>> MIM Speaks
BOGGED DOWN BY LACK OF TRANSPARENCY
JULY 26, 1998 -
THE STAR
ON top of the currency, financial sector and real sector
crisis, is there a management culture crisis that hits at the
heart of the East Asian debacle?
At the heart of the East Asian crisis, I believe, is the issue
of governance - both corporate and political. Governance is at
the core of business-government relations and has direct
bearing on transparency and accountability, which are
necessary elements of open markets and democratic systems.
It is about equal access to information, fair procedures and
consistent processes.
It is about allowing markets to operate to the advantage of
all, about protecting the interests of consumers and the
general public about taking political decisions out of
business and economic matters, and most importantly of
disallowing the use of public resources, power or office for
purposes other than public good.
In short, the Asian way of doing business must be
restructured. While the positive elements of relationships,
courtesy and respect must be retained, the practice of bending
regulations, the use of connections and the practice of saving
face over punishment must be done away with.
As your Deputy Prime Minister said in a recent speech in New
York: "For decades, Asian governments adopted an
interventionist approach towards economic development.
While policies were generally market-friendly, the state
played the principal role in the allocation of resources. This
was considered not only to be legitimate but essential to
correct social and economic imbalances which could plunge
whole nations into chaos."
Many of us in East Asia now realise that the integrity,
fairness, and competence of governments in small city states
may be more difficult to achieve in larger, more diverse, and
less well-educated countries.
Management imperatives. The prescriptions to the crisis are
many and well-documented. From a macroeconomic and public
policy perspective, these include:
Getting the macro fundamentals right;
* Shoring up the financial sector by recapitalising strong
banks, restructuring or merging weak banks, and shutting down
the worst banks;
* Introducing regulatory regimes of international standard
with better supervision of financial houses;
* Liberalising investment regimes
* Better fiscal management;
* Dealing directly and swiftly with unemployment and
inflation; and
* In the words of Dr Noordin Sopiee, moving forward with
"marketisation" of the economy and "taking politics and
politicians out of the corporate decision-making loop."
At company level, the conventional wisdom includes:
* Cutting down on waste and extravagance;
* Maximising productivity
* Ensuring greater productivity of capital and delivering on
total-factor productivity
* Working to keep balance sheets strong; and
* Exporting whenever and wherever possible.
However, we have to address a number of major structural
arrangements that need to be highlighted if this region is to
move up to the next level of development.
First, there is need to professionalise the financial sector.
In a major paper delivered at the Asian Development Bank
Institute in December 1997, former head of the New York
Federal Reserve E. Gerald Corrigan spoke of a lack of
objectivity and impartiality in the decision-making processes
in East Asia.
He stated: "Even with the best of intentions, due diligence in
credit extension is often compromised by poor sources of
objective information on the credit history of borrowers and
by corporate structures that are a tangled maze of financial
and operating interdependencies between multiple legal
entities.
"In many instances, in most countries, the objectivity and
impartiality of credit decision-making processes have been
undermined by lending and investing patterns that have been
encouraged, if not virtually mandated, by patterns of cross
ownership or control between banks and industrial concerns."
In the history of economic development worldwide,
entrepreneurs create engines of growth in local economies. As
these expand into industrial concerns, there is the natural
evolution to branch out into finance.
This pattern was evident in the United States up through the
1929 depression when the vulnerability of the banking sector
was exposed. Since then legislation has created a barrier
between industry and finance, and rightly so.
Entrepreneurs and industrialists take risks in the open market
- guided by their vision and limited only by their perception
of risk - to take advantage of opportunity and turn this into
profit. Their successes and failures are theirs and theirs
alone.
A banker, on the other hand, must be the consummate
professional. The resources entrusted to them are not theirs;
they are provided by depositors and hence are to be
safeguarded.
Banking is a public trust, or in the words of Jose B.
Fernandez, private banker and later Governor of the Central
Bank of the Philippines: "(Banking) is committed to
relationships of confidence usually earned over time. It takes
nothing less than commitment - a truly responsible one - to
the community it serves."
Thus, by the nature of the business, bankers must be stewards
of other people's money, prudent in their outlook and careful
in their judgment.
The interlocking directorates that are evident worldwide among
industrial concerns, successful entrepreneurs, and banks may
be unavoidable - and may at times be desirable.
But in emerging markets, banks are often controlled by
industrialists, property developers and borrowers. This gives
rise to problems of lack of transparency, subjective
valuations of projects, boardroom pressure to accept
inadequate proposals, and less diligence.
