How to reduce the distortions in Taiwan's credit and stock markets? During and after the 1997-1998 crisis, the Taiwanese government adopted several measures to address these problems.70 In the credit market, the government reduced the banks' business taxes, lowered reserve requirements, and helped to write off bad loans by dubious measures (e.g., redefine bad loans and relax repayment conditions). It formulated plans to take over the bad loans of insolvent local financial institutions. In the stock market, government assistance measures included the supply of US$5 billion low-interest mortgage loans to help real estate stocks, the establishment of a US$100 billion "stock-rescue fund" to buy stocks,71 the reduction of taxes on stock
69 United Daily News, February 20, 1999, p.1.
70 Zihua Huang, "Due Woguo Caijing Zhence De Jianyen" [Proposals of Financial and Economic Policies for Our Country], Taiwan Jingji Yenjiu Yuekan (November 1999), pp. 8-11.
71 The rescue fund consisted of the workers' pension fund, the workers' insurance fund, postal savings, and the government employees' pension fund. In 1990, the government allowed the pension fund to invest in stocks. In 1996, it expanded the investment levels and activities of the insurance fund and the
transactions, and the relaxation of transaction regulations.
I agree with liberal economists that all of these Keynesian reform policies serve only to prolong the crisis or to create a cosmetic short-term recovery. The crisis will repeat itself, perhaps on a larger scale, if the underlying institutional distortions are not properly addressed. The government has contemplated a number of mild structural reforms.72 However, most of these reforms either remain in the oven or lack implementation details. I agree also with liberal economists that the further liberalization of the financial markets, the strengthening of the government's monitoring capacity, and the reduction of government regulations will reduce market distortions. But I propose that these liberal reform policies will not be effective or adopted if those institutional relationships that caused the market distortions are not adjusted.
In the following, I will make six reform proposals based on the institutional relationships depicted in Graph 1. Graph 1 points out the institutional causes of market distortions and provides for six points of entry for reform policies. These reform policies are ordered according to their impact on the existing political-economic structures. They are financial liberalization, the reestablishment of the Central Bank's autonomy and leadership in financial policies, the promulgation of conflict-of-interest laws in legislative bodies, the removal of monopoly rights granted to local factions, the turnover of the ruling party, and the strengthening of the power of corporatist business associations.
(1) Financial liberalization. Financial liberalization will increase the scale and competition of financial markets. More importantly, the presence of foreign actors will complicate the relationships among the KMT, conglomerates, local factions, and the state. An oligopolistic alliance will be more difficult to sustain. Financial liberalization here refers not only to the liberalization of capital flow, but also to the encouragement of foreign financial institutions to establish branches in Taiwan and engage in the same business activities as their Taiwanese counterparts do. If financial liberalization entails only financial flow liberalization, it will reinforce the distortion effects of the oligopolistic alliance, since the alliance will have more leverage of
government pension fund. See Wanyi Dai, "Zhenfu Liyon Yinhangtuan Ji Teding Jijing Ganyu Gushi De Xiaoguo" [The Effects of the Government's Interventions in the Stock Market through Banking Groups and Special Funds] (MA. Thesis, National Zhongzhen University, 1997), pp.11-14.
72 These mild reform measures include efforts to increase the efficiency of public banks, the encouragement of mergers of financial institutions, the adoption of a credit-rating system, and the
influence, as has happened in South Korea, Thailand, Malaysia, and Indonesia. I urge the Taiwanese government to adopt investment incentive policies toward foreign financial institutions similar to those it had toward foreign manufacturing companies in the 1960s. These incentives include the enlargement of foreign ownership, the expansion of the scope of investment, the reduction of red tapes, the encouragement of technology (management know-how) transfer, and tax incentives for reinvesting profits in the economy. Since financial liberalization is a necessary component in Taiwan's application for WTO membership, the political obstacles to this reform measure will probably be the least among all six proposals.
(2) The reestablishment of the Central Bank's autonomy and leadership in financial policies. In the past twenty years, researches have found a positive relationship between central bank independence and economic development.73 An independent and powerful Central Bank will be able to resist the political interference of political parties, conglomerates, representatives, and local factions. It can effectively monitor and punish cheating in market transactions. Furthermore, it can maintain the long-term stability of the economy, which will assist long-term development, instead of short-term speculation, of credit and stock markets.
Therefore, I propose that the Central Bank be relocated from the Executive Yuan to the Presidency and become an independent commission like its American and German counterparts. The Central Bank should have the highest authority over financial policies, not share the power with the politically dependent Finance Ministry. It should report to the Legislature, but it should keep an independent budget (e.g., financed by banking taxes) not to be reduced by the Legislature. The board of directors of the Central Bank should increase the number of professional economists and reduce the number of private bank representatives. Their tenure should exceed those of elected officials. The President should appoint directors with two-thirds approval from the Legislature in order to get bipartisan support, or appoint new
establishment of an independent financial supervisory commission.
73 On the relationship between economic development and central bank independence, see John Goodman, "The Politics of the Central Bank Independence," Comparative Politics 23:3 (April 1991), pp.329-49; John Goodman, Monetary Sovereignty: The Politics of Central Banking in Western Europe (Ithaca: Cornell University Press, 1992); C. Randall Henning, Currencies and Politics in the United States, Germany, and Japan (Washington, DC: Institute for International Economics, 1994); Maxwell J.
