Young H. Byun
Introduction: Problem Posed and Managed
For a long time many scholars have been explaining the high
performance of NICs' economies, lumping all the countries together. But
whereas South Korea came under the control of the IMF in December of 1997,
Taiwan has survived the current Asian financial crisis until now, which
hints to us that there might be some difference in economic conditions or
institutions among the seeming homogenous group of NICs.
This paper aims to explain what factor(s) explain(s) the divergent outcome
between South Korea and Taiwan. Two countries have many similarities,
including the experience of Japanese colonialism, successful land reform,
divided nation-state, state-driven and export-oriented industrialization,
concurrent industrial stages or sequences, etc.. Given these similar
conditions, the two countries have one crucial difference in the managing
of financial sector and the speed of financial liberalization since 1980s,
which contributes to the divergent economic results.
Taiwan shows us that it has been choosing very cautious and strict
monetary policy, the independent central bank, and financial policy for
broad functional categories, not geared toward specific industries or a
particular set of preferred firms. Contrary to Taiwan, South Korea has
gone to path where its government accepted very politicized financial
policies, took the Bank of Korea under it discretionary control, gave the
preferential loans to favorable big businesses.
This dissimilarity also helps explain why these two countries have the
different industrial structure, and why different dynamics between the
government and business evolved since the early industrialization of
1960s. For our research purpose, we need to draw on the concept of
"embedded autonomy" as a heuristic thread. We assume that if one country
have the balance between autonomy and embeddedness, then its economy keeps
going well, and if not, then bad. We think it is helpful to show the
concept with the following graph. Path1(Zaire)
Autonomy
Path2(Taiwan)
Path3(Korea)
Embeddedness
As above graph shows, path 1 is for Zaire(predatory state), path 2 for
Taiwan(developmental state), path 3 for Korea(developmental state). The
space not only between path2 and path1, but also between path2 and path3
means the possibilities of "rent-seeking", which could be created because
the balance of embedded autonomy changes with the loss of autonomy and
degenerate into unproductive economic conditions.
We propose that South Korea and Taiwan went along the same path balancing
between autonomy and embeddedness, but due to different financial
management since heavy industrialization of 1970s, the former began to
lose the autonomy vis-`-vis embeddedness. After this tendency of unbalance
went beyond the point of no-return that could not be reversed toward the
balance by any policies or leverages by government, South Korea's economy
could not help endure the pressure of "Asian Flu" of 1997. But Taiwan has
been keeping the balance, so its economy is getting well until now.
Here we need to point out the hypothesis about the (un)balance
between autonomy and embeddedness. Those are as follows.
1) The mode of industrialization and political power of big business: if
state leads industrialization and big business is weaker than government,
autonomy tends to be larger than embeddedness.
1) The modus operandi of central and commercial bank(s): if central and
commercial bank(s) operate(s) independently from the government
intervention, balance between autonomy and embeddedness tends to occur.
1) The distribution of policy loan and credit: if government and banks do
not provide privileges to specific industries and take the general
approach to industrial credit support, balance between autonomy and
embeddedness tends to occur.
After testing these hypotheses, we hope to locate two countries' banking
and financial system in the typology that can be made by the criteria of
both degree of concentration and ownership of banks. And then we will show
how the financial system has contributed to the change of political regime
in Taiwan and Korea; the cycle of financial crisis coincides with the
alternation of political power in Korea, whereas relatively non-crisis of
financial system seems to support the dominant-party government in Taiwan.
Final section concentrates on the different processes of financial
liberalization in both countries. Here we'll argue that the Korean
financial liberalization in the 1980s was speedy and drastic because
financial liberalization was common interest for both Korea and U.S.
government, whereas Taiwanese financial liberalization was smooth and
gradual because its domestic condition was different from Korea.
Taiwan: Toward the re-equilibrium
between autonomy and embeddedness
1. Mode of industrialization and the Political Power of Big Business
Regimes in Korea and Taiwan have been interventionist by nature
and developmental in motivation but have made different strategic choices
about how to organize industry and cooperate with the private sector in
achieving developmental goals. Inspired by Sun Yat-Sen's quasi-socialist
ideology of "people's livelihood", and fearing the hyper-inflation and big
bourgeoisie which was the main reason of the defeat in the mainland,
Nationalist (KMT) regime chose the dual strategy of industrialization.