Second, the professionalisation of the banking sector requires
much tighter supervision of financial institutions.
The perceived political interference in the financial
institutions of Thailand and the weak supervision of finance
companies and banks hastened the rapid decline of the baht.
Again I would like to quote from Datuk Seri Anwar Ibrahim's
speech in New York: "An important outcome of the crisis is the
consensus for regional surveillance to facilitate coordination
in macroeconomic policies.
"Each country is sovereign and entitled to formulate its own
fiscal and monetary policies. However, it is in everybody's
interest to maintain economic stability and confidence in the
region as a whole.
"With the regional economy being increasingly integrated, it
would be foolish for any country to pursue unsustainable and
incongruent policies which put its neighbours in danger of
imminent failure."
Considering the need for all financial institutions in Asean
to be sound and strong, are we ready to accept common
standards and supervision by regional bodies of financial
institutions in Asean?
Are we ready to have banks and financial institutions in Asean
examined, and the results publicised, by a group of
technocrats and auditors from the different countries? This
seems logical, since a failure of institutions in one country
can adversely affect financial systems in neighbouring
countries.
Third, globalisation and the speed with which financial
transactions now occur forces us to take a closer look at the
possibility of placing parameters on currency movement, on
short-term borrowing and short-term investment. Today, in the
currency markets around the world, over US$1.3tril are
transacted daily without restriction. Such movements can have
damaging effects on small economies. The question of how free
should the free movement of capital be should be addressed.
Investments and human relationships. All of us may be in
favour of Toyota or Ford establishing their plants under
government-approved conditions. This is like a marriage the
investor is here to stay like a wife. We are delighted when
they bring in their parts suppliers, like concubines who
cooperate with the wife.
We may be temporarily happy when a fund manager buys shares of
a local company but we soon find that this is like a callgirl
who moves in and out depending upon where the market is more
attractive.
When many of our companies are in difficulty, we see funds
looking for two to five-year situations where they can invest
with the intention of moving out after the company's problems
are solved and share prices improve. These are more like
mistresses - comforting you when you are in need but not as
long-staying as wives or concubines.
Both Datuk Seri Dr Mahathir Mohamad and George Soros agree
that the completely free movement of capital funds for a small
developing nation is not desirable - just as the complete
freedom of movement for callgirls may not be tolerated by
society.
While our own weaknesses may have caused many of our current
problems, the complete freedom of capital movements certainly
aggravated the problem.
Both foreign lenders and domestic borrowers did not see the
danger signals and made the same mistakes. Yet present
solutions seem to hurt foreign lenders the least and give
governments very little room for relieving the suffering of
their poorest citizens.
I firmly belief that emerging markets must have restrictions
on sudden and massive movement of capital. Even if we were to
correct all our past faults, the benefits of capital mobility
would not match the cost and the risks of another crisis
caused by the herdlike behaviour of short-term foreign
investors.
Aside from monitoring - and maybe restricting - short-term
borrowings, we should consider other measures. Should we
permit non-residents to buy only shares and bonds under global
or American depository receipts so that sale of such shares
will not affect foreign exchange reserves?
Should central banks impose foreign exchange controls in case
of emergencies to prevent flight of domestic capital?
Taiwan and China have restrictions on capital flows, yet they
have attracted large amounts of foreign direct investments.
With the weak financial institutions in Japan and China, Asia
is unfortunately unable to mobilise its financial resources.
Japanese and Chinese banks have to operate with the assurance
that the governments are standing behind them.
We, therefore, have to depend on Western leadership until we
clean up our own houses, strengthen the foundations and the
structures, and even more important, develop the leadership,
transparency and discipline needed by the financial sector.
However, I share the worry of Henry Kissinger that when this
pacific storm is over, there may be stronger economic
nationalism - and possible resentment of the United State
which has the undisputed leadership of the financial world and
the greatest influence on the IMF and the World Bank.
Fourth, I would like to endorse a proposal made by Moeen
Qureshi for the establishment of a US$200bil Asian recovery
and development fund "to assist in debt-restructuring, promote
private investment, especially in infrastructure, to finance
social safety nets in association with IMF structural
adjustment programmes and to provide support for human
resource development and environmental preservation."
