congress may prescribe, taking into account ecological, developmental, or equity considerations and subject to the payment of just compensation." Just compensation may depend on the market value or the assessed value, and the Con-Corn equates it with market value.

"Reasonable retention" means landowners can hold onto 7 hectares (1 Hec.=2.5 acres), which the land reformers complain will disqualify 52% of the tenants from getting title. The Marxist influence is heard in complaints that "this places too much emphasis on family-sized farm plots which in certain areas may no longer be feasible. In such cases, the alternative of cooperatives or collective farms must be revived and incorporated into a new agrarian reform law."

The market value compensation is an even greater problem. Says one land reformer: "If the mechanism in agrarian reform will entail the payment by the beneficiary of the cost of the land he will acquire, then it must be based on his capacity to pay....Using fair market value in determining the cost of the land he will acquire will render this program meaningless and more punitive because you are actually advancing the rent that the landlord is extracting." In other words, only by stealing the land from landowners and selling it at cut-rate prices can the beneficiaries benefit and land reform be meaningful. Cory Aquino, whose family owned a sugar plantation, knows what's up.

Insurgency

It certainly seemed pollyannaish of Aquino to turn loose the communist leaders and open her arms to the 20,000 rebels in the hills. This is Bias Ople's main criticism of her, "the naive belief that they can be made to change their goals." He finds alarming the growth of the National Democratic Front since the release of the Communist detainees. And yet he sees an effect on the CPP, "its leadership put on the defensive, psychologically, the rank and file looking at Manila with most of their revered leaders speaking on television in the cause of communism as a superior ideology. So they are asking, 'What are we doing in the hills?' These pressures have forced to CPP to negotiate with the government," he says. And while they will not relent on their demands, the removal of the U.S. bases and "radical" land reform, they're off balance. The recent complaints out of the Reagan Administration that the Aquino government isn't doing enough to contain the insurgency seemed a bit out of sync. Enrile as well as Ople supports Cory's strategem even as they remain skeptical. A strengthening of commodity prices and the Philippine economy would no doubt help pull some of the rebels out of the hills, even as the government and CPP continue to spar over the shape of the bargaining table. This is more likely to happen than not. But sooner or later the government is going to have to go into the hills after the rebels. Enrile says army morale has improved with the reforms he's instituted, retiring the old, promoting the young. But it probably would help to send batches of officers and men to the U.S. for quickie training exercises, one idea I heard that sounded smart. Mrs. Aquino will be visiting the U.S. September 15, meeting with President Reagan and, one hopes, asking his help in keeping the IMF off her back. Her tour aims at persuading U.S. investors to take a closer look at the new potential of the country's 54 million people. At the moment, after this quick look in Manila, she has a pretty good story.

TAIWAN (Taipei)

The tour was originally scheduled to end in Manila, but when the Taipei government heard about us an all-expenses invitation appeared, with red carpet, fancy reception, official lunches and a banquet with the premier. Except for South Africa, Taiwan is the most embattled nation on the planet, having diplomatic relations with only a couple dozen countries including South Africa and a few I never heard of. Since the United States started playing ping-pong with the PRC in 1970 Taiwan has been in limbo, with only a "substantive" relationship with the U.S. since 1979, although still under our protective umbrella. In recent years, though, with Washington and Beijing getting cozier by the day, Taipei is biting its nails and red-carpeting anyone resembling a sympathetic ear. The U.S. has been tightening up arms sales to Taiwan, and she worries the big guy will try to use this leverage to push her toward Beijing.

It's not all bad. The economy is thriving, with official per capita income around $3,500. It's undoubtedly much better than that — perhaps $4,500 — because of the vast underground economy we're told is here. The signs of emerging wealth are evident, a clean, handsome, bustling city with traffic jams, the people affluent in dress, tree-lined boulevards with opulent stores and fine restaurants. There are 19 million people on Taiwan and its smaller islands, an area about the size of Massachusetts, Connecticut and Rhode Island. They're highly educated, with 1.5 million college graduates and 60% of adults saying they want their children to be college grads, 24% saying they'd like their children to have advanced degrees. This affluence and education is inspiring more political awareness and activity, with a healthy, newly emerging opposition to the Kuomintang Party that has dominated the parliamentary government since it was pushed from the mainland in 1949.

