Taiwan has the resilience to make a recovery

Just when Asia seemed to be getting back on the economic fast track, the devastating earthquake in Taiwan and fresh political turmoil in Indonesia have slowed the region's march back to high growth rates and optimism.

On Tuesday, an earthquake registering 7.6 on the Richter Scale hit Taiwan, killing more than 2,100 people, toppling buildings and cutting power to most of the island. Initial estimates put the damage at 100bn Taiwanese dollars (pounds 2.1bn) and the government immediately trimmed its 1999 economic growth target to 5.5 per cent from the earlier 5.74 per cent forecast.

The biggest economic casualty was Taiwan's huge microchip business. The island is home to the industry's largest foundry, Taiwan Semiconductor Manufacturing Co, and altogether supplies 10 per cent of global chip demand.

With the Hsinchu Science Industrial Park, Taiwan's answer to California's Silicon Valley, knocked out for up to three weeks, losses in the semiconductor sector could rise as high as pounds 50m. More significantly, shares in Intel and other big chip makers started to tumble on Friday as Wall Street analysts warned that Taiwan's earthquake could have a worse than expected impact on the fourth quarter.

Taiwan supplies 55 per cent of the world's motherboards, the main boards that hold all the chips in personal computers; 11 per cent of the world's memory chips; and more than 80 per cent of the world's graphics chips. Many of these are sold on to microprocessor manufacturers such as Intel. With capacity already tight in the run-up to Christmas, and Intel supplying 80 per cent of the microprocessors to personal computer makers, analysts warned that the short-term outlook was not good.

But for Taiwan as a whole, there were glimmers of hope. To start with, the epicentre was in the very centre of Taiwan, close to scenic Sun Moon Lake. While this hit the Hsinchu Science Industrial Park hard, it meant the island's two biggest population centres, Taipei in the north and Kaohsiung in the south, were relatively unscathed.

Second, although several dozen apartment blocks collapsed and a handful of builders and architects have been detained for shoddy construction, the scale of damage was significantly lower than in Turkey, which suffered a similar quake last month. Taiwan's resil-ience has been largely attributed to far tighter enforcement of building regulations, which shows the island has moved on from its corrupt past.

Taiwan's government is also hoping that the strong economic fundamentals that helped the island dodge the worst of Asia's financial crisis will carry it through the quake aftermath. It has already set up a low-interest loan facility for families and businesses that have suffered from the quake and announ- ced tax breaks for reconstruction. In addition, Chang Yao-tsung, chief statistician at the Economic Ministry, has predicted a reconstruction boom next year to take economic growth well past 6 per cent.

There has been no such optimism in Indonesia, where the terrors of East Timor, a banking scandal and two days of rioting in the capital over new security laws have pushed the nation to the brink of becoming a pariah state.

On the latest estimates, rampaging militias and Indonesian soldiers have slaughtered at least 7,000 civilians in East Timor for exercising their right to vote in a referendum on independence on 30 August. A staggering 600,000 people, three-quarters of East Timor's population, have been driven from their homes.

The violent protests in Indonesia's capital, which led to at least four deaths, erupted as UN peace- keeping troops moved into East Timor in a bid to restore order. Students were protesting against a new law which, they say, gives the military more sweeping powers. While the Indonesian government claims the legislation makes the country more democratic, it announced on Friday it would delay passing the bill in the face of such violent opposition.

All this instability comes against a banking scandal that reaches to the top echelons of power in Indonesia and has blocked all further assistance from the International Monetary Fund and the World Bank in helping the country recover from the Asian financial crisis. Both institutions are refusing to co-operate until the Bank Bali scandal - in which millions of dollars of government funds allocated for bank recapitalisation were allegedly diverted into a political slush fund - is fully investigated and the results published.

Although Indonesia has sufficient reserves for the next month, economists have already lowered forecasts for this fiscal year from 2 per cent growth to a contraction of 0.8 per cent. Ethnic Chinese businessmen, still traumatised by a wave of fatal attacks on their community in 1998, are again moving funds offshore, putting pressure on the rupiah and leaving the immediate future of the nation uncertain.

So Indonesia is in a big hole, and Taiwan in a significantly smaller but still noticeable dip. The picture across the rest of Asia is mixed. Thailand, which prompted the financial crisis two years ago when it was forced to devalue its currency, is recovering nicely. South Korea and Hong Kong are moving cautiously forward, as are Singapore, Malaysia and the Philippines.

But China and Japan, the giants of East Asia which managed to avoid most of the Asian financial flu, are both looking slightly shaky. China's flagging economic growth, coupled with rising unemployment and almost two years of deflation, is leading to fears of currency devaluation. In Japan, optimism over a spurt of growth earlier in the year has not carried through. Consumer sentiment is negative and public debt is close to a huge 8 per cent of gross national product.

One thing is certain: those heady days of the late 1980s and early 1990s, when economists hailed the Asian powerhouses as the leaders of the next millennium and multinationals dribbled with delight over market potential, have long since gone. Asia may still be the great economic hope of the future, but it won't be any time soon.