Sat, Nov 25, 2000 - Page 8 News List

Avoiding a financial crisis might be possible

By Chen Shang-mao 陳尚懋

It has been two weeks since a report in The Economist predicted a financial crisis for Taiwan. Since then, we have seen a senseless war of words over the report.

First, the government's financial officials came out and sanitized the report, saying it was impossible for Taiwan to have a financial crisis. Next, the author and editor of The Economist report said it was only meant to act as a reference for the Taiwan authorities. Even though the magazine has a record of coming out with predictions that are later proved wrong, and even though the problems pointed out in the report are nothing new, the fact is that non-performing loan ratios have continued to rise in Taiwan's financial institutions. Therefore, we need to evaluate, from a professional viewpoint, the possibility of Taiwan having a financial crisis.

Political economists have divided the causes of the 1997 Asia financial crisis into three categories. First, crony capitalism, which means close relations between government and business.

Second, bad firms and bad technocrats lead to bad decisions. For example, when the Bangkok Bank of Commerce, which had strong political ties, ran into a crisis because of a high non-performing loan ratio, the Thai finance ministry and the Bank of Thailand did not try to introduce institutional reforms, but instead pumped in more money to try to save it. This eventually led to Thailand's 1997 financial crisis.

Third, badly drawn-up development policies that impede a country's progress.

Looking at Taiwan now, the financial system is fraught with close government-business relationships. Loans acquired through political connections have been one of the culprits behind the high non-performing loan ratio. Grassroots-level financial institutions especially are under the thumb of local factions.

Next, when major Taiwan corporations run into problems, the finance ministry's solution is to bail them out through informal channels. Apart from giving rise to suspicions of favoritism and influence-peddling, this strategy has a negative effect on the entire financial system.

Finally, the new government has yet to come up with an all-around package of economic policies. Instead, it has continued to intervene in the stock market through the National Stabilization Fund and trying to create the illusion of having a policy. But the government's massive purchase of listed shares will affect investor confidence. It will also cause foreign investors to withdraw their capital en masse, thereby leading to a serious economic and financial crisis. The recent failure of the NSF to shore up prices is a serious warning sign.

In fact, the key to preventing a financial crisis lies in political factors. Taiwan's political turmoil has brought too many uncertainties, perhaps even more than what we saw in Thailand in 1997. Under such political circumstances, will Taiwan really be spared from a financial crisis?

Chen Shang-mao is an associate researcher at the Foundation for National Development Research.

Translated by Francis Huang

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