Alexander Gerschenkron argued that banks facilitate growth in “backward” countries, and modern theorists sometimes similarly claim that banks can promote growth by reducing informational asymmetries and improving the allocation of funds. Japan has played a part in these debates. In early twentieth‐century Japan, firms relied heavily on bank debt, observers argue. Those firms with preferential access to debt outperformed the others, and those that were part of the zaibatsu corporate groups obtained that access through their affiliated banks. In fact, Japanese banks did not play the role attributed to them. Japan was not a bank‐centered economy; instead, firms relied on equity finance. It was not an economy where firms with access to banks outperformed their rivals; instead, such firms earned no advantage. And it was not a world in which the zaibatsu manipulated their banks to favor affiliated firms; instead, zaibatsu banks loaned affiliated firms little more than the deposits those firms had made with the banks. During the first half of the last century, Japanese firms obtained almost all their funds through decentralized, competitive capital markets.
Is China a “transition country”? The answer is no, if by transition country is meant one that is converting from the rule of a communist party to a democracy. The answer is yes, however, if what is meant is the transformation of an economy from monopoly state socialism toward decentralized entrepreneurial capitalism. If China has traveled a smaller distance down the road to political transition than its counterparts in Eurasia, it has in many respects made an even greater transformation on the economic front. If it is incorrect therefore to call China a transition country, it is undeniable that it is a transition economy. China stands out as a special case among transition economies for several reasons. In the first place, not under the thumb of the Soviet Union, it was able to begin its economic transition more than a decade earlier than the Eurasian economies. A second difference is that it entered its economic transition as a primarily agricultural economy, starting from a much lower level of economic development than countries in Eurasia. A third difference lay in its transition strategy, which emphasized reform by sectors – sequential incrementalism – rather than gradualism or shock therapy. A fourth difference is that its growth strategy focused on the creation of free economic zones, the promotion of the international sector, and strong encouragement of foreign investment. A fifth difference is that it resisted the temptation to use the money-inflation tax as a source of finance and has instead made strong efforts through central bank policy and monetary reform to keep inflation under control.
The current economic problems in Southeast Asia can be attributed not to too much reliance on financial markets, but to too little . Like the U.S. economy a century ago, the emerging Asian economies do not have welldeveloped capital markets and so remain heavily dependent on their banking systems to finance growth. For all its benefits, banking is “not only basically 19th‐century technology, but disaster‐prone technology.” The extreme maturity (and, in some cases, currency) mismatch on banks' balance sheets plus the first‐come, first‐served nature of the deposit obligations mean that banks are inherently vulnerable to massive runs by depositors—and that their economies are subjected to periodic credit crunches. And, as the author says, “in the summer of 1997 a banking‐driven disaster struck in East Asia, just as it had struck so many times before in U.S. history.” In this century, In this century, the U.S. economy has steadily reduced its dependence on banks by developing “dispersed and decentralized” financial markets. In so doing, it has increased the efficiency of the U.S. capital allocation process and reduced its susceptibility to the credit crunches that have occurred throughout U.S. history. By contrast, Japan has not reduced its economy's dependence on banks, and its efforts to deal with its banking problems have served only to destabilize itself as well as its neighbors. Developing countries in Southeast Asia and elsewhere are urged not to follow the Japanese example, but to take measures aimed at developing financial markets and institutions that will either substitute for or complement bank products and services.
The internationalization of capital markets that occurred during the era of the classical gold standard (1870-1914) was part of a broader set of trends that threatened to drain local markets from capital and channel that capital to the national financial center and, from there, toward other national financial centers. Still, internationalization was neither inevitable, uniform, nor irreversible but was a political choice informed by redistributional considerations between rival domestic interests and decided by politically dominant coalitions. The domestic institutional structure in each country determined the composition of the politically dominant coalition. Decentralized structures allowed potential losers to curb public policies favorable to capital market internationalization, whereas centralized structures allowed expected winners to promote such policies. As a result, economies with centralized states ended up being the most dependent on the international capital market, whereas economies with decentralized states took a less active part in the globalization of finance.
The World Economic Outlook (WEO) exercise at the IMF evolved during the 1980s, partly in response to demands by policymakers in national finance ministries for objective and internationally comparable projections and policy scenarios. The exercise had begun as a staff initiative, encouraged by the Managing Director (Johannes Witteveen). Gradually, the Executive Board, the Interim Committee, the Group of Seven, and others came to view the discussion of the WEO documents as an important element in their efforts to keep abreast of world economic developments and prospects. Direct and indirect feedback from those discussions informed the staff as to how the exercise should be improved. Driven by this policy relevance, the WEO evolved from a decentralized project that was only haphazardly model-based into a more rigorous and coordinated exercise.
