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Economic analysts warn of a return to cronyism

"In office before, the KMT showed little enthusiasm for aggressive financial-sector reforms. It will be up to a re-elected KMT to show that it really has changed."

Paul Cavey, greater-China specialist at the Economist Intelligence Unit

Pundits yesterday warned that a Chinese Nationalist Party (KMT) victory in the presidential election would put in jeopardy financial reforms initiated by the Democratic Progressive Party government.

Under President Chen Shui-bian (陳水扁), the country has reorganized its financial sector by forcing banks and insurers to write off bad loans, and encouraging lenders to consolidate in a bid to compete with foreign rivals.

"This is indeed a worry. In office before, the KMT showed little enthusiasm for aggressive financial-sector reforms," Paul Cavey, an economist specializing in greater China at the Economist Intelligence Unit, said in an e-mail interview yesterday.

"It will be up to a re-elected KMT to show that it really has changed," Cavey added.

Louis Chen (陳春山), a law professor and an attorney at the law firm of Chen & Associates (亞卓), shared a similar view.

"The KMT may be highly restrained and show even less enthusiasm in restructuring grass-roots financial institutions after soliciting support from fishermen's and farmers' groups during the election."

Chen warned that, if the KMT past practice of cronyism is rekindled to force banks to bail out and re-finance ill-performing businesses, the health of the nation's banking sector may deteriorate again.

"The KMT has to bear in mind that its past business and finance policies before 2000 later contributed to the nation's bad-loan problem," he said.

But not all analysts thought a KMT victory would be bad news.

"A second transfer of power may do more good than harm for financial reform since the principle of transparency will be further upheld," said Edward Chow (周行一), a finance professor at National Chengchi University.

He said that cronyism doesn't exist only with the KMT as the recent political-contribution controversy involving President Chen Shui-bian (陳水扁) has shown.

"The beauty of democracy is that poor-performing ruling parties will be held accountable for their wrongdoing and voted out every four years," Chow said.

Hsu Chen-min (許振明), a professor of economics at National Taiwan University, agreed.

Democratic veto

"If the KMT fails with financial reforms, voters can veto its administration in another four years," Hsu said.

Despite the doubt, most pundits yesterday agreed that no matter which party wins the presidential election tomorrow, the nation's financial reforms will not be put on the back burner.

"Be it the DPP or the KMT in power, the new government has to accelerate the nation's progress with financial reforms," Hsu said.

A foreign investment banker who asked not to be identified said the new government has to quicken the pace of opening up financial products, such as hedge funds, to keep up with international capital markets and to increase the competitiveness of the domestic financial market.

Hsu said that more effort needs to be put into the bad-loan problem after a new definition for non-performing loans that meets international accounting standards takes effect in May next year.

The government set up a NT$140 billion clean-up fund to bail out bankrupt lenders and passed the Financial Holding Company Act (金融控股公司法) in 2001, allowing lenders and insurers to merge. But the DPP government has failed to carry out its original plan to close the debt-ridden grassroots credit cooperatives after more than 100,000 farmers and fishermen protested those plans in 2002.

Restructuring fund

Although both Cavey and Louis Chen praised the DPP government for writing-off bad loans and initiating reforms, Louis Chen said the new government will have to push for creating the Financial Restructuring Fund (金融重建基金), which the DPP administration had failed to achieve due to political gridlock.

The DPP was also weak in the privatization and consolidation of the large number of state-controlled banks, Cavey said, adding that he's not confident that even a re-elected DPP would make it a priority.

Cavey warned that the economic recovery may make the banking sector look good in the short-term, allowing politicians to forget the importance of further reform and making the banking sector vulnerable to a repeat of recent problems if the economy turns south again.

Immature system

Chow said that the nation's financial reforms still have a long way to go, compared to the maturity of countries such as South Korea and the US.

As well as financial reforms, Chow stressed the importance of an independent judicial system, one that is free from political interference while able to launch investigations into financial and political irregularities as well as white-collar crimes.

Louis Chen urged the new government to quickly develop a long-term plan for the banking sector to tap in to the greater China market, while Chow said that a supervisory mechanism should be finalized to regulate newly established financial holding companies after the Financial Supervisory Board (金監會) is slated to be set up in July.
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