Taiwan needs to establish its own World Bank — today
Taiwan needs to establish its own World Bank — today
WRITTEN BY DR OLIVER SCANLAN
2 August 2023
Taiwan legislators recently reignited an old debate by suggesting the use of some of the country’s USD 560 billion in foreign currency reserves to establish a Sovereign Wealth Fund (SWF). In theory, this would both secure a higher rate of return than the 2.7 per cent these reserves are currently earning and extend Taiwan’s geopolitical influence through strategic investments in foreign companies. However, the Taiwanese government would be better advised to establish a Development Finance Institution (‘development bank’) instead of a SWF, and not through reallocating foreign exchange reserves but by selling USD 200–400 billion of government debt. Institutionally, a “Taiwan Development Bank” (TDB) could provide concessionary finance (e.g. offering loans with substantially lower interest rates than might be available commercially) and target priority industries in a way that a SWF could not. At the same time, investments at home and abroad would be sufficiently profitable to meet resulting interest payments and leave Taiwan’s overall debt burden relatively modest compared with international benchmarks. Taiwan cannot afford to take the risk of foregoing this much-needed investment, which could decarbonise the country, expand overseas development finance, and secure a Taiwanese seat at the table in boardrooms across the world, increasing geopolitical influence and economic leverage.
Development banks versus Sovereign Wealth Funds
The rationale for a development bank is that they can do things SWFs should not. The International Forum of Sovereign Wealth Funds’ Santiago Principles that stipulate how SWFs should behave includes the requirement that investment decisions are made solely “on the basis of economic and financial risk and return-related considerations”. Making loans at concessionary rates or strategically targeting certain sectors based on broader government policies seem to break these guidelines. The stated opinion of Yang Chin-Long, the governor of Taiwan’s Central Bank, is that any such SWF would be unable to make “strategic” as opposed to purely “financial” investments. Meanwhile, a development bank modelled after Germany’s KfW can have much broader social and strategic goals while also securing a financial return.
Taiwan has always sought ways to expand its geopolitical influence; expanding its ‘international space’ is a way of mitigating the risks of Chinese coercion. If establishing an SWF would serve this end, then a much larger development bank would be even more effective.
Possible goals for a Taiwan Development Bank would have to include profit, meeting interest payments on the debt, and paying off the principal in the long term. Ethical but profitable investments, both at home and abroad, and where possible in strategic sectors according to government policy, would therefore comprise a major part of the portfolio, with the rest comprising concessionary finance. Concessionary finance from the TDB could target, first, the complete decarbonisation of Taiwan, much earlier than 2050. Second, working through existing infrastructure like the Taiwania national investment fund, a TDB could provide seed funding to Taiwanese businesses, international joint ventures, and startups in the green energy and circular economy industries, both being priorities in Taiwan’s “5+2” industrial strategy.
Finally, a TDB could finance resilience, adaptation, and mitigation projects in partner countries most vulnerable to climate change impacts at a scale that would dwarf Taiwan’s present official development assistance (ODA) outlays. This could include support for Indigenous Nations both in Taiwan and abroad through expanding existing efforts under the “Indigenous Peoples Economic and Trade Cooperation Arrangement” (IPETCA) established by Taiwan, New Zealand, Canada, and Australia. This would help alleviate the often disproportionately severe vulnerabilities to a changing climate that indigenous communities face due to the aftereffects of historical injustice and continuing socio-economic and political marginalisation.
Taiwan’s underappreciated national resource: high quality, low-risk debt
The rationale for funding such an institution through debt, and not drawing on foreign currency reserves, is that such efforts would require genuinely new money. The required amount would be an order of magnitude greater than the USD 50 billion of foreign currency holdings (equivalent to 10 per cent of Taiwan’s total reserves) being discussed by lawmakers for reallocating to an SWF. For USD 200 billion, Taiwan could capitalise on a development bank as large as the World Bank — twice as large as the Asian Infrastructure Investment Bank (AIIB). For USD 400 billion, a TDB could be of the same order as the German KfW, with ambitions to match. Realistically, however, the scale of the debt increase will be viewed as much too risky to contemplate, even by those who might otherwise not consider themselves to be fiscal conservatives. The Taipei Times, for example, criticised the SWF initiative as unjustified, given the risks. The editorial drew on long-standing arguments concerning Taiwan’s exclusion from the International Monetary Fund (IMF); as “external aid might not always be on hand”, Taiwan should continue to exercise extreme prudence in fiscal policy.
