Chapter 10: Weathering the Asian financial crisis: the experience of Taiwan
10. Weathering the Asian ﬁnancial crisis: the experience of Taiwan Tain-Jy Chen INTRODUCTION The Asian ﬁnancial crisis came as a major setback to the rapidly growing East Asian economies, whose performance had been described only a few years earlier as ‘miraculous’.1 So sudden was the crisis that it prompted many critics to interpret it as the ‘death throes of Asian state capitalism’ and to consider it as the evitable outcome of state intervention (Wade, 1998), whilst sympathizers considered East Asia to be the victim of an attack on the region’s undersupervised and underregulated ﬁnancial institutions, as a result of international ﬁnancial panic (Radelet and Sachs, 1998). These two opposing views seem to suggest, however, that there is something in common, that is, that discretionary policies aﬀecting resource allocation are dangerous, and that it is useful to adopt rule-based regulations that aim to protect the orderly functioning of the economic system, particularly the ﬁnancial system. The crisis revealed several shortcomings within the economies of East Asia, caused both by excessive intervention and by inadequate regulation, including overinvestment, excess capacity, relational lending by ﬁnancial institutions (that is, bank lending based not on commercial grounds, but on special status of the borrowers, such as good relations with the government, bank owner and so on), and lending against inﬂated asset values. Excessive and unwarranted lending pointed to the problem of moral hazard for which governments must assume responsibility, whilst inﬂated asset values pointed to the phenomena of asset bubbles which have...
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