International factors have thrown Taiwan’s stock market into a free fall, over which the government appears to have completely lost its bearings. First, it announced it would “encourage” insurance funds to use NT$8 trillion (US$262.16 billion) to rescue the ailing stock market, followed by an announcement that it would use the Postal Savings Fund (郵儲基金), the Labor Insurance Fund (勞保基金), the Labor Pension Fund (勞退基金) and the Civil Servants Pension Fund (退撫基金) to prop up the market. While the former suggestion came to naught, the other four funds are said to have lost NT$20 billion since they joined the stock market.
During the cross-strait crisis in July 1995, the government also used the insurance, banking, postal savings and labor pension funds to support the stock market. The same funds entered the market again in September 1998 after the stock market took a serious dive. In the aftermath, the National Stabilization Fund (國安基金) was established to take on this task.
The question of whether it is right to intervene in the stock market and the best time to do so is a much disputed issue. The real problem, however, is being overshadowed by this dispute. The question is: Should the government have the power to take command of public insurance funds to protect the market when the real owners of these funds are the people who place their money in postal savings accounts, as well as retired workers, soldiers, civil servants and public school teachers? This is what in economic terms is called the “principle-agent” problem.
VDuring the authoritarian era, the government’s coercive powers were often abused. Using national security and social stability as excuses, the government allocated public resources as it saw fit. Even if this practice sometimes served to promote these goals, it is difficult to prevent such abuse of power from leading to corruption.
Although the political atmosphere has changed dramatically, the attitude and thinking of officials seem to be carryovers from that era. Direct intervention in financial markets and inviting people over for a cup of coffee accompanied by verbal threats are both faster and easier than maintaining market order or adjusting supply and demand.
Insurance funds are set up to pay compensation to the insured. Gains and losses do not only affect the results of insurance companies, but also the rights of the insured. This raises the question whether officials intervening in the use of the insurance funds should also be responsible for their losses.
The government should be responsible for providing competent management of the Postal Savings, the Labor Insurance, the Labor Pension, and the Civil Servants pension funds, and not use them to save the stock market at every little hiccup. After all, if their owners lose money, will the national treasury reimburse them? In Japan, financial authorities were supposed to use postal savings to promote the development of strategic industries and infrastructure construction, but the highly inflated projects led to billions of dollars in losses. In the end, the participating government agencies and officials did not take any responsibility for the losses, which helped then-Japanese prime minister Junichiro Koizumi push through his privatization of the postal service.
Imitating Japan, Taiwan has established a task force at the Council for Economic Planning and Development for the mid and long-term use of capital. The task force is charged with allocating and using funds from the Postal Savings Fund, which potentially sets Taiwan up for the same kind of disaster as Japan.
The Ministry of Finance’s handling of the 1995 run on the Changhua Fourth Credit Cooperative following a financial scandal did not respect proper procedure for depriving shareholders of their rights. In developed countries, the state must publicly inform shareholders that the capital represented by their shares has been lost. Nor was the decision to let banking cooperatives sustain the losses of Changhua Fourth passed in advance by the boards of directors. These practices were later criticized by the Council of Grand Justices.
Following the 1998 Hung Fu Securities Corporation (宏福票券) scandal, the government decided that four banks should take joint control of Hung Fu at the price of NT$6 per share, which meant that shareholders at those banks incurred losses. The officials involved were later caught up in court cases for several years on charges of abusing public authority.
In a democracy, officials must act with caution — especially in the gray areas that are not explicitly covered by legislation. In the latest round of government financial staff appointments, the government should avoid the past practice of using these appointments to reward officials. It is ironic to see how the Financial Supervisory Commission requires that chairpersons of private banks who lack the expertise step down, while they appoint people with insufficient expertise to chair publicly owned banks.
Some people in the banking industry say that as these appointees lack even the most fundamental understanding of how to manage the capital and debt of financial institutions, it is no surprise that publicly owned banks are doing worse than privately owned banks and that private banks are doing worse than foreign owned banks.
As Taiwan’s financial markets have taken a great leap toward internationalization, intervention in these financial markets is being constantly criticized by international financial institutions. Last year, the US-based Heritage Foundation ranked economic freedom in Taiwan No. 26 in the world. One of the main reasons for this rating was the abuse of governmental powers and the authoritarian approach of the institutions managing the financial markets.
Norman Yin is a professor in the Department of Finance at National Chengchi University.
Translated by Perry Svensson