As in South Korea, there is in Taiwan an almost palpable elitism in any discussion of governance. Wise old men know what is best for the people. Much of this springs from national security expediencies of the last 40 years. But it's also under pressure in both countries from the young and the restless, who want the mechanism for change that democracy provides in order to reform the economic and legal systems.

Two Puzzles

There were two puzzles I grappled with in Taipei. One was why land reform was so successful here, the other why the booming economy has produced almost no world class companies -- as Korea has. The wise old men advised me that land reform worked because the people were educated and disciplined. There are no big companies, they said, because the Confucian way is to keep the business within the family.

Land reform succeeded, I discovered after spending an afternoon at the Land  Bank in Taipei, because of the unusual conditions surrounding the experience. Among the most important was the fact that the 430,000 acres controlled by the Japanese in the 40 years they administered Taiwan became public lands in 1945. The tenants had paid 50-55% of crops to Japanese "managers" who in turn paid 30% to the Japanese Government. This pool of cultivated land was critical in financing the land bank.

The Kuomintang had experimented with land reform on the mainland in the 1930s, in the process making the discovery that the traditional fifty-fifty split between landowners and sharecroppers was suboptimal. In 1949, when Chiang Kai Shek came to Taiwan, one of the first decrees was to change the split to 62.5% to the tenant and 37.5% to the owner. The tenant, now on the optimal incentive point of the Laffer Curve, increased productivity to the point that 37.5% of his harvest was equal to half of what the land had produced, so the owner got as much as before.

By 1953, when the transfer to the tenants began, it was against this background of agrarian expansion. The Land Bank was already flush with the receipts that had been going to the Japanese. The owners were allowed to retain 7 acres to farm themselves and were paid two and one half harvests for the land truned over to the tenants, at 4% interest, with the tenants making the payments in 20 installments to the Land Bank. The owners were given bonds amounting to 70% of the amount, the remainder equity in the four government industries that were being privatized. The owners were not only pleased to be paid fair market prices with stocks and bonds that were backed with real assets, they also used their equity holdings to develop an interest in the privatized industries and wound up running them

The Land Bank also provided a source of credit to the new owners and financed road and irrigation projects. The farmers were bound to the land for 10 years, unless they received permission to sell equity beforehand. But within this 10-year loophole, it was possible for farmers to borrow against their equity. Farmers can and have expanded their holdings by buying neighboring farms when the 10-year holding period expired.

Case closed: The land reform worked because it was financed by the dispossessed Japanese, the efficiencies that flowed from privatizing state industries, and a successful Laffer Curve decree! The one element that Mrs. Aquino might utilize in the Philippines, if nobody has told her about it, is the combining of her privatization problem with land reform -- reducing the price the tenants have to pay by giving the owners shares in the government corporations.

Small Is Beautiful

The second puzzle is important because Taiwan should be producing world class companies. Taiwan is running a $12 billion trade surplus with the U.S. after years of deficits, as its growth rate has subsided. If there were greater investment opportunities at home it would import more and export less. Or, it could be taking some of the sting out of the protectionist threat by establishing plants in the U.S., instead of buying Treasury bills and bonds. The Taiwan government has been trying to encourage local industry to do so, under a plan announced a year ago, but with disappointing results. It takes a world class corporation to go global, and Taiwan's growth is stunted, with tens of thousands of father-son-uncle enterprises and nothing bigger.

The country has simply outgrown its development model and needs to restructure. Whenever there is an elite class in power, it arranges to protect itself from competition. Korea fosters big and little and squeezes the middle with its economic structure. Taiwan pushed everything into the middle.

