Taiwan's financial services sector faces a massive challenge after the country's accession to the WTO when it has to open its domestic financial market according to the General Agreement on Tariffs and Trade.
Economic development in many countries over the past 20 years shows that the financial services sector has been taking up an increasingly higher proportion of GDP. The number of people employed in the financial sector is also rising. This shows the importance of the financial sector to overall economic activity. For this reason, the financial services sector will be a major influence in the rise and fall of economic development.
Once financial markets are opened up, foreign financial businesses will come riding in on the back of their superior business efficiency, the variety of their financial products and experienced management talent. This will help Taiwan's financial markets expand and deepen. But at the same time it will also pose a lethal threat to local businesses.
Generally, Taiwan's local banks and securities companies still operate under government protection because the country still places a large number of restrictions on their foreign counterparts. Competitiveness has been relatively weak and a sense of crisis over financial liberalization is naturally strong.
In contrast, Taiwan allowed foreign insurance companies into the country in 1987 and successively adopted various measures to make good on pledges made to the insurance industry to qualify for WTO entry. Therefore, the insurance industry has been an open and highly competitive market and will be relatively unaffected in the future.
The opening of financial markets will link Taiwan's capital markets more closely to international markets. The use and allocation of capital will therefore become more efficient. Individual economic entities will enjoy better services at lower prices. These are the positive aspects of opening the market. However, the government will have to consider in advance the challenges and structural transformations financial markets will soon have to face. Both the free flow of international capital and the spillover from international markets will create fluctuations in financial markets and reduce the government's ability to intervene. If the government still plans to intervene or influence the market at this time, it will inevitably suffer a market backlash.
Current research indicates that the Asian financial crisis was not due to the liberal financial policies of any country, but rather that governments continued to intervene improperly in markets after opening them. Such intervention jeopardizes market balance and leads to speculative attacks on currency exchange rates. Open markets boost the impact of such attacks and eventually cause financial systems to collapse. The government must understand that a significant level of fluctuation is inevitable in an open market, and that market fluctuations are not necessarily equivalent to financial instability.
Also, the government does not need to get involved in market activities on a whim. The government should be working hard to conduct a thorough review of regulations and amend those that are no longer suitable in order to establish healthy financial markets that are able to self-adjust.
Next, the government should understand the far-reaching effects of financial markets. Open finance markets can not only bring prosperity to the financial industry, but also to a number of other industries as well as to employment. For example, lifting the restrictions on investments by foreign banks in high-tech industries will help those industries capitalize and expand.
Open financial markets can also become an important foundation for funding and developing important industries like bio-tech. Lifting restrictions on investments by foreign banks in government bonds may help invigorate Taiwan's government bond market and other secondary markets. Taiwan has faced financial difficulties in recent years and needs to issue a large number of government bonds to fill the gaps. More government bonds and market participation will boost Taiwan's currently sluggish secondary markets and turn the bond market into an important window for capital allocation and investment hedging. If the government understands the importance of opening up financial markets, it should more aggressively seek to eliminate unnecessary restrictions that still exist in the market -- the quicker the better.
Only more competition -- not more intervention -- can truly strengthen our financial industry and invigorate the overall economy.
Finally, Taiwan can play a more active and positive role in international financial activities as both Taiwan and China enter the WTO. In recent years, many foreign financial conglomerates have not been successful with their business in China. This is because China maintained a large number of restrictions on its financial markets. But there are also restrictions created by cultural barriers.
Taiwan's financial businesses will have to go through a painful period of readjustment after the markets are opened. However, those who can successfully transform themselves will become highly competitive. Because Taiwan's financial businesses still possess cultural advantages that foreign businesses do not have, they can set up alliances with foreign businesses -- or even go it alone -- to expand their influence in the Chinese market, thereby ensuring that Taiwan becomes an Asian or international financial center.
Thinking along these lines, the government should also quickly set the tone for cross-strait economic and financial relations, remove unnecessary restrictions and let Taiwan's financial businesses fully utilize their capabilities. If Taiwanese businesses have their hands tied and as a result cannot expand beyond Taiwan's shores, they will naturally have no opportunity to compare themselves with others. Taiwan will have voluntarily given up its bid to compete on an international scale.
All told, opening up financial markets will be a difficult test that will also provide opportunities for further improvement. Our attitude and the way we handle this test will affect Taiwan's long-term development. We can take the initiative and move toward the role of a financial center, or we can shackle ourselves and sink into the role of a financial colony.
Between success and failure, there's much we need to think about seriously.
Kuan Chung-ming is director of the Institute of Economics at the Academia Sinica.
Translated by Francis Huang
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