Capital Formation, Financial Development and Good Governance: Lessons from Pacific Asia


Award Holders: J L Ford, M J Fry, S Sen, D G Dickinson and A W Mullineux

Period of report: 1.1.97 to 31.12.97

Institution: University of Birmingham

Amount of Award: £128, 270 (to end in January 1999)

Aims and Methods of Research:

This project aims to investigate aspects of Pacific Asia's rapid economic growth with special reference to the role of finance in growth. It recognises that within that process of growth in Pacific-Asia, financial development and liberalisation has proceeded in uneven pace and the relationship between finance and growth is complex. The project has both a macroeconomic and a microeconomic dimension. The macroeconomic studies of this project concentrates on the linkages between governance, saving, investment (domestic and foreign), financial/monetary reforms and international financial capital mobility (mainly foreign direct investment, FDI). The microeconomic inquiries involve issues of corporate governance, investment decision-making under uncertainty and company response to government policy on such things as tax structure and investment incentives. The stage of development attained by countries affects their response to given government policies and so initially three countries (Japan, Taiwan and Thailand) will form the subject of the empirical work. Cross-sectional econometrics involving other countries in the region, as well as other developing countries, will also be done. Some regional case studies of similar economies may also be conducted. The research methods being employed are very wide in their scope: analytical, statistical, econometric and case study.


Highlights of the Research and Important Findings:

A major regional conference was held at Bangkok during December 1997 (see proceedings and papers of the conference below). This allowed project members, regional collaborators and local academics and policy makers to meet and discuss their research findings in the context of the project. The conference took place during a major financial crisis in the region and therefore generated high interest from Thai participants. There was some media coverage, especially as the meeting was opened by the President of the University - a distinguished policy advisor to the government. The conference was held in collaboration with the University of the Thai Chamber of Commerce which has close contacts with financial specialists and policy makers. During 1997, each individual researcher in the project concentrated on specific issues relevant to their own domain of expertise. The conference allowed important interaction. It is expected that during 1998, the research results will be further pooled to address issues of commonality and interrelationships.

A major finding of the conference was that finance was vital to economic growth and financial development was a sine qua non of sustainable rates of growth. However, continuing rapid rates of growth, as has been common in Pacific Asia, creates incentives for the financial system to behave as if it is playing a 'Ponzi game' i.e. conducting financial intermediation (borrowing/lending) without adequate consideration of terminal constraints (i.e. that no institution can borrow forever to repay past borrowing). When the economy is in a down-turn, the so called 'Ponzi game' may collapse. The role of policy as well as governance becomes vital under these circumstances.

Special mention should be made of Fry who has continued his general research on the following areas: financing economic reforms; foreign direct investment and current accounts; governance at the macro level with reference to central bank independence; relationship between savings, growth and financial distortions; emergence of voluntary domestic markets for government debt; internationalising domestic debt markets; and macro governance and macroeconomic policy. All of these tissues have relevance for the Pacific-Asia region. He finds, for example, that econometric estimates for a panel of 70 developing countries demonstrate that most of Pacific-Asia's above-average economic performance can be explained by superior macroeconomic policy. Ford's new work investigates the impact of government policy and of central bank policy on the monetary and real state of the economy with special reference to Taiwan and ASEAN. Formulated within the context of endogenous growth theory, these empirical models allow an evaluation of immediate, interim and total impacts of policy changes on the rate of economic growth. The range of policies considered are wide so that governance issues could also be incorporated in addition to standard monetary/fiscal stabilisation. Policy variables include: liberalisation, formation of preferential trading areas, the encouragement of FDI, the stock of infrastructure, the stock of human skills via education, the actions of the central bank and so forth.


Since the publications list is very long, we have appended a separate sheet with an attached list of publications. The proceedings of the conference will be published by the end of the year and discussions are underway with some publishers. We will report to the Programme Director and ESRC as soon as more details are available on the publication of the book. In addition to these publications, conference and seminar papers have been given to a wide-ranging audience including the Bank for International Settlements, Bank of England, OECD, Development Economics Study Group Annual Conference, Money Macro and Finance Study Group Conference, and many University Departments.


Engagement with Potential Research Users (outside the academic community):

Our main engagement has been with professional economists in the banking and financial sectors (such as the Thai Chamber of Commerce, Bank of England) as well as international organisations, such as the World Bank, United Nations, and the Organisation of Economic Cooperation and Development. These have included informal discussions, dissemination of research results and comments on Working Papers. In addition, the Bangkok conference was specifically geared to both policy-makers as well as to academics (see list of papers and structure of conference). It was attended by advisors to the government, finance specialists from the Chamber of Commerce, members of the Stock Exchange and economists from the Bank of Thailand.


