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Economic report misses the target

`Does Taiwan's financial sector ... really have no future as the EIU claims? The EIU forecast could be right, but this has nothing to do with isolationalist policies or domestic politics.'

A few days ago, the Economist Intelligence Unit's (EIU) Hong Kong-based Asia-Pacific research department published a survey predicting that Taiwan's economic growth rate for the next 15 years would remain at a low average 3 percent per year. It also saw no future for Taiwan's financial sector because Taiwan has chosen to isolate itself and domestic political conflict.

Based on certain premises -- if, say, Taiwan's China-bound investment remains high at 2 percent to 5 percent of Taiwan's GDP -- it is possible the EIU's assessment will prove correct, but there are other the reasons for the lackluster performance of the nation's financial sector and modest growth outcomes.

People can get used to anything: residing in Hong Kong, it is only natural to make the non-state Hong Kong one's point of departure. The view of economic causes and effects in independence-leaning Taiwan, however, is very different.

Comparing Taiwan with China, whose financial sector is freer? The answer is, of course, Taiwan. According to the ratings of international research institutions, excluding the city-states of Hong Kong and Singapore, Taiwan's economy is Asia's freest. Taiwan's financial sector is open to global markets.

Is it fair that it is being called isolationist simply because direct exchanges with China are restricted? It is clear that the EIU commentators have completely incorporated the Hong Kong perspective into their analysis and that their thinking is focused on the Chinese market, while ignoring the fact that Taiwan's national security and sovereignty are under direct threat from China.

Does Taiwan's financial sector, and the banking sector in particular, really have no future as the EIU claims? The EIU forecast could be right, but this has nothing to do with isolationalist policies or domestic politics.

The nation's banking sector is an industry that has long been robust, and it is closely related to the performance of the real economy.

Taking Japan as an example, its banking sector dominated the world in the 1980s, and it almost bought the Bank of America. But as Japan's economy stagnated in the early 1990s, the bank sector saw troubled times. Japanese institutions had no choice but to retrench and withdraw from international markets.

This means that when a nation's economy collapses, the banking sector will suffer the most. Taiwan's bad debt crisis around 2000 was the result of a downturn in the real-estate market and business bankruptcies. In other words, whether or not Taiwan's financial sector has a future will depend on if Taiwan can regain past economic growth rates of 6 percent to 8 percent.

Today, the banking sector is facing hard times. Several large Taiwanese banks recently refused to accept long-term time deposits, sparking protests among major clients. The question is why would a bank refuse to accept deposits? The answer is that banks cannot find enough borrowers to use the available funds.

In the past, domestic investment rates were high and there were no worries about finding people who needed money to invest. With the opening of cross-strait investment in 1990, however, the situation changed sharply as local investment dropped and banks' annual loan rates declined.

In 2001, when the government adopted the active opening policy, domestic investment rates slid further to a mere 17 percent and business demand for loans also shrank sharply. Too many deposits and too few borrowers has led to a shrinking interest rate spread and dwindling profits. It is evident that the China-bound flow of capital is the source of the banking industry's current difficulties.

As the saying goes, only the person who ties the bell around the tiger's neck can untie it. The banking sector's difficulties should of course be resolved by measures taking aim at the problem. In other words, strategies to increase domestic investment should be prioritized.

Some people suggest that local banks should be allowed to operate in China to be able to provide financing to China-based Taiwanese businesses. This would be the worst of all policies and would only cause more problems.

At the very least, the first phase of such a policy should be predicated on increasing the domestic investment rate to 25 percent, the level prior to the implementation of the "active opening" policy. Everything will fall into place as long as Taiwan's average economic growth rate will increase to the past level of 6 percent to 8 percent.

Taiwanese should not to despair despite the EIU's warning. If we help ourselves, others will soon come to our aid, too. If the country can prioritize domestic investment, reduce China-bound investment, and diversity its foreign business activities, Taiwan's economy will once again be a raging tiger, and the EIU will have to take another look at its economic assessment.

Huang Tien-lin is a former national policy adviser to the president.

Translated by Lin Ya-ti
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