This argument ignores the fact that Taiwan is a rich country with a thriving export-led economy, whose sovereign debt is an attractive asset for both domestic and foreign buyers. When taking on debt to raise funds for investment — in the same way as a private company can — one should not worry about the IMF but rather ask how much debt is too much, making it unattractive as an investment for potential investors. The major international credit ratings agencies currently view Taiwan’s debt as very high quality and low risk: Fitch’s assessment of AA is typical. Taiwan’s low debt, underscored by statutory limitations enshrined in the Public Debt Act, is certainly a reason for this. However, the rating agencies place greater emphasis on the vast scale of Taiwanese public and private foreign asset holdings (Taiwan’s positive or creditor “Net International Investment Position”), and how the combined value of Taiwanese exports and earnings from foreign investments consistently and substantively exceeds that of its imports and payments to foreign investors, i.e., current account surplus.
Capitalising on a TDB would substantially increase payments to foreign investors. On the other hand, any investments the TDB makes abroad would increase earnings from foreign investments. When the TDB invests domestically it will stimulate domestic economic growth, which is also a factor in rating agency decision-making. The substantial increase in resources and materials necessary for decarbonisation would certainly see Taiwan’s imports rise in the short term. This would be counterbalanced, however, by the steady, incremental decrease in energy imports. In addition, decarbonisation would mean the complete cessation of energy imports in the medium term, leading to a permanent, structural strengthening of the current account. This would also address the major national security liability which is the dependence on energy imports. It would also potentially allow Taiwan to become an exporter of clean energy, particularly to developing country partners like the Philippines, thereby maintaining existing infrastructure and adding a further layer to Taiwan’s international cooperations and partnerships.
While the speed and scale of the debt increase would be dramatic, the resulting debt burden would remain modest relative to Taiwan’s peers. The chart below shows the debt-to-GDP ratios of a selection of countries for 2021 with that of Taiwan at status quo, Taiwan having capitalised a USD 200 billion development bank (“Moderate Option”), and Taiwan having capitalised a USD 400 billion development bank (“Maximum Option”). Austria’s debt burden is much higher than Taiwan’s, and yet Austria’s debt is more highly rated by Fitch (AA+ compared with AA). The “Maximum Option” would simply bring Taiwan’s debt burden up to Austria’s level, four percentage points below the G20 mean. The “Moderate Option” would see Taiwan’s debt burden rise only modestly higher than that of South Korea or the Netherlands, over twenty percentage points lower than the mean across the OECD.
Comparing Taiwan’s Debt-to-GDP ratio in various scenarios with that of comparator countries.
The status quo as the riskiest course
Nearly twenty years ago, the CEO of the major environmental think tank E3G Nick Mabey was one of the most prominent experts making the case that if we are to make effective judgements concerning the threats we face this century, we need a broader and more holistic conception of risk, drawing on both qualitative and quantitative measurements and more effectively integrating ideas of dual or co-benefits. This argument has never been refuted, but while many countries now have frameworks in place to explicitly integrate ‘non-traditional’ threats into security planning, the US Inflation Reduction Act passed in 2022 is a rare example of committed resources approaching the scale required to meet such challenges. Taiwan’s dependence on energy imports to meet 97 per cent of demand is a major national security risk and leaves Taiwan’s economy highly exposed to disruptions in the global supply chain. Such disruptions are likely to increase in number and severity as the impacts of a changing climate accelerate. Programmes to encourage homes to install insulation and photovoltaics will save consumers’ money; zero emissions means cleaner air and healthier people, lower healthcare costs, and higher labour productivity. Ultimately it will save lives. Taiwan has always sought ways to expand its geopolitical influence; expanding its ‘international space’ is a way of mitigating the risks of Chinese coercion. If establishing an SWF would serve this end, then a much larger development bank would be even more effective.
Every day, events show that warnings from the Intergovernmental Panel on Climate Change have, if anything, been too conservative. The pandemic and war in Ukraine have brought home the cascading risks to energy supplies and food security that are an inescapable part of an interconnected and therefore interdependent and fragile globalised society. Such realities suggest that we revisit our preconceptions concerning risk and ask whether the enormous dangers that are inherent in the status quo make ostensibly radical policy options the safest bet. Taiwan has the fiscal space to establish its own development bank of a scale comparable to the World Bank, to provide the finance needed to rapidly address climate and energy risks at home, while expanding both development and economic links abroad and translating fiscal space into international space. Taiwan should do so — today.
DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.
Author biography
Dr Oliver Scanlan is a Ministry of Foreign Affairs Taiwan Fellow, affiliated with National Chengchi University, Taipei. Dr Scanlan is a sociologist interested in issues linking Sustainable Development and Human Security, with a particular focus on how the land rights of Indigenous Peoples relate to conservation debates. He is a Research Fellow at Dublin City University’s Institute for International Conflict Resolution and Reconstruction, and Ireland India Institute. He has taught Sustainable Development at the Center for Sustainable Development, University of Liberal Arts Bangladesh, and International Political Economy at Dublin City University. He received his PhD in Political Science and International Relations from Dublin City University in 2018. He has worked with a number of international organisations, including the United Nations Environment Programme and the International Labour Organisation. Image credit: Wikimedia Commons/總統府.