Financial sector liberalisation: the Taiwan experience

Abstract

In the process of economic development, the financial system acts as a channel between savings and investment. Usually, in the early stages of economic development, the financial system is under strict regulation by the government. As the economy grows, the demand for financial reform becomes stronger. Several measures for financial liberalization and financial internationalization are proposed and enacted sequentially. However, the use of improper methods for opening up the financial sector might be accompanied by the potential danger of financial crises. Therefore, the use of optimal measures for financial reform, and the question of deciding upon the most effective optimal measures, is a subject worthy of discussion and analysis. Taiwan has experienced high economic growth and price stability for decades. Originally, the financial system was strictly regulated, however, since the late 1980s several acts concerning financial reform have been put into effect. Although there have been some financial crises locally, the damage was not very serious. The proper order of economic reforms are often discussed by the scholars and government. The optimal choice of policy combinations have been considered by the government. The issue of worldwide financial crises, as seen in the 1990s, can also provide a valuable reference-point for the pursuit of an optimal policy choice. This paper is structured as follows. Section II describes the characteristics of Taiwan's economy and financial system. Section III explains the suitable order for economic reform. Section IV is a discussion of macroeconomic stability policy in Taiwan. Section V is a brief review of financial liberalization and financial internationalization measures. Finally, Section VI, looking back at some of the financial problems of the 1990s, gives a summary.