Asia’s foremost statesman Lee Kuan Yew led Singapore from third-world backwater to first-world city in three decades. Now senior minister of the island state, he remains forthright in his views, here tackling questions on China’s stability, global banks and capital controls.
Is the trend for the US model of capitalism to be adopted everywhere unstoppable? Is this trend good or bad? The US model gives free rein to the entrepreneurial spirit, encouraging creativity and innovation.
Its defining features are emphasis on free competition, a level playing field, strong anti-trust laws and the use of open market discipline to determine costs, prices and profits. These have made for efficiency and dynamism, and have enabled US corporations to exploit IT ahead of the Europeans and Japanese.
But the reverse side of this winner-takes-all system has been wide income disparities with accompanying social problems, including an underclass. Given their different histories, the different European systems aim for a higher level of social equity.
Some European countries such as Sweden seem to have succeeded in combining high welfare spending with advances into the new economy and good economic growth. In the past decade, as US corporations forged ahead, European and Japanese companies and their governments have had to rethink their positions in order not to lose out in the globalised market place for capital and products.
European governments are attempting to cut back on welfare spending, to reform their labour markets and generally to make their economic systems less rigid and better able to respond to changing conditions. The Japanese have been forced to revise their hierarchical corporate structures based on seniority and also to abandon or at least change their lifetime employment practice. American capitalism values and emphasises individualism and survival of the fittest.
In contrast, Japanese and other Asian societies place great store on social cohesion and the interests of the community over those of individuals. It is unlikely that the American model of capitalism can ever be copied wholesale. Each country or society will modify its system to be more competitive but will also want to uphold its values and culture.
Do you feel the early 1990s idea of the Pacific century, in which Asian economies would dominate, is now dead? Is Asia in danger of turning inwards? East Asia defied its sceptics when it rebounded much quicker and stronger than expected from the Asian financial crisis. Economic growth in all the countries affected had resumed by 1999, two years after the crisis. GDP growth for year 2000 is expected to be 9.5% for Singapore, 9.5% for South Korea, 8.5% for Malaysia and 5% for Thailand.
Even Indonesia, the worst hit, is expected to grow by 4.9%. The financial crisis did not destroy east Asia’s long-standing, strong fundamentals. High savings rates and an enterprising, industrious and well-educated population will continue to underpin the region’s prosperity.
The financial crisis has prompted most east Asian countries to undertake painful but necessary economic and institutional restructuring. Korea and Malaysia have carved out a large proportion of problem loans from the financial system, and their asset management companies have recovered more than half of the assets they have acquired, with some profits.
Thailand also recorded marked progress recently. The proportion of non-performing loans to total banking sector assets has fallen from the peak of 47.7% in May 1999 to 22.8% in September 2000. For some countries, the financial crisis accelerated economic liberalisation and deregulation. In Thailand, foreigners can now hold 100% stakes in financial institutions.
Before the crisis, Korea was xenophobic to foreign investors. It has now lifted foreign ownership limits in most industries, and foreign direct investment (FDI) into Korea surged to $10.3bn in 1999, a jump of almost 350% from $2.3bn in 1996.
For the non-crisis countries, liberalisation and deregulation have also accelerated. Japan’s Big Bang, which started on schedule in 1997, was completed in October this year. Singapore has lifted ownership limits on banks and telecommunication companies, sectors that were previously protected.
East Asia is in no danger of turning inwards. The trends are towards greater openness. When China enters the World Trade Organisation (WTO), global competition will open up abundant opportunities for businesses, especially in the areas of banking, insurance, securities, construction, telecommunication and distribution.
By boosting FDI inflows and spurring economic reforms, WTO entry will secure China’s long-term growth. From its current low base, China’s per capita GDP has the potential to grow at 5-7% per year over the next 20 years, moderating to 3-5% in the following 30 years. Based on these conservative estimates, China will overtake Japan as Asia’s largest economy by 2030. By 2040, China and Japan’s combined GDP will exceed that of the US, or the EU.
North American trade across the Pacific, with close to 2bn people on the western rim, will grow much faster than its trade across the Atlantic. The economic centre of gravity of the world will shift to the Pacific. In this sense it will be a Pacific century. Can China continue as a nation state or will it eventually break up?
What I have observed of China in the past 25 years leads me to believe that a break-up is unlikely. Some 90% of the population are Han Chinese, and Han migrants are moving into the vast border regions where the country’s 10% of minorities live. The Chinese leaders have decided to integrate China’s economy into the global economy.
Given the high economic growth rates that China is expected to sustain, there is no reason for regional disaffection to grow into separatist movements. Several factors could upset China’s economic development: first, the possibility of war across the Taiwan Straits; second, rapid urbanisation and internet access will facilitate mobilisation of disaffected people, as Falung Gong followers have shown; and third, widening differences in incomes, growth rates and quality of life between the wealthy coastal and poor inland provinces may cause problems unless China’s plans to develop the inland western regions succeed.
However, these dangers can be contained if the Chinese government continues to attract pragmatic and capable leaders who are willing and able to adjust and adapt their system of government. They have to accommodate a better-educated and informed people who will want their wishes to be factored into the decisions of their government.
Is there a case for emerging markets to impose capital controls at certain stages of their development? Controls on cross-border movements of capital make sense for those emerging markets that do not have strong central banks, bank regulators and sturdy financial structures. Capital flows in large volumes can inflict serious damage to their economy and financial markets if they were to reverse suddenly.
Controls on inflows, especially short-term “hot money”, can reduce the risks of capital infusions driving up the prices of assets, stocks and real estate excessively. Controls on capital outflows, on the other hand, carry costs. They signal a change in the rules of the game and should only be used in extreme circumstances.
A country’s longer-term prospects may be adversely affected as investors will be sceptical of its policies after the imposition of such controls. Countries like China and India that have not fully opened up their capital regimes should liberalise the capital account cautiously. First, controls on long-term capital should be freed up before short-term capital.
Second, the proper regulatory environment must be in place. Finally, the banking system must be healthy otherwise opening up will only lead to problems. Should investment banks be allowed to structure and sell highly complex derivatives based on emerging market currencies and capital markets?
Emerging market economies with open capital accounts are susceptible to violent swings of portfolio flows. Derivatives could accentuate an existing problem but they are usually not the roots of the problem. There are practical difficulties in regulating the trading of derivatives. Most emerging countries can ban these activities in their own countries but cannot do so in other jurisdictions.
Exchange controls can stop the offshore trading of certain derivatives. However, they are ineffective against the trading of derivative products that are settled in foreign currencies. Are today’s global banks too large to manage? Does their concentration of capital and power pose risks for the world economy?
Banks need to be big in order to have the global reach demanded by their customers and to compete for the mega-deals. It is difficult to determine the optimum size of banks – whether they have grown too large. It depends on their business strategies, their management and the environment in which they operate.
Size does increase the complexity of administration, although new technology and better management systems can mitigate these difficulties. Some banks have grown so large that their failure may trigger a systemic crisis of global proportions. They may believe their governments and regulators will not allow them to go under.
This may encourage them to take greater risks than they should. Regulators have a difficult task to guard against moral hazard. They need to monitor risk profiles and take action before a mega-bank’s risk becomes too large.