Fry, Charles A. E. Goodhart, and Alvaro Almeida, Central Banking in Developing Countries:
Objectives, Activities and Independence (New York: Routledge, 1996); J. Lawrence Broz, "The Origins of Central Banking: Solutions to the Free-Rider Problem", International Organization 52:2 (Spring 1998), pp.231-268; William Bernhard, "A Political Explanation of Variations in Central Bank
directors with the majority support of existing directors in order to strengthen the continuity of the Bank's professional integrity. The Securities and Futures Commission should also acquire a similar strengthening of political independence.
Since the presidential race of the year 2000 is filled with uncertainty, the KMT badly needs a politically dependent Central Bank and the Securities and Futures Commission for raising campaign money. This reform proposal will not likely materialize until after the election.
(3) Promulgation of conflict-of-interest laws. One of the institutional causes of financial market distortions in Taiwan was the participation of representatives in legislative committees that deal with their businesses. Thus, there have been so-called
"stock legislators," "banking legislators," and "conglomerate legislators" who have acted both as umpires and players in the legislative process. To reduce such conflicts of interests, I propose that the Legislature pass laws prohibiting such behavior at all levels of representative bodies. In addition, campaign contribution laws, party enterprise laws, and property declaration laws for public officials will complement the above reform measure, but will also encounter more political obstacles. In January 1999, the departing Legislators passed a mild code of conduct concerning conflicts of interests. So far, however, the code has been left in the attic by the new Legislature. I do not see much hope in enforcing this reform proposal by the new Legislature, since more factional leaders, gangsters, and conglomerate representatives have entered the Legislature than before.74
(4) The removal of monopoly rights of local factions. For the moment, local factions have had limited influence on the national credit market and the stock market.
But on local credit institutions, their corrosive effects have been obvious and deteriorating. I propose to take the credit departments out of farmers' and fishermen's associations and transform them into local branches of a national agricultural/fishery bank, which would be subject to the independent Central Bank's supervision. Local credit unions should be merged with or reformed into commercial banks, and be opened to non-local members (including foreign investors). These reform measures will dilute the influence of local factions and expand monitoring mechanisms.
Independence", American Political Sciences Review 42:2 (June 1989), pp.311-327.
74 Of the 225 new legislators elected in 1998, two had a business background. Of these ninety-two legislators, seventy-ninety-two were in the business of construction, mass media, banking, and stocks, which could benefit a great deal from the legislative power. See Tiancai Kang, and Jinchuan Zheng,
“Liwei Jinquan Guanxi Quanmian Jiepou” [An Analysis of the Relationships Between Legislators and
However, these reform measures will encounter strong political opposition from the KMT, which has increasingly relied on factions for vote mobilization, and from the new legislators, who are factional leaders.
(5) Since most of the above reform proposals will affect the vital interests of the KMT, they are not likely to materialize, unless either the new KMT president has sufficient political influence and wisdom or the new president does not belong to the KMT. Hungtington has argued that a democracy is consolidated only when a country passes the "two-turnover test," i.e., the government changes hands between parties twice. 75 I argue similarly that after two turnovers of the Taiwan government, the old oligopolistic alliance will probably be shaken loose. Conglomerates might follow legal methods to do the lobbying, bureaucrats might adhere more sincerely to the principle of administrative neutrality, and the legislature might recruit more representatives with legal background than with business or gangster experiences.76 This reform proposal lies ultimately with the uncertainty of voters' choice.
(6) Strengthening business associations. Scholars have found a positive relationship between corporatism and economic development (e.g., Freeman).77 In his research on Taiwan's economic development, Kuo found that state corporatism was the most important factor for the island's economic success. I propose that the Taiwanese government establish corporatist institutions in credit and stock policies. 78 These reform measures include the establishment of corporatist associations for stock companies and banks, the recognition of these corporatist associations as the only legitimate representatives in national policymaking processes, and the authorization of semi-official powers to these associations (e.g., monitoring power and enforcement capabilities). These reform measures will not generate as many political obstacles as the previous four proposals do. However, they will require a considerable amount of organizational talent and costs.
Business], Shangye Zhoukan, no.587 ( 1999), pp.32-48.
75 Samuel Huntington, The Third Wave: Democratization in the Late Twentieth Century (Norman, OK:
University of Oklahoma Press, 1991).
76 Mingtong Chen conducted a statistical analysis of the impact of party turnover on the crime rate and the amount of bad loans in Taiwan's counties and cities. He found that in the past five years, KMT-controlled counties and cities tended to have higher crime rates and larger amount of bad loans than DPP-controlled ones did, see Mingtong Chen, "Heijin Xianshi Paihangbang" [Ranks of Counties and Cities in Black and Gold] (Mimeo, 1999).
77 See John R. Freeman, Democracy and Markets: The Politics of Mixed Economics (Ithaca: Cornell University Press, 1989).
78 Chengtian Kuo, Global Competitiveness and Industrial Growth in Taiwan and Philippines, (Pittsburgh: University of Pittsburgh Press, 1995).