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Democratization and Financial Reform in Taiwan: The Political Economy of Bad-Loan Creation

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  • Sato, Yukihito

Abstract

This study shows that many bad loans now burdening Taiwan's financial institutions are interrelated with the society's democratization which started in the late 1980s. Democratization made the local factions and business groups more independent from the Kuomintang government. They acquired more political influence than under the authoritarian regime. These changes induced them to manage their owned financial institutions more arbitrarily and to intervene more frequently in the state-affiliated financial institutions. Moreover they interfered in financial reform and compelled the government to allow many more new banks than it had originally planned. As a result the financial system became more competitive and the qualities of loans deteriorated. Some local factions and business groups exacerbated the situation by establishing banks in order to funnel funds to themselves, sometimes illegally. Thus many bad loans were created as the side effect of democratization.

Suggested Citation

  • Sato, Yukihito, 2002. "Democratization and Financial Reform in Taiwan: The Political Economy of Bad-Loan Creation," The Developing Economies, Institute of Developing Economies, Japan External Trade Organization(JETRO), vol. 40(3), pages 226-251, September.
    • Handle: RePEc:jet:deveco:v:40:y:2002:i:3:p:226-251
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    More about this item

    Keywords

    Taiwan; Politics; Economy; Democratization; Finance; 台湾; 政治; 経済; 民主化; 金融;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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