FINANCING EAST ASIA'S SUCCESS

FINANCING EAST ASIA'S SUCCESS

Also by Michael T. Skully MERCHANT BANKING IN THE ASEAN: A Regional Examination of its Development and Operations MERCHANT BANKING IN AUSTRALIA ASEAN FINANCIAL CO-OPERATION: Banking, Finance and Insurance CREDIT UNIONS FOR AUSTRALIANS (co-author) A MULTINATIONAL LOOK AT THE TRANSNATIONAL CORPORATION (editor) HANDBOOK OF AUSTRALIAN CORPORATE FINANCE (co-editor) FINANCIAL INSTITUTIONS AND MARKETS IN SOUTHEAST ASIA: A Study of Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand (editor) FINANCIAL INSTITUTIONS AND MARKETS IN THE FAR EAST: A Study of China, Hong Kong, Japan, South Korea and Taiwan (editor) FINANCIAL INSTITUTIONS AND MARKETS IN THE SOUTHWEST PACIFIC: A Study of Australia, Fiji, New Zealand and Papua New Guinea (editor) FINANCIAL INSTITUTIONS AND MARKETS IN THE SOUTH PACIFIC: A Study of New Caledonia, Solomon Islands, Tonga, Vanuatu and Western Samoa Also by George J. Viksnins THE ECONOMIES OF SOUTHEAST ASIA IN 1980 THE ECONOMIC AND POLITICAL GROWTH PA TIERN OF ASIA-PACIFIC (with L. R. Vasey) FINANCIAL DEEPENING IN THE ASEAN COUNTRIES

FINANCING EAST ASIA'S SUCCESS Comparative Financial Development in Eight Asian Countries Michael T. Skully Senior Lecturer in Finance, University of New South Wales, and George J. Viksnins Professor of Economics, Georgetown University Palgrave Macmillan in association with the AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH

ISBN 978-1-349-09040-2 ISBN 978-1-349-09038-9 (ebook) DOI 10.1007/978-1-349-09038-9 American Enterprise Institute for Public Policy Research, 1987 Softcover reprint of the hardcover 1st edition 1987 All rights reserved. For information, write: Scholarly & Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York, NY 10010 First published in the United States of America in 1987 ISBN 978-0-312-00536-8 Library of Congress Cataloguing-in-Publication Data Skully, Michael T. Financing East Asia's success. Bibliography: p. Includes index. 1. Finance-East Asia. 2. Finance-Asia, Southeastern. 3. Financial institutions--east Asia. 4. Financial institutions--asia, Southeastern. 5. Inflation (Finance)-East Asia. 6. Inflation (Finance)-Asia, Southeastern. I. Viksnins, George J. II. Title. HG187.E37S68 1987 332'.0959 86-31527 ISBN 978-0-312-00536-8

To our families

Contents List of Tables viii Preface x 1 Inflation and Economic Development 1 2 Inflation in East Asia: An Overview 26 3 The Glittering City States of Asia: Hong Kong and Singapore 56 4 The 'Unrepentant Capitalist-Roaders': Taiwan and Korea 94 5 Dominoes Still Standing: Thailand and Malaysia 126 6 Thousands of Islands in the South Seas: Indonesia and the Philippines 152 7 Asian Financial Development in Comparative Perspective 185 Bibliography 224 Index 236

List of Tables 2.1 Growth and inflation rates in East Asia 29 2.2 Financial indicators for twelve selected countries 31 2.3 Inflation rates during the two oil shocks 48 2.4 Economic performance indicators, selected countries, 1974-82 49 2.5 Exchange rates in East Asia, 1972-84 51 3.1 Real growth rates of GNP/GOP for Hong Kong and Singapore, 1964-83 58 3.2 Average consumer price inflation: average annual compounded rate for Hong Kong and Singapore, 1964-83 58 3.3 Financial institutions in Singapore, by numbers and total ~~ ~ 3.4 Largest ten banks in Singapore, domestic and foreign, total 1981 and 1983 64 3.5 Interest rate levels and spreads in Singapore, 1979-84 70 3.6 Deposits from customers, Hong Kong, 1980-84 72 3.7 Commercial banks in Hong Kong: by number of banks and bank offices, 1970-83 73 3.8 Top ten domestic banks, asset size, 1980-83 73 3.9 Interest rate levels and spreads in Hong Kong, 1980-84 75 3.10 Singapore's Asian dollar market, total assets, 1968-84 85 3.11 Summary of financial indicators, Hong Kong, 1965-83 90 3.12 Summary of financial indicators, Singapore, 1965-83 91 4.1 Sources of funds in Korea, 1981 and 1986 107 4.2 An overview of the financial system of South Korea, 1980-83 110 4.3 Manufacturing debt/equity ratio, selected countries, 1976-80 113 4.4 Summary of financial indicators, South Korea, 1965-83 115 4.5 Major financial institutions in Taiwan, total assets, 1980-83 117 4.6 Summary of financial indicators, Taiwan, 1965-83 122 viii