Globalization is moving much more rapidly in finance than in international trade and production. The international financial system is at present undergoverned. Necessary public goods — in furtherance of the objectives of stability, order, equity and efficiency in the global economy — are undersupplied. The world economy would benefit from stronger and more democratic macroeconomic and financial management, preferably centred in the International Monetary Fund. Development finance might best be decentralized from its present over‐concentration in the World Bank. The Chrétien Government has an opportunity, as host of the Group of Seven Summit, to lead the way to a credible and representative review of global economic governance.
U.S.-Japanese Corporate Finance For at least two decades, Japanese corporate investment consistently has outpaced U.S. corporate investment. One of the leading explanations of this phenomenon--and a favorite among U.S. corporate managers--is that the cost of capital is lower in Japan than in the United States. The combination of lower real interest rates and higher stock prices makes it cheaper for Japanese firms to borrow money and issue equity, enabling them to invest more. But how do we square this explanation with the view held by many economists that capital is mobile across national borders? If capital is indeed cheaper in Japan than in the United States, why don't U.S. companies go bargain hunting for capital in Japan? The answer may lie in differences in the structure of corporate financial markets between the two countries. 1) In 1977, the average debt-equity ratio of Japanese companies was roughly four times that of U.S. companies; it is now about the same. 2) Until fairly recently, about 90 percent of all Japanese corporate debt took the form of short-term bank loans; during the same period, only about 30 percent of U.S. corporate debt was financed by banks. 3) In a sample of financially distressed U.S. public companies, roughly one-half filed for reorganization under Chapter 11 of the Bankruptcy Code; in a comparable sample of Japanese companies, none filed for bankruptcy protection. These stark differences in financing behavior suggest tha there is more to understanding the cost of capital differences than a simple comparison of interest rates and stock prices. I have conducted research with Takeo Hoshi, Anil K. Kashyap, and David N. Weil that may shed some light on how structural differences in the two financial markets--many of which are quickly disappearing--could explain in part why corporate investment in Japan has been higher than in the United States. Relationship Banking in Japan Historically, the linchpin of Japanese corporate finance has been the close relationship between a firm and its main bank. The main bank provides debt financing, owns some of the company's equity (by statute, no more than 5 percent), and may even place bank executives in top management positions. This system is similar in many respects to West Germany's, but it contrasts sharply with U.S. financing practices. Here, large companies generally have a more arm's-length relationship with the capital market; their debt and equity tend to be held diffusely. Japanese banking practices are driven more by relationships, while U.S. banking practices are driven more by price. For many Japanese companies, the main bank relationship is part of a larger industrial structure known as the keiretsu, a group of companies centered around affiliated banks and other financial institutions. These companies also have strong product--market ties to each other that are strengthened by cross-share ownership. Historically, the links have been strongest in the six largest keiretsu--Mitsubishi, Mitsui, sumitomo, Fuyo, Dai-ichi Kangyo, and Sanwa. This corporate financial structure can facilitate investment through at least two distinct channels. first, the main bank and keiretsu system can provide a ready source of funds to companies that otherwise would be unable to raise capital in a decentralized market. Thus, even though the system may not affect the cost of capital, it can affect the availability of capital. Second, the main bank and keiretsu system can lower the costs of financial distress. This facilitates investment in two ways: by ensuring that companies with valuable investment opportunities are able to exploit them; and by enabling companies to take on more debt, which generally is thought to be cheaper than equity. I consider each of these channels in turn. Liquidity Constraints and Investment In a frictionless capital market, companies with valuable investment projects should have to trouble raising the funds they need to finance these projects. …
Although the recent performance of the U.S. macroeconomy is being hailed as "the longest modern peacetime expansion s n failures of depository institutions have been closely linked to certain depressed productive sectors in the country. The most stark examples can be found in the depressed farm-belt and oil-producing regions. Observations indicate that financial firms do not or cannot diversify against industry-specific risk when choosing their loan portfolios. Such behavior may be explained by extensive government regulation of the industry's scale and scope or by technological costs of intermediating credit that encourage specialized lending by region or by industry. This paper does not attempt to formally explain why depository institutions engage in specialized lending; rather, it examines some implications of regional and sectoral banking in terms of macroeconomic perf~rmance.