Changing the pattern of investment will get capital flowing in the region again
By ANTHONY ROWLEY 22 January 2009
Next week will bring publication of data on what has happened to private capital flows from the developed to the developing world since the global economic crisis erupted. From inside accounts, it appears that the news will be very grim, with not only portfolio flows from advanced to emerging markets collapsing but even supposedly stable flows of business fixed investment falling badly too.
So far as Asia is concerned, this is bad news in the short term but it could be good news from a longer-term perspective. It could provide the stimulus for policymakers to take action to end the absurd situation whereby savings-surplus economies in Asia channel much of their money to ‘advanced’ nations so that these same savings can then be routed back into investment in this region.
The reasons why this anomaly has persisted up until now are well known. Many Asians do not have sufficient confidence in their own banks and other financial institutions (such as pension funds, insurance companies, etc, even where these exist) to trust their money to them. They prefer to use overseas financial institutions, which are then able to exploit investment opportunities in capital-deficient Asian economies.
Much the same applies to business investment in many parts of Asia, where the accumulation of long-term capital is not generally sufficient to finance investment. As a result, capital has to be sought from outside institutions (often employing Asian savings). The dominance of foreign multinational companies over domestic enterprise in much of Asia is a result of this financing gap as much as of any technological gap.
Asian policymakers had become complacent before the current crisis that this situation of capital round-tripping could continue indefinitely, in the same way they allowed themselves to believe that Asian economies could rely forever on export- driven growth.
The game is over now, however, and it is no more likely that so-called ‘North-South’ capital flows are going to resume anytime soon than that recession in the West will disappear suddenly.
What to do about it? The solution lies largely in the hands of governments in this part of the world, provided that they can summon up the political will (as well as the intellectual and administrative talent) to make far-reaching reforms in the savings and investment infrastructure of the region.
But first, the pattern of investment in this region has to change. A shift in emphasis is needed from manufacturing consumer goods, primarily for export, to investment in public infrastructure - from transport networks to IT and other communications systems, as well as health, welfare and environmental improvements. This is something that governments can bring about by mandating official expenditures, to replace collapsing private investment.
How can such investment be financed, especially given the likelihood of a long drought in capital inflows from overseas? The answer is to issue more government debt - preferably in the form of ‘infrastructure bonds’ that separate the funds raised from general government borrowing.
There are at least two reasons to believe that such bonds would attract investment both from within and outside this region. The first reason is that it would be government debt, with all that implies for investor confidence (and if Asians are still confident about investing in US debt given the massive build-up of government debt there, they can certainly be equally confident about their own national debt).
This would help overcome mistrust of Asia’s private financial institutions and preference for foreign ones (supposing this still exists, given the shameful mess that those institutions are in).
The second reason is that infrastructure bonds issued by Asian governments could be expected to attract investment from overseas investors eager for yield at a time when interest rates around the world are near zero.
It is not necessary to woo such investors by denominating bonds in dollars. Long-term debt could be issued in Asian currencies, thereby providing an incentive for foreign exchange control liberalisation without the risk of currency or maturity mismatch.
Asian governments could kill two birds with one stone by adopting this sort of approach. Infrastructure spending on a grand scale would provide employment and spur domestic consumer spending while also laying the groundwork for a viable regional bond market in Asia. One of the reasons why this has been so slow to develop up to now has been the lack of incentive for budget-surplus Asian governments to issue debt.
True, savers in East Asia prefer to save through banks rather than via capital markets, and they prefer equities to the relative stability of bond markets. This means that governments also need to establish provident funds and insurance entities, and to direct their funds into public bonds.
Capital will then flow more efficiently within the region and, one day, foreign capital will flow back in again too. But this time it will be from overseas investors who have confidence in Asian markets, rather than domestic savings they are recycling back to Asia.
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By ANTHONY ROWLEY
22 January 2009
Next week will bring publication of data on what has happened to private capital flows from the developed to the developing world since the global economic crisis erupted. From inside accounts, it appears that the news will be very grim, with not only portfolio flows from advanced to emerging markets collapsing but even supposedly stable flows of business fixed investment falling badly too.
So far as Asia is concerned, this is bad news in the short term but it could be good news from a longer-term perspective. It could provide the stimulus for policymakers to take action to end the absurd situation whereby savings-surplus economies in Asia channel much of their money to ‘advanced’ nations so that these same savings can then be routed back into investment in this region.
The reasons why this anomaly has persisted up until now are well known. Many Asians do not have sufficient confidence in their own banks and other financial institutions (such as pension funds, insurance companies, etc, even where these exist) to trust their money to them. They prefer to use overseas financial institutions, which are then able to exploit investment opportunities in capital-deficient Asian economies.
Much the same applies to business investment in many parts of Asia, where the accumulation of long-term capital is not generally sufficient to finance investment. As a result, capital has to be sought from outside institutions (often employing Asian savings). The dominance of foreign multinational companies over domestic enterprise in much of Asia is a result of this financing gap as much as of any technological gap.
Asian policymakers had become complacent before the current crisis that this situation of capital round-tripping could continue indefinitely, in the same way they allowed themselves to believe that Asian economies could rely forever on export- driven growth.
The game is over now, however, and it is no more likely that so-called ‘North-South’ capital flows are going to resume anytime soon than that recession in the West will disappear suddenly.
What to do about it? The solution lies largely in the hands of governments in this part of the world, provided that they can summon up the political will (as well as the intellectual and administrative talent) to make far-reaching reforms in the savings and investment infrastructure of the region.
But first, the pattern of investment in this region has to change. A shift in emphasis is needed from manufacturing consumer goods, primarily for export, to investment in public infrastructure - from transport networks to IT and other communications systems, as well as health, welfare and environmental improvements. This is something that governments can bring about by mandating official expenditures, to replace collapsing private investment.
How can such investment be financed, especially given the likelihood of a long drought in capital inflows from overseas? The answer is to issue more government debt - preferably in the form of ‘infrastructure bonds’ that separate the funds raised from general government borrowing.
There are at least two reasons to believe that such bonds would attract investment both from within and outside this region. The first reason is that it would be government debt, with all that implies for investor confidence (and if Asians are still confident about investing in US debt given the massive build-up of government debt there, they can certainly be equally confident about their own national debt).
This would help overcome mistrust of Asia’s private financial institutions and preference for foreign ones (supposing this still exists, given the shameful mess that those institutions are in).
The second reason is that infrastructure bonds issued by Asian governments could be expected to attract investment from overseas investors eager for yield at a time when interest rates around the world are near zero.
It is not necessary to woo such investors by denominating bonds in dollars. Long-term debt could be issued in Asian currencies, thereby providing an incentive for foreign exchange control liberalisation without the risk of currency or maturity mismatch.
Asian governments could kill two birds with one stone by adopting this sort of approach. Infrastructure spending on a grand scale would provide employment and spur domestic consumer spending while also laying the groundwork for a viable regional bond market in Asia. One of the reasons why this has been so slow to develop up to now has been the lack of incentive for budget-surplus Asian governments to issue debt.
True, savers in East Asia prefer to save through banks rather than via capital markets, and they prefer equities to the relative stability of bond markets. This means that governments also need to establish provident funds and insurance entities, and to direct their funds into public bonds.
Capital will then flow more efficiently within the region and, one day, foreign capital will flow back in again too. But this time it will be from overseas investors who have confidence in Asian markets, rather than domestic savings they are recycling back to Asia.