This chapter investigates how the colonial government promoted capital formation through fiscal and financial policies, by providing financial incentives and creating a favorable economic environment to invest in newly-produced capital assets. The fiscal policies examined are the taxation and subsidy measures that enhanced business opportunities for profit, especially in the targeted industries. The financial policies examined are those that established various financial institutions to mobilize savings — both from domestic and foreign sources — and allocate loans with subsidized interest for...

This chapter investigates how the colonial government promoted capital formation through fiscal and financial policies, by providing financial incentives and creating a favorable economic environment to invest in newly-produced capital assets. The fiscal policies examined are the taxation and subsidy measures that enhanced business opportunities for profit, especially in the targeted industries. The financial policies examined are those that established various financial institutions to mobilize savings — both from domestic and foreign sources — and allocate loans with subsidized interest for investment in the targeted industries through public financial institutions. The means through which savings were mobilized are examined, including deposits in financial institutions, which were loaned out for investment; Japanese government grants, foreign borrowings, and “forced savings” through currency issues to supplement inadequate owners equity. Since the government's excessive intervention through preferential schemes, such as directed credits, subsidies, and tax exemptions carried a considerable economic burden, its negative impact is also evaluated.