The New Financial Development Paradigm and Asian Bond Markets

Abstract

For the better part of the last century, the debate between ‘liberalisers’ and ‘interventionists’ marked thinking about the relationship between finance and development. It has by now been superseded by the emergence of the discourse of financial system development, which links economic growth to the development of the financial sector. As the risks entailed by wholesale financial reform came to the fore in the financial crises of the 1990s and early 2000s, emphasis shifted from liberalising financial markets to building institutional frameworks to accommodate investment. Arguably, the emergence of the financial-system-development discourse occurred within a wider shift in the neoliberal paradigm towards institution building. These changes are particularly pronounced in East and Southeast Asia. This paper argues that a convergence of opinions has occurred between Asian financial policy elites, previously strong supporters of the bank-based developmental state model, and the liberalisers, represented through international financial institutions such as the IMF. This consensus is geared towards the expansion of capital markets and a generally more neoliberal, market-oriented mode of economic governance. To illustrate this claim, this paper traces institutional changes in Asian financial systems since the 1997-98 financial crisis. Although local characteristics remain, a common feature is the more salient role of bond markets in the financial system. This is the result of the conscious and deliberate development of local currency debt markets by policymakers. However, the new consensus narrows down the space in which economic policymaking takes place. Yet, by re-politicising financial system development, this space could be broadened again.

Keywords:

• financial system development
• financial crisis
• bond markets
• East Asia
• economic constructivism

Notes

I would like to thank James Brassett, Phil Cerny, Ben Clift, Michael Fini, Owen Parker, Tine Sinclair and three anonymous reviewers for their comments on earlier versions of this paper. All errors and omissions remain mine.

It has to be pointed out that their critique was foremost directed to the import-substituting Latin American countries. Until the mid-1990s, Asian countries such as Japan, Taiwan and Singapore were held up to these countries as successful examples with positive, market-oriented interest rates (see e.g. McKinnon 1989).

Apart from the participation of local financial policymakers in a wide range of financial development-related activities that will be discussed in the second half of this article, Asian financial policy makers also took a strong interest in the intellectual debates surrounding financial development. For example, the Annual Report for the year 1996 of the Malaysian central bank, Bank Negara Malaysia, published only shortly before the outbreak of the Asian financial crisis in 1997, dedicates a number of special interest boxes that run over several pages to the question of ‘financial development’ and how it has been treated in the academic (economics) literature.

The fourth trait identified by Haas are ‘shared notions of validity’.

Moreover, there are voices which recommend to make financial sector assessments an integral part of the Article IV surveillance process, although this has been put on hold for now (see e.g. Independent Evaluation Office 2006).

ASEAN + 3 consists of the 10 countries of the Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam), China, Japan and South Korea.

Interview Securities Commission, Kuala Lumpur, 22 March 2007.

Informal conversation with two ADB officials, Kuala Lumpur, 23 April 2008.

EMEAP consists of the Reserve Bank of Australia, People's Bank of China, Hong Kong Monetary Authority, Bank Indonesia, Bank of Japan, Bank of Korea, Bank Negara Malaysia, Reserve Bank of New Zealand, Bangko Sentral ng Pilipinas, Monetary Authority of Singapore and the Bank of Thailand.

Even if the potentially exclusionary dynamics of recent patterns of financial system development are left aside, there are most certainly distributive consequences which cannot be ignored, most importantly the price of credit for different economic actors, independently of the actual risk which is taken.

Nevertheless, it is important to point out that this more comprehensive understanding of financial development and its emphasis on financial inclusion is in itself normative. It presupposes the functional and moral superiority of the access to and use of credit (see also Jayasuriya 2006). Arguably, its focus on inclusion pre-empts more radical forms of resistance as for instance the prohibition of debt relationships (a core feature of Islamic finance, see Rethel 2010a).