This included promoting an internal Fordist and public enterprise sector
at the commanding heights of the economy, while fostering a more distant
but supportive relationship of coordination with smaller private
conglomerates and a host of small- and medium-sized enterprises (SME)
pursuing an industrial strategy of flexible specialization . This mode of
industrialization is different from Korea, in that sacrificing SME and
agricultural sector, Park regime chose the chaebols as developmental
coalition partner and poured policy loan into their businesses. For
example, sales of top five business groups accounted for only 10 percent
of Taiwan's total GNP for 1983, while the figure for Korea's top five
groups was over 50 percent.
Unlike official Korean tolerance for symbiotic government-business
relation, Taiwanese political leaders' anti-big capitalist bias and ethnic
suspicion of the indigenous majority have contributed to the weak
bargaining power of private businesses, allowing relatively small direct
private-sector input in policy-making. This explains why KMT government
formed the political coalition not with big businesses, but with SME and
farmers, who has been supporting the authoritarian government in response
to many financial benefits from the government for about 40 years.
In terms of the mode of industrialization and political power of big
business, Taiwan case shows us that the relationship between the autonomy
and embeddedness is in favor of the former because its state-led
industrialization and weak bargaining power of business sector enforced
the autonomy vis-`-vis embeddedness.
This seems different from our suggestion of the balance between them in
introductory section. But this is the Taiwanese enigma not undermine but
support our argument about Taiwanese balance. It is the very consequence
of financial management that counterpoises the heavier autonomy vis-`-vis
embeddedness in Taiwan. It will be shown in due course of our paper how
the seemingly overwhelming autonomy of Taiwanese government was able to
reach the re-equilibrium between autonomy and embeddedness with the
general, not politicized modus operandi of financial policies, as hinted
in the second hypothesis in previous section.
In contrast to Taiwan, Korea can strike the balance between them because
autonomy-enforcing factor of state-led industrialization was diluted and
counterpoised by the rise of chaebol since the heavy industrialization in
1970s. But even though this equilibrium which might be possible in the
first round of the mode of industrialization and capitalists' power, the
balance was not sustainable because of the very financial factor putting
more weight onto the embeddedness; the highly politicized and
industry-specific credit has brought up the chaebol with stronger power
than ever over its creator, the government. In the next section, we will
delve into the Taiwanese enigma.
2. The Modus operandi of Central and Commercial bank(s)
From 1961 when the Central Bank of China (CBC) resumed its
operation, the CBC was under the direct supervision of the president, like
the Bank of Korea (BOK). But it enjoyed a high degree of independence and
usually dominated the Ministry of Finance (MOF). The lesson of
hyperinflation on the mainland was most noticeably reflected both in the
power given to the CBC relative to spending ministries and industrial
planning authorities . CBC and the KMT favored macro-economic orthodoxy
which constrained the technocrats who advocated preferential credit for
rapid expansion and transformation if industry. Lending policy and the
control of loanable funds have been used to maintain financial stability
in Taiwan.
Almost all of the banking system was state-controlled in Taiwan.
Government-owned banks held the following percentage of total deposits;
98.5 per cent in 1970, 97.2 in 1975, 90.0 in 1980, 88.3 in 1985, and 84.0
in 1990 . In this situation, individual bank officers are by definition
civil servants, and face administrative sanctions and even criminal
punishment for any loans they make that later become nonperforming. Thus,
they meet strong disincentives against risky lending. In brief, the bank
officers allocate funds based on the consideration of security, that is,
collateral, not the rate of return.
Even since 1991 the private commercial banks have been in the
marginal position of Taiwanese banking hierarchy, because there have been
many regulations against entry of private capital into the banking system.
This is different from the Korea in that many chaebols have influences on
the private banks through the ownership of non-bank financial institution
(NBFI) which purchased a number of stocks of private banks.
Responsible fiscal policy, conservative monetary policy, balanced
budget, the autonomy of the central bank from the MOF, and the cautious
lending practice are the modus operandi of Taiwanese financial
institutions. The state had direct control over the financial system from
the beginning of the KMT's relocation from the mainland. Had it wanted to,
the leadership could have preferential credit to shape the industrial
structure, as was done in Korea and France. The unwillingness, rather than
inability, to use credit as a principal instrument of industrial policy
also separates Taiwan from Thailand, the Philippines, and Mexico, where
the financial sector is not under the government's direct control . We
think this is the factor that enforces the balance between autonomy and
embeddedness, as shown in the hypothesis in introductory section.
We think that Taiwan constitutes a kind of French model or statism in
terms of state as a banker, but it does one of German Model in terms of
autonomous function or performance of CBC. How can it be? It is possible
because of political learning or obsession from the past; KMT have kept in
mind that the defeat in the mainland was due to the hyperinflation,
speculative financial policies of its own, and the narrow-minded
capitalists. So KMT has tried to hold everything of economic means
separated from the societal interests, while to provide its constituents
with general benefits under the auspice of authoritarianism.
