East Asian Financial Systems as a Challenge to Economics: Lessons from Taiwan

For example, Lundberg Erik , “Fiscal and Monetary Policies,” in Galenson W. , ed., Economic Growth and Structural Change in Taiwan: The Postwar Experience of the Republic of China (Ithaca, NY: Cornell University Press, 1979); Galli Anton , Taiwan: Economic Facts and Trends (Munich: Ifo Institut fur Wirtschaftsforschung, Weltforum Verlag, 1980); Tsiang S.C. , “Monetary Policy of Taiwan,” in Li K.T. Yu T.S. , eds., Experiences and Lessons of Economic Development in Taiwan: Conference Proceedings (Taipei: Institute of Economics, Academia Sinica, 1982); Tsiang S.C. , “Exchange Rate, Interest Rate, and Economic Development: The Experience of Taiwan,” in Klein L. Nerlove M. Tsiang S. , eds., Quantitative Economics and Development (New York, NY: Academic Press, 1980).

Lundberg , Ibid., p. 280 [emphasis added].

Scitovsky Tibor , “Economic Development in Taiwan and South Korea,” Food Research Institute Studies, 19(3) (1985): 242.

Sen A. K. , “Development—Which Way?” Economic Journal, 93 (December 1983): 749. In terms of gross capital formation to gross national expenditure, Japan reached 30 percent in the late 1950s, when Taiwan's figure was about 16 percent; by the mid 1970s, Taiwan's had reached 30 percent, some 15 years later.

Sun Chen Liang Ming-Yih , “Savings in Taiwan, 1953–1980,” in Li Yu , eds., Experiences and Lessons of Economic Development in Taiwan, op. cit., p. 404.

Sun Liang , op. cit.; Scitovsky , op. cit.

International comparisons of government savings suffer from differences in definition as to what is included and what excluded. In South Korea most public enterprises are included, but some are excluded for no obvious reason, their savings being put with corporate sector savings. I do not know whether there are similar problems for Taiwan.

Chow , in Lundberg , op. cit., p. 304.

Scitovsky , op. cit., p. 243.

Tsiang (1980, 1982), op. cit.; Lundberg , op. cit.

The real cost of a bank loan in Taiwan in the mid-1960s was 12–13 percent, the nominal cost around 14–15 percent The nominal cost in Japan was then around 6 percent, in the U.S. around 5 percent. In Korea, the nominal rate was about 26 percent, the real cost of “ordinary” loans was 17 percent, while the real cost of “policy” loans was very low or even negative (such loans accounted for about half of total official loans). The cost of export loans, one type of policy loan, was minus 2 percent. Korea Exchange Bank, Monthly Review, various issues, for Korea. But see the discussion below on the difficulties of inferring costs from rates.

Sun Liang , op. cit., p. 412; Scitovsky , op. cit., p. 246.

Liang C. Skully M. , “Financial Institutions and Markets in Taiwan,” in Skully M. , ed., Financial Markets and Institutions in the Far East: A Study of China, Hong-Kong, Japan, South Korea and Taiwan, (London: Macmillans), p. 174.

Ibid., p. 189.

Scitovsky , op. cit., Chart 1.

World Bank, Korea's Development in a Global Context (Washington, D.C., June 1984), p. 238, n. 8.

Liang Skully , op. cit., p. 188. But cf. Chiu Paul , “Performance of Financial Institutions in Taiwan,” in Li Yu , eds., Experiences and Lessons, op. cit., p. 431, who talks of the “high equity position” of Taiwan's private manufacturing enterprises, referring to a debt/equity ratio over the 1970s of, by his calculations, 160–165. He has in mind the comparison with Japan, where he takes the ratio to be of the order of 400. Johnson Chalmers , MITI and the Japanese Miracle (Stanford, CA: Stanford University Press, 1982), p. 203, suggests a much lower figure for Japan. International comparisons of debt/equity ratios are plagued by differences in adjustment of asset values for inflation. The figures given in the text are not inflation-adjusted (except for the modified Korean figure). Bankers in Taiwan tend to take a debt/equity ratio of two-to-one as a rule of thumb. The macro numbers are roughly in line with the official figures of between 160 and 180 percent. If one takes industrial corporate assets as equal to 100–110 percent of GNP, as is common in middle-income countries, M₂ as equal to 67 percent of GNP (Table 2), and M₂ as roughly equal corporate debt, this leaves 33–43 percent of GNP for equity. So a debt/equity ratio of 160 to 180 percent is not surprising, considering that part of M2 is not allocated to the corporate sector. (The same calculation for Korea would have to include its high foreign debt in relation to GDP, offsetting low M₂/GDP).