Detailed Progress:

(i) This award began officially on 1st July, 1995. However, the delay in funding announcement and a further delay in getting a work permit for the Research Associate, meant that actual work began in late 1995. About two years have passed since the substantive research began. The first year was predominantly spent in collecting and collating data given that a substantial part of the research is empirical and econometric. The second year of the project (approximately over 1997) has seen a large number of empirical papers. These have been of three types: using time series data for single countries like Taiwan and Japan; using cross-sectional and panel data for a set of countries like ASEAN or Pacific-Asia as compared to other developing counties; as well as those on specific country studies of Taiwan, Japan and Thailand as presented at the Bangkok conference. The theoretical research has slowed during the last year and we expect it will pick up during the last phase of the project. The acceleration of research output, in terms of empirical papers, promised in last year's report has actually happened.

(ii) The main developments since the last report are: increased output of published papers emanating in part from the project; increased volume of papers, particularly on applied and econometric themes related to the subject matter of the project; the holding a very successful conference at Bangkok attended by regional participants and collaborators of the project as well as representatives from government, media, academic outlets and financial institutions; more dissemination of the project's findings to research users outside the academic community; informing local participants at Bangkok about the Pacific-Asia programme. As before, the macroeconomic aspects of the project has seen the higher productivity. On the microeconomic aspects of the project, for example related to areas of 'good governance and the corporate sector', progress has been relatively slower but has speeded up in the last year. Partly this is due to data availability; it is more difficult to get company data on the scale required. However, the two sessions on 'Finance and investment' as well as that on 'Financial sector issues in SE Asian countries', at the Bangkok conference demonstrate that new papers have been written during the last year on the microeconomic aspects of governance, growth and investment.

(iii) The project has been bedeviled by staffing problem (as mentioned in this and previous reports). We have been fortunate to have employed two excellent RAs who are regional specialists and have worked in regional institutions. However, the first RA left for a highly-paid job (partly as a result of working for this project) and the other has just joined. The lack of an RA for approximately one year has meant that applicants have had to work on data collection, processing and pre-testing rather than delegating these basic work and continuing with progressing the advanced research. This has inevitably slowed down our progress. There has also been difficulties with data collection (as has been mentioned in earlier reports) and we are doing our best to alleviate this problem through our formal and informal contacts. However, such difficulties are not uncommon in microeconomic company-based data for the region.




Conference Programme
"Capital Formation, Financial Development and Good Governance: Lessons from Pacific and South East Asia", Regent Hotel, Bangkok,
15 to 16 December 1997

The aim of the conference is to present analysis of key issues in the inter-action between the financial sector and growth in the real economy. Recent experience in SE Asia provides a dynamic background to the discussions. We are grateful to the UK Economic and Social Research Council (ESRC) (grant L324253010) for financial support and academic co-operation in holding this conference.

Day 1 (15/12/97) (Aimed at General Audience/Policy Makers) 09.15 Welcome address - Professor Krirkkiat Phipatserittan (President of the University of the Thai Chamber of Commerce) 09.30 - 10.10 Professor Somnath Sen

"Finance and Growth: A Survey"

10.10 - 10.50 Professor Andy Mullineux

"Good Governance and Financial Sector Reform"

10.50 - 11.20 Coffee Break

11.20 - 12.00 Dr David Dickinson

"Finance, Investment and Firms’ Objectives"

12.00 - 12.30 Discussion

12.30 - 14.00 Lunch

14.00 - 14.30 Dr Young-Bae Park

"Progress and Financial Sector Reform in Korea"

14.30 - 15.10 Dr Tarisa Watanagase

"Financial Sector Restructuring in Thailand: An overview of recent problems and progress". 15.10 - 15.50 Professor Kenjiro Hirayama "Japanese Financial Markets in Turmoil: Liberalisation and Consequences" 15.50 - 16.10 Coffee Break

16.20 - 17.00 Dr Jiann-Chyuan Wang

"Financial Sector Performance in Taiwan"

17.00 - 17.30 Discussion

17.30 End of Conference day

Day 2 (16/12/97) (For academic, public and private sector economists).

09.15 - 10.30 Session on Finance and Growth

Papers on issues relating to financial sector development and growth. Speakers Jim Ford: FDI, Policy Adjustment and Endogenous Growth: A Model of Taiwan Maxwell Fry: A New Measure of Central Bank Independence

Juda Agung: Financial De-regulation, Bank Behaviour and Channels of Monetary Policy

Hitoshi Osaka: An Empirical Analysis of Growth

10.30 - 11.00 Coffee

11.00 - 12.00 Session on Finance and Investment

Papers on issues relating to firm’s capital investment and relationship to financial structure and corporate governance Speakers David Dickinson: Investment and Uncertainty in Japan

Shin’ichi Hirota: Financial Structure and Corporate Efficiency: Evidence from Japan

Vasu Ramdeja: The Pecking Order Hypothesis: Tests for S. E. Asia

12.00 - 13.30 Lunch

13.30 - 15.15 Session on Financial Sector Issues in SE Asian Countries

Various issues discussed relevant to the financial sector in SE Asia

Speakers Andy Mullineux: Lessons from the Financial Crisis in Pacific and SE Asia

