No.44 Unraveling the Enigma of East Asian Economic Resiliency: The Case of Taiwan

Taiwan was one of the few Asian economies that had emerged from the 1997-1998 East Asian financial crisis relatively unscathed. During the 2008-2009 global financial crisis, the island’s shock-absorbing capability turned out to be once more quite respectable. Taiwan inherited a relatively healthy state of financial systems prior to the sub-prime loan crisis and built up a huge foreign reserve. Also foreign banks’ participation in domestic loan market was quite limited. The state dominated the banking sector and closely supervised its lending policy and balance sheet. The island’s macro-economic fundamentals were quite healthy and the government still enjoyed spare fiscal capacity to borrow and spend. Many elements that define Taiwan’s economic resilience have been fostered by some entrenched institutional arrangements and established policy orientations over a long time. Taiwan managed to retain the bulk of these long-running sources of economic resilience despite of the tremendous external pressures by neo-liberal policy advocates to dismantle these “out-dated” policy thinking and practices. Furthermore, despite of the political turmoil after the first power rotation of 2000, the legacy of an independent and proactive central bank, whose reputation and credibility had been strengthened by its record of steering the island safely through the financial crisis as well as the Strait missile crisis, was kept intact. The legacy of prudential financial regulation was also largely kept intact with the concentration of regulatory authority in a new cabinet-level supervisory commission. Taiwan was able to cope with the 2008-09 global financial crisis thanks also to a more enabling regional environment. The political backlash against IMF-imposed austerity measures precipitated a growing awakening among East Asian policy thinkers. Most developing countries in the region have insured themselves through managing exchange rates and building huge currency reserves, so that they could be protected against the tempests of currency speculation and never again would have to call on the IMF. The ideological milieu and the cooperative institutional arrangements in East Asia have changed so much between the two crises.

Keywords: Taiwan, Central Bank of China, State-owned Banks, Fiscal Conservatism, QFII System, Financial Supervisory Commission