Shea J.D. , “Financial Dualism and Industrial Development in Taiwan,” conference on Industrial Development in Taiwan, Institute of Economics, Academia Sinica, March 1983 (Chinese only), p. 5; Ho S. , “Small-Scale Enterprises in Korea and Taiwan,” World Bank Staff Working Paper No. 384, April 1980, Washington, D.C.; Chung Hua Institution for Economic Research; Sandeman H. , “An Island on Its Own,” The Economist, July 31, 1982.

Lundberg , op. cit., p. 292, Taiwan Statistical Data Book 1982. In 1981 the curb market rate was about 35 percent per year, the bank rate on secured loans was about 15 percent. Curb market borrowings are not included in debt/equity figures; if they were, the real debt/equity ratio would be increased.

The curb market estimates for Korea come from Scitovsky , op. cit., p. 253, who gives the high figure, and from the “miscellaneous” column of loan uses in Korea Exchange Bank, Monthly Review, 16(7) (July 1982) from which one can calculate a maximum share of curb market loans as 17% in 1979, 23% in 1980, and 8% in 1981. A more sophisticated calculation in The Banker (Korean only), October 1982, p. 8, suggests a share for the curb market in 1980 of only 6%. My thanks to David Darton for help with these figures. The best discussion in English is in Cole D. Park Y. C. , Financial Development in Korea 1945–1978 (Cambridge, MA: Harvard University Press, 1983), Chap. 4.

Prindl Andreas , Japanese Finance: A Guide to Banking in Japan (New York, NY: John Wiley and Sons, 1981).

Liang Skully , op. cit. The biggest of the four private banks was privatized in the wake of UN derecognition (1971), to enable Taiwan to have overseas branches of a domestic bank without running into the diplomatic problems posed by a “government” bank of a non-recognized country. China Airways is nominally private for the same reason.

Ibid., p. 178.

Over-invoicing is a favorite way of evading exchange controls. A local buyer may pay a foreign firm US$1 per unit, but on the invoice the price appears as $1.04. The local buyer pays the foreign firm $1.04, the foreign firm then deposits the difference in a bank account of the buyer's choice, generally in the U.S. or Canada, sometimes in Hong Kong. The amount of over-invoicing is often a matter of hard bargaining between local buyer and foreign firm. Foreign businessmen like to point out that some of the most outspokenly patriotic and moralistic public figures in Taiwan are themselves busy salting money away in overseas banks by such methods. Foreign firms operating in Taiwan themselves often over-invoice to a nominal head office in Hong Kong, which in reality may be little more than a post-office box number. The Customs Administration collects extraordinarily detailed information on overseas prices, partly so as to check over-invoicing.

Hofheinz Roy Calder Kent , The Eastasian Edge (New York, NY: Basic Books, 1982), p. 129.

China Post, August 27, 1983.

On Korean financial controls see, for example, Luedde-Neurath R. , “State Intervention and Export-Oriented Development in South Korea,” in White G. Wade R. , eds., Developmental States in East Asia, mimeo, Institute of Development Studies, University of Sussex, 1985. The quote about Japan's banking system is from Pempel T. , “Japanese Foreign Economic Policy: The Domestic Bases for International Behavior,” in Katzenstein P. , ed., Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States (Madison, WI: University of Wisconsin Press, 1978), p. 152. See also Wellons Philip , “Competitiveness in the World Economy: The Role of the U.S. Financial System,” in Scott B. Lodge G. , eds., U.S. Competitiveness in the World Economy (Boston, MA: Harvard Business School Press, 1985).

Johnson C. , “The ‘Internationalization’ of the Japanese Economy,” California Management Review 25(3) (1983): 14.

Luedde-Neurath R. , op. cit. In a properly coordinated system, either foreign exchange control or trade controls should be enough. What is the rationale of Korea's two hurdles?

Schuh G. E. , “Strategic Issues in World Agriculture,” mimeo, The World Bank, April 1985.

On the concept of the developmental state, see Johnson , op. cit., 1982 and 1983.

Mason E. , “The Economic and Social Modernization of the Republic of Korea” (Cambridge, MA: Harvard University Press, 1980).

Jones L. SaKong I. , “Government, Business and Entrepreneurship in Economic Development: The Korean Case” (Cambridge, MA: Harvard University Press, 1980), p. 296.

Op. cit., pp. 336–37.

Cumings B. , “The Origins and Development of the Northeast Asian Political Economy: Industrial Sectors, Product Cycles, and Political Consequences,” International Organization, 38(1) (1984): 31.

See, for example, McKinnon R. , Money and Finance in Economic Development (Washington, D.C.: Brookings Institution, 1973), a standard work.

See also Buffie E. , “Financial Repression, the New Structuralists, and Stabilization Policy in Semi-Industrial Economies,” Journal of Development Economics 14(3) (1984): 306; Veneroso Frank , Essays in Financial Instability in Developing Countries, mimeo, World Bank, 1985.