~ It considers the short-run implications of bank-capital immobility when banks produce real services in channeling the flow of funds into investments. We illustrate how regional banking conditions can affect the mix of aggregate investment and the level of future aggregate output in the absence of macroeconomic fluctuations. Given the current deregulatory trend in structural policy changes, the nature of the financial services industries has come under intense scrutiny. Recent banking literature has formalized how financial contracts are related to imperfect information. A recurring theme has been that when information is costly, the quantity and nature of external finance has allocative consequences. Diamond (1984) demonstrates how financial intermediaries (hereafter referred to as banks) can improve the efficiency of capital markets by diversifying and thus minimizing information costs; however, perfect diversification makes bank capital and the dispersion of bank asset returns irrelevant to bank portfolio choice. These strong informational assumptions allow the intermediation process to work more smoothly than we observe. If these conditions are not met, bank capital and the risk of bank assets affect bank profitability. Bernanke and Gertler (1987) show how the inability to eliminate variability in portfolio returns implies that "health" of a'bank's balance sheet can affect the flow of funds to risky bank investments. In their model, depositors cannot observe the ex-post returns on bank projects at any cost and bank capital must absorb random asset returns; insufficient bank capital may constrain banks from investing in risky but profitable investments. In a similar framework, Samolyk (1989) examines how the interest-rate risk associated with the maturity transformation in bank portfolios affects bank asset management. This paper will analyze the implications of imperfect information for investment in a decentralized banking ~ystern.~ We present an intertemporal model of banking similar to that of Bernanke and Gertler. Bankers possess a specialized technology that allows them to channel resources to investment projects that would not be funded in direct credit markets. They also have information about their portfolio returns. Unlike Bernanke and Gertler , this analysis attempts to incorporate the notion that there is more than one productive sector in the economy. We assume that in the short run, bank
The Hungarian banking system developed from the first third of the nineteenth century along the continental path, leading to the predominance of universal banks, the department stores of finance. This system of a large number of small banks with numerous branches, a sizable part of them at county and town levels, was controlled by a handful of big banks that were tightly intertwined with large foreign banks. This situation created many well-trained and broadly-skilled bank officers because, especially in the provincial banks and in branches with a limited staff, the bank employees had to be jacks of all trades, mastering all banking and stock exchange operations. Due to the fact that the Association of Banking Employees, a trade-union-like organization, had a strong left-wing audience which had considerable influence among bankers, the higher echelons of banking staffs consisted largely of pro-Allies liberals who had not been associated with Nazism. Thus, to a considerable extent, the new regime was able to draw its banking cadres from professionally well-trained, and politically loyal or neutral people. From 1949 on, even after the filling of the controlling posts with cadres of the labor movement, the lion's share of the former banking staff remained in lower posts as deputies of the new upper-level managerial staff, or in influential advisory jobs. Thus, the correctness and the professionality of banking operations, accounting, calculation, compilation of balance sheets, correspondence, both domestic and foreign, has been maintained at very high standards. Nevertheless, by having eliminated former top-level managers to a large extent, there was and is a scarcity of bankers who are specialists in allocating loans so as to optimize the safety and profitability of a portfolio. This lack was not obvious until the present decentralization because, even after the reform of the economic mechanism in 1968, the autonomy of the banks continued to be severely curtailed. There is a justified hope that Hungary can fill this gap since, from 1951 on, there has been university training for banking, and
This chapter examines the demand for global financial governance in the wake of the massive financial crisis of 2007–9. The global financial meltdown acted as a catalyst for a dramatic boosting of the International Monetary Fund's (IMF) resources and the creation of the Financial Stability Board (FSB), both which took place at the G20 leaders’ second summit in April 2009. These initiatives appeared to signal a heightened demand for global-level institutions in the areas of liquidity provision and financial regulation emerging from the crisis experience. But the limitations of that demand also quickly became clear as these global institutions found themselves working with and alongside strengthened regional, plurilateral and national authorities in complex ways. The result is neither a strengthening nor weakening of the demand for global governance, but rather a change in the content of the demand. A new kind of “cooperative decentralization” in global financial governance is emerging, driven by the preferences of both dominant powers and Southern countries. The first half of the chapter describes this argument in the case of the IMF. While the IMF's funding boost was dramatic, its significance was immediately called into question by the fact that its new money remained unused in 2008–9 partly because of Southern borrowers’ distrust of the institution. In the end, it was US authorities – not the Fund – that played the most important role in providing international liquidity during this period. Demand for the Fund's resources did, however, grow with the outbreak of the euro crisis, but as a way to supplement European regional arrangements. Lingering distrust of the Fund among Southern officials – reinforced by Northern resistance to governance reform – has encouraged them to strengthen and/or build alternative regional and plurilateral financing arrangements that also work either with or alongside the Fund. The second half of the chapter explores the FSB's creation. This development turned out to be less significant than it initially appeared because the institution was given very little formal power. This design feature reflected both Northern and Southern concerns about accepting international constraints on their regulatory policymaking. The crisis and post-crisis experience only reinforced their commitments to regulatory sovereignty by increasing the domestic political salience of regulatory issues and their fiscal implications, and by revealing the failures of international cooperation relating to the management of failing institutions.