How Asia Works: Finance: The Merits of a Short Leash

By Joe Studwell

“Demonstrating that an exchange economy is coherent and stable does not demonstrate that the same is true of an economy with capitalist financial institutions … Indeed, central banking and other financial control devices arose as a response to the embarrassing incoherence of financial markets.” 1 – Hyman P. Minsky, Stabilizing an Unstable Economy

Modern Approaches

Finance policy in North-East Asia recognised the need to support small, high-yield farms in order to maximise aggregate farm output rather than maximising returns on cash invested via larger, ‘capitalist’ farms. And finance policy recognised the need in industry to defer profits until an adequate industrial learning process had taken place. In other words, financial policy frequently accepted low near-term returns on industrial investments in order to build industries capable of producing higher returns in the future.

The case for deregulating and liberating finance so that it seeks out the most immediately profitable investments is not strong in the early stages of economic development in the emerging economies.

The alternative would have been for financial institutions to encourage more consumer lending, which tends to produce higher profits and is the focus of financial systems in rich countries. However, herein lies a far from attractive equilibrium for an emerging economy in which banks become very profitable and industry remains technologically backward. This is the situation in most of South-East Asia and Latin America today. The best banking returns in the East Asian region are produced in the region’s most backward countries – the Philippines, Indonesia and Thailand. The case for deregulating, and liberating, finance so that it seeks out the most immediately profitable investments is therefore not strong in the early stages of economic development. Far better to keep the financial system on a short leash for a considerable period of time and make it serve developmental purposes.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.