3. General and Impartial Characteristic of Loan-Distribution.
Industry-specific credit policy was apparent in the brief stage of
ISI during the 1950s but was soon superseded by credit policies targeted
at broad goals that included export promotion, industrial upgrading, and
pollution control. Revived in the 1980s to nurture strategic industries,
sector-specific credit policy was small in size, comprising only 4.4
percent of total government loans, and constantly came under criticism
from economists. Although export loans were accessible and widely used,
developmental financing--either sectoral, specific, or functional-became
available to the private sector only recently, and many loan facilities
were underutilized. Developmental financing was never a salient feature of
Taiwan's financial system .
Even though the difference between the strategic loan rate and the prime
rate has been 175 to 275 basis points, that was counterpoised by the
impartial distribution of preferential medium- and long-term loans. Those
indicator in 1988 shows that even though 31.7 per cent of total loan was
for the category of strategic industries, 31.7, 28.5, and 3.9 per cent was
for the category of automated equipment, domestically produced machines,
environment control, respectively . The report of Samsung Economic
Institute says that Taiwan preferred measure of tax-reduction to policy
loan in their industrialization, in contrast to Korea that preferred the
latter to the former .
Even Taiwan as a developmental state could not help avoiding completely
the preferential credit activism in their rapid development. The pecking
order of borrowings tends to be consistent to the scale of firms' assets;
firms with the asset of 5 to 10 million NT$ borrowed 44.1 per cent of
total loan from the financial institutions, whereas firms with the one of
over 1000 million did 70.1 per cent in 1983 . This biased distribution was
possible because of the risk-averse banks to avoid the default and to
favor the secure collateral, as we said above.
But this seeming partiality was counterpoised by the KMT's
deliberate support of SME and agricultural sector. For example, since
1982, the deposits of postal saving have been routed to the Bank of
Communication(40 per cent), Taiwan Medium Enterprise Bank(25 per cent),
and the Farmers' Bank(10 per cent) . The Land Bank and the Farmers' Bank
were assigned the task of renovating the agricultural sector; the other
two banks were to finance industrial upgrading. That is because SME sector
and rural sector have been the main coalitional partner to KMT regime.
We think that KMT government has maintained relatively general approach to
credit support, and this fact has contributed to the balance between
autonomy and embeddedness.
4. Typology of Taiwanese Commercial Banking System:
From Statism to French Model
Where can we position Taiwanese banking system in the typology ?
There are six government-owned commercial banks and four private
commercial banks in 1991. The ownership of commercial banking system comes
overwhelmingly under the control of the government; the government sector
has the 82 per cent of all the domestic deposits, whereas private sector
does the 12 per cent.
In addition to the criteria of ownership, we need to know the degree of
concentration. The sum of the squares of the banks' market shares of
deposits(HHI) reaches 15.52%, which means that Taiwanese banking system is
high in the degree of concentration . Combining two indicators, we regard
Taiwanese banking system as a statism among the four typologies.
But we need to point out the caveat. If we consider that many
private commercial banks(more than eight) are being allowed to start their
business since 1991 onward, the typology of Taiwan seems to approaches (or
go beyond the threshold of) the French model.
5. Financial management and Its Political Consequences
What can we say about the relationship between financial crisis
and the change of political regime? Here we point out intriguing
phenomenon of the relationship in our two cases. Korea experienced the
cycle of financial crisis in 1967-1970, 1972, and 1979-1981 .
If we measure this financial crisis with the help of indicator of
nonperforming loans as a percentage of total commercial banks loans in
Korea and Taiwan , two graphs can be drawn as follows.
Figure1) Korea
10
Percentage
Year
62 69 75
79 84 86 89
Figure2) Taiwan
10
Percentage n.a.
Year
62 69 75
79 84 86 89
These graphs show us that Korea has experienced crisis twice,
whereas Taiwan not any serious one , compared to Korea. If we consider
the change of political regime, that is, the rise of Yushin Regime in 1972
and military coup in 1979, it could be argued that the financial crisis
contributed to the alternation of political power. And more, the former
crisis coincided with the industrial policy change from light
manufacturing to heavy one, and the latter did with the start of financial
liberalization. These mean there seems to be a kind of correlation, if not
causality, among financial crisis, political change, and industrial
strategies.
How can we explain these coincidences in Korea? We suggest the
effect of osmosis to solve this puzzle. Insofar as state is responsible
for almost all of the financial system with the institutional network
covering big business, banks, MOF, and planning board, a crisis in one
area would tend to inflate toward the total crisis threatening the very
political regime. The more penetrating a state is, the more
responsibilities it takes.
