4. A Comparison of Industrial Policies in Singapore
4.5. Fiscal Incentives and Policy-Based Finance
In order to establish and maintain a compromise between industrial policies and firms, all four countries (Japan, Korea, Singapore, and Taiwan) used various incentives for those firms undertaking investment projects in the tar- geted industries. Governments provided tax holidays and various financial assistance schemes to these firms in order to ease the financial burden of investments. Types of incentives demonstrate similarity in almost all four countries. The governments often made use of public financial institu- tions to allocate the required funds to local businesses engaging in targeted industries.
Japan was the forerunner among the East Asian latecomers. In order to achieve policy targets and coordinate the large scale investments under- taken by public and private firms during the 1950s and the 1960s, the government of Japan provided a wide range of incentives and supporting schemes. The most important of these was policy-based finance (Katoet al., 1994). Public financial institutions such as Japan Development Bank, Small Business Finance Corporation, Shoko Chukin Bank, and People’s Finance
Corporation provided easy-to-access funds to these firms. The government also extended its fiscal facilities to support them by offering preferential tax concessions. Special depreciation allowances and tax relief from invest- ments helped these firms avoid some part of initial burden on investments. In addition, the government directly subsidized some firms. This subsidization took the form of interest payment subsidies in the shipping industry. The government also offered funds for rationalization and upgrading as well. In the case of export industries, the government supported exporting firms by offering them technical support and information about overseas markets, lower taxes for their export activities, low-import duties for materials, and extending credits through the Japan Export–Import Bank. However, attributed to the very close relations between banks and private firms, much of the loans used in policy-based finance were provided by banks and other private financial institutions (Table 4.2). The government did not rely on foreign finance for the development of the country’s industries and the nec- essary funds were raised within the firms or firm groupings (keiretsu) and by public financial institutions.
In the case of Korea, firms were given the opportunity to borrow from abroad. After 1965, with changing interest rate policies, a negative interest rate margin was introduced to protect domestic firms from increasing costs
Table 4.2. The Proportion of Policy-Based Financing in Loans of All Financial Institutions in Japan (1955–1990).
Unit (percentage) 1955 1960 1965 1970 1975 1980 1985 1990 Policy-based
financial institutions
13.2 11.0 9.6 9.8 10.6 14.1 13.7 11.8
Japan
Development Bank
7.5 4.1 2.8 2.2 1.8 1.7 1.6 1.2
Export–Import Bank of Japan
0.0 0.7 1.4 1.9 1.8 1.7 1.2 0.9
Private financial institutions
86.8 89.0 90.4 90.2 89.4 85.9 86.3 88.2
Source: Katoet al. (1994, p. 28).
of overborrowing (Cho, 1998). In the 1970s, the government’s policy shifted towards financial repression, i.e., the implicit taxation of depositors to sub- sidize priority industrial sectors. Rent distribution was another effective tool in industrial policies during the 1960s, e.g., export incentives including a multiple exchange rate system, direct cash payments, and easier access to foreign exchange. Credit allocation was linked to the performance of the rent-seekers, rather than political ties. During the Heavy and Chemical Industrialization Drive of the 1970s, various tax incentives were provided to firms undertaking the government-approved investment projects, such as, exemption from corporate taxes for 3 years, 50 percent reduction for the following 2 years, large tariff reductions for imported equipment and raw materials, etc. (Hong, 1997). This drive required a large amount of funds and the government implemented repressive financial policies to provide cheap financing to the investment projects. The banking system was not capable of raising entire funds. The National Investment Fund was established in 1971 to finance long-term investments and the Bank of Korea extended its rediscount facility to support the industrialization drive. On the other hand, credits became more selective in the 1970s whereas they were pro- vided on the basis of export performance regardless of industries that firms operated in. Foreign loans were also used extensively in Korea although they were subject to government approval. As a result of heavy borrowing, the financial structure of Korean firms became highly leveraged and private firms became vulnerable to external and internal shocks. That not many large companies went bankrupt during this period implicitly means that the gov- ernment was successful in credit intervention and risk management. After 1980, the new president Chun Doo Hwan abolished government supports in the form of preferential credit allocation and tax incentives to specific industries. They were substituted with incentives for research and devel- opment, automation, and promotion of infrastructure and human resource development. The government also supported selected high-technology research projects and subsidized them as well, e.g., the dynamic random access memory (DRAM) project in 1986, which was started as a consortium among public research institutes, private semiconductor firms, and univer- sities (Hong, 1997). However, government guidance after 1980 was dif- ferent from the previous periods in that the government drew the guidelines only rather than pushing for specific targets. In the 1990s, these incentives started to be extended to SMEs too (Laeven, 2002). Finally, to ease the
indebtedness problem of private companies the government took several measures in the 1980s and invigorated the stock market, allowed foreign participation in the Korean capital markets, and allowed foreign borrowing by private firms without state repayment guarantees. However, bank credits were still the dominant source of finance (Hong, 1997).
Taiwan also used large sums of funds to support domestic firms and also provided incentives to encourage upgrading of production technologies.
However, the Taiwanese government emphasized the need to upgrade the technologies in high-technology industries more and subsidized research and development costs of domestic firms. The government committed itself more to the provision of funds for high-technology investments.
High-technology investments in the science parks were rewarded various incentives, such as tax exemption, technical support, low-interest loans, and training of manpower (Tsay, 1995). Especially after the late 1980s, when the joint ventures of public companies established with Taiwanese and American firms in high-technology industries became successful, private firms also entered these industries. For these newcoming firms, the gov- ernment offered tax deductions and tariff exemption for intermediate goods.
Public research institutes such as Electronics Support Services Organization and the Institute of Information Industry helped the private firms by offering technical training. Indigenous firms were also offered generous incentives to upgrade their technologies by going into technology transfer agreements with MNCs. Human resource development by the government and cheap financing provided to domestic firms were the main channels in Taiwan through which the government promoted the growth of indigenous firms.
Singapore’s experience exhibit some differences compared to Korea and Taiwan. First of all, Singapore government did not explicitly provide low- interest loans to targeted industries. Local capital market did not allow this.
The main source of public investments, however, was the savings of the nation accumulating in the CPF.