In a Taipei convenience store, five female students are buying crisps and Coca-Cola. Who is paying, one asks. Giggling, three reply with one voice: “special state funds, of course”. The joke is tinged with irritation that their president, Chen Shui-bian, could be spending government money to buy his wife French jeweler and Burberry handbags.

The case was made public on November 3, when Taiwan's chief prosecutor announced that Chen’s wife, Wu Shu-chen, was being indicted on embezzlement and forgery charges, for using false receipts to claim US$450,000 in expenses from a government slush fund used for secret diplomatic activities. The prosecutor said Chen himself is suspected of corruption but cannot be indicted because of presidential immunity. The charges were the latest in a long-running series of allegations leveled against Chen, other members of his family and various aides.

Chen in turn has vigorously defended himself and refused to step down despite the fact that three former presidential aides were indicted on similar charges for allegedly collaborating with Chen’s wife. While Chen himself is constitutionally protected from criminal charges, if he resigns, is removed or otherwise is forced to leave office, he can be charged later. The president’s second four-year term ends in May 2008.

The charges illustrate both how far Taiwan has come as a fledgling democracy, and how far it still has to go. For rank-and-file Taiwanese, the most surprising news in the corruption scandal is that the state prosecutor publicly charged Chen’s wife. Most Taiwanese believed the president had the power to keep the prosecutor, Eric Chen Rui-jen, silent until Chen leaves office in May 2008.

In a bigger sense, the scandal has brought to light, to an extent not previously realized, the existence of long-standing state slush funds paid not only to the president but to as many as 5,000 of the county’s bureaucrats. The money is not included in their official salaries and is not subject to tax. They can spend it on official expenses, like inviting people for meals and giving presents. But all too often the money has ended up in their pockets, to be spent at their discretion.

Prior to the current scandal, the vast majority of Taiwan people were unaware of the existence of these funds. It is misuse of the same funds that forced Ma Ying-jeou, Taipei mayor and the likely opposition Nationalist Party presidential candidate in 2008, to make a public apology last week and offer to resign if charged over the issue. Previously known as Taiwan’s Golden Boy, Ma now faces a more difficult battle in what was once seen as a trouble-free path to power.

The funds will likely not be abolished but one healthy result of the scandal could be clearer rules on how they are spent and more rigorous oversight. It is at least a victory for greater public transparency.

It is easy to forget now that Taiwan’s democracy only came about in the late 1980s after 52-odd years of iron rule by the Nationalist Party (KMT) of President Chiang Kai-shek and later his eldest son, Chiang Ching-kuo. That system, brought by Chiang when he fled the mainland in 1949 ahead of the pursuing Communists, finally gave way when the island’s burgeoning economic development produced a new generation that demanded more democratic government. After martial law was revoked in 1987 and press freedoms were liberalized, thousands of demonstrators demanded direct presidential elections.

The election of opposition lawmakers resulted in raucous displays of parliamentary disrespect that included fistfights and hair-pulling for some geriatric lawmakers, rather than reasoned debate on issues. Finally the KMT lost its grip completely in 2001 when the opposition Democratic Progressive Party won 87 out 225 seats, compared with the KMT's 68. Chen Shui-bian was elected in 2000 and has faced continuing tumult ever since as the KMT has sought to impede his presidency.

However, Taiwan’s institutions have developed to the point that a prosecutor can bring the wife of a president to trial and, most Taiwanese appear to believe, can conduct a fair trial. Chen has promised that, if his wife is found guilty, he will resign.

“Many Taiwanese were surprised that the prosecutor had confronted Chen and his wife head-on,” said Yang Yung-ming, a professor at National Taiwan University. “This is a critical stage on the way to becoming a mature democracy.”

The unfolding of the scandal, for instance, contrasts sharply with a more serious one in the mainland, involving theft of more than three billion yuan from Shanghai’s pension fund and the arrest of dozens of officials and company executives, including Chen Liangyu, Communist Party chief of the city.

In Shanghai, however, the prosecutor, media, public, police and the state Anti-Corruption Bureau have played no role at all. It was only an order from the central committee of the Communist Party that caused Chen to be detained, while the Shanghai media is banned from reporting the scandal.

The move against Chen and other members of the so-called ‘Shanghai gang’ once headed by former President Jiang Zemin is part of a complex struggle for power at the highest levels of the Communist Party, as President Hu Jintao seizes a moment when his opponents are weak. The issue is power, not corruption. Had Shanghai party chief Chen Liangyu maintained better relations with Hu, he might well still be in office. There is little doubt that hundreds of deeply corrupt individuals remain in office and immune from prosecution in the mainland. In a nation of 1.3 billion people, there is still but a single center of power and no institutional counter-balance.

Another plus for Taiwan is the degree of transparency and a free press. The media have published a list of 48 of the president’s wife’s friends whom she allegedly asked to provide receipts to cover withdrawals from the slush fund, with the amount given for each receipt. The press has also given a list of the shops and restaurants where the money was spent and on what, down to NT$560 at a well-known Taipei vegetarian eatery.

Prosecutor Chen held a news conference to explain how he compiled the evidence, including statements from the staff at the stores where Wu bought the goods and details of a shadowy figure who has come to be known as “007” after the James Bond character, ostensibly a mainland secret agent whom Chen claimed to have paid. The agent’s wife, however, denied publicly that he had received any money.

Unfortunately, the episode also demonstrates the prevalence of the money culture in politics, which the DPP promised to uproot when it came to power. Instead, charges against Chen’s son-in-law Chao Chien-ming, and his associates show that, as other young democracies like South Korea and Indonesia, Taiwan has a long way to go in controlling the power of money. It needs clearer rules on how much money companies can pay to political parties and the need to make such contributions public.

However, the Kuomintang has blocked all attempts by the DPP to set up a Hong Kong-style Independent Commission against Corruption, principally because the party’s 50 years in power resulted in the creation of vast funds that the party has no invention of seeing exposed.

Another element of democracy Taiwan’s politicians need to learn is the art of compromise. The DPP controls the presidency and the Nationalists the parliament, making it virtually impossible to pass legislation with the KMT as obstructionist today as the DPP was in its formative years. One example is the failure to agree on the procurement of eight submarines, 12 marine patrol aircraft and six Patriot anti-missile batteries from the US, which the army badly needs to combat the mainland’s growing military power, including more than 800 missiles pointed at the island.

Everyone agrees on the need for this advanced weaponry but political infighting has made consensus impossible. The United States has become so impatient with the squabbling that Stephen M Young, who as director of the Taipei office of the American Institute in Taiwan is the US’s de facto ambassador, took the unusual step of holding a news conference in late October to virtually demand that the procurement bill pass during the autumn.

With a super-energetic media, including several 24-hour news channels and dozens of politicians eager to appear on them, Taiwan has become one of the world’s most politicized countries. The public is told all it needs to know – and more. This makes discreet forms of negotiations, among domestic parties or with allies abroad, very difficult.

The Chen and Ma scandals have badly hurt the two major parties and blown open the race for the presidency in 2008. Ex-President Lee Teng-hui is said to be planning to split the DPP and unite one wing of it with his Taiwan Solidarity Union, which holds nine seats in the parliament.