Norman Yin: The Impact of Recent Financial Turmoil in SE Asia on Taiwan Madhu Kanbur: Malaysia’s Banking System Vimut Vanichareontham: Dynamic optimisation model of capital inflows and economic performance with special reference to Thailand 15.15 - 15.45 Tea/Coffee

15.45 - 16.30 Session on Financial Sector Issues in SE Asian Countries (cont…)

Joy Suppakitjarak: Currency Hedging in Asian Equity Markets

Jane-Sue Wang: The Rigidity of Bank Interest Rates in Taiwan

16.30 - 17.30 General Discussion

17.30 Conference Ends





Professor Somnath Sen (University of Birmingham)

Professor Andy Mullineux (University of Birmingham)

Dr David Dickinson (University of Birmingham)

Professor Maxwell Fry (University of Birmingham)

Professor James Ford (University of Birmingham)

Professor Kenjiro Hirayama (Kwansei-Gakuin University, Osaka, Japan)

Professor Shin’ichi Hirota (Setsunan University, Osaka, Japan)

Dr Jiann-Chyuan Wang (The Central Bank of China, Taiwan)

Professor Norman Yin (National Chengchi University, Taiwan)

Dr Tarisa Watanagase (Bank of Thailand)

Porfessor Madhu Kanbur (University of Malaysia, Sarawak)

Dr Hitoshi Osaka (UNESCAP, Bangkok )

Dr Young-Bae Park (Dong-Eui University, Pusan, Korea)

Dr Vimut Vanichareontham (Thammasat University)

Juda Agung (Central Bank of Indonesia and University of


Vasu Ramdeja (Bank of Thailand and University of Birmingham)

Joy Suppakitjanak (University of Birmingham)

Jane-Sue Wang (University of Birmingham)

Discussants from local universities in Bangkok


Other papers:


‘The impact of FDI and regional economic integration on the economic growth of the ASEAN-5 economies, 1970-94: A comparative analysis from a small styructural model", (with A Bende-Nabende and J R Slater) Birmingham University Discussion Paper 97-13, 1997


"Output, price level, broad money and Divisia monetary aggregates with and without innovation: Taiwan 1967(1) - 1995(4), Birmingham University Discussion Paper 97-14, 1997.


"The impact of FDI on the economic growth of the ASEAN-5 economies 1970-94: A comparative dynamic multiplier analysis from a small model with emphasis on liberalisation", (with A Bende-Nabende and J R Slater) Birmingham University Discussion Paper 97-18, 1997.


"FDI, policy adjustment and endogenous growth: Multilpier effects from a small dynamic model for Taiwan", (with A Bende-Nabende) Birmingham University Discussion Paper 97-19, 1997. This paper is being reviewed by World Development.

"The targets and instruments of monetary control: Long-run trade-offs, multiplier effects and Central Bank independence, Taiwan 1955-95", Birmingham University Discussion Paper 97-21, 1997.

"Economic development, financial development and liberalisation: Taiwan, 1960-1995", Birmingham University Discussion Paper 97-25, 1997.


Maxwell Fry

``The Fiscal Abuse of Central Banks'' in Macroeconomic Dimensions of Public Finance: Essays in Honour of Vito Tanzi, edited by Mario I. Blejer and Teresa Ter-Minassian (London: Routledge, 1997, pp.~337--359.

Emancipating the Banking System and Developing Markets for Government Debt, (London: Routledge), 1997, pp.~xviii + 280.

``Foreign Direct Investment in East Asia'' in The Lessons of East Asia, edited by Danny M. Leipziger (Ann Arbor: University of Michigan Press, 1997, pp.~511--539.

``Financial Sector Development in Small Economies'' in Sequencing? Financial Strategies for Developing Countries, edited by Alison Harwood and Bruce L. R. Smith (Washington, DC: Brookings Institution), 1997, pp.~167--187.

``Opening Domestic Markets for Fixed-Income Securities in Developing Countries.''

(University of Birmingham, International Financial Group), March 1997.

`In Favour of Financial Liberalisation,'' Economic Journal, 107(442), May 1997,


``Do Capital Inflows Appreciate the Real Exchange Rate?'' (Birmingham: University of Birmingham, International Financial Group, IFGWP--97—01), June 1997.


"Macro-Governance, Capital Inflows and the Real Exchange Rate'' (Birmingham: University of Birmingham, Department of Economics Discussion Paper No.~97--10), July 1997.

``Globalization, Financial Market Opening, and Foreign Capital Inflows'' (Birmingham: University of Birmingham, International Financial Group, IFGWP--97—03), Paper prepared for the EWC/KDI Conference on Restructuring the National

Economy, Honolulu, 7--8 August 1997).