In Taiwan, we see the smooth and declining of curve. So no
regime-threatening crisis contributed to the change of KMT's domination
during the long time. Taiwanese state has kept big business relatively
apart from itself, pitting big business against the SME and rural sector.
It has coalitional partner not only SME and farmers in terms of political
supports, but also public enterprises in term of economic ones. In
addition, its financial policy was not politicized like Korea. Taiwan
seems to have a kind of safeguarding separation in its own political
economy.
6. Financial Liberalization: The Dynamics of Interface
Between International and Domestic Political Economy
It is interesting question that why authoritarian state tries to
liberalize its interventionist economic system, which provide the state
with the benefit of rent-seeking? . We are intrigued by the contrast in
that Korea showed willingness to liberalize its financial system in 1980s,
whereas Taiwan grudgingly start liberalizing its one. And the former
showed more speedy and intense in liberalization than the latter.
We think the study of financial liberalization in the 1980s and
early 1990s is required to integrate international factors with domestic
ones. In other words, we need to deal with the push-factor of the U.S. as
well as the pull-factor of the domestic government's willingness to
initiate financial liberalization. In this sense, it could be argued that
the Korean financial liberalization in the 1980s was possible because it
was the common interest for both Korean and U.S. government.
From the standpoint of the Korean government, there are three main
reasons for liberalizing its financial system. First, the Korean
government was eager to reduce the burden of socializing risk-the problem
of default-in a system where the state, as owner of the banks, was the
creditor . Second, the new authoritarian government hoped to discipline
too much grown big business groups, chaebol, by liberalizing the financial
system . Finally, coming to the office in the thick of economic crisis of
the early 1980s, the new government by military coup had to handle high
inflation and resumed continued economic growth. For this, the government
needed the radical disconnection of financial management from the
precedent government's repressed one, replacing interventionist
bureaucrats whit neo-liberal ones.
From the viewpoint of the U.S. government, there is a high stake
in the liberalization of Korea. The U.S. government was not able to
tolerate the closed and repressed Korean financial market as its position
declined in the structure of the international political economy. The U.S.
changed its foreign economic policy to pressure on Korea to open and
liberalize the financial market.
If we compare Korean case with Taiwanese one, our argument should be
clearer. Taiwan has gained a lot from the foreign trade with U.S. since
1950s, steadily, which means that U.S. must be eager to open the
government-owned repressive financial market, as we see in the Korean
case. But Taiwan survived the pressure of open-door policy from U.S.
because the domestic conditions were different from the ones in South
Korea. First, traditionally Taiwan chose the orthodox macroeconomic
policies, that is, positive interest rates, cautious monetary policy, and
a balanced budget. Second, Taiwan succeeded in restraining big businesses.
Political leaders' anti-capitalist bias and ethnic suspicion of the
Taiwanese majority led the state to structure a more distant relationship
of coordination between public and private sector . Third, KMT regime has
continued to dominate political arena without any (threat of) alternation
of government since 1949, so it didn't need any clear-cut departure from
the precedent policies. In a nutshell, push-factor couldn't collaborate
with pull-factor; the demand of liberalization from U.S. couldn't have its
counterpart to form the broad interface of agreement to initiate and
implement the policy drive .
In addition to the fact that the possibility of financial liberalization
to be initiated is the function of the size of common interest on both
parties, we think it is necessary to note that the processes of policy
implementation in domestic realm vary across issue-areas. This is because
the once-initiated financial policy subjects to the dynamic relationship
between the government and social forces, especially big businesses.
In Korean case, we observe the followings; speedy and remarkable progress
was made in privatization and entry regulation on economic activities for
domestic financial institutions, whereas the freeing of interest rates was
bogged down, policy loans reappeared, and the presidents of the privatized
banks continued to be appointed by the government.
The uneven financial liberalization in South Korea results from the rising
economic power of chaebols vis-`-vis the government, and from their
concerns about both domestic deregulation and internationalization. From
the 1980s and onward, chaebols in Korea came to have the power enough to
ward off the demand or guide from the government, or to drive the
government policies toward their preferred directions.
Even though chaebols welcomed the opportunity to enter the financial
sector and to gain independent assets to foreign financial markets, they
remained heavily dependent on preferential finance from the state-owned
banks. And they feared that foreign entry into the capital markets would
dilute their control . So, with their grown influence vis-`-vis the
counterpart of government, chaebols could make the scheduled introduction
of foreign financial institutions lag behind the time.