List of Tables ix 5.1 Financial institutions in Malaysia by type, number and total assets, December 1983 133 5.2 Domestic commercial banks, Malaysia, 1977-83 134 5.3 Branches of foreign banks operating in Malaysia, 1977-83 135 5.4 Commercial bank lending, Malaysia, 1960-84 137 5.5 Summary of financial indicators, Malaysia, 1965-83 141 5.6 Thai financial institutions: by number of institutions and total assets, 1983 146 5.7 Domestic banks in Thailand, 1978-83 147 5.8 Foreign banks in Thailand, 1978-83 148 5.9 Selected financial indicators, Thailand, 1965-83 149 6.1 Total and per capita GNP, Indonesia and Philippines 153 6.2 Indonesia and the Philippines: savings, investment, and resource gap, 1964-82 154 6.3 Philippine financial system in 1983: total assets, shares, and number of institutions 156 6.4 Commercial banks in the Philippines, total assets, 1983 158 6.5 Financial institutions in Indonesia by number and total assets, end of June, 1984 169 6.6 Major commercial banks in Indonesia, 1983 173 6.7 Indonesia and the Philippines: growth rate of GNP 176 6.8 Selected financial indicators, Indonesia, 1965-83 182 6.9 Selected financial indicators, Philippines, 1965-83 182 7.1 Monetization and real interest rates in selected Asian countries, 1983 190 7.2 Prices, exchange rates, and financial deepening, selected Asian countries, 1970-83 192 7.3 Banking concentration in Asia, 1982 196 7.4 Nonfinancial sectors' wealth composition and government intermediation, Japan and the United States 202

Preface The title of this volume is a bit ambitious, for we do not focus explicitly on China or Japan, the two most important countries of East Asia, but rather on four pairs of developing countries in East and Southeast Asia. We believe that the experience of these eight market-oriented and relatively open countries during the past three decades presents some valuable lessons for other developing countries in Asia and the rest of the so-called 'Third World'. They are all successful cases of export-led growth, but also more than just that, though their past successes may be much more difficult to replicate during the next 30 years. Broadly speaking, these eight countries, along with Japan (and perhaps Pakistan and Sri Lanka recently), could be called 'The Capitalist-Roaders of Asia'- a title we considered for this book but discarded as overly cute. The eight countries we discuss include seven independent nations and the very interesting multi-national entity of Hong Kong. Politically their history represents a mixed picture. Although the term 'Crown Colony' is now seldom heard in polite society, Hong Kong will continue to be administered by the British until 1997. Singapore and Malaysia are also former British possessions. Most of Indonesia was colonized by the Dutch, while the history of the Philippines contains elements of both Spanish and American influence. Thailand managed to preserve its independence during the colonial era, while both Taiwan (formerly Formosa) and Korea fell under Japanese domination during the first half of the century. Despite this heterogeneity in historical backgrounds, there seems to exist a good deal of political and sociological similarity in all eight of these modernizing societies. Today they all have relatively stable and firmly anti-communist governments with a fundamentally Western (and even a pro-us) tilt, although their political alignment has varied over time and country-bycountry. For example, Indonesia started out as militantly non-aligned in the 1960s, which tended in practice under Sukarno to mean 'anti American'. On the other hand, South Korea appears to be quite willing even today to maintain a close working military relationship X

Preface xi with the US. In Taiwan public opinion is probably much more pro American than American opinion is pro-taiwan, though that is a bit of an over-simplification. Thailand was formerly the home of six air bases and a major military port for the US Navy and fought on the US side in Vietnam. The Philippines still houses major US military installations at Subic Bay and Clark air base. Both countries, however, are continuing to re-examine their long-run strategic interests, and the change of government in the Philippines may call into question its strategic relationships as well. With an eventual resolution of the conflict in Kampuchea, the members of the ASEAN (now also including Brunei) are fervently hoping that its ZOPFAN concept (Zone of Peace, Freedom, and Neutrality) becomes a reality in Southeast Asia. In all eight countries a genuine system of parliamentary democracy and party politics cannot be said to exist-as it similarly does not in Japan. As in Japan, however, the requirement of political stability does not entirely eliminate dissent, discussion, and even demonstrations. By and large, ordinary citizens are free to come and go, send their children to study in Cambridge, Tokyo, or Sydney. For most, it is also possible to deposit some of their assets with the Gnomes of Zurich, London, or Wall Street. Except for the two city states of Hong Kong and Singapore all countries still have a sizeable and productive agricultural sector, but are industrializing rapidly. All eight have significant trade and investment ties to Japan, the US and Europe, as well as with Australia and New Zealand. Their future economic significance is likely to increase even further if we extrapolate recent trends. American trade with Pacific Asia now surpasses that with Europe. The export performance of the 'Gang of Four'- Hong Kong, Korea, Singapore, and Taiwan- has been based upon the competitiveness of their manufacturing sectors, but the other four countries enjoy a rich assortment of natural resources. For example, both Indonesia and Malaysia are exporters of oil and gas, tin and rubber, and other important primary commodities. Exploration for hydrocarbons is continuing in both the Philippines and Thailand, which are now energy importers, but experts are quite optimistic about their potential in that field. In general, future prospects are predicated upon the continuation of relative stability, both economic and political, in all eight of these countries. A key indicator of such stability -of people's expectations about the future- is the rate of inflation. A high rate of inflation essentially reflects a vote of no confidence for the policy-makers of that country, an unwillingness to hold money issued by its monetary authorities, and a fear of property expropriation.

