ASIA: by Jeffry Babb News Weekly
Taiwan's banking system under siege
, August 24, 2002
Singapore and Taiwan seem to have much in common, but approach their positions in the world very differently. Singapore has long been an entrepot port - that is, it ships commodities, goods and services from one place to another. Singapore has been - and remains - the gateway to Southeast Asia.
Up until recently, shippers have not trusted the alternative of Malaysia, but now that is changing. Denmark's Maersk and Taiwan's Evergreen - two of the world's biggest shipping lines - have changed the main focus of their Southeast Asia operations to Johore, in southern Malaysia. The truth is that Singapore is now a high-wage country, not bad for a country that few had high hopes for when it became independent in the '60s.
The Government has always had a proportionately larger role in the economy than in Taiwan. Some authorities estimate that up to 65 percent of Singapore's economy is connected to or controlled by government enterprises.Government role
Recently, there has been much debate in Singapore over the role of government business enterprises and other government-linked businesses. Having a big brother is not always an advantage, especially when dealing overseas.
Singapore Telecom's (Singtel's) ambitions in Hong Kong were thwarted in part because some 60 percent of Singtel was in the hands of the Government.
Singapore has always been more welfare-oriented than Taiwan. The Central Provident Fund has a role in providing for housing, retirement and medical expenses. The Singapore Government believes that the provision of health care is mainly the responsibility of the individual - as Taiwan has seen, making health care the responsibility of the state can expose the government to large expenses, public unpopularity and potentially huge liabilities.
While Singapore faces no direct potential military threat, unlike Taiwan, it is one of the few countries in Asia with compulsory military service for its young men. Recent events have shown that the region is an unstable place, and as a small island, it pays to have a big bark and a big bite.
Singapore remains a stable system of government - at some cost to freedom of expression - but the people of Singapore largely have faith in their leaders, in great measure because Singapore is a meritocracy - where the talented are recognized and moved ahead on the basis of their achievements. Singapore is a predominantly Chinese society, and education is valued highly.
While Taiwan is sometimes compared to Hong Kong, a nearer neighbour, a fairer comparison would be to Singapore. Hong Kong has never been a self-governing entity, and most likely never will be, while Singapore must make its way in a potentially hostile world, dwarfed by its larger neighbours - indeed, it is an island of stability in a volatile world.
A stable banking system is the basis of any developed economy, but recently, Taiwan's banks have come in for some negative coverage. How valid it this? The truth is that the island's banking sector is still dominated by government-owned institutions. They have frequently been encouraged to lend not on the basis of economic viability, but on the basis of "developing business." While the officially acknowledged bad debt ratio is about eight percent, outside observers estimate it to be about 15 percent and likely to rise to 18 percent. The truth is, it's the Government's problem and that means it's our problem, because in the end, the Government must rely on taxpayers to foot the bill.
The credit departments of the farmers and fishermen's associations have been rife with scandals and are being brought to heel, but once again, it's the bigger banks which are expected to carry the load - and that means all of us.
Taiwan is rapidly approaching the situation of Japan, where the banks are simply throwing good money after bad by not lending on commercial principles and using scarce resources to prop up failed enterprises.
Just how close Taiwan is to a banking crisis is very difficult for someone without the facts to say, but recent comments by international bankers do not give cause for encouragement.
Recapitalising the banks would be a financial undertaking of massive proportions and in all likelihood, much needed capital would flee the country to safer havens.
The Government could impose stricter exchange controls to combat this, but this would damage Taiwan's reputation and mean that people's savings are being held hostage by the Government. The Government and the Central Bank of China are taking steps to address the problem, but urgent action is needed before the situation gets out of control.
The central bank keeps saying that Taiwan's foreign exchange reserves are the third biggest in the world, which is true, but they are not a great deal of help in dealing with a domestic banking crisis, unless they were to use that money to recapitalize the banks. The truth is, the domestic banks and the foreign exchange reserve are two different things with one thing in common - the Government controls the purse strings. It's neither desirable nor prudent to mix the two or to give the impression that the two are already mixed.