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Balance financial reforms, incentives

Minister of Finance Yen Ching-chang (顏慶章) went to Europe last month to pitch for more Euro-pean investment in Taiwan while Vice Minister of Economic Affairs Lin Yi-fu (林義夫) went to the US with the same purpose -- proof of the hard work the government is putting into attracting foreign investment. If Taiwan doesn't establish a locational advantage -- where the profits from foreign investment are higher than what competing nations can offer -- then I'm afraid that we will only be adding fluctuating variables to Taiwan's economy.

The last year has seen decreasing foreign investment in the electronics industry, due to a wide range of factors. The industry used to be the main target for investment, which is now concentrated in the finance, insurance and telecommunications industries instead.

To deal with this situation, a delegation from the Ministry of Economic Affairs has already defined seven industries as the main areas which it wants to attract high-tech investment. The purpose of this list is to entice investment into new industrial fields and to cooperate in the promotion of strategic industries.

Unless developmental and directional strategies, much less concrete development plans, are proposed for these new industries, however, it will be difficult to create sufficient incentives to entice investors due to restraints such as high land and labor costs and lack of tax incentives. Given these restrictions, the purpose of the foreign ministry's investment promotional trips was to invite specialized investment organizations and financial institutions to invest in our securities markets or acquire shares in local financial institutions.

Six laws were passed by the Legislative Yuan in its extraordinary session in order to restructure the financial system. The Financial Holdings Company Law (金融控股法) will open the finance industry to cross-industrial operations, increasing the speed with which foreign institutions can purchase local financial institutions. It will also greatly change the financial environment for consumers. In particular, there is the question of whether or not acquisitions and mergers in the finance industry will create market monopolies or exaggerated concentration -- even to the point of institutions becoming so big that they cannot go bankrupt -- and have an impact on financial markets, distorting the economy, morals and perhaps even leading to economic instability.

Inviting foreign institutions to invest in our securities markets will increase the infusion of foreign investment in our stock markets. The previous financial or economic crises (the Mexican peso crisis in 1994, the Asian economic crisis of 1997 and the Russian crisis in 1998) prove that instability in securities investments, increases and decreases in foreign exchange following the movement of large amounts of short-term capital will not only affect the value of the NT dollar, they will also create fluctuations in the stock market and affect economic stability.

At the same time the government strives to invite specialized foreign capital to the local stock market to speed up acquisitions and mergers of local financial institutions by foreign institu-tions, the controlling agencies should research and plan efficient strategies to strengthen market discipline; strengthen information dissemination (by regularly publishing banks' non-performing loan figures for example) and financial transparency; and establish sound financial investigatory and supervisory systems. Only then will it be possible to balance the economic benefits of financial liberalization and internationalization with the systemic threats to the financial system flowing therefrom.

Tsai Horng-ming is vice secretary-general of the Chinese National Federation of Industries.

Translated by Perry Svensson
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