ASIA: by Jeffry Babb News Weekly
Taiwan's rural finance in trouble
, February 8, 2003
Things in Taiwan are rarely as simple as they seem on the surface and so it is with the recent events concerning the credit unions of the farmers' and fishermen's association.
On the surface it is fairly simple. Taiwan's farmers and fishermen's associations were formed over a century ago - when Taiwan was still a Japanese colony - with the aim of forming a link between the farmers and the government. Advice and scientific methods could be disseminated through the farmers' associations and thus raise the standard of living in the country.
Agriculture was the chief occupation in Taiwan then and remained so until well after the retreating Kuomintang set up residence in Taipei in 1949 after the loss of mainland China to Mao Tse-tung's Communists.
Indeed, it has been argued that it was the surplus capital from the agricultural sector that allowed Taiwan to achieve industrial takeoff, following one of the most successful land reform programs in history, the "Land to the Tiller" movement.Loans
The credit sections of the farmer's associations were there to allow farmers access to loans when it was virtually impossible for a small holder to get a bank loan. Thus, they formed a necessary function when bank finance was not readily available to anyone - and bank managers were not sympathetic to farmers.
Despite having a Land Bank, and Farmers Bank, which were supposed to lend to farmers, the best source of finance for agricultural small holders was the farmers' associations.
Now, things are different. Agriculture accounts for less than two per cent of Taiwan's GDP and the number of people actually engaged in agriculture is some 700,000 - still a significant number in a population of 23 million, but by no means the overwhelming proportion of previous days.
In addition, Taiwan's entry to the World Trade Organisation (WTO) has hit farmers hard. Quotas have been imposed on rice imports - in apparent contravention of Taiwan's WTO entry, affecting Australia and American rice farmers. Various other products threaten to flood in and the cosy marketing arrangements the rice growers had with the government are no more.
In the meantime, the farmers' and fishermen's credit unions have built up huge debts. The credit unions are undercapitalised - many with only NT$3 million - about A$150,000 in capital and they have bad debts, or non-performing loans (NPLs) of around 19 percent - twice that of the already shaky commercial banking sector.
The "profits" made by the credit unions paid for the upkeep of the farmers' associations. So when the Government began taking over 36 credit unions which were hopelessly insolvent and announced plans to roll up the rest who were not meeting international standards, a hue and cry went up that the Government was "destroying the farmers' associations and was the enemy of the agricultural sector."
A massive rally was called and the Government of Chen Shui-bian was faulted for keeping President Chen "in the dark" over the implications of this policy.
As Chen comes from an agricultural family in south Taiwan, it's hard to believe that he did not realise the implications of what was going on. His tough and respected finance minister "resigned" and was replaced by the fourth finance minister in two years. The chairman of the Council of Agriculture also resigned, and the Premier (Prime Minister, who in theory is number three man in the country) also offered his resignation several times but was persuaded to stay on.
As a result, Standard & Poors, the international rating agency, cut Taiwan's sovereign credit rating to that of Hong Kong and Japan, based on the inability of the government to tackle the tough financial problems facing the nation, plus the budgetary shambles caused by an archaic and inefficient taxation system.
However, given that there was a previous demonstration by labour groups when the health insurance rate went up by just 0.3 percent, no Taiwan Government is going to be in a hurry to impose new taxes, despite the fact that the Government funds more than half its budget outlays with debt - a recipe for financial disaster.
Chen backtracked on rolling up the farmers' credit unions and promised a new bank - yet another - that would not be supervised by the Ministry of Finance, but the Council of Agriculture.
The farmers' and fishermen's associations debts are already costing the nation A$2 million a day and the outlook for the bank cannot be optimistic. The Government would play a role, putting in about 20 percent of the capital.
If it were only the farmers affected, one might say "fair enough". But this is not correct. Figures show that the bulk of the bad debts aren't owed by individual farmers, but by large agricultural and industrial enterprises.
And the 100,000 plus protesting farmers? Most were lured by the promise of a free bus trip to Taipei, a good meal and a bit of cash in the pocket.
So, despite the apparent simplicity of the question - a bank for farmers - things are rarely so simple in Taiwan.