xii Preface These expectations and fears are also reflected by the long-run movements in a country's foreign exchange rates. Thus, a rise in money holdings per capita-expressed relative to income or in foreignexchange equivalent units (Special Drawing Rights (SDRs), for example) - reflects the relative financial development and over-all outlook for these eight countries. It can also be argued that an increase in money holdings per capita is likely to be associated with increased popular participation and a more equal distribution of income and wealth. The proximate cause for the writing of this volume was a conference on inflation in East Asian countries, which took place in May 1983 in Taipei. The conference was sponsored by three organizations: the Chung-Hua Institution for Economic Research, the Taiwan Institute of Economic Research, and the American Enterprise Institute for Public Policy Research. During the spring semester of 1983, Michael T. Skully was a visiting research associate at Georgetown University on study leave from the University of New South Wales. GeorgeJ. Viksnins, of Georgetown University, participated in the Taipei conference as a discussant, and the idea for this book was born - to combine our mutual interest in financial development in Asia with the main findings of the conference papers in a companion overview volume with the latter providing a summary for the non-specialist. In a very general sense that has been done-spiritually, this book is a supplement to the handsome volume of conference proceedings already published in Taiwan by the Chung-Hua Institution of Economic Research. However, we quickly realized that we did not want to write a 50-page summary of the conference, which at times got a bit esoteric, but a somewhat longer and more general overview for scholars, businessmen, and other readers interested in the area and the topic. The resulting product is truly a joint effort- with 60 per cent coming from both authors. Michael T. Skully had primary responsibility for Hong Kong and Singapore and Indonesia and the Philippines, while George J. Viksnins agreed to concentrate on the other four countries. However, since Skully had just completed a project dealing with Malaysia for the World Bank, and was engaged in a comprehensive consultancy with the Asian Development Bank on related matters as this book was being written, a good deal of the factual material in all chapters came from Skully and a lot of the overly expressive prose from Viksnins. We owe an intellectual debt to all the many people implicated in the bibliography, and a number of others who read bits and pieces of the final draft.

Preface xiii Also, the authors wish to acknowledge with gratitude the help of a number of people, who provided factual information and/or useful advice, but who should not be blamed for any shortcomings that still remain. A partial list of these individuals includes Francis Chan (Citibank), Hang-seng Cheng (Federal Reserve Bank of San Francisco), Kasigod Jamias (Sycip, Corres, Velayo & Co.), H. S. Kartadjoemena and D. Nurjaman (Bank of Indonesia), Paul Lau (United Overseas Bank), Soo Shin Lee (Bank of Korea), Yung-San Lee (Central Bank of China), Chen Young Mee (Monetary Authority of Singapore), Viraphong Vachratith (Bangkok Bank), J. H. Y. Wong (Hong Kong and Shanghai Banking Corporation), Kwi Sob Yoon and Chang Ho Choi (Bank of Korea), as well as Robert Emery of the staff of the Board of Governors of the Federal Reserve System and Maxwell J. Fry of the University of California at Irvine. Thanks go to Tom Johnson and Ed Somensatto of AEI which provided financial support for this volume, for their patience and encouragement since the project took rather longer than was anticipated, as well as to Keith Povey for a fastidious editing job. We should also like to thank the staff of the Georgetown University economics department: Susan Bredenberg, Joe Ganley, Michael Guidry, Shirley Kan, Allan Mascarenhas, Jacqueline Pirozzi, Kurt Stitcher, Tony Turjoman, and a number of others who patiently processed the words that follow. Finally, we hope that the future of all those millions of people in these eight countries that we have visited will indeed bring with it continued increases in real money balances per capita. MICHAEL T. SKULLY GEORGE J. VIKSNINS