Global Markets and Local Institutions: Corporate Law System and Financial Reform Debates in Taiwan

Abstract

Taiwan offers an interesting case for the discourse on global markets and local institutions. She began to develop her economy in the early 1960s, after a reasonably successful land reform program by the Nationalist (Kuomintang, or KMT) government in the 1950s. The KMT-controlled Republic of China (ROC) government had retreated to Taiwan in 1949 after losing the civil war to China. Despite her impressive economic achievements in the fifty years since the KMT government went to Taiwan, however, the dichotomy still exists: Taiwan eyes on the global markets, but her corporate law system and financial market remain local and parochial! Indeed, this dichotomy is a long-term weakness for Taiwan, which had a peaceful transition of government when the candidate from the Democratic Progressive Party (DPP), former Mayor Chen Shui-bian, won the March 2000 presidential election after the KMT splintered. Despite Taiwan's WTO accession to the WTO in 2001, her government had other new challenges. For example, President Chen Shui-bian had to face global recessions and lack of confidence in Taiwan, which registered negative growth for the first time since the first oil crisis in the early 1970s. Also, after a decade of opening up Taiwan's financial market, which coincides with her democratization, Taiwan finds her financial market in a dire situation. The problems in the financial market are illustrated by increasing nonperforming loans (NPLs), reluctance to lend because of shrinking market value of collateral, and lack of innovation. In the industrial sector, inadequate confidence in the new government led to reduced domestic investment and exodus of funds for active and portfolio investment abroad. Even towards the end of the KMT administration, financial reform became an obvious policy bandwagon. However, reforms are usually easier said then done. The KMT administration was able to propose a financial reform program, but did not garner the political will to force it into enactment. The Economic Development Advisory Council (EDAC) meeting, called in early July and closed in late August 2001 by President Chen Hsui-bian to solidify political consensus for economic reform, apparently met with success. Even though his predecessors had failed to achieve government re-engineering in the last decade, President Chen has called for shrinking the government and streamline the administrative process. The administration was instructed to develop a detailed implementation plan within two weeks after closure of the EDAC meeting, and to seek expeditious enactment or amendment of laws when necessary, despite a national election towards the year end which ended the term of the national parliament in early January 2002. One important goal of the EDAC and the recommendations, of course, was to maintain the confidence of the business community in Taiwan. Meanwhile, directed by the Ministry of Finance and the Central Bank of China and aided by some of the big five accounting firms, an elite team of close to 300 financial examiners drawn from ten government-affiliated banks began their work in August 2001. They were first stationed at 36 local credit institutions, which as a group generally had the worst NPL problems. These 36 local credit institutions represented close to 10% of the banking institutions. The MOF also made a public announcement that the government would guarantee to pay the debts of these local credit institutions. They then began to do special audits and examined questionable lend practices. In September 2001, despite protests by the management of some of these local credit institutions, their assets were involuntarily transferred to the ten government-affiliated banks. Their operations became part of the ten banks' branches, and they discontinued their banking business. There are speculations that this joint MOF-CBC enforcement action was motivated by political reasons to clip the wings of the local factions traditionally supporting the KMT. That may be so. But for possibly the wrong reasons the right thing was done. Indeed, this crackdown marks the first time in post-War Taiwan's history that the government is trying to clean up the financial system. As shown above, Taiwan had followed a path that focused on the manufacturing sector to transform herself from an agrarian society into a newly industrializing economy. She began with light manufacturing activities and went into shipping, steel, automobile, petrochemical and electronics in the 1970s and 1980s in an effort to upgrade her industrial prowess. She has followed a gradual, partial approach to globalization. Domestic competition was suppressed and small and medium, as was the financial sector.