When the Asian crisis erupted way back in 1997 and reduced many ‘miracle economies’ to rubble in weeks, the Washington economists blamed it on banks and the cronyism governing their relations with corporates. Adroitly, multilateral and bilateral donors took it upon themselves to reform the financial markets seeking to create markets for bonds, securities, derivatives and other esoteric products. If the West could finance its industry and infrastructure by raising funds through financial markets, there is no reason why the East cannot do it.
The Organization for Economic Co-operation and Development (OECD), a rich man’s club, was in the forefront carrying the message with full support from the Washington Twins. Since it concerned Asia, it was inevitable that the Asian Development Bank (ADB), a mimic of the two sisters, was willing to join hands on the mission. Since 1999, the OECD and the Asian Development Bank Institute (ADBI) have been holding Roundtable meetings on capital market reform in Asia.
Twelve meetings have taken place so far and the last one was in February this year. The roundtable has become an open forum for financial regulators, policy-makers, practitioners and academic scholars to discuss critical issues on banking and capital market reforms in Asia and regional financial market integration.
As we study the proceedings of the roundtables, it is evident that there has been a radical change in the nature of deliberations. There is no longer the overweening zeal of OECD participants to foist the Anglo-Saxon model on emerging economies in Asia. They had become humble and cautious in their suggestions. This was discernible from the meetings of the 9 roundtable held in February 2008. The subprime crisis had spoilt the party and questioned the basics of the market model held to be sacrosanct.
It took note of the “lack of proper understanding and monitoring of risks involved in the securitisation process and... the need for greater transparency and disclosure as well as for better risk assessment and risk management among financial institutions, regulators and credit rating agencies.”
Andrew Sheng puts it more trenchantly saying, “… financial market reforms in Asia are both urgent and important, but they have to be implemented in a context of highly distorted global macroeconomic environment and without the benefit of sound economic theory.”
Indeed there have been discussions and debates of a high order among specialists and practitioners in the roundtables over the last decade. This book includes some of the contributions made by the participants. Many of them are rather old and date back to the years 2003 or 2005 and a couple of them relate to 2010. The older contributions retain the vintage flavour though they are said to have been updated.
The most valuable contribution is that of Andrew Sheng who has the experience of a central banker, World Bank official, corporate regulator and an academic. He is clear in his view the “magic of the market” had failed in all the four functions expected of it, viz. resource allocation, price discovery; risk management; and corporate governance. Asian economies are diverse and have to evolve their distinct structures. There is lack of international coordination in bank regulation and emerging economies are at a great disadvantage. As he says, “Asia does not have the firepower and institutions to ensure that the dialogue with the West is conducted on the same narrative.”
Xinghai Fang narrates the experience of non-tradable share reform in the People’s Republic of China. The attempt was to offload the unlisted shares of state-owned enterprises (SOEs) in the stock market. It was well designed and carried out smoothly. It was “the most complicated economic reforms in PR China and perhaps, the world.” All the involved parties, the government, listed companies, investors and shareholders, and the stock market itself gained. India may learn a lesson or two from this experience in dealing with its divestiture programmes of PSUs.
Other chapters provide details of the progress made in capital market reforms in other countries, e.g. Malaysia. Some contributors (Stephen Grenville) deal with OECD practices, standards, etc. which enhance governance and trust in the market. He seems to rely more on “personal reputation” than on rules. While dealing with the growth of financial conglomerates his own preference is for “separate” entities until a deeper legal and prudential framework is built up and a stronger credit culture emerges.
It is surprising that there is no reference to the Indian efforts in capital market reforms. The book is too narrowly Asia-Australia-Eurocentric — perhaps, an instance of academic cronyism!
CAPITAL MARKET REFORM IN ASIA — Towards Developed and Integrated Markets in Times of Change: Edited by Masahiro Kawai, Andrew Sheng; Sage Publications India Pvt. Ltd., B 1/I-1, Mohan Cooperative Industrial Area, Mathura Road, New Delhi-110044. Rs. 995.