Holding companies, for example, are banned. Even more limiting is the strict application of corporate charters: Widget companies can only produce widgets. The government is pleading with the dad-and-jr. widget companies to merge, with little success. If bicycle companies were allowed to make widgets or to acquire widget companies, consolidation would be swift. The government's protective paternalism stands in the way. The protective tariff wall also stands in the way. Under pressure from the U.S. on its trade surplus, Taiwan announced tariff cuts on 1,300 consumer and industrial commodities last month and figured a revenue loss of $125 million annually. But the new average import tax will still be about 50% (which suggests they'll collect more revenues than before at the lower rate). This level of protectiveness is much too cozy to encourage the dad-and-jr. shops to combine. At lower tariff levels, the government would be besieged with requests to loosen the rules on holding companies and conglomerates.

The tax structure is also culpable. The dramatic growth in the 1980s is pushing all those family owners into serious income-tax brackets — 40% at $57,500, 50% at $87,500 — that were once above them all. A local businessman I spent a few hours with in grappling with this puzzle explained that the reason there is such a mammoth off-the-books underground economy is that father-son-uncle enterprises can keep secrets and hide business from the tax collectors. There is an enormous underground banking system as well, which sounds like something that was also brought by the Kuomintang from its mainland experience of the turbulent 1930s. My sense is that the younger entrepreneurial class is chafing under this obsolete development model and is one of the main political forces trying to emerge and find its voice in government. When it does, we'll see the restructuring along with a boom on a much bigger Taipei stock market.

The Mainland Dilemma

Naturally, the situation with the mainland tends to creep into all discussions. First of all there is the "dilemma." The widespread, almost official view is that Taiwan's system is the shining example to the people of the PRC. Here's how Yu-ming Shaw, director of the government-financed Institute of International Relations, sees it: As soon as the current reforms on the mainland fail, the political and ideological foundation of the communist government will be so shaken that the leadership will turn to the Taiwan model as a solution. Only then will reunification be possible, as the wise elite of Taiwan are called upon to design the political form and substance of the mainland. The dilemma is that to the degree the reforms on the mainland improve the lot of the citizenry, the harder it will be to unify China on Taiwan's terms. Does Taiwan want the reforms to fail? Well, that would worsen the lot of the mainland Chinese and the Taiwan Chinese can't find the moral justification to root for the misery of their mainland brethren.

The dilemma does tend to warp the Taiwan soul a bit, and here and there I found a tendency of the officials we met to speak as if the mainland reforms had already failed. American "China scholars" of the left and right are also preaching this view lately. (See James P. Sterba's "Some Sinologists See Reform Slowing Down After an Active Decade," The Wall Street Journal, September 5, 1986.) The academic left, the old Mao admirers, simply wish Deng would go away. The academic right has been nurtured by Taiwan these many years and faces the same dilemma.

There is a keen awareness here that informed opinion in the United States has the idea that Taiwan doesn't want an improvement in relations with the mainland, stemming from the passive nature of its "shining example" posture. They know this further isolates them, their natural allies among conservatives in Washington finding it harder to defend the relationship. The U.S. interest is clearly to have the PRC succeed in its reforms. Also cutting against Taiwan's political support in Washington is the threat from protectionists, including the Southern textile states. But nobody seems to have any ideas on what to do, considering the "Three Nos" of Kuomintang policy: no contact, no talks, and no compromise with the mainland. An official with the government information office told us that the press is free to debate any other policy, but not this. A we're-at-war attitude prevails.

The Beijing reformers, on the other hand, seem eager to begin breaking the ice. The China Daily of August 12, published by the government in Beijing, headlines: "Taiwan Poll Shows Hope for Reunion." The article says "a recent opinion poll in Taiwan showed about 60 percent of its people were confident that economic and political conditions on China's mainland would continue to improve over the next five years....The poll also showed more than 44 percent of Taiwan people did not favor the Kuomintang's Three Nos Policy' of no contact, no talks and no compromise with the mainland...."

It's logical that the mainland reformers would have common cause with those on Taiwan who would like to see contact, talks and compromise with the mainland — just as the Old Guard in Beijing and the entrenched Kuomintang elite in Taipei together hope the mainland reforms fail. If the PRC is going to make the economic headway it wants by the year 2000, it would be far easier if there was a free flow of human and financial capital across the Taiwan Straits. Observe the desperate need for Chinese PhDs and MBAs on one side of the Straits and a vast oversupply of Chinese PhDs and MBAs on the other. (There are 103 universities and colleges on Taiwan with an average semester tuition of $150.) My guess is that we will soon begin seeing cracks in the Three Nos Policy, followed by a "substantive arrangement." (I suggested to several top officials in Taipei that Taiwan begin the process by hosting an economic conference of the Northeast Asian nations, to discuss issues of commonality — investment, trade, debt and exchange rates, and invite economists from the PRC as well.)

