Asia Part 2 Jude Wanniski August 13, 2004

Memo To: SSU Students
From: Jude Wanniski
Re: China, Taiwan, Philippines

Here is the second and final part of my report on my 1986 trip to Northeast Asia.

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 Sherizhi, 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 pressureon 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 PRC's 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 Emile, 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-Com 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 a-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-Com 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 undertake 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-Com 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 stratagem 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% for the tenant and 37.5% for 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 turned 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 with 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," Wall Street Journal, September 5.) 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 Xiaoping. The letter, supposedly delivered in June by a 6O-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.

*****

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.