Taiwan election likely to breathe life into economy

TAIPEI (Reuters) - When Taiwan votes for a new president on Saturday, many will likely ignore pro-independence rhetoric in favor of bread-and-butter economic issues.

Stagnating wages, rising inflation and a widening wealth gap have taken centre stage as election issues over Taiwan's fragile ties with China, which sees the island a renegade province and has never renounced the use of force to bring it under its fold.

Taiwan's more than 17 million voters hope the next president will promote warmer ties with China, which could boost jobs and investment and help cushion the island from the impact of a weakening U.S. economy.

The Taiwan dollar already reflects such optimism. It has rallied strongly since the opposition Nationalist Party (KMT), seen as more pro-China than the ruling Democratic Progressive Party (DPP), won a landslide victory in legislative elections in January.

The presidential race comes down to Ma Ying-jeou of the KMT, a former mayor of Taipei, who has promised to fulfill ambitious growth targets, and Frank Hsieh of the DPP, who has sketchier economic plans.

The KMT favors closer trade ties with China than the incumbent and independence-leaning ruling party. It wants to relax various restrictions on business with China, boost flights across the Taiwan Strait and open the island to more Chinese tourists, believing such moves will breath life into the economy.

"On the whole, Ma Ying-jeou has a more rounded economic agenda," said Tony Phoo, an economist at Standard Chartered Bank in Taipei. "Hsieh is trying to focus on the quality of the economy so he's not quantifying it."

Many blame incumbent President Chen Shui-bian for neglecting the economy and putting too much focus on fiery language during his eight years in power, which rattled investor confidence and slowed economic reform.

Analysts say a win for either candidate on March 22 should usher closer trade ties with China, Taiwan's top trading partner.

But the KMT's Ma had a significant lead over his rival in opinion polls conducted by local media last week.

"This election is a wake-up call for the new president to pay more attention to economic issues," said George Hou, president of JPMorgan Asset Management.

FATTENING TAIWANESE WALLETS

Ma has proposed a plan known as "633", which is to achieve economic growth of 6 percent, a jobless rate of 3 percent and per capita GDP of $30,000. Ma hopes his China platform will help him hit the targets.

With Taiwan's economic growth averaging 4.9 percent over the past 5 years, several analysts said a 4 to 5 percent target would have been more realistic over the next few years as the world economy, hit by the credit crisis, looks set for a slowdown.

Standard Chartered's Phoo said that lowering the jobless rate below its current level at about 4 percent, relatively high compared with a decade ago, would be difficult without boosting employment in the services sector.

Many factories have moved production to lower-cost locations outside Taiwan and critics say government spending has been minimal in recent years, fostering a sense of a widening income gap and lack of jobs.

Grace Ng, an economist at JPMorgan, said Taiwan need not look too far to see how closer ties with China would likely benefit the economy. Hong Kong's GDP growth accelerated to about 7-8 percent after it signed a trade pact with China in 2004.

Ma also plans to spend T$4 trillion ($130 billion) over 8 years on 12 infrastructure projects to pump prime the economy.

Liang Kuo-yuan, president at Polaris Research Institute, noted the growing influence of China on Taiwan's fortunes.

"KMT's 633 pledge will be impossible without China's enormous market, and for Hsieh, a more conservative approach will not go down well with voters, especially since cross-strait ties are increasingly intertwined," he said.

Hsieh wants a "prosperous economy", with his policies based on a "golden triangle" of sustainable development, economic prosperity and social justice.

Ma and Hsieh have proposed expanding trade, from banking to tourism, including allowing more Chinese tourists to visit.

Taiwan will need to build more shopping malls and hotels, which will create jobs in services and construction and in turn lift domestic consumption and wages.

Taiwan's stock market rallied after the legislative election, but has since weakened with stock markets globally, while the Taiwan dollar is up 5.5 percent this year.

"Financial markets overall do think that at this point in time, opening up of cross-strait links is the most crucial factor going ahead," economist Ng said.

(Additional reporting by Faith Hung, editing by Jacqueline Wong)