In Japan's Mainichi Shimbun of August 10 there's a curious, no doubt apocryphal, front page story about an alleged secret letter from Taiwan's President Chiang Ching-ko to Deng Xiao-ping. The letter, supposedly delivered in June by a 60-year-old Chinese woman who "works as a coordinator of China-Taiwan relations under the Reagan Administration," sets forth six conditions for KMT-PRC talks: 1) The principle must be established that the meeting is for development of the Chinese race, not for the sake of partisan interests; 2) After integration, the national flag would depict a "sun in the blue sky"; 3) Six provinces in eastern China will be under the administration of the KMT and the personal annual income target will be set at $2,000 (U.S.) in three years; 4) Military personnel of both parties shall not engage in politics; 5) Free competition and free development of both the Communist Party and the KMT must be guaranteed; 6) All records regarding cooperation between the two parties must be made public.

Hmmm. Even if this is a total fabrication, the fact that rumors like this can make the front page in Tokyo mean they can be self-perpetuating and will continue, adding to reunification pressures. There's a broad constituency on Taiwan, the mainland, the Pacific as a whole, and in Washington, D.C., for movement in that direction. The Taiwan government is digging in its heels, but it's only a matter of time before it's dragged kicking and screaming into the dance. It's too isolated, too embattled, to be able to resist the forces building up for contact across the Straits.

It's just beginning to penetrate in Taiwan that unless the PRC reforms succeed, and it makes the transition to democratic socialism with Chinese characteristics, Taiwan will have Hong Kong on its lap in a few years. At the moment, although Taiwan claims to be the true government of China, it refuses to tell the 5.5 million Chinese of Hong Kong that — rather than become communists when the British Crown leaves in 1997 — they will be welcomed in Taiwan. Why not? We're too crowded already, they say, nervously. (I reminded them that the people of Hong Kong — where we stopped for a few hours — only occupy 200 square miles, which Taiwan wouldn't miss.) It began to dawn on me that the Hong Kong dilemma may become the greatest of them all for Taiwan, eventually forcing it to cheer for the success of the mainland reformers and offer assistance. Sun Yat Sen would want it that way.

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It was a remarkable trip to Northeast Asia, the whole turning out to be greater than its parts. The compactness of it was something that concerned me at the outset — five countries in three weeks. What could you learn? But thanks to the World Media Institute, which didn't stack the deck, the whirlwind tour offered a rare chance to plumb the mindset and perspective of five neighbors — four Confucian and one Catholic -- within the same rough news cycle. The United States was always a remote presence, an affable giant clunking around in the background, mumbling about its trade deficit and exchange rates while doing an historic tax reform. Although its Pacific fleet is all about, the Soviet Union seemed even more remote, present more than usual because of Gorbachev's Vladivostok speech, vaguely conciliatory.

Of the five, the Philippines is the most inward-looking, the least concerned with the geopolitical dynamics of the rest of the world, Cory riding the tiger. China is similarly preoccupied, although it is conscious of its global weight and importance. On reflection, how odd that Beijing should seem to be thinking more like a great power than does Japan, which is so much richer. I was startled when Professor Chen Zhongjing of Beijing University's Center of International Studies mildly chastized the U.S. for picking on Japan by trying to dictate its exchange rate — calling this "hegemonic" on our part. (Nobody in Japan expressed concern that the U.S. was picking on Korea and Taiwan on the same issue.)

This report is an optimistic one, but I didn't expect it to be at the outset of the trip. But close up, I saw the positive forces of youthful, entrepreneurial democratic capitalism (or socialism with Chinese characteristics) gaining the upper hand over the weakening forces of authoritarianism and elitism, right and left. On the whole, I came away bullish on the Pacific.

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