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


  • Sato, Yukihito


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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    References listed on IDEAS

    1. Chen, Tain-Jy, 1992. "Technical Change and Technical Adaptation of Multinational Firms: The Case of Taiwan's Electronics Industry," Economic Development and Cultural Change, University of Chicago Press, vol. 40(4), pages 867-881, July.
    2. Levy, Brian & Kuo, Wen-Jeng, 1991. "The strategic orientations of firms and the performance of Korea and Taiwan in frontier industries: Lessons from comparative case studies of keyboard and personal computer assembly," World Development, Elsevier, vol. 19(4), pages 363-374, April.
    3. Mody, Ashoka, 1990. "Institutions and Dynamic Comparative Advantage: The Electronics Industry in South Korea and Taiwan," Cambridge Journal of Economics, Oxford University Press, vol. 14(3), pages 291-314, September.
    4. Chen, Tain-Jy & Tang, De-Piao, 1986. "The production characteristics of multinational firms and the effects of tax incentives : The Case of Taiwan's Electronics Industry," Journal of Development Economics, Elsevier, vol. 24(1), pages 119-129, November.
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    More about this item


    Taiwan; Politics; Economy; Democratization; Finance; 台湾; 政治; 経済; 民主化; 金融;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services


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