Most of this could come in the form of credit lines and
guarantees from Japan, China, Taiwan, Hong Kong, and Singapore
- Asian countries with substantial reserves. Japan's offer of
US$100bil at the start of the crisis could be the nucleus of
this Lund.
Fifth, as an ethnic Chinese, I want to comment on the role of
ethnic Chinese in the South-East Asia economies. Many of my
comments are equally applicable to all family- controlled
financial groups but it is the large share of this ethnic
group that has emboldened me to talk on this sensitive
subject.
In all communities around the world, where the perception that
the economic line dividing the "have" and "have-nots" is based
on language, race or religion, an emotional problem exists.
The problem becomes more difficult to solve when a minority is
economically stronger than the majority.
While the benefits of economic development have advanced
income levels throughout Indonesia, the economic gap between
Pribumis and ethnic Chinese has widened. Only education can
peacefully narrow this gap but this takes time.
All the South-East Asian nations have successfully motivated
the ethnic Chinese, who originally came as immigrants, to
direct their-energies to the economic development of their
adopted land. From small- scale commerce and artisans, they
have moved to industries - and to he financial sector.
The willingness to take risks and the reliance on family - two
important factors in their past success and probably the
success of all Asian entrepreneurs - are often handicaps in
the financial sector.
Indeed, this may also be the weakness of most
family-controlled banks in Asia, regardless of nationality.
Taiwan should know the weaknesses and Strengths of the ethnic
Chinese groups. When Taiwan finally opened its banking
industry to the private sector, it insisted on banks having a
minimum of US$400mil paid-up capital with no group owning more
than 20% of the shares. It also limited the number of new
banking licences.
This was done at the time when Indonesia rather foolishly
opened its banking sectors with minimum paid-up capital of
US$6mil. This resulted in 250 hanks, mostly family-controlled,
with few real bankers to run the business.
The professionalisation of business practices from the
informal to the formal with transparent, international
standards for conducting business should become more evident.
Again, nowhere will this be more evident than in the field of
banking where there is need to build a culture of professional
management - one part of the equation Corrigan calls the
"culture of credit."
The future for East Asia. During the last 35 years, I have had
the privilege of seeing all the East Asian countries grow from
poor rural communities to stable middle-class nations. I am
not ready to accept that the Year of the Tiger should follow
an Australian saying "rooster todays feather duster tomorrow."
East Asia will eventually steer its way out of this crisis.
The questions instead are: How long will it take and can the
region realise high growth again?
This will be a difficult year for all of us. China, Singapore,
Malaysia Hong Kong and the Philippines will still be able to
manage despite worsening figures every quarter. On the other
hand, Thailand, Indonesia and South Korea will have high
negative growth rates.
The economic outlook for 1999 is equally depressing as
companies will have to implement painful adjustments. As we
enter the 21st Century, positive trends will hopefully emerge.
The recent decline of the yen seems to have been temporarily
checked by the joint intervention in the currency market by
the United States and Japan. But until there is a solution to
the problem of the Japanese banks and the recession of (he
economy, we cannot discount the spread of the Asian flu to
China and then to the United States where economists are
already commenting on the dangers of assets inflation.
East Asia will overcome its difficulties. Strong cultural
fundamentals will help - most important of which are the
desire for education hardworking populations and a social
fabric that continues to place great emphasis on the family as
an institution.
Also encouraging are the indications that the crisis has
increased tile awareness of managers that public funds are
different from the private purse. And farsighted managers are
building up the human resources of their organizations.
New foreign direct investments have continued and in certain
areas have increased. Wives have not abandoned us. Other fund
managers have even returned - "callgirls" are very
opportunistic!
The more difficult questions are: now I East Asia is to govern
itself in terms of business-government relations and its way
of doing business?
East Asia must accelerate the moves for closer economic
cooperation if it hopes to catch up with Europe Nafta and
other regional groupings. I he Asian Development Hank may have
to expand its r ale to cope with regional crises. Unless there
are safety nets, complete freedom of capital movements Mad not
be desirable at this stage of development.
Closer to us is the future of Asia. The recovery of Indonesia
with almost half the Asean population is essential if Asia is
not to be paralysed. We have lost much ground and it will take
visionary leadership to think regionally when each country is
trying to solve its own pressing problems.
I am sure that entrepreneurs will now be more careful,
financial institutions will consolidate to strengthen their
organizations and procedures and wise managers will tear n
from the experience.
The learning curve has been extremely steep hut least Asia has
shown a high receptivity to learning from crises in the past.
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