Not long after taking office, the administration of President Ma Ying-jeou (馬英九) said that its goal was to turn Taiwan into an Asia-Pacific regional financial and logistics center with strengths in asset management.
Turning Taiwan into a financial center is key to making it a regional operations center. If an efficient platform to communicate financial supply and demand of companies could be established in Taiwan, it would be a lot easier to persuade businesses to move their headquarters here.
Financial experts believe the government should pursue financial reform aimed at establishing strategic alliances with international financial institutions. I agree and would like to argue that a successful financial industry can become a main ingredient for continued economic growth and development in an advanced economy.
The second stage of the financial reform in Taiwan is widely considered a failure characterized by excessive government intervention. The reforms were aimed at cutting the number of financial holding companies in half within a two-year period. But too many businesspeople with vested interests became involved in the plan, which led to a lot of irregularities that have yet to be addressed.
What where the consequences of the failure of the second stage of reform? Net exports, or exports minus imports, of the financial industry, which includes insurance and financial services, can serve as an index to measure international competitiveness. In 1995, Taiwan’s financial industry had a deficit of US$97 million in terms of net exports. After the failed reforms, this deficit increased to US$628 million, or six-and-a-half times the previous figure.
On the other hand, in 1995, South Korea’s financial exports reached US$89 million and imports reached US$381 million, representing a trade deficit of US$292 million. After financial reforms following the 1997 Asian Financial Crisis, South Korea started attracting large amounts of foreign investment and became more competitive.
Financial exports increased to US$2.92 billion in 2006, much more than in Taiwan. This gave South Korea a surplus of US$397 million, which flowed back into the economy. Both Taiwan and South Korea implemented reforms, but the effects on the economy differed greatly. It can therefore be concluded that successful financial reform can have a huge effect on a nation’s economy. However, this example only concerns financial trade and not the huge effects that an efficient financial market can have on a nation’s domestic financing and economic operation.
Financial centers have a higher ratio of exported financial services, which contributes to the gross national product of these countries. Hong Kong and Singapore have financial export ratios of 10.6 percent and 9.4 percent, which is higher than Taiwan at 6 percent and South Korea at 5.8 percent.
Other examples of how financial exports can improve an economy can be seen in Ireland, Switzerland and Britain.
Ireland is a prime example of how a small country can succeed and other small countries should follow suit. Despite its size, Ireland has a trade surplus of US$5.82 billion in financial services, much higher than both Singapore at US$467 million and Hong Kong at US$507 million. The example of Ireland proves that a newly established financial center can become successful within a relatively short period of time. Switzerland is another example of a country with a high ratio of financial exports — 33.4 percent — which gives them a surplus of US$15.2 billion. This is one of the main reasons for Switzerland’s high GDP.
A successful financial industry can also act as a driver in large counties. Britain is a case in point. London views itself as leading New York in terms of financial innovation. Britain’s net export value of financial services is US$46.25 billion, which is more than the US, which exports US$4.61 billion in financial services. Financial exports account for 26 percent of total British exports.
The nation is faced with a number of difficulties in establishing itself as a financial center.
The first is that financial laws are not tailored to the specific needs of setting Taiwan up as a financial center and corporate merger and acquisition laws do not allow hostile takeovers. Second, the structure of the Financial Supervisory Commission must be adjusted to meet the demands of the financial industry as it becomes more complex. Third, there is no incentive for international financial organizations to establish strategic alliances with Taiwanese financial institutions.
Lastly, Taiwan must conform to established international practices in terms of taxes and human resources before it can become a financial center. If Taiwan is to become a regional financial center, solutions to these problems must be found and implemented quickly.
If we can use Taiwan’s abundant funds while attracting capital from Taiwanese businesspeople abroad by encouraging tax cuts and seeking other overseas capital, Taiwan could become a major financial center in the Asia-Pacific region. This is what we must do. Otherwise, the future does indeed look bleak and the government should proceed with extreme caution.
Tu Jenn-hwa is an associate professor at National Taiwan University’s Graduate Institute of National Development.
TRANSLATED BY DREW CAMERON
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