Distributor-Vacuum Advance Unit 

This is common to be bad if it appears original.  Its not only a vacuum advance, as far as ignition timing goes but it is also an ignition retard under boost conditions.  Below explains what happens.  That wall you hit around 3000-3500rpms where the car stumbles and jerks and maybe backfires is likely this part not working properly.  The plate that this part acts on could also be in need of lubrication as this is to react QUICKLY not drag on for 30 seconds from gummed up 20+ year old grease in the distributor.  Disassembling the distributor to clean and grease it may be in order.  See link on main page for that or click -> here <-

Its when this part is bad that it can't hold ignition retarded to counteract the mechanical advance because of the boost conditions that can cause detonation.  When the knock sensor detects that detonation the ignitor instantly pulls ignition timing back about 7% and that's the power loss you experience.  The retarding of timing is for safely even at stock boost levels, more so for levels higher.  Base timing is what you set timing at for idle.  The mechanical portion of advance is independent of vacuum advance/retard.  RPM based advance is for higher rpms when boost likely will retard timing and and vacuum advance is for when RPMs is lower and advance is need for additional power.  That this is happening is a sign your knock sensor is working.  If you have a dead knock sensor or set base timing with it not connected then you will not have this safety net and can have serious damage.  Base timing is usually at 10 BTDC or 10 degrees advanced.  Mechanical advance goes up to 34 degrees at high rpms near red line.  Add that and you have an ignition event that is far to long and the heat created from that is what melts parts not detonation.  Detonation breaks things and blows gaskets it isn't melting parts.  Pre-ignition can cause detonation since its not related to cam/valve train/crank timing  but its something else, that's the parts so hot that fuel ignites with out ignition.  Try driving a car with no reference hose and the mechanical portion disabled; its no fun.  This along with the knock sensor are very important parts of your car.

You can get a new part at auto parts stores or the dealer its not hard to get and its ability to retard timing is unique to the turbo version of this motor.  In other words, one from a minivan or truck will not work.  If you find one that appears to have dual chambers that is a high altitude advance unit and is not for our turbo motors.